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

The fall of the Berlin Wall marks one of the largest transformations of the 20th century. At its core, the year 1990 brought two new systems to Eastern Europe: capitalism and democracy. Yet, to this day, Eastern Europeans show distinctly negative attitudes toward the Western world order, and democratic and market institutions across the region are far from perfect. What explains this unsuccessful transformation? This paper points to the rushed privatization of East European economies as one plausible driver of citizens’ discontent with capitalism and democracy. Using micro-level data from East Germany, we show that firm privatizations led to a marked resurgence of the successor of the former Socialist Unity Party as early as 1994. We argue that this effect is likely due to perceived injustice: Socialist voting thrived whenever firms were sold to Western elites, which local residents took as a sign that capitalism is not meritocratic.