The heavy burden of a divestiture strategy of privatization: Lessons from Germany's experiences for Latin American privatization?

The Quarterly Review of Economics and Fmance,Vol. 34, Special Issue, Summer 1994,pages 281-299 Copyright 0 1994Trustees of the University of Illinois All rights of reproduction in any form reserved. ISSN 0033-5797

The Heavy Burden of a Divestiture Strategy of Privatization: Lessons from Germany’s Experiences for Latin American Privatization? HANSGijNTER RRtiSSELBERG Philipps University-Marburg

THE CHALLENGE My interest refers

in Latin America

to the endeavors

2000, an engagement

of economists

policy that might provide

a region

social

equity. This is a challenge

policy

of the reunification

Democratic nomic

Republic

politicians

brought

about

Democratic

enormous enforced

amount

Germans

policy successfully that occurring private property, planning

handled

now. Indeed,

of the former

and capital

course

of the chosen

network,

markets;

financial

an information

system

and so on.“’ What went wrong? 1945,

German

not very much

had not dissolved

the economic

transactional

system and the other

that in the years after

a process of transfmation

In the middle

the

of markets and did not ensure

as it were, a settled

a banking

the Nazi Regime

be done

in that special case “where the East

to import,

marketing

but had subjected

authority.

which most

since 1990 did not increase

the efficiency

with money

to remember

could

on the unsatisfactory

via privatization

overnight

widespread

It is worthwhile

of the economy

economy

in Germany

a whole new price structure,

with global reach,

as far as eco-

burden

an

transformation

associated

consequences

are concerned-a

the

to reflect

were able almost

intermediaries

alarming

economic

and the German

without

did not improve

social equity. It is worthwhile

framework,

of Germany

and

aid and social costs proved to be wrong. Evidently,

policy practiced

stability of government,

institutional

never expected.

into a market

of financial

policy of (system)

rather

of markets

to frame

stable governments,

has to face as well: The

Republic

that the transformation

Republic

privatization

scientists

markets,

that Germany

and too many economists

In fact, the suggestion German

with efficient

of the Federal

stability and the efficiency

to forge “a New Latin America,”

and political

process

economic

different

from

the institution

of

nearly totally to a central

of the 1940s a qtwivatization

of a system of central

282

QUARTERLY REVIEW OF kONOMICS

economic planning

was required.

due to the endeavors blueprints

AND FINANCE

This historical

of some economists

for this special social and economic

strategy of economic The lessons comparative

of this experience

Philipps

University nation

Untiringly,

reform.

remain

of Marburg.

and economy

they admonished

of economy

They

never

ceased

as an event

to regard

that history

a consistent

check

in

at the

the splitting

might

of the

and

revise.

the public and the political system that the-longed-for would be a second process of transfor-

of reunification

by reasonable

concepts

and society.” This was in vain. The political

if it were not interested

in those

efforts.

to exist when they were urgently

tion process

They developed

his followers and colleagues

mation in Germany that had to be accompanied

seemed

to be successful

vivid in the writings of some experts

such as Karl Paul Hensel,

and, finally, expected-process restructuring

proved

policy which paved the way to a “Social Market Economy.“2

economics,

German

experiment

who had been working for many years on

No concepts needed.

developed

The second

for the

system acted as to guide politics

German

transforma-

is now on a pragmatic course. Are there new lessons to be learned?

What is the message

and the practical

significance

of a request

for privatization?

No answer can be given without at least a consideration

ofwhat Ludwig Erhard called

“the fundamental

view of events” as a point of reference

for political decision-making.

If we are inclined

to listen to Ludwig Erhard and Alfred Miiller-Armack,

and the practitioners

of the “Social Market Economy,”

answer. Explicitly, Ludwig Erhard gives the kitmotzyof this concept again and again: the liberation the realization

of people

of a constitution

of economic

from the spoon feeding

of economic

the theorists

we shall get an unambiguous policy

of the state” and

order which enables

more

and more

strata of society to reach wealth and prosperity5 Thus,

the main purpose

philosophies

currently

tries to address selected.

the general

Of course,

experiences.

This

of this work is not to discuss the various privatization

being implemented issues involved,

we shall

generally

not question changing

its statement:

Europe.”

I thus hesitate the heading

sheet of an enterprise,” the state-owned

institutional

enterprises,

frameworks.

Arguing

headway

Of course,

in a complex

I do

reform

in

procedure

of

To get to “a better understanding

operations

I” is useful,

of enterprises,”

though

marketing,”

of Privatization”’ “the opening

“the business

evi-

transfers.”

about privatization

under balance

plan,” “breaking

” “venture capital companies,”

and “management

change.

that made

which seems to rely only on “operations.”

like “valuation

“privatization

holding

process,”

be institutional

can succeed

format

its current

factor of economic

is only one factor

of privatization

and

of privatization.

essential

this work

of the privatization

to discuss the “Main Aspects and Objectives of “operations”

privatization

problems

social, and political structures.

dently, no privatization-policy

Instead,

the Treuhandanstalt

to be an institution

“Privatization-an

and objectives

countries.

irrespective

about

outstanding

But, privatization

economic,

of the methods

speak

is thoughts

towards solving the numerous Eastern

in different

Privatization

“employees

up

in the

is and intends

has to start with reflections

to on

BURDEN OF DIVESTJTURE STRATEGY

283

ASPECTS AND OBJECTIVES OF PRIVATIZATION Shares

of public enterprises

rather

seldom

noticed,

the economy

well. In 1986 the Institut intervention

unrestricted

The reunification well as a need ‘dinosaurs

Republic

was that within

of Germany.

of the planned

economically

out of them competitive

offered meet

competitive

The definite

companies

the quality

ket.“”

That

products

standards

is a request

required

inefficiency

and ineffectiveness

this version

of “privatization”

large-scale

monopolies

on the supply side and size which can then be

. . . economically

them

to those

of public is implied

in Ger-

of a manageable

to make

close

of firms as

enterprises-the

policy recommendation

which are marketable

rather

of its

competition

in state ownership

unviable

for sale by the state with a clear conscience,

offering

the result

in which

as

of state

of the total value added was produced.‘”

many was then and is still now: “to prise open create

the extent

On balance,

about an increase

economy.“’

But, though

is a “mixed economy”

of the economy

less than 50 percent

“to dismantle

Germany

Kiel, tried to record

the segment

in 1990 brought

reach high proportions.g

of Western

fur Weltwirtschaft,

in the Federal

investigations remained

in South America

viable companies

on the domestic marketable

critics

enterprises

market

and

on the world mar-

who complain

in general.

The

about

the

definition

of

“Privatization ” is the sale of publicly-owned

assets, it means divestiture.“” There

can be no doubt that successful

breakup

of the state-owned

plans. Special

enterprises

forms of privatization

involving,

nies and management

and management

process

of restructuring And,

is inconceivable

and the preparation for instance,

transfer

compa-

in the privatization

are all issues which need to be considered

the socialized

“To this end

without the

of new business

venture-capital

buyouts and buyins, the role of employees

process

economies.

privatization

holding

the

sectors right

into successful

framework

in the

and enduring

for privatization

market

has to be

created.“13 The President sional character

of the Treuhandanstalt,

transfer

state-owned

market.

This presupposes

minimum nisms.”

outlined

the multidimen-

property

to new owners and to organize

a minimum

of infrastructure:

from

and create a competitive

of legal and institutional

a capital

market

reforms

to transport

Republic

tion with German in eastern

of Germany

unification Germany.

system is not all that matters.

was extended

to cover the former

was undoubtedly But experience

to understand

perfection

arguments

make

sense,

and speed

of implementation

GDR in connec-

for the privatization

of long-established

Western

legal

laws often

and apply for those who are unfamil-

iar with them. They are, after all, the result of decades These

mecha-

legal system of

has also shown that a sophisticated

The complexity

makes them virtually impossible

an advantage

and also a

planning

She adds: “The fact that the purview of the tried-and-tested

the Federal process

Birgit Breuel,

of that task: “The first step is to scale down the role of the state, to

but Breuel should

then

of fine-tuning.“t4 states:

go against

“The

choice

perfection

between here.

That

284

QUARTERLY REVIEW OF ECONOMICS AND FINANCE

explains

my recommendation

privatization territory.

and transacting

Simple specimen

that we should business

contracts

and thus facilitate

are appealing

and abroad.

Nonetheless,

privatization

or the range of instruments

Regulations practicable provided

such as restitution

the institutional

the fine-tuning straight

to a much

compensation

up the vast formerly

procedures

of policy for privatization

a normal

instrument

to a market

it seemed

Such strategies

enterprises

is to postpone and act

means

radical

dominated

the

was handled

like

to sell public enterprises

in a well equipped box of policy instruments,

It was thus implemented reflect

economy

Privatization

policy, just an instrument

As one instrument

to be applicable.

restrictions.

holding option

this perspective

Germany.

of

or vice versa are simple and

state-owned

context

in Eastern

of economic

to private individuals.

the pace

it.

later date in order to be able to make decisions

shall discuss below, in a broader

As we

to restrict

are kept short. Another

n15

for

the move into new legal

used to implement

before

regulations

to investors both within Germany

must not be allowed

away. On the other hand, the transition

changes. choice

simplicity

ways of breaking

find straightforward

with speed without far-reaching

the fact that privatization

must always be seen in

an absolute context of economic and social reform. The

state can privatize

nearly everything;

but the question

is: what for? If one

seriously believes in the message of the interdependence of all social and economicprocesses, planners

will be forced

privatization forgotten

activities tend to change

that every change

social structure. market

to have an idea of what should be changed. structure.

structure

But it should never be

by privatization

This may lead us to ask for the role of private ownership

economy-in

a world of “Twentieth

discover is a framework spoon feeding

the economic

of the economic

It is obvious that

for a privatization

of the state and enable

Century

Capitalism.““What

policy which may liberate

changes

the

in a modern we want to

people

from the

a growing strata of society to attain wealth and

prosperity.

THE IMPORTANCE OF THE INSTlYI’UTIONAL FRAMEWORK FOR EFFICIENT MARKETS It is a basic economists

message

ships in their economic order

of the postwar

can only succeed entirety

by considering

plan or economic

German

in understanding

a combination

same.*’

one of the most important that the economic

He stated

theorists

systems

that

process and its relation-

of history

only within such a framework.

be a bad one, but without a system no economy War, insisted

of economic

and theory.

action takes place within the framework

or system, and can function

Eucken,

theory

the economic

Every

of an economic “The system may

is possible.“” in Germany

after the Second

World

system and the legal system are not one and the

that it is important

to see that the legal system has to contain

BURDEN OF DIYESTITUBE principles

by which

contracts,

business

everyday life were to be linked together modern

industrialized

but requires

certain

found

constitutional

of classical political combinations

of human

ory-building

sufficiently

accounting

and its historical

development.

orders

order.

for a general

theory of social and economic

accepted

as a chance

that Eucken’s

and decent,

Its basic theme

policy-centered Looking

That is the focus which allowed

to consider

economic

was a reform

the intended

the new institutional

of the economic

of Western

and a law requiring

about

framework

competitive

political

preconditions

order

Germany

order,

Socialism

after a period

that it should

after the Second

prices (both June

structure.

was finally granted

of a “veil of ignorance.”

had stressed

a human

of National

of

World

it was on the way to a new constitution. 1948) preceded

The overwhelming

success

of

by the fact that the “Grundgesetz”

into being by a group of representative

the basic condition

to reestablish

destruction

planning.

A currency

reform

endeavor

after the expected

that from the beginning

Eucken

inter-

to a kqr-concept

but how was it applied? It is worthwhile

War, we recognize

was brought

“Economy

of a human

at the actual development

the decisions

the overwhelm-

between

and the “Principles”

work was part of a scientific

reasonable

in Germany.

recognized

the facts of history.“20

That is the point of reference, being

orders.

and

and social reality

to get as near as possible

to develop his ideas about the “Foundations” that regards

rules

kind of the-

the Weberian mexsage of an encompassing

He basically of human

order

for relevant

thought-some

that field, Eucken

dependence Eucken

system,

tried to discover within the

Searching

requires-he

and Society.”

The

that fxzttern which might have

of Max Weber’s analysis of the interdependencies orders

etc., of

process.

economic

for the full range of economic

Within

285

as a foundation.lg

Eucken

institutions

a reasonable and workable human necessities

promotions,

an effective

principles

economy,

of human

institutional

ing importance

company

in an effective unified economic

world does not by itself produce controlling

In the tradition variety of possible

agreements,

STR4TEGY

people

doing their work under

As far as the economic

be a competitive

order is concerned,

order, and he mentioned

the

for its functioning.

Here he distinguished

between

stitutiveare,

according

of markets;

(3) private property

(enforceable

to Eucken,

constitutive conditions

and liability

only by the general

and regulative ones.

Con-

the following ones: (1) price stability; (2) openness (risk-bearing)

; (4) freedom

of contract

of economic

policy.

I would like to stress that most people failed to notice the special structure

of that

order: Within in a residual mined

that competitive position

(3) income

chain

is (no more and no less than)

of relations

which are crucially

deter-

over monetary, real and human assets. All of them

by market

Regulativeelements nal effects;

system, private property

in a complicated

by rights of disposal

however, dominated

rules of law); and (5) constancy

are,

forces.

are: (1) preventive distribution

anti-trust

policy; (2) corrections

policy; and (4) stabilization

of exter-

of labor markets.

21

286

QUARTERLY REVIEW OF ECONOMICS AND FINANCE But, though

mainly emphasizing

never wearies of pleading unitary

constitution.

version

of the German

role. This school

of the economic

of complementary

Here we get to the question theory

of an efficient

stressed the relevance

create social structures anteeing

the questions

for the creation

of solidarity-establishing

of social equity, which within this

far-reaching

basic human

institutions

in a

and just order plays a very important

of those forms of social integration

which generate

rights that safeguard

order, Eucken

orders embodied

consensus

needs

beyond

among people.

(“vital rights”)

the market

suited to Guar-

and the existence

system are thought

to be

indispensable.” All these elements of economic

were regarded

and social reform.

as necessary

order to realize what rightly was named was enriched

by a social house-building

not only home

ownership,

shares and bonds,

and single generate

persons.

debate

One

in

the program to stimulate

of savings in the form of bank accounts,

therefore

framework,

those general

in Latin America

insist

that privatization

is unlikely

partially adopted

ideas and concepts

welfare function

suitable

to

by other

If we rely on the adequacy

a framework

as well. But beware -that

implied-the

points for a

assets to private firms

and social equity unless it is accompanied

and social structure.23

theoretical

have found

the value-system

Thus,

and measures

view of events,” there exist more starting

should

in the economic

we might

scheme

than only that of selling industrial

major gains in efficiency

reforms

Social Market Economy. assistance

but ownership

policy concept

above sketched

for the desired system

field had to be structured

and insurance.

Given these “fundamental privatization

components

This vast and complex

of the

in Germany,

for a privatization

means to accept and recommend

of the spiritual fathers of the concept

“Social Market Economy.” Thus, we get a message from the ongoing of Germany

from Germany’s

story of the divestiture

Experience

No. 1. What can be learned

version of privatization

in the eastern

part

since 1990?

THE TRETJHAND ANSTALT: A PHILOSOPHY, AN INSTlTUTIONAL ARRANGEMENT AND A POLICY OF PRIVATIZATION It is easy to characterize Germany. Germany,” following

presented sentences:

the philosophy

of privatization

with the title, “The Chance

In a brochure

to the public “The eastern

in 1993,

German

nist world, is for sale. The Treuhandanstalt, privatizing the

the company’s

world’s

breakup. “‘L4

largest

10,000

holding

state-owned

company

one finds

economy,

part of

in Eastern

in the “Introduction”

the

once the pride of the commu-

based in Berlin, industrial

engaged

in the eastern

of the 90’s: Investing

has been charged

enterprises.

in the world’s

That

largest

with

makes corporate

it

STRATEGY

BURDEN OF DIVESUnder broad

the heading

political

social market the

consensus economy

economy.

dominated

“Reasons

to Invest,”

in west and east about

in eastern

It is clear

by German

the additional

Germany,

in both

interests,

hint is given: “There

the desirability

and consequently

east and west that

and therefore

foreign

287

of establishing

of privatizing

investment investment

is the

most of

should

not

be

is heavily encour-

aged.” In the same business,

one

receives

further

information

question’

created

but has now been dealt with. The German

east German 1945)

section

Climate. ” “The ‘ownership

“Improving

land,

property

or the Communists

Government restitution.

or business,

(1949-1989)

has now decided

Government’s

expropriated

attracted

relating

to the subject

initial uncertainty by either

to return

the Nazis (1933-

more than one million

that, in most cases, new investment

No new investor need to fear that a former

for new

decision

claims. The

has priority

over

owner can lay claim to a factory

or plot of land after it has been sold.“‘5 Correctly, institution

the Treuhandanstalt

created

zation with more 15 regional

to manage

than 3,000 employees,

offices

throughout

the swift privatization 17.2 bn sq meters

The Treuhandanstalt

East which

Germany’s

dominated

to be evident

Republic mentions

Luft,

and

aim was

of real estate,

of forest.

in March

government,

was a coalition

1990 by East Germany’s

the

governments

and

in order to find

of March

a highly

five parties, to reform

the

For all its members,

18,199O

intensified

government,

from

It intended

steps towards democratization.

that the elections

Modrow

of 28 members

means communist-ministers.

and, at least,

of (Western)

Christa

1990 its principal

plus 25 bn sq meters

and has since lived with three

last semi-communist

the Treuhand,

new government

Headquarters

was changed.

and to take some

seemed

the Berlin

new

It is an organi-

Let us tell the story from the beginning

by 17 SED-that

economy

of Germany.

Since June

industry

was actually conceived

of structure.

created

split between

and 19.6 bn sq meters

government

out how the structure

itself to be the most significant

unification

East Germany.

of East German

of farmland

last semi-communist three changes

characterizes

the economic

it

would bring into power a

cooperation

with the Federal

Germany.

the Minister

in her book,

of Economic

“Treuhandreport,“‘”

institution

Treuhand

had been

up-to-then

state-owned

“Wahrung

des Volkseigentums,”

property

means

of production

March

1990, the Treuhand

to prevent into

Affairs

in the Modrow

that their

main

an uncontrolled

privateowned

by the people acquired

of the GDR.” In order control

interest

in the new

transformation

property.

that is, “the maintenance

government,

The

of the

objection

of the ownership

was of the

to serve that purpose

over most of East Germany’s

in

corporate

assets. The range of responsibility

ofTreuhand did not, at that time, include

of the plants of the municipalities, services,

nor the property

the property

of the traffic systems and postal

nor the real estate owned by the state. The decision-makers

thought

that the

288

QUARTERLY REVIEW OF ECONOMICS AND FINANCE

state of these different

kinds of assets could only be decided

through

a constitution-

giving process. It should be mentioned, property

of the people

into a real promise political

however, that the idea that the means of production

should,

of people’s

group “Demokratie

according participation

Jetzt”

His proposal

was (February

spread of ownership

The former

communists

they supported

those

to create a trusteeship

(“national

Party insisted it would be necessary a broader

Wolfgang

wealth”).

in order to care for the in order to promote

27

the population.

Nevertheless,

capitalists.”

He and the Social Democratic

within that government

proposals.

of the

that the indus-

German

to give shares to the people

rights among

are

be turned

Ullmann,

Now”), proclaimed

into the “hands ofwestern

12,199O)

of the “Volksvermogen”

in ownership.

(“Democracy

trial wealth should not be transferred future

to the will of that government,

have claimed

the

arguments

up to now that

of the

economic

experts within their group were that in order to come to a solution which guaranteed a just

distribution

thought

of shares,

one first had to evaluate

that was impossible

because

Thus, they finally decided

(March

be able to avoid “spontaneous

1,199O)

and individual

order to be in charge

of the industrial

be sold or delivered

before

a special arrangement

This decree elections unexpected Prime more

Minister needed

Lothar

on June

de Maiziere,

than before.

short-lived

enterprises

and property

property

“in the interest

to the

was established of public.”

firms or other

30, 1990. In the meantime, into power

Democratic was eager

On June

in

Nothing

organizations

to change

government

which

(either

was created

transferred

all enterprises

limited

under its

the law. Privatization

and determined

(July 1,199O)

corporations

with an

Party This government,

to the Treuhandanstalt union

the (democratic)

a new government

17, 1990, a Trusteeship

democratic

and currency

into West Germany-style

a state authority

Hoping

especially

was settled by parliament.

of the Christian

Germany’s the economic

enrichment,

18, 1990 had brought

majority

assets. They

manner.

privatization,”

into the hands of persons,

was repealed

of March

to act in a certain

(nonlegally-controlled)

risk of embezzlement should

the industrial

the time was short.

was

by Eastern

all state-owned that on the day of

should be converted

liability GmbHs

or stock com-

panies AGs) . The Trusteeship has continued Treuhandanstalt nomic

union,

it reports

Charter,

published

entity constituted

to the Ministry of Finance

in public

that

the Trusteeship

in favor of privatization

Act

The

the eco-

was “a total mutation

(Treuhandgesetz,

contained

a message

trusteeship

on behalf of the people nearly “unrecognizable.“‘sThe

dominated

by the divestiture

strategy.2g

operations. law. Since

in Bonn.

revealed in Christa Lufts’s critical judgment

complains

shortly thereafter,

the legal basis for the Truehandanstalt’s

is an independent

What followed in law.” She

and the Treuhandanstalt

to form

which

made

July 1, 1990)

the former

idea of a

new program

was

BURDEN OF DIVESTITURE STR4TEGY It cannot decisions secures

be denied

that the philosophy

that will help to build an efficient and generates

(March

1992)

in the states of eastern

formerly in their

own companies.

buyouts

in the privatization

stimulus

a share of formerly

seems

Europe

state-owned

the following

into financial

operations

carried

in eastern

text was not translated

of the workforce

proportion

of management

out by the Treuhandanstalt

that such a conversion

development

is a strong

of what were

would function

Europe.“3”

into English:

in East

as a substantial

What is surprising

“In eastern

Germany

is that

we had in the

spring 1990 the same debate about the fiduciary administration

of the formerly

owned

by the people’

Those

papers’

should grant every person

anonymous substance

that policy

assets.

“There

conversion

participations

As in the case of the high

it can be expected to economic

to be unambiguous:

in the large-scale

‘assets owned by the people’

Germany,

“to make

economy

the public did not fail to notice this. The resume of the (international)

Treuhand-Workshop interest

is more

modern

than to care for a wealth-formation

new employment,”

that grants every citizen of East Germany Of course,

of the Treuhand and competitive

289

‘assets

and about

owned

so-called

‘Anteilsscheine.’

a concrete

ownershipclaim Actually,

by the people.’

of these ‘assets owned by the people’

‘assets

‘participation

to the up-to-that

it turned

out soon

was widely exhausted

point

that

the

and burdened

with large debts.“31 Was it abandoned done?4r

was politics

that the inability

circumstances

change-values.” ues” reflected

Its devices

Perhaps immediately

and

Doing

that

“use-values”

markets

are “social-use-val-

If these conditions

of “use-values.” But neither can discover

process.

Assigning

a useful prelude

are not policy nor

the “use-values” of industhe usufi-uct of assets to

to full divestment.“”

paradigm”

and “ex-

Thus, all we

to an “asset-based-paradigm.”

user rights for assets to agents”

in order

and second:

to let them

“Do not sell before

‘set prices right.“’ with other

be handed

“use-values,“-on

prices.”

that reveal “use-values,”

the government

concerned

to tender.

between

of functioning

from an “ownership-based

markets

can never-

on the seller to sell might result in

or “market

like the Treuhand

are first: “Entrust

to assume

accounting

a single seller (Treuhand)

to the difference

in an ongoing

those possibilities

functioning

eastern

created

agents might “constitute

need is a change

policies

pressure

can be

left!”

policy has to be guided by estimations substitute

It is bad economics

price or by invitations

that put political is acquainted

is left; thus, nothing

in short-run

process between

selling

Only under the conditions

trial assets being

discover

by a bargaining

in “exchange-values”

a capital-market nonstate

nothing

uncertainty

1) prices,-“nothing

Every economist

fulfilled,

historical

buyers over a certain

zero (or: -DM

grounds:

the victim of bad economics?

to handle

theless be overcome potential under

on political

have initiated

(than industrial)

over to the people

a zero-price

part of Germany

should

reflections

on the grounds

basis. It is my firm conviction

would have received

upon

privatization

assets. It might own assets that could

more

of political

estimations

that privatization

approval

had there been

of

in the some

290

QUARTERLY REVIEW OF ECONOMICS AND FINANCE

concept

granting

that the residential

buildings

formerly

being “assets in the owner-

ship of the people”

got into private ownership

and not into that of the new State.

(PRELIMINARY)

LESSONS

GERMAN

PROM

THE

EXPERIMENTS

IN

PRIVATIZATION The statement

of the UN Economic

the east’s revolutions, underestimated

by virtually

qualification

be applied

consideration which

only

Commission

the complexity

all observers”s3-

took

that “at the outset of

divestment and

programmes

advisers-can

“the ‘state’

institutions

(that

is, the political

and power centres)

process

to allocate

obstacles

paradigm

commodities,

of disposal

met in all transition

At the beginning (asset)

rights

of the 1980s I pleaded accounts,

that enables

an individual

the production

process-or

an income.

liabilities

of economic

They circumscribe

to act.” The “potential” world of imagination

“Vermogen,”

and possible

and human program structure The

of an economic around

every stream

These

“stocks. n Thus, in order to get to a sufficiently better sources, plants, patents,

register

assets than income-material

households’ housing,

and firms’

human

copyrights

they are the basic units or potency

“in the future-the

place where man lives.” And, “it is has its value.“35

for the German

rights of disposal welfare.

Thus,

expression

over monetary,

I proposed

of its laws and institutions.

to consumption

equipment

resources, financial and licenses. 37

which

ratio of economic

the thesis: The welfare of a society is a function

of this “Vermogen”-paradigm of services

ratio-of-exchange

a totality of assets being in the possession

agent.

of assets, as well as a function axiom

goods or goods serving

however, constitute

has no equivalent

assets are the basis of human

centered

physical

even goodwill. Assets

that the act or transaction

means

of a “Vermogen”

“one’s faculty, ability, capacity

and the “possible,”

which explicitly

at the disposal

to obtain consumer

limit the field of initiatives;

It is a pity that the English language

.34

avoid the real

Assets include

stocks, bonds,

and the world of value-the

in view of the potential

economics.

It is not the present

values. Assets enlarge, activities.

(italics H.G.K.)

over assets which

of the present right to a future

but the relationship

. . the

agents, and the recommendation

for the introduction

contracts,

mean anything is essential,

about.

economies.

into the theory of comparative

cash, deposit

with the

and its subordinated

out of decision-making

allocation of the usufruct of state-owned assets as quickly as possible”

ownership

I agree

further

divestment,” a policy might have been chosen

Here, “usufruct” means the use of assets by nonstate calls for concepts

was vastly

without

to the German case as well. Additionally,

that, instead of “outright

bureaucratic

for Europe

of managing

reliable

measure

of its total

36

and

process

and

flows from

of welfare, one should

and nonmaterial (private

real

a research

is that every kind of “income” or the production

and

assets-natural

public),

re-

raw materials,

and social assets as well as rights like

BURDEN OF DIVESTITURE STRATEGY The message structure

is then

of private

freedom-founding Thus,

that every welfare-increasing

and

public

and order-creating

the “asset-based

privatization.

assets which

Within

paradigm”

its context

the privatization

try to create

a balanced

a

mixture

of

institutions. may be helpful

“there

the fixed assets and inventories

policy should

guarantees

291

to develop

is no a priori reason

of industrial

enterprises

a timely concept

why assets” other

of

than

“should be excluded

from

party.““s

Lesson 1: A change in the economic paradigm is necessary from the ownership-based paradigm to an asset-basedparadigm. As far as the privatization industrial

enterprises”

Treuhandanstalt philosophy dating

as carefully

benefits,

to be tolerated.” enterprises

million jobs, Looking Trends

(SVR)

stated

industry

doubled (Table

employment

guarantees

amounting

privatize

over

for over

1.4

to DM 169.5 billion,

or

legal regulation

be mentioned

for Assessment

that in its

of Overall Economic

part of Germany

capital

reached

than 65 percent

expenditures

no more

of enterprises

they were mostly

expenditures,

in Autumn

impediments

expenditures

of

of the

in the manufacturing

for more than 50 percent

restricted

of

to the construction

to invest still existed.

of German

1992, West German

and administrative

defects

and promotion

Chambers

enterprises

are the main obstacles

(Table 2). The authorities

concerned

of capital expenditures

of enterprises

Concerning

of all the applications

for the restitution

of ownership

to a and

that legal

to capital expenditures

capital

and

States did

expenditures

of new industrial

are areas

and assets, only a small

has been dealt with so far. The figures are 10 percent

of real estate and 42 percent

As this process

mentioned

in the new Federal

and the declaration

the clarification

According

of Commerce

with the administrative

to be able to cope with that task. As a result, the privatization

respectively.

had

to be a serious

or partially

of Experts

by the Organization

(DIHT)

are hampered.

and liqui-

1).40

in East Germany

portion

capital

in 1992, significant

survey conducted

not seem

of what appears

from 1991 to 1992 and now account

capital

Moreover,

delayed,

Board

per capita of the population

insecurity

the

resolutely,

to privatize

guarantees

that: in the eastern

level. Although

all private

the

losses from privatization

of this “success, ” it should

the German

western

Industry

investment

1993)

agency,” following

that “with the focus on long-term

upside

obtain

(June

of

of the 1992 GDP of West Germany.“3g

1992/93

industry

1990-92,

at the trade-offs

Report

enterprises

“The

presented

restructuring

They mentioned

summarize,

during

and secure

over 6 percent

as quickly as possible,

is that THA has managed

assets and inventories

privatization

has meant that heavy short-term

They

problem

IMF economists

of “a successful

as possible.”

the approach

financial 11,000

is concerned,

as an example

of “privatizing

“fixed

of East Germany’s

of clarification

for enterprises

will take much

and parts of them

time, legal insecurity

will

292

QUARTERLY

REVIEW OF

ECONOMICS AND FINANCE

Table 1. CAPITAL-EXPENDITURE ACTIVITY BY WEST-GERMAN ENTERPRISES IN THE NEW PARTS OF GERMANY AND FAST BERLIN’ Capital Expendihres2 1991 in billion DM

1992 in billion DM

1992 in percent’

Energy and Water Supply Mining

3.0

5.5

83

Manufacturing Industry thereof: Basic Materials and Producer Goods Capital Goods Consumer Goods Food and Luxury Food

8.0

17.5

119

2.3 2.9 1.0 1.8

5.9

6.8 2.0 2.8

157 134 100 56

Construction

1.2

1.8

50

Trade

2.8

4.5

61

Services4

2.4

3.7

54

17.4

33.0

90

46

53

Total for Information: Proportion of Manufacturing

Industry in Percent

Traffic and Transmission of News5 Total of Enterprises Soune:

lnstitulc

for Economics

Research

X

8.0

12.0

50

25.4

45.0

77

(ifo).

NOIPJ. 1. Estimations of the Institute for Econormc Research (Ifo) on grounds of a special inquiry Germany cnterpriscs including subsidiaries of foreign trusts. 2. Accrual of new buildings and equipment: rentals excluded. 3. Change as against the previous year. 4. Not counting lettmg of flats 5. German Federal Postal Services T&corn included: German Railways excluded.

from April to August

IS@4 of West

Table 2. IMPEDIMENTS TO INVEST FOR INVESTORS FROM THE OLD FEDERAL TERRITORY IN EASTERN GERMANY PROPORTION OF MAIN REASONS IN PERCENT’ Legal Insecurity Sector of the Economy Industry

Administrative Infrastructural Defects Defects

Ecological Damage

1991

1992

1991

1992

1991

1992

1991

1992

37

38

25

29

24

21

14

12

Basic Materials and Producer Goods

34

34

28

33

17

15

21

18

Capital Goods

41

39

24

28

26

22

9

11

Consumer Goods

33

37

28

29

25

26

14

8

Food and Luxury Food

42

40

26

28

23

19

9

13

Construction

42

41

35

43

17

11

6

5

Trade

42

48

29

30

24

18

5

4

Services

39

46

30

27

26

22

5

5

Total

39

41

27

30

24

20

10

9

Sounc: 1.

Organization

of German

Main reasons adding

Chambers

up to 100 percent

of Industry

and Commerce

(DIHT).

for each sector of the economy

respectively.

BURDEN OF DIVESTITURE continue tance

to constitute

an obstacle

of infrastructural

to capital expenditures.

shortcomings

has lessened.

STRATEGY

Nevertheless,

the conditions

for traffic,

East Germany

have improved.

But still, both traffic and telecommunication

the West German

But the most serious

telecommunication

and energy

supply in facilities

level.

and alarming

indicator

of policy problems

degree

of “underemployment”

measured

by adding

market

policy”

of people

being

further

conclusions

to the number

the impor-

Due to the high level of capital

expenditures,

have not reached

293

is the very high

the cases of an “active labor

unemployed

(see Table 3). Thus,

may be drawn:

Lesson 2: Without a sufficienttj developed theory of transformation, no country should start any reform. This pattern

means

the government

and to propose

has to anticipate

a strategy with a suitable

than an idea about micro-economic Examples

l

for the structures

a continuum enterprises

l

l

a balanced

in order

to get an efficient

and large size, promising

mixture

allocative,

of

adaptive,

efficiency;

property

distribution,

people,

granting

a dispersal

or dissolution

with an enlarged

can only be justified

participation

of lower-in-

social equity; of monopolistic

and society, a precondition

serve objectives

may be:

in size of the firms

come-class

Privatization

socio-economic

To start with no more

selling activities will not suffice.

desired

of small, medium

and productive

the intended

time horizon.

structures

in the economy,

polity,

of democracy. if it is guaranteed

of the above mentioned

that the instruments

proposed

kind.4’

Lesson 3: In order to improve the efficiency of an economic system entre$neneurship should be encouraged. To sell ownership entrepreneurs. should

offer

techniques. thus, receive

titles on the free market

It is an old concept assets to people Whenever

having

they succeed

of economic

does not automatically theory

new ideas about they should

create

that the banking

markets,

organizations

be able to accumulate

will not necessarily

further

the competitive

and

wealth and,

rewards as private owners. Again, selling assets to already existing

and owners of large fortunes

new

system

firms

strength

of

a system.42

Lesson 4: Zfprivatization disappoints the expectations of a majority of the population it will not be possible to use the widespread knowledge of potential agents better than before. Thus, inde@ndence should be encouraged.

196,415 101,622

Thiiringen Berlin (East)

Nolu:

UER (unemployment

Full-time equivalents

2.

3.

(number

in percent

FEDERAL

of the gainfully hours).

employed

780,534

130,227 48,892

150,147 233,797

124,699

92,772

persons.

250,803

49,855 9,914

46,073 82,159

32,917

29,476

507,300

94,400 44,600

86,500 147,700

75,300

59,800

Vocational Training

OF GERMANY

Short-time Work3

STATES

Early Retirement Regulation

NEW

works x average loss ofworking

persons

15.2

15.7 14.9

15.5 13.8

15.0

17.6

UER Percent’

IN THE

of rounding.

of short-time

rate) = unemployed

Sums may differ from total sums because

1.

Sounc:Franke

1992361.

221,184 320,499

Sachsen-Anhalt Sachsen

1,195,962

184,262

Brandenburg

Total

171,980

Mecklenburg-Vorpommem

Unemployed

UNDEREMPLOYMENT

Federal State

Tubb 3.

1992l

404,460

67,410 28,357

92,234 103,714

62,220

50,525

Job Creation Schemes (ABM)

-APRIL

3,139,059

538,307 233,385

596,138 887,869

479,398

404,553

Total

39.8

43.0 34.2

41.8 38.2

39.1

41.3

Percent

fi

5

E!

5

B

i

s

;=3

0

%

1 cc

BURDEN OF DIVESTITURE

Trusteeship should

means

to administer,

to be willing to entrust

have time to take their initiative.

given. Finally, what is required

Lesson 5:

Advice and helpful

STRATEGY

295

assets to people

who

information

should

be

is help for self-reliance.

Whmeueran authority is in charge of selling public assets, the guidelines

should define very carefully the responsibility of sellers and buyers. It will never be pertinent to look to the short-run. The

responsibilities

period

of investment.

cannibalization

must be defined What

in view of the time span of, at least, one

is to be avoided

of an arrangement

ment in order to be rearranged

of assets which are entrusted

or to be completed

objective

of improving

economic

efficiency.

of factor

combination.

Financial

transactions

den, and violations

should be penalized.

of the early Anti-Trust framework

that can explain

A last word about improve hope,

economic though

divestiture

strategy.

Germany

Product

West

recent

they cannot

amounted and

are sure that for a considerable

to give serious

DM, 6 percent number

advice to

it is possible

All Germans

the burden

of the public Gross

Act.43

theoretical

failures of privatization.

privatization.

of the

be forbid-

the Sherman

Of course,

fail to notice

to 170 billions 60 percent

experts

experience.

In 1993 the yearly volume

(GNP)

in the field

might be that

to strive for acoherent

and potential

and social welfare through

at present

Eastern observers

Germany’s

that the procedure

States, for instance,

events and may enable

about the chances

that with the

is a decision

with the assets sold should

economists

the

to a new manage-

by other assets-all

What is needed

I imagine

Rules of the United

Lessons like these might encourage all those who ponder

is the worst of all possibilities:

to

share that

of the chosen

financial

transfers

to

of the Gross National

National

Product

of years this volume

East.

Most

cannot

be

greatly reduced.44

NOTES *Direct all correspondence 4,3557

Ebsdorfergrund 1.

to: Professor Hans-Gbnter Krusselberg, In der Opfergarten

8, Germany.

am very happy to have been invited to present a paper for this conference

by

Professor Baer and Professor Conroy, and I am eager to thank Professor William Glade very much for his comments on the first version of this paper presented on November 4,1993, Austin, Texas. 2. See Krfisselberg (1992) _ 3. 4.

See Hensel (1972/1992, Erhard (1963, p. 194).

5.

Erhard (1963, p. 7).

pp. 176-182).

in

296

QUARTERLY REVIEW OF ECONOMICS AND FINANCE 6.

In March

1992

the Treuhandanstalt

Otto Wolff von Amerongen, Breuel,

President

experience

neighbors

p. 162).

Project

by many foreign

ment permanently In order Europe

to manage

of Central agency Eastern

Actually,

inquiries

and Eastern

the Treuhandanstalt

Europe.

for intensive

created

It is said that this company

up the structures

needed

(Treuhandanstalt

will be regarded consultancy

Govern-

on privatization. Treuhand

of experience economy

Eastern

to the countries

will serve as a contact

for a market

as a Pilot

and the Federal

a company-the

the transfer

to pass on the

to all that our eastern

process”

experiment

the Treuhandanstalt

will operate

in Berlin. and Birgit

and control

in the countries

of

Europe.

7.

Treuhandanstalt

(1992,

p. 163);

8.

Treuhandanstalt

(1992,

pp. 183-299).

9. 10.

Baer/Birch

(1992,

Donges/Schatz

12.

See, however,

theprivatization are policy

(1992,

the much

state in the economy

(1992,

p. 182).

pp. 26-27). pp. 180-181).

broader

many dzj@rentpolicieswhere

encompasses

Wolff von Amerongen

pp. 9-10).

(1986,

11. Wolff von Amerongen

definition a common

and to strengthen

of Baer/Birch: objective

the role of market

“The

is to reduce forces.

term ~uatization

the influence

of the

included under

Most often

rubric are liberalization, deregulation and divestiture. Liberalization and deregulation

programs

which

seek to remove

increase

competitive

forces

in the market.

ronment

for companies

costs

of the privatization

and requests

Company-which

to assist in setting

Congress

that “while it is important

that the German

governments.

that,

Consultancy

concluded

in the course

it seems

received

a Privatization

East-West Trade Committee,

equal value must also be attached

have learned

Nevertheless,

organized

of the German

of the Treuhandanstalt,

of the Treuhandanstalt,

European 1992,

Chairman

(and benefits)

by allowing

of lobbying

the sale of publicly-owned the most attention

market

forces

and negotiating

market

regulation

13.

See Treuhandanstalt

14.

Breuel

press” (Baer/Birch

(1992,

Foreword,

and introduce

a more

to assert themselves

for licenses

competitive

the

Divestiture is

permits.

programs

or envi-

and by reducing

and other

assets and is the aspect of privatization

in the popular (1992,

or reduce

Deregulation may create

that has received

1992, p. 151; italics H.G.K.).

p. 162).

pp. 166-167).

15.

Breuel

(1992,

p. 167).

16.

Which

Robin

Marris

17.

Eucken

(1951,

pp. 47,80).

18.

Eucken

(1951,

pp. 82-86).

19.

Eucken

(1951),

20.

Eucken

(1968).

21.

See Eucken

22.

See, e.g., Riistow

calls “Managerial

Capitalism”-see

Marris

(1992,

p. 36).

p. 315.

(1968,

pp. 254-304). (1950,

pp. 50-56);

Rustow

(1960,

pp. 7-16);

Miiller-Armack

(1960,

pp. 275-291,301-313). 23.

Baer/Birch

24.

Treuhandanstalt

(1992,

(1993,

p. 4).

25.

Treuhandanstalt

(1993,

pp. 4-5).

26.

See Luft (1992,

pp~ 43,51,53).

27.

See Luft (1992,

p. 31).

28.

Luft

(1992,

look at the crucial

p. 18).

p. 66).

If we intend

formulations

to control

of the Preamble:

that statement

of Christa

Luft we should

297

BURDEN OF DIVESTITUBE STBATEGY “The intention

l

To reduce through

l

of this Act is: the commercial

activity

To establish

the competitiveness

and create

employment;

l

To provide

land and premises

l

To grant depositors the unfavorable evaluation

29.

(1)

of as many companies for commercial

conversion

as possible

as possible

in order

adjustment

of the present

and Task of the Treuhand);

The Treuhand

assets to offset

This will take effect

and in balancing

staff at the Treuhand

after

utilized

in

the state budget.” that the crucial

paragraph

is

it states:

is an independent

and use of state-owned

2, 1990.

power and after they have been

of the economy

to secure

purposes;

rate of June

of these assets and their earning

It is the persuasion

tion

and extensively

the legally vested right to a share in the state-owned

currency

the structural 32 (Function

of the state as rapidly

privatization;

government

assets

based

agency

established

on the principles

for the privatiza-

of the social

market

economy. (6)

Treuhand

promotes

requirements then

transferring

them

decentralization structures (7)

the

structural

by developing into

within

an efficient

the Treuhand

Under former tisierung

German

Democratic

the terms of the Unification GDR,

the Trusteeship

aims to create

market

enterprises

and

a program

competitive

of

corporate

future

privatizations,

and issues debentures

between

the Federal

the Treuhand as established

Republic

by

of Germany

Republic.

Treaty between

Act will continue

und Reorganisation

to meet

By implementing

from

process

27 of the State Treaty concluded

and the former

economy

base.

proceeds

can raise loans for the restructuring Article

ownership.

industrial

of anticipated

of the

viable firms into competitive

private

and divestment,

On the strength

adjustment

potentially

the Federal

Republic

to apply as federal

des volkseigenen

Vermogens

of Germany

law” (Gesetz

[Treuhandgesetz]

and the zur Priva-

vom

1’7. Juni

1990). 30.

Baumgarten

(1992,

p. 286).

31.

Baumgarten

(1992,

p. 137).

32.

Economic

Commission

(1992,

p. 204).

33.

Economic

Commission

(1992,

p. 217).

34.

Economic

Commission

(1992,

p. 204).

35.

Commons

(1968,

36.

Kriisselberg

37.

See Opitz

(1980,

38.

Economic

Commission

39.

Schwartz/Lopes

(1980,

40.

SVR (1992,

41.

See Baer/Birch class,

(1993,

(1992,

p. 205).

p. 16).

(1992,

p. 19). “Although

and efficiency

. in some developing

assets to a small group of ownership

pp. 16-17).

p. 69).

p. 94).

the size, sophistication, capitalist

pp. 78-81).

of wealthy

and the appearance

elites.

privatization

of emerging countries Instead

of a large

capital

should

markets

. . . (it) has resulted of the anticipated number

theoretically and develop

in the transfer benefits

of small capitalists,

enhance a stronger of public

of the dispersion wealth

is further

298

QUARTERLY

concentrated. process

REVIEW

This unbalanced

and undermine

42.

Those

limitations

insights

43.

well-known

in reflecting

of ownership

See Baer/Birch

(1992,

given

have known

answered

on July 30,1993

had been

concluded

“Vertragsstrafen,”

capital

President

markets

(added

“Two major

H.G.K_)

in Latin

and the highly skewed distribu-

assents

to the

was asked what she could

that it would have been better

(1993,

the development

experiences:

of the Treuhand

Breuel

that is, with punishment

Fuest/Kroker

on Latin America’s

what was to be expected

with very definite

and retard

from privatization.”

p. 15).

by the

before

can distort

(and entrepreneurship;

weekly, “Die Zeit,” Mrs. Birgit

if she could

44.

structure

of well-developed

In an interview

AND FINANCE

that were said to accrue

were gained

were the absence

tion of income.”

ownership

the benefits

to the dispersion

America

OF ECONOMICS

about

internationally

have done

in the privatization

if from the beginning

investments

better

process.

She

only contracts

and employment

and fines in the case of the breach

and with

of contract.

pp. 5, 14).

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