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payments to individuals, mostly as pensions, social security benefits, and scholarships, and is the sole source of financing for national defense, civil administration, and public services.

Turnover taxes, paid by producers but levied mostly on consumer goods, provide a large share of budget revenues. Profit taxes on socialized enterprises are also an important source of revenue, as are various taxes on private and semistate-owned concerns. In 1968 the regime introduced land-use taxes—designed to prevent alienation of valuable agricultural land—and capital-use charges—to encourage full use of capital goods and to reduce excess inventories. Contributions of these taxes to revenues are probably not large. Additional revenues are derived from direct wage and income taxes and from payments made into the social security fund by employees, employers, cooperative members, and the self-employed.

The East German currency is the mark, usually referred to in Western usage as the DME (Deutsche Mark East). It is used exclusively in internal transactions. At the end of 1971, the GDR announced it was revising its exchange rate DME4.2 to US$1.00 to DME3.15 to US$1.00 to keep it in parity with the West German mark. A comparison of foreign trade statistics reveal, however, that East Germany revalued the "valuta mark" by 9%—from DME4.2 to US$1.00 to DME3.8 to US$1.00—in keeping with the changes made by the U.S.S.R. and other CEMA countries. In 1972 the rate undoubtedly will be adjusted again to reflect the dollar devaluation and West German mark revaluation.

D. International economic relations

1. Foreign trade

a. Policy (C)

The development of East German foreign trade since World War II has been determined by the absorption of East Germany into the Soviet economic sphere of influence. The Soviet Union and the other Eastern European Communist countries have largely replaced West Germany as a market and as a source of raw materials. This forced redirection of trade handicapped East German recovery and growth throughout the postwar period.

During the early postwar years the U.S.S.R. continued to collect reparations from East Germany; still worse, however, the U.S.S.R. could not supply the industrial raw materials previously supplied by West Germany, nor could it provide a market for many specialized East German manufactures. In addition, the redirection of trade toward Soviet markets forced the East Germans to develop from inefficient new industries, such as shipbuilding and uranium mining. Exporting to the relatively undeveloped markets of Communist Eastern Europe and the U.S.S.R.—where most East German exports of machinery and equipment were readily saleable and where ether was little competition from Western suppliers—provided no incentive for modernizing designs and technology. In addition, the rapidly growing machinery trade with the Communist countries was not accompanied by an exchange of components or subassemblies; the exchanges involved increasingly obsolete machinery lines with little interrelationship.

As Western suppliers began to compete with East Germany to supply machinery and equipment to the Soviet Union and the other countries of Communist Eastern Europe, and when East Germany began trying to expand its own machinery sales in the West, it discovered that even the lines in which it was traditionally strong were 10 to 15 years behind comparable equipment in the West. Recent strenuous

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