One of the shocking things that emerged out of the collapse of the GDR over the course of 1989-1991 was the extent of its faltering and sclerotic economy. Although its shortcomings were plain to many observers and visitors to the GDR, a number of FRG and global estimates overestimated the efficacy of its planned economy. The FRG Deutsches Institut für Wirtschaftsforschung estimated that the GDR's productivity was 70% of that of the FRG's and the World Bank in 1980 claimed the GDR was a more productive economy than the UK. The real figures were much lower with the general estimate that the late-period GDR was only a third as productive as its FRG rival. The SED dictatorship was certainly a factor behind these overestimations as it carefully hid its true economic performance. The GDR may have been one of the more productive economies of the Eastern bloc, but it was an economy still dominated by persistent shortages and never matched that of the West. One of the problems for the GDR was the events of the first postwar decade did significantly hobble its future economic growth and potential.

One of the earliest theories explaining the GDR's economic failure was the Soviet's ruthless system of reparations and expropriation of industrial plant in the Soviet occupation zone (SBZ). Some of this "late start" hypothesis dated back to the late-Cold War among economic historians like Horst Barthel who emphasized the hurdles the GDR faced in establishing its economy. The Soviet military occupation government (SVAG) enabled a degree of large-scale uprooting of machinery and a dismantling of industrial plant. Filip Slaveski in his book on SVAG aptly termed these methods "smash and grab" as Soviet overseers at times literally ripped machinery from its foundations, ruining both the building and damaging the machinery. Soviet reparations were also chaotic and there were overlapping jurisdictions; some in SVAG recognized that such policies were counterproductive if they were to win German hearts and minds for communism, but the reparations often took place under the aegis of Gosplan, not the military government. In many cases the left hand did not know what the right was doing with regards to Soviet policy towards the SBZ.

Although Soviet reparation policies were clearly counterproductive in hindsight, they were not entirely without precedent. Allied wartime agreements did stipulate that Germans would be subject to a battery of reparations and dismantlement. The American JCS 1067 directive for occupied Germany called for decartelization and the breakup of heavy industry in the Ruhr and other regions under Allied control as vital for the new Germany. The difference between the SBZ and the Western zones was that the Soviets never really walked back on these wartime plans. Although the French and to a lesser extent, the UK, had to be persuaded by the US to scale back reparations, the US occupation government (OMGUS) pushed for greater economic cooperation and reconstruction. Slaveski argues that the Western Allies' scaling back of reparations actually added another impetus for "smash and grab" as the Soviets wanted to get as much German material as possible before a final peace treaty reunifying Germany forced them to draw down their demands.

The figures of reparations from the SBZ were quite daunting. By 1948, the total value of the total value SBZ's gross capital assets was 25% lower than it had been in 1936, the last "normal" year for the prewar German economy. 1946's reparations amounted to around half the SBZ's GNP and while the Soviets did lower them, direct reparations by the newly-formed GDR to the USSR continued into the early 1950s. According to Andre Steiner, the SBZ/GDR paid a greater proportion of its national wealth for reparations than any other defeated Axis power. The Soviet's response to the Marshall Plan, COMECON, was not only too anemic to outmatch outflow of plant, goods, and money from the GDR, it also created a degree of disruption to the zone's economy as it had to export to new markets in the Eastern bloc. So even as the SBZ/GDR's economy got back on its feet, it had to readjust to a new trading partners and this readjustment was often quite painful. The GDR did not have the luxury of having relatively rich countries within its geopolitical orbit of its Cold War bloc, so this made a type of West German export-centric recovery unlikely.

The structural readjustment due to COMECON points out that the problem for the GDR's economy was not just its late start and Soviet reparations. Czechoslovakia's economy also declined from prewar standards even though it received reparations. The creation of a Soviet-style economy by SVAG carried along with it Soviet methods of the planned economy and its attending inefficiencies. A number of economic historians have noted that Soviet expropriations targeted those sectors of the SBZ's economy such as heavy industry that actually did quite well in the 1960s and 70s and generally left consumer economy unscathed. The SED's embrace of the planned, centralized economy carried with it its own inefficiencies and precepts that made it ill-suited to match the growth of its Western rival. These planners often placed a low priority on sundry consumer goods and even used shortages of them as an expedient to strengthen the state. The GDR's Handelsorganisation (HO) shops offered scarce consumer goods as a means to absorb excess wages and cement a paternalistic relationship between the SED and its working class. The planned economy created gross inefficiencies and wasted man hours as the constitution mandated full employment and the Stalinist shopfloor was characterized by shock labor to meet quotas rather than a more rationally-planned system. In agriculture, SVAG's treatment of the East Elbian landowners as a class enemy meant the break-up of large estates and ushered in a decade-long attempt at collectivization. The problem was the sandy soils of the SBZ needed such large estates, so the productivity of the agricultural sector never fully recovered from this break-up.

Collectivization drives did lead to an exodus from the countryside to the cities and, more seriously for the GDR, to the FRG. This was of a wider piece with Republikflucht wherein the GDR lost a major proportion of its population to the West. Although crossing the border with intent to flee became illegal in the 1950s for GDR citizens, it was very difficult for the SED to staunch this outflow of people via West Berlin. A 1961 report by the MfS concluded that for every one individual stopped by border and police controls, some six evaded these controls. The outflow of Germans from the GDR was quite massive. It was not just the numbers of refugees that was so damaging to the GDR but the fact that many of them were young and relatively well-educated. The West German economic miracle coupled with the sputtering the GDR's planned economy meant there was an attractive incentive for these individuals to make the flight to the West. FRG business firms played a role in recruiting such skilled laborers as their native talent pool dried up in light of the Wirtschaftswunder. Other economic incentives for GDR professionals and skilled laborers to leave the state were the stringently controlled and often corrupt planned economy which limited promotions and sometimes placed SED loyalists in senior management positions. The GDR's reliance upon shock labor action to meet quotas made the Western model more attractive for a number of laborers who swallowed the dream of working less and earning more. A not insignificant number of these laborers were disappointed that the bounty of the FRG's economy was not as open as the image of the West promised. These returnees were always outnumbered by those who remained in the FRG and a good many returnees themselves re-fled the GDR as the SED often subjected them to legal discrimination for mounting a Republikflucht in the first place.