Figure 1.--Eastern Germany was much more agricultural than the more industrialized West. Living standards were relatively comparable at the time of the War. This only began to change after the Soviets severed economic ties with the West. As a result of the West German Ecomoic Miracle a huge disparity developed in living standards. And unlike many areas in the Soviet Empire, the East ermans were very much aware of it. This photogeaph shows children in East Germany during the mid-1950s. (Notice the one boys Pioneer scarfe.) Few West German children at the time were going barefoot. Nor did East Germsan boys have bikes and scootwers like their West German countertparts. Clicvk on the imsage to see West German boys tsaken about the samne time.

The Economic Miracle that occurred in the West did not occur on the other side of the Iron Cutrain. The Soviets moved to separate the East German ecomomy fom that of the West after the United States decided to enact the currency reform promoted by Bavarian Finance Minister Ludwig Erhard. Stalin refused to accept Marshall Plan aid or allow his Eastern European satallites to participate. The Soviets and East Germa Communist allies moved to create a socialist economy. The Soviet occupation zone that became the DDR (1949) was a largely agrarian part of Germany without the heavy industry that had developed in the Ruhr and other western areas. The primary factor here was raw materials. The heavily developed Ruhr Basin for examle developed around the abundant coal resources there. And the Soviet occupiers initiated a massive program of dismantling factories that survived the War and shipping it east as reparaions. Even after actual reparations ended, the trade agreements negoitiated by the Soiviets through COMECON were heavily in their favor. The East German economy thus stagnated while the West Germany econonomy began a period of explosdive growth. The German Economic Miracle (GEM) underway in West Germany proved an increasing embarassment for East Germany. Rather than a worker's paradise, East German workers increasingly envied the rising living standards in West Germany. The GEM proved to be more than an embarassment. The East Germans could not very well blame the lackluster economic performance on their fratenal socialist ally or the socialist economy they created so they blamed in on the exodus of trained workers and profesionals from the worker's paradise to the capitalst west. A huge dispsarity in living standards developed between East and West. And unlike the situation in Russia, the East Germans could not hide the disparity. East Germans could listen to West Germsn television and radio. Ironically the commercials that plague Western TV viewers and radio listeners were in essence effective proaganda. Aparently the commercials had more impact than the political content. The Berlin Wall and extensions dividing the two Germanies ended the flow (1961). It probably did impair the Germnan economy, but was not the central problem. Even with all the limitations, East Germany became the most producvtive part of the Soviet Empire--COMECON. The East Germans published impressive production statistics. Very little of this production could be excported to the West. It was either consumed in East Germany or traded within COMECON as COMECON barter arragemets. As a result, consumer demand had little impact on production. Nor was any attention given to enviromental concerns. While the DDR produced some of the best indusdtrial product within COMECON, their output was not up to Western standards. Thus when the Berlin Wall came down and Germany was unified, few East German industries could survive in a market economy. The rapid economic improvement in East Germany following the unification of East and West Germany is another important subject. The popular media in the West which tends to focus on problens have taken this second miracle largely for granted.

Plan

Each of the four victorious World War II powers after the NAZI surrender assumed authority in their separate, predetermined occupation zones (June 1945). This took a few weeks to sort out because the forces had not precisely conquered their assigned zones. The americans in particular had gone further east than anticipated, even into eastern Czechoslovakia. The initial plan was to pursue a common occupation policy in their individual zones and they attemoted toi do this. The immeduate goal was denazification and demilitarization. On this the four powers agree. One the future they did not. The United Nations at the time the NAZIs surrendered had not decided on an occupation policy. American Secretary of the Treasury had formulated the Morgethau Plan, but thee was disagreement and President Truman rejected it. And the Wesern Allies split fundamenrally with the Soviets. The goal of the Western Allies was the restoration of a democratic, independent German nation-state. Stalin had no problem with using the democratic label, but his plan was just the opposite, a Communist police state dictatorship and perpetual Soviet occuption. Actually this was not just his plan for the Soviet occupation zone. He assumed that as in World War I, the Ameicans would return home after a short period, opening the way for the Sovietuzation of all of Germany. And being a firm believer in Communism, not only would the Red Army bring this about, but the superority of Communism over capitalism would gain worker support for the process. The basic differences between the Western Allies who combined their zones and the Soviets made a joint occupation impossible.

Poor Performance

East Germany like North Korea was a test case in the Cold war because both were parts of divided countries and the relative peformance would show the relative effectiveness of Communism and Capitalism. Very quickly because of the phenominl success of West Germany and the German Economic Miracle it became obvious that Capitalism was a much more succesful economic system. There were reasons that East Germany performed so poorly. The principal reason was the inherrent inefficencies of Communism, but that was not the only reason. Other factors included reparations to the Soviet Union, loss of markets, and lack of raw materials. Reparations were definitely a factor, but some of the other factors seem more excuses than actual factors. West Germany also had few natual resources other than coal. West Germany also losr mrkets it had in Estern Europe before he War. It should be noted that East Germany's poor performance is only the case in comparison to West Germany and other counties in West Germany. The East Germans despite the many problems were the best pergorming country in te Siviet Enpire, including the Soviet Union itself.

Communist Central Economic Planning

The East German Government developed Five-year plans to efficently produced goods. East German Communuists following the Soviet model introduced central planning to the economy. On paper, central planning seems to make a lot of sence. Theoretically, central planners can maximize the utilization of available resources. And the result can benefit the entire nation rather than individuals. The central problem with central planners is that political factors commonly outweigh economic factors which resultb in an inefficent use of resources. In a capitalist system producer has to satisfy consumer deamd. This ensures that quality producrs or at least proucts consumers want or manufactured. In a centrally planned economy, producers have to please beaureacrats not consumers. Often beaureacrats are more concerned about impressive numbers than product quality. And central planners do not have to compete. This poweful incentive to inovation and product quality is lacking in centraly planed economies. Nor or resources used very effectively. Resources are assigned with little accounting. As a result, not infrequently the value of the inputs (msterial and labor) exceed the value of the goods manufactured. The DDR pursued Soviet central planning more slavishy than some other Eastern European satellites. The Soviets were particularly concerbed that the Germans toe the line. And East Germans officials seeing what was happening in Poland were not about to liberalize. The Soviets allowed a degree of liberalixation in Czechoslovakia which became known as the Prague Spring. The same was true in Hungary. But there ould be no Berlin Spring. [Jefferies, p. 2.] The East Germans did a better job of central planning than other East European sattelites or even the Soviets, but the results were in sharp contrast to those achieved in the dymamic capitalist economy of the West.

Reparations to the Soviet Union

One of the major diffences between the Western Allies and the Soviets was reparations. By the accident of geography, the Soviet driving west seized eastern Germany (a lagely agicultural area) and the allies driving east seized western Germany (a highly industrialized area). The intention was that food from the eastern Soviet zone would feed western Germany and the Soviets would be compensated with reparations from the western Allied zone would compensate the Soviets. As cooperation between the Soviets and Western Allies fell part from an early point, this did not occur. The Americam Morgenthau Plan had also anticipated reparations, but President Truman rejected the plan and Morgenthau resigned. The Westen Allies might have insisted on reparations. The French went further thamn the other Wetern Allies, but it was Stalin more than anyone that prevented a major reparations program. By thretening the Wesrrn Allies, Stalian forged an alliance beteen them and the de-Nazified Germans that would stop Soviet aggression in its tracts. His aggressive tactics in Easten Europe resulted in America stating in place. Not only did that alliance stop the Soviet Red Army, but much to Stalin's surprise, capitalism very quickly exposed Commuism to be totally encapable of creatung the promised worker's paradice. Not only did Communism prove to be a disaster for the economy of the Soviet zone, but the Soviets denied access to th industry of the Western zones, proceeded to pursue a massive program of raparations in their occpation zone. The Soviets began disassembling wht industry existed in their zone and shipping it east as reparations. Major targets were state-owned facilities, property of NAZI Party members, and anything owned by war criminals. German industry had been severly damaged by the Allied strategic bombing campaign. The Soviets claimed much of what was left. The industrial plants disassembled and shipped east approximtly 60 percent of the remaining industry in East Germany. They were especially focused on heavy industry. The Soviets also set up joint stock companies (Sowjetische Aktiengesellschaften, SAG) for coniscated property not shipped east. Most of the remaining confiscated industry was nationalized. Some industrial property was left in private hands at first. It would eventually be nationalised as well. As the Cold War developed and the economy of East Germany lagged far behind that of the capitalist West and the German Econonic Miracle, the East Germans had an excuse. But it was an excuse they could rarely use, criticizing the Soviet Union was not permitted.

American role

In sharp contrast to reparations demanded by the Soviet Union, the United States prividd economic assistance to West Germany and other European countries, including the Soviet Union. The Soviets rejected the offer and would not llow the nations in their empire to participate in the Marshal Plan. Americans probably over enphasize the impotance of the Marshal Plan, but there is not doubt that it was important in the rapid recovery after World War II.

Raw Materials

We note children collecting scrap metal about 1950. We might have guess a little earlier. The image is not identified, but we believe it must come from East Germany. This practice happened during World War II, but we think this photo was taken in East Germany under Communist rule. Note the neckerchief of the boy, which I take to be a sign of the Young Pioneers. (We never see HJ boys wearing their scarves with regular clothes.) The date is from a Berlin archive, although it could be an estimate. The boys wear short trousers and long stockings, which also goes along with East Germany. I'm not sure whether this was a volunary effort or something organized by the Young Pioneers at school. It's interesting that girls are involved as well as boys. The kids look to be about 10-12 years old. We are not sure how common collecting scrap in East Germany. We think the Soviets eventually supplied East German raw material needs. But right after the War, the Soviets were mostly interested in reparations. Eastr Germany had to import most of its raw material needs. The major coal mines were located in West Germany and metals like iron and copper had to be imported. Oil also had to be imported.

Markets

East Germany was separated from the rest of Germany. This required a major transition. Germany had major trade relations with Eastern and Central Europe. These relations continued as part of Comecon. The Economic Miracle that occurred in the West did not occur on the other side of the Iron Cutrain. The Soviets moved to separate the East German ecomomy fom that of the West after the United States decided to enact the currency reform promoted by Bavarian Finance Minister Ludwig Erhard. Stalin refused to accept Marshall Plan aid or allow his Eastern European satallites to participate. The Soviets and East Germa Communist allies moved to create a socialist economy.

Agriculture

The Soviet occupation zone of eastern Germany was a largely agrarian part of Germany without the heavy industry that had developed in the Ruhr and other western areas. Thus agiculture was an important part of the economy. Investment went primarily into the inustrial secror, but the Communists instituted major changes in agicultue--the Bodenreform. Soviet authorities expropriated all land belonging to NAZIs and war criminals. Private ownership was basically limited ownership to plots of 1 square kilometers (km). This severely limite possible income. About 500 Junker estates were seized and reorganized as collective people's farms (Landwirtschaftliche Produktionsgenossenschaft -- LPG). Over 30,000 square km were turned over to 500,000 peasant families, agricultual laborers, and refugees. The only indivuls to be ompensated for seuzed property were active anti-NAZIS and few inividuals qualified. This was all done very quickly fter the War. Soviet authorities announced the completion of agrarian reform in thir zone (September 1947). Authorities proudly reported with much fandfare seizing 12,355 estates, totaling 6 milliom acres (24,000 km2) which was redistributed to 119,000 families of landless farmers, 83,000 refugee families, and some 300,000 in other categories. State farms (Volkseigenes Gut --People's Owned Property). Less attention was goven to the productivity of East German agriculture.

COMECON

Even after actual reparations ended, the trade agreements negoitiated by the Soiviets through COMECON were heavily in their favor. The East German developed into a Eastern European powerhouse. The Soviets came to rely on East German machine tools, chemicals, and electronics. The German Economic Miracle (GEM) underway in West Germany proved an increasing embarassment for East Germany.

Recovery

Despite the limitations, the East German economy gradually recovered from World War II. It developed in the words of one economist, "The DDR is a world-ranking industrial economy." The East German economy like the West German economy did emerge from the devestation left by the War. In Communist terms it waas a real success. Compared to the rest of the Estern Bloc Soviet satellite countries, the DDR aschieved a relastively high rate of growth. They even surpassed many Soviet economic achievements, especially living standards. The problen for East Germany, was that most East Germans compared their situation with that in West Germany.

Volkseigener Betrieb (VEB)

The German economy was structured around Volkseigener Betrieb (People-owned Enterprise--VEB). An hororific name was usually added to the firm's actual name. The VEB was comparable to Western industrial corporations, although owned by the state rather than private investors. The VEB was principal legal form of industrial production in the DDR. About 80 percent of the East German work force was employed by the VCBs. This was a much larger proprtion than employed by large corprations in the West. They were formed after mass nationalisation between (1945-1960). The Soviet Union handed back 33 enterprises previously taken as reparations (1954). Eas Germany was the least industrialized area of Germany and much of the industry that existed was destroyed in the war. The managing director of a VEB was known as the plant or works manager (Werkleiter, Werkdirektor or Betriebdirektor). He was assisted by the first secretary of the factory SED party organisation (Betriebsparteiorganisation) and the chairman of the factory trade union (Betriebsgewerkschaftsleitung). Other important officers were the Chief Accountant and Technical Director. This mean that there wwere important destinctions between Western corporations and VEBs. The primary differences was that the Werkleiter was not an independent director, but subject to priorities sent by Government central planners. And the SED Party played a major role in the direction of each VEB. This mant that political loyalty rather than technical competence was often a factor in personnel decesions. The Betriebsgewerkschaftsleitung was not a free trade union, but also subject to the dictates of the SED Party. The difference are imporant to consider because although the East German VDBs were the most productive in the Soviet Empire, the pailed in compaison to the efficency and productiveness of West German corporations. The East Germans tried hard to make Communism work. No one dared, gowever, to suggest market reform like China eventually implemented. The VEBs were at first vertically integrated into units labeled Vereinigung Volkseigener Betriebe (Associations of Publicly Owned Operations--VVBs). VVBs were set up in most of the major industries. The idea was to achievce efficencies by streamlining production and reducing waste. The VVBs eventually replaced with the VEB Kombinate, or VEB Group (1979). This was designed to integrated the VEBs more closely than the mostly administrtice structure of the VVBs. Popular usage in East Germany was to drop the Kombinate' and just use 'VEB' meaning the group and not the individual factory. The State Planning Commission was the responsible for the organisation of all the VEBs. In essence the Werkleiter could not make majpr changes without government approval. It also meant that startups by highly talented young inovators that led to companies like Appel, Facebook, Google, Microsoft, Oracle, ect. were impossible in the DDR. Research and development was in the habds of the large, established VEBs. The VEBs also played important social roles. The VEBs sponsored day care facilities for workers' families as well as Pioneer summer camps for the children. There would also factory sports teams. The VEBs thus played an important role in the DDR's impressive sports program. After the fall of Communism and German reunification, some 8,000 state-owned VEBs were turned over to the Treuhand, a trust given the responsibility of oversseing the privatisation of the VEBs (1990). It was quickly found, however, that very few VEBs could compete in the the market economy (1990).

Disparity

The DDR economy did not grow as rapidly as the market based economy as the market economies in the West recovered, especially West Hermany. Nor did it provide DDR citizens the same standard of living as those in the West. The problen East German Communist authirities faced was that East Germans did not compare their wages and living standards with Bulgarians, Poles, and Romanians, but rather with workers in West Germany. [Jefferies, p. 1.] As earlybas the Berlin worker riots, the East Germans were cresponding to nthe disparity between East and cWest (1953). This is not what the Commujnist faithful expected. Rather than the worker's paradise they expected, East German workers increasingly envied the rising living standards in West Germany. The GEM proved to be more than an embarassment. The East Germans could not very well blame the lackluster economic performance on their fraternal socialist ally or the socialist economy they created so they blamed in on the exodus of trained workers and profesionals from the worker's paradise to the capitalst west. A huge dispsarity in living standards developed between East and West. And unlike the situation in Russia, the East Germans could not hide the disparity. East Germans could listen to West Germsn television and radio. Ironically the commercials that plague Western TV viewers and radio listeners were in essence effective proaganda. Aparently the commercials had more impact than the political content.

Berlin Wall

The Berlin Wall and extensions dividing the two Germanies (1961). This ended the flow of educated professiionals and skilled workers west. The ability of East Germans tob reach the West probably did impair the DDR economy, but it was not the central problem. That was the East German Communist system and central economic planning. The Wall became a symbol etched in stone iof Cimmunist economic failure. Try as they might the Communists could not explsin why a wiorker's paradise had to fence in their people.

East German Production

Even with all the limitations, East Germany became the most producvtive part of the Soviet Empire--COMECON. The East Germans published impressive production statistics. Very little of this production could be excported to the West. It was either consumed in East Germany or traded within COMECON as COMECON barter arragemets. As a result, consumer demand had little impact on production. While the DDR produced some of the best indusdtrial product within COMECON, their output was not up to Western standards. Thus when the Berlin Wall came down and Germany was unified, few East German industries could survive in a market economy.

Environment

Nor was any attention given to enviromental concerns.

Oil Crisis (1970s)

East German gradually developed important industries. But the coubntry had tio import raw materials. Virtually all the oil consumed in East Germany was imported. Most other raw materials were imported, but oil became a real problem after the Oil Crisis and run up in oil prices. East Germany did not have the foreign currency earnings to import oil from the world market. The Romanians also wanted hsrd currency. So the oil and most other raw materials had to come from the Soviets. This meant that in the 1970s, the Soviet Eastern European countries shifted from a region the Soviets could exploit to an area they had to support economically. The Sioviet Uniin produced very little they could export to the West. It did produce large quantities of raw materials which had market values. And after the oil crisis, petroleum exports could generate major export earnings. The Soviets thus were increasingly reluctant to provide their Eastern European sattelites oil at a fraction of what they could export it for tgo the West.

Unification

The rapid economic improvement in East Germany following the unification of East and West Germany is another important subject. The popular media in the West which tends to focus on problens have taken this second miracle largely for granted.

Sources

Jeffries, Ian. "International perspective," in Ian Jeffries and and Manfred Melzer, eds.. The East German Economy.

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Created: 1:17 AM 2/12/2009
Last updated: 4:17 AM 9/7/2017



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