In the 1960’s The New Economic System was introduced which replaced production quotas for factories with new targets designed to measure efficiency and profit. There was increased investment in automation and a drive for improved technology, but yet again production levels, after an initial rise, began to fall and the scheme was scrapped when Erich Honnecker came to power in the early 1970’s. Honnecker felt that East Germany should concentrate on its own national interests rather than try to compete with the West and began a ‘nationality’ programme.
During the oil crises of the 70’s, which West Germany had countered so effectively, the East Germans switched to soft brown coal and nuclear power to provide their main energy sources with disastrous effects on the environment. The Communist hope that ‘Made in East Germany’ would have exactly the same connotations as ‘made in Germany’ had become laughable and instead only stood for inefficiency, incompetence and ideological failure and shame.
But it was not with a sense of shame that the East Germans tuned into West German TV each night just envy for a standard of living that was beyond them and anger at a regime that had denied them the opportunities of their twin across the border. A 1990 EC bulletin noted that the economic structures of the GDR had “changed relatively little over the past few decades”. Output per worker in the GDR was on average a third of that of equivalent workers in the FRG due mainly to centralized bureaucratic planning, lack of incentives and little or no investment in technology.
In the West energy production was safe and cleaner ways of producing energy were being developed. The east relied on its old soft coal burning power stations whose highly polluting smoke accounted for the destruction of 25% of the trees and wildlife in the surrounding areas, and Nuclear Power stations, which were, as one might expect, below western safety standards. The chemical industry, an area in which West Germany had excelled with, had changed little in GDR since 1939.
The textile industry too was operating in much the same fashion as it had done before the outbreak of war and was virtually unautomated and hence no match for the newly industrialised nations in the Far East. The car and truck industry, an area of great economic importance in most countries was of nominal significance in the GDR. Food production was of poor quality and of little variety. The telecommunications network was completely antiquated and needed total modernisation. In fact in 1991 it was still virtually impossible to dail from west Berlin to a number in East Berlin.
The sewerage system needed to be rebuilt as only half of the system was connected to purification plants and safe driking water was scarce. In the GDR the roads needed massive investment if they were to cope with the increase in car ownership and subsequent heavier traffic. The EC Bulletin highlighted infrastructural and environmental problems as being “a major impediment to private investment”. This then was the truth behind the East German myth and politicians and business leaders faced an almost impossible task of intergrating an ailing command economy into one of the most successful post war market economies in the world.
Politicions soon had to rethink their earlier optimisim over the ease to merge the two economies. And more importantly their promise to voters that the cost unification and reconstruction of the East could be borne without any increase in taxation. In an interview with the Financial Times in April of 1990 – election year, Chancellor Kohl was cheerfully optimistic. “We will not have to increase taxes. This is not a reasonable policy. We will have to spread our expenditure over a longer period”. Only 30. 8% of Germans actually believed this. By mid 1991 DM150 billion had already been spent by the FRG and new taxes had to be introduced.
Kohl lost considerable popolus support by this miscalculation and in the regional elections in his homeland of Rhineland-Palatinate a 44 year association with the CDU was broken by a victory by the Social Democrats. In another naive decision Kohl believed that the East German recovery would, in much the same way as the West German experience 40 years previously, be demand led and that an increase in consumerism would ultimately lead to higher productivity. He was wrong as the East Germans did not behave as the West German counterparts had.
More positive action was needed and this came with the formation of the Treuhandanstalt, a holding company, in February 1990. Under the leadership of its chairman, the SPD Western Economist Detlev Rohwedder it embarked on a quite ruthless programme of privatising East Germany’s industries in an effort to combine profits and full employment. The plan was that a third of East Germany’s 8,000 larger companies would be privatised as soon as possible, a further third would be privatised after a period of heavy investment and restructuring. It was assumed that the rest would become casualties and close down.
After a few costly annd scandalous mistakes in its early days such as the giveaway of the lightbulb manufacturer – NARVA; and the needless ruination of such companies as the state airline, Interflug, which fearful of creating a monopoly Rohwedder prohibited Lufthansa from investring in. The Treuhand soon became known as a job killer with unemployment spirralling out of control. With tens of thousands of East German workers finding themselves out of a job, with little prospect of finding another civil unrest rose. Rohwedder met an early death at the hands of the Red Army Faction.
He was replaced by Lower Saxony’s finance minister, Birgit Breull , although she enjoyed a reputation as a hard liner and a devout believer in the free market the Treuhand’s plan changed subtly but importantly, it now recognised the importance of preserving East Germany’s four main industries,- Chemicals, Textiles, Shipbuilding, and Micro Electronics to provide crucial employment within the five new Lander. Emphasis now shifted to reconstruction and West Germany had to face up to the cost of this, which some estimates have put in the region of DM 400 Billion.