Capitalists Among Communists

East Germany's Communist chieftains are generally recognized as the most doctrinaire political ideologists in Eastern Europe, but they are well aware that a touch of capitalism also has its attractions. With an unexpected pragmatism, the party leaders decided that nationalizing some small and medium-sized businesses would cost the state more trouble than it would be worth. So the state has simply become a "partner" in a number of "semiprivate" firms that employ hundreds of people, ring up millions in yearly sales and account for some 9% of the $31 billion gross national product. Their size and importance to the economy is unique in Eastern Europe, and other Communist countries are studying East Germany's example in hope of emulating its success.

Semiprivate concerns are concentrated in textiles and other consumer industries where the premium is on skill and imagination. Not only do they pay high taxes, but they also do well in the export trade and earn generous amounts of Western currency. They tend to react more flexibly than the wholly nationalized companies to changing markets. Recently TIME Bonn Correspondent George Taber visited two East German businessmen who described their relations with their "silent partner," the government. His report:

Herbert Schnabel's tastes run to handmade gold cuff links. He drives a Soviet-built Chaika, the same make as Communist Chief Walter Ulbricht's. He probably earns about $125,000 a year (before stiff taxes) as president of Lucie Kaiser K.G., near Leipzig. East Germany's largest semiprivate women's fashion firm, it employs 370 workers, has annual sales of $3,000,000 and exports 65% of its product, for which Schnabel has won the Medal of the German Democratic Republic. Schnabel dates his prosperity from 1960 when, to raise capital for expansion, he sold a 37% interest to the government. Sales have since quadrupled.

"At first I saw this half-state idea as a trick to embrace private firms and strangle us," he says, "but I've never had any trouble and won't have as long as the business goes like it is. It's easier facing state officials than the stockholders." After consultation, officials give him target figures for sales, employees and exports. As long as the targets are met, the state stays relatively silent. The bureaucrats demand a pretax profit of at least 6%; last year Schnabel doubled the figure.

Consulting the Workers. Schnabel is convinced that if he had fled to West Germany before the Wall went up, he would now be a millionaire. But he says he is not sorry. "You can't take it with you, and I'm not sure I'd have it, with all the gangster methods of competition." He boasts that when his bridal gowns and pantsuits are sold in West Germany, the stores switch his East German labels for fake Paris labels and double the price.

Ernst Strohbach turned to the state for money in 1959. With Communist capital (47%), he built a diversified firm in the ruins of Dresden. His 135 workers turn out just over $1,000,000 worth of jewelry, electroplated metals, and baroque Hofmuster silver each year. Strohbach could have gone with a giant state firm, which would have guaranteed him the security that he insists is "very important." But he remained semiprivate because, he says, rubbing his thumb and first two fingers together: "I can make so much more."

Like all East German capitalists, he must put up with labor relations that would unsettle many a Western businessman. Before his firm absorbed another company, Strohbach had to invite the workers' council into the negotiations. The workers also demanded, and got, a redecoration of their dining room, and they control most of the hiring and firing. Strohbach confers with the workers' council two or three times a day, but he retains the right to decide what products are made and how. The state may be his partner, but he insists: "Ich bin der Boss."

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