Eastern Germany
Privatization

The rapid pace of privatization of large state-owned enterprises and the dramatic loss of industrial employment mark out East Germany from its neighbours in Eastern Europe. In Discussion Paper No. 892, Research Associate Wendy Carlin relates these phenomena to the Treuhand's mandate to achieve rapid privatization. In order to create units that could be sold to Western investors, while matching assets with management capabilities and establishing effective corporate governance, it had to undertake considerable enterprise restructuring. Carlin notes that the employment cuts made by the Treuhand to create such units entailed explicit employment subsidies that took account of the regional and industrial consequences of its privatization decisions, but there was no such requirement for the employment cuts it made to control its own deficit. The Treuhand therefore had every incentive to lay off workers who would go into retraining, job creation schemes or even unemployment at the expense of other Federal authorities.

Carlin argues that a more consistent application of the wage subsidy would have had little impact on the privatization of `fast-track' enterprises and their rapid achievement of Western productivity levels, but it would have allowed a broader-based process of enterprise transformation, leaving employment in the rest of the economy much higher than at present. The Treuhand was late to recognize that the shortage of management ability during the transition would require greater use of scale economies through the creation of new institutions to undertake the strategic restructuring of potentially viable enterprises for which Western owners could not be found. Management KG now provides high-powered incentives for Western managers to turn around enterprises still owned by the Treuhand. The literature on vertical integration can also provide theoretical justification for the common ownership of groups of enterprises by state and private institutions during transition, when many enterprises consist of rather arbitrary collections of assets and require extensive restructuring.

Privatization and Deindustrialization in East Germany
Wendy Carlin

Discussion Paper No. 892, December 1993 (AM)