The East German Economy:

The History of the Failure

By Ryo Shimizu



East German cars, rather old-fashioned, mingle with the luxurious BMWs and Mercedeses on the east German highways: it is a part of the remainder of the communism that ruled in east Germany until a decade ago. This gap between the economically wealthy west and less developed east is still present after the radical unification that occurred after the Cold War.

Germany faced the most striking event in its history after WWII on the third of October 1990: the western part of Germany finally succeeded to annex with the post-cold war restructuring east, formerly known as the German Democratic Republic. Before this period, GDR was totally isolated from its neighboring west (FRG), that succeeded to reestablish its state after the devastating defeat by the allies in WWII. Communism was the main power that caused GDR to lag behind the development towards high-technology that occurred throughout western Europe.

Today, this new formed nation-state is still struggling to balance its unequal distribution of wealth and employment. Before looking into the future of the reunified Germany, we will concentrate on this specific question: why did the communism in GDR not succeed, and how is the eastern part of Germany dealing with the sudden change in the economic policy, after the breakdown of the forced separation for several decades?

In this paper, I will briefly discuss the history of East Germany and its path towards the collapse of the communism in 1990, focusing mainly on the political decisions and the macroeconomic consequences that GDR has dealt with until then.


History of GDR

During the second World War, Adolf Hitler wanted to lead this nation-state to an establishment of the Third Reich, spreading across the whole European continent. However, his dream ended up as a total destruction of the Nazism. The Allies won for the second time against the Germans since the loss in WWI, and they were to keep Germany in peace this time. Thus, Germany was divided in four parts after the Potsdam treaty, and became under control of four different occupations.

These were the U.S., U.K., France and the Soviet Union (S.U.). They were driven by the five D’s: Denazification, Demilitarization, Decentralization, Democratization and Dismantling of production capital as reparation payments caused by the war. The U.S., U.K. and the French authority occupied the western part which later became the FRG, whereas the Soviets occupied the eastern part, that became the communist GDR. Berlin, the capital of Germany and the headquarter of the Nazi, was also separated into four parts, controlled by the four great powers. All participants were motivated to keep economic stability, in order to restructure the country gradually.

However, two of the occupants were yet to face another type of conflict: the Cold War. During the second half of the fifties, this tension reached its peak; this resulted as a definite separation of the German Reich. The western part adapted a democratic market economy, and the east started a central planned economy, which obviously suggests the direct influence of the communism.


The East German Economy


The occupation of the Soviets placed heavy burden on East Germany’s capital and resources, on top of the fact that this country was already suffering of heavy loss during the two World Wars. Despite this, the economy reestablished rapidly among the communist countries. However, this was not growing as in the market based economy as the market-based economies in the Western world started to develop, because Central Planned Economy (CPE) was almost entirely based on state-owned enterprises and capitals.

Advantages of the CPE are that it can maximize the continuous utilization of all available resources and that it serves as a social fulfillment rather than individual.

Examples of the disadvantages of this economic system are the ignorance of the product quality, the ineffective use of resources and inefficient allocation of goods and services. This made trade with other countries that provided better goods rather difficult. Also, international trade became unpredictable when the availability and the variation of the goods started to increase, thus the prices of the products being very fluctuous.


Taking these factors into account, the government made five-year plans and one year plans in order to produce goods in the most efficient and satisfying way. Although there were suggestions made by a large number of the population to improve the standard of production, the final decision was always made by the government until the breakdown of the communism.

Surprisingly, East Germany increased significantly in its production after the war. During the 50ís and 60ís, most of the country was already influenced by collectivization. The output of the industrial sector increased dramatically. Consequently, the GDP jumped up and investment took place in large numbers. The future seemed very colorful at that time.

However, during the 70ís, the CPE started to lag behind the technological development of the western world. They started to bring up so many different products on the market as a result of the technological development, it became too expensive for the CPE system to produce just as many varieties in good quality.


The economic growth started to slow down gradually after that, and to make it even worse, there was a oil crisis in 1973, resulting as a worldwide inflation, followed by a major recession. By the end of the 70’s, GDR was facing serious debt problems. In the 80’s, the economy was still going downwards, despite of the intensive attempts by the five-year plan to improve the situation and the actual improvement in the GDP; this meant the beginning of an end to the communism regime in East Germany that everybody thought it would work.

Thus, when the east and the west got reunified in 1990, the change to an open market economy was the start towards a new economic standard. Goods and services were provides according to the basic market economy theory: supply and demand. This way, the value of products produced in East Germany had a reasonable value, considering the fact that it is now able to change the prices of goods and products in the short term more easily than the CP

In conclusion, we could say that after the separation of the German Reich there has been either good sides to the economy in East Germany in a sense of the overall growth and the development in industrialization as well as bad sides, such as lagging behind so far that it was not able to compete with the Western democratic countries with open economy policy and free trade, which mostly took place during the eighties. Thus, with the full support from the Western part of Germany, the current unstable economic situation of East Germany will be gradually blended into the rapidly moving economic market in the west. The future of Germany is once again prosperous







-Anonymous; The Economist, London,Feb 7, 1998, p.17

-Keylor, William R.; The Twentieth Century World, Oxford University Press, third edition, 1996





OK Economics was designed and it is maintained by Oldrich Kyn.
To send me a message, please use one of the following addresses:

okyn@bu.edu --- okyn@verizon.net

This website contains the following sections:

General  Economics:


Economic Systems:  


Money and Banking:


Past students:


Czech Republic


Kyn’s Publications


 American education


free hit counters
Nutrisystem Diet Coupons