East Germany had a command economy, similar to the economic system in the Soviet Union and other Comecon member states — in contrast to the market economies or mixed economies or other capitalist states. The state established production targets, set prices, and also allocated resources, codifying these decisions in comprehensive plans. The means of production were almost entirely state-owned. The GDR had an above-average standard of living compared to other Eastern Bloc countries or the Soviet Union, and enjoyed favorable duty and tariff terms with the West German market; in 1989, it was estimated that 50 to 60% of its trade was with Western countries. However by the mid-1980s its economy had reached a state of stagnation.
History
Soviet occupation period
Each occupation power assumed authority in their respective zones by June 1945. The Allied powers originally pursued a common German policy, focused on denazification and demilitarization in preparation for the restoration of a democratic German nation-state.
Over time, the western and Soviet zones drifted apart economically. In 1946, the Soviet zone had a slight total factor productivity lead; wartime industrialization had contributed more to the eastern economy, and the destruction caused by the war was lighter than in the west. However, by 1948 the western zones had become more prosperous.
There were several reasons behind the backward economic situation in East Germany. While large sums had been poured into West Germany, especially by the United States, the Soviet Union not only put nothing into the economy of its zone but actually took out large amounts in reparations and occupation costs. Direct and indirect reparations paid by East Germany between 1946 and 1953 amounted to $14 billion in 1938 prices.
Military industries and those owned by the state, by Nazi Party members, and by war criminals were confiscated. These industries amounted to approximately 60% of total industrial production in the Soviet zone. Most heavy industry (constituting 20% of total production) was claimed by the Soviet Union as World War II reparations, and Soviet joint stock companies (German: Sowjetische Aktiengesellschaften - SAG) were formed. The remaining confiscated industrial property was nationalized, leaving 40% of total industrial production to private enterprise. The reparations seriously hindered the ability of East Germany to compete with West Germany economically.
While the dismantling of industrial capacity had a significant effect, the most important factor in explaining the initial divergence in economic performance was the separation of the eastern zone from its traditional West German market. The East German economy was dominated by consumer-goods manufacturers, and depended on raw materials and intermediate goods found exclusively in the West. East Germany had virtually no hard coal deposits, and only half of the fuel demand could be met domestically. In 1943 the East accounted for 0.5% of total output in coke, 1.6% in raw iron, and 6.9% in raw steel produced in post-war German territory. After the war, trade between East and West fell by a factor of 35.
Retail trade in the east was slowly being absorbed by two state-controlled organizations (Konsum and Handelsorganisation) which were given special preferences. On 2 January 1949, a two-year plan of economic reconstruction was launched, aiming at 81% of the 1936 production level, and, by cutting 30 per cent off production costs, hoping to raise the general wage level 12% to 15%. The plan also called for an increase in the daily food ration from 1,500 to 2,000 calories.
It was estimated that by 1949, 100 per cent of the automotive, between 90% and 100% of the chemical, and 93% of the fuel industries were in Soviet hands. By the end of 1950 East Germany had paid $3.7 bn of Russia's $10 bn reparations demand. After the death of Joseph Stalin and the June 1953 uprising, the Soviet Union began to return the East German factories it had taken as reparations.
In May 1949, Soviet Foreign Minister Andrei Vishinsky claimed that production in the Soviet occupation zone in March 1949 had reached 96.6 per cent of its 1936 level and that the government budget of the Soviet zone showed a surplus of 1 billion East German Marks, despite a 30% cut in taxes.
The following case is typical of the economic relationship between the two eastern bloc countries. According to documents supplied by a shipbuilding official who escaped from the East, ships ordered by the Soviet Union for 1954 cost $148 million to build, but the Soviets paid only $46 million for them; the difference of $102 million was absorbed by the GDR.