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Sources: The Library of Congress Country Studies; CIA World Factbook
    << Back to Germany (East) Economy

    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

    NOTE: The information regarding Germany (East) on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Germany (East) ECONOMIC POLICY AND PERFORMANCE information contained here. All suggestions for corrections of any errors about Germany (East) ECONOMIC POLICY AND PERFORMANCE should be addressed to the Library of Congress and the CIA.

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