EAST GERMAN COMMENTS ON ECONOMIC PLANNING AND PRICE REFORM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80-00247A001800830001-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 10
• Document Creation Date: December 27, 2016
• Document Release Date: January 28, 2014
• Sequence Number: 1
• Publication Date: November 13, 1964
• Content Type: REPORT

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CE W..1TELLIGENCE AGENCY
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This material contains information affecting the National Defense of the United States within the meaning of the Espionage Laws. Title
18, U.S.C. Secs. 793 and 794, the transmission or revelation of which in any manner to an unauthorized person is prohibited 50X1 -HUM
SECRET
NO FOREIGN DHSSEM
COUNTRY
East Germany
REPORT
SUBJECT
East German Comments on
DATE DISTR.
13 NOV
19 64
Economic Planning and
Price Reform
NO. PAGES
1
REFERENCES
DATE OF
INFO.
PLACE &
DATE ACQ.
THIS IS UNEVALUATED
50X1 -HUM
INFORMATION. SOURCE GRADINGS ARE DEFINITIVE. APPRAISAL OF CONTENT IS TENTATIVE.
East German economic planning and price reform under
the new economic system.
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East Germany/Soviet Bloc
Economic/political
East German comments on economic planning and price reform
(July 1964)
During discussions about economic planning and price reform,
senior East German economists and officials made comments as follows :
(a) The economic planning system of the D.D.R. is still under dis-
cussion and final decisions have not yet been taken. The new system
will not represent a sudden change but will be an evolutionary stage.
The VI Congress of the S.E.D. in January - February 1963 decided that
a new system could be introduced because productive socialist relations
had been attained and a firm state frontier had been established. (The
open border had caused a loss of 30 billion D. marks.)
The first economic plan, in 1948, was based on the Soviet model,
but it took years to train a planning staff. The new system is more
complex - no one aspect should be seen in isolation - and there are four
main lines of reform, the first three being the introduction of scientific
methods into planning, the development of central planning techniques,
and the development of incentives.
On the first point the essential is the definition of levels of
responsibility. The new associations (VVB) are in principle on a pro-
duct basis, e.g. the main footwear plants are in one VVB but small plants
are outside. There are three territorial VVB's for coal but normally
they are country-wide for a single product. The VVB is not responsible
for private or half-state enterprises unless they are particularly impor-
tant. The Deutsche Investbank or the district branches of the Deutsche
Notenbank hold the state shares in half-state enterprises but voting
rights are exercised by a VEB in the same sector. The new feature is
that the VVB is responsible for one group of products, including local
industry. Technical development and balances are now transferred to
the VVB from the central organ. 50X1-HUM
Management research and information techniques
are to be developed, including the operations research of capitalist 50X1-HUM
enterprises (which we previously rejected). Centralism has been too
bureaucratic. All short-term decisions will be taken by the VVB and
only long-term structural changes will be left to the central organs.
Beeret
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Secondly the development of central management is to be put on a
scientific basis. We want to introduce long-term planning for technical
development. We used to set up 5 and 6 year plans but could not fore-
cast technical progress. We now try to foresee technical progress for
10 or 15 years ahead, i.e. the level that other countries will reach by
those dates. This cannot be done in detail and the prognosis can vary -
it is essentially "a fantasy based on exact facts". We may forecast
technologies but cannot know how far they can be translated into economic
terms or which of them should be used in the D.D.R. We can only get a
"raw outline" of the future.
Unlike long-term plans, the 7-year plan (1964 - 1970) can be better
optimised . We identify technical progress, import and export efficiency
and evolution of the structure of consumption. Hitherto planning was
effectively co-ordinated only annually and the 5 or 6 year plans were not
effective in this respect. The new system co-ordinates at the longer term
level with annual plans as executive program I At the same time new 50X1 -HUM
experience must be taken into account in the long-term plan which must be
revised continuously.
Long-term plans are the responsibility of the central plan agencies
but not in isolation from the executants. Long-term plan commissions
have been set up with VVB participation. These planning groups are res-
ponsible for forecasting technical progress in their sector and for each
group of products. In the Volkswirtschaftsrat (VWR) there is, say, a
textiles, clothing and leather department, which has VVB's, as does the
Landwirtschaftsrat (LdWR), the Ministry of Foreign Trade, the Transport
Ministry, etc. The State Planning Commission has departments analogous
to those in the VWR as a co-ordination centre for the entire economy.
The executive level of authority runs up to the VWR but the State Planning
Commission is a working agency of the Council of Ministers, like the
Committee for Research
not exercising executi50xi -HUM
authority. The VVB's are responsible for carrying out plans and laying
out the detail. They set out general proposals on technical progress,
consumption needs and export prospects. The plan itself is evolved in
interchange between the State Planning Commission and the executive levels.
We are now working an new balance techniques requiring electronic
computers for solution. Plan balancing is the most crucial part of the
plan and has in the past been done with punch-cards and small calculating
machines. It was both incomplete and over-detailed. A 27 X 27 input/
output table was published but no larger one in the D.D.R. so far. The
input/output table must have better primary documentation. Our 27 X 27
table was an experiment, aimed at balancing gross production. The basis
was production sold by factories, whereas the Soviet input/output table
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was based on existing statistical data, not on specially collected data.
This practice has limits but the big difficulty is the information system.
After trials we made an ex ante input/output table for 1964 which was
ready at the same time as the 1964 plan prepared by traditional methods.
It was simply used to check the 1964 plan. But seeing the input/output
table the Council of Ministers required that every annual plan should
include an ex ante input/output table. But in our system balances in
groups of products are worked out by the administrative user whereas the
input/output table reflects the technological process. We need two
tables, item by item (the LEONTIEFF-type) called the principle of groups
of products, and the office by office or the principle of administration.
The latter is on a sales only basis whereas the former is on a production
basis.
The Volkskammer has to adopt the Plan and Budget at the same time
so co-ordination is essential between production and financial flows.
There is, however, often a failure to fulfil the capacity commissioning
plan while the investment outlay plan is fulfilled. Enterprises have
purchasing power when the goods for that money are not available. There
is not yet complete co-ordination between the financial and production
sides.
In the first stage of development production is most important,
but in the second stage consumer preferences,
limits of resources, all summed up in price, must be more deeply studied.
In its incentive aspects the new system would be impossible without plan-
ning of price and purchasing power.
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_Trude outlines are the responsibility of the State Planning
Commission and the Ministry-W-Foreign Trade, using the research of the
foreign trade corporations and VVB proposals. The foreign trade plan
forms part of the overall plan, co-ordinated with the investment plan and
foreign policy requirements. Foreign Trade enterprises and VVB's give
these concrete form. The new economic system involves a change as
import/export corporations for groups are now changed to "real 50X1-HUM
enterprises", i.e. working on cost accounting to maintain profitability
just like any other enterprise. They co-ordinate with VVB' a. The
corporation buys from the VVB at domestic prices and the valuta D.M. is a
ficticious transaction, in transferable roubles or dollars. They must
be profitable on domestic prices but they also have a foreign currency
plan. Their profit is solely in domestic values and the new price
system is hence the crucial problem. Co-ordination within C.M.E.A. is
carried on at all levels of planning. Every East European long-term
plan must start from energy (power) planning. Hence intra-C.M.E.A.
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geored.
planning must start with the drawing-up of an energy (power)balance.
Attached at Appendix "A" is a tabulation of authorities for composing
balances.
(b) The price reform is in three stages. April and July reforms are
the first stage and covered materials. The second stage will cover
engineering and the third all other goods and they will be completed by
1966 although exact dates have not been fixed. The principle of the
reform is that under normal conditions every enterprise must break even.
Prices will allow "normally-run" enterprises to keep running. Raw
material reforms were therefore the start. Subsidies allowing abnorma-
lity will in time be withdrawn. The long term plan lays down supply of
equipment but not all loss-implicit equipment will be replaced by 1970.
The problem is to shut obsolete plants and replace equipment.
Account has to be taken of limited raw materials supplies. We
have to use capacity to the utmost. Thus to produce sulphuric acid we
have to continue to use lead-chamber methods though they are dearer than
anhydrides. At present all production capacity is required to meet
demand but only those making profits will be expanded.
In the present price-reform there was no capital-use charge but
only capital demand. When fixing prices we took into account the need
for new plant as prices must cover investment needs. Factories would be
forced to use capital better if a charge were levied but this is still
under discussion. If the rate of interest can allocate capital better
it should be on the lines of a high rate such as Bulgaria's 15% and as a
pay-back period. We are calculating these as an experiment, from
1st July. From 1st January 1964, VVB's must work on autonomous finance.
They were responsible for running enterprises but they are now partners
in the enterprise.
Our imports pricing is relatively easy. We base it on foreign
trade plus transport costs. Thus export industries working on imported
raw materials have full cost basis. Everything is included in import
prices which thus reflect world market capital intensity in raw materials.
But we do not measure capital intensity in manufacturing because we do
not reflect foreign prices at this level. World market prices can only
be compared on an international basis
Import prices are based on world market prices and goods produced
at home on a "mixed basis". The trend for the future will be to bring
export prices to the world market. There are at present "treaty prices"
the costs of the biggest C.M.E.A. producer. C.M.E.A. is researching on
Oecre
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the basis that all socialist country costs are covered, not on the basis
of any one country's costs but on that of the average of allC,MEA
production. But no decision on a C.M.E.A. "own price basis" has yet
been reached. Prices for flow-of-funds analysis are still embryonic.
Turnover tax or production levy, for which the rates were laid
down in 1950-55, was intended to equalise profits on individual produots.
But costs have changed. In the new price reform new raw material and
machinery prices mean that no enterprise is inhibited from production by
below-cost prices. Retail price changes in the future cannot be judged
from prices of producer goods. For consumer goods the aim of the reform
is to reveal real cost prices but this stage has not been reached. The
turnover tax in consumer goods has been cut to take account of the increase
in the price of raw materials by 1st April 1964. Some flexibility is now
envisaged for turnover tax. As long as the reserves of the national
economy against inflationary pressure are small we must be cautious about
changes. At present we are mainly comerned to prevent price rises for
raw materials being passed on to the retail consumer. Al]. prices are
in principle laid down by law and enterprises must apply for a new price.
Prioe zoning is as a rule not applicable to consumer goods, except
for coal which varies by ooal mine. For producer goods there are prices
franc? ex works station. Transport is not so important in the D.D.R.
The sales price allows for average transport costs. We are interested in
West European price formation on integration.
(a) The new measures can only become effective because the state
frontier has been closed. Until 1961 administrative measures were
directed-solely at problems arising from the open frontier. We now want
to move from administrative to-doonomio levers.
The State Planning Commission gives main directives to the VWR for
industry. Each industry section has a number of VVB's. There are now
250 economic indicators in the annual state plan and we want to reduce
them. Under perspective planning the settling of long-term targets for
the VVB permits the reduction of indicators in the Annual plan. The
enterprise has to pass its plan indicators upwards rather than downwards.
The VNB has been Ohanged from an administrative entity to a planning and
financially independent agency with responsibility for plan fulfilment.
The kind of plan indicators given by the VVB's is goods sold, technical
progress, production costs of new groups of products - all the traditional
ones except gross production. Foreign trade corporations are supposed
to work more closely with enterprises and VVB's though the calculations
are in DM prices. As an experiment the Ministry of Foreign Trade is
trying to transfer some of its corporations to the VVB's. Thus the D.D.R.
0(2 creg
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will supply over 100 chemicals plants to the U.S.S.R. by 1970 : the
VVB's are directly responsible for supplying and installing this equipment.
Practical necessity requires this to be extended to the capicalist market.
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The WB has a technology fund as a levy on its enterprises for
research. Another fund is a profit pool for all its enterprises. And
thirdly there is a premium fund for intra-VVB competition. This premium
fund comes from the profits of enterprises at a fixed scale. A "treaty"
is ooncluded between VVB and factory, settling a given task (e.g. produc-
tion of a given article by a given date) and offering a premium if the
task is fulfilled.
The factory director may get up to 5,000 DM for the fulfilment of
special tasks under this "treaty" system but the premia are mainly for
the enterprise staff. The "treaty" lays down who are the key staff to
get premia - the drafting staff, the specific workshop brigade, etc. Their
names are laid down in the "treaty". It is now laid down that up to
30% of salary should be bonus under the premium system. The new system
decrees that only 7C% of basic salary is payable in any event. The
other 3oro is paid when plan indicators are fulfilled, paid out of the
enterprise wage fund. When the plan is over-fulfilled an extra premiUm
is payable.
Fixed assets have just been revealed for 1963 and have been
written into the books of enterprises an 1st January 1964. The revalua-
tion of assets and the new price reform are the crucial features of the
new economic system. Prices have to be fixed an a cost basis. The
system is introduced step by step so that each step can be carefully
assessed. At all costs it must not lead to a rise on the retail market.
The shortfalls shown by the revaluation of assets will be carried on the
budget.
The former premium system which has been replaced by the 3-tier
system was a single fund, 44% of wage fund, payable out of profits and
divided into two sections. About one third of the 14% was always paid.
Formerly the establishment of the premium was essentially gross production.
Now in 1964 the April and July price reforms allow attention to profit
change : in 1965 engineering prices will be reviewed and the whole reform
will come later.
Gross production productivity and cost reduction were the50X1-HUM
former premium criteria. But an enterprise could simulate gross
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production output by using input goods. This was stopped on 1st
January 1964 : until then gross production determined the premium, with
reductions if productivity and cost of production plans were ful-
filled, viz, a reduction for each underfulfilment. The higher the
overfulfilment the higher the premium and a sufficient overfulfilment of
the gross production plan could offset underfUlfilment in the other two
indicators. The new premium indicators are generally productivity,
production cost, assortment, production of new items, quality indicators,
sales or exports. Now the profit plan is the main indicator, plus
exports, commercial production and technical progress. All plants must
have these four indicators plus one or two others from the previous list.
(d) VEB BERLINER WERKZEUGMASCHINEN FABRIK, of which the'EAERGER factory
was the original nucleus, employs about 2,000 staff. Three quarters of
its output are new models, covering grinding and abrasives and outomatic
lathes. There is no intra-enterprise cost accounting since this is best
adapted to clearly defined shops. We divide our work into small
mechanical operations, large mechanical operations, assembly and finishing.
All three groups work for the same end-product. Each is given quarterly
and monthly plan indicators. There are basic material inputs, cost
indicators for various processes, breaking down wages and waste products.
This indicates the value of materials used. Price ratification by the
Price Office is effected by technical coefficients and a check on factory
book-keeping. This is not the responsibility of the VVB. As the enter-
prise works mostly on exports the price limits are laid down by contract,
negotiated through the Engineering Export Agency, but the enterprise can
")ook for its own markets. Indeed this direct link with customers must
increase both at the VVB and enterprise level, just as ZEISS have direct
customer relations.
We do not use the foreign trade price in the factory, as in Poland
and Hungary, but we may be forced to buy materials from high cost D.D.R.
plants. Such a calculation would be academic as we have no influence
over and cannot choose our suppliers.
Being under oonstruction the enterprise is not yet profitable : at
present it is not subject to the production fund levy. We have revealed
our assets and this has affected our cost prices through depreciation.
We are paying mere for power and foundry products. Our prices cannot be
raised though in the price reform the prices of precision machine tools
will be raised, and for very special machines under development may be
raised 8 times over : but this is offset by the very high productivity
of the machine. The aim of the price reform is to transfer the
possibility of accumulation to the basic industries which have hitherto
had to be subsidised.
Seeret
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As plan indicators the enterprise gets : goods production,
quality indicators,
production cost reduction, researoh
and profit plan. Everything is also drafted in the internal plan :
production plan and new technology, social measures, finance are written
into the annual technical eoonomio plan, submitted and. approved with the
VVB. This is then confirmed in the autumn. The praotioe of quarterly
and monthly planning has been abandoned but the VVB management controls
special tasks.
geerett
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