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IBM computer centers in West Germany—like this one near Stuttgart—were chief targets of East Germany’s industrial spying program. 

© Leonard Freed/Magnum Photos

Cold War espionage paid off—until it backfired, East German spy records reveal

Deep in debt and struggling to provide for his family, Hans Rehder got an offer he couldn’t refuse: to steal key files from his employer, West German electronics firm Telefunken, for a monthly payoff from East German agents. Soon the former Nazi party member and physicist was on board, and he delivered a staggering volume of material: hundreds of invaluable documents each year, including the complete plans for the radiation-resistant Leopard 1 tank. His side hustle lasted 28 years—from 1957 to 1985—and he was never caught.

But although spying clearly paid off for Rehder, economists and historians have long wondered whether industrial espionage is worth it for the country subsidizing all the spying. Now, in the first study of its kind, researchers have analyzed more than 150,000 previously classified documents from the former East German Ministry for State Security (also known as the Stasi) to reach a surprising conclusion: Stealing can boost economic productivity in the short-term, but it cannibalizes long-term investment in research and development.

“It’s R&D on cocaine,” says author Erik Meyersson, a political economist at the Stockholm School of Economics. “Maybe you can have a little bit of fun with it, but it’s not good for you in the long run.”

Industrial, or economic, espionage has a rich history. It helped the Soviet Union get the atomic bomb in the mid-20th century. In the early 19th century it launched the United States onto the world stage after American agents stole technology—and skilled workers—from factories across Europe. And as far back as the 6th century C.E., it helped the Byzantine Empire break China’s monopoly on silk production, when two Nestorian monks smuggled silkworms out of the Far East. But thanks in part to the very nature of such secrets, no one has ever had a bird’s eye view of how stolen information can affect an entire economic system.

Words to spy by

East German scientists evaluated the reports sent in by their spies, rating each on a scale of one to five and tagging them with keywords for easier cataloguing. Economists used these keywords—which ranged from fewer than five per report to 145—to figure out what information spies were collecting.

Credits: (Graphic) G. Grullón/Science; (Data) A. Glitz and E. Meyersson, 2017

Meyersson’s opportunity came in 2011, when he stumbled across a news story about Stasi spying, and he sensed there were untapped databases on the topic. Fellow economist—and German speaker—Albrecht Glitz of Pompeu Fabra Univeristy in  Barcelona, Spain, agreed and launched their investigation. He soon called back with good news: “The data is there. All we have to do is go get it.”

That was easier said than done. After several years of negotiation, Meyersson and Glitz got their hands on 151,627 dispatches on scientific secrets collected by thousands of spies between 1970 and 1988. The duo couldn’t see the content of the reports, but they could see the metadata, including who collected the information and when, how valuable the information was, and keywords related to each item’s content.

They used the 2000 most common keywords—which included terms like “military technology,” “optics,” and “IBM”—to divide the reports into 16 economic sectors, from machine building (23,152 items) to chemicals (33,409 items) to office appliances, computers, and electronics (100,279 items). They then looked at how each of those sectors fared in something called total factor productivity, (TFP) a measure of how efficiently an economy uses its capital equipment—from forklifts to computerized control systems—and labor. (Higher TFP growth is typically associated with innovation.) Finally, they compared growth in TFP for each sector in East and West Germany for every year in the data set.

After controlling for the effects of trade and research and development, the team found that economic espionage boosted TFP growth in East Germany, helping it close the gap with West Germany by some 8.6% in 1989, they report in a working paper published by the Institute of Labor Economics, an economics research institute in Bonn, Germany. The effect was especially pronounced in the computing and electronics sector, where espionage reduced the gap between East and West by almost 26%. (The chart below reveals the same gap, but using the TFP difference between West and East Germany—not the TFP difference before and after espionage—as its baseline.)

“It’s a very original paper,” says Bart Hobijn, a macroeconomist at Arizona State University in Tempe formerly with the U.S. Federal Reserve Bank in San Francisco, California. “Not only did they have access to the data, but they thought about it very creatively. They are in a sense … going through the back door.”

The achievement gap

East Germany was far behind the West when it came to economic productivity. But without espionage, that gap would have been some 9.4% bigger for all sectors of the economy (left chart) and 35.1% bigger for computers and electronics (right chart). And if the East didn’t make up for its losses by putting out more patents, the gap in both cases would have been even larger.

Credits: (Graphic) G. Grullón/Science; (Data) A. Glitz and E. Meyersson, 2017

Historian Kristie Macrakis of the Georgia Institute of Technology in Atlanta, who has spent more than a decade studying Stasi databases—including the one used in the current study—agrees. “I was really excited that someone crunched these numbers,” she says. “They basically quantified what I did [already] in a qualitative way.” Macrakis, who has argued that East German industrial espionage was ultimately a failure, says the next step is to look at how the stolen technology was integrated into individual East German firms, who often requested—and received—the stolen information.

Hobijn says that the paper could also be instructive for countries and companies currently engaged in industrial espionage. “If I were running a secret service, I’d like to know what the return is on my effort.” According to the new study, the payoff may have been as high as €4.6 billion for East Germany in 1988, compared with annual spying expenditures of about €6.4 million. Espionage “has a substantial effect,” Hobijn says.

But there’s a hidden cost, Meyersson says. Espionage seems to “eat up” investment in research and development. For example, the authors’ model showed that increases in industrial espionage significantly reduced patent applications, a key proxy for research and development. “It’s a way to keep up,” Meyersson says. “It’s not a strategy to become a world leader.”

That’s exactly what played out in East Germany, Macrakis says. Despite early successes, including the “reinvention” of polyurethane and the reverse engineering of the “must-have” mainframe computer of the 1960s—the IBM 360—industrial espionage hit a wall in the late 1970s and 1980s. That’s because a new focus on advanced computing—in particular, the country’s quest to create a 1-megabyte memory chip—required orders of magnitude greater investments in human intelligence and embargoed goods. Easy access to secrets had, over time, discouraged both state and private investment in research and development. “East Germany collapsed,” she says. “Maybe they caught up a little bit, but in the end the whole computing thing [at least] was a fiasco.”

Perhaps physicist-turned-spy Hans Rehder would have agreed. In a cryptic comment to his case officer, he once asked: “I’m giving you the best technology available, why can’t you use it?”