East Germany

German Democratic Republic (GDR), byname East Germany, German Deutsche Demokratische Republik, or Ostdeutschland is a former country (1949–90) that constitutes the northeastern section of present-day Germany.

Population
From its founding, the GDR struggled to stabilize its population and thwart emigration. In the course of its forty-year history, almost one-quarter of East Germany's population fled the state to settle in West Germany (a decline of three million people, from 19 million in 1948 to 16 million in 1990 ).

In the 1950s alone, more than 2 million people moved west, a migration that triggered the regime's radical solution in August 1961--the construction of the Berlin Wall. During most of its existence, the only segment of East Germany's population permitted to leave for West Germany were retirees, whose resettlement there was unofficially encouraged to reduce the GDR's pension payments. As a result, the number of persons sixty years of age and older in the GDR fell from 22.1 percent in 1970 to 18.3 percent in 1985 and made the East German population younger than that of West Germany.

The record year for population loss was 1953, year of revolt and repression. During those traumatic twelve months, almost 400,000 left for the West. The figure dropped in 1954 to less than 200,000 before starting to climb again, staying at around a quarter of a million annually for the next three years. In the first twelve years of its existence, East Germany lost around a sixth of its population. Shortly before the construction of the Berlin Wall, the number of emigrants arriving in West Berlin had exceeded 2,500 a day. (If this had continued, the population could be expected to diminish at the rate of about a million a year.)

It was the skilled workers, doctors (of whom 20 percent fled westwards between 1954 and 1961) and nurses and teachers and engineers, who were choosing to go west. Because of these population losses, the GDR was also suffering a labor shortage.

Economy
By early 1960, the GDR was suffering from serious shortages of raw materials and quality industrial products as well as food. It was heavily in debt both to the USSR and the West. Far from overtaking West Germany, the GDR was falling further behind. If such a word were permitted in the Communist lexicon - which it was not - then the situation in East Germany could be only described as a recession.

In the 1970s, like other Communist countries such as Poland and Hungary, East Germany had embarked on a policy of importing technologies from the West in the hope of raising productivity. To do this, the government in East Berlin had accepted Western credits, assuming it would be able to repay them from the economic improvements these imports would bring. But from 1973, when the first oil crisis hit, the GDR had serious energy and raw-materials problems. Cheap raw materials and oil from Russia made up for the truncated state's lack of natural resources, and favorable price agreements compensated for the lack of real productivity increases in the GDR's industry. In the mid-1970s, the Soviet Union raised its prices for vital supplies of fuel and raw materials. In 1979-80 came the second 'oil shock', and the Soviet Union reduced its oil deliveries to the GDR. The country slid into a situation of massive indebtedness to both the USSR and the West.

In the 1980s, East Germany was frighteningly uncompetitive outside the Soviet bloc. Thuringia and Saxony especially had always been in the forefront of the industrial and technological revolution, from the early 19th century until the time of the Third Reich. Bomb damage, sequestering of plant and machinery by the Soviets for reparations, heavy-handed socialisation of industry, and the subsequent loss of expert management, capital, patents and skilled workers to the West, had weakened the country's economic fundamentals.

Before the First World War, Saxony, along with neighboring Bohemia (later the Czech Republic) enjoyed the highest real net output in Europe. Chemnitz, with a population of 400,000, was known as the 'Manchester of Germany'. Until the collapse of the Third Reich, Dresden, with its camera and typewriter factories and electronics workshops, was the second fastest growing city after Berlin. Leipzig, Magdeburg, Halle and Jena were booming manufacturing centers. In 1939, industrial production per head in the region that would a decade later become the GDR amounted to 725 Reichsmark per year. In the territories that would become West Germany, production per head was only 609 Reichsmarks.

The East, which should have been more advantaged, never recovered under the bureaucratic, centrally directed command structure that remained the basis of the GDR's economy. Despite this, with West Germany tapped successfully for credits, with relatively favorable terms of trade with the Eastern Bloc and parts of the Third World, and despite raw-minerals and energy problems and mounting deficits, the GDR maintained a facade of success. As the East German state approach its fortieth anniversary, it appeared to many unsuspecting outsiders to represent a confident, progressive and egalitarian alternative to grasping, high-stress Western capitalism.

In the 1980s, when according to the economic plan the country was supposed to be turning into a high-tech, R&D-based modern powerhouse, the story had in fact been one of steady decline and increasing foreign debt. The GDR could only imitate, not innovate. Between 1980 and 1989, the outlay required for a state enterprise to earn one West mark almost doubled, from 2.40 East marks to 4.40. The Soviet Union, with grave financial and economic problems of its own, had indicated that it would be scaling down deliveries of cheap oil to East Germany and raising foreign trade prices within the Eastern Bloc to world market levels.

In the final moments of the regime, on 30 October, 1989, a highly secret 'Report on the Economic Situation of the GDR with Consequences' was submitted to the Politburo. It made clear what had been hidden all those years, even from many members of the party leadership. The country was a wreck and approaching bankruptcy. More than half of all industrial facilities was effective classifiable as scrap. 53.8 percent of all machines were write-offs, only reparable at a cost that could simply not be justified. Half the transport infrastructure was in a state of decay. Productivity was around 40 per cent behind the West's. State indebtedness has risen from 12 billion marks in 1970 to 23 billion in 1988. Direct debts to capitalist states and banks had increased during that period from 2 billion to 49 billion West marks.

The GDR was largely dependent on capitalist credit institutions and annual borrowing was running at 8-10 billion West marks. The country had embarked on an increasingly frantic game of financial manipulation, moving cash around the international money markets at speed, inflating the extent of its claimed assets and understating its true debt in order to raise more credit. The GDR was covertly taking out short-term loans to make interest payments on long-term credit, and using this apparently creditworthy status to assume yet more debt. This was criminal deception, fraud on a vast scale.

Official black market
From the 1970s, the GDR was in a state of crisis that continued for the rest of its existence. The people had to be kept happy with consumer goods and social benefits, or the regime would risk another 1953. There was a social-security and welfare system to pay for - the cradle-to-grave safety net that helped compensate East Germans for their lack of freedom to travel, express themselves fully, or enrich themselves. An army and a security apparatus - after the USSR, the GDR had proportionally the second-highest military budget in the East Bloc (5.8 percent of GDP), twice or even thrice those of its allies. The army, the Stasi at home and abroad, the cost of maintaining, extending and manning the border and the Berlin Wall, all these calls on East German finances were sky-high and, as the balance of payments deteriorated, crippling.

The state responded in a way unusual in a modern industrial country. It basically set up a completely alternative, secret economy, that it didn't have to account for. The organization, highly secret and closely tied with the Stasi, was known as the 'Commercial Co-ordination' (KoKo). Founded in 1966, it was charged with earning hard currency outside the normal, planned economic system.

The advantage, as the GDR accumulated foreign debts, was that KoKo, this secret store of foreign currency, wasn't liable for payment of interest on foreign loans and could be used to plug gaps in the state's finances. Through KoKo, the elite were supplied with Western goods and personal luxuries unavailable to the vast majority of East Germans. It built up a labyrinthine network of more than 220 mailbox and front companies in East and West. It sold arms to the Third World - most successfully trading with both Iran and Iraq during the war that begun in 1980 - and through front companies secretly imported high-tech goods from the West that had been placed on the banned list by NATO.

KoKo also exported large quantities of valuable antiques and artworks to the West, where they were sold for hard currency. In many cases these treasures were confiscated from their owners, who had previously been presented with huge and mostly fictitious tax bills. In some cases, the owners were imprisoned, until they agreed to cede their possessions to the state.

A final source of foreign currency came from the GDR's sale of its political prisoners to the West - political prisoners as 'export items'. At least 200,000 East Germans were convicted of political crimes of some kind in the forty years of GDR's existence. About 34,000 of these prisoners were released on payment by the West German government. In the 1960s, the price per head was around DM 40,000, while by the 1980s the West Germans were paying almost DM 100,000 for each human being set free. The official proceeds of prisoner-trading amounted to at least DM 3.4 billion; Schalck-Golodkowski (KoKo's long-term director) later put the figure at around DM 8 billion.

Links

 * Studies about Germany and East Germany from the Library of Congress (1986-1998)
 * SED-Politbürovorlage: Analyse der ökonomischen Lage der DDR mit Schlußfolgerungen (German: "Report on the Economic Situation of the GDR with Consequences"), October 30, 1989, Gerhard Schürer et al.
 * De-Socialization in a United Germany (pdf) by Hans-Hermann Hoppe, 1991
 * The Intellectual Cover for Socialism by Hans-Hermann Hoppe, February 1988
 * DDR Museum
 * DDR Museum
 * DDR Museum