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East Germany Table of Contents

East Germany


Investment activity in the East German economy in its broad outlines is fundamentally a function of planning on the national level. Funding for investment activities may be allocated by direct provisions in the national budget, by disbursements made from the resources of economic units, or by credits. General investment goals for the various sectors of the economy are defined in the five-year and one-year plans.

The East German banking system is highly centralized. The State Bank (with regional and industrial branches), which is an organ of the Council of Ministers and serves as the bank of issue, is responsible for overall execution of currency and credit policies. Integrated within the centralized system are banks for the various sectors of the economy: institutions to handle foreign trade, investment, agriculture, and small enterprises. There are also savings banks, functioning directly under oversight of the Ministry of Finance. Various economic units and, less frequently, individuals may apply for credit, which the banks grant in accordance with guidelines devised by the State Bank and the Ministry of Finance and approved by the Council of Ministers. Banks play an active role in the planned economy of East Germany, exercising supervisory functions, promoting the goals of the economic plans, and generally helping to shape economic behavior in ways considered desirable by the government.

In East Germany, prices have always been centrally controlled; pricing policy is used as a tool to promote economic, political, and social objectives. In production, alteration of prices on selected input goods has been one method by which central planners encourage greater efficiency. Prices for basic consumer goods, by contrast, have by and large been held constant, although some increases are masked by the introduction of "new" or "improved" products.

The currency of East Germany is the East German mark, or GDR mark, officially a nonconvertible, domestic currency. International financial relationships are assessed on the basis of the valuta mark (see Glossary), over which the Council of Ministers has oversight. In East-West trade, Western currency is used, and in Comecon trade the "Soviet foreign-exchange ruble" is used (see Foreign Trade , this ch.). For noncommercial transactions such as tourist trade, the State Bank establishes the rates of exchange for the GDR.

Beginning in 1973, it became legal for East Germans to possess foreign currency. The state tapped this supply of hard currency through the establishment of a chain of Intershops, which sold luxury and Western goods to tourists and to East Germans with hard currency; exchanging East German marks privately for hard currency remained illegal. In the late 1970s, the government introduced regulations that required East Germans to make their Intershop purchases in certificates obtained by exchanging their foreign currencies at a bank (foreign tourists could still use Western currencies in the Intershops), making it possible to monitor the circulation of foreign currencies more closely.

In terms of magnitude, East Germany has a currency problem unique among the countries of Eastern Europe. Each year the country is visited by millions of West German tourists and relatives of East German citizens, who bring West German marks, or Deutsche marks (also known as D-marks--see Glossary) with them. As a result, some portions of the population have access to hard currency and the goods it can buy, while others do not. One by-product of this state of affairs is a black market in currency, in which one D-mark costs four or five GDR marks. This situation causes several problems for the regime. First and most obviously, the local currency is discredited because its de facto value against any Western counterpart is markedly lower than the official exchange rate. Second, the fact that hard currencies are unevenly and inequitably distributed among the people on a random basis threatens to create a distinction between "haves" and "have nots." Third, the circulation of such monies can introduce uncertainties in economic activity that can at least marginally distort the balance intended in the plan.

From the leadership's point of view, the influx of Western currency is far from ideal. However, it may be that the advantages obtained from the acquisition of hard currencies through the Intershops, the general popularity of such stores with the people, and their utility in satisfying consumer demand in some degree outweigh the disadvantages or problems that accompany the existence of a second currency in the economy.

Data as of July 1987

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East Germany Table of Contents