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East Germany ECONOMIC POLICY AND PERFORMANCE
During the interwar years, the territory that is now East
Germany was profoundly dependent on external economic ties. In
the mid-1930s, it shipped almost half of its total production to
the other parts of Germany. In return it obtained a slightly
larger percentage share of its total economic needs from the same
territories. This domestic trade featured sales of agricultural
products; textiles; products of light industry, such as cameras,
typewriters, and optical equipment; and purchases of industrial
goods and equipment. In addition, a substantial share of the
production from the area was shipped abroad in those years, and
additional goods were received in return.
Such a pattern of interdependence and specialization had its
advantages, particularly in ensuring the population a standard of
living comparable with that of West Germany. Conversely chaos
could result if the intricate system of interactions broke down.
Major dislocations occurred after World War II, when Germany was
divided into two sections, one part dominated by the Soviet Union
and the other by the Western Allies.
Because it could no longer rely on its former system of
internal and external trading, the Soviet Zone of Occupation had
to be restructured and made more self-sufficient through the
construction of basic industry. Such an economic strategy was
also dictated by the Stalinist pronouncement that the newly
established people's democracies in Eastern Europe were to
replicate the Soviet economic strategy, which emphasized heavy
industry and a trade denial policy bordering on autarky. For East
Germany, this meant building iron and steel plants and increasing
the country's capacity to produce chemicals and heavy machinery
regardless of the cost such a strategy imposed on living
standards.
The reorientation and restructuring of the East German
economy would have been difficult in any case. The substantial
reparations costs that the Soviet Union imposed on its occupation
zone, and later on East Germany, made the process even more
difficult. Payments continued into the early 1950s, ending only
with the death of Stalin. According to Western estimates, these
payments amounted to about 25 percent of total East German
production through 1953.
Reconstruction was complicated by the massive effort to
introduce socialism that began almost immediately after the war.
In October 1945, the Soviet Military Administration in Germany
ordered the confiscation of all properties belonging to former
Nazis and their sympathizers. The measure affected properties of
the great German banking concerns and about 10,000 other
enterprises. In 1946 the first phase of agrarian reform began; it
involved redistribution of all landholdings over 100 hectares, as
well as lands owned by former Nazi activists, and affected about
one-third of all land in agricultural production. Agricultural
laborers, poor farmers, and Germans recently resettled from the
"lost territories" in Eastern Europe received about two-thirds of
this confiscated land, and the remainder was converted into state
farms.
The public reaction to reparations and land reform, though
muted, was mixed. Reparations costs could hardly have been well
received by the impoverished population, whatever their political
views. Dispossession of the ex-Nazis and large landowners may
have been popular with many, including those who received parcels
of land; but many individuals who were dispossessed fled to the
West with their much needed expertise, if not their movable
resources. In addition, dividing the land into small units (the
plots averaged about eight hectares) was unlikely to lead to the
institution of efficient farming methods, although initially the
level of mechanization in agriculture was so low that the matter
was of little significance.
The postwar years and the early 1950s were very difficult
ones for the East Germans. About 2 million more people lived in
East Germany during the immediate postwar years than in the
1930s, straining the country's limited resources. Nevertheless,
official statistics suggest that by 1950 the extent of economic
recovery was already impressive (see
table 4, Appendix A).
By 1950 the results of the state's cautious steps toward the
socializing of both industry and agriculture were already
discernible. Near the end of 1950, about 66 percent of all
industry, 40 percent of the construction enterprises, and 30
percent of the domestic trades were already state owned. In 1952,
six years after the land had been distributed to the poorer
agricultural population, collectivization of agriculture began in
earnest. By 1960 about 85 percent of the land had been
collectivized.
During the 1950s, East Germany made significant economic
progress, at least as indicated by the gross figures. By 1960
investment had grown by a factor of about 4.5, while gross
industrial production had increased by a factor of 2.9. Within
that broad category of industrial production, the basic sectors,
such as machinery and transport equipment, grew especially
rapidly, while the consumer sectors such as textiles lagged
behind.
In the 1950s, the size, composition, and distribution of the
labor force also underwent significant change. Although during
that decade the population declined by 1.2 million, the number
employed actually increased by about 500,000, a development
caused by an increase of over 650,000 in the number of working
women. In the same period, the percentage of the total labor
force employed in industry increased by about 7 percent (to 36
percent of the total), while agricultural labor dropped from 28
to 22 percent of the labor force. The only other significant
shift was in the services area, which increased its share of the
labor force from 12.5 to 15 percent.
Consumption grew significantly in the first years, although
from a very low base, and showed respectable growth rates over
the entire decade (see
table 5, Appendix A). Fluctuations were
considerable from year to year, however. High rates for the years
1954, 1955, and 1958 reflected consumption-oriented policies
proclaimed in 1953 (the New Course) and 1958 (the year that
witnessed the inauguration of the Seven-Year Plan for 1959-65).
In 1955 and again in 1960, downturns were recorded, in the latter
year partly because of popular resistance to further steps toward
the full collectivization of agriculture. Disruptions in
agriculture and the migration of East Germans to the West, which
reached a high point at the beginning of 1961, helped to produce
a general crisis in the economy, as reflected in almost all the
economic data for the early 1960s.
As the 1950s ended, pessimism about the future seemed rather
appropriate. Surprisingly, however, after construction of the
Berlin Wall and several years of consolidation and realignment,
East Germany entered a period of impressive economic growth that
produced clear benefits for the people. For the years 1966-70,
GDP and national income grew at average annual rates of 6.3 and
5.2 percent, respectively (see
table 6, Appendix A).
Simultaneously, investment grew at an average annual rate of 10.7
percent, retail trade at 4.6 percent, and real per capita income
at 4.2 percent (see
table 7, Appendix A).
During the 1960s, collectivization of agriculture continued.
The number of people employed grew steadily, although marginally,
by about 80,000, despite a net population decrease of more than
100,000 and an increase in the percentage of the population
either too old or too young to be part of the labor force. By the
end of the 1960s, the percentage of women in the work force had
reached 48.3 percent. The most significant shift in the sectoral
composition of the labor force was the continued drop in the
relative size of the agricultural labor component, which went
from 17 percent of the total in 1960 to about 12 percent a decade
later.
As of 1970, growth rates in the various sectors of the
economy did not differ greatly from those of a decade earlier.
Production increase continued to be highest in the basic industry
areas, while light industry--textile and food-processing
branches--still lagged. Production reached about 140 to 150
percent of the levels of a decade earlier. Agricultural growth
was not reported in comparable terms, but it is possible to
compare total production of certain key items for the years 1966-
70 against those for 1956-60 and thus obtain a rough measure of
increase, while minimizing the impact of a possible single poor
harvest (see
table 8, Appendix A). The growth rates in production
resulted in substantial increases in personal consumption (see
table 3, Appendix A).
This same period also saw the establishment and subsequent
dismantling of significant economic reforms. The SED leadership
instituted the New Economic System (NES), as the reforms came to
be known, at its Sixth Party Congress held in 1963. The
theoretical basis of the NES drew upon the ideas of the reform-
minded Soviet economist Evsei Liberman. Specifically, East
Germans who advocated reform argued that existing procedures
placed too much emphasis on numbers (the "tonnage" ideology) at
the expense of efficiency, that the distorted pricing system
caused excessive waste and improper decision making, and that
innovation was being stifled because enterprises had neither the
incentive nor the autonomy necessary to introduce progressive
changes. The NES substantially decentralized authority, giving a
degree of power to production units; central controls were
effected essentially through fiscal and monetary instruments.
Prices were altered and made more flexible and thus more
rational, while enterprises were given much greater control over
their investment and other funds.
The reform did not fail in terms of production figures. Yet
by the end of the 1960s, its most important features had been
rescinded. Apparently the crucial factors prompting its
abandonment were both economic and political. Economically,
decentralization had led to unacceptably high investment levels
and decisions that were inconsistent with central priorities.
Politically, the leadership may have simply been uncomfortable
with the trend toward decentralization. The reform also suffered
from its affinity with the liberal economic program of the
Alexander Dubcek era in Czechoslovakia.
Most of the reforms of the 1960s having been abandoned, the
decade of the 1970s began with a "return to normalcy" in terms of
economic organization. By this time, East German leaders could
face the future with a greater measure of confidence than ever
before, for both political and economic reasons. The political
isolation was ending, as demonstrated by East Germany's
conclusion of the Basic Treaty with West Germany in 1972 and its
subsequent admission into the United Nations in September 1973.
And on the economic side, East Germany's performance was
noteworthy.
In the 1970s, with two decades of economic expansion and
development behind them, the East German leaders faced a number
of new problems. Concern now centered on how East Germany should
proceed under conditions of "mature socialism." In the 1970s, in
East Germany and in the other member states of Comecon, attention
focused on the proper way to respond to the trend toward ever
expanding varieties of products needed in an advanced society,
many of which were becoming more complex and expensive to
produce. Since this trend meant increasing costs for each
increment in total product output, prospects for sustained
economic growth at previous rates were uncertain.
The Comecon member states agreed that the organization would
move toward greater integration, specialization, and cooperation
of the several economies in what became known as the
Comprehensive Program of 1971
(see Appendix B).
The member states
would pool their resources for the development of costly and
sophisticated projects of organizationwide importance. Members
would also specialize in certain areas of production to minimize
duplication of effort. For example, no longer would every member
manufacture ships or buses; only one or two countries would
produce such items, which they would then trade for goods
produced elsewhere. All countries would presumably benefit from
the greater efficiency of mass production.
This focus inevitably had significant implications for the
East German economy, i.e., how it should be structured, what it
should produce, and so on. In general, East Germany gradually
consolidated production units into larger and larger entities,
culminating in the introduction of the Kombinate of the
late 1970s
(see Economic Structure and Its Control Mechanisms
, this ch.). Consolidation also occurred in agriculture; by 1980
there were only one-third as many collective farms as there had
been in 1960.
In the 1970s, unforeseen international developments forced
East German leaders to modify their strategy in some areas. First
came the 1973 price explosion for petroleum, accompanied by a
more general inflationary spiral on the world market. A slowdown
in the rate of growth in Soviet petroleum export capabilities
clouded the future, as did the fact that prices for raw materials
rose much more steeply on the world market than did prices for
the kinds of products East Germany exported. In the late 1970s, a
worldwide recession also had a negative impact on the performance
of the East German economy. Because much of its trade was with
the Soviet Union and the other European members of Comecon, the
East German economy was somewhat insulated from the immediate
effects of changes on the world market. Nevertheless, over the
long run these interrelated developments affected East Germany,
and in each case the impact was decidedly negative. As early as
1970, East Germany began to show a deficit in trade with the West
and after 1975 with the Soviet Union.
Despite these problems, throughout the 1970s the East German
economy as a whole enjoyed relatively strong and stable growth.
In 1971, first Secretary Honecker declared the "raising of the
material and cultural living standard" of the population to be a
"principal task" of the economy; and private consumption grew at
an average annual rate of 4.8 percent from 1971 to 1975 and 4
percent from 1976 to 1980. The economy's sturdy performance was
not a result of a growing labor input the size of the work force
scarcely increased--but rather of a high level of investment in
fixed assets and an increase in materials consumption that
actually exceeded the growth of net output. The 1976-80 Five-Year
Plan achieved an average annual growth rate of 4.1 per cent.
By the end of the 1970s, the country's growing indebtedness
both to the West and to the Soviet Union was becoming a serious
problem. A major priority of the East German economic strategy
for the 1980s, therefore, was holding down imports and
accelerating the growth of exports. The new economic strategy
called for speeding up scientific-technological advances;
reducing specific production consumption (primary materials
consumed per unit of national income), particularly with regard
to energy use; making limited, carefully targeted investments
geared toward modernization rather than new projects; and
improving labor productivity (especially important because little
expansion of the labor force could be expected). The stated goals
were an overall "intensification" of economic processes and
elimination of "reserves," or excess capacity in the system.
The 1981-85 Five Year Plan called for maintenance of previous
growth rates, both in the basic producing spheres and in the
consumer sector, while at the same time mandating a reduction of
6.1 percent per annum in specific consumption of "nationally
important" energy supplies, raw materials, and other materials.
To reduce dependence on imported fuels, East Germany sought to
develop the capability of mining 285 to 290 million tons of
lignite annually by 1985, a substantial increase over the 1980
production level of just under 260 million tons. On the consumer
side, the government sought to hold prices for the basic
necessities at existing levels, necessitating increasing
subsidies from the state over time. The plan projected an
expansion in supplies of consumer goods retail trade by 20 to 23
percent and net personal income by about the same amount. Housing
construction was to continue to receive special attention, and
more than 900,000 units were to be completed by 1985.
While the traditional planned system remained fundamentally
unchanged, a number of significant innovations did occur during
drafting and implementation of the 1981-85 Five-Year Plan. One
change in the direct control mechanisms of the planning process
was the elevation of efficiency measures, including cost/profit
considerations, to a level of primary importance as plan indices.
As of 1983, efficiency measures displaced industrial goods--or
gross--production as the primary consideration (gross production
remained an important consideration in planning, however). This
change implied a cautious upgrading of the profit motive. To
serve as indirect controls on the functioning of the economy, the
plan introduced a series of price increases in the producing
sector, first for raw materials (actually beginning as early as
1976) and subsequently for semifinished and finished goods as
well. Beginning in 1984, a payroll tax, in the form of employer
contributions to social funds, was levied in the industrial
sector to encourage efficient use of labor. Examination of loan
applications submitted by enterprises became more rigorous,
involving a more direct assessment of the proposed investment
project's potential contribution to the "intensification" effort.
The 1981-85 plan period proved to be a difficult time for the
East German economy. The first serious problem was the decision
by Western banks in 1981 and 1982 to clamp down on credit for
East Germany and the concurrent decision of the Soviet Union to
reduce oil deliveries by 10 percent
(see Foreign Trade
, this
ch.). The immediate East German response--retrenchment on Western
imports and stepped up exports--resulted in domestic bottlenecks
and a growth rate of less than 3 percent. However, by the end of
the period the economy had chalked up a respectable overall
performance, with an annual average growth rate of 4.5 percent
(the plan target had been 5.1 percent).
Industrial production proved especially disappointing;
affected as it was by scarcity of resources, it grew at an annual
rate of about 4 percent instead of the targeted 5.1 percent. In
the limited investment program, which amounted to roughly the
same amount as in the previous plan period (264 billion GDR marks
at 1980 prices; for value of the
GDR mark--see Glossary),
metallurgy, the chemical industry, and microelectronics received
high priority, necessarily at the expense of other areas. During
the 1981-85 period, however, specific energy consumption (primary
energy consumption per unit of national income) was reduced by
3.5 percent per year, an impressive record. The savings were
largely in the production sector; household consumption increased
markedly (energy prices for consumers remained stable, and
acquisition of energy-using consumer durables continued apace).
Oil consumption dropped sufficiently to more than compensate for
the cutback in Soviet oil exports that occurred in 1982-83; by
the end of the plan period, East Germany was able to make
available for export (as crude oil and various oil products)
about 40 percent of its oil imports from the Soviet Union. At 312
million tons, lignite production exceeded plan targets in 1985 by
22 to 27 million tons. In the 1984-85 period, the agricultural
sector registered a particularly good performance, and record
harvests were reported. During the plan period, the state raised
crop and livestock prices, and it eliminated subsidies to the
input sector (for example, fuels, feedstuffs, and construction
materials) to promote greater efficiency. The situation of the
individual consumer deteriorated somewhat during the early years
of the plan because of shortages and supply bottlenecks. In 1984
the growth rates in private consumption customary in earlier
years resumed.
During the 1981-85 plan period, East Germany also managed to
reduce substantially its debt both to the West and to the Soviet
Union. Lower oil prices were helpful in some respects, and East
Germany would benefit increasingly as the Comecon price was
adjusted to the new world prices during the 1986-90 Five-Year
Plan period. It was true that lower prices also made East
Germany's re-export of oil products to the West less profitable.
In general, however, by 1985 East Germany was again considered to
be a "good debtor," so that the foreign trade balance was a less
sensitive issue, at least for the time being.
Data as of July 1987
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