ECONOMIC GROWTH IN EAST GERMANY 1951-60

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP78-01634R000100120005-3
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 22
• Document Creation Date: December 19, 2016
• Document Release Date: April 20, 1998
• Sequence Number: 5
• Publication Date: July 11, 1958
• Content Type: REPORT

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ECONOMIC GROWTH IN EAST GERMANY
1951-60
CIA/RR IM-475
11 July 1958
WARNING
THIS MATERIAL CONTAINS INFORMATION AFFECTING THE
NATIONAL DEFENSE OF THE UNITED STATES WITHIN THE
MEANING OF THE ESPIONAGE LAWS, TITLE 18, USC, SECS.
793 AND 791i, THE TRANSMISSION OR REVELATION OF
WHICH IN ANY MANNER TO AN UNAUTHORIZED PERSON IS
PROHIBITED BY LAW.
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
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60
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CONTENTS
Page
Summary and Conclusions . . . . . . . . . . . . . . . . . . . 1
1. First Five Year Plan (1951-55) . . . . . . . . . . . . . 2
a. Production by Sector . . . . . . . . . . . . . . . . 2
b. End Uses by Sector . . . . . . . . . . . . . . . . . 3
c. Fixed Capital Investment . . . . . . . . . . . . . . 5
d. The Legacy for the Future . . . . . . . . . . . . . . 6
2. Second Five Year Plan (1956-60) . . . . . . . . . . . . . 7
a. Original Plan . . . . . . . . . . . . . . . . . . . . 7
b. Revision of Plans . . . . . . . . . . . . . . . . . . 9
c. Probable Rate of Growth . . . . . . . . . . . . . . . 17
Tables
1. Estimated Gross Fixed Capital Investment in East Germany,
Original and Revised Plans, 1956-60 . . . . . . . . . . 14
2. Estimated Gross Fixed Capital Investment in East Germany,
1956 Plan) and 1957 . (Actual) and 1958 . and . 1959-60 , (Revised 14
M 11 1 11 MOD
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CIA/RR IM-475 - - -
(ORR Project 16.1785)
ECONOMIC GROWTH IN EAST GERMANY
1951-E0
Summary and Conclusions
Since World War II the East German economy has gone through 6 years
of reconstruction (191.6-51), 3 of transitional adjustment (1952-54), and
3 of relatively stable growth (1955-57). The rate of annual increase in
national income has fallen from between 15 and 20 percent in the years
of reconstruction to the present rate of about 5.percent. The present
rate may be maintained for another year or two but will not be maintained
in the 1960's unless the USSR decides to make a substantial net invest-
ment in the East German economy.
The growth of East German production to date has been obtained at
a large hidden cost. Much of the output of goods and services no longer
meets the quality standards of Western Europe. The plant capacity is
older and in worse shape. The existence of such discrepancies is not
only a serious economic handicap but also a heavy political liability.
Some Soviet officials apparently have argued that East Germany must
overtake West Germany in economic development, but it seems quite un-
likely that this view has been adopted as Soviet policy.
The USSR has a big stake in keeping the East German economy going
and has protected this stake by normalizing its economic relations with
East Germany, although the USSR continues to obtain an economic advantage
from its position as the dominant partner. The USSR has also extended
the credits needed to finance East German capital exports to other Satel-
lites. It has not, however, made, and may well be unwilling to make,
a significant net investment in the East German economy.
From its own resources, East Germany cannot long maintain its present
rate of growth, which is still higher than the average rate of growth in
Western Europe. The maintenance and replacement of facilities throughout
industry and transportation and the expansion of raw materials production
from high-cost domestic resources will preempt a large and increasing
part of East German savings, leaving very little for new investment in
the consumer goods, capital goods, and export industries -- too little to
maintain the present rate of increase in productivity. To these handi-
caps must be added the exorbitant cost of persisting in the "socializa-
tion" of agriculture and a continued slow decline in the size of the
labor force (as long as emigration goes on at the steady rate of the past
few years). The prospective decline in the rate of growth of the
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national income of East Germany in the next decade poses an important
political problem for the USSR which will make it increasingly diffi-
cult to avoid a choice in East Germany between the risks of a more rigid
and repressive regime and the risks of a considerably more flexible and
"liberal" regime.
1. First Five Year Plan (1951-55).
The First Five Year Plan marked the transition of the East German
economy from a period of reconstruction to a period of relatively stable
growth. In spite of errors in planning this transition and in spite of
the heavy load of Soviet exploitation, East; German national income in-
creased by about 60 percent during the period -- that is, at an annual
average rate of 10 percent. The achievement of so great an increase
reflects the underutilization of capital and labor in the base year,
in which East German national income was still at an extremely low
level. It also reflects the regime's policy of maximizing industrial
production while allowing quality to deteriorate, ignoring consumer
preferences, neglecting the replacement and maintenance of capital
equipment, and postponing urgently needed expansion of capacity (es-
pecially in fuels and power).
a. Production by Sector.
The growth of the East German economy during the First Five Year
Plan was dominated by the increase in industrial production. The offi-
cial index of "gross" production, which shows an increase of almost
90 percent for the 5-year period, overstates the growth of industry,
and if the output of small (handicrafts) producers is included, indus-
trial production (net output) increased by less than 75 percent. The
increase in industrial output was accomplished without large new in-
vestments except as urgently required to compensate for the partition
of Germany and the dismantling of plants by the USSR after World War II.
Large new investments were made in metallurgy and heavy machine building.
Mining and electric power also received substantial investments, es-
pecially at the end of the period. Otherwise, relatively small additions
to the plant capacity available at the beginning of the plan period were
enough to permit a considerable rise in industrial employment and large
increases in industrial production. The increases in output of finished
goods generally exceeded the increases in output of basic materials
(except for iron and steel), which were supplemented by rapidly increasing
imports,.
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awdiEWENNIMP
In spite of the increased use of fertilizers and increased crop
prices, the performance of agriculture and forestry during the plan
period was poor because of adverse weather and the deadening effect of
government policies intended to "encourage" the formation of coopera-
tives. Although there was some increase in market production over the
period, consumption in kind fell, material costs increased, and the net
product of agriculture probably increased only slightly if at all.
There was a good deal of surplus labor in agriculture in 1950, almost
all of which was absorbed in the urban economy by 1953. By the end of
the period the regime was trying to recruit agricultural labor.
The output of construction has been reported by official sources
to have risen more than 90 percent in current prices during the period
1951-55. This increase reflects some understatement of the volume of
construction in 1950. Construction costs, moreover, rose rapidly --
possibly by as much as 50 percent -- because of rapidly increased wages
and continued inefficiency in the use of labor. As a result, the real
growth in construction was much less than reported -- probably between
30 and 45 percent for the plan period -- and was accounted for in con-
siderable part by increased employment.
The value of the services of trade rose by about 90 percent
during the period in response to increased industrial output -- in
particular, the output of consumer goods. The growth in transport and
communications was much less, probably about 40 percent, because of
the small increases in the use of transport by agriculture and by
households. This increase mostly reflects increased utilization of
inherited facilities, with relatively large increases in employment
and small increases in productivity.
b. End Uses by Sector.
The low level of personal consumption in 1950 (by prewar stand-
ards) required -- and the comparably low level of utilization of capacity
for producing consumer goods and services permitted -- rapid increases
in consumer welfare from 1950 to 1955. Personal consumption rose by
somewhat more than national income, or by about 70 percent. Retail sales
(in constant prices) more than doubled during the period, whereas other
elements of personal expenditures rose very little. These estimates re-
flect real increases, but they overstate the improvement in living con-
ditions. Available consumer goods were characterized by poor quality
and a limited range of choice. The negligible improvement in the supply
of housing (chiefly resulting from the decline in population) has too
little effect on the measure for personal consumption, because of the
artificially low level at which rents have been kept. In general, even
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though the standard of living was the highest in the Soviet Bloc,* the
East Germans were still worse off than before World War II, and the
standard of living was perhaps one-third below that in Western Europe.
"Social" consumption, which includes, among other things,
reparations, occupation costs, other uncompensated deliveries, and
expenditures on military end items, was officially reported to have
declined as a share of national income. Covert information for 1955
indicates, however, that "social" consumption had become a slightly
larger proportion of national income than in 1950, implying a growth
somewhat in excess of 60 percent for the plan period. Because most
of the components of this category did not grow so rapidly as national
income, the chief reason for the over-all increase was probably the
rapid growth of expenditures for military end items.
The East German government has refrained from making any claims
directly relating to investment at constant prices. The large increases
in investment costs that occurred during the 5 years have been acknowl-
edged in the economic journals. The rise in costs was between 20 and
35 percent (possibly more). As a result, the official index of 164 for
"accumulation"** in current prices represents a "real" growth of be-
tween 20 and 35 percent. Covert information on the distribution of
national income in 1955 indicates that the actual growth was probably
near the lower end of this range.
The "rate of accumulation" (net investment as a proportion of
national income) was much lower than that prescribed in Soviet theory
and claimed by the USSR and the other European. Satellites during the
period. The announced average rate was 13 percent.** Investment was
held down during the early years of the plan by the weight of repara-
tions deliveries together with occupation costs and probably direct
subsidies to uranium mining. The cancellation of reparations and the
small reduction of occupation costs after 1953 were more than offset
by increased military expenditures and personal consumption and by the
repayment of indebtedness to the USSR. It seems probable that during
the years 1951-55 fully one-third of East German savings was in effect
devoted to "net foreign investment" -- in the Soviet economy.
* The standard of living in Czechoslovakia was about the same.
For practical purposes, "accumulation" during the First Five Year
Plan was the same as net domestic investment, including additions to
inventories and state reserves.
*** Believed to be calculated from data in 1950 prices.
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c. Fixed Capital Investment.
Net fixed capital investment, valued at current prices, increased
by about 90 percent during the plan period, a rate of growth greater than
that for total net investment in current prices. Accompanying this rapid
rise, however, was the sharp rise in investment costs, so that in terms
of constant (1950) prices net fixed capital investment probably increased
by less than 55 percent. Construction costs rose more rapidly than other
investment costs during the period. The impact of rising costs was least
in the industrial sector, where construction was a smaller (and declining)
part of the total investment effort and where construction costs rose less
rapidly.
Throughout the entire period the regime systematically used the
allocation of investment to promote the centralization and "socializa-
tion" of production. Very little in the way of investment funds was
allocated to local, cooperative, and private industry and construction;
handicrafts; private agriculture; and private retail trade. Local, co-
operative, private, and handicrafts enterprises employ about one-half
of the labor force* and supply the greater part of the requirements for
personal consumption.
Fixed capital investment in industry accounted for about 40 per-
cent of total gross fixed capital investment (in current prices) during
the period of the First Five Year Plan. Including the construction
sector, net investment in industry probably about doubled during the
5-year period. The greatest increases in industrial investment were
made during the first 3 years of the plan. In 1954, a year of read-
justment, there was a decline in industrial investment, followed by a
rise of about the same amount in 1915.
Very nearly three-quarters of the net fixed capital investment
allocated to industry was devoted to the basic materials and heavy
engineering industries. The big investments were made at first in
metallurgy (iron and steel) and the heavy engineering industries, but
substantial and increasing investments were made in mining, electric
power, and chemicals. The remaining investment was divided in roughly
equal proportions between light engineering and the consumer goods
industries.
Agriculture was allocated only about 10 percent of total in-
vestment, and much of this was wasted in the attempt to promote the
"socialization" of agriculture. Transportation, chiefly rail, received
probably less than 15 percent of the total. Allocations to the other
producing sectors -- construction, trade, and communications -- amounted-
* Exclusive of employment in public administration and defense.
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to just under 10 percent of the total. The remainder, something over
25 percent of the total,* was allocated to public welfare, housing,
defense, and administration. These sectors, of which housing was the
most important, felt most severely the impact; of rising construction
costs. In the case of housing, for example, the increase in allocations
during the last 2 years of the plan was almost entirely cancelled by
the sharp rise in construction costs.
d. The Legacy for the Future.
In no small measure the growth of the East German economy from
1950 to 1955 resulted from the increasing utilization of available re-
sources. Although it is not possible to provide an accurate yardstick,
there seems to be no question but that the average capital-output ratio
declined considerably during the years of the plan, particularly in the
finished goods industries. At the same time, much of the increase in
labor productivity achieved reflects the underutilization of labor at
the beginning of the period. Although opportunities still existed for
increasing output through the more intensive use of resources, they were
certainly more restricted in 1955 than in 1950, except perhaps in
agriculture. Prospective increases in output would be much more closely
related to new investment than would be indicated by the experience of
the 1951-55 period, and the demand for increasing managerial efficiency
would be more intense.
The need for future increases in personal consumption ran in
direct conflict with the need for future increases in new productive
capital. Although there was a large real increase in personal con-
sumption from 1950 to 1955, the gap still remaining between living
conditions in East and West Germany was very large. Not only were the
supply, the mix, and the quality of consumer goods poor, but housing
space per person was only about one-half the prewar level and the state
of repair was worse. The differential between East and West Germany
was one important reason for the high rate of emigration during the
period (greater than the natural increase in the population of work-
ing age). Besides the probable continuation of emigration at a high
rate, East Germany faced a prospective decline in the natural increase
in the population of working age. If only for this reason, increases in
personal consumption deserved quite as serious consideration as invest-
ment in the allocation of East German resources during the preparation
of plans for the years 1956-60.
* If the investments in public welfare under investment in industry,
agriculture, and the other producing sectors are included, the propor-
tion is almost one-third.
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2. Second Five Year Plan (1956-6o).
The Second Five Year Plan, now at the halfway point, has been char-
acterized by a stable rate of growth. The annual rate of growth of
national income has remained at the level to which it had declined by
1955, about 5 percent. The government expects to maintain this rate
of growth through the end of the period. This goal is within reason,
though it will probably not be fulfilled. Even if it is fulfilled, the
rate of growth cannot be-maintained in the next period unless the USSR
decides, unexpectedly, to invest a substantial amount in the East Ger-
man economy. East German plans through 1960 do not assume an import
surplus.
a. Original Plan.
The present 5-year economic plan was adopted only after prolonged
dispute within the East German government. The first draft of the plan,
circulated in the spring of 1956, called for an annual average rate of
economic growth of about 8 percent. This version of the plan represented
the views of Walter Ulbricht, First Secretary of the SED. He believed
that the rate of growth had declined further than necessary in the pre-
vious period. He held that there remained large enough untapped re-
sources -- in the form of underutilization of capital and wasted time
and materials -- to continue to increase labor productivity almost at
the average annual rate in the preceding period. This conviction rested
in part on his realization of the inefficiency of the East German na-
tionalized economy and in part on his faith in the efficacy of "social-
ist" attitudes, organization, and methods as they should take further
effect.
Such faith, highly resistant to evidence, was shared by very
few, if any, other officials dealing with economic problems. Neverthe-
less Ulbricht had his way. The preparation of the original draft of
the Second Five Year Plan was controlled by his views on the rate of
growth. In order to provide for such a rate of growth, unrealistic
calculations were made in projecting, the coefficients that express re-
lations between the use of scarce resources -- raw materials, capital,
and labor -- and the value of end products.
Large economies in the use of fuels and power and metals were
to be obtained. by more careful management and by changes in processes,
designs, and product mix. In planning for fuels and power, reductions
were projected in coefficients (1) for the consumption of coal, notably
in rail transport and electric power production; (2) for network losses
of electric power; (3) for electric power consumption in chemicals and
nonferrous metallurgy; and (4) for coke and coal consumption in metal-
lurgy. It is illustrative of the way in which the fuel and power
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balance was drawn up that a last-minute change was made in the rate of
increase for electric power production without any apparent changes in
plans for the supplies of coal. Although the change (from an increase
of 42.5 percent to one of 53 percent) was a step in the right direction,
inasmuch as industrial production was to increase by 55 percent, it was
under the circumstances almost meaningless. Very large "savings" of
metals also were to be made -- in particular, reductions of over 20 per-
cent in the inputs (per unit of output) of both rolled steel and copper.
Such economies were based in considerable part on the assumption that
all plants could come much closer to the efficiency in the use of ma-
terials (in more or less comparable processes) already reached by those
plants with the best workmen, managers, and. equipment. The proposed
"savings" also involved the assumption that improved scheduling and
quality of supplies -- variations in which had had a great deal to do
with the records of individual plants on material consumption -- would
permit a more economic use of materials. They finally involved the
introduction of changes in production mix in industry which would raise
the average value of products in relation to the value of inputs of
scarce material. This last expectation greatly influenced estimates
of the requirements and output of the chemicals industry and to an
-even greater extent the engineering industry.
In calculating the capital requirements of the Second Five Year
Plan, the East German planners projected the steady increase during the
previous period in the value of output relative to increases in the
value of capital assets in the finished goods industries. There was
still some plant capacity in these industries which was not fully util-
ized, as a result of continued difficulties in obtaining material sup-
plies and of remaining bottlenecks in plant capacity. There remained
no such reserves of capacity, however, as in 1950, and there was no
reliable basis for overruling the cautious estimates of management on
the additional production that might be obtained.
A lack of realism entered likewise into estimates of the size
and efficiency of the labor force. It was recognized, to be sure, that
the low birth rates of World War II would result in a very small net
addition to the labor force by 1960, even if large-scale emigration to
West Germany, which had been an almost constant factor during the pre-
ceding 5 years, could be eliminated. It was also recognized that there
were no significant labor reserves, with the chief exception of pen-
sioners who might be willing and able to go back to work. Even the
small projected gain in total employment, however, of less than 1 per-
cent per year was probably too high, if emigration was assumed, and much
too high given the prospective continued emigration at the same rates
as in the past.
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The efficiency of labor was projected in much the same way as
the efficiency of capital. This practice introduced a strong upward
bias in plans for the finished goods industries. Labor productivity
in these industries had increased rapidly through most of the preceding
period because of rapid improvements in materials supplies not likely
to be matched in the future.
Besides the use of unrealistic coefficients in balancing the
domestic plans, the other great weakness of the original draft of the
Second Five Year Plan was the extent to which export markets and im-
port availabilities were taken for granted. The other Soviet Bloc
countries were proceeding on similar assumptions in their own planning.
Like East Germany they fixed their principal goals and developed their
material balances before examining the likelihood that the assumptions
as to foreign trade would be satisfied. It would have been a remark-
able coincidence if their plans had matched even reasonably well. Even
in cases in which they did match, of course, they often reflected opti-
mistic estimates by other Bloc countries as well as by East Germany
about the productivity of labor and capital. Moreover, projected re-
quirements for East German export goods are especially liable to revision,
since East German exports to Bloc countries consist to such an extent
(on the order of three-quarters of total exports to those countries) of
engineering goods and thus relate to investment requirements, which are
highly specific and are often revised.
b. Revision of Plans.
The weakness of the assumptions made as to foreign trade was
acknowledged before any of the other weaknesses of the draft plan.
Negotiations and exchanges of information both bilaterally and through
the Council of Mutual Economic Assistance (CEMA) during the first half
of 1956 made it only too evident that such assumptions must be revised.
The lesson was emphasized by the large underfulfillment of current im-
port and export plans. Even more serious was the failure of Polish
coal exports in the second half year. The final blow to all Satellite
plans was the development of the crises in Poland and Hungary during
the fall of 1.956.
It is unlikely that earlier disputes over the internal capabil-
ities of East Germany were renewed at the time. There was no question
but that all the Satellite plans would have to be reviewed so as to
bring them into balance, and it was plain that overambitious planning
was not the order of the day. By the end of 1956 the economic leaders
who had opposed Ulbricht's views were thus in a much stronger position
than in 1955 to gain approval for a more realistic economic plan.
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The development of a revised draft plan lasted through the entire
year 1957. Some preliminary figures were announced in October 1957, and
the "final" plan was formally presented at the end of December 1957 and
adopted. in January 1958. The calculations and assumptions made in pre
paring the revised plan rested on the experience of the years 1955-57 in
much the same way as the original plan had rested on the experience of
the years 1951-55. This is to say that the important coefficients re-
lating scarce resources to the supply of end products were projected as
before rather mechanically from past experience. The great: difference
is that the new base period used was one with a much lower and more
stable rate of growth and actually included a part of the plan period,
thus considerably shortening the time over which the experience was
projected. Comparisons, therefore, between the original plan and the
revised plan illustrate the difference between projection of the co-
efficients of the First Five Year Plan as against a projection of the
coefficients of the first year or two of the Second Five Year Plan.
The main differences between the two versions of the Second Five Year
Plan are shown by the following indexes (1955 s 100):
Category
Original
Goals
October 1957
"Final"
Gross industrial production
155
134
138
Gross agricultural production
About 125
N.A.
117
Exports
201*
N.A.
164
Imports
151*
N.A.
159**
Retail trade
140
122
127
Personal consumption
135
117
122
Gross fixed capital investment
200
150
150
National income
145
127
About 130
Along with the evident differences, the plans have various im-
portant things in common. Both plans show personal consumption growing
less rapidly and gross capital investment growing much more rapidly than
national income. Both show rapid increases in agricultural production
and investment. Both show the maintenance of the substantial export
surplus (on commercial account) existing in the base year.
* Soon revised to 186 for exports and 159 for imports.
Later given as 161.
*K The published plan figure (for gross product) was 134. See, how-
ever, p. 16, below.
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The development of a revised plan for the period 1956-60 began
in early 1957 with important decisions relating to the basic materials
industries. Fritz Selbmann, one of the Deputy Chairmen of the Council
of Ministers, undertook to convince the East German planning authorities
that the review of the Second Five Year Plan must be preceded by firm
decisions on electric power capacity and related decisions on fuels
production. He succeeded in this aim, and it seems likely that at the
same time he also carried the point that existing coefficients in the
use of fuels and power must be used in planning production in other
sectors of industry. Apparently it was agreed that projected invest-
ment in fuels and power under existing plans represented nearly the
maximum that could be allocated during the period. On this basis the
planned increase in electric power production was reduced to 41 percent
and later raised to 44.6 percent -- about the level originally pro-
jected by the electric power industry.
These decisions being made, related revisions were developed
for the production of coal, manufactured gas, and liquid fuels. Through-
out the period, coal -- chiefly brown coal -- will continue to be the
basis for electric power production. The East German plans in the field
of atomic energy do not provide for the commercial operation of any
atomic power capacity until 1960, and it will in any event be some years
after 1960 before atomic power becomes significant. The plans for coal
production implied that imports of hard coal were to continue to account
for about the present proportion of total fuel supplies. This projec-
tion presumably had the support of the USSR. The principal changes in
the plan for fuels and power production are shown by the following index
numbers (1955 = 100):
Sector
Original Goals
Preliminary
"Final"
Electric power
153
141
145
Raw brown coal
130
117
122*
Brown coal briquettes
108
105
113
Hard coal
109
111
110
Liquid fuels
129
127
127
The decisions reached with reference to fuels and power did not,
of course, determine automatically the revisions that had to be made in
other sectors of industry. Selbmann urged that goals for the chemical
industry, a heavy user of fuels and power and the most reliable source
of exports, be determined along with the goals for fuels and power, but
* The first final" revised goal was 124.
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he was overruled on this point. The revised. goals for other sectors of
industry and the rest of the economy remained under discussion through
the spring and summer of 1957 and were not finally announced until late
October 1957. The effect of the revisions for industry was to scale
back the 5-year growth to 34 percent as against the original goal of
55 percent. With this announcement the government in effect acknowl-
edged that the planned output of end products had originally been too
great for the panned output of basic materials and that industrial
production as a whole had been planned at too high a level in relation
to employment and investment.
Some further modifications were made in the "final" plan as
adopted in January 1958. The principal modification was the adoption
of the goal of a 38-percent increase for industry. This modification
was accompanied by a new goal for retail trade, which was to rise to
27 percent over the 1955 level (as against the October goal of 21.8
percent). Both of these modifications apparently reflect the formal
incorporation into the revised plan of a project (already mentioned in
October) for "supplementary" production of consumer goods, a device
already discredited in 1954. The "supplementary" production of consumer
goods, about 800 million Deutsche Mark East (DME) in 1958 and 2.2 bil-
lion DME in the years 1958-60, is supposed to be derived entirely from
the "inner reserves" of enterprises -- that is to say, without the
allocation of additional resources. The rest of the increase in the
goal for industrial production is accounted for by a small increase in
the 1960 goal for engineering production.
The revised goals, as announced, compare as follows with the
originally announced goals (1955 = 100):
Sector
Original Goals
October 1957
"Final"
Coal and power
131
132
132
Mining and metallurgy
150
126
126
Chemical industry
165
134
134
Heavy machine building
175
General machine building
212
193
150
153
Other industry
141
129
134
All industry
155
134
138
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In the revised plan the gaps between the production of basic materials
and finished products have been reduced greatly -- notably the gaps
between chemicals and coal and power, between engineering and both coal
and power and mining and metallurgy, and between "other" production
(chiefly consumer goods) and agricultural production. The planned
changes in the structure of domestic production show a much more ob-
jective assessment of what is possible. Moreover, even if a somewhat
more pessimistic projection of employment is involved -- as is pos-
sible -- somewhat less unquestionably is expected from the "internal
reserves" of the enterprises.
The investment figures in the revised plan are not comparable
with those in the original plan, because of changes in investment
accounting after the development of the original figures. The revised
figure given for total planned investment, 55 billion DME,* represents
gross fixed investment for the period, including capital repairs,
whereas the original plan figure of 54.6 billion DME included only
"new" investment. It excluded, that is, "replacement" investments and
capital repairs valued at some 13 billion DME. The revised plan really
involves a reduction of about one-fifth to one-sixth in planned in-
vestment -- partly accounted for, of course, by the underfulf illment of
the 1956 and 1957 plans and at the same time involving proportionally
greater reductions for the remaining years. In real terms the revised
plan still provides for investments of at least half again as much as in
the years 1951-55.
The changes in investment accounting also affect the compara-
bility of available information by sector. The estimates shown in
Table l3* are believed to indicate correctly the direction and, roughly,
the extent of changes in plans for the various sectors, but they are
still mostly approximations rather than reported figures.
A still more tentative breakdown is made in Table 2' showing
the plans for the years 1958-60 compared with actual investments in
1956 and 1957. Later information, most of it from covert sources, may
be expected to result in changes in some of these figures, especially
the 1957 figure for investment.
The revision in planned investments corresponds with the change
in plans for the engineering industry and for construction. The planned
increase over the period in availability of capital goods for investment
has been cut back greatly, whereas the planned increase in construction
For this purpose, the value of the DME may be estimated at between
US $0.25 and US $0.30.
Table 1 follows on p. 14.
XXX Table 2 follows on p. 14.
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Estimated Gross Fixed Capital Investment in East Germany a
Original and Revised Plans, 1956-60
Original Plan
Revised Plan
Industry and construction a
31.5
23.0
Transport and communications
9.0
7.0
Trade
1.8
1.1
Agriculture and forestry
7.0
5.9
Housing
7.3
9.0
Defense
3.6
3.7
Residual b
7.4
5.3
Total
67.6
2L a
a. Including investments in uranium mining and possibly all invest-
ments in defense production.
b. Chiefly accounted for by investments in civil administration and
public services.
Estimated Gross Fixed Capital Investment in East Germany a
1956 and 1957 (Actual) and 1958 and 1959-60 (Revised Plan
Billion DME
1956
1957
1958
1959-60
Sector
Actual
Actual
Plan
Plan
Industry and construction a/
4.5
4.5
4.6
9.4
Transport and communications
1.4
1.3
1.4
2.8
Trade
0.2
0.2
0.2
0.5
Agriculture and forestry
1.1
1.2
1.3
2.3
Housing
1.2
1.9
1.8
4.1
Defense
0.6
0.6
0.8
1.7
Residual b
1.0
1.1
1.2
2.1
Total
10.0
10.8
11.3
22.9
a. Including investments in uranium mining and possibly all invest-
ments in defense production.
b. Chiefly accounted for by investments in civil administration and
public services.
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has been raised somewhat. These changes reflect an increase in-the
proportion of construction to total investments and a decline in the
proportion of machinery and equipment. These shifts not only correspond
with the reduction in planned investment in industry and the increase
in planned investment in housing but also indicate some shift in the
composition of investment in other sectors, notably transportation and
agriculture, from machinery and equipment to construction.*
The most important change in investment plans, of course, is
that for industry -- a reduction of more than one-quarter in planned
investments, corresponding to the reduction in planned production of
machinery and equipment. Planned investments in fuels and power have
remained at about the original level, now representing over one-half
of the total investment in industry and construction as against about
two-fifths in the original plan. In order to maintain the planned in-
crease in construction, planned investments in the building materials
industry have been increased. Planned investments in all other branches
of industry have been reduced (specific figures which seem to show the
contrary are not comparable with the original figures). On a comparable
basis the total planned investment for the metallurgical, chemical,
engineering, and consumer goods industries is not more than three-fifths
of what was originally planned. In short, it has been cut back by about
the same proportion as the planned increases in production, indicating
that the plan revisions involved little net change over-all in planned
marginal capital-output ratios, although there were doubtless changes
in some sectors. The following rough breakdown may be made of the re-
vised investment plan for industry** (percent of total):
Fuels and powers
55
Metallurgy
9
Chemicals
7
Building materials and construction
5
Engineering
12
Othert
12
* In both plans the projected wiailability and requirements of in-
vestment goods were balanced by a great reduction in uncompensated de-
liveries of engineering products to the USSR, which had been large
through 1955.
* Excluding long-term credits but including capital repairs.
xxx Including liquid fuels and. probably uranium mining and atomic
energy.
X Excluding liquid fuels.
t The chief component is consumer goods.
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The general rate of economic growth :Lndicat-ed for the rest
of the plan period is about the rate maintained since 1955, The cut-
backs in planned industrial production are accompanied by cutbacks in
trade and presumably in transport and commun:Lcations. Some reduction
has also been made in goals for agricultural production, with a pro-
jected increase of 17 percent in gross production of crops and animal
products as against the originally planned increase of perhaps 25 per-
cent. The new goals are lower for yields per hectare of grains, pota-
toes, and sugar beets; for the production of meat and milk; and for
the level of mechanization of agricultural production. The goals for
agriculture are still based more on doctrine than on experience.
The present plans call for about the following growth of gross
output by sector of origin over the period.:
1960 Plan
Sector 1955 == 100)
Industry
Construction
Handicrafts
Agriculture
Transportation
and communica-
138
162
115
117
tions* 120
Trade 130
All sectors 131-
It is likely that not too much practical dependence is put on the
plans for "additional" consumer goods production and on the projected
increases in agriculture. The "realists" in the State Planning Com-
mission probably continue to work on the assumption of an average
annual increase of about 5 percent in gross output (and about the
same in national income). In this connection it appears that the re-
vised plans for investment and consumption. in 1960 suggest a reduction
of at least 10 percent in the original goal for national income in
1960, implying an increase of about 30 percent in national income
over the period.
Present plans do not imply additional Soviet help except as
it may be needed to finance export surpluses with other Satellites.
Although a probable deficit in foreign trade in 1957 was acknowledged,
* Including services to households.
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it was stressed in published announcements that a deficit must not
again be incurred. The plan figures show a projected increase by
1960 of 64+ percent in exports and 59 percent* in imports over 1955,
when there had been a substantial export surplus in commodity trade
on commercial account. Even after allowance is made for some net
deficit on commercial account for invisibles (chiefly transport charges),
it seems likely that a small export surplus is planned, sufficient to
cover interest on foreign indebtedness.
c. Probable Rate of Growth.
For the most part, the revised plans are quite "realistic" --
that is to say, not greatly at variance with the recommendations of East
German management. The plans are likewise in keeping generally with the
results achieved in 1956 and 1957. In short, the revised plans are
really meant to be fulfilled (except those for agriculture and "supple-
mentary" consumer goods production).
An annual average increase of 6 to 6.5 percent in gross indus-
trial production is entirely possible, given the increases** of 6.2
and 7.3 percent achieved in 1956 and 1957, respectively. It should be
stressed, however, that industrial employment, which declined slightly
in 1956, increased by perhaps 2 to percent in 1957 and that the
growth of productivity in 1957 was lower. The current plan for 1958
calls for an increase in output of 6.8 percent, implying further
planned increases of 6.4 percent in both 1959 and 196o.XXX These goals
can be fulfilled approximately, even if there is some lag in industrial
investment. There is very little room, however, for underfulf illment
of plans for importing industrial raw materials, and some further in-
creases in employment, probably at the expense of other sectors, will
be required.
For the construction industry the annual rate of increase in
1956 and 1957 was above the annual average rate (10 percent) required
to reach the revised goal for the plan period, even though there is
some question about the comparability of the fulfillment figures for
these years and the 1960 goal. The chief reason for improvement since
1955 is the increase in the supply of building materials, which has
led to a considerable rise in labor productivity (as well as some in-
crease in employment) in construction. The construction industry is
probably capable of meeting the 1960 goal if the production of building
A later source gives a figure of 61 percent.
Based on absolute figures. In both years, somewhat different per-
centage increases were given in the plan fulfillment announcements.
The latter are considered to be less reliable.
*** Given the modified 1960 goal of 138 percent of 1955 production.
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materials reaches planned levels, although, again, additional labor
will be required.
The revised goal for agricultural production still calls for
an increase of 17 percent in gross production over the 5-year period.
Under present government policies the outlook in agriculture is for
annual fluctuations in crop yields within the range of the past few
years and for continued increases in output of animal products; which,
however, depend on imports of fodder grains.
In both trade and transport and communications, there is no
particular reason to expect that present plans for employment and in-
vestment will not permit essential increases in service, although the
transport system will be operating under even greater strain.
According to official announcements, national income (at cur-
rent prices) increased by 5, 3, and 7 percent in the years 1955, 1956,
and 1957,* respectively. Allowance being made for price changes, the
rate of increase in each of these years was about 5 percent. It seems
entirely possible for the East German economy to maintain about this
rate of economic growth through the present 5-year period, but the
prospects are not good for maintaining it in the 1960's.
The present rate of growth can be maintained for a;short time
simply by providing the necessary increases in raw material supplies,
with only selective investments in the finished goods industries. The
"inner reserves" of labor and capacity, however, are in almost all
cases quite limited, as is widely recognized by East German management.
Not only is there a tight labor supply in general, but also, and more
seriously, there is a shortage of skills in certain areas (notably
agriculture, mining, and rail transport) in which a large part of the
trained labor is nearing retirement age. Given the generally full use
of capacity, the growth of industry and the entire economy will be
increasingly dependent on new investment. In addition, increased
allowances must be devoted to replacing old and obsolete capital equip-
ment. At present a serious effort is under way to improve East German
capital accounting in the hope that the resources available for in-
vestment can be used more intelligently. There will unquestionably be
renewed disputes, however, over the rate of growth permitted by a given
level of investment, and attempts probably will be made to persuade
the USSR to invest a substantial amount in the East German economy.
Unless the USSR should decide -- as seems quite unlikely -- to make such
an investment, the East German rate of growth will fall in the 1960's.
Even in prospect, this is a trend of enormous political importance
which will make it increasingly difficult for the USSR to avoid a choice
* The announced figure for 1957 applies to gross product.
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in East Germany between the risks of a more rigid and repressive regime
and the risks of a considerably more flexible and "liberal" regime.
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