German Privatization Agency Ceases Work

Treuhand officials claim they achieved most goals without major social upheaval

AN exhibit here at the headquarters of Treuhand, Germany's privatization agency, presents eastern German industry at its best.

Some sophisticated crafts are displayed, including intricate glasswork from a factory in Jena and high-tech mountain bikes made in Saxony. More mundane household goods - from Florena facial cream to Spee laundry detergent - are also in the show.

The exhibit confirms that some eastern German products are ready to compete in world markets. But what it doesn't indicate are the enormous economic and social costs Treuhand incurred to make the transformation from Communist to capitalist business methods possible.

Treuhand's resuscitation of the moribund eastern German economy has left about $200 billion in debts, for which German taxpayers are responsible. In addition, critics say the agency's strategy of rapid privatization caused excessive economic dislocation for eastern Germans.

Treuhand's top managers say hardships were unavoidable in the privatization process, adding that there was no precedent for an operation of such massive scope. That they were able to achieve most of their goal, while avoiding major social upheaval, is an accomplishment of which Treuhand officials are proud.

``Our concept was the right policy at the right time,'' said Joachim Fried, a Treuhand official.

The agency is scheduled to cease operation on Saturday after more than four years of privatization. Statistically, the agency has produced impressive results, privatizing more than 13,680 enterprises - from large factories to corner grocery stores. Less than 100 businesses remain unsold.

But a look at the privatization process shows the job hasn't been easy.

The parliament of the Communist-led German Democratic Republic, or East Germany, created Treuhand in March 1990, four months after the Berlin Wall fell. Legislation in June 1990, while Germany was still divided, made the agency the owner of all enterprises, real estate, farmland, and forests that had been owned by the state under communism.

Huge holding company

Treuhand emerged virtually overnight as the world's largest holding company. Its task was to prepare businesses for market competition, then find private-sector buyers for the properties. It proceeded to spend billions on technological modernization, labor retraining, environmental cleanup, and paying off Communist-era debts. The operating principle was to make eastern German companies as attractive as possible for investors, thus, hopefully increasing the chances that new owners would keep the businesses going.

But along the way, there were obstacles that helped make Treuhand's privatization job more difficult than just about anyone imagined. In particular, the German monetary union of July 1990 eliminated competitive advantages of eastern German business, such as cheaper labor costs. Currency union - which allowed eastern Germans to exchange Communist-era ostmarks for West German deutsche marks at a 1:1 ratio - made costs higher in eastern Germany, thereby diminishing its appeal for investors.

But that union satisfied a demand for more purchasing power and stemmed a westward migratory flow. One side effect was that property and business values in eastern Germany jumped by up to 500 percent, placing them out of reach of most would-be eastern German investors.

Despite the drawbacks, there was no way to avoid monetary union, Mr. Fried insists. ``It was clear that either the mark had to go east, or the East would go to the mark,'' he says. ``What counted was political necessity.''

Public's whipping post

While monetary union may have been unavoidable, some Treuhand observers say West German Chancellor Helmut Kohl's government erred by not preparing the population psychologically for reunification's hardships. Mr. Kohl, who was facing reelection in 1990, promised that the process would be relatively painless, painting a picture of ``blooming landscapes.'' When the rosy scenario failed to materialize, however, eastern Germans started to complain, and the high-profile Treuhand became a whipping post for the people's wrath.

``Treuhand had a job to do, and there was no other solution,'' Guenter Albrecht, an analyst at the German Industry and Trade Council in Bonn, said in defense of the privatization agency's overall accomplishments. ``But if politicians had told the truth about the difficulties, the complaints could have been avoided.''

Much discontent is related to Treuhand's activities. In preparing the ground for privatization, the agency's restructuring of industry - including plant closings - resulted in 2.6 million lost jobs. That was a shock for east German workers, who had grown up with Communist guarantees of lifetime employment.

About half of those laid off have found new jobs. But more than 1 million eastern Germans, or about 13 percent of the work force, are still unemployed. And despite a strong Germany-wide economic recovery, unemployment is expected to remain a problem.

Concurrently, many eastern Germans found themselves largely excluded from the privatization process because they lacked capital. Most businesses were bought up by western German entrepreneurs and firms, while about 800 ended up in foreign hands. That left many locals feeling colonized.

``The problem is that Treuhand degraded east Germans as objects rather than subjects of the process. They should have been more highly integrated,'' said Otto Schily, a federal parliament member of the opposition Social Democratic Party. He heads a parliamentary committee that is investigating Treuhand's performance.

``East Germans have lost faith in the transformation process. We forgot that a market economy is also determined by psychological factors. `Corporate identity' is something that is now missing in east Germany,'' Mr. Schily added.

Indeed, a large number of eastern Germans are expressing disillusionment in various ways. Political apathy is growing, evidenced by lower eastern German voter turnout in recent elections. Other people are voting for the Party of Democratic Socialism, the restyled former East German Communist Party.

The present eastern German political climate is making it difficult to find buyers for companies still in Treuhand's possession. For example, some political and labor leaders are opposing the proposed $72 million sale of Deutsche Wagonbau to the Boston-based investment firm Advent International Corporation. Wagonbau, the largest eastern German enterprise still in state hands, makes railway cars. Local officials fear that a privatized Advent would emphasize profits more than preserving jobs.

The good times - when Treuhand's investments pay off - are largely still to come, Fried insists. In 10 years, he predicts, the eastern German economy should be booming, the way West Germany's was during the 1950s and '60s, a period known as the ``economic miracle.''

Already, the annual eastern German economic-growth rate stands at about 8 percent.

``Expectations were unrealistic because no one took the time factor into consideration,'' Albrecht added.

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