Economic System of Socialism
Encyclopedia
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 plastic
s. 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 quota
s 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.
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
policy implemented in East Germany between 1968–1970, led by General Secretary
General Secretary
The office of general secretary is staffed by the chief officer of:*The General Secretariat for Macedonia and Thrace, a government agency for the Greek regions of Macedonia and Thrace...
of the Socialist Unity Party
Socialist Unity Party of Germany
The Socialist Unity Party of Germany was the governing party of the German Democratic Republic from its formation on 7 October 1949 until the elections of March 1990. The SED was a communist political party with a Marxist-Leninist ideology...
Walter Ulbricht
Walter Ulbricht
Walter Ulbricht was a German communist politician. As First Secretary of the Socialist Unity Party from 1950 to 1971 , he played a leading role in the creation of the Weimar-era Communist Party of Germany and later in the early development and...
. It focused on high technology sectors in an attempt to make self-sufficient growth possible. Overall, centralized planning
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...
was reintroduced in the so-called structure-determining areas, which included electronics
Electronics
Electronics is the branch of science, engineering and technology that deals with electrical circuits involving active electrical components such as vacuum tubes, transistors, diodes and integrated circuits, and associated passive interconnection technologies...
, chemicals, and plastic
Plastic
A plastic material is any of a wide range of synthetic or semi-synthetic organic solids used in the manufacture of industrial products. Plastics are typically polymers of high molecular mass, and may contain other substances to improve performance and/or reduce production costs...
s. 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 quota
Production quota
A production quota is a goal for the production of a good. It is typically set by a government or an organization, and can be applied to an individual worker, firm, industry or country. Quotas can be set high to encourage production, or can be used to limit production to control the supply of goods...
s in the structure-determining areas 2.6% higher than in the remaining sectors in order to achieve industrial
Industry
Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...
growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
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.