Privatization in East Germany

This paper is a critical review of east German privatization policy. It is argued that the restitution of old property rights has been a major obstacle to investment and that the attempt to sell two thirds of an economy in the market place is bound to be a failure. Such an attempt implies serious macro and microeconomic stock-flow problems which erode the sales prices of Treuhand assets, induce the Treuhand to slow down its sales, and reduce private investment. By combining a participation model with a wage freeze the paper designs a social contract that may help increase the chances of economic recovery in east Germany.