East Germany was the most successful economy in the Eastern bloc and it went bankrupt. Both statements are true and the distance between them is the subject of this chapter.
By the 1980s the GDR had the highest living standard of any Warsaw Pact country, a genuine industrial base in optics, chemicals, machine tools and microelectronics, and a welfare system — childcare, employment, subsidised rent and food — that its citizens have remembered with more affection than the politics that came with it. It also had a hard-currency debt it could not service, a capital stock it had stopped replacing, and an internal report, delivered in October 1989, that told the Politburo the country was insolvent.
What the Soviets took first
The starting position was worse than West Germany's by a wide margin, and not because of anything the East Germans did.
The Soviet Union took reparations from its zone in a way the Western allies did not. Whole factories were dismantled and shipped east — estimates run to around 2,000 industrial plants — along with rolling stock, and in some cases the rails themselves: about half the track on the zone's railways was lifted and taken. Uranium mining at Wismut in Saxony and Thuringia was run as a Soviet company with conscripted labour in conditions that were lethal, and the ore went to the Soviet bomb programme.
Total extraction from the Soviet zone in the decade after 1945 is usually estimated at somewhere between a quarter and a third of its industrial capacity. Reparations continued until 1953 and stopped only after the June uprising.
Meanwhile the West received Marshall Aid. The comparison that East Germans grew up making — that the two Germanys started level and diverged because of the system — was never true; they started very far apart, and the system then failed to close the gap.
How planning worked
The instrument was the State Planning Commission and the five-year plan, setting output targets in physical quantities for every enterprise in the country.
Quantity targets produce predictable distortions and the GDR exhibited all of them. A plant measured on tonnes made heavy goods; a plant measured on units made small ones. Managers hoarded inputs and labour against the possibility of shortage, which created the shortage. Nobody had any reason to improve quality, since output was bought by the plan rather than by a customer. Innovation was a risk to plan fulfilment and was therefore avoided.
From 1979 the enterprises were consolidated into Kombinate — around 130 vertically integrated combines, each covering an entire sector from raw material to finished product, employing between 20,000 and 40,000 people and reporting directly to a ministry. It was a rational response to coordination failure and it made the combines into fiefdoms that could not be disciplined by anything except the plan they negotiated.
The consumer consequence is the one everybody remembers. A Trabant, unchanged in essentials from 1964 and with a two-stroke engine and a body of resin-bonded cotton waste, had a waiting list of ten to thirteen years. Orders were placed for newborn children. A second-hand Trabant sold for more than a new one, because it was available.
Honecker's bargain
When Honecker replaced Ulbricht in 1971 he announced the Einheit von Wirtschafts- und Sozialpolitik — the unity of economic and social policy — which in practice meant buying consent with consumption.
The programme was and popular: a vast housing construction drive that built or modernised around three million flats, with rents fixed at a few per cent of income; heavy subsidies on bread, milk, meat, children's clothing, transport and childcare; generous maternity provision and near-universal nursery places, which gave the GDR one of the highest female employment rates in the world.
It was also unaffordable. Subsidies consumed a rising share of the budget, reaching tens of billions of marks a year by the late 1980s, and the money came out of investment. The capital stock aged: by 1989 a proportion of industrial plant was over twenty years old, the railways were running on pre-war infrastructure, and the housing in the old city centres — Leipzig, Halle, Görlitz — was falling down while new Plattenbau estates went up on the edges.
The 1980s bet was microelectronics. The GDR poured capital into developing its own chips at Dresden and Erfurt, and did produce a 32-bit microprocessor in 1988 — at a unit cost estimated at many times the world market price, for a device several years behind. It was a serious technical achievement and an economic catastrophe.
Hard currency
Underneath the plan ran a second economy in Deutschmarks, and the man who ran it was Alexander Schalck-Golodkowski.
His department, Kommerzielle Koordinierung — KoKo — sat outside the plan, answered to Honecker and to the Stasi, and existed to earn convertible currency by any available means. It ran several hundred front companies; it exported arms; it sold antiques confiscated from private collectors on trumped-up tax charges; it took payment from West Germany for political prisoners, at rates that rose to around 96,000 marks a head, releasing some 33,000 people over twenty-five years; it charged Western lorries for transit; it operated the Intershops where East Germans could buy Western goods with Western money they were not, in theory, supposed to possess.
That last point is the quiet corrosive one. A country whose ideology rested on the abolition of class created a currency hierarchy in which a relative in Hamburg was worth more than a party card, and every citizen could see it.
In 1983 the GDR was close to default and was saved by a billion-mark credit guaranteed by the Bavarian premier Franz Josef Strauss — a hard-line anti-communist, negotiating with Schalck, to keep East Germany solvent. A second credit followed in 1984. It is the single most revealing transaction of the decade.
The Schürer report
On the 27th of October 1989, with Honecker already removed and demonstrations in the streets, Gerhard Schürer, the head of the Planning Commission, delivered an analysis of the country's position to the Politburo.
It said that net hard-currency debt stood at somewhere over 20 billion valuta marks; that servicing it was consuming a growing share of export earnings; that solvency in 1990 depended on new Western credit; and that stabilising the position would require cutting living standards by something in the order of 25 to 30 per cent — which, the report noted, would raise the question of whether the country remained governable.
The numbers have been argued over since — some economists consider Schürer overstated the crisis, partly because a planned economy's debt figures are not directly comparable to a market one's — but the direction was not in dispute and the Politburo did not dispute it. The state had been living on Western credit for a decade to pay for the consumption that kept it quiet.
Nine days later the Wall opened. The economic collapse did not cause the revolution described in the next chapters — the people in the streets of Leipzig were demanding freedom of movement and free elections, not a solvency plan — but it is why the state had no resources left with which to buy its way out, and why unification, once it began, moved at a speed nobody had planned for.
End of Chapter V