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and consumer goods were to be stabilized. Trade with the U.S.S.R. was to be balanced at any cost, and an effort was to be made to balance trade with West Germany.

In order to carry out these decisions, party control over the economy was greatly tightened. Enterprises lost the discretionary authority that they had acquired in the late 1960's to change their product-mix, to plan investments, and in some cases to engage in foreign trade on their own account. Increased use was made of physical indicators in setting plan goals.

This policy was taken over by Erich Honecker when he replaced Walter Ulbricht in May 1971 as Party First Secretary. In 1971-72 he attained the most urgent objectives in the fields of investment, supply, and foreign trade. Toward the end of 1971, as conditions began to improve, Honecker allowed enterprises to change approved plans by small percentages—by 1% to 1.5% for plan indexes, by 1% for plan balances, by 10% for product-mix, and by 3% for other product balances. Controls over investment and foreign trade, however, were not loosened.

Honecker's most notable initiative in economic policy was his rapid takeover of semistate-owned enterprises in 1972. By mid-1972, most had been turned into or absorbed into state enterprises. This was a sharp change from the recent policies of Ulbricht, who in the late 1960's had allowed private and semistate-owned enterprises to flourish.

The most troublesome problem that remained at the end of 1972 was the unsatisfactory supply of industrial consumer goods. Supplies of some scarce products—especially furniture, kitchen utensils, china and pottery, carpets and floor covering, and detergents—rose substantially in 1972, but these increases made only a beginning in satisfying pent-up consumer demand. Accordingly, the leadership planned large additional increases in 1973 by expanding domestic consumer goods production, by directing a greater share of output to domestic consumption (and a smaller share to exports), and by greatly increasing imports, both from Communist countries and from the West. These efforts were designed not only to appease long-standing complains, but also to help compensate for popular disappointment over the results of the basic treaty with West Germany—increased ideological pressure and retention of tight controls on East German visits to the West.

Honecker's successes in 1971-72 came at the cost of rising trade deficits with the West, also the price of carrying out the plan for 1973. In 1971, East Germany managed to narrow its deficit in trade with West Germany, but deficits continued in other trade with the industrial West, and a deficit appeared again in 1972 in trade with West Germany. If economic growth continues to depend so heavily on imports from the West, East Germany's debt servicing is likely to rise by the mid-1970's to the point at which it will be hard to manage.

The solution to this problem is not in sight. East Germany espouses closer economic integration with the U.S.S.R. and the rest of Eastern Europe and hopes thereby to further specialization and, in turn, competitiveness, but integration will hardly reduce the need for alternate sources of supply, especially for scarce raw materials and new technology. Finding ways to finance the increasing imports from the West appears to be the key to continued stability, growth, and technological change in the 1970's.

2. Development

After the first significant postwar reconstruction effort in 1949-50, the economy began a period of impressive growth. During 1951-55, GNP increased by 40% and industrial output by 70%. A substantial part of the increase was achieved through more intensive use of existing plants by increasing their employment and supply of materials; investments during that period were small and were devoted largely to heavy industry. In contrast to the rapid industrial recovery, agricultural output stagnated because of poor weather and a harsh collectivization policy. The Berlin riots in June 1953, combined with the "New Course" in all of Eastern Europe that year, resulted in some improvement in living conditions and in the allocation of materials to agriculture, basic materials, and light industry.

During 1956-60, industrial output rose substantially—at a yearly rate of about 7%—but more slowly than projected by the planners. Planners had largely ignored the effects of emigration, which doomed the planned increases in industrial employment. As unused productive capacity was being rapidly absorbed, new investment began to plan an increasing role in industrial development, almost doubling in value between 1956 and 1960. Most investment was channeled to the fuels and power sector, with an increased share also going into the manufacturing sector. Construction output rose 58% during the 1956-60 period as the result of increased supplies of building materials, and agriculture also registered steady improvement.

Encouraged by the successes of the late 1950's, the regime proclaimed the goal of surpassing West Germany by 1965, both in output per worker and consumption per capita. In order to reach this goal,

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APPROVED FOR RELEASE: 2009/06/16: CIA-RDP01-00707R000200110021-0