Economic Efficiency and Political Constraints –
The Dilemma of Privatization in Eastern Germany

von: Patrick Avato
 

Introduction

More than 14 years after German unification, the transformation process integrating the former centrally planned economy of the German Democratic Republic (GDR) into the market economy of the Federal Republic of Germany (BRD) is far from over. Unemployment rates in Eastern Germany are on average more than twice as high than in the West and GNI per capita reaches only €17,528 compared to €27,671 in the West (Deutscher Bundestag 2004, p. 153). The debate over the reasons for this crass difference in economic performance is still fierce. While it is clear that it is not easy to erase the marks of 40 years of communist rule on the functioning and structure of the East German economy, citizens increasingly blame the architects of unification for having mismanaged unification and not having delivered the promised “flourishing landscapes”. Increasingly, this critique focuses on the privatization of state enterprises that accompanied the transformation process of the East German economy. Under the bleak circumstances of the East German economy, it is no coincidence that privatization and a quest for re-nationalization of certain “key industries” appear on the platforms of parties like the extreme right NPD and the socialist PDS1. Both parties have consequently gained substantial support during recent elections. Given this extreme critique and growing dissatisfaction with the largely privatized economy of Eastern Germany, it seems opportune to re-evaluate the process of privatization that accompanied German unification. The first part of this paper will provide a general introduction into the economic problems of German unification. Part two introduces privatization as a principal means of transformation and the following three parts describe the actual privatization process in Germany. The final part assesses the work of the Treuhand – the government agency entrusted with privatization – and concludes.

German Unification and Economic Transformation

On 9 November 1989 the Berlin Wall fell. This dramatic event brought on the demise of the GDR paving the way for German unification. Convinced to have only a small window of opportunity to forge unification, Helmut Kohl’s government disdained the cautious warnings by leading economists and lawyers, and rushed into organizing immediate unification with the objective to incorporate the former GDR into the West German model of soziale Marktwirtschaft as quickly as possible. This process entailed the merger of two very diverse countries – politically, economically and socio-culturally. Considering that there had never been any similar event in history to draw experience from, this was an enormous challenge indeed. While the BRD had experienced one of the most impressive economic miracles after the World War II and became the world’s third largest economy, the GDR economy was not merely as successful. Although being the star economy of the communist world – the GDR was COMECON’s major producer of machinery and chemical products – the performance of the GDR economy lagged far behind western market economies. The reasons for this difference in economic performance between the two Germanys were manifold.

Firstly, as typical for a centrally planned socialist economy, the great majority of productive capacity belonged to the state. Large, state owned enterprises (Volkseigene Betriebe), often grouped into huge industrial conglomerates (Kombinate), made up 80.7 percent of total assets. Cooperative property accounted for another 14.7 percent in March 1990. Private property merely amounted to 4.7 percent of economic resources and was confined to small-scale businesses, restaurants, and craft shops. Employment was consequently almost entirely in the hand of the state leaving only about 2 percent of the workforce independently employed (Merkl 1994, p. 200). Also, the structure of the GDR economy differed largely from its western counterpart. Employment was heavily concentrated in sectors and branches that had actually been declining in the West. The production was skewed towards agriculture, energy, mining and manufacturing, which together accounted for 47 percent of employment in the GDR (37 percent in the BRD) (Lange and Pugh 1998, p. 32). As shown in table 1 agriculture, forestry and fishery, energy and mining as well as textiles and clothing employed almost 18 percent of the GDR’s workforce in contrast to 7 percent in West Germany. Further differences appeared in the service and trade sector which, by Western standards, was rather underdeveloped in the GDR.

Table 1 Sectoral Employment Structure in Selected Industries in East and West Germany, 1989/90 [Tabelle in der Downloaddatei vorhanden]

The industry as a whole suffered immense weaknesses which had developed over the years of its existence under the socialist system. Production processes in the Kombinate were integrated vertically and horizontally, resulting in a quite unproductive under-specialization. The resulting low productivity was further accentuated by the almost complete lack of incentives for management and workforce. Also, except for integration into the inefficient economic markets of COMECON, East German firms had never been exposed to real competition. Consequently, firms suffered under largely outdated capital stocks and often entertained huge inventories of raw material and intermediate goods. Overall by some accounts productivity in Eastern Germany reached merely 28.2 percent of the level of Western Germany in 1987 (Beintema and van Ark 1993). Given these crass differences between the economies of Eastern and Western Germany, unification and the transfer of the entire institutional framework of Western Germany to the territory of the GDR together with the German Currency Union equaled an immense economic shock. While this shock provided Eastern Germany with an institutional framework of a market economy and a stable currency2 (processes which in other East European countries were problematic) it also created some distinct problems for the last step of transformation – the real adjustment of the economy to a market economy (Siebert, 1993, pp. 25-26).

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1 See party platforms of the PDS and the NPD: [http://www.sozialisten.de/download/grundsatzdokumente_partei/parteiprogramm2003.pdf] [http://www.npd.de/npd_dokumente/NPD_Programm.pdf]

2 I will at this point refrain from elaborating on the actual effects of transferring an outdated and inefficient regulatory and welfare state system together with an extremely strong currency onto the territory of a relatively underdeveloped economy. However, the tremendous effects of these political choices are visible throughout the entire transformation process of Eastern Germany and greatly affect the success of its economy up to the present day.