Presentation at the Goethe-Centre Nicosia, Cyprus
Nicosia, February 28th 2004
The rather complicated regulations of restitution in East Germany seem to have delayed the economic growth process after Unification. This seems to be especially true in the first years, when restitution was given priority to compensation. After 1992, when the priority was changed, the problem became less important; however, until today a number of about 100.000 claims is still unsettled. As typically these are the more complicated ones, the problem will remain. Additionally, there is, of course, some delay as the personnel of the respective administration might fear to lose their job if proceeding too fast with terminating its task. This, however, seems to be only a minor problem.
More important seems to me that the treatment of expropriated wealth in East Germany was not really fair. Compensation was set rather low, while in case of restitution principally the market value of the respective object could be obtained. Even more, the question might be posed why restitution of those who had left GDR, accepting the loss of their properties, was necessary at all. This, however, is a question that is only academic now.
Introduction
After separation in 1945, East Germany and West Germany had taken two different paths of development. In GDR, a socialist-type system similar to that of the Soviet Union was developed, while the Federal Republic moved to a system called “Social Market Economy”, being much alike the West European kind of economic order. Both systems were refined in the following forty years; therefore the main task after unification in 1990 was to integrate these two completely different economic systems.
One of the major differences between both economic systems is the definition and the character of “property”. In socialist systems, typically, private property of production factors (that is capital and land) is excluded, instead it is – officially – assigned to “the people”. Of course, this does mean that the real owner of these factors of production is the state, not “the people”, but more important is that the individual or the firm that is using this production factor has only limited rights with respect to it. By this construction, the allocation of capital and land (and labor and raw materials as well) to different means of production is made by governmental institutions according to political or social considerations – being the main reason for the well-known inefficiencies of socialist production.
In market based systems, on the contrary, private ownership of production factors is one of the essential principles of this economic order. In combination with the other elements of the market mechanism (that is: decentralized production and consumption plans, coordination of individual plans by prices, competitive environment) private property acts as a mean to assure an optimal allocation of resources – that is, production factors are directed towards profit maximizing uses.
So, the economic systems of East and West Germany were largely incompatible to each other. With unification, there was not much discussion of which system to choose; as the GDR failed economically and politically, the only possibility was to join the Federal Republic. This meant, that the West German economic, political and social order was introduced in East Germany, too. While being simple in theory, in practice huge problems arose that were widely underestimated when the main principles of unification were fixed in summer 1990. This was especially true with respect to the issue of property.
Treatment of nationalized property: The legal provisions
Official West German policy had never fully accepted the existence of an independent East German state. Although before 1989 hardly anyone could imagine the possibility of reunification, the West German constitution maintained the fiction of a pan-German nation and the ultimate target of a unified Germany. One consequence of this position was that decisions of East German authorities which were not in line with West German legal principles were considered as illegal. This, in turn, implied that these decisions had to be cancelled after reunification. While convincing in theory, in practice this rule led to many problems that could hamper the transformation process in the new Laender. Additionally, the interests of the citizens of the GDR who had trusted in their system had to be drawn into consideration. And finally, as nearly all East German rules did not fit to the West German system and were abolished, there was widespread dissatisfaction with the results of unification.
Although private ownership of resources is predominant in West Germany, the possibility of expropriation or nationalization exists, for example when land is needed for public infrastructure purposes (Art. 14 III GG). However, several conditions have to be met in this case, mostly important the need to pay a fair compensation. By transferring this constitutional principle of the West German state to the situation in East Germany after unification, expropriation in the GDR was considered legal if a compensation had been given (or at least: if legal provisions promising a compensation existed). In all other cases the nationalization of private property was considered as an act of injustice that had to be reversed. So, policy did not want restore all things that happened in GDR-times, as is sometimes argued, but only those that were not in line with West German legal provisions. Of course, even this was an enormous task, taking much time.
In the unification treaty between the (still existing) GDR and the Federal Republic it was fixed that normally the disposessment acts should be reversed by return of the former property. Only exceptionally, a compensation (instead of restitution) should be paid. This principle should become one of the basics of the unification process: restitution prior to compensation.
The expropriation of property in the Eastern part of Germany took place in several steps. One can distinguish four groups of nationalization types which were differently treated after unification (see also table 1):
- In the first round, even before the foundation of the GDR (that is in 1945-1949), all large industrial firms and all owners of big farmland were nationalized on the basis of occupation law. The reason for this was mainly ideological, but it can also be interpreted as a kind of punishment as most of the owners of these properties were suspicious of having supported the NS-regime in the years 1933 to 1945. A compensation for these expropriations was of course not given; moreover, the former owners were forced to leave their property within only a few hours in most cases. All in all, about 10.000 enterprises and around 33.000 square-kilometres of land were nationalized.
However, in a joint declaration between the GDR and the FRG the restitution of these properties was excluded in an early stage of the unification process already. Officially, it was stated that this had been a precondition of the Soviet Union to allow unification, but it is not quite clear whether this is really true. In any case, the unequal treatment of those being expropriated between 1945 and 1949 and those who lost their property after 1949 is still a problem in Germany.
- The second category of nationalization concerned people that had left the GDR illegally, from 1949 to 1989 about 4,9 million people, most of them in 1950 to 1961 before the Berlin Wall was build. While in the first years their property was formally expropriated, later on for simplicity often only state control was imposed because nobody really expected that the existing system would ever be overcome. So officially the former owners were still the legal possessor of these objects.
As in these cases of expropriation a compensation was (of course) not given either, according to the regulations of the Unification Treaty a claim for restitution was possible. However, in many cases this was not possible for physical reasons or because the authorities had sold the respective goods to GDR citizens, leading to a majority of cases where restitution had to be replaced by compensation payments.
- The third case concerned the property of people who were not residents of the GDR, i.e. foreigners (from a GDR point of view). Officially, their property was also not expropriated but only put under state-control – in fact it did not seem necessary to make a formal nationalization as under normal circumstances it was not possible to get someone’s property back. However, from time to time the GDR authorities claimed money for restoration of the respective objects from the (legal) owners, followed by a formal expropriation as these claims in most cases were not fulfilled. Consequently, restitution was the normal solution according to the Unification treaty.
- Finally, in 1972 the GDR has nationalized most of existing smaller firms. In general, the owners of these enterprises were forced to sell their property to the state at very low prices. In many cases this was accompanied by economic pressure to sell. As a fundamental public need to nationalize was not given, this must be considered as ideologically motivated, justifying the decision to return these firms to their former owners, too.
Table 1: Overview on restitution regulations in East Germany
Expropriation under occupation law 1945-1949
* no return / compensation max. 10 000 DM
Expropriation with compensation according to GDR-law, - only for GDR citizens
* no return / no compensation
Expropriation without compensation (1949- 1989): - disposessment of refugees until 1952, - economic discrimina¬tion/pressure
* return to former owner, but compensation if - restitution physically not possible / - priority of current users / - priority of investment
No expropriation but state control: - refugees after 1952 / - property of for-eigners
* return to legal owner
Despite general nationalization efforts, in 1989 still many (but very small) firms and nearly two thirds of real estate had officially remained in private property but were only put under state control instead. However, as these legal owners had only restricted rights, in fact nationalization was nearly complete. Restitution decisions after unification were nevertheless simplified by this because it was relative easy to identify the legal owners of these objects.
Another aspect is that because of the legal provisions described above, citizens of the GDR who were the legal owners of properties could get this back; however, if they were expropriated, a claim on restitution or compensation was not given because normally they had been compensated for their loss by the GDR itself. The only exception was for those who were disposessed by economic pressure, but this was a small group. So restitution laws in fact favored people from West Germany.
As already mentioned, the restitution of nationalized wealth to former owners was considered to be the “normal” solution for the East German property problem. However, in many cases GDR officials had sold or at least rented the nationalized property to GDR citizens – for example, in GDR it was possible to build a house on a piece of land that belonged to the state. In these cases a compromise were found: the new “users” (that is: the owners of the house) were given a prioritized right to buy the respective land while the former owners could only get a compensation claim. Only if the “user” did not want to buy the respective land, restitution procedures applied. The potential conflict between former owners and current users were therefore normally solved in favor of the current users.
With respect to the volume of compensation, very restrictive regulations were found. Restitution and compensation would have been equivalent if the compensation would be equal to the market price of the respective good. In this case, the legal provisions would be neutral with respect to a former owner’s decision for return or compensation. However, as market prices were often not known, it was determined (1) that the level of compensation payments should be dependent of the historical value of the respective goods, (2) that there should be a differentiated treatment for different types of land and firms, giving farmland a very low value, buildings a medium one and firms a high one, and (3) that the higher the value of the respective property the lower the compensation should be. For example: If the value for a piece of real estate in 1936 (the last officially determined value of real estate in Germany) was 20.000 Reichsmark, the current value was set to be seven times the historic value (that is: 140.000 DM); the compensation, however, was calculated by a degressive formula that resulted in a sum of only 56.000 DM. The maximum compensation for expropriations under the occupation regime (that is in 1945-49) were even set to 10.000 DM per person only. In cases where the market value of the respective goods was supposed to be higher, people would therefore ask for restitution, while only in case of a lower market value compensation was preferred. Especially in cases of attractive objects restitution procedures applied, possibly hindering investment in these objects. Further, former owners did not get cash but only public bonds, due in 2004-2009. As these bonds are bearing no interest, the present value of the compensations was additionally diminished.
Obviously, an additional reason for the low level of compensation was that the Federal Government feared the fiscal burden arising from the expected compensation claims. Indeed, by selling real estate and farm land, the Federal Government earned about 12 bio Euro since 1990; on the other hand, the volume of outstanding compensation bonds is only 442,6 million Euro.[1] This might be one reason for the widespread view that “true” expropriation did not take place in GDR, but merely in the decisions of the pan-German government after 1990.
As nobody really had expected to get his or her former properties back, even a small compensation would have been a “present” to those who had lost their possessions in GDR when leaving the country. To avoid an unequal treatment of those being restituted and those being compensated therefore a uniform rule (and that does mean compensation, not restititution for all) would have been a much better solution.
By the time, restitution claims in former GDR added to nearly 2.6 million (see table 2a and 2b). Most of these were directed towards real estate (2.2 million), only few to enterprises (260 thousand). Further, until today more than 500 thousand claims for compensation were registered. It is obvious that the treatment of these claims soon proved to be a major problem for the public administration. Especially in the beginning, when administrative capacities were limited, the process of restitution decisions was rather slow. Until 1993, only about one third of all claims was solved (and these were, of cause, the simpler ones). However, until today more than 95 per cent of all restitution claims are finished. Nearly half of them proved to be not justified.
Table 2a: Statistics of property restitution in East Germany as of 9/30/2003
The major problem in the early nineties was the disastrous economic development in the former GDR. Production dropped to only one half of former values, and employment declined by about one third. Restitution claims with respect to firms and to real estate was soon identified as one of the reasons for low investment in Eastern Germany. Of course, investment took place, but most of it were “new” investments, i.e. modernization of the existing capital stock did not took place and existing firms had great difficulties to survive. Further, much investment was directed in sub-optimal locations because better investment opportunities were blocked by restitution claims. Finally, as long as restitution claims were unsettled, banks were unwilling to give credit as security could not be given in a sufficient manner. In 1993, 23 per cent of all firms in the construction sector felt themselves handicapped by unresolved restitution problems; in manufacturing, the corresponding figure was about 10 per cent.
Therefore, in 1992 a new principle was imposed, the so called “priority to investment”. This meant that in cases where investment (in firms or in real estate) could not take place due to unsettled restitution topics, the principle of “restitution prior to compensation” was altered into the opposite, i.e. “compensation prior to restitution”. Former owners still had the right to get their property back, but only if they could present an comprehensive investment concept equivalent to that of other investors; however, as the time span to develop such a concept was rather short (only two weeks), normally restitution was excluded. Instead, they had to be compensated, but, differing to the model described above, in this case the compensation was principally set equal to the market value of the respective object (if being higher than the result of the general calculations described in the previous section).
The new principle proved to be rather effective: Investment per capita increased from 1992 to 1993 by nearly 40 per cent, and for the first time after unification it was higher than in West Germany in that year. Something similar hold for privatisation success of the privatization agency (“Treuhandanstalt”). Production in the construction sector that was favored by investment in real estate could regain momentum and increased by about 20 per cent in 1993 and 1994.
A second negative effect of restitution of firms was that not always the “best” investors were chosen. Though it is often argued by those having an interest in restitution that the former owners would have a greater interest in their old firms than any “new” investor, this does not really translate into economic success. Until 1995, re-privatized firms performed significantly worse than those being sold to another investor. Since then, however, the differences between the two types of firms have diminished, maybe because of a higher number of exit from the market.
Finally, investment could have been delayed (especially in larger cities) when due to restitution uncertainties the global attractiveness of investment locations was lowered. Many problems in downtown areas (for example: the impossibility to attract business and retailers) have been caused by the unattractive surroundings. However, this is only a very indirect effect of the whole restitution problem.
Concluding remarks
The rather complicated regulations of restitution in East Germany seem to have delayed the economic growth process after Unification. This seems to be especially true in the first years, when restitution was given priority to compensation. After 1992, when the priority was changed, the problem became less important; however, until today a number of about 100.000 claims is still unsettled. As typically these are the more complicated ones, the problem will remain. Additionally, there is, of course, some delay as the personnel of the respective administration might fear to lose their job if proceeding too fast with terminating its task. This, however, seems to be only a minor problem.
More important seems to me that the treatment of expropriated wealth in East Germany was not really fair. Compensation was set rather low, while in case of restitution principally the market value of the respective object could be obtained. Even more, the question might be posed why restitution of those who had left GDR, accepting the loss of their properties, was necessary at all. This, however, is a question that is only academic now.
[1] Of course, on the other hand, the privatization of state owned enterprises by the privatisation agency brought about a loss of about 120 bio Euro (including outstanding debt) but this is not comparable to the compensation payments as most of the firms being privatized were founded in GDR times.
