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East Germany ECONOMIC STRUCTURE AND ITS CONTROL MECHANISMS
Like other East European communist states, East Germany has a
centrally planned economy (CPE), imposed on it by the Soviet
Union in the late 1940s, in contrast to the more familiar market
economies or mixed economies of most Western states. The state
establishes production targets and prices and allocates
resources, codifying these decisions in a comprehensive plan or
set of plans. The means of production are almost entirely state
owned. In 1985, for example, state-owned enterprises or
collectives earned 96.7 percent of total net national income.
Advocates of CPEs consider this organizational form to have
important advantages. First, the government can harness the
economy to serve the political and economic objectives of the
leadership. Consumer demand, for example, can be restrained in
favor of greater investment in basic industry or channeled into
desired patterns, such as reliance on public transportation
rather than on private automobiles. Second, CPEs can maximize the
continuous utilization of all available resources. Under CPEs,
neither unemployment nor idle plants should exist beyond minimal
levels, and the economy should develop in a stable manner,
unimpeded by inflation or recession. Third, CPEs can serve social
rather than individual ends; under such a system, the leadership
can distribute rewards, whether wages or perquisites, according
to the social value of the service performed, not according to
the vagaries of supply and demand on an open market.
Critics of CPEs identify several characteristic problems.
First, given the complexities of economic processes, the plan
must be a simplification of reality. Individuals and producing
units can be given directives or targets, but in carrying out the
plan they may select courses of action that conflict with the
overall interests of society as determined by the planners. Such
courses of action might include, for example, ignoring quality
standards, producing an improper product mix, or using resources
wastefully. Second, critics contend that CPEs have build-in
obstacles to innovation and efficiency in production; managers of
producing units, frequently having limited discretionary
authority, see as their first priority a strict fulfillment of
the plan targets rather than, for example, development of new
techniques or diversification of products. Third, the system of
allocating goods and services in CPEs is thought to be
inefficient. Most of the total mix of products is distributed
according to the plan, with the aid of a rationing mechanism
known as the System of Material Balances. But since no one can
predict perfectly the actual needs of each producing unit, some
units receive too many goods and others too few. The managers
with surpluses are hesitant to admit they have them, for CPEs are
typically "taut," that is, they carry low inventories and
reserves. Managers prefer to hoard whatever they have and then to
make informal trades when they are in need and can find someone
else whose requirements complement their own. Finally, detractors
argue that in CPEs prices do not reflect the value of available
resources, goods, or services. In market economies, prices, which
are based on cost and utility considerations, permit the
determination of value, even if imperfectly. In CPEs, prices are
determined administratively, and the criteria the state uses to
establish them are sometimes unrelated to costs. Prices often
vary significantly from the actual social or economic value of
the products for which they have been set and are not a valid
basis for comparing the relative value of two or more products to
society.
East German economists and planners are well aware of the
alleged strengths and weaknesses of their system of planned
economy. They contend that Western critics overstate the
disadvantages and that in any case these problems are not
inherent in the system itself. They direct their efforts toward
preserving the fundamental framework of the system while
introducing modifications that can address the problems just
noted.
The ultimate directing force in the economy, as in every
aspect of the society, is the Socialist Unity Party of Germany
(Sozialistische Einheitspartei Deutschlands--SED), particularly
its top leadership
(see The Socialist Unity Party of Germany
, ch.
4). The party exercises its leadership role formally during the
party congress, when its accepts the report of the general
secretary (Erich Honecker since 1971; the title of the party
chief changed from first secretary to general secretary in 1976)
and when it adopts the draft plan for the upcoming five-year
period. More important is the supervision of the SED's Politburo,
which monitors and directs ongoing economic processes. That key
group, however, can concern itself with no more than the general,
fundamental, or extremely serious economic questions, for it also
has the full range of other matters on its agenda.
At the head of the government organs responsible for formally
adopting and carrying out policies elaborated by the party
congress and Politburo is the Council of Ministers, which has
more than forty members and is in turn headed by a Presidium of
sixteen. The Council of Ministers supervises and coordinates the
activities of all other central bodies responsible for the
economy, and it may play a direct and specific role in important
cases.
The State Planning Commission (sometimes called the Economic
General Staff of the Council of Ministers) advises the Council of
Ministers on possible alternative economic strategies and their
implications, translates the general targets set by the council
into planning directives and more specific plan targets for each
of the ministries beneath it, coordinates short-, medium-, and
long-range planning, and mediates interministerial disagreements.
The individual ministries have major responsibility for the
detailed direction of the several sectors of the economy. The
ministries are responsible within their separate spheres for
detailed planning, resource allocation, development,
implementation of innovations, and generally for the efficient
achievement of their respective plans.
Directly below the ministries are the centrally directed
trusts, or Kombinate. Intended to be replacements for the
Associations of Publicly Owned Enterprises--the largely
administrative organizations that previously served as a link
between the ministries and the individual enterprises--the
Kombinate resulted from the merging of various industrial
enterprises into large-scale entities in the late-1970s, based on
interrelationships between their production activities. The
Kombinate include research enterprises, which the state
incorporated into their structures to provide better focus for
research efforts and speedier application of research results to
production. A single, united management directs the entire
production process in each Kombinate, from research to
production and sales. The reform also attempted to foster closer
ties between the activities of the Kombinate and the
foreign trade enterprises by subordinating the latter to both the
Ministry of Foreign Trade and the Kombinate
(see Foreign Trade
, this ch.) The goal of the Kombinate reform measure
was to achieve greater efficiency and rationality by
concentrating authority in the hands of midlevel leadership. The
Kombinate management also provides significant input for
the central planning process.
By the early 1980s, establishment of Kombinate for
both centrally managed and district-managed enterprises was
essentially complete. Particularly from 1982 to 1984, the
government established various regulations and laws to define
more precisely the parameters of these entities. These provisions
tended to reinforce the primacy of central planning and to limit
the autonomy of the Kombinate, apparently to a greater
extent than originally planned. As of early 1986, there were 132
centrally managed Kombinate, with an average of 25,000
employees per Kombinate. District-managed Kombinate
numbered 93, with an average of about 2,000 employees each.
At the base of the entire economic structure are the
producing units. Although these vary in size and responsibility,
the government is gradually reducing their number and increasing
their size. The number of industrial enterprises in 1985 was only
slightly more than one-fifth that of 1960. Their independence
decreased significantly as the Kombinate became fully
functional.
In addition to the basic structure of the industrial sector,
a supplementary hierarchy of government organs reaches down from
the Council of Ministers and the State Planning Commission to
territorial rather than functional subunits. Regional and local
planning commissions and economic councils, subordinate to the
State Planning Commission and the Council of Ministers,
respectively, extend down to the local level. They consider such
matters as the proper or optimal placement of industry,
environmental protection, and housing.
The agricultural sector of the economy has a somewhat
different place in the system, although it too is thoroughly
integrated. It is almost entirely collectivized except for
private plots
(see Economic Sectors
, this ch.). The collective
farms are formally self-governing. They are, however, subordinate
to the Council of Ministers through the Ministry of Agriculture,
Forestry, and Foodstuffs. A complex set of relationships also
connects them with other cooperatives and related industries,
such as food processing.
The fact that East Germany has a planned economy does not
mean that a single, comprehensive plan is the basis of all
economic activity. An interlocking web of plans having varying
degrees of specificity, comprehensiveness, and duration is in
operation at all times; any or all of these may be modified
during the continuous process of performance monitoring or as a
result of new and unforeseen circumstances. The resultant system
of plans is extremely complex, and maintaining internal
consistency between the various plans is a considerable task.
Operationally, short-term planning is the most important for
production and resource allocation. It covers one calendar year
and encompasses the entire economy. The key targets set at the
central level are overall rate of growth of the economy, volume
and structure of the domestic product and its uses, utilization
of raw materials and labor and their distribution by sector and
region, and volume and structure of exports and imports.
Beginning with the 1981 plan, the state added assessment of the
ration of raw material use against value and quantity of output
to promote more efficient use of scarce resources.
Medium-range (five-year) planning uses the same indicators,
although with less specificity. Although the five-year plan is
duly enacted into law, it is more properly seen as a series of
guidelines rather than as a set of direct orders. It is typically
published several months after the start of the five-year period
it covers, after the first one-year plan has been enacted into
law. More general than a one-year plan, the five-year plan is
nevertheless specific enough to integrate the yearly plans into a
longer time frame. Thus it provides continuity and direction.
In the early 1970s, long-term, comprehensive planning began.
It too provides general guidance, but over a longer period
(fifteen or twenty years), long enough to link the five-year
plans in a coherent manner.
In the first phase of planning, the centrally determined
objectives are divided and assigned to appropriate subordinate
units. After internal consideration and discussion have occurred
at each level and suppliers and buyers have completed
negotiations, the separate parts are reaggregated into draft
plans. In the final stage, which follows the acceptance of the
total package by the State Planning Commission and the Council of
Ministers, the finished plan is redivided among the ministries,
and the relevant responsibilities are distributed once more to
the producing units.
The production plan is supplemented by other mechanisms that
control supplies and establish monetary accountability. One such
mechanism is the System of Material Balances, which allocates
materials, equipment, and consumer goods. It acts as a rationing
system, ensuring each element of the economy access to the basic
goods it needs to fulfill its obligations. Since most of the
goods produced by the economy are covered by this control
mechanism, producing units have difficulty obtaining needed items
over and above their allocated levels.
Another control mechanism is the assignment of prices for all
goods and services. These prices serve as a basis for calculating
expenses and receipts. Enterprises have every incentive to use
these prices as guidelines in decision making. Doing so makes
plan fulfillment possible and earns bonus funds of various sorts
for the enterprise. These bonuses are not allocated
indiscriminately for gross output but are awarded for such
accomplishments as the introduction of innovations or reduction
of labor costs.
The system functions smoothly only when its component parts
are staffed with individuals whose values coincide with those of
the regime or at least complement regime values. Such a sharing
takes place in part through the integrative force of the party
organs whose members occupy leading positions in the economic
structure. Efforts are also made to promote a common sense of
purpose through mass participation of almost all workers and
farmers in organized discussion of economic planning, tasks, and
performance. An East German journal reported, for example, that
during preliminary discussion concerning the 1986 annual plan,
2.2 million employees in various enterprises and work brigades of
the country at large contributed 735,377 suggestions and
comments. Ultimate decision making, however, comes from above.
The private sector of the economy is small but not entirely
insignificant. In 1985 about 2.8 percent of the net national
product came from private enterprises. The private sector
includes private farmers and gardeners; independent craftsmen,
wholesalers, and retailers; and individuals employed in so-called
free-lance activities (artist, writers, and others). Although
self-employed, such individuals are strictly regulated. in 1985,
for the first time in many years, the number of individuals
working in the private sector increased slightly. According to
East German statistics, in 1985 there were about 176,800 private
entrepreneurs, an increase of about 500 over 1984. Certain
private sector activities are quite important to the system. The
SED leadership, for example, has been encouraging private
initiative as part of the effort to upgrade consumer services
(see The Consumer in the East German Economy
, this ch.).
In addition to those East Germans who are self-employed full
time, there are others who engage in private economic activity on
the side. The best known and most important examples are families
on collective farms who also cultivate private plots (which can
be as large as one-half hectare). Their contribution is
significant; according to official sources, in 1985 the farmers
privately owned about 8.2 percent of the hogs, 14.7 percent of
the sheep, 32.8 percent of the horses, and 30 percent of the
laying hens in the country. Professionals such as commercial
artists and doctors also worked privately in their free time,
subject to separate tax and other regulations. Their impact on
the economic system, however, was negligible.
More difficult to assess, because of its covert and informal
nature, is the significance of that part of the private sector
called the "second economy." As used here, the term includes all
economic arrangements or activities that, owing to their
informality or their illegality, take place beyond state control
or surveillance. The subject has received considerable attention
from Western economists, most of whom are convinced that it is
important in CPEs. In the mid-1980s, however, evidence was
difficult to obtain and tended to be anecdotal in nature.
One kind of informal economic activity includes private
arrangements to provide goods or services in return for payment.
An elderly woman might hire a neighbor boy to haul coal up to her
apartment, or an employed woman might pay a neighbor to do her
washing. Closely related would be instances of hiring an
acquaintance to repair a clock, tune up an automobile, or repair
a toilet. Such arrangements take place in any society, and given
the serious deficiencies in the East German service sector, they
may be more necessary than in the West. They are doubtless
common, and because they are considered harmless, they are not
the subject of any significant governmental concern.
There is another kind of private economic activity, however,
that does concern the government: the stealing and selling of
goods for profit by individuals who have ready access to them.
For example, an individual might siphon gasoline from a public
vehicle and sell it to a friend. No statistics are available on
such practices. Surface impressions, however, suggest that they
are not very common or significant, certainly not as significant
as may be the case in other socialist states where they are
reportedly quasi-institutionalized.
Another common activity that is troublesome if not disruptive
is the practice of offering a sum of money beyond the selling
price to individuals selling desirable goods, or giving something
special as partial payment for products in short supply. Such
ventures may be no more than offering someone Trinkgeld (a
tip), but they may also involve Schmiergeld (money used to
"grease" a transaction) or Beziehungen (special
relationships). Opinions in East Germany vary as to how
significant these practices are. But given the abundance of money
in circulation and frequent shortages in luxury items and durable
consumer goods, most people are perhaps occasionally tempted to
provide a "sweetener," particularly for such things as automobile
parts or furniture.
These irregularities do not appear to constitute a major
economic problem. However, the East German press does
occasionally report prosecutions of particularly egregious cases
of illegal "second economy" activity, involving what are called
"crimes against socialist property" and other activities that are
in "conflict and contradiction with the interests and demands of
society" (as one report described the situation).
Data as of July 1987
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