FIB Papers
Wissenschaftszentrum Berlin für Sozialforschung
Veröffentlichungsreihe der Forschungsgruppe Internationale Beziehungen
P 92-309
Pennies from Heaven:
Entry Fees to a Socialist ‘Paradise’
by
Klaus Zimmermann* and Thomas R. Cusack
Federal Armed Forces University Hamburg
Publication Series o f the International Relations Research Group
ABSTRACT
Based on a political-economic perspective, this paper assesses the former GDR-regim e’s policy o f obligatory exchange (Pflichtumtauschsatz). The Pflichtumtausch, one o f a wide array o f instruments used to collect convertible currency and restrict access to the GDR, is briefly described. Following that, a demand function, relating visits to East Germany on the one hand to the Pflichtumtauschsatz on the other, is estimated. The empirical evidence adduced suggests that visits to the East were considered a normal good. The next question considered is whether the GDR-regime, acting in its role as a monopolist, followed an optimal pricing policy. On both theoretical and empirical grounds this can be rejected. Visits to the East were underpriced. This resulted in a higher num ber o f visits and lower revenue when seen from a profit-maximizing perspective. On the other hand the actual pricing was advantageous with respect to two goals: the deterrence o f visits and the collection o f convertible currency. Nonetheless, it is clear that the GDR-regime voluntarily restricted its revenue collection from the Pflichtumiausch. This restraint, however, can be seen as its input into a political bargain. As a rule, such ‘good m anners’
in the matter o f the Pflichtumtausch were more than compensated by interest payments saved in the use o f the Swing. The GDR-regime’s generosity thus turned out to be a rather expensive good for the West Germans.
ZUSAMMENFASSUNG
Der Artikel behandelt die Politik des Pflichtumtauschsatzes des ehemaligen DDR-Regimes aus einer politisch-ökonomischen Perspektive. Basierend auf einer knappen Darstellung der Geschichte des Pflichtumtauschs im Kontext aller möglichen Instrumente, harte W ährung zu erlangen und Zugang zu beschränken, wird eine Nachfragefunktion nach Besuchen in der DDR und Ost-Berlin als Funktion des Pflichtumtauschsatzes geschätzt m it dem Ergebnis, daß Besuche im Osten offensichtlich als ein ganz normales Gut behandelt wurden. Es liegt dann die Frage nahe, ob das DDR-Regime eine optimale Preispolitik als Monopolist betrieben hat. Theoretische Ableitungen und empirische Schätzungen zeigen, daß dies nicht der Fall war: Besuche im Osten waren unterpreist m it der Folge einer höheren Besuchszahl und niedrigeren Einnahmen, als bei gewinnmaximalem Pflichtumtauschsatz möglich gewesen wäre. A uf der anderen Seite hatte diese Preispolitik den Vorzug, zur Erreichung zweier Ziele gleichzeitig beizutragen: der Sicherung hoher Deviseneinnahmen und der Abschreckung von Besuchen. Es bleibt aber als Tatsache der evidente Verzicht auf Einnahmemaximierung aus dem Pflichtumtausch bestehen, der jedoch leicht als politischer Handel interpretiert werden kann: ein solches W ohlverhalten beim
I. Introduction
On October 3rd 1990, the German Democratic Republic joined the Federal Republic o f Germany. This union was the result o f a peaceful revolution by the East German people against an aging and petrified socialist party and bureaucracy. In conjunction with a number o f other major developments, this event marked the end o f the Cold War. W ith this the Iron Curtain had finally been lifted and an end put to strange and sometimes amusing practices o f the East German government. Certainly one o f the most conspicious examples o f such practices was to be seen in the approach the East German government took to keeping westerners, particularly W est Germans, out o f its socialist ‘paradise’. By most measures o f economic well-being, East Germany, in comparison with other East European countries, was something of a ‘paradise’. In addition, the citizens o f this country were allowed to travel and take vacations in many o f the other countries in the socialist fraternity. But the Wall in Berlin and the barriers on the western borders stood as a bulwark against not only the ‘imperialist, revanchist and neocolonialists forces’ to the west, but also denied most East Germans entry into that frightful domain. Only ‘ socialists ’ with the most impeccable credentials, the so-called Reisekader, were allowed to travel there. It is a fact, as well as an irony o f history, that the second East German ‘revolution’ (the first being the suppressed uprising o f June 17, 1953) culminated in a mass flight through Hungary, a socialist country, to Austria, a block free country, during the summer holidays o f 1989.
The revolution in the East resulted from a mixture o f push and pull factors. Placed under strong pressure from the Soviet Union following Mr. Gorbachev’s course of
‘perestroika’ and ‘glasnost,’ the GDR government gradually was forced to loosen the chains on its population. In particular, the control exercised by the Staatssicherheitsdienst (State Security Service) waned. The diminution in A ngst that resulted within the population led to mass demonstrations in the major cities and mass flights to the west.
Contributing to these results was the Helsinki Accord o f the Conference for Security and Cooperation in Europe. Again, historical irony was at work. The international recognition o f the East German state, which had so long been strived for and finally achieved through the Helsinki agreement, had planted the seeds o f the state’s destruction. As a consequence o f the Accord restrictions on travel to the West were slightly liberalized. Perhaps producing an even greater effect was the possibility throughout nearly all o f East Germany (with the exception o f the Dresden area, the so-called ‘valley o f the innocents’) to receive West German television programming. Both o f these factors helped to demonstrate the extreme relativeness of the socialist ‘paradise’ at home as it was displayed in the official propaganda.
The history o f the GDR cannot, however, be correctly described by concentrating on the last few years which were dominated by these push and pull factors. In fact, it was the persistent policy o f the East German government to keep any contacts o f its population with the West, and especially with W est Germans, at a minimum. To achieve this goal it used a variety o f instruments; among the most prominent o f these were visa requirements and the famous obligatory exchange {Pflichtumtausch).
The main focus o f this article is on the latter instrument, the Pflichtumtausch. This instrument had the advantage o f fulfilling two functions for the East German regime. On the one hand, it worked as an entry barrier to the GDR and East Berlin, and, on the other hand, it performed a fiscal function by collecting the convertible currency so urgently needed for the import of consumer goods and advanced technology from the West. The next part o f this paper presents a short politico-economic sketch o f the history o f the Pflichtumtausch and describes the forces behind its variations. Part III uses the standard microeconomic model o f constrained utility maximization to estimate the expected number o f visitors and compares the results with publicly available data. Part IV again refers to standard micro theory and applies the profit maximization model to judge
whether the East German government did in fact behave as a profit maximizer. Part V presents some conclusions that connect the results to a broader historical, political and economic context.
II. A Brief History of the Entry Fee to the GDR
As part o f the World W ar II settlement, Germany was divided into four occupation zones. Each was administered by military governments o f the major allied powers.
Travellers between these zones were required to have the so-called Tnterzone Passport’
(Interzonenpaß). This passport was introduced in June 1946 and was issued by the zonal military governments. After a short while the passport requirement was dropped in the western zones. However, it was retained in the East where the Soviet authorities passed control over its issuance and monitoring to the government o f the newly established GDR[1]. The latter rescinded the requirement in 1953. However, a bit earlier (May 1952) the GDR government had begun to install barriers at the inner German border in order to restrict road travel between East and West. Regulations were also introduced to discourage all other means o f trans-border crossing aside from rail—a mode of transportation easy to control. Among the restrictions imposed on trans-border road traffic was a road traffic fee (Straßenbenutzungsgebühr), which was introduced in September 1951 and then doubled in March 1955 to further depress the flow o f W est Germans travelling by automobile into the GDR. The escalation o f restrictive measures reached its apex in August o f 1961 with the construction o f the ‘anti-fascist protective w all’
(antifaschistischer Schutzwall). Prompted as a measure to stem the torrent o f refugees to W est Berlin, this fencing-in strategy had the welcome effect o f gaining absolute control over all traffic passing into East Berlin and the GDR.
Before the Wall ’s construction the government o f the Federal Republic o f Germany and the Berlin Senate had adhered to the so-called Hallstein Doktrin. This doctrine abjured
the diplomatic recognition o f the GDR and effectively treated it as a non-sovereign entity.
As a consequence o f the w all’s construction, West German authorities had to retreat in step-by-step fashion from this political principle. Simultaneously the Berlin Senate had to move away from a strict adherence to the tenets o f the doctrine and, in order to facilitate the creation o f a more normal situation for its citizens, negotiated a ‘permit agreem ent’
with GDR authorities that allowed West Berliners to visit relatives in East Berlin. Such actions represented a success for the East German regime. They implied a movement toward international political recognition. For the West Berliners the agreement itself permitted access to the East and 1.24 million such excursions took place between December 1963 and M arch 1966.
A t a broader level, though, the restrictions imposed by the East German authorities contributed to an appreciable decline in inner German traffic and indeed such cross-border movements reached their lowest levels o f the period following the creation o f the two German states in 1949. Although accurate and definitive figures are not available, it has been estimated that about 4 million people annually travelled east from West Germany and W est Berlin during the early 60s (Friedrich-Ebert-Stiftung, 1985:19).
In 1964 the GDR government seized yet another opportunity to restrict inner-German traffic. Furthermore, by introducing the so-called ‘obligatory exchange’
(Pflichtumtausch) it also acquired the means to gain freely convertible currency. The
‘obligatory exchange’ had already existed in a very limited form; visitors to the Leipzig fairs had been required to exchange at a rate o f DM 25 per day. From December 1,1964 every W est German travelling to the GDR or East Berlin was required to change DM 5 per day on a completely unrealistic 1:1 basis. For West Berliners visiting only East Berlin, the tariff was somewhat lower at DM 3 per day with children under 16 and senior citizens over 65 exempted. Importantly, these regulations also stipulated that East Marks could not be changed back into DM and that the export o f East Marks to the West was regarded
as a currency offence. The GDR government justified this obligatory exchange by claiming that it helped cover the cost o f the imported foodstuffs needed to feed the hungry masses o f tourists visiting the country (Friedrich-Ebert-Stiftung, 1985:25). No one, particularly those that had the opportunity to sample GDR cuisine, took this argument seriously. Indeed, the ‘obligatory exchange’ soon was commonly labelled the ‘entry fee’
(Eintrittsgebühr) to the ‘socialist paradise’ or the GDR. The lucrativeness o f this entry fee led the GDR regime to employ it for a variety o f ends in the coming years. Among these can be counted limiting West German visits to the GDR, and the subversive consequences such visits could produce, to profiting from the collection of freely convertible currency extracted from West German citizens, and, last but not least, extracting such currency from the West German government in exchange for the public good the latter was willing to buy, viz., ‘hum anity.’ The ‘entry fee’ charges introduced in 1964 would come to be modified over the years. A history o f the fee running up to the opening o f the wall on November 9,1989 is provided in Table 1. The significance o f the changes to the ‘entry fee’ policy is the principal focus o f the rest o f this paper.
The East-West macro-climate improved as a consequence o f Chancellor Brandt’s new ‘Ostpolitik.’ This compelled the GDR regime to make some concessions at the micro level. Central here were the alleviation o f restrictions on travel into the GDR. The easing of restrictions were formalized in special agreements between the GDR government and the Berlin senate and in the Grundlagenvertrag (fundamental treaty) between the West German federal government and the GDR. The East German government quickly had second thoughts on these concessions. Fearing ‘capitalist and imperialist subversion,’ it undertook measures to devalue the concessions it had made.
These measures included the ban on contacts with West German ‘class enem ies’ through the classification o f all GDR citizens employed by the state as ‘bearers o f secrets.’
Despite these actions, W est-East tourism increased. To stem this increasing flow, the GDR regime raised the entry fee once again in 1973. Meanwhile, the GDR had begun to appreciate and use the economic instrument o f the entry fee as a political asset in international negotiations. Thus, it reduced the entry fee in 1974 in exchange for a zero interest loan provided by the West German government. In return for an increase in the
‘swing loan’ in inner German trade, again at a zero interest rate, it re-introduced in late 1974 the special regulations for children and elderly (Härteklauset) that it had abolished in 1973 when it had last raised the entry fee.
Alarmed in the wake of the crisis in Poland, the GDR regime once again raised the entry fee in 1980. It was set to an all time high o f DM 25 per day. Simultaneously, it again abolished the Härteklausel. A fter a sharp downturn in the number o f visitors, minor improvements and concessions in travel regulations were introduced when the W est German government offered another interest free loan in 1983. Once again, the H ärteklausel was put into effect and, at the same time, the entry procedures at the border-crossings were sped up.
This was the situation when the ‘revolution’ in the GDR began. The extent to which the trading o f ‘humanity’ for money from the West contributed to the onset o f the revolution remains unclear. It is likely, though, that the extremely cynical behavior o f the East German regime in these matters played at least some role. Historical studies from a political psychology perspective may some day provide an answer.
III. West German Demand for Visits to the GDR and East Berlin
One East German publication (Kohl, Marcinek and Nitz, 1981) describes tourism as playing an important role in the "social policy o f the developed socialist society." It w ent on to characterize the GDR as an excellent destination for tourists because o f its extraordinary recreational areas and attractive landscapes. This source characterized the
infrastructure as exceptional, the facilities for overnight accommodation as more than sufficient, and supplies as satisfactory in quantity and quality. A view (Schwartau, 1990) from the west came to very different conclusions. Among the more salient elements of travel to the GDR noted were: intimidating bureaucratic procedures, badly equipped campsites, extremely expensive Interhotels fully equipped with bugging devices by the Staatsicherheitsdienst, very few restaurants and pubs, all o f which offered the typical GDR ‘basse cuisine’ consisting mainly o f Broiler (fried chicken) and Schnitzel, and country-wide severe environmental deterioration. In addition, those areas and facilities o f interest to visitors from the west were usually overrun by GDR tourists.
The West German impression appears to be nearer to the truth than the East German claims. Thus, it is not surprising that visits to the GDR played no important role in the development o f travelling activities o f the West Germans during the last decades.
Whereas in 1960 about one in every four West German went on vacation at least once a year and two decades later about one in every two (at least 13.9 million holiday trips in 1960 and 28.6 million in 1980), the number o f visitors to the GDR fluctuated around a slightly negative trend. [2] Obviously, there was a de-coupling between the general travel trends and the figures for GDR visits, and, o f course, the motives for travelling to the GDR are very different from those for flying to Majorca, for instance. W hen the West-East German border was closed and the Berlin Wall was built in 1961, many families were separated so that the purpose o f a certain number o f the annual visits to the GDR was to meet relatives. But, in the course o f time, the ties to relatives in the East were loosened by the simple fact that new generations grew up: separated brothers and sisters had their own families who were hardly more than strangers to one another.
This consideration leads to the hypothesis that the overall importance o f this travel motive declined with time. If we had data on the share o f West Germans with relatives in the East, differentiated according to degrees o f relationship, w e could test this kind o f
‘social’ explanation for the overtime development in the number o f visits to the East.
Unfortunately, such data are not available, and the only thing we can say concerning this
‘social’ hypothesis is based on two auxiliary variables and their correlations with the
‘visits’ variable.[3j If we use a variable measuring the share o f the West German population 21 years o f age and over when the Wall was built to represent ‘awareness’, we get a correlation coefficient with ‘visits’ of.574(sig.: .10). Ifw e take another auxiliary variable representing the share o f the West German population between 21 and 40 (the
‘active’ society), we arrive at a negative correlation o f -.625 (sig.: .05). So, despite the fact that we do not have data for the exact variable required, we see that the number of visits to the GDR obviously declined with the decreasing share o f West Germans who consciously experienced and were affected by the 1961 events. Furthermore, the values o f the indicator for the ‘active’ part o f society increased in time, whereas the number of visits decreased, showing that there were other forms o f ‘action’ than travelling to the East and investigating the German ‘past’.
Leaving aside this consideration o f social factors and their influence on the number o f visits to the GDR and East Berlin, we concentrate our attention on finding out how well an ‘econom ic’ model would account for this activity. Since the derivation o f a demand function for GDR visits follows traditional microeconomic analysis (see Pindyck/Rubinfeld, 1989), w e restrict the presentation here to some basics and the results.
It can be assumed that rational individuals seek to maximize a utility function, U=U(q,r), consisting o f 2 goods (q, the number o f visits to the GDR, r, ‘other’ private goods, and pr and pq their respective prices), subject to an income (I) constraint. As a result o f constrained optimization, it follows that the optimal demand for GDR visits depends on relative prices and individual income.
(i)
If a visit to the GDR is treated as a normal good by the individual, then the number o f goods purchased should decline with increasing relative price (Pfichtumtausch) and increase with growing income.
A fter a short description o f the data, we will be in a position to estimate equation (1). Values o f the variable q, the number o f visits to the GDR and East Berlin by West Germans and West Berliners, are based on various yearly reports o f the Bundesministerium fü r innerdeutsche Beziehungen (Federal Ministry for Inner German Relations). The problem with these official figures is that, on the one hand, they present separate data for annual trips to the GDR and East Berlin made by W est Germans but, on the other hand, do not disaggregate the trips o f West Berliners according to both destinations. Consequently, to get a combined picture o f trips from W est Germany and West Berlin to the East, the aggregate figures had to be used. This produced the problem o f averaging the entry fees (Pfichtumtauschsätze) which (see again Table 1) differed according to destination. This problem could easily be solved for the disaggregated West German figures by calculating weighted averages but required an assumption concerning the relative weights o f trips made by West Berliners to the GDR and East Berlin. Given the absence o f more detailed information, we assumed that the same proportions o f destinations apply for West Germans as well as for West Berliners.[4]
Given the economic meaning o f the income constraint term, data on private consumption (PC) (source: Institut der deutschen Wirtschaft 1983, Table 22 and 1989, Table 24) are used to operationalize the income variable. Note that the consumption data reported in this source have been weighted by the annual shares o f the native German population in the total population figure o f Germany and West Berlin. This adjustment was necessary because the travel data only refer to German nationals. The resulting figures for the period 1972-1986 are shown in Table 2, col. (1) to (3).[5] Given that relative prices determine demand, we used deflated values o f pq (pqd) and PC (PCd)
applying the cost-of-living-index as deflator. [6]
Using these data, a linear regression model based on equation (1) has been estimated. The OLS technique yields the following results:
(2) q - 8663.31 - 239.21pqd + 2.66PCd
^ = .772 D W = 1.278
The fit o f this equation to the data is quite good with about 77% o f the variance (F statistic significant at .001 level or better) in the dependent variable being accounted for by the two independent variables. [7] However, the Durbin-Watson coefficient reveals a weak positive autocorrelation. The signs o f the estimated coefficients correspond to the theoretical expectations: q declining with increasing pqd and growing with increasing PCd. However, only the first o f the two effects is statistically significant (at the .001 level) while the second is not (sig.: .32).
Far better results are achieved if one uses ‘travel expenditures’ TE (in real terms TEd) as the operational measure of I (income). In so doing, one restricts private choice to travel to East Germany or Majorca and excludes buying oranges, for example. The data on this measure, in nominal terms (see Table 2, col. (4)), consist o f annual expenditures for vacations and refer to the official statistics for household type 2: 4 persons, 1 employed, middle income (source: Statistisches Bundesamt, various years).
The results o f this alternative estimation are presented in equation 3 below.
(3) q = 8087.69 - 2 4 5 .4 0 /? / + 1.35TEd F = .883 D W = 1.518
This OLS estimate for equation (1) is a clear improvement over that provided in (2). M ore than 88% o f the variance in q is accounted for and there is no problem o f autocorrelation. [8] Furthermore, both regression coefficients are highly significant (at
the .001 and .05 levels respectively). Based on these estimates, a 1 DM increase in the entry fee resulted in about 245000 fewer visits to the East, while an average increase of 100 DM in the travel budget for this type o f household led to about 135000 more visits.
Based on these results we can conclude that, on the average, W est Germans treated visits to the East as a normal good, something comparable to buying oranges or flying to Majorca. They consumed more o f it when their purses became fuller and they bought less o f it when the ‘entry fee’ rose. This cannot mean, however, that there would have been zero visits to the East had the entry fee reached an exorbitant lev el-ev en then there would have been a positive number o f visits because attending brother Fritz’s or Aunt H elga’s funeral does not seem to be price elastic.
IV. The ‘Supply’ of Visits to the GDR: A Socialist Regime as a Profit Maximizer?
Clearly, the East German regime was a pure monopolist — due to ‘technological’
and legal reasons; no other institution, private, national or international, was capable of supplying West Germans with visits to the GDR. Since the demand side consists of millions of independent individual decisions it is genuinely atomistic, and obviously this market structure perfectly fits the standard monopoly model described in any textbook on micro-economics. In the case under consideration, the East German regime was a price setter; it varied the entry fee pq, and consequently had to accept the resulting number of visits q.[9] But, did the GDR government have any idea o f how profit maximization functions in a monopoly situation, and if so, did it set the profit maximizing price pq correctly? If it did not, are there reasons why the East German regime renounced maximizing profits?
Standard theory holds that a monopolist will maximize profits by equating marginal revenue with marginal cost. Let us consider the cost side first. As anyone familiar with crossing the GDR border will remember, the activity o f changing DM into East Mark required nothing more than a face-to-face contact between cashier and visitor, 2 money boxes, 1 pencil-and obviously there had not been any technical progress or scale economies for decades.
Unfortunately, there are no data available on the cost side, but there are two further reasons for believing them to be relatively insignificant. First, there was a certain degree o f hidden unemployment in the GDR; consequently, the number o f people employed in the public service was high and their marginal productivity low. Therefore, the real resource cost for the GDR o f collecting western currency at the border was also relatively low. Second, the GDR regime did all it could to make the crossing o f the border as uncomfortable as possible. As a consequence, it imposed extreme limits on the number o f crossing points to form queues. This again meant relatively low fixed and variable costs. So, even if there had been positive costs they appear to have been low, probably insignificant relative to revenues or even a quantite negligible.
Therefore, since we can treat costs as relatively low or even negligible, the profit maximization problem for the monopolist is identical with simple revenue maximization;
revenue and profit maximization can be used as synonyms. Assuming a demand function such as q (p q) = a - b p q - normal (as is actually the case) and linear (as best estimate)
— the revenue function is quadratic, and it has its maximum at the point w here marginal revenue is 0. Some further calculations along these lines lead to the revenue maximizing (or, at 0 costs, profit maximizing) price, p q, and the corresponding num ber o f visits,
(4) (5)
For the empirical calculations we employed a "sequential" information procedure based on the model o f adaptive expectations. Since the GDR administrators did not have our informational base and naturally possessed only limited information on the demand for visits at time t—precisely at every current year about the years p a st—we have attempted to simulate their decision process at each year t and estimated the demand functions for the periods t= l to t-1, set them as known for the years t and determined the revenue or (with zero costs) profit maximizing entry fee and the resulting number o f visits according to the regression equation based on the preceding years. [10] As before we used the deflated values o fp q (Table 2, col.(2)) for estimating the regression equations but inflated the results for p qd* afterwards to present current values o fp q and, later, R ’, the maximum revenue. We did this for reasons o f clarity: the later analysis is better understood if current values are used instead o f ‘artificial’ real figures—inner-German politics was made in current values, they are more familiar to the reader and the dimensions and consequences o f the results will be more obvious. The results o f this operation are again shown in Table 2: Col.(5) presents the nominal profit maximizing entry feesp *, col.(6) the corresponding profit maximizing number o f visits q*, and col.(7) R \ the maximum revenue at profit maximizing entry fees and visits in current values; additionally, the actual revenues R (col.(8)) as the product o f co l.(l) and (2) in Table 2 are given for further comparisons.
The results o f these calculations show that the actual entry fees were always lower than the profit maximizing fees, that the actual number o f visits was always higher than the profit maximizing number except for 2 years, and that the maximum revenues would have always been higher than the actual revenues, with the exception o f the last year o f the period. These comparisons are summarized in Table 3 which presents two supplementary columns (explained in detail below): the so-called q-effect (the quantity
effect o f pricing ’to o ’ low) which is the difference between the actual visits and the profit maximizing num ber (col.(l)), and the R-effect (the revenue effect o f pricing ‘too’ low) which is the difference between actual and maximum revenues.
What does this suggest about maximization behavior by the GDR regime?
- If it were the case that costs > 0 , then the profit maximizing entry fees should have been even higher than those shown in Table 2, col.(5). In fact, prices were set remarkably lower according to col.(2) during more than half o f the period.
- Therefore, again assuming costs > 0, the profit maximizing number o f visits should have been even lower than is shown in col.(6). It is clear that the regime tolerated remarkably higher figures by pricing ‘too’ low, especially in the early years. Later, the q-effect declined, mirroring the fact that the actual entry fees approached profit maximizing levels from below.
- The (negative) R-effect declined in absolute terms; the above trends combine to give this figure, showing that actual profits gradually neared the potential maximum profits and exceeded them in the last year.
Obviously, in most years, and especially at the beginning o f the period, the GDR government certainly did not behave as a revenue or profit maximizer. But it could well be that growing experience or ‘learning’ contributed to a change in pricing policy in the early 1980s that was directed at stronger profit maximization. To some extent this interpretation becomes plausible the more we learn about the G D R’s increasingly sophisticated practices o f acquiring convertible currency—practices which are linked to the impressive figure o f Mr.Schalck-Golodkowski who was responsible for that business.
But, as reflected by average behavior over the whole period, the profit maximizing performance o f the GDR government ranged from rather moderate to poor.
Excluding the possible impacts o f a lack o f knowledge, experience or even intelligence, could there have been a rational basis for this? Two alternative hypotheses can be entertained. First, it may be the case that the GDR regime tried to achieve several political goals simultaneously. Second, it may be that in an international co n tex t-o r better stated, an inner-German context—it took money from the ‘old ’ FRG to at least compensate for the losses caused by ‘good m anners’, namely setting the entry fees lower than the profit-maximizing level. A third hypothesis can immediately be excluded: the cost o f collecting convertible currency greater than 0 should have resulted in higher profit maximizing prices, thus broadening the gap between actual and profit maximizing prices even more.
Let us examine the first hypothesis which deals with the simultaneous pursuit of different goals. At least at first glance, it can be argued that the GDR regime was confronted with a tricky problem. If there was a normal demand function for GDR visits (q declining with rising p q), which the evidence provided above attests to, and if there were no or negligible costs involved in collecting the entry fees, which seems a plausible assumption in this case, then the profit maximizing price is where marginal revenue is equal to 0. If the price is increased from a level lower than the profit maximizing entry fee, the number o f visits is necessarily reduced. Up to the profit maximizing price the positive price effect dominates the negative quantity effect—after passing it the situation is reversed. These simple economic truths can be translated into two political goals o f the GDR government: isolation o f its citizenry and the acquisition o f scarce economic resources from the outside world. As we know, the East German regime followed the declared policy o f keeping contacts between its own population and the dangerous
‘capitalist, imperialist and neocolonialist’ West Germans at a low level. In so doing it hoped to stabilize its own regime (the private good) and, as a spill-over, the regimes o f its socialist ‘brother countries’ (the public good). On the other hand, few visitors from
the W est meant low revenues in convertible currency, which were so urgently needed for imports for consumers—to keep them quiet—and industry—to modernize chronically outdated machinery. Pricing policy could have been the appropriate instrument to achieve both goals. As long as the positive price effect on revenues prevailed and the profit maximizing price was not reached, increasing prices or entry fees fulfilled both goals—they simultaneously led to higher revenues and fewer visitors to the socialist
‘paradise’. Only when the profit maximizing entry fee was surpassed would there be a necessity to trade off between both goals.
It follows that the choice problem for the East German government did not prove to be so tricky as long as it refrained from raising prices to the point where they exceeded the profit maximizing level. Higher entry fees would have inevitably reduced revenues to the benefit o f deterring ‘subversive’ visits to the East—and such behavior would only have been efficient if the deterrence motive had dominated the revenue motive. In pure economic reasoning, this is because a monopolist would never choose an output in the inelastic range o f market demand or a price in the elastic range o f market demand. This, as we know, was not the case since the East German regime always set its prices lower than the profit maximizing level. But even for this range o f prices, it would be interesting to know which motive had a stronger impact on its actual pricing policy. We can gain some insight into the relative priorities within its motivation structure by constructing two indexes o f ‘goal achievement’ (GA):
- GA - R describes the degree of goal achievement with respect to the revenue motive.
Since we know the actual revenues (Table 2, col.(8)) and the profit maximizing revenues (Table 2,col. (7)), GA - R is simply the quotient o f both figures (see Table 3, col.(3));
- GA - q represents the degree of goal achievement in terms o f the deterrence motive for visits, q . This is derived as follows. At price 0, there would have been no deterrent
effect; if we subtract the actual number o f visits from this satiating number of visits at p q = 0, we get a figure for deterred visits at current entry fees. The number of deterred visits divided by the satiating number o f visits provides GA - q , as shown in Table 3, c o l.(4 ).[ll]
If we sum up the levels o f goal achievements shown in Table 3, it would seem that the learning process o f the GDR administration was extremely successful: the year 1979/80 obviously was the turning point to a resolute economics-based entry fee policy leading to a remarkable jum p in the overall goal achievement. The data reveal a very similar trend in the degrees o f achievement for both goals over the whole period but the level o f goal achievement with respect to the revenue motive was much higher than with regard to the deterrence motive before and after the jump. One could conclude from these results that the revenue motive was the decisive one for the GDR administration.
Deterrence was clearly a motive as well, but here again the old German proverb holds
"Kasse macht sinnlich" (cash is irresistable).
Let us turn to the second hypothesis. The idea here is that ‘good manners,’ such as pricing lower than profit maximizing (the political goal o f the Federal Republic to maximize contacts o f W est Germans with their ‘brothers and sisters’ in the East), could have been rewarded by the W est German government with some kind o f financial subsidies, mainly loans at lower than market or even zero interest rates. Assuming the GDR government to be a rational actor, it should only have agreed to that if, and only if, the subsidies had exceeded the R-effect, the loss o f revenue due to ‘good manners’ as presented in Table 3, col.(2).
In addition to paying West German firms huge subsidies for trading with the GDR, the W est German government also made a large number o f direct payments to the East.
These latter were officially declared as payments for the use o f GDR infrastructure, but they were in fact pure subsidies.[12] The most important subsidy was the famous ‘swing
loan,’ a zero interest rate overdraft loan, the purpose o f which was to facilitate inner German trade. It was based on the Berlin Accord o f 1951; it survived the Cold War and was in effect until the GDR ceased to exist. The fundamental idea behind inner-German trade was always that West Germany did not regard the GDR as a foreign country, and thus joint trade was not foreign trade. The economic purpose o f the ‘sw ing’ was to put some flexibility into the rigid inner-German exchange o f goods and thereby help bridge the gap between the very uneven distribution o f inner-German trade. Conceived as a pressure instrument, its political aim was to foster, through economic means, political
‘disciplining’ o f the GDR. However, over the years it seemed as if the ‘sw ing’ had little political effect on the GDR regime despite the expansion o f trade. It developed into a permanent loan benefitting the GDR. This can be illustrated by the following two examples:
- In 1960, when the GDR government introduced the entry permits for W est Germans visiting East Berlin, the Federal Republic felt obliged to revoke the Berlin Accord for reasons o f ‘political responsibility’ (Hort, 1981). Since the GDR did not submit to this form o f pressure, the West German government was forced to revert to the Accord three months later because 70,000 jobs in the Federal Republic depended on trade with the GDR (Starrels, 1984).
- West German politicians (e.g., Ministers at that time, Count Lam bsdorff and Franke) were always tempted to simplify the sensitive ‘politico-psychological environment’
o f the ‘sw ing’ to the the issue o f the obligatory exchange by tourists from the Federal Republic, especially after the last increase in 1980. The East German government reacted in a flexible way by making less use o f their credit margin in order to demonstrate their independence, thereby using the "tactical advantage of the party who offers nothing because it wants nothing in exchange." (Lölhöffel, 1982)
Striking examples from the long period o f inner-German relationships show that, in specific situations, the ‘sw ing’ was not an appropriate economic lever to force the GDR to further or continue political ‘good conduct’ or ‘good intentions.’ ‘Continue’
because one could assume on the basis o f previous experience that the GDR had already displayed ‘good conduct’ by renouncing profit maximization with respect to the entry fees.
If one agrees with this interpretation, then the rational-actor-hypothesis would imply that such ‘good conduct’ in the sense o f revenue waivers from entry fees would be balanced or even over-compensated through expenditure savings in the form o f saved interest in the use o f the ‘swing.’ Some information contained in Table 3 confirms this expectation. Table 3, col. (5) shows the average annual use o f swing (source: DIW, 1983, 1986, 1989); col. (6) presents a possible interest rate in the form o f the average annual European Interbank interest rate; col. (7) illustrates what interest savings the GDR realized by taking advantage o f swing at its zero interest rate; col. (8) balances the revenue waivers through non-profit maximization o f entry fees (Table 3, col. 2)) and the saved interest through the use o f the ‘swing.’ The data clearly show that over the whole period the G D R ’s revenue losses generated by setting non-profit maximizing levels o f entry fees were much lower than the indirect subsidies gained through the use o f the zero interest rate swing. The average annual surplus during the 1974/86 period was 37 million DM. The statement "East Germany Exploits Its Own Bonn Ties" (Kempe, 1982) is therefore correct, even with regard to this small sector o f inner-German economic relations.
A more in-depth view o f the data also illustrates that there definitely was a connection between the revenue losses through the waiver o f entry fees and the use of the swing. The spectacular previous counter-examples only serve to prove the rule: when
‘business as usual’ was called for, the amount o f ‘sw ing’ in use or the respective interest
savings rose, as did the revenue losses from the G D R’s entry fee policy.[13] This effect demonstrates once again that Mr. Schalck-Golodkowski and his colleagues in the former GDR were well aware o f how they could, in a politico-economic context, very
‘noiselessly’ maximize profits by trading political ‘good conduct’ for Deutsche Marks following a more or less implicit contract. When this contract threatened to become explicit from the W est German side, the East, quite understandably, became stubborn and veered away from the implicit contract.
V. Conclusions
According to official propaganda, the German Democratic Republic was the first sozialistische Arbeiter und Bauernstaat (socialist workers und farmers state) in Germany but it was also a state on old Prussian soil. Unfortunately, only a very limited and selective range o f Prussian virtues was re-activated, and excluded were such ‘prim ary’ virtues as freedom und sense o f humanity.
A t the beginning o f this article the origins o f its entry fee policy were sketched. It was characterized as an instrument to keep West Germans out o f the socialist ‘paradise’
(clearly contradicting ‘prim ary’ Prussian virtues) and to collect convertible currency.
Estimating a demand function for GDR visits, we were not only able to show how effective that policy really was but were also able to demonstrate that the East German regime really had not acted as a revenue or profit maximizer. On the one hand, the GDR government clearly behaved as a rational monopolist. It kept its hands off the uncomfortable range o f the demand curve, thus avoiding a goal conflict between deterrence and profit making. Nevertheless, at least in later years, the second motive clearly dominated the first in its pricing policy. On the other hand, it obviously refrained from setting profit maximizing fees. But pricing ‘too’ low cannot be interpreted as being humanely motivated. On the contrary, it can be interpreted as a variant o f behavior one would expect in light o f the Coasian model. Thus, by giving up potential revenues flowing
from profit maximizing fees, it was able to gain extra profits by trading its restraint for Deutsch Marks from the W est German government. In so doing, the GDR government exploited the former FR G ’s high preference and willingness to pay for this scarce good, accompanied by a relatively lower marginal utility o f the DM.
Endnotes
1. For a detailed exposition on the ‘freedom o f movement’ problem in Germany, see Wettig (1986).
2. See Table 2, col. (1). The regression equation is 7845.87 - 132.5t; r square is 0.2712 and the coefficient is significant at the 5% level.
3. The basic data, recalculated for our purposes, are taken from various volumes o f the
‘Statistisches Jahrbuch für die Bundesrepublik Deutschland’, edited by the Federal Statistics Agency, Wiesbaden/FRG.
4. There is an additional problem with using the entry fee data p . Obviously, the total cost o f a trip to the East would consist o f the entry fee and travel costs plus the cost o f
accommodation, meals, etc. We only know the number o f visits, but not the average cost o f the other components o f the total figure because data on the length o f a trip and the spatial distribution o f travelers and destinations do not exist. The only cost component actually known is the entry fee.
5. The raw data before re-calculations can be obtained from the authors on request.
6. The cost-of-living index used as the deflator here (1980=1.0) is as follows:
1972 0.683 1977 0.893 1982 1.120 1973 0.729 1978 0.916 1983 1.156 1974 0.779 1979 0.950 1984 1.184 1975 0.826 1980 1.000 1985 1.210 1976 0.863 1981 1.063 1986 1.207
7. The results o f an alternative log-linear specification o f the regression model proved to be slightly worse than the linear version.
8. Again, the log-linear specification did not improve the results so we rely on the original linear model. There is no question that it would have been better to use aggregate travel expenditures o f all W est German households instead o f ‘typical’ expenditures for the average individual household o f type 2. However, the German Federal Statistics Agency does not even possess data on the total number o f households o f type 2 in the country.
9. Needless to say, the notion of ‘supply’ in the title o f this section is a little misleading since a monopolist does not have a supply curve. In perfect competition any price given translates into an optimal amount o f supply but the monopolist, confronted with a negatively sloped demand function, always offers the profit maximizing quantity at the profit maximizing price determined by himself.
10. W e do not present the period-dependent demand functions here; again, they are available from the authors on request.
11. Here we apply the sequential information procedure previously described and use deflated values; q at price 0 is given by the doubled figures o f Table 2, col.(6) and the actual q in Table 2, col.(l).
12. The best known in-depth study in this field is still Biskup (1976). In the eighties, the quantitatively most important subsidy was the transit payment o f 525 million Deutsch Marks per annum for the 1980-89 period, followed by postal services payments o f 200 million Deutsch Marks per annum for 1983-89, and road tolls o f 50 million Deutsch Marks per annum for 1980-89. By adding West Germany’s financing o f new highway transit routes to W est Berlin and the Berlin-related items, we would arrive at a ‘profit’ for 1981 o f
approximately 1.8 billion Deutsch M arks for the GDR, which resulted from its special relationship to the Federal Republic (the ‘entry fees’ not even being taken into consideration).
13. The regression equation between the R-effect and the use o f swing is highly significant, and the equation relating the R-effect and saved interest payments is significant at the 10%
level. In both cases the expectations regarding the signs o f the coefficients are met.
VI. References
R.Biskup (1976) Deutschlands offene Handelsgrenze. D ie D D R als Nutznießer des EWG-Protokolls über den innerdeutschen Handel. Berlin.
Bundesministerium für Innerdeutsche Beziehungen (various years), Zahlenspiegel - Sammlungen der Jahresberichte des Bundesministeriums fü r Innerdeutsche Beziehungen. Bonn.
DIW-Deutsches Institut für Wirtschaftsforschung (1983) "Westverschuldung der DDR begünstigt innerdeutschen Handel," D IW Wochenbericht 10/83:132-139.
DIW-Deutsches Institut für Wirtschaftsforschung (1986) "Innerdeutscher Handel:Kontinuität erforderlich," D IW Wochenbericht 10/86:119-128.
DIW-Deutsches Institut für Wirtschaftsforschung (1988) "Die Lage der DDR-Wirtschaft zur Jahreswende 1987/88," D IW Wochenbericht 5/88:59-67.
DIW-Deutsches Institut für Wirtschaftsforschung (1989) "Innerdeutscher HandehExpansionsmöglichkeiten wirklich nutzen!" D IW Wochenbericht 9-10/89:95-105.
Friedrich-Ebert-Stiftung (1985) Reisen in die DDR. Bonn.
P.Hort (1981) "Wie aus einem Warenabkommen ein Dauerkredit für die DDR wurde,"
Frankfurter Allgemeine Zeitung, Dec.5,1981.
Institut der deutschen W irtschaft (1983,1989) Zahlen zur wirtschaftlichen Entwicklung der Bundesrepublik Deutschland. Cologne.
G. A Je h le (199T) Advanced Microeconomic Theory. Englewood Cliffs.
F. Kempe (1982) "East Germany Exploits Its Bonn Ties," The Wall Street Journal, Dec.7,1982.
M.Kohl, J.Marcinek, B.Nitz (1981) Geographie der DDR. 4.ed., Gotha/Leipzig.
H. Lölhöffel (1982) "Beim Thema Zwangsumtausch stellt sich Ost-Berlin taub,"
Süddeutsche Zeitung, M arch 19,1982.
R.S.Pindyck, D.L.Rubinfeld (1989) Microeconomics. New York/ London.
C.Schwartau (1990) DDR-Perspektiven. Frankfurt/M.
J.Starrels (1984) "The Two Germanies Draw Closer to Each Other," The Journal o f Commerce, April 6,1984.
Statistisches Bundesamt, ed. (various years) Statistisches Jahrbuch fü r die Bundesrepublik Deutschland, Stuttgart/Mainz.
UN (1982) Economic Survey o f Europe in 1981, New York.
G. Wettig (1986) "Das Freizügigkeitsproblem im geteilten Deutschland 1945-1986,"
Berichte des Bundesinstituts fü r ostwissenschaftliche und internationale Studien, Cologne.
Table 1
Entry Fees (DM)
from West Germany to: from W est Berlin to:
Date o f
Introduction GDR East Berlin GDR East Berlin
December, 1964 5 5 5 3
June, 1968 10 10 10 5
November, 1973 20 10 20 10
November, 1974 13 6.5 13 6.5
October, 1980 25 25 25 25
Source: Friedrich-Ebert-Stiftung (1985)
1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986
Year
1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986
( i ) q (2 )P q (3) PC (4 )T E
Visits to East Entry Fees Private Consumption Travel Expenditures Germany/Berlin by
Germans from West
(weighted averages) (West Germans/
Berliners)
of Type 2 Household Germany/Berlin
-1 0 0 0 - - DM/day - -b il. D M - -D M -
6260 8.75 422.58 1017
7499 9.05 460.21 1173
5879 15.88 492.48 1387
7734 10.99 539.21 1507
7921 10.99 591.90 1664
7788 10.93 639.25 1626
7837 11.01 681.60 1908
7423 10.89 732.04 1964
6746 18.75 780.03 2220
5020 25.00 821.25 2299
5068 25.00 848.54 2109
5059 25.00 892.77 2076
5219 25.00 932.08 2294
5620 25.00 963.77 2180
6740 25.00 989.75
(5) Pq* (6)q* (7 )R * (8 )R
= (5) (6) = (1) (2)
Profit Maximizing Profit Maximizing Maximum Revenue Actual Revenue Entry Fee Number of Visits
- DM/day - -1 0 0 0 - -1000 DM - - 1000 DM
• • 54775
67866
24^87 4296 106823 93359
23.17 4640 107506 84997
22.11 4899 108317 87052
22.06 5007 110440 85123
22.07 5082 112142 86285
23.70 4988 118228 80836
28.24 4809 135806 126488
26.47 5011 132634 125500
26.50 5103 135225 126700
26.39 5170 136444 126475
26.53 5205 138107 130475
27.13 5204 141175 140500
28.33 5123 145125 168500
text
1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986
Year
1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986
(1) q-effect (2) R-effect (3) GA-R (4) GA-q
T2 (l)-(6) T2 (8)-(7) T2 (8)/(7) 1-(T2(1)/
q(Pqd=0)) Difference: Difference: Degree of Goal Degree of Goal Actual and Profit Actual and Achievement: Achievement: Visits Maximizing No. of
Visits Maximum Revenues Revenues
-1 0 0 0 - -1000 D M - - %/100 - - %/100 -
1583 -13464 .8740 .3158
3094 -22509 .7906 .1666
3022 -21265 .8037 .1916
2781 -25317 .7708 .2223
2755 -25856 .7694 .2289
2435 -37391 .6837 .2559
1937 -9319 .9314 .2986
9 -7135 .9462 .4991
-35 -8525 .9370 .5034
-111 -9969 .9269 .5107
14 -7632 .9447 .4987
416 -675 .9952 .4600
1617 23374 1.1611 .3422
(5) Use of Swing (6) European (7) Saved (8) Surplus
by GDR Interbank
Interest Rate
Interest Payments
T3 (2)+(7)
- mil. DM - - % - -1000 DM - -1000 D M -
539
592 7.8 46176
559 11.1 62049 48585
711 6.2 44082 21573
786 5.4 42444 21179
748 5.6 41888 16571
677 6.8 46036 20180
748 9.3 69564 32172
745 11.6 86420 77101
676 14.3 96668 89533
582 11.6 67512 58987
543 8.6 46698 36729
210 9.1 19110 11478
170 7.7 13090 12415
185 6.3 11655 35029
text
