Economic System of Socialism

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The Economic System of Socialism (ESS) was an economic policy implemented in East Germany between 1968–1970, led by General Secretary of the Socialist Unity Party Walter Ulbricht. It focused on high technology sectors in an attempt to make self-sufficient growth possible. Overall, centralized planning was reintroduced in the so-called structure-determining areas, which included electronics, chemicals, and plastics. Industrial combines were formed to integrate vertically industries involved in the manufacture of vital final products. Price subsidies were restored to accelerate growth in favored sectors. The government wanted to force key segments of the state-owned economy to pay their own way and, if possible, to show a profit. Individual plant managers were given greater freedom to decide their raw material and labor needs, and to set production targets. They also retained a percentage of profits to distribute among their workers.

To determine profit, however, East German economists needed to know how much it cost to produce goods. In an effort to find out, economists began to recalculate all their data on the nation's national income and gross national product back to 1950. This drastic step revealed how artificially East German prices were pegged in the past and how little relation they bore to actual costs of production.

For the first time the government levied a capital-use charge on enterprises. A factory was taxed on its capital assets, including inventory. A plant manager who wanted to lower the plant's taxes was obliged to sell off any surplus inventory. This in turn encouraged the factory to turn out better-quality goods, which consumers would buy.

The capital-use charge followed another innovation, loans of state capital at interest to individual plants or groups of plants. Formerly the state planning commission had funnelled centrally determined amounts of money into factories without requiring interest or a return of the capital, leaving the managers little incentive to invest wisely. The obligation to repay the principal plus interest placed managers under pressure to borrow only what they thought their factories could repay.

In foreign trade, state planners concentrated on developing export lines which could earn hard currency, enabling the GDR to buy needed machinery from the Western world. Chemicals and pharmaceuticals and products of the metalworking industry—from fine optical equipment to railroad cranes—were major areas of East German specialization.

The annual plan for 1968 set production quotas in the structure-determining areas 2.6% higher than in the remaining sectors in order to achieve industrial growth in these areas. The state set the 1969–70 goals for high-technology sectors even higher. Failure to meet ESS goals resulted in the conclusive termination of the reform effort in 1970.

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