Countries of the World/COUNTRYS.BIN/dp/0115/01150.txt

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$Unique_ID{COW01150}
$Pretitle{355}
$Title{German Democratic Republic (East Germany)
Chapter 3A.   The Economy}
$Subtitle{}
$Author{Stephan R. Burant}
$Affiliation{HQ, Department of the Army}
$Subject{east
economic
economy
german
germany
plan
percent
planning
private
system}
$Date{1987}
$Log{}
Country:     German Democratic Republic (East Germany)
Book:        East Germany, A Country Study
Author:      Stephan R. Burant
Affiliation: HQ, Department of the Army
Date:        1987

Chapter 3A.   The Economy

     The economy of the German Democratic Republic (East Germany) has
developed impressively since its founding in 1949. By almost any indicator, it
stands at the top of the socialist world in economic development and
performance. The country has the highest per capita income, the greatest
number of automobiles and hospital beds per 1,000 inhabitants, the highest
labor productivity, and the highest yield in the agricultural sector per
agricultural worker. It uses the most electricity and has the greatest number
of television sets and radios among member states of the Council for Mutual
Economic Assistance (Comecon), all on a per capita basis. East Germany is a
major supplier of advanced technology to the other members. In short, it is
the most modern and industrialized socialist state.

     The condition of the economy is all the more remarkable when one considers the
circumstances under which it has developed. The country was devastated during
World War II. Subsequently Soviet occupation of East German territory placed
heavy burdens on the population and resources. In addition, the partitioning
of the German lands after the war seriously disrupted the economy. East
Germany's heavy industry capacity was very low, and its raw material supplies,
except for lignite (low-grade) coal and potash, were almost nonexistent. The
fact that the country for many years lacked international recognition as a
sovereign state certainly did not contribute to economic growth, and its
population loss before construction of the Berlin Wall was a significant drain
on labor resources.

     Explaining the relatively successful economic record achieved by East Germany
after these early troubled years is not as easy as many assert. It is clear,
however, that the previous level of German industrialization and the existence
of a trained and diligent labor force have been important factors in the
success story. To this East German leaders themselves would add two other
explanations: the socialist character of their system and the help they
received from the Soviet Union, particularly after 1953, the year of Joseph
Stalin's death.

     The differing statistical concepts and procedures used by communist and
noncommunist economists, both of which have drawbacks, result in differing
images of East Germany and the functioning of its economic system. Data
calculated on the basis of noncommunist concepts will be identified by the use
of such Western terms as gross national product; East German statistics will
be called official data or identified by such terms as gross social product or
national income.

Resource Base

     East Germany is a resource-poor and relatively small politico-economic entity.
It must import most of the raw materials it needs, aside from lignite, copper,
and potash. Iron ore deposits are widely scattered in areas unfavorable to
mining and have thin seams with an iron content of only 20 to 35 percent. Most
of the iron ore, high-grade coal, and oil needed by the country and all of its
bauxite, chromium, manganese, and phosphate must be imported. Most cotton and
lumber also come from abroad. According to West German calculations, in the
early 1980s East Germany was exporting 25 to 30 percent of its gross domestic
product (GDP--see Glossary) to pay for these basic materials. Even the
country's water supply has been barely sufficient for its needs. However, East
Germany is self-sufficient in a number of other minerals: rock salt,
fluorspar, heavy spar, stone and earth for building, tin, and raw
materials for glass and ceramics manufacture.

     East Germany's agricultural base is not as large as that of other East
European countries; the country has an agricultural area of only 0.4 hectare
per citizen. However, its climate and soil fertility are adequate for
large-scale production of a wide range of crops and livestock. By the
mid-1980s, East Germany's heavy reliance on lignite, the only fuel source it
possessed in great quantity, was exacting a heavy price from the country's
natural environment, resulting in a high level of atmospheric pollution,
particularly from sulfur dioxide. In the 1980s, increasing use of nitrate
fertilizers and pesticides was also creating problems. The country has become
one of the most polluted regions of Europe. In an effort to combat the growing
pollution, the East German government, having long affirmed the importance of
environmental protection, was a party to a number of international agreements
concerning progressive reduction of harmful emissions. Additional government
policies to protect the environment and the country's resources included
recycling of materials, energy conservation, and enforcement of already
existing regulations.

Labor Force

     The population, and therefore the labor force, of East Germany, has always
been comparatively small. Prior to the 1960s, when birthrates were relatively
high, over 2.5 million people left East Germany for the West. Perhaps half of
these individuals were twenty-five years of age or younger. Subsequently the
birthrate fell, and during the 1970s East Germany, alone among European
countries, witnessed a continuing population decline. By the late 1970s, the
situation prompted government efforts to promote large families (see
Population, ch. 2). According to official East German figures, after World War
II the total population fell from around 18.5 million in 1946 to 16.7 million
in 1986. The decline occurred despite the fact that in the postwar years some
Germans had had to be resettled from the territories in Eastern Europe that
had been part of the Third Reich but that subsequently had fallen within the
boundaries of Poland, Czechoslovakia, and the Soviet Union.

     Beginning in the late 1940s, the East German leadership moved to expand the
labor force. First, the government initiated a program to socialize
agriculture, reducing the number of people employed in the agricultural sector
from 2.2 million in 1949 to less than 1 million in 1970 and to only 874,000 in
1977. In subsequent years, the number of agricultural workers increased
slightly, reaching 922,000 in 1985. As a result of the government's policy,
well over 1 million persons became available for employment in other sectors
of the economy.

     Second, and more important, the state effectively mobilized women and brought
them into the ranks of the gainfully employed. Whereooas in 1949 women had
constituted about 40 percent of the labor force, by 1985 that proportion had
risen to 49 percent, giving East Germany one of the highest rates of female
employment in the world.

     As a result of this mobilization, by 1985 the East German labor force was
a comparatively large segment of the country's total population, standing at
about 51 percent. (According to official figures, 64.8 percent of the
population was of working age; about 79 percent of these individuals were
employed.) In 1975 the proportion of the retirement-age population was 19.8
percent. According to East German statistics, in 1985 this proportion of the
population had dropped to 16.6 percent. Nevertheless, in the mid-1980s the
country continued to suffer from a labor shortage. The government was
attempting to solve the problem through a more efficient use of labor and
through the replacement of workers by robots. In the early 1980s, increasing
labor productivity was a major priority in economic planning.

     In 1985 the socialist sector employed 98 percent of the work force.
Industry accounted for more than one-third of the total work force, the
"nonproductive" sector (such as service industries and the state bureaucracy)
employed one-fifth of the work force, and agriculture and trade accounted for
one-tenth each. The East German Constitution guarantees to all citizens the
right to work, and officially there was no unemployment in East Germany. The
country's leaders acknowledge, however, that temporary unemployment could
occur as a result of rationalization and restructuring.

     Although the government was intent upon mobilizing the available labor
reserves, it was not insensitive to popular sentiments favoring a shorter
workweek. The standard workweek for all workers was reduced to forty-three and
three-quarter hours in 1967. In 197, it was further reduced to forty hours for
women and forty to forty-two hours for those working shifts. In conjunction
with the government's efforts to raise the birthrate, women received
substantial opportunities to work part time and increasingly liberal maternal
benefits, including extended leave with pay and further reduction in the
workweek (see Population Structure and Dynamics, ch. 2).

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 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
interministerialdisagreements.

     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 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. ooooAn 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 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).