Within months of the opening of the Berlin Wall the East Germans had freed themselves of the communist political system, but retained the state-owned economic system. In the spring of 1990 the still-sovereign government of the German Democratic Republic (GDR) created the Treuhandanstalt to manage what remained a centrally planned economy. Due to the speed of German unification, however, this government holding agency was quickly taken over by the West Germans in the summer and fall of 1990. As a result, under Bonn's auspices, the Treuhand's mandate changed from economic management to rapid privatization and radical restructuring.
As an "independent" governmental agency, the Treuhand was supervised by the Finance Ministry in Bonn, but was intended to fulfill its mandate independently of the federal government. What began as a determined effort to transform the former GDR economy according to strict rational market principles soon became a struggle between economic and political priorities in East Germany. My aim in this essay is first to describe how the Eastern European context of East German economic reform had a significant impact on this conflict of Treuhand priorities and second, to discuss the potential lessons of East German privatization for Eastern European reforms.
I examine four aspects of the East European context: 1) the collapse of the Council for Mutual Economic Assistance (CMEA) trade framework; 2) the gap between East German and East European wages; 3) the potential lessons of East German privatization for Eastern Europe; 4) Germany's attempt to institutionalize the transfer of Treuhand know-how to Eastern Europe. The first two sections describe East European pressures on the conflict between political and economic priorities in East Germany. A study of the 1993 East German metal workers strike illustrates how political and economic pressures were reconciled in one case. The struggle between these priorities remains a central aspect of post-communist reform throughout Eastern Europe. How it is resolved in East Germany has far reaching consequences both for Eastern Europe and for Germany's relations with the region. The final two sections assess the appropriateness of applying the Treuhand's experience to Eastern Europe. Can the Treuhand's lessons assist other privatization efforts? Although this has remained largely a theoretical question, the final section examines concrete attempts to link the Treuhand with East European economic reformers by way of a German government consulting agency.
THE COLLAPSE OF EASTERN EUROPEAN MARKETS
Virtually all aspects of Eastern Europe's centrally planned economic activity were highly integrated within the CMEA framework. In 1989 over two thirds of GDR trade was conducted with other East European states. In several sectors, such as microelectronics and oil refining equipment, the GDR provided between 50% and 90% of the USSR's total imports.(1)
Early in the privatization process, Treuhand officials and international investors alike perceived that East European interdependence increased the attractiveness of investment in East Germany. By 1992, however, this East European orientation became one of the more troublesome hindrances to the Treuhand's privatization efforts. The dependence on East European trade became an additional source of conflict in the process of rationalizing the East German economy. Subsidization of the East European links meant postponing the economic priority of demanding market competitiveness from East German firms. Conversely, the lack of such subsidies compromised the political priority of minimizing popular discontent in East Germany.
After the political revolutions of 1989, post-communist leaders across Eastern Europe were determined to reconstruct their international economic relations better to reflect world market prices. The Soviet Union demanded hard currency (rather than transferable rubles) for their oil shipments to Eastern Europe. …