Economy of the German Democratic Republic
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Like other East European communist states, East Germany had a centrally planned economy (CPE) similar to the one in the former Soviet Union, in contrast to the market economies or mixed economies of most Western states. The state established production targets and prices, and allocated resources, codifying these decisions in a comprehensive plan or a set thereof. The means of production were almost entirely state owned. In 1985, for example, state-owned enterprises or collectives earned 96.7 percent of total net national income. To secure constant prices for inhabitants, the state bore 80% of costs of basic supplies, from bread to housing.
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[edit] Central leadership
[edit] Socialist Unity Party
The ultimate directing force in the economy, as in every aspect of the society, was the Socialist Unity Party of Germany (Sozialistische Einheitspartei Deutschlands--SED), particularly its top leadership. The party exercised its leadership role formally during the party congress, when it accepted the report of the general secretary, and when it adopted the draft plan for the upcoming five-year period.
More important was the supervision of the SED's Politburo, which monitored and directed ongoing economic processes. That key group, however, could concern itself with no more than the general, fundamental, or extremely serious economic questions, because it also had to deal with many other matters.
[edit] Government bureaucracy
At the head of the government organs responsible for formally adopting and carrying out policies elaborated by the party congress and Politburo was the Council of Ministers, which had more than forty members and was in turn headed by a Presidium of sixteen. The Council of Ministers supervised and coordinated the activities of all other central bodies responsible for the economy, and it played a direct and specific role in important cases.
The State Planning Commission, sometimes called the Economic General Staff of the Council of Ministers, advised the Council of Ministers on possible alternative economic strategies and their implications, translated the general targets set by the council into planning directives and more specific plan targets for each of the ministries beneath it, coordinated short-, medium-, and long-range planning, and mediated interministerial disagreements.
The individual ministries had major responsibility for the detailed direction of the different sectors of the economy. The ministries were responsible within their separate spheres for detailed planning, resource allocation, development, implementation of innovations, and generally for the efficient achievement of their individual plans.
In addition to the basic structure of the industrial sector, a supplementary hierarchy of government organs reached 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, extended down to the local level. They considered such matters as the proper or optimal placement of industry, environmental protection, and housing.
[edit] Central planning
The fact that East Germany had a planned economy did not mean that a single, comprehensive plan was the basis of all economic activity. An interlocking web of plans having varying degrees of specificity, comprehensiveness, and duration was in operation at all times; any or all of these may have been modified during the continuous process of performance monitoring or as a result of new and unforeseen circumstances. The resultant system of plans was extremely complex, and maintaining internal consistency between the various plans was a considerable task.
[edit] Planning by timescale
[edit] Short-term planning
Operationally, short-term planning was the most important for production and resource allocation. It covered one calendar year and encompassed the entire economy. The key targets set at the central level were 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.
[edit] Five-year plans
Medium-range (five-year) planning used the same indicators, although with less specificity. Although the five-year plan was duly enacted into law, it is more properly seen as a series of guidelines rather than as a set of direct orders. It was typically published several months after the start of the five-year period it covered, after the first one-year plan had been enacted into law. More general than a one-year plan, the five-year plan was nevertheless specific enough to integrate the yearly plans into a longer time frame. Thus it provided continuity and direction.
[edit] Long-term plans
In the early 1970s, long-term, comprehensive planning began. It too provided general guidance, but over a longer period, fifteen or twenty years, long enough to link the five-year plans in a coherent manner.
[edit] Planning mechanisms
In the first phase of planning, the centrally determined objectives were divided and assigned to appropriate subordinate units. After internal consideration and discussion had occurred at each level and suppliers and buyers had completed negotiations, the separate parts were 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 was redivided among the ministries, and the relevant responsibilities were distributed once more to the producing units.
The production plan was supplemented by other mechanisms that control supplies and establish monetary accountability. One such mechanism was the System of Material Balances, which allocated materials, equipment, and consumer goods. It acted as a rationing system, ensuring each element of the economy access to the basic goods it needed to fulfill its obligations. Since most of the goods produced by the economy were covered by this control mechanism, producing units had difficulty obtaining needed items over and above their allocated levels.
Another control mechanism was the assignment of prices for all goods and services. These prices served as a basis for calculating expenses and receipts. Enterprises had every incentive to use these prices as guidelines in decision making. Doing so made plan fulfillment possible and earned bonus funds of various sorts for the enterprise. These bonuses were not allocated indiscriminately for gross output but were awarded for such accomplishments as the introduction of innovations or reduction of labor costs.
The system functioned smoothly only when its component parts were staffed with individuals whose values coincided with those of the regime or at least complemented regime values. Such a sharing took place in part through the integrative force of the party organs whose members occupied leading positions in the economic structure. Efforts were 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, came from above.
[edit] State industrial sector
[edit] Kombinate
Directly below the ministries were 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 included 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 directed the entire production process in each Kombinat, 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. The goal of the Kombinat reform measure was to achieve greater efficiency and rationality by concentrating authority in the hands of midlevel leadership. The Kombinat management also provided 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 Kombinat. District-managed Kombinate numbered 93, with an average of about 2,000 employees each.
[edit] Production facilities
At the base of the entire economic structure were the producing units. Although these varied in size and responsibility, the government gradually reduced their number and increased 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.
[edit] State agricultural sector
The agricultural sector of the economy had a somewhat different place in the system, although it too was thoroughly integrated. It was almost entirely collectivized except for private plots. The collective farms were formally self-governing. They were, however, subordinate to the Council of Ministers through the Ministry of Agriculture, Forestry, and Foodstuffs. A complex set of relationships also connected them with other cooperatives and related industries, such as food processing.
[edit] Private sector
[edit] Legal private enterprise
The private sector of the economy was small but not entirely insignificant. In 1985 about 2.8 percent of the net national product came from private enterprises. The private sector included 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 were 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 were quite important to the system. The SED leadership, for example, had been encouraging private initiative as part of the effort to upgrade consumer services.
In addition to those East Germans who were self-employed full time, there were others who engaged in private economic activity on the side. The best known and most important examples were families on collective farms who also cultivated private plots (which can be as large as 5,000 m²). Their contribution was significant; according to official sources, in 1985 the farmers privately owned about 8.2 percent of pigs, 14.7 percent of sheep, 32.8 percent of horses, and 30 percent of 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.
[edit] Informal economic activity
More difficult to assess, because of its covert and informal nature, was the significance of that part of the private sector called is the "second economy." As used here, the term includes all economic arrangements or activities that, owing to their informality or their illegality, took 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.
These irregularities did not appear to constitute a major economic problem. However, the East German press occasionally reported prosecutions of 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.
[edit] Barter economy
One kind of informal economic activity included private arrangements to provide goods or services in return for payment. An elderly woman might have hired a neighbor boy to haul coal up to her apartment, or an employed woman might have paid a neighbour 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 have been more necessary than in the West. They were doubtlessly common, and because they were considered harmless, they were not the subject of any significant governmental concern.
[edit] Theft
There was another kind of private economic activity, however, that did concern the government: the stealing and selling of goods for profit by individuals who had 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 were reportedly quasi-institutionalized. Popular products were car spare parts or plumbings.
[edit] Corruption
Another common activity that was troublesome if not disruptive was 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, the so called Bückware (duck goods; sold from "below the counter"). Such ventures may have been no more than offering someone Trinkgeld (a tip), but they may have also involved Schmiergeld (money used to "grease" a transaction) or Beziehungen (special relationships). Opinions in East Germany varied as to how significant these practices were. But given the abundance of money in circulation and frequent shortages in luxury items and durable consumer goods, most people were perhaps occasionally tempted to provide a "sweetener," particularly for such things as automobile parts or furniture.
[edit] See also
- New Economic System
- Volkseigener Betrieb
- Volkseigenes Gut
- Landwirtschaftliche Produktionsgenossenschaft
[edit] Source
- This article contains material from the Library of Congress Country Studies, which are United States government publications in the public domain. Library of Congress
