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the regime planned to maintain a high rate of economic growth throughout the period of the Seven Year Plan (1959-65). The regime failed, however, to take into full account the lack of further reserves of productive capacity, the unfavorable age structure of the population, and the negative impact of its policies. The policies increased pressure against the remaining private sector and brought about the abolition of the industrial ministries in 1958 which led to disorganization and confusion of industrial management.

By 1961, an extremely hard winter, a massive exodus of labor to West Germany, and increasing foreign trade imbalances all combined to produce a real economic crisis. The border with West Germany was closed in August 1961, the unrealistic Seven Year Plan was quietly abandoned in early 1962, and the publicity about overtaking West Germany was dropped. During 1961-63, GNP grew at an average annual rate of only 2.3% and agriculture fell well below the 1960 level. Per capita personal consumption rose by only 1% between 1960 and 1963, actually falling slightly in 1962 and 1963. Investment was particularly hard-hit, growing by only 2% annually during this period.

In response to the economic crisis, the regime fostered a consolidation and recovery and began for the first time to consider problems of quality and efficiency. Investment was concentrated on modernizing and improving existing installations rather than initiating large new projects. The culmination of the regime's efforts to deal with these programs was the New Economic System.

By 1964 the worst of the crisis had passed, and the economy, temporarily freed from the worst forms of central control and operating under looser and more realistic plans, began to grow again though at well below the rates of the late 1950's. In 1964-68, GNP grew at an average of 3.4% annually, industrial production, at 3.1%, and agricultural production, at 3.4%.

In a remarkably similar parallel to the late 1950's, the regime, at Ulbricht's personal urging, launched another program of forced growth in 1966-67. The main emphasis was placed on the petrochemical and electronic industries, with the goal of placing East Germany in a position of leadership in these fields and providing it with more competitive exports that could be sold to both Western and Communist markets. Dogged pursuit of this policy, in spite of two harsh winters and poor harvests in 1969 and 1970, resulted in supply bottlenecks, backlogs of unfinished investment projects, and severe shortages. Output of potatoes, sugar beets, and fodder crops in 1969 all fell below 1965 production. Consumer supplies of foodstuffs in 1969-70 could be maintained only by increasing imports of agricultural and food supplies by 23% in 1969 and 26% in 1970. Investment and construction not only fell far short of planned levels, but also resulted in shortages and rationing of electric power, as power projects under construction remained unfinished. Severe shortages of semimanufactures, spare parts, and subassemblies also developed. Large above-plan imports were necessary to keep the economy functioning, and a 2-year, $800 million trade deficit accumulated in 1969-70, which contributed to the discarding of the forced growth program at the end of 1970 and the subsequent removal of Ulbricht from leadership.

The new leadership under Honecker sought to bring the economy into balance, in party by expanding the production of spare parts and industrial materials and boosting the capacity of the power industry. Rolled steel production is to be increased to 6.1 million tons in 1975 (compared to 3.4 million tons in 1970), and 30% of industrial investment between 1971 and 1975 is to be channeled into the power and coal industries. Overall investment policy included a cutback in 1971 in total investments, a modest 27% increase in investment between 1970 and 1975, and a restriction of new plant construction to 50 to 60 large projects, which will be carried out as state planning projects under direct control of the government.

The 1973 plan continues the basic pattern of 1971 and 1972, which were admitted to be years of "consolidation." National income in 1973 is scheduled to grow by 5.7%, industrial production, by 6.5%, and labor productivity, by 5.7%. Efficiency in production continues to be emphasized in 1973, as in 1971 and 1972, and the production expenditure per unit of output is scheduled to drop by 2.1% for industrial materials, 2.0% for electric power, and 4.6% for rolled steel. The major shift in 1973 is in the greater effort to be made to increase consumer supplies, especially for products in chronic short supply. Consumer goods for the population are to increase at an annual rate of 6.2% in 1973, and investment expenditures are to rise by 63% for the glass and ceramic industries and 37% for the food industry.

3. Government finance

The financial institutions in the centrally planned East German economy are divided into the organs of the Ministry for Finance—including the financial sections of all regional levels of government—and the state banking system. Until January 1968 the latter was headed by the German Bank of Issue (DNB),

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