Could the GDR have survived? Part II – the Economics of Stealing the Future

External factors were the main cause of death for the GDR economy. In those days the economies of the Soviet dominated Eastern Bloc were far more globalised than we are even today, and the collapse of COMECON – the East European trading bloc in January 1990 meant that export markets disappeared overnight. New trade links could theoretically have been built were it not for the preparations to introduce the West German D-Mark in the GDR. This happened in June 1990 and meant that all the GDR’s traditional trade partners were simply unable to pay for goods or services from East Germany.

The Treuhandanstalt – twisted logic

But even the collapse of the export markets is dwarfed by the brutal deindustrialisation facilitated by the Treuhand – the trust holding set up by the penultimate GDR government under Hans Modrow, and taken over by the West Germans on reunification. Only now are widespread grumblings to be heard from the mainstream media about the way this institution closed down and sold off East German industry to asset stripping Western businesses.

To quote one unemployed worker in Magdeburg, surveying the site of his former factory: “It takes an economist to tell you that a functioning factory with a trained and willing workforce can’t be saved. It’s a twisted logic that says that it’s impossible for us just to go into this factory and produce something, anything.”

West German Interests

Another major factor for the GDR’s financial woes was the huge debt (DM86 billion) owed to West Germany. The interest on the loans from West Germany, originally given in the 1970s, quickly led to a debt spiral similar to that experienced by developing countries (at the time called Third World Debt).

Put simply, before 1990 the GDR economy was broken, seriously ill in fact – but it wasn’t until West German interests took over that it entered intensive care. 25 years later, in most parts of the ex-GDR the economy is still in a critical state with little hope of improvement: for the last ten years GDP in the east has remained at two-thirds that of the west, and the unemployment rate has remained steady at twice that of the west.

The opening of the Wall in November 1989 wasn’t the start of the brain and labour drain that the GDR suffered. Ever since Hungary loosened border controls in May of that year people had been streaming out of East Germany. Opening the borders to West Germany and West Berlin merely provided a short-cut for these refugees who had previously been heading out through Czechoslovakia and Hungary. Over 300,000 people left the GDR in 1989 – approximately 2% of the population.

Even a healthy economy can’t sustain such a depletion of labour resources – and the economy in the GDR was far from healthy. Already staggering under the impact of severe labour withdrawal – army conscripts were sent into the factories in an attempt to plug the gap – the economy then had to weather the collapse of COMECON.

Comecon and Eastern Neighbours

In Stealing the Future I’ve tried to remain as true to historical fact as possible – practically this means trying to keep the history of countries other than Germany much the same as actually happened. Obviously, by fiddling with the history of the GDR I have to accept that there will be knock on effects. But, for example, I’ve assumed that Czechoslovakia would still have its Velvet Divorce, yet on the other hand the continued existence of the USSR is clearly a massive tweak on reality! Remaining as true to real-life events as possible means that, for the inhabitants of my counter-factual GDR in 1993, COMECON was to all intents and purposes dissolved in January 1990, and that the East Germans would have to renegotiate practically every single trade agreement with its eastern neighbours.

East German stamp celebrating COMECON
East German stamp celebrating COMECON

But the other Eastern Bloc countries were in a similar position – they may not have had to sustain such huge losses of labour resources, but they did have equally inefficient economies and had to work out new deals with old trading partners. In each country large scale restructuring, particularly of heavy industry, would have been necessary to take account of the new conditions – and this would doubtless have been painful. Once completed though, the restructuring would have been beneficial – industry would have been better placed to supply the domestic needs or to take advantage of competitive advantages. After all COMECON was structured to serve the interests of the USSR, and an international economic plan prescribed production according to political rather than economic criteria – replacing COMECON was in the interests of every Eastern Bloc country (except perhaps the Soviet Union).

Given the government’s history of political interference in production (eg cable factories being ordered to produce garden hoses, rolling stock plants required to produce water heaters) East German industry had extensive experience in creatively adapting to suit radically different production requirements – this would have been an advantage in the restructuring that would have inevitably come to a post-1990 GDR.

The Brain Drain and Open Borders

The other big problem facing the GDR economy in 1990 was the labour shortage.

For the population of a post-1990 GDR the first hope would be that a reasonable percentage of those who headed West in 1989 decided to return. The number of returnees is highly debatable, but I think it’s a fair assumption that quite a few emigrants would come back – those who emigrated for political reasons might well be attracted back by the development of direct democracy systems; while those who emigrated for economic reasons may well have been discouraged by the poor employment prospects in the West (in the real world, Western Europe was entering a recession at that point – which West Germany only managed to postpone by asset stripping the East).

Nevertheless, not everyone would have returned, and those who did would probably have slowly trickled back over the next few years. Additionally, the most skilled workers – the ones such as doctors and engineers, sorely needed by the GDR – would be most likely to find well paid work in the West, and therefore least likely to return.

On the other hand, if, as conjectured in Stealing the Future Kohl lost the Bundestag election in December 1990 due to his failure to further the cause of German reunification then the most likely candidate for the position of Kanzler of West Germany would be Oscar Lafontaine, who at the time favoured discontinuing welfare benefits for German immigrants from the GDR and other territories. This would have been a significant deterrent for those considering moving from the GDR to West Germany, thus stabilising the population of the GDR after December 1990.

In 1961, the GDR faced a not dissimilar situation: people were leaving the GDR in masses (over 2.7 million people left the GDR before 1961 – that’s 1 in 6 of the population), crossing over the open border in Berlin. The economy was collapsing. The solution then was to build the Berlin Wall. The Wall worked – it stabilised the international political situation, and the East German economy, but at a terrible personal, political and financial cost.

What does a Border Cost?

Partly dismantled border installations along the Berlin wall, 1990
Partly dismantled border installations along the Berlin wall, 1990

The annual costs of the inner German border (including the Berlin Wall), Stasi and other armed forces posted on the border in the mid-1980s came to approximately 40bn Marks and about 335,000 personnel. In the world of Stealing the Future there is quite simply no longer a job for the army and the Stasi: the military responsibilities of Warsaw Pact membership have expired, and a small country such as the GDR can only maintain a convincing military defence at the risk of bankrupting itself. That leaves the armed forces only with border policing and disaster relief roles.

If we assume that most of the armed forces and all of the Stasi can be reassigned to replace workers who have emigrated then the benefits of this tactical disarmament amount to approximately 6.5% of the GDP and over a third of a million workers, which happily approximates the number of people of working age who left the GDR in 1989.

Of course, even though all these sums (very approximately) add up, the reality would have been a lot more difficult than shifting numbers around on paper. The armed forces had a mind-bogglingly large arsenal, and although (in the real world) they set about deactivating this early in 1990, they hadn’t come anywhere near completing the job when reunification came in October. Decommissioning at this level is a massive task, requiring large numbers of personnel to carry it out – who are consequently not available to help out in the domestic economy. Nevertheless, by 1993, the year in which Stealing the Future is set, one would expect (using predictions from 1990) the task to be practically completed, and the savings gained from no longer needing to maintain and replace the equipment and munitions would be effected as soon as the costs of disposal had been met.

The West Strikes Back?

If the East Germans’ decision to remain independent had riled the West German government as much as I hint at in the book then we might expect the West to start demanding repayment of the huge debt owed by the GDR. It’s difficult to see how the GDR economy would be able to service this debt under these conditions, and a default may have led to economic sanctions that would have hit the living standard of East Germans. Refusing to allow the rescheduling of debt payments would have been a break in policy for West Germany, and they would have to consider the fact that the GDR would still have some diplomatic and practical clout: the GDR could easily hinder West Germans’ road and rail access to West Berlin, not to mention restricting visits by West German and West Berlin citizens to the East.

In addition to political leverage, contemporary figures on the GDR’s balance of trade show a gross deficit of 48.8 million Westmarks, shrinking to a net 19.9 million when the dark money from Schalk-Golodkowski‘s secretive trading business on behalf of the Party is included. In principle, if West Germany decided to call in their loans, the GDR would have enough liquidity to restructure its debts.

Stealing the Future is based on the conjecture that the West Germans have decided, for the above reasons, not to use the debt for leverage, but are concentrating on the Silesian Crisis as a way to destabilise the GDR.

A Summary

The above just outlines the problems facing my counter-factual GDR economy in the early 1990s. The economy would need to concentrate on domestic requirements and minimise hard-currency imports, leading to supply shortfalls in oil, metals and animal feed.

I’ve tried to show that, given the situation of the GDR at the end of the 1980s, it would be economically possible to continue. On balance, if we assume the population is willing to put up with a material standard of living that is below that of their Western cousins (but importantly, pretty much on a par with what they were used to in the 1980s) then the GDR would have the breathing space needed to restructure industry and consumer goods production.

There is of course a difference between possible and likely. Would the GDR have been likely to be able to continue within this economic framework? To me that is a political question. East Germany managed to dig itself out of economic holes at least twice in its short history, just after the war (when it was still the Soviet Zone of Occupation) and in 1961 (when they built the Berlin Wall). I’d argue that this time round, given more responsibility and power, the East German people would be willing to put in the effort to turn their economy round.

A footnote: Figures based on statistics from the Bundesbeauftragte für die Stasi Unterlagen and the Bundesministerium für innerdeutsche Beziehungen