Privatizations Spark Socialist Backlash: Evidence from East Germany’s Transformation

Anselm Hager (HU Berlin), Moritz Hennicke (U Bremen & ULB Brussels), Werner Krause (U Potsdam), Lukas Mergele (BSS)

Preferences over Firm Ownership?

Mergele, Hennicke and Lubczyk (2024)
  • Redistribution: State transfer policies e.g. taxes, benefits
  • Predistribution: Market policies e.g. unions, protectionism, minimum wage

This paper

RQ: Do privatization and non-local ownership increase support for Socialist parties?
  • Case study: East Germany's Economic Transformation 1990-1994
    • Treatment: Local exposure (district and municipality) to privatizations
    • Outcome: Vote for Party of Democractic Socialism (PDS), successor of regime party Socialist Unity Party (SED)
  • DiD Evidence:
    • (+) Privatizations to West Germans for 1994, (0) in 1998
      • Spillovers
      • Convergence in preferences for (p)redistribution (Alesina & Fuchs-Schuendeln 2007)?
    • (0) Privatizations to East Germans through MBO
    • (0) Job loss


  • Preferences for (P-)redistribution
    • Kuziemko, Longuet-Marx, and Naidu (2022): U.S. less-educated prefer predistribution (protectionism, unions) over redistribution (taxes, transfers)
    • → State-owned enterprises and local ownership as dimensions of predistribution
  • Success of communist successor parties in transition countries
    • Alternative explanations: Organizational strength (Tavits 2012, 2013), institutional legacies (Geddes 1995)
    • → Supportive evidence of "vicissitudes of the transition and its economic consequences" (Grzymala-Busse 2002)
  • Legacy of authoritarian systems on political preferences
    • East vs West Germany "natural experiment": Preferences for redistribution (Fuchs-Schuendeln 2007), trust (Rainer & Siedler 2009), gender (Lippmann & Senik 2018), immigration (Carl 2018)
    • → Adding to pre-WWII differences (Becker, Mergele and Woessmann 2020) this misses crucial transition period

The privatization program

  • November 1989: Fall of Wall
  • March 1990: Privatization agency "Treuhand" founded by last Socialist government (SED)
  • September 1990: Detlev Rohwedder becomes director, agecny staffed with West German business elite
    • 14 local branches headed by West Germans
    • Minister presidents of East German states on supervisory board, rarely voted against directorate
    • Restitutions decided in courts for expropriations in 1930ies and 1970ies, but not in 1940/50ies
    • In charge of 100% of manufacturing firms, 27% services, 50% of jobs
  • April 1991: Director is murdered allegedly by left-wing terrorists (RAF)
  • Dezember 1994: End of program
    • More than 14k firms privatized (54%), liquidated (25%), restituted (13%) or remunicipalized (2%)
    • Public ownership 1990→2000: Russia 70%→20%, China 55%→40% (Novokmet et al 2018)

Treatment: Share of privatized firms 1990-1994

  • Data: Privatization status of universe of firms, location from representative firm surveys (Hennicke, Lubczyk & Mergele 2020)

Treatment: Treuhand privatization decisions

  • Less than 5% of firms were privatized until the end of 1990

Outcome: PDS vote share

  • PDS lost in last "free" election of the GDR to the Conservative Christ Democrats (CDU)

DiD estimation: TWFE with leads and lags

  • Treatment: Share of privatizations and liquidations, omitting share of restitutions in adminstrative region $l$ for election $t$
\[y_{lt} = \sum_{t \neq -1} \beta_{t} privatizations_l * \tau_t + \sum_{t \neq -1} \beta_t liquidations_l * \tau_t \\ + \sum_t \beta_t X_l * \tau_t + \nu_l + \tau_t + e_{lt} \]
  • Fixed Effects: 5 elections $\tau_t$ and administrative regions $\nu_l$
  • Controls: State and 1990 population trends
  • Weights: Population

DiD: Socialist vote share

  • Fed. Elec. 1994: 1 sd privatizations in municip. ↗ 0.55 pp
  • Fed. Elec. 1994: 1 sd privatizations in districts ↗ 0.67 pp

DiD: Socialist vote share with untreated municipalities

  • Enable us to include restitutions

DiD: Binary Treatment

  • Compares municipalities with Treuhand firms to municipalities without
  • Requires weaker assumption of parallel trends than continuous treatment (Goodman-Bacon, Sant'Anna & Callaway 2022)

Privatizations: Sensitivity to Violations of Parallel Trends (Rambachan and Roth 2022)

Smoothness Restrictions
Relative Violations

DiD: Spillovers and Persistence of Effect

  • Spillover: Average treatement intensity in 10km buffer
  • Alternative: Convergence of preferences for (p)redistribution (Alesina and Fuchs-Schuendlen 2007)

Mechanism: Management-Buy-Out (MBO)

  • Apart from restitutions: MBO only way for East Germans to gain control
DV: Socialist Voting
Privatizations (w/o MBOs) x 1994 General Election1.659***7.551***
MBOs x 1994 General Election0.680-1.823
Liquidations x 1994 General Election1.386***5.379**
Adjusted R20.9200.962
Residual Std. Error0.018 (df = 5803)0.047 (df = 411)
Note:*p<0.05; **p<0.01; ***p<0.001

East vs West German attitudes in 1994

  Average agreement
  (4-point scale)
  West East
"Reunification was beneficial to West" 2.1 3.0
"Reunification was beneficial to East" 3.1 2.4
"East Germany's fate depends on whether they try hard" 3.1 2.3
"East Germans can't handle competitiveness of markets" 3.0 2.6
"Political organization is useless" 2.6 2.7
"State must interfere in economy to safeguard prices" 2.9 3.4
"Profits are fairly shared in society" 2.1 1.6
"Profits are necessary for a functioning economy" 3.0 2.7
"Class matters" 2.8 3.4
"Skills matter, not upbringing" 3.0 2.6

Alternative mechanisms: Job Loss

DV: Socialist Voting
Privatizations x 1994 General Election1.281***7.322**
Liquidations x 1994 General Election2.612***7.623*
Privatizations x 1994 General Election x 1994 Employment Loss1.166-2.079
Liquidations x 1994 General Election x 1994 Employment Loss-0.712-0.974
Adjusted R20.9230.958
Residual Std. Error0.018 (df = 5222)0.050 (df = 403)
Note:*p<0.05; **p<0.01; ***p<0.001

Alternative mechanisms: Individual job loss

  • Staggered treatment of first unemployment experience (Callaway & Sant'Anna 2021)

Alternative mechanisms: Corruption

  • Entire local branch of Treuhand in Halle was exposed of corruption
DV: Socialist Voting
Privatizations x 1994 General Election1.595***7.198***
Liquidations x 1994 General Election1.382***7.022**
Privatizations x 1994 General Election x Halle-1.049-5.103
Liquidations x 1994 General Election x Halle0.412-3.628
Adjusted R20.9210.958
Residual Std. Error0.018 (df = 5795)0.050 (df = 403)
Note:*p<0.05; **p<0.01; ***p<0.001


  • East German transition
    • Rapid average wage growth and investment into infrastructure
    • Loss of local control of firms
  • Privatizations led to resurgence of reorganized Socialist Party
    • Expression of preferences over economic ownership