COUNTRY COMPARISONS     

 

East and West Germany

A Tale of Two Germanies

Germany, 1945-1990:

 

             

      

East and West Germany

by Lyubov Zhabskaya,
April 2002

 

 

 

 

Part I:

The countries of East and West Germany came into existence in 1949, after nearly eighty years of functioning as a united state. Although there is no definite date of the “beginning of German history”, some historians consider such point being the 911 A.D. election of Conrad I, the first king of the Eastern Frankish Kingdom, which contained many Germanic tribes (Library of Congress, Ch.1). From then until the creation of German Empire under the efforts of Otto von Bismarck in 1871, the territory of modern-day Germany was populated by many tribes led by local princes, warring amongst themselves. The number of these local states was reduced through the Thirty Years War (1618-1648), and the Age of Enlightened Absolutism (1648-1789), during which reforms pertaining to the industrialism and nationalism took place. The Congress of Vienna in 1815 further reduced the number of independent German states to thirty-eight, out of which Prussia led by the superior political skills of Otto van Bismarck soon assumed supremacy in what became the German Empire in 1871.The economy of the German Empire prospered, and by 1900 it became an important player in European political game (Library of Congress, Ch.1). German participation in the colonial race together with a great degree of military expansion created tension, which resulted in World War I in 1916. Germany lost the war, and the weak Weimar republic, created towards the war’s end, was plagued by many economic challenges (Library of Congress, Ch.1). These challenges were further aggravated by the worldwide Great Depression, which made way for the extreme politicians of the likes of Adolf Hitler. He and the National Socialist German Workers' Party soon grew very powerful, and in 1933 became the ruling party of Germany (Library of Congress, Ch.1).

Hitler’s foreign policy sought to expand German borders as far out as possible. The initial steps of this expansion: the annexation of Austria, invasion of Moravia and Bohemia, were met with no resistance from the other European powers; however, Britain and France stood up to defend the sovereignty of Poland. September 1, 1939 marked the beginning of World War II, which continued for almost six years and ended on May 8, 1945 with the unconditional surrender of the Third Reich (Hitler’s government).

As was decided in February of 1945 at the Yalta conference, upon German surrender, its territory was divided into four zones, which were to be governed by Britain, France, the United States and the Soviet Union. Berlin was also divided among the four countries, with the Soviet Union retaining almost half the territory of the city. However, with Cold War tensions creating a rift between the United States and the Soviet Union, Germany and Berlin soon became divided into two main spheres: East Germany, controlled by the Soviet Union, and West Germany, aided by the democratic West and the United States. In 1949 the three western zones became a separate state of the Federal Republic of Germany (FRG), and the Soviet-controlled East Germany became the German Democratic Republic (GDR). The two countries soon developed separate governments, currencies and national symbols (German Institute of Contemporary History, 84). The construction of the Berlin wall in 1961 divided East and West Berlin, and the wall remained in place until November 9, 1989. Germany was united again on October 3, 1990, when GDR merged with the Federal Republic of Germany.

Part II:

 In the years of the Cold War, GDR and FRG diverged in their social experiences for the first time since 1871. While the social and economic reconstruction of the FRG was guided by the democratic capitalist West, the re-development of GDR was closely supervised by the Soviet Union. Gradually, as the Cold War reached its height, the Soviet Union found it necessary to develop an “East German national identity” as a means of retaining control over the territory. Thus, the Germans were no longer supposed to share the same values and experiences and the allegiance to the same land, but rather feel divided on the basis of the ideological differences of the United States and the Soviet Union.

          Although a complete break with the past was not desirable, the communist leaders of East Germany sought to build on the traditional German values of discipline, hard work, respect for authority and efficiency, and to connect these with the desirable qualities of a model socialist citizen (McCauley, 96). The educational, media and political systems were all geared for the creation of the new socialist East German identity. A desirable socialist personality was meant to blend creativity and intelligence with a sense of responsibility and obligation to the collective society, and also a strong moral adherence to the socialist goals. A thorough knowledge of the socialist theory was required of all the citizens, and historians were especially asked to develop a new identity with an emphasis on the socialist aspects of the German past: thus, selected literary, military and political figures were given a prominent place in the East German history because of their progressive socialist ideas. Marx, Engels, Otto von Bismarck, Goethe and Martin Luther were commanded for their actions and thoughts; they were proclaimed national icons of progressive thought and fearless adherence to socialists’ beliefs (Library of Congress, Ch. 3). The new communist government also highlighted the work it has done in the Nazi trials and criticized the seeming lack of similar behavior on part of their Western neighbors (German Institute of Contemporary History, 82).

At the same time, the development of West Germany was closely supervised by the capitalist countries of Western Europe and the United States. However, as the development of a national identity was not stressed in West Germany, things took a somewhat different turn. In the early days of the Federal Republic of Germany’s existence, many people did not take an active part in political affairs, preferring to withdraw into their personal and family lives (Conradt, 19). The public interest and support for the political system came after the economic situation improved in the late 1960’s and early 1970’s; yet there was no united desire for participation in the democratic process (Conradt, 26). While the traditional German values were still relevant in the national identity of the West Germany, the people were much less politically active than their Eastern neighbors. They grew to appreciate the democratic structure of the new society, yet politics played less of a role in their lives than it did in the lives of the people of East Germany.

  The problem of discussing cultural and national differences between East and West Germany lies in the artificial superimposition of the political differences between the people of the same cultural and historical past. Despite the newly developed separate political identities, the people of East and West Germany came from the same place, and their values and belief systems were essentially the same. The new socialist identity created by the communist leaders of East Germany was an artificial entity, and it could not take firm hold with those people who came of age in the years before 1949. The generation born in the years after the partition of Germany was much more influenced by the new ideology, yet the system was not in place for a long enough time for these values to take hold (Library of Congress, Ch. 3). This was further aggravated by the differences in the standards of living between the people of East and West Germany, and a certain degree of envy experienced by the East Germans towards the better economic situation of the West (Steury, VII). Thus the artificially created national identity of the East Germans was rather disliked by the majority of the population, as it was only a reminder of the less-desirable living conditions than those of their Western neighbors.  

Part III:

Beginning with the four-power occupation of Germany and the creation of the FRG and the GDR, drastic economic differences began to take place. East Germany was quickly becoming a Soviet-style centrally planned economy, in which the decisions of production, prices and allocation of resources were established administratively rather then left to the market (Keefe, 106). The ultimate authority lay with the Socialist Unity Party of Germany, which was supervised by the Politburo; the Economic General Staff of the Council of Ministers, a political body just below the Politburo in the hierarchy, served as the State Planning Commission (Keefe, 112). It advised the Council of Ministers on the necessary economic measures and also coordinated economic planning. The major responsibility for the direction of the separate sectors of the economy was vested in the individual ministries, which were responsible for their specific sphere’s planning, resource allocation, development, innovation, and effective achievement of the plans (Keefe, 112). Directly below the ministries were the centrally directed trusts, which further propagated directions from above and acted as coordinators and managers of the resources. And finally, one step lower in this hierarchy were the producing units, which received instruction from above and produced what was asked of them.

GDR joined COMECON, the Council for Mutual Economic Assistance, which also included the Soviet Union and other communist countries of Eastern Europe, Cuba, Mongolia and Vietnam; like many of these countries, East Germany emphasized basic industry and industrialization at the expense of consumer goods. The majority of its trade was done with other COMECON members: about 65 to 70 percent in early 1981, with a little over 35 percent coming from the Soviet Union alone (Keefe, 107).

 Despite the fact that it had few natural resources and had to import a lot of necessary materials, GDR soon became the most affluent socialist country, with the highest GDP per capita and the highest standard of living among the Soviet-style economies (Keefe, 108). It was estimated that roughly 30% of the GDP of GDR was exported in the 1970’s to pay for the necessary imports, yet impressively, the East German economy flourished despite the seeming lack of resources and shortage of the labor force (Keefe, 108). GDR also had to deal with a small labor force, resulting from the migration of a large segment of the population early in the country’s existence; to compensate for this, the government encouraged women to join the workforce by allowing them to combine family and working lives (Keefe, 110).  A steady rate of economic growth, which ranged from about 3 to 5% a year (there is some difference, depending on the source of measurement) was observed throughout the 1970’s, and only a slight decline occurred in the 1980’s.

West Germany’s economic development took a different route. Traditionally more industrial than the East Germany, West Germany was nonetheless hurt by the war waged on its territory. However, it benefited greatly from the influx of some 14 million refugees from East Germany and the territories of Poland and Czechoslovakia, which continued until 1961 (Goldman, 13). The labor force was thus abundant, and the laborers who came to West Germany from other countries were not overly concerned with the initial conditions for work. This turned out to be a beneficial situation for an economy that needed to be rebuilt from shambles.

The West German government took an active part in the reconstruction of the economy, but it never took control of the economy completely. In 1982 it owned about $25 billion worth of assets, including railroads, oil companies, the largest national automobile producer (Volkswagen), and many other firms (Goldman, 14). State governments were allowed to make separate investments in commercial venues, as was the case with the two major aerospace companies, whose ownership was shared by Hamburg, Bremen and Bavaria (Goldman, 15). West Germany developed a mixed economy, in which the government took an active part in the development of the resources, yet an essentially free enterprise system remained in place. 

 Numerous subsidies were available for the private sector, and a special Federal Ministry of Research and Technology was created to administer funds to encourage technological innovation (Goldman, 15). The government also paid a great deal of attention to the condition of the economy, requiring an annual review of a five-year economic projection (Goldman, 15).

Just as GDR, FRG experienced difficulties due to the fact that its natural resources, namely energy resources, must be imported. In order to reduce its dependence on the fluctuations of the market, the government heavily invested into alternative sources of energy supply. West Germany also worked hard on achieving a favorable balance of trade by exporting many of its products. However, the establishment of the trading block in Western Europe created a demand for German products, and FRG soon became one of the major exporters in Western Europe. The Common Market is believed to be one of the major reasons for such a strong and quick economic development as the one which took place in West Germany (Goldman, 14). However, due to its lack of natural resources, West Germany was dependent on the demand for its exports in order to be able to afford the necessary imports (Goldman, 17).

Both East and West German economic development have been remarkable given the economic and political conditions of the 1940’s. Both countries had risen from ruins to quite impressive levels. While West Germany enjoyed a higher standard of living, the East German model illustrated that it was possible to achieve impressive results with the Soviet-type model as well.

Part IV:

    One of the major differences between the GDR and the FRG economies was the standard of living they provided for their citizens. While both countries enjoyed a relatively strong economic situation, a noticeable difference existed in the lifestyles of the people. A study conducted by the German Institute for Economic Research in West Berlin in 1978 attempted to measure the purchasing power of the Deutsche mark and the purchasing power of the GDR mark, which were at that point officially exchanged at a 1:1 ratio (Keefe, 132). Two typical market baskets were compared for this study, considering the consumption patterns of East and West Germans, respectively; the study found that the GDR mark purchased more if the GDR market basket was used, and the Deutsche mark purchased more if the FRG market basket was used (Keefe, 132). The FRG market basket contained more of what was considered to be “luxury” goods in the East Germany: coffee, automobiles and fine crystal, which, while fairly commonplace for an average FRG citizen, were hardly affordable to an average person living in GDR (Keefe, 132).  

As illustrated by the study, the purchasing power of the GDR and the Deutsche marks was comparable, and the problem lay in the availability of goods and services which one may desire and the daily choices made by the citizens of the two countries. Contrary to the popular belief of the West, there was no lack of basic products, such as milk, bread potatoes, clothing and other essentials in the East Germany; the availability of fresh produce off season was scarce compared to that in West Germany, but it improved somewhat in the late 1980’s (Keefe, 133).

The educational and health systems were at comparable levels, with those in the East Germany being free of charge; the health system of East Germany may even have surpassed that of the West Germany in some respects, considering that the infant mortality rates in the East were lower (Keefe, 135). Availability of housing was satisfactory, and although most of the government-built housing was not particularly aesthetically pleasing, it was affordable and provided easy access to schools, transportation and other necessary sites (Keefe, 134).

The area of consumer choices in which the most differences existed between East and West German economies lay in the availability and quality of services and luxury goods (Keefe, 134). Automobiles remained one of the most demanded luxury items in the GDR, and one of the least affordable ones; demand for automobiles and some other items, such as washing machines and refrigerators was much greater than the supply available, and people without connections had a lot of difficulty obtaining these items (Keefe, 134). For example, a Soviet, Polish, Czechoslovakian or Japanese car could cost over 20,000 GDR marks, while the income of an average person was somewhere between 2,000 and 3,000 marks (Keefe, 132, 134). The quality of domestically produces automobiles was way below the world standards.

Similarly, the services available to the general public, such as transportation, communications, auto service stations, barbers, etc. were quite poor compared to their quality in the FRG (Keefe, 134). The restaurants were crowded, the service was slow, and the lines in supermarkets were long; however, it must be noted that major improvements were made in this area in the 1980’s with an increased number of supermarkets and introduction of new transportation vehicles and modernized rail lines (Keefe, 134).

 The differences in the standards of living and the goods and services available to the general population have been attributed to the difference in the structure of the society’s employment. In 1978 about 48% of the West German population was employed in the service sector of the economy, compared with only 24% in East Germany (Keefe, 134). The lack of employment caused a lack of income, which constrained the economy and brought down the general standard of living.

Works Cited:

  Conradt, David P. Political Culture, Legitimacy and Participation. The West German Model: Perspectives on a Stable State. William Paterson and Gordon Smith, eds. Frank Cass & Co, Ltd., 1981.

German Institute of Contemporary History. German Democratic Republic: 300 Questions, 300 Answers. GDR, 1967.

Goldman, Guido G. The German Economic Challenge. The Political Economy of West Germany. Andrei S. Markovits, ed. New York: Praeger, 1982.

Keefe, Eugene K., ed. East Germany: A Country Study. United States Government as represented by the Secretary of the Army, 1982.  

Library of Congress, Federal Research Division, Country Studies Area Handbook Series. Germany: A Country Study. Research completed in 1995.

            http://memory.loc.gov/frd/cs/detoc.html

McCauley, Martin. The German Democratic Republic since 1945. New York: St. Martin’s Press, 1983.

Steury, Donald P. On the Front Lines of the Cold War: Documents on the Intelligence War in Berlin, 1946 to 1961. History Staff, Center for the Study of Intelligence, Central Intelligence Agency, 1999.

            http://www.cia.gov/csi/books/17240/index.html

 

 

 

Structure and Performance: A Tale of Two Germanies

by Angelo Caraballo

The effects of the communist system, that had its hold over East Germany for over half a century, continues to present obstacles for efficient growth. It has been more than a decade since East and West Germany were unified yet full economic integration continues to be elusive for the two regions. Despite massive efforts from West Germany in the form of governmental assistance to East Germany productivity growth has stagnated. East German living standards still lag behind that of the west, as does productivity growth. The Soviet command economy may be long gone but the effect it has had on the East German economy continues to this day.

In order to understand better the present difficulties of East Germany it will help to compare the command economy it was under to the market system it now functions in. For this East and West Germany provide a good backdrop for analyzing the effect of economic systems because countries were roughly similar at the outset. The people of east and West Germany have shared homogenous tastes, culture, and history. Both countries were united as one people prior to 1945 and experienced many major historical events together. Under control by the same Kaiser, the people of East and West Germany experienced defeat in WW1, the depression of the 1920s, and the militaristic surge of the Third Reich in the 1930s and 40s. Geographically located next to one another both countries also shared almost identical climates and terrain.  Furthermore per capita input, per capita output, and foreign trade partners were also roughly identical between the two.

Some of the dissimilarities of both countries at this outset could however account for some of the economic differences of the two over time. East Germany for instance was a much smaller economy with a population of only 25% of West Germany at the end of WW2, and even though the two were located next to each other the resource base of East Germany was inferior to that of West Germany. East Germany had to import most of its iron ore, high grade coal, oil, cotton and lumber from abroad and was in the 1980s spending 25-30% of its GDP to pay for these raw materials[i]. East Germany also suffered from massive emigration of people in the 50s. As many as 2.5 million under the age of 25 emigrated to the west during this period which decreased labor force substantially. East German figures show that total population fell from 18.5 million in 1946 to 16.7 million in 1986.

National clamor for socialist economic platforms were far from weak in western Germany at the end of the war. The nation had bad memories of its market system during the 20s and was afraid of a repeated experience. Nevertheless West Germany adopted a western capitalist system with a considerable degree of government intervention to provide social security and some extent of equity. East Germany on the other hand began its transition into a planned economy as part of the Soviet Union immediately following WW2.

Structural economics differences of the two nations were huge. East Germany like other communist East European states had a centrally planned economy (CPE) in which the state establishes productions targets and allocates resources. The economy is run in a hierarchical fashion with the highest authority, the Socialist Unity Party of Germany, setting the agenda and producing annual, 5 year, and long term plans that dictate economic activity. Most property used for production purposes are owned by the state and all workers are paid a wage contracted by the state.

West Germany on the other hand had a very decentralized economic system. Most production property is privately owned and market forces determine both prices and wages. West Germany has a considerable degree of government intervention to protect society from the damages of imperfect economic activity. A high degree of government intervention has made West Germany more of a socialist market economy. Taxes are generally higher than those found in the United States because of the higher social cost of public support programs. Thus West Germany has often been referred to as the “Welfare State”.

Initial differences in economic performance of the two systems seemed to be minute initially. During the 50s and 60s both countries made a remarkable economic recovery averaging between 5.5-8%% annually in GDP growth. West Germany became the economic miracle of the West and East Germany was the economic powerhouse of the east. West Germany growth did at times exceed East German growth but it must be remembered that East Germany did loose a significant part of its population between 1945 and 1961. West Germany on the other hand benefited tremendously as skilled labor flowed into the country immediately after WW2. Figures estimate that as much as 12 million workers immigrated into Germany at the same time that East Germany lost around 2 million. Furthermore although many hail the Marshal Plan as being an important factor contributing to the West German miracle recent studies have shown that its impact was much greater politically than it was in fact economically.[ii]

The first two decades after WW2 were characterized by heavy extensive growth by both countries. As each country reached its capacity utilization over time the gains from extensive growth began to diminish. In order to achieve considerable growth a system, at capacity utilization, needs innovation and productive gains. This intensive growth was a particularly rare occurrence in communist type systems because of their incentive structures. East Germany did however for a period after 1965 seem to exhibit this type of intensive growth because it ran growth rates similar to those of western countries.

Over the course of years economic growth in both countries seemed to taper off. This was especially the case in Soviet economies, which after having enjoyed economic successes in the 70s while the west dealt with high degrees of inflation, stumbled into extreme economic difficulties in the 80s. Growth for the communist bloc almost ceased to exist with some countries experienced annual growth of less than one percent. East Germany shared relatively better at 1.6 percent but even it was seeing hard times.

At the collapse of the Soviet Union however growth figures for former Soviet countries were double-checked and were found to be misleading. Soviet officials had in fact misreported growth gains in order to make their economies look more robust. Growth gains after 1970 were in fact significantly lower than western growth gains most likely due to the diminishing returns of extensive growth and lack of intensive growth.

A central question is then why East Germany and communist countries in general have low degrees of intensive growth. Economic growth requires innovation and productivity gains to increase efficiency when a system is already maximizing a majority of its resources. One explanation for the lack of intensive growth could be that planning was badly implemented in East Germany and elsewhere. Continued investments into heavy industry, a benchmark of Soviet policy, could not return constant returns because labor, a supplementary input of production, was already stretched too tightly. Resources were thus allocated towards extensive growth investments when they could have been used for something with a higher degree of intensive growth returns such as research.

Another explanation for the poor display of intensive growth on part of East Germany after 1980 is that worker incentives were simply not aligned to that of the planning ministry. Although such principal-agent relation problems are also a cause for imbalance in the market economy they weigh much more heavily in the communist economy. Competition among firms in a competitive market forces managers to be resource efficient and innovative in order to remain competitive. Incentive problems in market economies thus remain within the firm wherein it is arguably easier to monitor the workers. Conversely in planned economies there is no competition at the firm level. Enterprises merely follow the plans handed down to them from the central planning authority. The fear factor of loosing one’s job due to lack of performance was minimized and the greed factor of over-performing in hope of gaining a salary raise was all but lost because of homogeneous pay rates. Motivation either through fear or self-advancement was thus minimal in communist states. It is true that the Soviet Union places heavy emphasis on moral incentives but it probably safe to say that these incentives did not substitute for material goods as rewards for the majority of people. Moral incentives can play a tremendously important role but studies have shown they do so only for a short period of time. Typically during revolutions, war times, and other emotionally intense moments moral incentives will push people to increase output and efficiency

 Deficiencies of communist economies in intensive growth thus bring about a lower rate of GDP growth in the long run. Even though GDP may have been similar between East Germany and West Germany for a time period, living standards were most certainly not. One of the great advantages of having a centrally planned economy is being able to dictate economic policy with a much firmer grip than can be had in market type systems. The policy of communist countries rarely placed consumer goods as the primary objectives. Soviet countries instead placed great deal of emphasis on the accumulation of capital. It is not that the planners did not care about the well being of the people; in fact they thought they were doing what was in the best interest of the people. It was thought that heavy investment into heavy industry would bring about greater returns for future consumption. This is correct if the rate of return on heavy industry stays constant, such was however not the case.

This does not mean however that a communist system cannot provide adequately for the well being of its people. Honecker the leader of East Germany in 1971 for instance announced that his regime would fulfill the “principal task” of the economy which was as maximizing the well being of its citizens[iii]. Honecker lead the way for great improvements in the standard of living in East Germany making it the envy of other Eastern European countries yet this standard of living was still substantially low compared with the West. It could be perhaps argued that a centrally planned economy does not know nor can it predict the ever-changing needs and wants of its people. Plans are too rigid and do not take into account new technology or new tastes as quickly as the market economy does. Theoretically a centrally planned economy could match the market but in practice it fails to do so because of the immense amount of both information and processing power needed to allocate resource goods accordingly.

Continuing evidence of how communist systems fail to provide sufficient incentives for intensive growth some say can be seen in East Germany even a decade after reunification. West Germany has been burdened with extending very large sums of transfer payments per year to its brother country since unification. A sum of about 100 billion dollars is extended to help improve East German infrastructure so that economic convergence of the two countries will take place. Seen as a trivial undertaking at the start it has proved to be a daunting task. There are two prevalent reasons for this; one being politically incorrect, but supported by a majority of West Germans, is that East Germans are just simply lazy the other advocated by East Germans is that transfer payments have been insufficient.

A study done by Joachim Ragnitz shifts the reason for East Germany’s economic troubles away from having insufficient capital intensity and concludes that the problem is more delicate. West Germans are quick to criticize East Germans as being a lazy bunch because of a failure to produce productively. Their foundation of criticism lies in the fact that they believe East Germans have been “educated” to be inefficient throughout their lives under the former communist system. This to them must be the case because institutional blame cannot be asserted as it is when talking of Russia’s failed transition to the market economy. East Germany did after all get a “world class” west German law, property rights and courts, public administration, capital markets and banks overnight.[iv] 

While it is true that East Germans are less productive being given increasing amounts of technology and capital it is wrong to assume that they are any less productive than anyone else in their shoes. For the most part East Germans are trying to maximize their well being yet by choosing individual maximization choices they do not choose the optimal choice for the society. Ragnitz states that a majority of East German enterprises are small scale and regionally oriented. East Germans choose to startup regional companies over national companies because of the lesser degree of competition. They know that they are not able to compete with the more highly skilled western workers and thus choose to join an industry that is less risky. The problem then becomes if all East Germans do not join competitive industries they will never be forced to become innovative and efficient. The government then encourages companies to enter competitive industries by subsidizing them. The subsidizing then leads to another problem wherein the companies feel too “safe” and again fail to become efficient because they know the government is there to bail them out.

For the time being productivity levels and standards of living remain below that of Germany for the east. Since the West German economy is continually growing East Germany will have to align itself with a moving goal. This convergence is predicted to take another 30-40 years and is truly indicative of the differences in performance of the two countries since 1945. Central planning as it was implemented in East Germany did indeed satisfy policy goals and achieve a period of high extensive growth but in comparison with the west it failed to increase innovation and productivity to allow longer-term intensive growth. Without better ways to measure consumer desires, by having a more dynamic planning system in place, standards of living will remain higher in stable market economies.

 References:

Library of Congress Country Studies: East Germany

http://memory.loc.gov/

 Lagging Productivity in the East German Economy: Obstacles to Fast Convergence

Joachim Ragnitz;  Halle 2001

 East Germany: 10 Years of unification with a Vengeance

Rudi Dornbush

East Germany, West Germany, and their Mezzogiorno Problem: A parable for European Economic Integration A.J. Hughes Hallet, Yue Ma The Economic Journal, Vol 103 Issue 147 (416 – 428)

Productivity Differences Between Western and Eastern establishments

Lutz Bellman, Martin Brussig

Comparative Economic Systems 6th Edition

Gregory / Stuart Ch9 Ch11

 The Causes of Economic Growth

Renuven Breaner CATO Policy Report May/June 1998


[i] Library of Congress Country Studies: East Germany – Resource Base, http://memory.loc.gov/cgi-bin/query/r?frd/cstdy:@field(DOCID+gx0080)

[ii] Causes of economic growth - Cato Policy report May/June 1998

[iii] Library of Congress Country Studies – East Germany – The Consumer in the East German Economy 

[iv] East Germany:10 years of Unification with a Vengeance – Rudi Dornbrush

 

 

 

 

 

East and West Germany, 1945-1990:

A Comparative Economic Glance


by  Jamie Gill

 

At the present time, the world accepts the economic status of the powerful German state as a normal part of the international order. Since it’s inception as nation in the late 19th century until 1945, Germany was a prominent member of the European continent. After Adolf Hitler’s destructive path through Central Europe, however, the German state would remain divided and remarkably different from earlier times. Germany was separated into zones by the reigning world powers, including France, the United Kingdom, the Soviet Union, and the United States following World War II. Coincidentally, this time period was also the beginning of the Cold War and the ideological division of the world could not be any more noticeable than in the governing of the zones. The three western powers untied their zones into a region simply known as Trizonia while the Soviet Union held onto its region in the eastern half of the nation. The division of Germany was an accidental result of the Cold War as the controlling world powers imposed their own economic and social ideals on their respective areas. (Fulbrook 14) In 1955, the creation of the western Federal Republic of Germany (FRG) and the eastern Democratic Republic of Germany (GDR) successfully divided the communist and capitalist nations of Europe. This “Iron Curtain” resulted in the pursuit of separate economic and legislative policies in the new regions of Germany and would keep the country from reunification for a further four decades.

I. History

The history of the two German states can be divided into five time periods. The first began in the years directly following World War II and continued until the recognition of the two states as distinct governments in 1949. During this time, the governments of the United States, United Kingdom and France controlled the western half of Germany. These nations were constantly backing the region with financial support including the heralded Marshall Plan of 1948, which supplied massive amounts of aid to western European nations. (Fulbrook 14) The governments also dismantled any current socialist reforms and unions as well as aided the right wing government to consolidate their power. (Fulbrook 15) At the same time, the Soviet Union was stripping the land of the eastern half of Germany for what it considered to be reparations for the damage caused by the German armies during the war. They were also beginning to implement Soviet style reforms in the region including a land reform in 1945 that effectively broke up large estates and the nationalization of industry in 1946. (Fulbrook 14) Many Germans were not deeply involved in the political arena and were simply trying to reestablish their lives after the war. For this reason, they may have been more susceptible to the increased role of other nations in their own governments. Berlin remained an international city and was divided in a similar fashion as the rest of the nation. As the economy of West Germany recovered, the governing powers introduced the new currency – the deutsch mark. Fearful of the new currency and the invasion of capitalist ideas, Josef Stalin closed the borders to Berlin in 1948 and forced the United States to airlift in the commodities needed in the western half of the city. Stalin, citing the repair of roads as his ostensible reason for closing the region, ended the blockade after the success of the airlift. This event would foreshadow the events that would occur only a decade later.

The second period of post war German history occurred between 1949 and 1961. This was the time after the creation of the two separate nations but before the building of the Berlin Wall. In the West, Konrad Adenauer came into power and was a supporter of the western world. He was in power during the FRG’s ‘economic miracle’ of the 1950’s and led what could only be called a “chancellor democracy”. (Fulbrook 18) In the east, communist Walter Ulbricht maintained control and implemented programs to assume full control of the many communist factions including the removal of the upper house of parliament and the abolition of the leaders of the regional governments. (Fulbrook 19) It was during this time that central planning of heavy industry and the collectivization of agriculture experienced their first declines. This economic downturn resulted in an exodus of skilled workers into West Berlin. (Fulbrook 19) The governments remained separated by their ideological differences and would receive sovereignty in 1955. West Germany was a member of the North Atlantic Treaty Organization and the European Economic Community, which promoted economic cooperation on the continent. At the same time, East Germany moved closer into the communist bloc, becoming a member of the Warsaw Pact and COMECON, military and economic cooperative agreements, respectively. (Fulbrook 19) West Germany refused to recognize the existence of the GDR (stated in the Hallstein Doctrine) and the two states drifted into further isolation from one another. (Fulbrook 20) The next period was the decade from 1960 until 1970. In the East, there was a definitive change in the domestic atmosphere, as a physical wall had closed the nations off from the rest of the world. It was a society based on militarization and repression including the use of border guards and the State Security Police or Stasi. (Fulbrook 39) The government established a full communist political system emphasizing nationalization of industry and property, labor reform, centralization of power and the formidable role of the Socialist party (SED). (Fulbrook 21) In the West, the economy continued to grow along with their similarities to other western European nations. In 1969, Will Brandt came into power initiating the liberal policy of Ostpolitik and the mutual recognition of the two states or as he called it “two states and one nation”. (Fulbrook 21)

From 1972 until 1989, the FRG established their ‘social market economy’ that maintained a capitalist market system while instituting social programs such as unemployment aid, improved labor relations and social security. (Fulbrook 22) To the east of the Wall, Honecker made the GDR the most successful nation in the communist bloc and continued the use of five-year plans and communist economic systems. In 1987 he made an unprecedented visit to West Germany. (Fulbrook 23) Political activism was on the rise especially among environmental groups along with an air of conservatism in the west and instability in the east. In 1989, Mikhail Gorbachev rose to power and installed his programs of openness in the bloc. As a result, Hungary opened its borders to the west and many East Germans fled through the only hole in the ‘Iron Curtain’. (Fulbrook 24) Demonstrations for more liberal policies increased in the GDR and Egon Krenz replaced Honecker in October of 1989. A month later, he announced permission for unlimited travel out of East Germany. (Fulbrook 24) The strong binds of communism were quickly unraveling. The currency was officially united in the summer of 1990 and the country was officially unified in October of that year. (Fulbrook 25) The divided country of Germany had finally been reestablished after 40 years

II. Cultural Identity

The Berlin Wall was a symbol for the division of Germany and remains an icon of the world during the Cold War. It was the physical ‘Iron Curtain’ that separated a once proud people and two very different societies. It was “…96 miles of barbed wire barricades and concrete walls with an average height of eleven feet…” (Berlin Wall Online) It consisted of 4 separate installations of concrete during the period from 1961 until 1975 along with 3 checkpoints along the route. There were 302 watchtowers and about 3200 people arrested attempting to cross. (Berlin Wall Online) The most famous was Checkpoint Charlie, a crossing point maintained by the United States, which provided some East German residents with some of their only looks into the western world. The wall stood from 1961 until 1990. However, it was not it’s physical presence that made it such an important symbol of the German life.

The wall was also in many ways a psychological as well as a political and social boundary. It successfully ended the flow of people out of the communist GDR and stood as “an embarrassing symbol of East Germany’s prison-like status.” (Keylor 308) As long as the wall was in place, communism existed in Germany and upon its destruction the unification process began. The social differences between the people living their lives on either side were much larger than the short distance of land that separated them. It has been a common description to say that crossing that arbitrary line was like driving from black and white into Technicolor. After the wall fell, the social stigma attached to it became even more obvious. These people had been separated for forty years and some of the younger generations had not even know what it was like to live any other way. The older generations were astounded by the changes that had taken place and felt isolated by their inability to catch up. (Hafner 15) Many East Germans resented the new capitalist system they felt had been thrust upon them along with it’s higher prices and lack of social programs like child care. In the same respect, West Germans were overwhelmed by the differences in East Germany and become disillusioned by the feeling that they were “footing the bill” for modernizing the sector. (Hafner 15) The wall remains a symbol for the division and subsequent unification of Germany and holds a social significance much larger than it’s physical presence. It stands as an icon of the Cold War world and the alienation of two states which would soon become one nation.

III. Economic Systems

After the end of World War II, the industrial center of Germany, including the Saar and Ruhr areas, was situated in the occupied zones of Western Germany. The FRG was always economically on the upswing, upholding a capitalist market economy. It was also aided by the financial assets of the Marshall Plan and the migration of skilled labor from the East before the Berlin Wall. (Schnitzer 52) Growth rates in the 1950’s averaged around eight percent, increasing to a remarkable twelve percent in 1955. (Schnitzer 53) The FRG also focused much of its energy on obtaining a role in the collective economy of the European continent. Two measures to achieve this were the European Coal and Steel Community, which provided for collaboration between the French and German industries, and later in 1953 the European Economic Community (EEC), the forerunner of the European Union. West Germany followed a policy of codetermination after 1951, which gave workers a recognized voice in the structure of industry. In 1952, this was followed by the introduction of work councils, allowing more even further communication between employees and employers. (Schnitzer 50) There was one union per industry to decrease the amount of infighting and increase the bargaining power of the unions. An example of this was the German Trade Union Federation. (Schnitzer 50) The West remained capitalist throughout its entire existence with varying amounts of state power in the economy as a response to world conditions. For example, there was more state control of the economy during the oil crisis of 1972 to 1973. (Schnitzer 51) The economy of the GDR, on the other hand, was a perfect example of the Soviet command and control type. They utilized central planning, state control of the financial markets as well as a tendency to stress quantity over quality. (Schnitzer 52) As was mentioned, they initiated massive land reforms in 1945, effectively breaking down large estates. During the 1950’s, they focused on the collectivization of the agricultural sector, effectively ending the role of the independent peasantry. In the 1970’s, the government focused further energy on agricultural specialization, especially of the produce market. (Schnitzer 52) The land had lost most of its industrial capability after the Soviet Union had stripped it of its primary machinery after the war. On average, the GDR maintained about a rate of three percent growth per year in the 1960’s and 1970’s with a decline in the 1980’s. (Schnitzer 54) The New Economic System of the 1970’s initiated reforms that based the production of the economy on profit incentives and stronger intermediate control. The government of Honecker also focused on consumer satisfaction after the scarcity, which resulted from the plans of the 1960’s, became a social problem. (Schnitzer 52) However, it came too little and too late. Labor was organized into one large union called the Free German Trade Union that was essentially a mouthpiece for the ruling SEC party and had little power to change the working environment. (Schnitzer 53) This region had less industrial and natural resources to use for growth from the onset. After the installation of the communist system, the industrial sector was not used up to it’s potential and therefore the growth of the economy suffered accordingly as well as any comparison between the production of the West or Eastern haves of Germany. (Schnitzer 47)

In the FRG, private citizens controlled the bulk of the industry and market forces determined the prices. The government de-nationalized most of it’s stock including the selling of Volkswagen stock in the 1960’s. (Schnitzer 32) The industrial sector accounted for 54% of the nations GDP and each year the government averaged about 180 billion Deutsch Marks (DM) in investment. (Schnitzer 35) Agriculture amounted for a small sector of the economy and they imported most of their foodstuffs. (Schnitzer 39) The fiscal system was controlled on three levels by the local, state and national governments and they invested heavily in the economy as well as set the taxation rate to support the public sector. (Schnitzer 107) Unlike the GDR, there was little economic planning. The government did however make a few medium range plans to continue growth in the 1960’s but they were not comparable to the detailed plans of the GDR. (Schnitzer 48) The banking system was controlled on the national level by the Deutsches Bundesbank. (Schnitzer 167) The bank was considerably independent from the national government, with a structural system similar to the Federal Reserve Bank in the United States. Meanwhile, smaller banks were usually independently owned. The unemployment rate averaged around one percent for the first three decades of the nations existence (Schnitzer 127) The average wage and national income were almost double that of the GDR. (Schnitzer 399)

In the East, the allocation of resources was a result of the government-planned economy. Industry was maintained by either state or semi state owned institutions, cooperatives, or by private companies with strong governmental oversight. (Schnitzer 199) The economy was dominated by their remaining industrial sector, which accounted for some sixty percent of their Gross National Product, and large agricultural sector. (Schnitzer 199) Instead of a reliance on the market economy similar to the FRG, East Germany depended two, five and seven year plans for economic growth submitted by the government. They were usually written and administered by the State Planning Commission. (Schnitzer 202) These plans usually established the volume and distribution of national income, investment, industrial production, retail trade and expected increases during the upcoming set time period of labor productivity and the income of the population. There were also plans developed for the financial planning of the monetary and banking system. These plans were then sent on to the ministries of each industry for implementation. (Schnitzer 206-207) All enterprises within the GDR were responsible for submitting an annual operating plan, which was developed in the framework of the national plans. (Schnitzer 209) There was a high amount of bureaucracy and plans were passed between sectors and ministries without ever being successfully implemented.

With the beginning of the aforementioned New Economic System, the focus became placed primarily on the construction of development of primary industries and capital goods. No attention was paid to the increase in consumer goods, which resulted in the unhappiness of the people and the scarcity of the commodities. (Schnitzer 221) In the labor market, profit was the main criteria for performance and a portion of any profits were distributed to the workers as bonuses. However, these bonuses were offset by the high levels of levies placed on all sectors of the economy which resulted in the lowering of wages. (Schnitzer 281) Unlike the FRG, East Germany maintained a high level of social services. Most of the expenditure of the government in the public sector was for social services or education. (Schnitzer 266) The state budget was essentially a plan for the whole economy and financial planning was based on the estimated levels of output for each year as a result of the output levels of the year before. The banking system was planned by the Ministry of Finance and expectations were handed down to the central bank or Staatsbank on topics such as currency emission standards, the refinancing of other banks, and the needed preparations for other banks to maintain national plan. (Schnitzer 328) There were certain specialized bank for each sector of the economy as well including the Industrial and Commercial Bank and the Agricultural Bank. (Schnitzer 329) The one major labor union (FDGB) was intended to ensure that workers encouraged ideas of  “socialist enlightenment” and the workers had no right to strike. (Schnitzer 346) The two separate economic systems of divided Germany differ by their procedures of implementation, allocation and treatment of labor. These differences are most accurately portrayed through a closer look at the industrial sector of the GDR and FRG.

IV.  Industry in the GDR and FRG

Comparatively, the West averaged higher productivity in their industrial sector, manufacturing 455.3 million DM worth in 1968, compared to the East’s production of 112.5 DM. (Schnitzer 353) On a side note, to show the GDR’s inability to compete with the FRG, Even with the East’s focus on the agricultural sector, they still had a productivity which was 36 percent of the West’s total. (Schnitzer 371) In the FRG, they already had a strong foundation of industrialization to build off of before the division of the nation. The Allies also took extreme measures to break down cartels and monopolies, ostensibly to break down the capabilities of any future war-making machine. (Schnitzer 53) This tradition continued with the government’s passage of the Law Against Restraints of Competition in 1957, which denied manufacturing firms the right to have either horizontal or vertical agreements. (Schnitzer 55) This continuing trend of preserving the rights of competition among the firms in the FRG helped to establish a busy and growth oriented market, if only in some cases for businessmen to preserve their own livelihood. This also increased competition among smaller firms and provided for employment concentration in the larger firms. (Schnitzer 56) A reliance on larger firms, although it could deter economic growth, made the West German state a powerful economic icon through its encouragement of extreme capitalism and competition. The large firms accounted for sixty percent of the nations GDP in the 1960’s. (Schnitzer) The state was never involved in ownership and the prevalent industries were the chemical, electro technical, machinery and automobiles. (Schnitzer 75) It is clear that the FRG was a highly modernized and capitalist nation, increasingly dependant on their industrial capabilities.

East Germany was also highly dependant on their industrial sector, however, their socialist economic policy made it very difficult for any of their plans to be achieved. The state held a monopolistic control of the industrial sector and basically served as a large bureaucratic planning mechanism. (Schnitzer 219) The aforementioned four types of industry were in all some ways under the dominance of the government. The industrial sector was essentially a satellite of the national government and the ministries made the important decisions for each individual industry and their allocation of resources. (Schnitzer 227) However, the bureaucracy did not end there. Underneath the ministries, a group called the VVB was in charge of further correcting and following through on the implementation of policy in the actual enterprises. (Schnitzer 228) The enterprise itself had little influence on the policies of production or wages and all price levels were set by the state. (Schnitzer 235) All of this bureaucratic muddle was a structure unheard of in the FRG and inhibited the growth of East Germany.

As a more specific comparison of the industrial sector of the two German states, a comparison of the production of the GDR’s Trabant and the Western Volkswagen are extremely helpful. The Trabant, or Trabi as it is affectionately called, was intended originally to be essentially a closed motorbike made of plastic with a small engine and lightweight construction. (KTUD Archive) It was made in the Zwickau region of the GDR and was based entirely on one model – the F8. (KTUD Archive) Although there was a new model almost every year, they were all slight variations of the original. This serves as a metaphor for the East German economy – many changes but little progress. There were about 3 million made during the period from 1945 until 1990 and some people waited almost 17 years for delivery. (RFERL) Due to the influence of the COMECON, the Soviet Union was the only communist nation allowed to make strong and powerful motors and therefore the Trabi suffered. (RFERL) This again serves as an example of the type of hierarchy established in the GDR and their allegiance to the Soviet Union. They had little progress and any they did was not comparable to that of the western world. After the plants were closed in 1990, unemployment in those areas was sometimes as high as 95 percent. (Stanford GSB) The Trabi was a harsh reminder of the ineffectiveness of the East German economy and their stress on quantity and not quality. At the same time, the Volkswagen, or People’s Car, was produced in West Germany. The company originally intended to satisfy the desires of the working class to have access to luxury items and a higher standard of living. (Streeck 40) The VW firm constantly expanded throughout the decades and was one of the top firms in the world during the 1960’s. (Streeck 41) Volkswagen was a symbol of world-class engineering and ingenuity and the results of an effectively run capitalist system. Although the Volkswagen still exists and thrives today, the Trabi ceased to exist the day the wall fell. The end of the communist economy meant the end of its ineffective industries. These two products stand as symbols of the productivity of the individual states and the outcome of the two different economic systems.

V.  Conclusion

The division of Germany following World War II was thought at first to be a temporary process that would end the threat of war on the continent. However, this separation lasted for forty years. The two new nations chose entirely different economic systems based on their alignment in the Cold War. The German states stood not only on the battlefront of the Cold War but they also seemed to be a social experiment to decide the results of a capitalist or a communist society. However, neither economy was a true capitalist or communist society according to Marx’s definitions. The ineffectiveness of the GDR’s economy and the growth and power of the FRG’s industry became even more noticeable after the fall of the Berlin Wall and the reunification of Germany. For a few years after the unification, it was even unclear if the eastern sector could ever be brought up to the economic status of the west. However, after lots of time and modernization, the GDR was effectively built into the system of the FRG as they made a full transition from a planned to a market economy. (Fulbrook 79) Ten years after this process, Germany is now a united economic force on the European continent and one of the leading members of the European Union. It is only through a comparison of their past social and economic structure that we realize how far the nation has come.

Bibliography

1)      Fulbrook, Mary, Interpretations of the Two Germanies, 1945-1990. New York: Macmillan Press, Ltd., 2000.

2)      Keylor, William R., The Twentieth Century World. New York: Oxford University Press, 2001.

3)      Hafner, Katie, The House at the Bridge. New York: Scribner, 1995.

4)      Schnitzer, Martin, East and West Germany: A Comparative Economic Analysis. New York: Praeger Publishers, 1972.

5)      Streeck, Wolfgang, Industrial Relations in West Germany – A Case Study of the Car Industry. London: Heinemann, 1984.

6)      Burkhardt, Heiko, “Berlin Wall History,” Berlin Wall Online, 2002.

(http://www.berlinwall.ws/berlinwall/index_en.html), accessed on April 19, 2002.

7)      Negyesi, Paul, “Trabant,” KTUD Online Automotive Archive, September 1996.

(http://www.team.net/www/ktud/trabi.html), accessed on April 18, 2002.

8)      Naegele, Jolyon, “Ten Years After – The East German Trabant,” Radio Free Europe/Radio Liberty, 1995.

(http://www.rferl.org/nca/special/10years/germany3.html), accessed on April 17, 2002.

9)      “A Bumpy Road Through New Germany,” Stanford Graduate School of Business, 2000.

(http://www.gsb.stanford.edu/history/germanytrip.html), accessed on April 19, 2002.

 

 

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