The economy of the German Democratic Republic (East Germany; GDR, DDR) was a command economy following the model of the Soviet Union based on the principles of Marxism-Leninism. Sharing many characteristics with fellow Comecon member states — the East German economy stood in stark contrast to the social democratic economies of Western Europe. The state established production targets, set prices, and also allocated resources, codifying these decisions in comprehensive plans. The means of production were almost entirely state-owned. The GDR had an above-average standard of living compared to other Eastern Bloc countries or the Soviet Union, and enjoyed favorable duty and tariff terms with the West German market; in 1989, it was estimated that 50 to 60% of its trade was with Western countries. However by the mid-1980s its economy had reached a state of stagnation, contributing to the process of German reunification.
History
Soviet occupation period
Each occupation power assumed authority in their respective zones by June 1945. The Allied powers originally pursued a common German policy, focused on denazification and demilitarization in preparation for the restoration of a democratic German nation-state.
Over time, the western and Soviet zones drifted apart economically. In 1946, the Soviet zone had a slight total factor productivity lead; wartime industrialization had contributed more to the eastern economy, and the destruction caused by the war was lighter than in the west. However, by 1948 the western zones had become more prosperous.
There were several reasons behind the backward economic situation in East Germany. While large sums had been poured into West Germany, especially by the United States, the Soviet Union not only put nothing into the economy of its zone but actually took out large amounts in reparations and occupation costs. Direct and indirect reparations paid by East Germany between 1946 and 1953 amounted to $14 billion in 1938 prices.
Military industries and those owned by the state, by Nazi Party members, and by war criminals were confiscated. These industries amounted to approximately 60% of total industrial production in the Soviet zone. Most heavy industry (constituting 20% of total production) was claimed by the Soviet Union as World War II reparations, and Soviet joint stock companies (German: Sowjetische Aktiengesellschaften - SAG) were formed. The remaining confiscated industrial property was nationalized, leaving 40% of total industrial production to private enterprise. The reparations seriously hindered the ability of East Germany to compete with West Germany economically.
While the dismantling of industrial capacity had a significant effect, the most important factor in explaining the initial divergence in economic performance was the separation of the eastern zone from its traditional West German market. The East German economy was dominated by consumer-goods manufacturers, and depended on raw materials and intermediate goods found exclusively in the West. East Germany had virtually no hard coal deposits, and only half of the fuel demand could be met domestically. In 1943 the East accounted for 0.5% of total output in coke, 1.6% in raw iron, and 6.9% in raw steel produced in post-war German territory. After the war, trade between East and West fell by a factor of 35.
Retail trade in the east was slowly being absorbed by two state-controlled organizations (Konsum and Handelsorganisation) which were given special preferences. On 2 January 1949, a two-year plan of economic reconstruction was launched, aiming at 81% of the 1936 production level, and, by cutting 30 per cent off production costs, hoping to raise the general wage level 12% to 15%. The plan also called for an increase in the daily food ration from 1,500 to 2,000 calories.
It was estimated that by 1949, 100 per cent of the automotive, between 90% and 100% of the chemical, and 93% of the fuel industries were in Soviet hands. By the end of 1950 East Germany had paid $3.7 bn of Russia's $10 bn reparations demand. After the death of Joseph Stalin and the June 1953 uprising, the Soviet Union began to return the East German factories it had taken as reparations.
In May 1949, Soviet Foreign Minister Andrei Vishinsky claimed that production in the Soviet occupation zone in March 1949 had reached 96.6 per cent of its 1936 level and that the government budget of the Soviet zone showed a surplus of 1 billion East German Marks, despite a 30% cut in taxes.
The following case is typical of the economic relationship between the two eastern bloc countries. According to documents supplied by a shipbuilding official who escaped from the East, ships ordered by the Soviet Union for 1954 cost $148 million to build, but the Soviets paid only $46 million for them; the difference of $102 million was absorbed by the GDR.
1950s
The agrarian reform (Bodenreform) expropriated all land belonging to former Nazis and war criminals and generally limited ownership to . Some 500 Junker estates were converted into agricultural production cooperatives (German: Landwirtschaftliche Produktionsgenossenschaft - LPG), and more than were distributed among 500,000 peasant farmers, agricultural laborers, and refugees. Compensation was paid only to active anti-Nazis. In September 1947 the Soviet military administration announced the completion of agrarian reform through the Soviet zone. This report listed 12,355 estates, totaling , which had been seized and redistributed to 119,000 families of landless farmers, 83,000 refugee families, and some 300,000 in other categories. State farms were also established, called Volkseigenes Gut ("People's Owned Property").
The Third Party Congress of the Socialist Unity Party of Germany (Sozialistische Einheitspartei Deutschlands—SED) convened in July 1950 and emphasized industrial progress. The industrial sector, employing 40% of the working population, was subjected to further nationalization, which resulted in the formation of the "People's Enterprises" (German: Volkseigene Betriebe—VEB). These enterprises incorporated 75% of the industrial sector. The First Five Year Plan (1951–55) introduced centralized state planning; it stressed high production quotas for heavy industry and increased labor productivity. The pressures of the plan caused an exodus of GDR citizens to West Germany. The second SED Party Conference (less important than a party congress) convened from 9–12 July 1952. 1565 delegates, 494 guest-delegates, and over 2500 guests from the GDR and from many countries in the world participated in it. In the conference a new economic policy was adopted, "Planned Construction of Socialism". The plan called to strengthen the state-owned sector of the economy. Further goals were to implement the principles of uniform socialist planning and to use the economic laws of socialism systematically.
By 1953, one out of every seven industrial companies had relocated to the West. Joseph Stalin died in March 1953. In June 1953, the SED, hoping to give workers an improved standard of living, announced the New Course which replaced the "Planned Construction of Socialism." The New Course in the GDR was based on the economic policy initiated by Georgi Malenkov in the Soviet Union. Malenkov's policy, which aimed at improvement in the standard of living, stressed a shift in investment toward light industry and trade and a greater availability of consumer goods. The SED, in addition to shifting emphasis from heavy industry to consumer goods, initiated a program for alleviating economic hardships. This led to a reduction of delivery quotas and taxes, the availability of state loans to private business, and an increase in the allocation of production material.
While the New Course increased the availability of consumer goods, there were still high production quotas. When work quotas were raised in 1953, it led to the uprising of June 1953. Strikes and demonstrations happened in major industrial centers, and workers demanded economic reforms. The Volkspolizei and the Soviet Army suppressed the uprising, in which approximately 100 participants were killed.
When the 1953 budget was introduced in the Volkskammer on 4 February, economic exploitation in the Soviet interest was still the dominant trend. The budget envisaged expenditures of 34.688 bn East marks, an increase of about 10% over the 31.730 bn of the 1952 budget. Its main object was to provide investments for strengthening the economy and for national defense.
In 1956, at the 20th Congress of the Communist Party of the Soviet Union, First Secretary Nikita Khrushchev repudiated Stalinism, in his so-called ‘Secret Speech’ to selected members of the Congress.
Around this time, an academic intelligentsia within the SED leadership demanded reform. To this end, Wolfgang Harich issued a platform advocating radical changes in the GDR. In late 1956, he and his associates were quickly purged from the SED ranks and imprisoned.
An SED party plenum in July 1956 confirmed Walter Ulbricht's leadership and presented the Second Five-Year Plan (1956–60). The plan employed the slogan "modernization, mechanization, and automation" to emphasize the new focus on technological progress. At the plenum, the regime announced its intention to develop nuclear energy, and the first nuclear reactor in the GDR was activated in 1957. Decision was also made to build the first nuclear power reactor, the Rheinsberg Nuclear Power Plant, which started commercial production in 1966. The government increased industrial production quotas by 55% and renewed emphasis on heavy industry.
The Second Five-Year Plan committed the GDR to accelerated efforts toward agricultural collectivization and nationalization and completion of the nationalization of the industrial sector. By 1958 the agricultural sector still consisted primarily of the 750,000 privately owned farms that comprised 70% of all arable land; only 6,000 LPGs had been formed. In 1958–59 the SED placed quotas on private farmers and sent teams to villages in an effort to encourage voluntary collectivization. In November and December 1959 some law-breaking farmers were arrested by the Stasi.
An extensive economic management reform by the SED in February 1958 included the transfer of a large number of industrial ministries to the State Planning Commission. In order to accelerate the nationalization of industry, the SED offered entrepreneurs 50% partnership incentives for transforming their firms into VEBs.
1960s By mid-1960, nearly 85% of all arable land was incorporated in more than 19,000 Landwirtschaftliche Produktionsgenossenschaft; state farms comprised another 6%. By 1961 the socialist sector produced 90% of the GDR's agricultural products. As more farmers fled to the West, a crop failure occurred in 1961, which was made worse by unfavorable weather.
At the close of 1960, private enterprise controlled only 9% of total industrial production. Production cooperatives (Produktionsgenossenschaften—PGs) incorporated one-third of the artisan sector during 1960–61, a rise from 6% in 1958. The opening of the new port of Rostock in 1960 reduced the country's dependency on the West German port of Hamburg.
The Second Five-Year Plan encountered difficulties, and the government replaced it with the Seven-Year Plan (1959–65). The new plan aimed at achieving West Germany's per capita production by the end of 1961, set higher production quotas, and called for an 85% increase in labor productivity. Emigration again increased, totaling 143,000 in 1959 and 199,000 in 1960. The majority of the emigrants were white collar workers, and 50% were under 25 years of age. The labor drain exceeded a total of 2.5 million citizens between 1949 and 1961.