ABSTRACT
Germany faces the monumental challenge of transforming the centrally planned economy of the former German Democratic Republic into a market economy. Monopolies were isolated from the pressures of competition, and the state regulated the right to foreign trade. Firms in eastern Germany must reorient their thinking toward making decisions based on profit and investments in the larger context of a competitive international marketplace. Demand for products from East Germany decreased radically after July 1990 for two reasons. First, Eastern consumers dramatically changed their buying habits when Western goods became available to them. The second reason that demand fell was that many of the Council of Mutual Economic Assistance markets were collapsing as well. The fate of old and new firms in eastern Germany is of crucial importance to the level of public-sector spending that can be maintained in the years to come.
