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East Germany Table of Contents

East Germany


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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East Germany Table of Contents