THE EAST GERMAN ECONOMY: AUSTERITY AND SLOWER GROWTH

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Directorate of
Intelligence
STAT
The East German Economy:
Austerity and Slower Growth
State Dept. review completed
Secret
EUR 83-10196
August 1983
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Directorate of Secret
Intelligence
The East German Economy:
Austerity and Slower Growth
This paper was prepared b Office of
European Analysis.
of EURA contributed to the analysis. The
paper was coordinated with the Directorate of
Operations.
Comments and queries are welcome and may be
directed to the Chief, East European Division, EURA,
Secret
EUR 83-10196
August 1983
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The East German Economy:
Austerity and Slower Growth
Key Judgments East Germany continues to experience external financial problems despite
Information available a dramatic improvement in its hard currency trade balance over the last
as of 30 June 1983 two years and the recent approval by Bonn of a five-year $400 million loan
was used in this report.
by West German banks. East Berlin has responded to its payments
difficulties by launching a harsh austerity program that has cut imports,
consumption, and investment and boosted exports. Because bankers gener-
ally remain cool about lending to Eastern Europe, however, East Germa-
ny's borrowing problems will continue, and East Berlin, we believe, will
almost certainly have to maintain vainful and volitically unpopular
adjustment measures.
Thanks largely to an austerity program, we believe East Germany is likely
to run another current account surplus in 1983. We project a borrowing re-
quirement of $3.3 billion for this year, which is nearly 25 percent below
that of 1982 because of a drop in scheduled debt amortization and lower
interest expenses. Nevertheless, East Germany could still have a liquidity
crisis, especially if Western bankers continue to extend only short-term
credits or refuse to roll over more maturing debt. It cannot count on
significant help from its CEMA allies or most Western governments,
although Bonn might prQvide more assistance if East Berlin makes some
political concessions.
The austerity program has exacted some social and economic costs. We
estimate that real personal consumption, which fell in 1982, will decline
further-a difficult situation for a country accustomed to having the
highest personal consumption in the Soviet Bloc and living standards
comparable with those in some West European countries. Because of the
continued need for austerity, we expect that GNP growth, which dropped
to only 0.5 percent in 1982-the lowest of party General Secretary
Honecker's tenure-will remain slower over the next several years than in
the 1970s. The reduction in investment, moreover, is likely to hurt the 25X1
economy's future international competitiveness, hindering the regime's
efforts to sustain growth while running a current account surplus.
The regime probably will become even more hard line in reaction to its eco-
nomic troubles. Never seriously interested in Hungarian-style economic
reform, Honecker is likely to push centralization further in the face of
adversity. In our judgment, he would be deterred from such a path only by
a significant change in Soviet attitudes toward reform and even then would
change course only reluctantly. Continued economic troubles and austerity,
moreover, could require the regime to intensify even more its pervasive 25X1
control over East German society although a tougher domestic policy
would jeopardize further financial assistance from West Germany
Secret
EUR 83-10196
August 1983
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The East German Economy:
Austerity and Slower Growth
In our opinion, East Germany's external financial
problems result in large measure from the poor
economic policies of the regime of Erich Honecker.
After succeeding Walter Ulbricht as First (later
General) Secretary of the Socialist Unity Party (SED)
in May 1971, Honecker announced a 1971-75 plan
directive that focused on ambitious gains in economic
growth and living standards. Because East Germany
faced serious manpower and raw material constraints,
the regime planned to accomplish these ends by
upgrading its manufacturing sectors primarily
through technology purchased from nonsocialist coun-
tries, particularly the industrialized West. While hard
currency imports rose sharply, the East Germans were
relatively unsuccessful at expanding exports. By the
end of the 1970s East Germany had run up a
formidable foreign debt necessitating, in the early
1980s, considerable economic retrenchment at home.
This paper explains the reasons for East Germany's
economic difficulties, discusses its efforts to stave off
financial crisis, and analyzes the present and future
economic and social costs of the regime's adjustment
measures.
The Honecker regime's decision in the early 1970s to
increase trade with the West reflected the realization
that manpower and raw material constraints were
becoming severe impediments to continued economic
expansion. In particular, Moscow was increasingly
unwilling to maintain the growth in deliveries of raw
materials. The regime planned to overcome its labor
shortage through an industrial modernization pro-
gram based on Western science and technology.
Throughout the 1960s the size of the East German
population stagnated because of emigration and low
birth rates. Although emigration virtually stopped
after the Berlin Wall was built in 1961, reduced
fertility rates-births per 1,000 persons fell from 17
in 1960 to 10.6 in 1973-caused the population to
decline further; by the early 1970s it was some 1.7
million smaller than in 1949. The regime was able to
keep the industrial labor force growing-by some
87,000 during the decade-only by continuing to
move workers out of agriculture, and encouraging the
employment of women. By the end of the decade, East
Berlin had achieved one of the highest labor force
participation rates in the world but had virtually
exhausted labor reserves
ued, we believe, to decline thereafter.'
By the end of the 1960s the leadership also encoun-
tered increasing difficulty securing from the USSR
adequate amounts of raw materials vital to continued 25X1
industrial growth, given the resource-poor nature of
the East German region (see figure 4). Ever since
Moscow had stopped blatant exploitation of its por-
tion of conquered Germany in the 1950s, the Soviets
had been providing increasing quantities of materials
on favorable terms, mostly in exchange for East 25X1
German manufactured goods. This enabled East Ger-
many to rebuild the economic base destroyed during
and immediately after the war. Beginning in the late
1960s, however, the Soviets began to reduce the
growth rate on deliveries of some materials and to
increase the amount of manufactures it pressed East
Germany to buy. The volume growth rate of imports
of Soviet raw materials, by our estimate, slipped from
4.5 percent annually in 1961-65 to less than 2 percent
annually in 1971-73. In 1975, after Moscow unilater-
ally changed the price formula for its oil and raw
material prices, East Germany's terms of trade with
the USSR deteriorated by over 10 percent and contin- 25X1
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Figure 1
East Germany: Trade With Nonsocialist
Countries
Source: Wharton Econometric
Forecasting Associates Inc.
New Strategy: Increased Trade
With Nonsocialist Countries
To maintain the growth of consumption and upgrade
the country's industrial base, the newly installed
Honecker turned to nonsocialist countries for new
technology, larger amounts of raw and semifinished
materials, and agricultural imports. The gradual
warming of East-West relations lowered trade barri-
ers, and Western capital markets became more will-
ing to finance East-West trade, especially after the
explosion of oil prices in 1973-74 provided banks with
large amounts of recycled petrodollars. Partly because
of this increased trade with nonsocialist countries, the
regime attained, by our calculation, higher GNP
growth in 1971-75 than in Ulbricht's last years, and
managed to keep GNP growth in 1976-80 from
slowing as much as it did in most other East European
countries. We estimate GNP growth averaged 3
percent annually and personal consumption about 2.5
percent annually during the 1971-80 decade (see
table 1). By 1975 East Germany, in our estimate, had
achieved the highest levels of per capita GNP and
Figure 2
East Germany: Imports From
Nonsocialist Countries
Millions of current US dollars
7,000 ;.Consumer goods
Source: Wharton Econometric
Forecasting Associates Inc.
personal consumption in the Soviet Bloc, and, by
1980, it had a standard of living rivaling that of some
West European countries.
According to partner country trade data, the value of
East German imports from nonsocialist countries rose
from $1.6 billion in 1971 to $3.8 billion in 1975 and
nearly doubled again by 1980. The value of exports
also grew rapidly-reaching $2.7 billion in 1975 and
$5.3 billion in 1980-but did not keep pace with
imports (see figure 1). With the growth of trade with
nonsocialist countries outpacing trade with the Com-
munist allies, East German statistics show that the
nonsocialist world's share of total trade rose 5 per-
centage points in the 1970s, to 33 percent in 1980 (see
table 2).
The increase in imports from nonsocialist countries-
averaging 15 to 20 percent annually in 1971-80-was
due almost equally to volume and price changes (see
figure 2). On the volume side, using East German and
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Table 1
East Germany: Estimated Annual Rates of Growth
of GNP by Sector of Origin, 1966-82
Gross national product, total
3.2
3.5
2.4
2.7
2.4
2.4
0.5
4.1
3.3
2.9
3.0
2.9
3.7
2.2
0.4
3.7
1.6
5.3
0.8
2.5
-5.9
7.7
4.6
2.8
1.2
1.5
-1.8
2.9
Transportation, communication
4.4
4.9
2.0
1.7
2.1
0.8
-2.6
Trade
4.5
5.3
2.0
1.4
2.8
1.3
0.6
Housing
0.8
1.2
1.0
1.4
1.3
1.0
0.8
2.1
2.7
2.7
2.2
3.2
1.9
1.9
Table 2
East Germany: Foreign Trade by Country Group
1970
1975
1980
N
C
on-Soviet
EMA
39.10 2
8.22
4.25
35.67 3
0.55
3.46
35.48 2
7.21
3.76
Source: Statistical Pocketbook of the German Democratic
Republic, 1982.
Percent of total
trade turnover
4.04 24.39
4.37 25.94
6.10 27.44
partner country data we estimate that imports from
nonsocialist countries approximately doubled during
1971-80:
? Honecker's promise of greater meat supplies led to
large increases in feedgrain imports; imports of corn
rose from 650,000 tons in 1971 to 3.2 million in
1980. Overall grain imports-most from nonsocial-
ist countries-more than doubled from the late
1960s, reaching more than 4 million tons by 1980
and comprising about one-third of annual grain
consumption.
? Purchases of crude oil from nonsocialist countries
rose nearly 150 percent in volume terms during the
same period.
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? Imports of technology from the industrial West also
grew, although the exact extent of the increase is
difficult to gauge. According to partner country
data, the volume of annual East German machinery
Figure 3
East Germany: Exports to Nonsocialist
Countries
imports in real terms from nonsocialist countries-a Millions of current US dollars
rough measure of purchases of technology-also
about doubled during 1971-80.
Meanwhile, commodity and oil price booms of the
early and mid-1970s boosted import prices. Partner
country data indicate that prices for East Germany's
raw material imports from nonsocialist countries more
than doubled in 1972-74, while machinery prices rose
only about 42 percent.
During the 1970s the value of East Germany's export
gains to nonsocialist countries averaged roughly 15
percent annually, but the country consistently failed
to reach balanced trade (see figure 3). Partner country
data show that the value of fuel exports grew most
rapidly-on average over 30 percent annually-but
from a small base. Most of the increase was the result
.of shipments of refined oil products. Exports to the
developed West of consumer goods-many of them
simple, moderately priced products such as furni-
ture-grew an average of about 14 percent annually
during the decade. Exports of machinery grew less
than 14 percent, and less than overall exports. Much
of this gain, moreover, was with LDCs; by 1978
shipments to LDCs actually exceeded those to the
developed West even as machinery imports from the
West were burgeoning.
The growth of overall trade with nonsocialist coun-
tries was paced by increased commerce with LDCs
and nontraditional developed Western trading part-
ners, such as the United States. Trade with LDCs
climbed over 18 percent annually, on average, during
1971-80, reflecting the increase in energy imports. A
similar rise in trade with the United States during the
same period was almost exclusively the result of East
German grain purchases. The value of trade with
West Germany grew more slowly, in part because
economic relations at the beginning of the 1970s were
already well developed (see table 3). Additionally,
a conscious effort by
the East German leadership to curb economic reliance
on West Germany (including West Berlin); the regime
This figure depicts estimates prepared by Wharton Econometric
Forecasting Associates Inc., using official East German, Soviet,
and CEMA Statistics, and partner country trade data. The Five
categories used here are from the CEMA Trade Nomenclature
(CTN), which is CEMA's equivalent to the United Nations'
Standard International Trade Classification (SITC). The machinery
and equipment category (CTN 1), roughly equivalent to SITC 7,
includes a broad variety of capital goods such as electrical
equipment, motor vehicles, boats and some appliances; the
category excludes such consumer goods as radios. The fuels
category (CTN 20, 21, 22 and 23) is the same as SITC 3,which
includes oil, gas, coal and lubricants. The non-food raw materials
category (CTN 2, 3, 4 and 5 minus fuels) comprises SITC
categories 2 through 5 and 67 through 69 and includes raw and
semifinished materials, animal fat and oils, raw chemicals and
related intermediate products, iron, steel, and nonferrous metal
products. Food and raw materials for food (CTN 4, 6, 7 and 8) is
roughly comparable to SITC categories 0 and l; it includes human
food and animal feeds, beverages and tobacco products.
Industrial consumer goods (CTN 9) encompasses SITC categories
6 (less categories 67 through 69) and comprises manufactured
consumer goods, including textiles and clothing.
wanted to project the image of an independent Ger-
man state and wanted to enhance political ties with
other countries through increased trade. Nevertheless,
according to West German and OECD data, West
Germany still accounted for nearly half of East
Germany's trade with nonsocialist countries in 1980.
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Table 3
Intra-German Trade
Million current
West German marks
1970
1,996.0
2,415.5
-419.5
1971
2,318.7
2,498.6
-179.9
1972
2,380.9
2,927.4
-546.5
1973
2,659.6
2,998.5
-338.9
1974
3,252.5
3,670.8
-418.3
1975
3,342.3
3,921.6
-579.3
1976
3,876.7
4,268.7
-392.0
1977
3,961.0
4,409.4
-448.4
1978
3,899.9
4,574.9
-675.0
1979
4,588.9
4,719.6
-130.7
1980
5,579.6
5,293.2
286.4
1981
6,050.6
5,575.6
475.0
1982
6,639.3
6,382.3
257.0
As trade with nonsocialist countries grew, so did hard
currency trade deficits. The top leadership failed to
take effective corrective measures even though some
East German economic planners began to argue by
the mid-1970s that growth targets should be reduced,
he regime also did not adopt systemic
reforms to solve longstanding structural problems.
Instead it chose to intensify centralization of the
economy, partly, we believe, for ideological reasons
and partly out of a mistaken belief that this would
bring enough new efficiencies to help solve the debt
problems.
We estimate that the annual hard currency trade
deficits soared from $300 million in 1971 to $1.1
billion in 1975 and to $2 billion in 1979 before
beginning to fall. Meanwhile, according to our calcu-
lations, total hard currency debt climbed from $1.2
billion in 1971 to $3.5 billion in 1975 and to $13.1
only to Poland's in Eastern Europe.
billion at yearend 1981 (see table 4). The country's
debt service ratio (the ratio of annual principal. and
interest obligations to export earnings) rose during the
same period from 15 percent to 56 percent, second
A number of factors contributed to the rising tide of
deficits in the 1970s; most important, in our view, was
East Berlin's inability to develop adequately its export
industries. We believe that East German industry
failed to:
? Assimilate new technology quickly. Despite regime
efforts, many East German export goods remained
dated and energy inefficient.
? Redress chronic quality problems 125X1
observers regularly rated quality as un- 25X1
even, and the regime itself gave only 24 percent of
its products a "Q" rating for achieving world quali-
? Adequately market and service the products it could
sell in the West. Customers regularly reported 25X1
inadequate responses to sales and service requests.
In addition, some of the government's centralization
efforts proved counterproductive. In agriculture, for
instance, the regime increased the size of farms and
created highly specialized "industrialized" farms
that, by its subsequent admission in the 1980s, had
management problems and used large amounts of
costly energy. Agricultural output grew slowly, and
yields per hectare of cereals, according to official
statistics, actually fell over 1 percent in 1976-80 from
the 1971-75 level.
The deficits also were exacerbated by factors beyond
East Berlin's control. Most serious was the overall
worsening terms of trade' with the nonsocialist world
' "Terms of trade" refers to the relative prices of traded goods of
given countries. East Germany's terms of trade deteriorated in the
1970s because the unit prices of its imports grew faster than the
unit prices of its exports. As a result, the country had to export
relatively larger h sical quantities of goods to maintain a constant
level of imports.
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Table 4
r?? East Germany: Hard Currency
Balance of Payments and Debt
Million US $
(except where noted)
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981a 19828
Current account balance -293 -197 -383
Trade balance -299 -268 -483
Exports 1,261 1,368 1642
Imports 1,560 1,636 2,125
Net invisibles, excluding interest 56 132 175
Net interest - 50 -61 -75
Capital account balance 298 198 24
Drawings 418 352 354
Repayments 120 141 208
Changes in reserves b 0 -13 -122
Statistical discrepancy c -5 -1 359
Gross debt 1,197 1,408 1,554
Commercial 700 855 945
Official 497 553 609
Reserves 190 203 325
Net debt 1,007 1,205 1,229
Of which:
Total debt service
Debt service ratio d (percent)
Gross annual financing
(repayments to medium- and
long- term debt plus current
account deficit)
Net resource transfer
460 500 550
170 202 283
13 15 17
413 338 591
a 1981 East German trade data are especially inconsistent with
partner country data. For this reason, the 1981-82 trade and current
account estimates should be regarded as very tentative.
b - means increase in reserves and + means decrease.
Adjustment needed to ensure that the capital account balance
offsets the current account balance.
-689 -1,019 -1,067 -1,446 --1,336-1,094
-774 -1,068 -1,125 -1,591 -1,510 -1,137
2,230 3,014 3,062 3,643 3,578 4,158
3,004 4,082 4,187 5,234 5,088 5,295
220 260 250 450 550 650
-135 -211 -192 -305 -376 -607
647 716 956 1,499 1,112 1,389
858 1,367 2,520 1,376 2,156 2,862
276 367 468 708 867 1,113
65 -284 -1,096 831 -177 -360
42 303 iii -53 224 -295
2,136 3,136 5,188 6,118 7,145 8,894
1,510 2,495 4,485 5,043 6,140 7,729
626 641 703 1,075 1,005 1,165
260 544 1,640 809 986 1,346
1,876 2,592 3,548 5,309 6,159 7,548
675 790 920 1,100
411 578 660 1,013
18 19 22 28
965 1,386 1,535 2,154
-1,858 -1,600 -489 1,246
-1,810 -1,590 60 1,509
5,098 6,555 6,714 7,172
6,908 8,145 6,654 5,663
800 900 985 950
-848 -910 -1,534 -1,213
2,228 1,974 765 -1,279
4,179 4,168 3,050 1,650
1,400 1,941 2,250 3,150
-551 -253 -35 221
-370 -374 -276 33
11,673 13,900 14,700 13,400
9,672 11,400 11,500 9,965
2,001 2,500 3,200 3,435
1,897 2,150 2,185 1,964
9,776 11,750 13,115 11,436
1,420 1,700 1,850 2,000 1,650 1,555
1,243 1,720 2,248 2,851 3,784 4,363
35 41 44 43 56 61
2,203 2,207 3,258 3,541 2,739 1,904
447 789 1,860 363 913 1,142 1,931 1,317 -734 -2,713
d Repayments of medium- and long-term debt plus net interest as a
share of exports.
e Difference between drawings and debt service.
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after the 1973-74 oil price explosion. Western experts
estimate that East German terms of trade with the
industrial West deteriorated by about 10 percent
during 1973-75 before stabilizing in the late 1970s
and that the terms of trade with LDCs-heavily
dependent on commodity prices-deteriorated by
nearly 40 percent in 1973-75.
Indirectly adding to the hard currency deficits were
continued problems with socialist suppliers. To main-
tain needed imports from the Soviets, who
toughened trade, credit, and debt
negotiations as their economic growth slowed, East
Germany apparently was forced to export to the
USSR better quality goods, some of which could have
been sold to the West. By our count, East Germany
spent at least $200 million in hard currency in 1980
and 1981 to replace goods Poland failed to deliver
during the height of Warsaw's economic crisis. Ac-
cording to East German statistics, Polish shipments of
coal and coke to East Germany fell 59 percent from
1979 to 1981.' The cuts were partly to blame for some
temporary factory closings in the winter of 1980-81
and prompted East Berlin to seek alternative sources
of supply, mainly in the West.
The deteriorating debt situation and increasing un-
willingness of bankers to lend to East Germany finally
forced the regime to take effective remedial action in
1981. Although the regime for years had urged
increased exports and maintained control over im-
ports, we believe it more seriously pushed its program
after the party congress in April 1981. The govern-
ment upgraded meeting export goals as a criterion for
judging enterprise performance and imposed still
tighter controls on hard currency imports. As a result,
partner country data show that the dollar value of
' East Germany also receives Polish coal on Soviet account under a
longstanding, complicated trilateral trade agreement. Most of the
drop in "Soviet deliveries in 1980-81 probably was due to Polish
imports dropped 18 percent, exports rose 8 percent,' 25X1
and the regime achieved a $60 million surplus in trade
with nonsocialist countries-the first of the Honecker
era-and a marked improvement over what we esti-
mate to have been a $1.6 billion deficit in 1980.
The regime took further measures in early 1982.
Despite the improvement in the trade account., West-
ern bankers became more concerned about East Ger-
many's large debt and much less willing to extend new
credits. To a large extent, their shift in attitude
stemmed from further problems with Polish and
Romanian loans and the deterioration in East-West
relations following declaration of martial law in Po-
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land in December 1981. As a result, in mid-February
1982, Honecker told a group of district party func-
tionaries that the world economic situation had wors-
ened noticeably since December and that further
remedial measures were necessary-his first signifi-
cant public admission of real difficulty. The regime 25X1
subsequently gave even higher priority to improving
its hard currency trade balance and moved,__
to cut imports further and boost
In a series of confidential directives to combines and
enterprises, the party ordered:
? Reduced imports of capital goods, industrial raw
materials and semifinished goods, feedgrains, and
foodstuffs.
? Higher domestic prices for goods imported from the
West.
? Emergency sales of hard goods, such as steel, to the
West at bargain prices without regard to production
costs.
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' While the dollar costing of imports and exports is necessary for
balance-of-payments assessments, changes in trade volume provide
the best indication of economic adjustments to the regime's trade
controls. Since most East German trade is conducted in currencies
that depreciated against the dollar in 1981, the year-to-year trade
performance when measured in dollars overstates the degree of
import cuts and understates export expansion. Allowing for dollar
appreciation and assuming minimal price inflation in 1981, we
estimate a fall in import volume of under 5 percent and a :rise in
export volume of about 15 percent. Similarly we estimate ,:hat
imports fell about 8 percent in 1982 while exports declined slightly. 25X1
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At the same time
the regime sought quicker payment for its deliveries,
bargained for delays in payment for imports, and
accelerated its efforts to secure barter deals in lieu of
cash purchases
East Berlin also diverted to the indus-
trial West goods originally scheduled for delivery to
East European countries, and that it undertook some
unconventional trade and financing arrangements in
order to secure hard currency credits for even very
short periods.'
The tough new orders were effective in improving
significantly the hard currency trade balance. Signal-
ing its satisfaction, the regime released in mid-1982
normally secret trade data that indicated that East
Germany had run a trade surplus with the developed
West and LDCs of "over" 1 billion Valuta Marks
(more than $300 million) in first-half 1982. In March
1983, in another unusual move, the East German
foreign trade bank announced a $1.5 billion trade
surplus with nonsocialist countries for the year gener-
ated by a 17.3 percent rise in exports and a 4.3
percent cut in imports. We accept the East Germans'
trade balance figure but believe that the officially
reported export and import growth rates are inflated.
As a result of the trade turnaround, we estimate a
$1.2 billion hard currency current account surplus for
the year and conclude that the East Germans began
to reduce their hard currency debt for the first time
under Honecker
In large part because of the improving current ac-
count, East Germany's financial situation stabilized
in the second and third quarters of 1982.' By the
day trade financing provided by Western banks, but immediately
resold the goods to third parties, mainly LDCs, on 120-day terms.
would not have been able to acquire.
' Banks in West Germany do not report their assets and liabilities
with East Germany to the Bank for International Settlements, and
Bonn refuses to divulge the information. East Berlin may have
drawn down deposits in West Germany in order to pay off maturing
Although Bonn's Intra-German Affairs Ministry regularly re-
ports the net accumulated debt arising out of intra-German trade,
we believe that this total excludes credits from West German banks
that are not related to West German-East German trade. Because
West German banks have been providing non-trade-related financ-
ing since at least the mid-1970s, East Germany's debt to West
Germany is almost certainly greater than the announced totals.
Table 5
East Germany: Officially
Reported Performance
Percent growth over
previous period
25X1
1981
Plan
1981
Actual
1982
Plan
1982
Actual
25X1
National income
5.0
5.0
4.8
3.0
Industrial production
5.0
5.1
4.6
3.2
Productivity
5.0
5.4
4.5
3.6
Retail trade
4.0
2.5
4.0
1.0
Construction
2.8
4.1
2.5
4.2
Foreign trade
16
10.1
15
NA
fourth quarter, Bank for International Settlements
data, reflecting the growing trade surplus, show a
noticeable improvement. Assets rose nearly $700 mil-
lion during the quarter-to only $120 million below
levels a year earlier-while liabilities declined
$9 million
East Berlin reported achievement of most major
domestic goals for 1981 but admitted a significant
slowing in 1982 as the import cuts hit home (see
table-5). Investment spending declined, and real per-
sonal consumption probably dropped for the first time
under the Honecker regime.
For 1981 we estimate that GNP grew 2.4 percent, the
same as in 1980, and that industrial production rose
3.7 percent, slightly higher than in 1980. Increased
monitoring of imports, reported gains in the efficient
use of energy and raw materials, much of which are
imported, and probable drawdowns of "reserves" all
helped prevent an industrial slowdown. Import cuts
were concentrated in areas that would have less
immediate impact on overall growth rates. We calcu-
late that as much as 30 percent of the 5-percent cut in
imports-after adjusting partner country data to re-
flect the appreciation of the dollar-can be accounted
for by a 1.3-million-ton reduction in feed corn im-
ports, a decline of 42 percent from the 1980 level. The
regime held the growth rate of investment to 1.2 per-
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We tentatively accept the regime's recent trade claims
despite considerable inconsistencies between East
German and Western trade data. East German trade
statistics for 1980-81 (thefirst such statistics re-
leased by East Berlin since 1975) show that East
Germany's trade balance with non-socialist countries
moved from a $1.6 billion deficit in 1980 to the
reported $60 million surplus in 1981 because of a 4-
percent drop in imports and a 29 percent gain in
exports. But statistics from the OECD and West
Germany show the deficit declining from $430 mil-
lion in 1980 to $240 million in 1981, with a 5 -percent
decline in exports and an 8-percent fall in imports.
We can nearly replicate East Berlin's reported hard
currency trade surplus in 1982 from partner country
data. But we believe that because of valuation prob-
lems, and possibly deliberate exaggeration, both im-
port and export growth figures are seriously over-
stated. By our calculations, using OECD and West
German figures, exports grew 6.8 percent and imports
fell 14.9 percent. Reported imports from OECD
countries other than West Germany fell over 32
percent for the year compared with the East German
claim of a roughly 20 percent cut. The data show a
particularly sharp import retrenchment in the third
quarter, which tends to confirm our anecdotal evi-
dence.
We cannot explain the discrepancy between the
March 1983 East German foreign trade bank report
and partner country data in 1982. The East Germans
were characteristically cryptic, providing scant infor-
mation about their accounting practices. Despite its
financial troubles last year, East Berlin steadfastly
refused to release additional information 25X1
and in early 1983 ceased publication of a 25X1
monthly journal that was a significant source of 25X1
economic information. We believe the regime.proba-
bly released aggregate trade figures this year mainly
because they were favorable and would impress
bankers.
Such contradictions between East German and West-
ern partner trade data, the lack of basic information
on West German-East German credit flows, and
limited East German statistics make us very cautious
in our analysis of East Germany's trade and f :'nancial
situation.
cent, while concentrating investment resources in
export, energy, and high-technology areas; it reduced
spending absolutely in the construction, agriculture,
and retail sales sectors, according to official statistics.
We calculate that the growth of personal consumption
slowed slightly to 1.3 percent.
The regime's priority on industrial production was at
the expense of other sectors. Industry grew more
rapidly than all but one sector-communal services-
of the 10 we regularly evaluate. We calculate, for
example, that GNP originating in the construction
sector fell 1.8 percent while the transportation and
communications sector declined 0.8 percent in 1981.
The austerity measures of 1982, however, were signif-
icantly more disruptive. GNP growth fell to an esti-
mated 0.5 percent and growth in industrial production
to 2.2 percent. The decline in growth rates would have
been even greater if the regime had not further
expanded its strategy of protecting industry at the
expense of other sectors. Moreover, even where im-
ports of industrial inputs were cut, the regime refused
to lower enterprise production goals. While this tactic 25X1
may have backfired in some cases, we believe that the
overall effect on output was positive as enterprise
managers were forced to draw upon "emergency"
hoards of raw and semifinished materials. The; regime
kept the pressure on managers,
by firing several of them for failing to meet 25X1
quotas and by sacking two industrial ministers in the
fall, apparently because of the poor performance of
their industries
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Despite our estimate that the economy continued to
grow in 1981 even with a 5 -percent import cut with
nonsocialist countries after adjustment for the
strengthening of the dollar, we have no evidence that
the East Germans falsified the economic data on
which we have based our estimates. Nevertheless,
domestic inflation appears to have increased in
1981-by perhaps 1 to 2 percentage points-and may
have biased reported results upward somewhat. In
addition, growing economic troubles and strong re-
gime emphasis that managers were responsible for
performance may have induced them to increase
falsification of plan fulfillment reports submitted to
the Central Statistical Administration.
We believe that there is a strong possibility that the
aggregate official data reported for 1982-including
a 3 -percent growth in national income-were inflated.
Though it is usual for component statistical series to
be somewhat inconsistent with aggregate results, the
1982 report seems especially suspect. Our GNP esti-
mate is based on official disaggregated series and the
GNP/national income ratio for 1982 is markedly
below that of previous years. Moreover, some of the
1982 government's performance statements appear
inconsistent. For example, the regime reported that
The regime, in order to cut back sharply machinery
imports from the West, reduced investment spending
by about 5 percent and slowed down the rate of
initiating new industrial projects. Preliminary data
through September from some OECD countries and
West Germany indicate that East German imports of
machinery fell more than any other category, nearly
35 percent. We believe the reduced imports of capital
goods contributed to a decline in initiation of new
industrial projects and a roughly 5-percent decline in
investment spending for the year.
The 1982 import cuts hit the consumer hard. The
drop in the officially reported growth rate of retail
sales to slightly below 1 percent and numerous reports
meat consumption remained the same as in 1981
despite production cuts and apparently increased
exports, and that transportation of goods declined
sharply at the same time that industrial production
grew. The regime's increased emphasis on plan ful-
fillment may have sparked increased plan falsifica-
tion by enterprise management, and apparently in-
creased inflation in 1982 may have been reflected in
the reported results. Finally, the regime's intense
insecurity about its political legitimacy may have
induced it to alter its own accounting systems to
overstate actual performance
Produced national income is the Communist world's
rough equivalent to GNP, but differs from GNP by
excluding most services. Growth of GNP is lower
than national income growth because the value of
services, including housing, tends to grow more slow-
ly than other sectors of Communist economies. Both
concepts are used in this paper; our calculation of
GNP necessarily lags behind regime announcements
of national income results because component series
are not released until after the aggregate plan full-
ment reports.
worsened meat and butter shortages, longer lines,
locally imposed rationing, and higher prices for con-
sumer goods lead us to believe that real personal
consumption probably declined in 1982 for the first
time under Honecker. Supplies of imported goods
were especially short. The grain import cuts contrib-
uted to declines in numbers of pigs, cattle, and
chickens; the swine population, for example, shrank
by over 7 percent, according to official statistics
yoked growing unhappiness among the populace.
Some workers, for example, walked off the job to
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protest shortages in factory canteens and increasingly
criticized party activists defending regime policy.
Housewives, meanwhile, grew more sullen and in-
creasingly compared their situation to that of the
enterprises laid off some workers, the regime trans-
ferred others between factories, and young people
entering the job market began to find work harder to
come by-very unusual in traditionally labor-short
East Germany
Despite a somewhat favorable report released by the
regime in mid-June, we believe that the continued
curtailment of imports increasingly hindered growth
of industrial output in early 1983.
Embassy contacts report that factories throughout the
country were curtailing production somewhat and
that a few closed for lack of factor inputs. As a result,
We believe that the regime's austerity measu:res have
improved markedly the country's financial situation,
and that the chances of avoiding a debt rescheduling
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this year are good. Threats to solvency remain, how-
ever, and the long-term adjustment process necessary
to reduce its debt will be painful. We believe that East
Germany will be able to run a current account surplus
again in 1983 and its estimated financing requirement
this year of $3.3 billion will be nearly 25 percent
below last year's. It will benefit from lower interest
rates and the fact that fewer loans come due in 1983.
Table 6
East Germany: Estimated Financing
Requirement 1981-83
Financing requirement
Current account
balance
Trade balance
The near-term financial outlook improved further in Exports
late June 1983, when the West German Government Imports
decided to approve a five-year 1 billion Mark (about Net invisibles,
$400 million) loan from West German banks. The excluding interest
loan went through because the East Germans agreed Net interest
that if they fail to make scheduled principal or Repayments of
interest payments, they will forgo payments by Bonn short-term debt
for regular transportation and some postal services. Repayments medium-
um- and
Bonn would use the funds to reimburse the banks. long-term debt
But East Berlin is still not immune to a financial crisis
(see table 6). The major threat to financial solvency in
1983 and beyond is the possibility that East Berlin
may not be able to roll over maturing Western credits.
Western bankers for the most part closed their long-
term loan windows despite the East Germans' im-
proved current account outlook. Until then, numerous
reports indicate that two-year trade financing was the
longest term money East Berlin could secure and that
it accepted one-year loans because of some bankers'
unwillingness to offer longer term credit.
Borrowing sources
Medium- and long-
term credits
Short-term credits
Error and omissions
Changes in reserves
(+ = decrease
- = increase)
Reserves in BIS
reporting banks (end
of the period)
5,239
4,254
3,275
-489
1,246
1,400
60
1,509
1,500
6,714
7,172
7,675
6,654
5,663
6,175
985
950
850
-1,534
-1,213
-950
-2,500
-2,350
-1,475
-2,250
-3,150
-3,200
5,550
4,000
NA
3,200
2,525
NA
2,350
1,475
NA
-276
33
NA
-35
221
NA
2,185
East Berlin's chances of avoiding rescheduling depend
heavily upon its maintaining and improving the confi- significance bankers place on Bonn's role in arranging
dence of international bankers. With the international the recent loan and the extent to which they believe it
banking system under increased strain from LDC represents a West German financial "umbrella."
borrowers, any further deterioration in East-West
relations or in the economic or political situation in
East Germany or the rest of Eastern Europe might Help To Avoid a Rescheduling?
discourage more bankers from rolling over even short-
term loans. To bolster its standing with Western
bankers, the regime has been punctual in making its
debt payments. We believe that it is consciously
putting the best face on the situation despite the
reduction in lending by some banks and that it hopes
for a break in the chilly banking climate before it has
to require even harsher sacrifices of the populace or
ask for rescheduling. Such a break may depend on the
We believe Bonn's backing was crucial for the success
of the recent West German bank loan, and that West
Germany may find other ways to help East Germany
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bank activity is limited because of Bonn's refusal to 25X1
release most intra-German financial data, West Ger-
man banks, in our judgment, are not inclined to do
much more than roll over maturing obligations. They
hold large amounts of Polish debt, have lent consider-
able sums to other East European countries, and are
under pressure at home from the recession and related
problems such as the bankruptcy of AEG-Telefunken.
A failure by East Berlin to respond in some fashion to
Bonn's assistance in arranging the recent loan could
induce the West Germans to insist on political conces-
sions before they would agree to extend further help.
Bonn especially wants the regime to lower the mini-
mum amount of hard currency that Western visitors
are required to exchange daily for East German
marks because such restrictions reduce much valued
travel of West Germans, particularly pensioners, to
East Germany. West Germany believes it is important
to keep the level of contacts as high as possible for
humanitarian reasons and to keep alive hopes for
eventual reunification. East Berlin in the past has
emphatically refused to link the issues, maintaining
that the exchange requirement is an internal East
If a deal to reduce the currency exchange requirement
is struck, further West German assistance could be
substantial. East Germany long has received West
German marks via a variety of noncommercial and
semicommercial channels that now provide, in our
estimate, at least $1 billion in hard currency annually.
The two sides could agree on new construction proj-
ects in and around West Berlin-such as efforts to
improve rail links-or water pollution control projects
that have long been under discussion. Bonn could
provide East Berlin a cash grant to compensate for the
financial loss East Berlin would suffer by reducing the
exchange requirement
East Berlin will have difficulty obtaining significant
new loans from West German private banks unless
they are pressed by Bonn or receive guarantees.
Although our knowledge of West German commercial
Other Western governments might help out if they
believed East Germany's problems threatened their
financial or commercial interests. They could for
domestic employment reasons agree to extend export
credits
for guarantee the loans of banks granting East
Germany credits. But such assistance probably would
be relatively small. East Germany does not belong to 25X1
the IMF and cannot expect Western support such as
the BIS loans to Hungary in 1982.
The Soviet Union is unlikely to provide enough assist-
ance to avert any financial crisis. As it did to assist
Poland, Moscow could provide hard currency grants,
accelerate deliveries of goods, exempt East Berlin
from price increases, or allow reduced shipments of
East German products to the USSR. Moscow, how-
ever, has its own serious economic problems, including
a hard currency shortage, and seems increasingly to
be pursuing its own interests at the expense of its East
European allies. Indicative of this is Moscow's
roughly 10-percent cutback in oil deliveries to East
Germany, which we believe took effect on 1 January
1982. As Soviet raw material prices approach world
levels, East Berlin probably will pay more for imports
from the USSR. We believe that East Germany will 25X1
again experience deterioration in its terms of trade
with the USSR-the decline for 1982-83 has been 25X1
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The East German economy is the most industrialized
in Eastern Europe-we estimate that industry pro-
duces over 40 percent of GNP-but has made only
limited progress toward achieving technological de-
velopment on a par with Western Europe and the
United States. East German statistics show that
about 70 percent of industrial output is concentrated
in manufacturing, particularly machinery, up from
less than 65 percent in 1970. Electronics and ma-
chine-building sectors grew most rapidly during the
1970s. But official statistics also show that exports to
the West, while including some technologically ad-
vanced goods, are largely intermediate goods and
relatively unsophisticated manufactured items-a
product mix not greatly different from that which
prevailed in the early 1970s. These include relatively
simple machine tools and machinery; electrical
equipment such as cables; relatively simple chemicals
and chemical products like dyes and photographic
film; refined oil; and consumer goods such as textiles,
clothing, and furniture. Many industrial goods, fur-
thermore, are below world standards of quality and
technology and find ready buyers only in less de-
manding markets, particularly the USSR, Eastern
Europe, and the LDCs. ob-
servers at the semiannual Leipzig Trade Fairs-East
Germany's premier marketing events-regularly rate
many East German goods as lagging several years
behind comparable Western products.
The regime long has been committed to improving its
industrial performance. At its party congress in April
East Germany probably will not get any help from its
other allies. Poland and Romania remain in financial
crises, Hungary is trying to avert one, and Czechoslo-
vakia and Bulgaria, although maintaining current
account surpluses, have little to offer the East
Germans.
We believe that slower growth will continue in 1983
and for at least the next several years. East Berlin
seems determined to reduce its hard currency debt
1981, it reemphasized that policy in adopting a 10-
point `economic strategy"for the 1980s that called
for significant gains in productivity and product
quality through further use of "scientific-technical
progress, "particularly in microelectronics and robot-
ics. Output of the industrial ministries that grew
most in the 1970s-such as electrical engineering and
electronics and mechanical engineering-was sched-
uled to grow rapidly in 1981-85. The plan also called
for sharp reductions in the usage of energy and raw
material inputs, but the party did not order major
structural changes in the economy, despite the higher
prices for and reduced availability of some Soviet
raw materials and chronic deficits in trade with the
West
We believe that East Germany's program to improve
the quality and efficiency of its products will produce
gains. The more technically advanced industrial sec-
tors that East Berlin has been pushing in recent
years, such as electronics, probably will continue to
outperform the economy as a whole. This develop-
ment should help keep the East German economy
growing faster than most other East European econo-
mies, albeit below the rates of the early 1970s. But
East Berlin's decision to cut imports of capital will
slow the modernization program, delay the introduc-
tion of new products, and inhibit needed structural
changes. As a result, East German industry will
continue to trail its competitors in the West.
and will closely control the growth of imports from
nonsocialist countries that helped fuel growth in the
1970s. Even a resurgence in East Germany's tradi-
tional export markets as a consequence of a Western
economic recovery will not, we believe, induce East
Berlin to dramatically increase imports. Recovery in
the West would increase export earnings only slowly
and East Berlin would, we believe, use such proceeds
to reduce its debt more quickly.
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The government probably will maintain its tight rein
on investment outlays and imports of capital goods.
But such a short-term expedient will retard long-term
modernization plans and efforts to develop new inter-
nationally competitive industries. The regime has
expressed a particular interest in expanding produc-
tion of high-technology goods such as electronics. The
limited East German investment resources probably
will be dedicated largely to maintaining production of
current export goods, developing substitutes for im-
ports-especially energy-and meeting politically
sensitive housing construction goals. We believe that
investment in other sectors-probably including retail
trade-may be cut back sharply
We regard the call in the 1983 Plan for 4.2-percent
growth in national income as overly optimistic and
think that the regime's continued unwillingness to
reduce production quotas despite reductions in factor
inputs will increasingly strain an already taut econo-
my. We believe that managers have few inventories of
raw materials and parts left to draw upon
As the import reduction program continues, we be-
lieve the quantity and variety of foodstuffs and con-
sumer goods probably will decline further. A senior
West German official told a US diplomat in August
1982, that Bonn has firm evidence that East Berlin
has completed plans for rationing meats.
3.6 percent versus 5.4 percent in 1981, a trend that
may reflect the decline in investment and other
negative developments as well as reduced worker
effort.
We believe the worsening economic situation is likely
to make the regime even more conservative. Honecker
has never shown any interest in market-oriented
economic reform and seems more likely to push for
greater centralization in the face of'adversity. -Party
and government leaders and economic experts consist-
ently reject any abandonment of tight central con- 25X1
trols, and their antireform rhetoric has grown more
strident as problems have mounted. A commitment to
reform by the new Soviet leadership could, however,
require Honecker to reassess his position and to
endorse some changes. But decentralization would
require a major industrial reorganization and could
impede economic growth in the short run.
25X1
In any case, continuing economic problems will 25X1
heighten tensions over resource allocation and other
aspects of economic policy. Reports of increasing 25X1
complaints by party functionaries suggest there al-
ready ready has been a growing debate over economic
As economic troubles continue, friction
expect that the population may react with scattered
protests, but the regime is closely monitoring consum-
er attitudes and will doubtless move to head off or
crush any serious unrest. As in the past, it will try to
blame its troubles on external factors, particularly the
alleged US "crusade" against Eastern Europe
Such shortages could significantly reduce the growth
of worker productivity. Em-
bassy sources already report that workers are leaving
their jobs to stand in lines for scarce goods. Official
statistics for 1982 show that productivity grew only
between competing constituencies within the party
and government seems likely to grow.
25X1
The regime, still insecure because of its lack of
popular support, is likely to try to intensify its control
over society. Party hardliners may argue for tighter
security and a crackdown on domestic dissent.
Church-state relations could worsen if the regime
becomes less tolerant of such church-sponsored activi-
ties as peace workshops. Such actions would chill
relations with the West German Government, how-
X1
25X1
25X1
25X1
ever, and the regime would, in our judgment, be 25X1
reluctant to jeopardize possibly crucial financial aid
from Bonn
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and Processing
-Oil
'--' Natural gas
PROCESSING
Iron and steel
Copper
I Oil
randenber
ihale
rle Fire
hrxrta~ Eslahen '00
sb
an erhause Lauc am
?'" J 6rOdha'S
kdod Riess
I Pap S
Zeiti W
*Go. Nad
G Ya ue
v Start
Onterxellenhom
~Aue
Population
Persons per square kilometer
0 50 100 200 300
0 150 269 518 711
Persons per square mile
nem
Q
Figure 4
East Germany
Industrial
Production
water supply
(Metal working ?
Basic materials
(Food Industry
Potsdam Frankfurt
bee
Halle
Lei ig Dresden
Erfurt
ar4
M
IF-I~ arr-
Start
Most intensive agriculture
(primarily wheat, sugar beets,
and corn)
Mixed intensive and
extensive agriculture (including
rye and potatoes)
Mixed extensive agriculture,
pasture and forest
r Permanent pasture
Forest
Urban area
P
17
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