The German Democratic Republic or
East Germany had a rough start. The devastation of the war. The Allied occupation.
An abrupt and idealistic turn towards socialism. Despite all this, the GDR became
the most important economy in the Soviet sphere - the crown jewel of COMECON. In this video, we look at the rise
and peak of the East German economy. ## Beginnings Let us begin with the beginning. After the war, the German Third Reich's eastern regions of Silesia and East Prussia were
ceded to Poland and the Soviet Union. Thus, the Soviet Occupation Zone
and the GDR actually covered what had been the Third Reich's central
regions. Some parts of this area were quite industrialized and in some
cases even technologically advanced. For instance, the city of Berlin. While the
areas surrounding the city were quite rural, the GDR had much of Berlin's
industrial structures, including 80% of the country's
office machinery and tool industries. South of Berlin, the GDR also had a significant
industrial cluster. This was especially the case in chemicals. One of the world’s biggest
chemical plants Luena-Werke was in the GDR. This chemical plant and others near it would
become the GDR's industrial heart - producing plentiful amounts of fertilizers,
dyes, synthetic rubber, and more. And near this chemical cluster was the
city of Jena and the East German half of its world class company Carl Zeiss. Despite
major losses in personnel and equipment, Zeiss remained a formidable player in optics. Germany's other major company Siemens was largely relocated out of Berlin to
Munich by its top managers. One major issue however was that there was
no easy access to the energy and raw goods needed to run this industrial juggernaut. The
country had no oil, some coal and uranium. But the Soviets claimed that uranium
for their own nuclear programs, selling the excess back to the GDR. And
the coal was not particularly high quality, generating little heat and a lot of pollution. ## Dismantling
Measured by gross value of equipment, East Germany actually had more equipment
in 1944 than they did in 1936. This was because of massive infrastructure
buildup during the war. As well as the fact that fighting on the ground and Allied bombing
had not been so intense in East German lands. But much of this equipment was hauled off as
war booty. Both sides practiced dismantling and de-industrialization policies after their
victory, but the Soviets far more fervently. Its actual intensity remains debated,
but estimates generally say about 30% of the capital stock was taken back to
the Soviet Union. Some industries had it harder. For example, machine tools lost
over 50%. Optics, 65% and electrical, 60%. This massive technology transfer played
a critical role in the development of Soviet technology. The Soviet officers chose
advanced technologies, dismantled them well, and put them to good use once
back home in the Soviet Union. The Soviets also took human capital back home in a
secret operation (Osoaviakhim, or Осоавиахим). The Soviets ended up "recruiting" over 3,000
specialists - scientists, technicians, assistants, plus their families -
across a broad range of technologies. And on top of all that, there were reparations.
Until 1953, East Germany had to pay up to 15% of their total gross national income
to the Soviet Union as reparations. Contrast this with the Marshall plan, which
poured hundreds of millions of dollars to rebuild West Germany and you can see how
the two countries immediately diverged. ## Labor The Germany during the War had run
its war economy using forced labor. Those laborers left after the war ended.
Refugees and returning German soldiers helped make up some of the labor gap, but
shortages persisted especially in food. In the first two years after the war's end, average daily caloric intake for manual
laborers was just 65% of the recommended daily total. Absentee rates were over 20%
because workers left to forage for food. East Germans started moving West. This brain drain only intensified when they heard of the
3,000 workers taken away by the Soviets. Educated workers only made up a
minority of the migrants moving to West Germany. Most of them were
farmers or laborers. But educated workers were more likely to stay
in West Germany and not come back. This worsened a core problem
with the East German economy - a struggle to rebuild technological
competences. By the end of the war, the Reich was already very behind the rest of
the world in terms of technological innovation. And that was before the brain drain and the
Soviet appropriations of equipment. Moreover, there was a dearth of funding for
R&D and sciences. Plus many of the universities and corporate R&D
locations were in West Germany. All this translates to a technological lag
that would persist throughout the GDR’s history and keep its workers
from being more productive. ## Reforms and Nationalizations At the start, the Soviets and
their German Communist Party partners - the SED - did not have
an overarching plan for the country. However, they did agree that changes
were necessary to prevent a return of German militarism. The existing structure of
elites needed to be torn down and rebuilt. So they embarked on a series of land
reforms - confiscating land from the big landowners and re-distributing small plots to new farmers. The new owners can keep
that land so long as they worked it. Such land reforms usually do quite well. But
out in the fields, the new farmers suffered from inexperience, labor shortages, corruption,
and missing equipment taken away by the Soviets. At the same time, the SED started
pressuring all the remaining farmers to join massive collective farms, LPGs
(Landwirtschaftliche Produktionsgenossenschaft). In an LPG, land, tools and even animals
are shared amongst the group - overseen by a Party official. As you might guess,
this was not too popular. Tensions between the farmers and the political class
in Berlin simmered for many years. The Soviets also nationalized some
of the country's biggest factories and businesses - creating Soviet
joint-stock Companies. A third of the country’s industrial output became the
direct-owned property of the Soviet Union. It was only because of this that the dismantling
of factories and industrial sites finally stopped. The Soviets apparently thought it be more
profitable to leave them as they were. ## Rapid Investment The end of the Berlin Blockade and Airlift
solidified the divisions between East and West. With that, the West and East German Republics were officially founded - recognized
by their respective allies. Shortly thereafter this, the ruling Communist
SED Party and its First Secretary Walter Ulbricht set ambitious economic goals to vastly
increase output and accelerate socialism. This was partly to generate enough output
and wealth to pay the Soviets their onerous reparations. But also because the Party recognized
that the presence of West Germany fundamentally challenged their own legitimacy to rule.
Plans towards socialism had to be accelerated. The SED's economic strategy felt distinctly Asian. The government would suppress capital for
personal consumption and instead funnel that into investment - building new
factories, roads, and infrastructure. This meant rationing goods like linens,
meat, sugar, electricity, and so on. In 1952, personal consumption in the GDR was just 44% of
national income. In West Germany that was 58%. But the economy struggled, in part due to the
aforementioned low labor productivity. So the SED passed Order 234. Its goal was to raise
productivity by getting people to work harder. There were some carrots - a hot lunch and shoes,
for instance. And some sticks - withdrawal of ration cards and deployment to a
bomb clearing site, for instance. But what irritated the workers the most
was the return of piecework wages and punch clocks - something supposedly
banished to the "capitalist past". ## 1953 So imagine the situation for
the ordinary East German worker. Rationing for all the things they need, including food. Shortages led to food riots
in the autumn of 1952 in Leipzig and Dresden. A longer and harder work week for wages
that were not always paid on time. And the inability to complain about any of this
due to withdrawals in civil liberties. Meanwhile, East Berliners can easily stroll
into West Berlin - at the time. There, you can see TVs and record
players in the shops and West Germans getting richer - in part
thanks to the boom of the Korean War. How can the people accept Communist rule
when its deficiencies are so starkly clear? The number of East Germans fleeing the country
surged from 166,000 in 1951 to 182,000 in 1952. The SED only pushed harder on the
country's Sovietization - collectivizing more agriculture and nationalizing more industry. The GDR also instituted military service
for all men between ages of 18 and 24. The GDR asked the Soviets for economic aid, but
the Soviets had many mouths to feed. It was not just East Germany in a terrible state. Many other
Soviet satellite countries were suffering too. For example, Hungary, where the
Hungarian Communist Party leader Matyas Rakosi was pushing through an
irresponsible Stalinization program that emphasized steel plants over food and
caused a million people to be persecuted. ## A New Course
Then Stalin died. As a power struggle played
out in the Soviet Union, the Communist Party sent someone to
review the situation in April 1953. To their horror, they found that nearly
half a million East Germans had already fled to the West. Furthermore, this included
nearly 3,000 SED party members in the first few months of 1953. When even the party
members are leaving, you know it is bad. Lavrentiy Beria, the former head of the NKVD
and the Soviet leader after Stalin's death, pinned blame on Ulbricht and his
rapid industrialization policies. Beria pushed for reforms, including
Ulbricht's removal and a possible reunified Germany. A "New Course" (Neuer
Kurs) was publicly announced in March 1953, revoking price increases and granting leniency
for returnees among other concessions. This did help, but importantly it
did not touch the productivity quotas that so irked the workers. A few
months later, we have the Uprising. ## Uprising The East German Uprising of
1953 began in June 16th 1953. It started as a purely local dispute
that quickly spread. A simple sit-down strike by workers at a socialist
boulevard called the Stalinallee. The workers were striking against
increases in work hours and quotas. The strikers then took to marching, and it
gathered other industrial workers like tax collectors and garbage men. Even policemen
and a few SED party members. The march arrived at the House of Ministries
and demanded to speak to Ulbricht. He did not show up, but several lesser officials
did, pledging to roll back the hikes. The crowd refused to accept. Simple demands for better
quotas, wages, and work hours mushroomed into general ones like food shortages, freedom,
democratic elections and German reunification. The workers now agitated for a
general strike. The word spread, asking workers in some 272 other towns to
strike in solidarity with those in Berlin. Alarmed, the SED senior leadership sought refuge
in the Soviet military headquarters. On the 17th of June, the Soviets declared martial law,
sending troops and tanks to disperse the crowds. At least several dozens of people died.
Strike leaders in several cities were arrested and executed without trial. Nevertheless, the demonstrations lasted for several more
days - finally dying down by June 24th. ## Consequences The East German Uprising of 1953
taught the SED some lasting lessons. From now on, the SED would always keep
a close eye on the workers on the shop floor. This included increased
surveillance and combat groups to respond to discontent before it
can mushroom into something bigger. This in turn led to the strengthening of the
infamous East German internal police, the Stasi. The uprising also set the precedent that
the Soviets would militarily intervene in their satellites' affairs to
keep their governments in line. But along with the stick came a few
carrots. The Soviets terminated the reparations payments that so
burdened the East Germans. They also "gifted" back all of their joint-stock Companies except the
one overseeing the uranium mine. Behind the scenes, the Soviets made it clear
to the SED and Walter Ulbricht that the pace had to slow down. Things did slow a bit, but the
socialist economic policy remained. And despite the Soviets' own attempts to find a suitable
replacement, Ulbricht himself remained in charge. And finally for the East
German workers who protested, they came to the realization that
they had no voice in this country. And so even more people decided to
vote the only way they could: Leave. ## The Emigration Crisis Worsens Things improved a bit. But in 1956
came the Hungarian Revolution, another uprising violently
put down by the Soviets. Ulbricht took advantage of the Revolution as
the impetus to paint several moderate members and critics of his rule as revisionists.
Those people were purged from the Party, securing Ulbricht's rule for a decade. Revitalized, the SED hardliners
- tired of slow progress towards socialism and the country's ongoing
economic struggles - felt a need to show the "superiority of the socialist
world order over the capitalist system". So in 1959, they replaced the
existing economic plan and unveiled a new Seven-Year Plan. It called for
ambitious raises in industrial productivity. Iron and coal labor productivity was to rise by
90% and machine building productivity by 160%. Overall labor productivity had to be nearly
doubled - again through the raising of work norms and automation technology. Formerly
private, independent craft businesses had new taxes and regulations levied to force
them to join massive artisan collectives. Out in the fields, the ongoing collectivization of
agriculture - at the time slow but steady - would be accelerated. This was done using "agitation
troops" deployed to pressure the farmers. Stubborn farmers were dragged into court
and had their possessions taken and their bank accounts blocked. Anyone could have
expected that these policies would cause backlash - especially the collectivization
drive, which was first implemented in February 1960 with no thought about
the effects on the growing season. A new wave of labor and goods shortages hit
the economy. Food rationing was re-imposed later in 1960. East Germany was
the only Communist country with rationing - other than Albania, and
we all know what's going on there. ## The Wall Goes Up As we approached the end of the
1950s, the GDR's exit crisis worsened. In 1960, the number of migrant
exits rose again for the first time since 1956 and kept rising.
In the first six months of 1960, an average of 14,751 people left each month. That
went to 18,447 in the next six months of 1960. And then that rose to over 19,000 in
the first half of 1961. Tightening restrictions only caused more people to leave -
correctly feeling like the window was closing. This eventually led to the Second
Berlin Crisis. In June 1961, Soviet leader Nikita Khrushchev demanded
that the United States pull out of West Berlin. Tensions between the two
superpowers ramped up to new levels. There were no breakthroughs so in August 1961,
Walter Ulbricht decided to build the Berlin Wall. The Berlin Wall stood as a symbol of the
GDR's lack of freedoms. But nevertheless, it succeeded in cutting the flow
of migrants to the West. It also showed the people that the SED was here to stay. ## The Soviet Partnership The Berlin Wall stabilized the GDR, but the SED still had to figure out
a way to generate economic growth. In the early 1960s, they tried to turn to
the Soviet Union, deepening their economic cooperation. The East Germans turned to the
Soviets as a source of new technologies. Second and just as importantly, the Soviets
agreed to provide the East Germans with the energy they desperately needed -
including promises of an oil pipeline. But having the Soviet Union as your
most important economic partner is a double-edged sword. The Soviets
struggled to find enough oil for all their commitments - remaining elusive on
timelines when the oil would actually come. And in the late 1950s, the
Soviets decided to pivot away from long-range bombers and focus on
missiles instead. This had a massive impact on the aviation industries
in both the Soviet Union and GDR. Germany once had one of the most advanced
aviation industries in the world. And the SED had invested a lot to bring it back
to its former glory. They needed the Soviets to buy at least few of them,
and the Soviets had promised to do so. But the Soviets going back on that promise
- combined with a disastrous crash of one of the first prototype Baade 152
airliners - led the East German government to dissolve its national
aeronautical industry. A costly loss. ## The New System With the Soviets an unsteady partner and the
rest of COMECON unable to meet their needs, the SED decided to try something new. In 1963, the GDR announced new reforms - the New Economic System or NES. Inspired
by the ideas of Evsei Liberman, the NES sought to devolve more control of
the economy to the Party's lower levels. Individual administrations called VVBs
were allowed to allocate resources at their own behest. They were also allowed
the use of incentives and bonuses. And interestingly enough, "profits" were
allowed as a measure of success. At the same time, Ulbricht promoted science
and automation as ways to overcome the GDR's persistent labor productivity issues - focusing on
optics, petrochemicals, machines and electronics. SED hardliners attacked these reforms for
straying close to capitalism. They were concerned that decentralizing economic
power would inevitably lead to the loss of political control. So the NEC
deliberately pulled back in some ways. It did not loosen prices and didn't
totally set aside centralized planning. But nevertheless, for a few years the reforms
seemed to have brought about real economic change. ## Boom After six years of debt and deficits, the
East German economy turned a surplus in 1963. From 1964 to 1968, the GDR grew by
about 5% each year when judged by net output. This was in part due
to the NES's loosening reforms, but also due to the completion of
several high-technology projects. The GDR's chemical industry had started to
master plastics-making. Despite persistent oil supply issues, outputs of raw
plastics like polyvinyl chloride or PVC grew by over 12% each year
- doubling between 1960 and 1966. This in turn generated benefits downstream
at the consumer goods level. Plastics like PVC became an easy replacement for
traditional things like metal or wood. And semiconductor and electronics production
began picking up in a real way. Semiconductor production quadrupled from 1965 to 1969.
In 1968, over 60% of households had a TV. And in 1968, the GDR completed its first
atomic power station in Rheinsberg. These were the GDR's best years,
economically. East Germany still lagged West Germany in all of these aspects,
but it seemed like they were catching up. ## Reversals In the second half of the 1960s, the cooperation
between the GDR and the USSR began to wane. The Soviets locked down on transfers
of computer technology on national security grounds. Ongoing issues like the
Cuban Revolution caused them to renege on deliveries of several key supplies
like oil, steel, meat and grain. The NES's apparent success caused
other Eastern European countries to experiment with these reforms
too. However they could not thread the needle of loosening economic control
without losing political control as well. In 1968, the Soviets led another military
intervention into Czechoslovakia to crack down on reforms that had - in
their opinion - gone too far. This tainted the NES's political associations. So when the GDR economy ran into challenges in
1969 due to over-investment and drought from bad weather, the SED entirely discarded the NES
reforms and re-imposed control over the economy. The party also elected a new leader. In 1971,
the wily but aging Ulbricht was removed by his most powerful colleague and
lieutenant, Erich Honecker. Ulbricht died two years later after suffering
a stroke. His legacy is mixed. On one hand, he lacked imagination and his
leadership saw repeated fumbles in economic management. Nevertheless,
East Germany in 1970 was the Soviet Union's leading trade partner and
the most advanced economy in COMECON. ## Conclusion East Germany's rise as an economic power within
the COMECON bloc is tied to several factors. At the heart of it, the GDR was an industrial
economy that took in raw goods from the Soviets and other states, and processed them
into refined goods using cheap energy. The country could never do that processing as
well as the West could due to issues in labor productivity and technological sophistication. But
it did far better than any other Eastern state. However the coming decades would
expose that model's economic flaws. What happens when the raw goods and
the energy stop becoming as cheap? More importantly, there were other unresolved
issues. The GDR was too small. Its rulers were trying to impose socialism on where it had
not been wanted. And its ruling Party did not want to give up political control even
as it needed to give it up economically. These contradictions caused devastating crises
in 1953 and 1958. And as East Germany embarked on the years of its decline and fall,
they would rise up again and again.
