EPORT
USSRp^^OJS OF- EAST GERMANY
OA HISTORICAL REVIEW PROGRAM RELEASE AS SANITIZED
DIRECTORATE OF INTELLIGENCE Office of 'Research and Reports
KSRJORD
The economic Interest of the USSR ln Bast Germany Is subordinate to the main Soviet objective ofoiceif possible, the deciding voicen settling the future of Germany. Control over tho land, labor, and Industrial capacity of East Germany is an important strategic asset to the USSR. An independent East Germany thus wouldalpable subtraction from Soviet strategic power, and an East Germany Integrated Into the Federal Republic wouldtill further change in tbe strategic balance. This report does not consider the political andaspectshange In the status of East Germany or the terms on whichhange could be negotiated. Rather, the report describes the nature of the economic stake the USSR has in East Germany and the extent to which its purely economic interests might be Jeopardizedhange In East Germany's position. Among the topics considered are the degree of Soviet exploitation of the East German economy; the size,and terms of trade between the two countries; and the extent to which each country could adjust to marked changes in this trade.
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Summary and
I*
II- Economic Advantages to the USSR Remaining
from the Postwar
German Support of Soviet
of the Uranium
HI- Advantages to the USSR from
A. Scope and Character of Trade
Soviet Exports
Soviet
B- Terms of
Soviet Loss from the Reorientation of East
German Trade
TV. The East German Economy and the Balance of Power
Appendixes
Appendix A. Bibliographical Kotes on Soviet Price
Appendix B. Sources of Estimates
Tables
1, Commodity Composition ofast German Trade,
Selected
Composition of Soviet Exports to East Germany,
Composition of Soviet Imports from Rase
Ccnnany,
ECOKOMIC INTEREST OS? THE USSR IK CONTROL OP EAST GERMANY*
Sumir.sry and Conclusions
In purely economic terms the USSR stands to lose little from giving up control of East Germany. ast German trade, the largest in the Communist world, probably would declineoliticalon Germany. ecline, however, and accompanying changes in terms of trade and commodity composition would involve little or no net economic loss to the USSR. Foreign trade is of marginal importance to the Soviet economy, and most of it Involves only small gains per unit traded. Under the conditionsolitical settlement on Germany, the USSR could readily make the necessary economic adjustments at little cost, mainly by shifting from the production of certain goods now taken by East Germany to the production of substitutes for some goods now imported from East Germany. Under any such settlement, however, the Soviet government probably would insist on retaining control of the East German uranium mines until they arc exhausted.
Systematic Soviet exploitation of the East German economy ended ln thes. By the end6 the USSR had renounced most of its claims on the East German economy, enterprises seized after World War II had been returned to East German hands (except for the uraniumnd Soviet advisers hud been withdrawn from East German economic organizations. East Germany had been relieved of the burden of paying reparations, and occupation costs had been reduced, although payment was not discontinued Finally, the Soviet government had agreed to East German demands for fair pricing in foreign trade.
In recent years the Soviet presence in East Germany has hadmall impact on the East Gorman economythrough the requirements levied by Soviet forces in East Germany and by the Soviet-controlled uranium raining corporation. Soviet forces stationed in East Germany are partly supplied from local sources, at unfavorable prices for East Germany, but the Soviet gain is not large. Tne uranium mines supply the USSR annually with ores and concentrates containingetric tons (mt) of recoverable uranium metal, about one-fourth of the current Soviet supply from all sources. Proved reserves are believed to be enough to continue production intos. The costo of mining uranium in East Germany are high, and the USSRigh price by world standards even though the Soviet puymcnt may not cover the entire cost to East Germany. the USSR probably intends to retain control of the uranium mines until they are exhausted.
Trade turnover (exports.plus imports) between the USSR and East Germany now amounts to nearlyillion annually. The USSR fills the greater part of East German deficiencies in raw materialschiefly fuels, metals, wood, textile fibers, and foodstuffs. In return, East Germany sends the
* The estimates and conclusions in this report represent the best judgment of this Office as Of
ide range of manufactured goodschiefly machinery andtextiles and clothing, and furniture and domestic appliances.
Prices inast German trade are negotiated on the basis of Western priceorld market prices"). The prices do not reflect the relative bargaining power of the two sides, for the USSR probably could insist on much more favorable terms and in fact did so until thes. At the same time, however, the terms of trade are more favorable to the USSR than it can obtain in Western markets. Both the USSR and East Germany face various handicaps in trading with the Westincluding tariffs (which greatly affect East German exports to Western Europe and the Britishigher transport costs (especially important for Soviet bulknd Communist methods of doing business. Communist countries still tend to trade to fill specific needs and thus are rarely able to maximize returns froa exports. Moreover, they have not as yet developed stable markets in the West. esult, Soviet and East German prices. basis) to the West now averageercent below prices for comparable products Inast German trade.
If the size and composition ofast German trade were to change becausehange in. the status of East Germany, the effect on the two economies would depend on the nature and speed of the transition. In general, the transition wouldreater problem to East Germany, if only because the volume of tradeuch larger fraction of its economic activity. egotiated settlement on Germany, it may be assumed that no obstacles would be placed in the way of Soviet-German trade,onsiderable volume of the present trade would continuehe import of certain kinds of Soviet raw materials by East Germany In return for those kinds of machinery most useful to the USSR. This sort of trade would continue to make economic sense, especially in the short run, when the USSR would be hard put to market great new quantities of row materials in the West and the East Germans would bc hard put to meet the quality standards of Western markets for machinery and manufactured goods. Over the longer run the two economies probably would find alternative markets or would replace former imports by shifting resources in the domestic economy. For example, Soviet exports of crude oil and eteel to East Germany probably would continue to expand, whereas exports of grain, nonferrous metals, and wool probably would fall off, to mention the most obvious eases. East Germany would eventually discontinue the production of many lines of heavy muchinery now sold only to the USSR and other countries of the Soviet Bloc* In general, aportion ofast German trade would survive on the basis of economic advantageith appropriate adjustments in prices, quantities, specifications, and the likeand the remainder would fall away as attractive alternative opportunities presented themselves.
* The term Soviet Bloc as used in this report refers to the USSR and the Eastern European Communist countriesBulgaria, Czechoslovakia, East Germany, Hunfiary, Poland, and Rumania.
The extent of these adjustments would depend partly on whether East Germany was absorbedeunified Germany oreparate entity. The loss to the USSR would depend on the net effect of some worsening in the termseduced volume of trade,ecidedln the cccmodity composition of trade, and of some loss in efficlenej through shifting Soviot resources from the production of exports to East Gerir*ny to the production of impart substitutes. Tn the case of complete German reunification, the net effect probably wouldmall loss to the USSR. If East Germanyeparate entity. It Is unlikely that the USSR would suffer any purely economic loss from giving upof East Germany.
The USSR would also take East German economic resources into account in evaluating the strategic Importance of control over East Germany. The East G'-rman economy has made little direct contribution to Soviet strength in the cold war. East Germany has played an important role in Soviet plans for economic collaboration among the countries of Eastern Europe, but lt is no longer likely that the Soviet government haa any great hopes of carrying out these plans.
Of more immediate interest to tho USSR is the East German economic aid program in less developed areas of the Free World. ast Germany did very little ln this field, much less than either Poland or Czechoslovakia. Since the beginningk, however. East Germany haa extended0 million in new credits to less developed countrieo, chiefly to Egypt, Indonesia, and Ceyloo,rive to acquirerecognition.
Probably the most significant measure of the strategic importance of East German economic resources is what they would add to the strength of West Germany in case of German reunification. The national product of East Germany Is only Just overercent of that of West Germany, but the population Is almostercent, and East German laborwould doubtless rise in case of reunification. The addition of East German resources would thus greatly strengthen the West German economy, already the recond largest In Europe.
I. Introduction
The problem posed in this report Is to assess tbe economic interest of the USSB in the control of Bast Germany. Open Soviet exploitation of the East German economy haa given wayusinesslike relationship, almost as If between equals. East Germany Isoviethowever, and the USSB still retains certain special rights, associated with maintaining Soviet forces in East Germany ond with the management of the uranium mines. arge trade has grown up between the USSR and East Germany.
The problem of assessing the Soviet Interest in these economic relation' ships is posed here in the contextolitical settlement on Germany. Any settlement clearly would affect allast German relationships. There are variousettlement might, for example, provide for the reunification of Germany, orfederation" of some kind between East and West Germany, or again for the political independenceIn the Freeeparate East German state. Some sort ofseems the moot likely solution.
But it lo not in the terms of reference of this report to select or exclude any particular basis for settlementthe entire range ofis considered. It is assumed, however, as in the nature of things,egotiated solution of the German question would not produce any sudden, abrupt changes in the otatus quo butradual transition, perhaps in singes, lt is also assumed that tho USSR would receiveof free access to the East German (or German) markethat it would te granted most-favored-nation treatment and freedom fron quotas or other direct trade or financial restrictions.
In order toertain concreteness to the analysis, the present economic relationships between the USSR and East Germany are taken as the point of departure, and the data used belong to the recent (or, ln some cases, the not-so-recent) past. This approach, although static, seems more realistic thun attempting to project the situationuture Inerman settlement might he more likely than at present.
The point of view in analyzing the Soviet economic interest ln East Germany is essentially thatestern economist looking at the facts as he sees then. Soviet conclusions obviously would be Influenced not only by overriding political considerations but alsoifferent approach to economic analysis as well as by the vested interests of the Soviet economic apparatus. 8uch factors are not token up In the following discussion.
The discussion is divided into three parts. The first dealo with the ecanonic prerogatives enjoyed tyfJtU Ui Hat Mtaany aa tho occupying power. The USSR has surrendered most cf these. The East Germans, however, still contributenail way to tbe support of Soviet forces in Bast Germany, und tho USSR retains control of the important uranium mines ln the Erzgcbirge.
r*s> V
The second part of the discussion is devoted to the question of Soviet gains from trade with East Germany. The volume and commodity composition ond the terms of trade are analyzed to determine the extent of Soviet gains from trude with East Germany and of possible Soviet lossesesultolitical settlement on Germany.
The third part of the discussion considers the importance of East Germany in the balance of power, using economic Indicatorseasure. olitical settlement on Germany would involve an important shift in the balance of power, as indicated by the economic weighteunified Germany, which doubtless would seek toore independent role in European affairs.*
11. Economic Advantages to the USSR Remaining from the Postwar Occupation
The USSR has given up most of the economic advantages that went with the occupation of the Soviet Zone of Germany and the Soviet-administered sector of Berlin. The balance that East Germany owed on the reparations account was canceled as of the end At the same time the Soviet government promised to turn over the control of the last of the enterprises seized after the warexcept for the urunlura mines. The East Germans took over control of these enterprisesnd finished paying for them. East German payments for occupation costs were reduced8 and were finally discontinued beginning
The Soviet presence in East Germany is now used for maintaining Soviet strategic interests, not for exploiting the East German economy. of the Soviet forces in East Germany and operation of the uranium mines are the only remaining aspects of the Soviet presence having any economic importance. The East Germans reportedly ure paid in both cases for the goods and services furnished, but not enough to cover the cost fully.
German Support of Soviet Forces
The Soviet forces In East Germany, now numbering, depend partly on local sources for the following items: food and other consumer goods; coal and POL; supplies for repair shops;ariety of services, including construction, transport and communications, and housing. Judging from data for theS, the value Of these goods und services amounts to well0ear (US wholesale prices). The Soviet forces pay for these goods and services at East German wholesale prices (excluding turnoverhich do not fully cover the cost to East Germany.
of the Uruniutq Mines
According to current US estimates, the annual shipment of uranium ores and concentrates from Fast Germany to the USSRhe entire output of the East German uranium minescontainst of recoverable
The basis of the estimates Is discussed briefly in Appendix B.
uranium metal. East German output leveled oil" at this amount7airly steady lncreaae for several years. This productionabout one-fourth of total Soviet supplies from current output, and the USSR has an obvious Interest ln retaining control of the mines.
East German uranium miningigh-cost Industry. Huge amounts of ore must be mined, moved, and processed to obtaint of uranium metal. Costs vcrc ouch reduced durings. Labor-saving machinery was installed, and employment droppedeak of moren thes0 or leco ln thea. If the costs are convertedealistic basis, however, they would still have been on the order0 million0 and may have increased to some extent since then. The current costs thus run at somewhut moreer kilogram of uranium, much higher than coats in the US or Canada.
The question aust be left open whether the USSR Is paying only pert or all of the cost of exploiting the uranium mines. Official East German statements have implied that the USSR would thereafter bear half the cost directly and vould reimburse the East Germans for the other half. The only known Soviet payments to Eaot Germany for uranium are those carried In official tradehich in fact have run at about one-half of estimated costs (declining6 million76 million0 and thereafter rising to flM million. On the average, these payments came toilogram of uranium.
lt ls believed that the USSR intends to retain control of the East German uranium mines until they are exhausted. The proved reserves sre probably enough to continue production intos. Apart from the Inportoncc that the Soviet government attaches to increasing its uranium stocks, thereresumption that the Soviet leadership ulso considers it important to deny the uranium resources to any future German government.
III. Advantages to the USSR fror. Trade
A. Scope and Character of Trade
Soviet trade with East Germany, beginningery low level after world Mar II, expanded rapidly through moit of the postwar period. , turnover (trade In both directions) was aboutimen what it had been The nominal value of exports and imports together wan8 billion* and should rise to almostillion" The trade
* Secndbelow. ** Based on data ln current pricn, adjusted for changes in the nominal value of the clearing ruble. (Official statements fail to allow for the change in the nominal value of the ruble) The net change in prices0 is not large: 0ccording to Soviet calculations, thereet increaseercent In thw prices of Soviet exportset increaseercent In the prices of Soviet
porta.
Converted from Soviet statistics at the official exchangeuble.
of the US with Ita principal trading partnersomparison which ls meaningful even though the above estimates mayast German trade. US trade with Canada ls more than three timesast German trade, US trade with Japan is somewhat larger, and US trade with the UK and West Germanyittle smaller. With these exceptions, trade between the USSR and East Germany is now substantially larger than the trade between any other two countries in tbe world.
ast German trade is so large because the USSR supplies most of the deficiencies of East Germany ln minerals and metals and ln agricultural and forestry products. The USSR also supplies East Germany with military end items. In return the USSR imports East German machinery and equipment and consumer goods. East Germany is the leading supplier of machinery and equipment to the USSR, with the value amounting to more0 million annually. East German technology has fallen behind that of the industrial We6t, and East Germany could not sell in the world market much of what the USSR accepts. East German machinery meets Soviet requirements, however, and the sudden loss of Importa from East Germany vould cause difficulties in the Soviet investment program. uBsary of the distribution, by major commodity group, ofast German trade in selected years, beginningee
1. Soviet Exports
East Germany is heavily dependent on trade, even more so than the otherCoccunist countries of Eastern Europe. This dependence results ih part from deficiencies in resources. East Germany has little bituminous cool, almost none of lt suitable for makingcoke; scarcely any proved reserves of petroleum, although there arc hopes of discovering major oil deposits offshore in the Baltic; and only very limited, low-grade resources in ferrous metals. All the cotton und much of the wool used in the country must be imported. Large imports of wood and wood products arc also necessary. East German dependence on imports has risen because of Industrial growth and the accceipanying rise in the standard of livingwhich have reduced the supply of labor ln the countryside and increased the domestic demand for foodand also because of insistence on agricultural collectivitation, which has resulted in gross inefficiency. East Germany now Imports perhaps one-fourth of its roodstuffa.
The USSRarge port of East German deficiencies in raw materials and foodstuffs. East Germany's reliance on Soviet deliveries is indicated by the figureselow, which show the share of Soviet deliveries in East German imports and ln total East
-"rviiif-:;
Soviet Deliverlee
Soviet Dollverle*
9
coal
steel
coka**
oil
phoapftatcn-""
i
ore
Iron
a
The flgurno In parentheses include Polish coal delivered on Jloviet account. MoBt of tho Soviet coke le or metallurgical grade. Kant Gorman brown coal coko la excluded.
"* Data PhOBpbate rock (apatite) le uoed to make fertiliter.
t Only lumber nhlpnentv are Included here. If Soviet deliveries of raw timberaddedomparablehe shares would be hlgberell over Uo percent of the total Kast German supply.
Theseew other such commodities, together with military end Itemsfor which the USSR isajor source of supplyake up the greater part of Soviet deliveries to East Germany, as indicated by thebreakdown In Table 2.
Soviet exports to East Germany, although large, generallyery small share of Soviet output. The only types offor which exports to Bast Germany3 amounted to moreercent of Soviet output are textile fibers and nonferrous metals. For these, Soviet exports to East Germany ranercent of Soviet output. The USSR does not in any sense depend, however, on East Germanyarket for these commodities; on the contrary, the USSR is an importer as well au an exporter of oost textile fibers and nonferrous metals. For two of theso commodities, wool and copper, Soviet Imports (which come Largely from the West) are greater than total Soviet exports (which go largely to the Soviet Bloc).
Tho extent of East German reliance on Soviot Importsirect result of Soviet control of East Germany. From the beginning of the Soviet occupationast Germany was cut off from ito main Bource of raw materials and its principal market. The area had always depended heavily on imports from the rest of Germany, which had accounted for more than one-half of its total external trade before World War II. If the postwar East German economy was to get back into operation, the USSR had to supply the greater part of its material deficiencies.
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Table :
Commodity Composition Ofast Genr.ar. Trade a/ Selected
Percent cf Ibtal
Sovl^-Exports
i
and equipment b/
metals, chemicals, building materials, and raw naterlale for light industry c/
d/ Consumer gcods (excluding
1?
8*J
1
L
1
end items e/
ores end concentrates f/
-o
f.O
cd
CO
trade, excluding reparations deliveries, deliveries in payment of occupation costs, and the like' TheTor commodity. the border of the exporting country. The breakdovn is based on East German3 and Soviet published data Tests for the, which arebotb aets of data, 8hov quite close agreement. Coverage varies fron year to year, and Uie significance of thefigures differs accordingly. Because of rounding, components may not add to the totals shovn.
munitions.
exclude uranium; cheaicala include fertilizers and rubber.
include rav materials; consumer goods Include aeaiifabricates but not rav materials. Soviet imports ininclude sccc foodstuffs. Soviet exports0s later, are virtually all foodstuffs.
estlnate for military end itemsesidual in Soviet exports, closely corresponding to the differencetotals in Soviet and East German data.
for uranium deliveries, first included in conmerclal tradeepresent the amount of the SovietEast Germany, ostensibly to cover the East Gersan share of coata of the uranium mines (aee p.bove).
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Table 2
Commodity Composition of Soviet Exports to East Germany a/
US $Total
Machinery and
Solid
Petroleum and petroleum
Metals and metal
Iron
Pig
Rolled steel and rolled steel
Nonferroue metals and metal
Nonmetallic minerals, chemicals, and
buildingand forestry products, food
products, and light industry
Textile rav materials and semifinished
Timber, lumber, and wood
ft
Meat and dairy
Other agricultural and food
Other light industry
Military end items
C. 'J
are from published Soviet foreign trade statistics andthe Soviet border. Because of rounding, coaponents may notthe totals shown.
from clearing rubles. As Indicated belowhey correspond roughly to the figures that would bevaluing the commodities at "world market prices*"
nonitemized residual which may also cover other shipments ofcharacter (for example, atomiche residualwith the difference between the total as shown in Sovietthat shown in East German statistics- The average residuals correspondseported figure for Soviet munitionsEast Germany during the period.
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Soviet deliveries beganow level in tho early postwar years and, measured by East German needs, were altogether inadequate. To be sure, they rose rapidly. till more rapid Increase, however, would have been to the advantage of East Germany, which could have used and paid for larger Soviet deliveries throughouts. The East Germans would thus have been enabled to avoid developing high-cost domestic resources. The Soviet loaders, on the other hand, evidently believed that it was to their advantage to draw the line far short of what East Germany could use. Presumably, they thought that the USSB would benefit more from keeping the additional materialsor from diverting to other uses the capital and labor needed to produce themhan from getting the additional machinery and equipment and other manufactures that East Germany could have supplied. This view doubtless was based more on habitual autarkic thinking thantrictly economic calculation of alternative benefits to the Soviet economy.
Comparisons with prewar trade levels indicate the extent of the readjustments made by East Germany. It Is only ln recent years that Soviet steel deliveries have reached the level of prewar imports from the Ruhr valley. Soviet coal deliveries, even including Polish coal delivered on Soviet account, have never reached that level. Total Soviet -East German trade is still below the prewar level of East German trade with the rest of the Reich (valued at comparable prices). Soviet deliveries, nevertheless, have furnished the main basis of East German economic recovery and growth.
2. Soviet Imports
Soviet laports from East Germany are dominated by machinery and equipment, light industry products, and uranium ore.* East Germany ls the leading supplier of machinery and equipment to the USSR, with deliveries amounting to more0 millionwhich, however, make upercent of total Soviet supplies of engineering products for sale outside the engineering industry,** Moreover, Soviet imports are spreadide range of products, as shownreakdown inf Soviet imports from East Germany There areouple of cases (forging equipment and presses and food industry equipment) ln which the deliveries, et the level of aggregation shown in Tablemount to more
* The special case of uranium ores and concentrates, considered above. Is not discussed under this heading.
** Based on the estimate of Michael Boretsky of the value of Sovietoutput (Joint Economic Committee, Dlncnsiona of Sovietf). Boretsky considers his estimates to be somewhat on the high side, although they are much lover than those of Tarn and Campbell. (See Alexander Tarn and Robert W. Campbell,omparison. and Soviet Industrialmerican Economic Review,lso Alexander Tarn, "Dollar Value of Soviet Industrial Productionhe Review of Economics and Stallutlcs, No. ft,ft, pp.
-
ercent of total Soviet supplies. In still more narrowly defined groups, East Germany contributedarger share of the total Soviet supplyumber of products, but onlyery few cases (the most important are presses, industrial refrigerating equipment, rolling mill equipment, railroad passenger cars, and fishing ships) was the share more thanercent of Soviet supplies. In such cases. East German deliveries to the USSR invariablyarge share of East German output.
Short-term considerations also have largely determined the composition of Soviet imports. In the early postwar period, East German heavy Industry was rebuilt and, in some cases, expanded specifically to meet Soviet reparations requirements. After reparations were ended, Soviet representatives became more selective in choosing imports. It was understood on both sides, however, that they had to order enough goods of some kind to pay for the materials being furnished to East Germany. The lack of suitable East German goods could not be allowed to affect the overall level of deliveries to East Germany, which must increase in order to assure the steady growth of East German output. Here, as in other cases, political considerations greatly influenced Soviet trade policy, leading to an expansion of trade beyond what the USSR probably would have undertaken on purely economic grounds. esult. East German industry continued to have an assured, protected market in the USSR (and elsewhere among the Communistt therefore followed the line of least resistance and expanded output in the industries built under Soviet control. Because of the lag ln East German recovery, there was substantial unused manufacturing capacitylargely dating from before World War IIand substantial increases in output across the board were made with little additional investment, simply by using more materials and labor. It was only, mainlyesult of the growing labor shortage, that further increases became difficult.
This shortsighted policy has left East Germany producing far tooange of manufacturesespecially of machinery and equipment, which, according to East German estimates, wereercent of the total range of products on the market. Much of this output is obsolescent by world standardscustomers have long criticized East German products. East German authorities themselves have acknowledged this fact, as pari of an educational campaign to convince management of the need for They were especially frank, when the regime wasplanning to "overtake and surpass" West Germany: they then admitted thatraction of East German output met world standardsfor example, one-half of the machine tools produced, less than one-third of the textile machinery, and only one-fifth of all machinery. Since the adoption of new, more realistic goals, other admissions have been made in announcing improvements. For example, the share of electrical machinery accepted as fully meeting world standardsy East German judgmentroseercent?ercent Ulbricht has recently complained that in agricultural machinery East Germanyears behind the West. Foreign observers have also continued to note
Table 3
Comnodlty Composition of Soviet Imports from East Germany
Machinery and equipment
Metalcutting tools
Forging equipment and presses
Pover equipment
Electrical equlpaent
Mining and metallurgical equipnent
toisting and conveyor equipnent
Pood induetry equipment
Light Industry equipment
Cheaical industry equipment
Construction and excavating equipnent
Business aachinery
Agricultural aachinery
Precision instruments and equipnent
Railroad rolling stock
Ships nnd aarlne equipment
Other
Petroleum products Pipe
Wire and cable ChcmicaLs Building natcrlals
Textile raw materials and foodstuffs Light industry products
Textiles
Clothing
Wood furniture
Cultural and household goods
Other
Urnriiun oros and concentrates c/
/)
j:
I* 26
c
23
Pit
X 21
5 fi-
ll 8
VA
of Total
)
li
a. Data arc from published Soviet foreign trade statistics and. tlie Rast Gernan border. Because of rounding, components may not odd to the totals shown. 0- Converted from clearing rubles. As indicated bclovf. and Table these figures correspond roughly to those that would be obtained by valuing the COninOdities at "vorld market prices."
c. onitemleed residual in Soviet imports rroai East Germany. Tbe amount agrees closely vith the nonltenlBod residual in all Soviet inporta of "metallic ores and concentrates" and with the residual in total East German exports. For eoae earlier years the residual io the East German statistics con be located specifically in the category of raw materials. One defectorrovided direct evidence on the amount of the Soviet payment.
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such deficiencies. The latest exampleeportS visitor at this year's spring fair in Leipzig, vho found that the Bast German data-processing equipment on display was entirely obsolete by US standards.
East Germany thus contributes very little to Soviet technology. At the same time, however. East German goods are generally quite acceptable by Soviet standards. Bast German deliveries contribute significantlyreat many Soviet investment projects. If suddenly deprived of East German machinery and equipment, the USSR would have to cut back or phase out most of these projects, because it would be unable to replace these goods on short notice either from domestic production or by imports from other sources.
ontingency, however, is not at all likely. Insulation from the market has left East German industryonvictong sentenceunsuitedompetitive environment. In the short run. East Germany is heavily dependent on Soviet patronage, and the USSR is in turn obliged to support the captive industries of East Germany in order to avoid serious dislocations, with the political risks that would he involved. The commodity composition of East German deliveries reflects this involvement. The largest Soviet imports are from East German industries for which the USSR is the principal market. About two-thirds of the final output of ships and of railroad rolling stock in East Germany is exported, largely tp the USSR. The Soviet market also takes ashare of the East German output of various kinds of heavyequipment, including machine tools, forges and presses, rolling mills, and sugar refineries. Most other exports of these products go to customers in the Soviet Bloc or to underdeveloped areas; few are readily salable in Western Europe, except for machine tools.
Bast Germany doesariety of other kinds of machinery and equipment to the industrial West: the most important are business machinery, electrical equipment, textile and printing machinery, andequipment. East Germany, however, has hod difficulty in expanding sales of these products in the industrial West. The value of East German exports Of machinery and equipment to European NATO countries* did not increase6nd their share in total East German exports to European NATO countries declined steadily from abouto onlyercent.
R. Terms of Trade
In view of the captive status of East Germany and its economic dependence on the USSR, it would not have been hard for the latter to demand extremely favorable terms of trade from East Germanythat is, to practice price discrimination. The USSH has been accused of doing just that, yet in fact it has long given Fast Germany quite favorable
* Belgium, Denmark, France, West Germany, Greece, Italy, Luxembourg, the Netherlands, Norway, Portugal, Turkey, and the UK.
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terms of tradeterms that reflect, not the relative bargaining power of the two sides, hut their agreed conceptust price.
According to ComnuniBt claims and the other evidence that is available, trade agreements between the USSR and East Germany specify that prices will be based on recent world market prices for equivalent goods and services. Tn practice, prices are negotiated on the basis of quotations from major Western markets and Important Western European producers. This practice was adopted throughout the Soviet Bloc as an expeditious way of reaching agreement ln the absence of any suitable Soviet Bloc prices.
For most Soviet exports to East Germany, Western European market prices ere readily available. Producer prices in Western Europe serve very well for some commoditiesor example, coal, coke, iron ore, and pig iron. The price range on the Continent for the commodities mentioned is relatively narrowesult of the work of the European Coal and Steel Community. For many other important products there are in fact world market prices, as for various nonferrous metals and grains. The basic selling price in Western Europe (for example, on the London market) is often used as the starting point inast German negotiations.
Inasis for negotiation, allowances are made for differences in handling and transport costs from one market to another. The appropriate costs, running from abouto severalon, are added to the Western European price to. the East German border (or port). Prom this price are then subtracted the handling and transport charges from the USSR to East Germany, which average abouter ton, to obtain the. the Soviet border.
A good deal of work and some bargaining are involved In resolving problems of comparability, even for the relatively homogeneous products that the USSR sells to East Germany. The specifications of the Soviet products often differ from any of the usual specifications on the Western European market. For example, Soviet iron ore, with aboutercent iron contentigh sulfur content, differs from any ores traded In Western Europe.
Rapid changes in quoted prices also create problemsnprice fluctuations on commodity exchanges. Prices for Soviet goods shipped to East Germany inevitably lag behind changes In world market prices, generally byear, because trade is conducted at prices negotiated on the basis of the world market the year before. Tn the case of goodB for which Western prices can fluctuate rapidly, such us lead and zinc, prices in Bloc markets may be fixed for several, years.
Finally, there are apparently cases in which the Council for Mutual Economic Assistance (CEMA) has agreedrice significantly different from that in Western Europe. The only case so far identified
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is that of steel, which ie bought and sold in the CEMA market at prices well above those in Vestern Europe. The higher prices apply to steel sold by Poland and Czechoslovakia as well as by tbe USSR and to purchases by the USSR and other Soviet Bloc countries as well as by East Germany. Thia situation has worked chiefly to the disadvantage of East Germany, the largest net importer of steel.
Average unit prices of Soviet exports to East Germanyalues divided by quantitiesare compared inith readily available market prices in Western Europe. In drawing up the table an effort was made to select comparable Western ccssnodlties and to assure tbat quotations were In comparable terms. The prices vere not adjusted for differences in handling, insurance, and transport costs. The coverage is quiteercent of tho total value of Soviet deliveries and ulmostercent or the value of itemized deliveries excluding machinery and equipment. As given, the world market prices are clearly somewhat higher than Soviet export prices for commodities representing shout one-half of the total value of those listed in Table k. World market prices are clearly lower for about one-third of the value. For the otherthe differences are uncertain. So attempt has been made toet overall difference between Soviet delivery prices and Western European priceshe prices used aro not strictly comparable, thereertain price range ln the Western market, and the commodity eovsrage could be extended somewhat. The difference, however, is evidently quite smallcertainly small enough to corroborate the official claim that trade does take place at prices very near those on the world market.
For most products that the USSR imports from East Germany, especially for machinery and equipment, It Is much moreroblem toworld market price." Prices must be got from Individual producers: some products are priced in catalogues, but for many lt Is necessary to obtain information on Individual contracts along with technical specifications aad other special features. Including financial arrangements. Both tho USSR and East Germany supplement such information by eliciting offers from Western manufacturers for purposes of comparison.
Various sources ore available on which to baso estimates of the pri< of some types of deliverieschemicals and some consumer goods. Such dataseful Indication of pricing policy and are cited later In this report. It is desirable first, however, to make some effort to estimate the prices paid for East German machinery and equipment, which are so important ln East German deliveries to the USSR. Published tradeinclude hardly any meaningful duta on the capacity of machinery and equipment imported by tbe USSR, and ouch data at best areery rough Indicator of value. Classified information Is available on prices of specific deliveries of East German machinery end equipment and of other products. Some reports Include comparisons with Western prices, but such information is not plentiful. Otherwise, it is hard to find appropriate Western prices for comparison with East German quoted prices.
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Table h
'World Market Prices" Compared with Average Unit Values of Soviet Exports to East Geraany
Toe 2/
biiiinlnoiii coil
Cmda oil 1/
allIroe or* h/
Tit
Sail rial eh*4l/. ^/
itrtl j/ Coppar
S/
;j
0.8
ug
1.7
J.
1.6
Bsrsfsaft
?-rl ilry? S> Otherkaz Prls*
. Aruba)
,ke
at Garaany0 (Meat . '/
Seat Geraaay
for Algerian era)
export price, IX)
x-.f. Fkperta to Baat Carraa/ Aiaras* Itelt FrlcaoMer)
3
0
?
The problem nay be approached, hovever, by way of evidence relating average East German domestic prlceo to the average prices paid for East German exports to different markets. This evidence shows (for theery consistent pattern. The prices paid by the USSR werelower in relation to East German prices than those paid by other Soviet Bloc countries but were substantially higher than those paid by Western countries with the exception of West Germany. The relation between East German domestic prices and foreign trade prices was then about the same for exports to West Germany (with certains for exports to the USSR. This pattern le established for one year or another byfor total East German exports; for total exports of machinery and equipment; and for many commodities, including agricultural machinery, motor vehicles, machine tools, and chemicals.
As it happens, the characteristic differences among the foreign trade price/domestic price ratios for different markets are accentuated by the peculiarities of the Eaot German price structure because of wide variations in the commodity composition of exports from one market to another. Relative prices for manufocturcs in East Germany differ from those in the Western European market chieflyesult of indirect taxes and subsidies, although there are also some important differences incosts.
The peculiarities of the East German price structure, as applied to the difference in the commodity composition of exports to various markets,ignificant effect. In the case of machinery andthe most important group of exports, tentative estimates indicate that these factors alone would resultifference of moreetween the highest prices paid (by Soviet Bloc countries other than the USSR) and the lowest prices paid (by Western countries other than West Germany). The differences produced by these factors are probably much the same for the entire range of exports.
The characteristic price differentials for different markets, however, are much greater than and did not arise primarily from the peculiarities of the Eaot German domestic price structure. Even when Eaot German exports are revalued at Western European prices Tor purpoBeo of comparing returns from exports to different markets, thereide gap between tho prices that East Germany received from the Soviet Bloc countries and those that it received from the West. omparisonhown inor East German exports of machinery and equipment to various markets
This statement holds for East German exports to West Germany excluding brown coal briquets and synthetic fuels. For these products. West Germany has paid thenflated prices to East Gemany as to domestic Vest German producers- The West German governmentow refusing, however, to continue paying Inflated prices for East German synthetic fuels,as tbe subsidy to domestic producers has been discontinued.
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ICE Tel
Table 5
Relative Prices Paid for East German Machinery and Equipment in the USSR and Other9
Value (Million US S)
USSR
Eastern European
countries West Germany Other Western
countries
Total
Western
Foreign
y
of Values at Foreign Trade Prices
to Values atPrices
5
7
on published East German data except for the figure forwhich Is from official West German data.
from the values at foreign trade prices by means ofof coefficients. The first sot, representing the ratiosat foreign trade prices and values at domestic prices, ison factorshifted9 by foreign tradefor Czechoslovakia and Hungary. (Bast German domesticvery little6)
The second set, representing ratios between values at domestic prices and values at Western European prices, is based mainly on Stolper's estimates of value added9 in the engineering industries, automotive industries, electrical equipment industries, and precision machinery and optical industries. (See Wolfgang F. Stolpor, The Structure of the East German Economy, Cambridge,hese estimates,0 West German marks, are converted to estimates of output (including sales within the sector) by the use or West German factors. The estimates or output arc converted0 dollars by the mark/dollar ratio of investment goods (European mix) of Milton Gilbert and Henry B. Krovits (An International Coaparlson of national Products and the Purchasing ?Jwer of Currencies,. The estimates in dollars are then Inflated to put them9 prices by U3 pricefor the several types of equipment. The resulting estimates are compared with data for gross output In East German marks to obtainpower ratios, which ure then weighted for total exports andto each market to obtain the coefficients.
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From the comparison int appears that the USSR on the average paid East Germany prices that vere only slightly below those on the Western European market (the prices generally used as "world market prices" for machinery and equipment in trade negotiations among the Soviet Bloc countries). Actually, the prices are likely to have been more favorable than ia indicated ln Table 5 because the basis forEast German exports in Western European prices does not reflect fully the obsolescence of much of the East German output. The estimates rest on Wolfgang Stolper's estimates of East German output at West German priceB. Stolper was extremely thorough, but he waa unable to allow for qualitative factors. It is more likely that his estimates overstate than that they understate the purchasing power of the East German mark for machinery and equipment* It may be noted that they are consistentater East German estimate (by Alfred Neumann, head of the National Economic Council) comparing labor productivity in the East and West German metalworking industries. The East Germans are not given toEast German productivity.
Turning from the prices inast German trade to the prices that the USSR and East Germany receive from other partners, the most important fact is that they receive substantially less favorable terms of trade in the West, the principal market to which both would have to turn as an alternative. They tend to pay more for their importa from the West than they do to each other, but tho main difference is in the prices that they receive for exports to the West, which arelower than those that they receive from each other. The difference results froa various factorstariffs (mainly for East Germanfor which the rates areoercent in the Common Marketigher transportation costs (mainly for Soviet bulkand Communist methods of doing business. Both the USSR and Bast Germany still tend to trade to fill specific urgent needs and thus are rarely able to maximize returns from export. They have as yet failed to develop stable markets in the West for most of their goods. Finally, the East Germans do not maintain adequate foreign currency reserves for orderly trade.
The difference between the prices that the USSR and East Germany receive from each other and those that they receive in the West has been growing since thes. There are several possible reasons for this situation. For one thing, both countries have lagged in adapting the mix and specifications of their export goods to the rapidly changing market in the Free World. Another reason is the beginning of economic integration in Western Europe. Still another applies chiefly to Soviet exportsthe falling trend in world market prices for some of the important basic materials, such as petroleum and iron ore, for which prices have been kept relatively stable in trade among the Communist countries.
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esult, Soviet prices to Western Europe, which averaged onlyercent below those paid by East Germany7 (the first year in whichast German trade was really conducted at recent "world marketave fallen to aboutercent below those paid by East Germany, which (as shown in Table k) are still close to "world market prices."* Any such comparison relates, perforce, to those commodities that the USSB Bells to both East Germany and Western Europe and is heavily influenced by the prices for two or three of themsteel (especially using weights based on sales to East Germany) and lumber and petroleum (major weights in sales to Western Europe). The trend, however, has been much the same for most commodities. ew exceptions (such as wool and zinc) the prices obtained by the USSR in Western Europe have declined steadily, and more rapidly than world market prices,
The prices received by East Germany in the Westexcept in West Germany, where East German goods do not face tariffs but do face restrictive quotasare at leastercent below those received from the USSR. The prices paid for East German machinery and equipment9 by all Western countries except West Germany averaged aboutercent below those paid by the USSR, as shown in Table 5. The difference was probably about the same for exportshole. The East Germans themselves publicized data9 comparing the prices they receivedariety of items sold to Belgium, the Netherlands, and Austria with the average prices in those markets and the prices at which West German products sold in those markets. Of prices for someistedere betweenndercent below average price from otherere fromoercentand the other prices all fell more thanercent below the
9 the difference between the prices obtained by East Germany from the USSR and those obtained from Western customers hasto grow. l, one East German authority estimated that the prices received from Western Europeide range of products were fromoercent under the going Western European prices. An analysis of East German trade with the Common Market (excluding West Germany)3 indicates that East German terms of trade with the West have improved Slightly But the same appears to bc true also for East German terms of trade with the USSR. The only products forlear test can be made are chemical products. East Germany's most salable exports.3 the USSR was buying East German chemicals (including synthetic rubber and fertilizers) at prices averagingercent or more above the going prices in Western Europe. In the few cases in which comparable
* Calculations of average unit prices Of Soviet exports to various markets, based on Soviet trade statistics, have been made by Horst Mendershausennd by Frederic L. Pryorseeelow, and Appendix A, Bibliographical Notes). For purposes of the present report, Mendershausen's procedures were used to update the comparison
The procedure used here by the East Germans involves the computation of average unit prices from standard foreign trade data.
data are available for Soviet purchases fron Western Europe, the difference runs even greater. The prices at which East German chemicals were selling in Western Europe were onlyoercent below going prices as shown by foreign trade data for the Common Market and the Organization forCooperation and Development (OECD). The prices that East Germany received in Western Europe, however, were still aboutercent below those that it received from the USSR. Itair inference that the difference is probably at least as great for East German commodities less in demand.
From the above comparisons it follows that the USSR has not practiced
years. The Soviet government, that le, has not sought to exploit theweakness of East Germany, or even its economic dependence, lnon foreign trade prices, although the bargaining on specifics is stiff. The USSR has granted terms of trade much more favorable to East Germany than East Germany could have obtained in Western markets. The USSR, to be sure, has also enjoyed more favorable terms of trade with East Germany than with Western partners, but it has by no means maximized its gains in this respect.
A contrary impression ofast German terms of trade has been created by some Western writers on Soviet trade, particularly by Horst Mendershausen of the RAND Corporation. Hendershausen, who published the first detailed analysis of Soviet terms of trade vith the Eastern European Ccenounist countries, concluded that the USSR practiced systematic
Soviet exports lo these countries and to Western European couotrien. He calculated thathe USSR consistently obtained higher prices in the Soviet Bloc countries than in Western Europe. Some problems are Involved ln working vith average unit valueshiefly because entries for even fairly narrowly defined commodities do not necessarily represent homogeneous products and deliveries to tvo countries and thus may differ significantly in specifications and therefore in value. The results, however, are undoubtedly significant. The only real question relate* tc Mendershausen's explanation of the renults.
Mendershausen tried to apply Lhe same procedures to Soviet imports as velL. Here, too, he contended that Soviet price discrimination could be detected, although acknowledging that the commodity coverage vas much smaller and less representative, because meaningful average unit values generally cannot be obtained for machinery and equipment. Here, however, Mendershausen's findings are clearly of doubtful significance, particularly for East Germany. tudy of all available data, as shown above, leadsontrary conclusion, suggesting that the prices paid for East German goods were probably at least as high as those quoted fcr conparable poods
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The weakness of Mendershausen's argument rests not only on the use of inconclusiveond Indeed misleadingcomparisons of average unit values for Soviet imports but also on his failure to consider East Oerman as veil as Soviet alternatives. As pointed out in the present report, the East Germans in any case would have had to pay as much for Imports from tbe Vest as for Soviet materialsln fact, they often have to pay more and would hare been forced to accept much lower prices for their exportsf, indeed, they could have sold the same volume of goods In Western markets at any prices. The USSR, too, perennially finds that it is unable to market enough goods in the industrial West to pay for its Imports from this area. Hence it has bad to resort to large-scale sales of goldts major export commodity to this market ia recent years.
Most other writers have been more careful than Mendershausen and, accordingly, have received leso attention. Frederic Pryor, who later dealt with the subject at much greater length, ended by deciding that the data were simply not conclusive. Pryor, like Mendershausen, was concerned with the Eastern European Communist countriesroup, and hie work lo the most thorough that has been published.*
There ie information for othor Eastern European Ccanunistpointing to much the same conclusion as that reached here for East Germany. For both Czechoslovakia ond Hungary it is clear tbat the terms of trade with other Soviet Bloc countries are more favorable than the terms of trade with the Vest.**
C. Possible Soriet Loss from the Reorientation of East German Trade
A political settlement on Germany undoubtedly would affect Soviet -East German tradethe volume, the commodity composition, and the terms of trade. Far-reaching changes in the East German economy may be expected to uccoopany the reunification of Germany, although they would occureriod of several years and not all ot once. East German industry would become more competitive in Western markets, and dependence on the USSR would be much reduced. Even on independent East German state would to some extent reorient its economy In any case, there probably wouldubstantial increase in trade between East and West Germany, and the share of the USSR in East Cerman (or all-German) trade wouldrop in the absolute level of trade is possible,arge drop is at least conceivable although not very likely, given the longstanding German
* Inre listed, with brief comments, the main books and articles touching onast German terms of trade.
** Par Czechoslovakia, official indexes of the volume and value of foreign tradeharp deterioration in relative terms of trade with the Vest since the Communist takeover, before which there was probably little difference. Forimilar difference in the terms of trade is noted in Journal articles. Frederic Pryor (see Appendix A) has reached the some conclusions by analyzing trade data.
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interest in Soviet markets. Terms of trade and commodity composition would become more like those of the USSR with Western European countries, although bow for and bow fast such changes would go depends on theof tho settlement.
A sudden large reduction inast German trade would, of course, cause the USSR considerable transitional difficulties because Soviet industries normally produce at or near full capacity levels, but it can be assumed that an agreement involving East Germany would excludeevelopment. The shift ln East Gorman trade vould occur slowly, over several years, and the USSR consequently would have time to provide for it in long-term plans and to make the necessary changes in investments, output, and labor allocations. Economic plans would have to be modified to provide for smaller increases in Soviet output (or,ew cases, in planned imports from other sources) of various agricultural andproducts and some basic industrial materials. Somewhat larger increases in Soviet output (in certain cases, of imports from otherf machinery and equipment and of certain consumer goods would also be planned. Most of these changes would be smaller than those that have to be made every so often simplyesult of miscalculation.
Apart from transitional problems, which are excluded by assumption, lt Is unlikely thatarge reduction in the volume ofast German trade would cause the Soviet economy substantial losses. In large, diversified economies such as that of the USSR, foreign trade is of marginal importance and the bulk of it involves only small gainB per unit traded. The reason is that the factors of production formerly producing exports can be shifted to producing former Importsairly short timo without much loss of efficiency. The Soviet economy could produce the bulk of Soviet imports from East Germany without difficulty, some of these imports embody technology that is superior to Soviet technology, generally in equipment containing components of Western origin. The best-known example is East German chemical equipment, of which the USSR is planning toimports substantially in the next few years. Soviet technology, however, is generally equal or superior to East German technology, and most Soviet imports from East Germany, although meeting Soviet requirements for serviceability, do not embody technical innovations. The USSR also may import some East German products on which it obtains unusually large gains for some reason other than technological characteristics. Clearly, however, such products, together with those containing advanced technology, make upmall fraction of total Soviet imports from East Germany, and so the USSH could continue to import thco even if trade declined greatly.
Another reason for believing that the USSR's economic lossesarge reduction ofast German trade would be small is that the Soviet motivation for this trade is partly political. As explained earlier, the volume or trade is probably larger than the Soviet authorities would wish if they had no responsibility for East German economic development. Moreover, some Soviet exports to East Germany either are very scarce in the USSR (as grain has been in theears) or involve high andcoets of production (as in the case of iron ore).
- 27
Current Soviet gains froa trade vith East Germany result, of course, not only froa such differences as may exist in comparative costs but also from the terms of trade. It has been shovn earlier that, even though the USSR has not taken advantage of its strong bargaining positionis East Germany in the pricing of trade, it obtains significantly better terms on Its trade vith East Germany than on its trade vith the West. Prices of Soviet exports to the West arc aboutercent belov prices to East Germany, and prices of imports are slightly higher than the prices paid to East Germany, if the USSR tried to redirect to Western markets all or the bulk of the trade that it now transacts vith Bastlt would suffer an even greater loss in the terms of trade than is indicated by the static comparison because larger Soviet exports to aarkets would depress world market prices for some of these goods. This case, however, is totally unrealistic. If East Germany became part of the Western market, the USSR would treat Its trade with Bast Germany in the same way in which lt treats its trade with the industrial West generally. The volume of trade would drop greatly, and the composition of trade would change greatly. Some trade could be shifted to other countries of Eastern Europe, probably with little effect on the terms of trade. Even more of the trade would disappear, absorbed by Soviet domestic output. The small remaining part of tbe former trade with East Germany that the USSR would find It advantageous to continue transacting vith East Germany or with other Western countries probably would involve less favorable price terms than before for the USSR, butuch smaller volume.
In conclusion, the USSR probably wouldittle from the integration of the East German economy into the Western market. There probably would be some worsening in the termseduced volume ofecided improvement in the commodity composition of trade, and some small loss in efficiency In redirecting Soviet resources from exporting to East Germany to producing import substitutes.
The case Just examinedin which East Germany would be totally absorbed Into the Western marketis on extreme one. The case for assuming any Soviet economic loss in ita foreign tradeettlement involving East Germany io even weaker under other political assumptions. If, at the other extreme, East Germany were not absorbed into Wcot Germany but became an independent state, in order to maintain full employment it could ill afford in the short run to shut down any large nisober of plants.esult, it would remainime heavily dependent on its existing markets ln the USSR and other Soviet Bloc countries. In the longer term an independent Bast Germany undoubtedly wouldubstantial part of its trade to the Westarticularly to West Germany. West Germany and other Western countries would probably be eager, for political as well as economic reasons, to expand trade with the new state and doubtless would offer substantial credits. olitically neutral East Germany, however,trong bias toward central economic planning and an independent East Germany can hardly be imagined on otherrobably wouldargo trade with Eastern Europeasis for
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protecting its precarious independence. Under these circumstances the USSR would stand to lose very little if anything, economically, from East German independence. On the assumption that an independent East Germany wouldentrally planned economy, its competitive position In the world market, evenarge infusion of Western credits, would be likely to remain weak, as would its political position. Indeed, under any settlement in which East Germanyeparate entitywhether politically independent or federated with West GermanyEast Germanwould remain dependent on the Soviet government in order to maintain its separate existence. Under such circumstancee, it is hard to imagine that the USSR would suffer any purely economic loss in its foreign tradeesult of the change In the status of East Germany.
r, Euoi-jmy'u- Balance of Fever
from any tangible direct benefits that it provides the Soviet economy, Soviet control of East Germany is an economic factor in the balance of power in the postwar world. The econoaic resources of East Germanyelatively small addition to those of the Soviet Blochole. They are an important part of the resources of the tastern European area occupied by the USSR after World War II, however and they wouldreat deal to the resourceseunified Germany.
The national product and population of East Germany may be compared as follows with those of the Soviet Bloc, the USSR, the Eastern European Communist countries, and West Germany:
Gross Rational Product
at MarketPopulationU
East Germany Soviet Bloc
USSR
Eastern tturopean Communist
West Germany (including West Berlin)
301
EastRelative to Given Area
100
102
228
11'
21
100
Germany Relative to the Given Area (Percent)
IT
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Tbe East German contribution to Soviet Bloc activities in the cold vor Is less than proportional to Its econoaic weight, although lt has increased somewhat in recent years. The politically anomalous and strategically exposed position of the country is the main reason. atter of Soviet policy. East Germany has produced very little in tbe way of military end items or of other products with important military applications (ouch as advanced electronic equipment). The Fast German military establishment lo not large relative to theen ln uniform, including the militarized border police, comparedopulation ofillion. East German military expenditures have averaged lessercent of the national product, although they may nowlightly larger shareercent).
The Bast German contribution to Soviet Bloc aid to less developed areas, which was also relatively small until recently, has increased rapidly during the last year. Out of aboutillion of credits extended by the Soviet Bloc, Bast German credits represented onlyillion,ercent. Among the small Communist countries of Eastern Europe, both Czechoslovakia and Poland extended substantially larger credits than East Germany. From the beginningk to the present, however, the Eaot German aid program has expanded more rapidly than that of any other Eastern European country, with the extension of0 million ln new creditschiefly to Egypt, Indonesia, and Ceylon.
Eaot German resources alsoertain Importance in relation to economic collaboration among the Communist countries of Eastern Europe. Specialization among the members of CEMA isong-range objective of Soviet policy in spite of the generally discouraging results achieved to date. Specialization offers the prospect of achieving substantial economies of scale in production and of enabling the small Cccxiunlstto maintain successful research and development programs trytheir limited resources in specific fields. For such purpoaea it is more realistic to consider the size of CEKA excluding rather thanthe USSR (which Is not likely to enter into specialisationalthough Soviet rav materials and access to the Soviet market are key features of CEMA planning. The membership of East Germany, with almost one-fourth of the sum of the national products and more than one-fourth of the Industrial output of this area (the Soviet Bloc excluding the USSR) seems almost essential to tho future of CEMA. Substantial progress in intra-Bloc economic integration is not in sight, however, so that the Soviet leadership would certainly discount heavily the importance of any reduction in the long-term prospects for integration in considering the future of East Germany.
Another measure of East German resources, one that is unquestionably important to the USSR, is what they would add to West German resources in case of reunification. The West German national product is one-fourth of the sum of the national products of the European RAT0 members together, and the national producteunified Germany would beercent greater. ew years,robable rapid rise in the productivity
-
of East German labor after reunification, German national product would amount to almost one-third of the national products of all Western Europe and one-half of that of the USSR.
A settlement on Germany presupposes some basis for easing Soviet anxiety about Germany. The greater economic powereunified Germany would be one serious barrier to any such settlement.
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APPEKDIX A
BIBLICQRAPHICAL NOTES ON SOVIET PRICE DISCHIMIfJATZOfJ
Tbe following Western writers aro among those who have discussed at some length the terms of trade in Soviet trade with East Germany as well as other Communist countries of Eastern Europe:
Holzman, Frenklyn D. "Soviet Foreign Trade Pricing and the Question of Discrimination; Customs Unionhe Review of Economics and Statistics,o.. The occasion of thiswas the publication of an article by Horst Mendershausen, cited below. Holzman's point, as indicated by the title, is that comparative advantage within the Soviet Bloc, if used in determining prices, could lead to prices that would appear to be discriminatory on the basis of world market prices. (Holzman has alsoebuttal to an article on the some topic by A. Kutt, cited below.)
KUnkmueller, Erich. Die gegenwaertige Aussenhandelsverflechtung der sowjetischen Besatzungsr.one Deutschland, (West) Klink-mueller, who is on the staff of the Ost-Europa Institut (attached to the Free University Inives an overall view of East German foreign trade. He believes that the terms of trade inast German foreign trade were much in favor of the USSRhen thereubstantial improvement ln favor of East Germany.
Kohler, Heinz. East Germany's Economic Integration into the.Bloc (reprinted fromissertation, University of The author deals with overall East German terms of tradeinding that, for commercial trade, thereore or less random up-and-down movement from year to year with little net change over the entire period. He does not attempt to decide the question of Soviet exploitation in commercial trade with East Germany.
Kutt, Aleksonder. "Exploitation in Soviet Blocast Europe,o.P- The author's studies, carried on under the auspices of the Assembly of Captive European Nations,ontinuation of Mendershausen's (see below). To Mendershausen's calculationse adds calculations ovel feature is that, theof Soviet "price discrimination" are stated in terms Of an absolute loss to the Eastern European Communist countries.
Mendershausen, Horst. "The Terms or Soviet-Satellite Trade; he Review of Economics and Statistics.o.also availableeparate publication of the,. Mendershausen'S position, as given in this and earlier papers, is discussed ln the text of this report.
-
Pryor, The Communist Foreign Trade_ System, Cambridge, Pryor's work, revised from his dissertation at Yale,rovocative and learned study. He draws heavily on East German sources ao well as on Soviet Bloc sources generally. Pryor finds that the Bloc countries all received more favorable terms of trade from each other than from Western countries. He also finds that the USSR discriminated against the European Satelliteslthough least of all against East Germany. Like Klinkmueller, he points out that increased pressure was put on the Soviet government beginning6 to end price discrimination. He does not reach any conclusion for later years, although he repeats Mendershausen's exercise, with additional precautions.
Stolper,nd Roskamp, Karl W. "An Input-Output Table for East Germany with Applications to Foreignulletin of the Oxford University Institute of Statistics,ff. ProfcsBor Stolper and his associate use Input-output tables for East Germany6et up on the basis of their study of the structure of the East German economy (the standard workast Germano demonstrate that East Germany benefited substantially from foreign trade ln that lt cost much less to produce East German exports than it would nave to produce (where possible) import-substitutes. They also conclude that Fast German terms of trade improved by more than one-fourth6 Their findings, as they note, do not rule out the possibility of Soviet price discrimination.
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APPENDIX B
SOURCES OP ESTIMATES
The present discussion ofast German economic relations ls based largely on unclassified sources, as indicated by various references in the text and tables. In certain cases, however, the use ofinformation is necessary and in many others it is useful for testing conclusions based on open sources.
In estimating East German support of Soviet forces and the importance of the East German uranium mines to tbe USSR, classified data are Most of what is known about the goods and services supplied to Soviet forces and about the prices they pay comes from clandestine reports (up to SECRET) ofs. Estimates of East German uranium production and its importance to the USSR are classified SECRET.
The key estimates onast German trade are based onfrom standard published sources on foreign trade and prices, but they have been checked out by the use of available information from clandestine reports (throughhich provide corroborationwith some additional detail.
The discussion of the East German economy and the balance of power is based partly on classified data. Estimates of this Office for the gross national products of the Soviet Bloc countries are CONFIDENTIAL. Estimates on aid to less developed areas, also by this Office, are SECRET.
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Original document.
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