The present policy of privatization in east Germany consists of low-price sales of industrial firms to those investors who present the best investment pledges and job guarantees. This policy has been successful: privatization of 2,500 industrial firms in the first six months of 1991 attests to much more than was achieved in Czechoslovakia or Poland during the same period. This paper argues, however, that the extent of giving away national property could be reduced by applying a modified version of the Sinn-Sinn participation model, making the Government’s property trust (Treuhandanstalt) a silent partner of the private investors. The Akerlof proposal of a general scheme of wage subsidies has been rejected in the paper because it would lead to undesirable consequences and because the existing German system of retraining and wage-subsidy schedules seems to be preferable.
Furthermore, the present paper argues that the 1991 euphoria for rapid privatization will have disappeared by the end of 1993, by which time the Treuhandanstalt might have fully degenerated into a government-financed subsidization trust to keep alive nonviable firms in east Germany. Hence, the paper argues against restructuring by the Treuhandanstalt and proposes to set decreasing limits on its finances for the years following 1993, to be published now and not just before the next federal election in 1994. The decreasing financial inflow will force the Treuhandanstalt to close firms and will also signal the commitment of the Government to liquidate the Treuhandanstalt itself by, say, the year 2000.