CHAPTER 14
CHARACTER AND STRUCTURE OF THE ECONOMY
In 1972 Romania entered the second year of a five-year economic plan that is intended by the leadership to advance the country on the road to industrialization and to increase its economic potential sufficiently to make the economy one of the most dynamic in the world. This goal is to be attained mainly through a continued high rate of investment, a significant improvement in productivity, and an expanded and more efficient foreign trade. Although significant strides in industrial development had been made in the past, this achievement entailed a neglect of agriculture, an inadequate provision for consumer needs, and a balance of payments deficit with Western industrial nations that threatened to undermine the leadership's policy of political and economic independence from the Soviet Union (see ch. 10).
Rigidly controlled by the PCR (see Glossary), the economy suffers from the basic weakness common to all centrally controlled economies, that is, a lack of adequate incentives for managers and workers. Rapid industrialization since 1950, made possible by massive inputs of capital and labor and aided by heavy imports of advanced Western industrial plants and technology, has involved a waste of resources on a scale that may hamper economic progress at the present stage of development. In trying to evolve a system of incentives that would lead to a more economic use of resources, the PCR is facing a dilemma. Greater efficiency requires more flexibility, which, in turn, implies a greater freedom of initiative at lower economic levels than the PCR has been prepared to grant thus far. In the search for a solution numerous administrative changes have been made since 1968 without basically altering the nature of the system.
A major problem facing the economy is its heavy dependence on imports of raw materials and equipment and the failure, thus far, to develop a sufficient volume of exports salable in world markets. At the present stage of development, Romanian industrial products compete poorly with the output of advanced Western nations. Expansion of agricultural exports, which have a ready market in many areas, has been hampered by the slow development of the country's agricultural potential and by a growing domestic demand. Although greater attention is to be devoted to agriculture under the current Five-Year Plan (1971-75), the additional resources to be allocated to this sector are not commensurate with the magnitude of its needs. Instead, major emphasis is placed in the five-year period on the development of the chemical, electronic, and precision tool industries for domestic needs and export.
The state of the economy in the early 1970s was revealed by two Romanian economists in articles evaluating their country's economic progress. According to their calculations, the per capita national income in Romania in 1975, provided that the economic targets for that year are reached, will approach the level attained by Italy and Austria in 1968 and will be somewhat larger than half that in France and the Federal Republic of Germany (West Germany) in the same year. At the same time they estimated that, even with continued acceleration of the rates of industrial modernization and growth of labor productivity, it will require several more five-year periods to reach the 1971 economic level of the more developed nations.
ORGANIZATION
The economy is highly socialized. The state owns virtually all industry and shares with collective farms ownership of more than nine-tenths of the farmland. Private artisan shops contribute only a fraction of 1 percent to the industrial output, and private farmers' limited holdings are confined mainly to marginal lands. The state owns all natural resources other than the collective and private farmlands; maintains complete control over the country's physical resources, finances, and labor; and has a monopoly of foreign trade and foreign exchange. The functioning of the economy is directed by comprehensive long-term and annual state plans, which are binding for all economic entities.
Control over the economy is strongly centralized, despite half-hearted attempts since 1968 to grant more freedom of initiative to lower management levels in the interest of greater flexibility and efficiency. Supreme decisionmaking power rests with the Standing Presidium of the PCR and the Council of State, the memberships of which are almost identical (see ch. 9). Compliance with PCR decisions is enforced through an administrative hierarchy that consists of three distinct levels: the Council of Ministers, all of whose members hold high positions in the PCR; economic ministries, which are responsible for specific sectors of the economy; and trusts and combines, which group enterprises along functional or territorial lines. Specialized committees with ministerial rank administer certain aspects of economic activity; chief among these are the State Planning Committee and the Committee for Prices (see ch. 8).
The organizational structure of the economy has undergone frequent changes in efforts to resolve economic problems by administrative means. Officially, the reorganizations have been declared necessary to keep economic management abreast of the requirements of socialist economic development. The frequency of the changes, however, and a lack of clarity in many of the directives have brought about a blurring of jurisdictional lines with consequent overlapping of functions and conflicts of authority. The organizational problem has been compounded by the contradictory nature of the motives that have prompted the reforms--to grant more discretionary power to enterprise managers and, at the same time, to strengthen central controls by enhancing the directing role of the compulsory economic plans. In 1971 economic officials considered important aspects of the economic organization to be still in an experimental stage.
STRUCTURE AND GROWTH
Data on gross output and national income in absolute terms have not been published. Official statistics on these social accounts have been limited to a few index series for overall, productive sector, and per capita values and a percentage breakdown of gross output and national income by productive sector. The arbitrary nature of the pricing system and differences in statistical treatment compared to Western practice preclude a direct comparison of the published growth rates of the economy and its components with similar rates in Western countries. The same holds true for comparisons of economic structure. Independent studies of the economy by Western scholars in Western statistical terms yielded significantly lower rates of growth and a different structure of economic activities from those officially announced.
According to official data, national income (net material product, which excludes private and government services not directly related to production) more than doubled between 1960 and 1970, and industrial output more than tripled. Agricultural production, by contrast, increased by less than one-third. The rates of economic and industrial growth, even when translated into Western terms, have been relatively high and among the highest in countries of Eastern Europe. Such high growth rates have usually been associated with early stages of industrial development. The high growth rates were made possible by an official policy that allocated more than 30 percent of national income to investment. Growth rates in the 1966-70 period were somewhat lower than in the preceding five years, with the exception of agriculture, the performance of which was slightly better.
The predominant growth of industry has been a direct consequence of the leadership's policy. This policy was reflected in a disproportionately large allocation of investment to industry at the expense of other economic sectors. In the 1966-70 period, for instance, industry received 55 percent of total investment--60 percent if the construction industry is included--compared to less than 13 percent granted to agriculture.
Within industry preponderant emphasis has been placed on the development of the capital goods sector at the expense of consumer goods. Whereas total industrial output increased at an average annual rate of 11.8 percent from 1966 to 1970, production of capital goods rose at a rate of 12.7 percent, and production of consumer goods grew by only 9.5 percent annually.
As a consequence of the uneven sectoral growth, the structure of the economy changed significantly between 1960 and 1970. According to official data the contribution of industry to the net material product rose from 44 to 61 percent, whereas that of agriculture declined from 33 to 20 percent (see table 4). The relative importance of construction and transport rose slightly, but that of trade declined by half. A strikingly different structure of the economy emerges in terms of the Western concept of gross national product (GNP), which includes housing and services and treats both taxes and subsidies in a different manner. The contribution of industry was less than that of agriculture in 1960, but by 1967 it had increased more rapidly than is indicated by the official data (see table 5). The role of agriculture, on the other hand, declined more rapidly.
_Table 4._ _National Income (Net Material Product) of Romania, by Economic Sector, 1960, 1967, and 1970_ (in percent)
---------------------------------------------------------- Economic Sector 1960 1967 1970 ---------------------------------------------------------- Industry and handicrafts 44.1 51.7 60.8 Construction 9.0 8.4 9.6 Agriculture 33.1 28.6 20.0 Transport and communications 3.8 4.2 4.2 Trade 6.5 4.6 3.2 Other sectors 3.5 2.5 2.2 ----- ----- ----- Total 100.0 100.0 100.0 ---------------------------------------------------------- Source: Adapted from _Anuarul Statistic al Republicii Socialiste Romania, 1970_ (Statistical Yearbook of the Socialist Republic of Romania, 1970), Bucharest, 1970; and U.S. Department of Commerce, Office of Technical Services, Joint Publications Research Service--JPRS Series (Washington), _Translations on Eastern Europe: Economic and Scientific Affairs_, "Development of National Income Discussed," _Probleme Economice_, Bucharest, April 1971, (JPRS 53,521, Series No. 491, 1971).
Published labor statistics leave many serious gaps, and unofficially reported data do not always agree with official figures in the annual statistical yearbooks. Information released on the size of the economically active population is limited to percentage changes over the years.
The economically active population increased by only 3.5 percent from 1960 to 1967 and remained stationary thereafter to 1969. During the ten-year period the number of persons active in industry increased by half, whereas the number of those engaged in agriculture declined by 19 percent. Nevertheless, in 1970 about half the population was still engaged in agriculture, and only 22 percent were active in industry.
Although there is no officially recognized unemployment, a substantial amount of underemployment is reported to exist in industry and, even more so, in agriculture. The reasons advanced by Romanian economists for this situation are the duty and the right of every citizen to work and the inability to achieve quickly full and efficient employment in a country that inherited a backward and predominantly agrarian economy with a large peasant population. Efforts toward obtaining full and efficient employment have been handicapped by the rapidly rising volume of investment needed to create new nonagricultural jobs. The average investment per nonagricultural job increased almost fivefold to 324,000 lei (for value of leu, see Glossary) from the 1951-55 period to the 1966-70 period, and a further 40 percent rise in cost was projected for the 1971-75 period.
_Table 5. Gross National Product of Romania, by Sector of Origin, 1960 and 1967_ (in percent)
------------------------------------------------- Economic Sector 1960 1967 ------------------------------------------------- Industry and handicrafts 24.4 32.9 Agriculture and forestry 31.8 22.0 Construction 7.6 11.1 Transport and communications 7.6 8.8 Trade 6.5 5.4 Housing 9.2 7.0 Government and other services 12.9 12.8 ----- ----- Total 100.0 100.0 ------------------------------------------------- Source: Adapted from U.S. Congress, 91st, 2d Session, Joint Economic Committee, _Economic Developments in Countries of Eastern Europe_, Washington, GPO, 1970.
PLANNING
As in all communist states, comprehensive economic planning has been a basic element of the PCR's dogma. Planning is conceived of as an indispensable tool for economic development. Traditionally, five-year and annual plans for all segments and aspects of the economy have been formulated by a central planning agency with the participation of economic ministries, trusts, and enterprises. Planning has proceeded from broadly defined goals set by the PCR to minute instructions for all economic enterprises. In line with the established priorities, the main planning effort has been devoted to industry.
The major problem in planning has been posed by the need to balance supply and demand, not only with regard to the final consumers but also at all stages of the production process and for each individual enterprise. This task entails detailed decisions on the allocation of thousands of different materials, machinery and equipment items, specialized labor skills, energy, and investment funds. With the expansion and growing complexity of the economy and, more particularly, of industry, the balancing task has assumed dimensions that defy solution by traditional means.
At the same time, the imposition of detailed operational prescriptions deprived enterprises of the freedom to exercise constructive initiative and of the flexibility needed to meet unforeseen contingencies. A failure by an enterprise to fulfill its planned assignment necessarily produces a chain reaction involving the production programs of enterprises dependent upon the missing output. Failures of this nature have been frequent.
The breakdown of the planning mechanism brought about a disorganization of the material and technical supply for enterprises, with adverse effects on productivity and output. It has been responsible for a general lag in the economy's performance in relation to official plans.
The deficiency of the traditional system of central planning was officially recognized in 1967, when a decision was made by the National Party Conference to raise the quality of planning to the level demanded by the needs of a modern industrial state. This aim was to be achieved by granting a larger degree of autonomy to individual enterprises while, at the same time, maintaining and even strengthening the directing role of the central plan. The prolonged and intensive discussion engendered by the PCR decision has brought to light many flaws and proposals for change but has not provided a clear insight into the current planning process.
Modifications of the traditional pattern have taken place as a result of organizational and administrative changes introduced after 1967. The intended adoption of a new system, however, that would take into account market relationships and give greater weight to the needs of consumers has been delayed by differences of views among economists and officials on essential elements of the system, by disagreement on the nature of such basic concepts as productivity, economic efficiency, and profit, and by the need for a prior reform of the price system. A draft of a new planning law was reported to be in preparation toward the end of 1971.
As a means of decentralizing planning and mastering the intractable supply problem, the task of coordinating requirements with supplies was delegated to the centrals (see Glossary), trusts, and other enterprise associations and, ultimately, to the enterprises themselves by a law on economic contracts enacted in December 1969. Under the law, industrial and trade enterprises must enter into contracts with suppliers for all products and services needed to fulfill the tasks of the next year's economic plan. In theory, the demands of final consumers for consumption and capital goods would determine the nature of the contracts through all stages of production down to the producers of raw materials. This has not been the case in practice.
Most contracts must be concluded at least six months before the beginning of the plan year because they are supposed to serve as the basis for developing the final version of the annual plan; they must take into account the economic tasks set for that year by the five-year plan. The central planning authorities formulate the ultimate annual plan by modifying individual contracts, where deemed necessary, in the light of official policies and anticipated availabilities of materials and other inputs. Correction of original contracts was reported to be essential because enterprises tended to exaggerate their true requirements as determined by official norms and standards. In 1970 initial orders exceeded available resources of materials by from 20 to 200 percent.
In 1970 and 1971 a large number of inter-enterprise contracts were not concluded on time and, despite legal provisions for financial and other sanctions, thousands of contracts were not adhered to. This entailed a disruption of supplies and production, nonfulfillment of export obligations, and insufficient deliveries to the domestic market. In an attempt to cope with the supply problem, the Ministry of Technical-Material Supply and Control of the Management of Fixed Assets was created in September 1971--yet another example of trying to solve economic problems by administrative means.
The final stage in the planning process, as in the past, continues to be the assignment to each enterprise of specific tasks bearing on all aspects of its operations. These tasks, generally known as plan indicators, spell out in minute detail such items as the production and investment program, the size of the labor force and the wage bill, costs of production, and profits. They also specify norms for the use of all materials, equipment, and labor and set goals for raising productivity. In the case of large enterprises the number of indicators runs into the thousands. The indicators are also used to evaluate the performance of enterprises in relation to the plan. The entire process has been said to represent the application of democratic centralism to planning.
The number and type of indicators to be assigned to enterprises and their associations and the nature of the system of indicators best suited to stimulate greater efficiency and technological innovation have been subjects of wide-ranging and intensive debates. No clarification of the underlying issues, however, much less a consensus on appropriate measures to be undertaken, had emerged by early 1972. Officials have ascribed the lack of any significant progress in the planning reform to general inertia, organizational confusion, bureaucratic interests, and a reluctance on the part of many enterprise directors to assume the added measure of responsibility that is inherent in a greater freedom to exercise initiative. Most of the officials are aware, nevertheless, that the basic problem lies in the absence of adequate incentives. The reconciliation of an obligatory central plan with enterprise autonomy has thus far proved elusive.
Planning in the field of collective agriculture has also been highly centralized, at least through 1971, despite measures introduced at the end of 1970 to reduce the number of plan indicators for individual farms. Detailed instructions on crop and livestock production and on the volume of farm products to be delivered to the state have been handed down to farms by higher authorities insufficiently familiar with their natural and economic conditions. This method of planning has entailed significant losses through improper use of land and other resources. The relatively minor relaxation of central controls beginning in 1971 was intended to eliminate this waste. The extent to which central controls over farming operations were retained even after the announced decentralization of agricultural planning was illustrated by the Grand National Assembly's enactment of a law toward the end of 1971 concerning correct methods of producing and using livestock fodder. Information on the method of planning for state farms was not available.
PRICE SYSTEM
As in all centrally directed economies, prices are set by the government. In 1967 the National Party Conference called for a reform of the price system on the grounds that the prevailing prices failed to ensure the desired balance in economic development or to promote greater efficiency in production and foreign trade. After four years of intensive debate, a new price law was enacted in December 1971. Preliminary information on the provisions of the law indicated that prices would continue to be fixed by the government, although the method of calculating them had been modified. In contrast to the announced policy of decentralizing economic management, the law provided for strengthening central controls over prices.
Until March 1970 there was no unified control over prices. The State Planning Committee and the Ministry of Finance administered industrial wholesale prices, and the State Committee for Prices had jurisdiction over prices of consumer goods and government procurement prices for farm products. In 1970 the reorganized State Committee for Prices was given authority to control all prices. Representation on the committee has been provided for the State Planning Committee; the ministries of finance, domestic trade, and foreign trade; the Central Statistical Bureau; and the Central Council of the General Union of Trade Unions. Participation by delegates from economic ministries and other organs is to be ensured at all sessions in which problems of interest to them are brought up for discussion.
The basic criticism leveled against the price system concerned its tendency to undermine the government's drive for economic efficiency through the failure of prices to reflect production costs, improper relationships among prices, and price inflexibility. A comprehensive, unified approach to price reform was considered beyond the capability of the authorities; a piecemeal approach of dealing separately with different types of prices was therefore decided upon. Priority in this program was given to the improvement of industrial wholesale prices.
Wholesale prices for industrial products have been based on average costs for each product in the relevant industrial branch. Prices have therefore been profitable for enterprises having below-average costs, whereas enterprises with costs above the average have had to rely upon state subsidies for continued operation. Wholesale prices were last fixed in 1963, and subsequent changes in technology and other aspects of production magnified the dissociation of prices and costs. For political reasons and because of general shortages the closing of uneconomic enterprises was not considered feasible. Maintenance of fixed prices over long periods of time has been deemed essential for purposes of planning.
Under the prevailing price system, which assured high profits to many enterprises and provided subsidies for unprofitable ones, there was no incentive for enterprises to reduce costs. This tendency was reinforced by the methods used to calculate costs and prices. The fact that cost calculations did not include any charges for rent or capital induced waste in the use of land and equipment. Prices included an element of planned profit determined as a percentage of cost. In the price-setting procedure it was therefore advantageous for enterprises to overstate actual costs. This practice has been widely prevalent in fixing prices for new products.
Prices for raw materials, including products of the extractive industries and agriculture, were generally set below the cost of production. This policy has been responsible for a wasteful use of many materials in manufacturing. A price discrepancy also served to negate the official fuel policy. Efforts to increase the use of coal in electric power production were frustrated by the relatively much lower price for natural gas. This led some economists to advocate that prices for fuels be based on their caloric content. The price system has also been reported to have produced various other inimical results, such as inhibiting innovation and rewarding the continued production of obsolete goods.
Procurement prices for farm products have been deliberately kept low in relation to industrial prices; prices for farm requisites and consumer goods, on the other hand, have been fixed far above cost through the medium of a turnover tax channeled into the budget. In this manner the price system has served to transfer resources from agriculture to industry and to keep consumption low for the benefit of investment.
Pending the completion of price reform legislation, a provisional measure was adopted in 1970 to lower wholesale prices for export goods and to reduce excess profits through a so-called regularization tax on domestic sales of the main products manufactured by state industry. The measure involved a recalculation of wholesale prices, based on the average cost of products within an industrial branch and a profit allowance of only 10 percent of cost. The difference between the recalculated prices and those in effect at the time was to be channeled into the budget by the tax. In the case of high-cost producers who would suffer losses under this procedure, the profit margin included in the price could be raised to a maximum of 15 percent. The new price measure put pressure on enterprises to lower the cost of production.
The comprehensive new law on prices for goods and services that will come into effect in March 1972 will have no immediate impact on prices. On the basis of criteria outlined in the law and upon approval by the State Committee for Prices, economic ministries, central government agencies, collectives, and other public organizations are supposed first to issue norms for establishing and correlating prices within the areas of their respective jurisdictions, in accordance with the specific conditions of each producing branch, subbranch, or group of enterprises and the specific features of each product and service.
The law makes provision for fixed and ceiling prices. Both types of prices may be either uniform or differentiated. Uniform prices will apply throughout the entire country and will be applicable to the main products and to services of major importance to the economy and the standard of living. Differentiated prices for a product may be set at various levels depending upon territorial or seasonal factors and the nature of the producers or buyers. These provisions will also apply to agricultural procurement prices.
As in the past, uniform wholesale prices will be based on pre-calculated average costs for each product at branch level. For the first time, however, cost will also include taxes on capital and land (interest and rent) and expenditures for the introduction of new technology. An important change will also be made in determining the profit element of the wholesale price. In the future the planned profit level for enterprises, differentiated by branch and subbranch, will be calculated in relation to the fixed and circulating capital employed rather than in relation to cost.
The new law also contains provisions for pricing imports and exports and for establishing retail prices of consumer goods. Retail prices will include a profit for the trade organization and a variable turnover tax applied to the wholesale price. The tax is to be relatively low on goods produced for children and high on those manufactured in small quantities and on luxury products. Changes in retail prices may be made only in the light of planned provisions for the real income of the population.
Authority to set prices and control over the implementation of price policy will be shifted from the Council of Ministers to the Council of State and the Grand National Assembly. The Council of State will make decisions not only concerning general price levels and price changes but also about specific prices for products and services of particular importance to the economy and the standard of living and on prices of products earmarked exclusively for the defense sector. In an effort to ensure a uniform price policy under a decentralized process of price fixing, the law spells out the responsibilities of all entities concerned with pricing, from the Council of State down to the individual enterprise. Jurisdiction over prices for products and services is to be allocated among the various sectors and levels of the economy, and the State Committee for Prices will be responsible for the correct application of the law.
In order to prevent further abuses in the formulation and changing of prices, a state price control inspectorate is to be created within the State Committee for Prices with power to supervise price control agencies in each county. Penalties for infractions of trade regulations have been increased to 2,000 lei, and persons guilty of price irregularities will be subject to prosecution under sections of the penal code on profiteering and fraud, which provide for imprisonment of from six months to seven years.
The intricacy of price formulation, the complexity of the price law (which contains 157 paragraphs), and disagreement among officials about the efficacy of some of the law's provisions suggest that the new measure may not be the final answer to the country's price problems. The determination of the authorities to retain firm control over prices and not to allow market forces to play any significant role in price determination, however, was made clear in a statement by the chairman of the State Committee for Prices to the effect that the building of socialism cannot be directed by transferring the leadership and decisionmaking to some self-regulating mechanism or to instruments that cannot be controlled.
BUDGET
The annual state budgets are more comprehensive than budgets in Western countries because they also cover economic activities that are the province of private enterprise in the West. Information on the manner in which budgets are formulated is not available, except that they are closely related to the annual economic plans and are prepared under the direction of the Ministry of Finance. Budgets must be approved by the Council of Ministers, the PCR, and the Grand National Assembly. The consolidated budget is divided into a central and a local budget; the local budget is roughly one-fifth the size of the central budget.
Official statistics on the budget are deficient in that only summary data are published on the major elements of revenue and expenditures and the source of one-third or more of the revenue is not disclosed. The published data show a small budgetary surplus each year, regardless of the vicissitudes of the economy and unforeseen emergency outlays. Information is not available on budgetary performance in 1970, when the country suffered a disastrous flood. In the planned budgets for 1971 and 1972 revenues and expenditures were perfectly balanced.
Budgetary revenues increased steadily from about 58 billion lei in 1960 to 147 billion lei in 1969, and expenditures rose correspondingly from about 55 billion lei to 143 billion lei. The budgets for 1971 and 1972 were planned to balance at a little more than 138 billion lei and 152 billion lei, respectively. Reasons for the decline in the size of the 1971 budget, the only decline reported in at least a decade, are not known.
A turnover tax levied on consumer goods, farm products, and farm supplies and a profit on the income of economic enterprises and organizations constitute the main sources of budgetary revenue. The relative importance of the two levies changed after 1966; the yield from the profit tax approached that from the turnover tax in 1967 and grew relatively larger in 1968 and 1969. Together, these two levies accounted for from 50 to 56 percent of the annual revenues. Direct taxes on the population yielded close to 6 percent from 1960 to 1969, except that in the first and last years of that period their proportion approached 7 percent. The magnitude of direct taxes does not reflect the real tax burden borne by the population, because the population ultimately pays both the turnover and the profit tax through higher prices of consumer goods.
Financing the national economy absorbed an average of 64.6 percent of annual expenditure in the first half of the 1960s and 68.3 percent in the second half of the decade. At the same time the proportion of outlays for social and cultural purposes declined from an average of 24.9 percent to 23.2 percent, although the absolute amount of these outlays more than doubled. Expenditures for defense declined from 6.1 percent of total outlays in 1960 to 4.4 percent in 1969.
BANKING
The banking system operative in early 1972 was the end product of several institutional reorganizations, the last of which was completed in May 1971. The main purpose of the reorganizations was to make bank credit a more effective tool for promoting economic development and for controlling the operations of economic enterprises and organizations. Control through credit extension has been officially considered an important means for inducing enterprises and trusts to attain the targets of the economic plans. Little information is available on the banks' operations beyond the formal statement of their functions. Data relating to the money supply and foreign exchange reserves have also been kept secret.
Banking Institutions
The banking system consists of the National Bank of the Romanian Socialist Republic (referred to as the National Bank), the Investment Bank, the Romanian Foreign Trade Bank, the Bank for Agriculture and the Food Industry, and the Savings and Loan Bank. The functions of the Romanian Foreign Trade Bank and of the Bank for Agriculture and the Food Industry had been exercised to a more limited extent by the National Bank until 1968. The Economy and Consignment Fund, a department of the Savings and Loan Bank, makes credit available for the construction of privately owned housing--a function exercised by the Investment Bank until the end of 1969. Information on the interrelations between the specialized banks and the National Bank or between the banks and the Ministry of Finance was not available in early 1972.
The National Bank, as reconstituted in December 1970 with a capitalization of 1 billion lei, is the country's central bank of issue, but it also acts as a banker for the government, a bankers' banker for the specialized financial institutions, and a short-term credit and discount agency for economic organizations. The main functions of the National Bank in the field of domestic finance include: the issue of currency and control over its circulation; management of the budgetary cash resources; coordination of all short-term credit and discount activities; and participation in the formulation of annual and five-year credit and cash plans, jointly with the State Planning Committee and the Ministry of Finance.
The National Bank establishes official foreign exchange rates, engages in foreign exchange operations directly or through the Romanian Foreign Trade Bank and other authorized organizations, and participates in working out the balance of foreign payments and in following up on its execution. The National Bank also controls the production, processing, and use of precious metals and gems and, together with the State Planning Committee and the Ministry of Finance, develops plans for their acquisition and allocation at home and abroad. The bank has exclusive authority to purchase from individuals items made of precious metals or stones and items of artistic, historic, or documentary value.
The National Bank is managed by an administrative council, the members of which must be approved by the Council of Ministers upon the recommendation of the bank's governor, who is also chairman of the administrative council. In addition to the chairman, the administrative council includes several vice presidents of the bank; the directors of the bank's fourteen divisions; superintendents of some of the subordinated units; delegates of the management of the Investment Bank, the Bank for Agriculture and the Food Industry, and the Romanian Foreign Trade Bank; experienced specialists from the bank's professional staff and from the outside; and a delegate of the labor unions, designated by the General Union of Trade Unions. The council as a whole and each individual member are responsible to the Council of Ministers for the entire activity of the bank.
The Investment Bank, created in 1948 and last reorganized in September 1971 with a capitalization of 700 million lei, serves to finance, and exercise control over, investment projects of all state, collective, consumer-cooperative, and other public organizations, with the exception of collective farms and organizations subordinate to the Ministry of Agriculture, Food Industry, and Waters. The control powers of the bank extend not only to projects financed with its own resources but also to projects financed through budgetary allocations and out of enterprise profits. The bank's management is organized along the lines of the administrative council of the National Bank.
The Investment Bank must participate in the preparation of draft plans for the financing of all investment projects undertaken by central and local state organizations from the ministerial down to the enterprise level. During the formulation and implementation of these plans the bank must ensure the most economical use of available resources. The bank is also called upon to determine appropriate rates of depreciation for fixed assets and to ensure that the required amortization payments to the budget are made on time.
Two of the bank's main functions are the review of technical and economic investment criteria submitted to it for approval by ministries and other state agencies and the evaluation of the feasibility of proposed investment projects on the basis of accepted standards; the more important of these standards also require approval by the Council of Ministers. Approval may be granted by the bank only for investment projects that satisfy all legal requirements regarding need, suitability, and adherence to prescribed norms; have an adequate raw materials base and assured sales outlets; and serve to improve the economic performance of the organization that undertakes the investment. In the event of disagreement between the bank and the organization seeking investment approval, appeal may be made to higher authorities.
The Romanian Foreign Trade Bank was established in July 1968. Its principal functions are to facilitate exports and, through strict controls over exchange allocations, to encourage import substitution by domestic producers. In 1970 about 73 percent of the bank's credits were devoted to exports, and only 21 percent were granted for imports. The remaining 6 percent of the credits were used to finance internal transport.
In July 1971 the Romanian Foreign Trade Bank and a group of eight French financial institutions opened the Romanian-French Bank in Paris. This bank was organized as a private limited-liability company with a capital of 20 million French francs underwritten in equal parts by the Romanian Foreign Trade Bank and the French bankers. In the second half of 1971 the Romanian Foreign Trade Bank acquired affiliates in London and Rome.
The Bank for Agriculture and the Food Industry was created in May 1971 by expanding the functions and changing the name of the Agricultural Bank established three years earlier. This reorganization followed the consolidation of previously independent ministries into the Ministry of Agriculture, Food Industry, and Waters (referred to as the Ministry of Agriculture). The bank was capitalized at 500 million lei and was required to create a reserve out of profits equal to the amount of its capitalization. The bank's function is to provide investment and operating credits for enterprises under the jurisdiction of the Ministry of Agriculture, including collective farms, and to finance the distribution of their products within the country.
A few summary data on credits extended by the Bank for Agriculture and the Food Industry to collective farms have been released to the country's press in an obvious effort to publicize official concern for this important but neglected farm sector (see ch. 15). Information on other aspects of this bank's operations have not been disclosed.
The Savings and Loan Bank, an institution nationalized at an early stage of communist rule, had 1,560 branches and agencies in 1971, most of which were located in rural areas. The main function of the bank has been to mobilize the cash resources of the population for investment, through obligatory periodic transfers of deposited funds to the National Bank. In the 1966-70 period subsidiary functions of the bank gained in importance, including small-scale commercial bank transactions, personal loans, and tax collections. Receipts from personal savings deposits accounted for 70 percent of total cash receipts in 1970. Since the beginning of 1970 the bank has also made loans for private housing construction.
The schedule of payments to the National Bank has been sufficiently stringent to induce the Savings and Loan Bank to mount special educational programs for attracting savings, particularly in rural areas, and to seek ways of stimulating cash collections from its other activities. To this end the bank is giving special attention to finding more effective means for identifying cash reserves held by the population. One avenue the bank has been exploring is to gain greater knowledge of the timing of income receipts and of the uses to which incomes are put.
The volume of savings has been steadily mounting; it rose at an average annual rate of more than 20 percent in the 1966-70 period and was 2.5 times larger at the period's end than at its beginning. In 1970, 13.6 percent of the population's cash income was deposited in savings accounts, compared to 5.8 percent in 1960. More than 65 percent of the population's cash assets in 1970 were on deposit in savings accounts, as against 56.6 percent five years earlier. Under the economic plan for the 1971-75 period, savings deposits of the Savings and Loan Bank are scheduled to increase by 87 percent--the equivalent of an annual 13.4 percent growth rate. An important reason for the growth of savings has been a general shortage of consumer goods.
Loans granted by the Savings and Loan Bank for private housing construction in 1970 amounted to 2.1 billion lei. In 1971 the bank planned to provide construction loans totaling 2.9 billion lei. Information on other bank transactions has not been published.
Credit Policy
Interest rates do not reflect the scarcity of money or the element of risk. They are used by the government as one of the economic levers intended to motivate enterprises toward greater efficiency. In 1969 the average rate for short-term operating credits was 2.9 percent; actual rates ranged from less than 1 percent to a level far above the average. New regulations issued about mid-1970 raised the interest rates, established greater uniformity among them, and introduced a differentiation among penalty rates based on the length of time that repayments remain in arrears or credits in excess of those planned are used. As a result of these measures, National Bank officials expected the average rate of interest to rise to 3.8 percent.
A uniform interest rate of 5 percent was established on all operating credits for inventory and production purposes in economic sectors other than agriculture. Preferential rates for artisans' collectives were abolished on the grounds that the collectives had received enough state support in the past to place them on an equal footing with state enterprises with regard to credit. A rate of 3 percent was continued on credits used in the distribution of goods. Interest rates of 4 percent and 2 percent, respectively, were established for state and collective farms.
The government attaches great importance to the penalty feature of the credit system, which allows it to discriminate between efficient enterprises that find themselves in temporary difficulties and enterprises that are poorly managed. Enterprises that require operating funds in excess of those prescribed by officially determined norms or are unable to repay credits on time must pay progressively higher interest rates. Excess and overdue credits carry an interest rate of up to 10 percent for the first three months and up to 12 percent for the next three months. Enterprises in the second stage are subject to a searching examination by a committee of experts and may be denied further credits. Information is lacking on the procedures followed in the case of enterprises that would be declared bankrupt in a Western economy.
According to a National Bank official, the new credit regulations were to be rigorously applied in order to combat a rising trend in the volume of overdue credits that became apparent in the first half of 1970. The credit and interest policies were to be applied in a manner that would protect the economy from the bad effects of mismanagement and that would place the onus only on poorly run enterprises. This task was said to demand a high level of competence from those called upon to resolve the difficult problems of the enterprises.
CURRENCY
The currency unit of the country is the leu (plural, lei), divided into 100 bani. It is nonconvertible and usable only within the country. The leu is officially defined to contain 148.112 milligrams of fine gold, so that 5.53 lei are equivalent to US$1. This basic rate of exchange became effective on December 23, 1971, in the wake of the agreement reached by the United States with other major Western trading nations to devalue the American dollar; before that date the rate was 6 lei per US$1. The basic rate is used in foreign trade accounting and is also applicable to nonresident accounts created by a transfer of foreign currencies into Romania.
A wide range of official noncommercial or tourist exchange rates is in effect for residents of other communist countries. These rates vary from about one-third to more than double the basic rate. Tourist rates for noncommunist country currencies embody a bonus of 189 percent over the basic rate, making 16 lei equivalent to US$1. In addition to the official exchange rates there are at least thirty-seven semiofficial rates resulting from seven multilateral trade and payments agreements with members of the Council for Mutual Economic Assistance (COMECON) and thirty bilateral agreements with other communist and noncommunist states.
The state has a monopoly of foreign exchange. Control over currency and foreign exchange is vested in the National Bank and administered by the bank jointly with the Ministry of Finance and the Romanian Foreign Trade Bank. All foreign exchange realized by state agencies from exports and other foreign operations must be surrendered to the Romanian Foreign Trade Bank, which also controls all exchange expenditures abroad.
Transferability of funds by private individuals is strictly limited. Only 15 to 30 percent of inheritances, royalties, pensions, and support payments derived from abroad may be used or retransferred; from 70 to 85 percent of the sums received must be surrendered at the tourist rate of exchange. Residents may send small amounts and get travel allocations to COMECON and some Western countries. Most currency transactions by individuals with residents in Western states are prohibited. Residents may not own foreign currencies or securities or have bank balances abroad without official permission, nor may they import or export Romanian banknotes. They are forbidden to own or trade in gold, to export jewelry and diamonds, and to engage in foreign merchandise trade.
Controls over financial transactions by state agencies in domestic currency and foreign exchange were tightened by a decree issued in September 1971. A companion decree also provided for much stricter border controls over foreign exchange, precious metals, and jewelry carried by individuals entering or leaving the country. Violations were more precisely defined, and penalties were substantially increased to discourage illegal traffic.
FOREIGN TRADE
Foreign trade is of crucial importance to the country's industrial development because imports must be relied upon for a large part of the requirements for materials and equipment. Trade has been expanding at a rapid rate, and imports have been growing faster than exports. In a bid for economic and political independence from the Soviet Union, the country's leadership succeeded in reorienting a substantial portion of its trade toward the industrial nations of Western Europe during the mid-1960s (see ch. 10). After 1967, however, the inability to generate enough exports salable in Western markets to balance imports forced the country to turn increasingly to the Soviet Union and other Eastern European countries for its import needs.
Foreign trade is a state monopoly. Trade policy is established by the PCR and the government, and its implementation is the responsibility of the Ministry of Foreign Trade. Authority to engage in foreign trade operations has been partially decentralized by a law enacted in March 1971, although initial steps in this direction were taken under administrative regulations in the beginning of 1970. The main purpose of the law has been to raise the efficiency of foreign trade and to help expand exports. These ends are to be attained through greater exposure of domestic producers to international competition and by providing incentives for them to meet it. The law was also intended to create favorable conditions in the country for the establishment of industrial enterprises with foreign participation.
Before the adoption of the trade reform law, only specialized foreign trade enterprises directly subordinated to the Ministry of Foreign Trade were empowered to carry on trade activities. Producing enterprises were completely divorced from foreign buyers. They delivered their export goods to the foreign trade enterprises at domestic prices, without knowing to whom or at what price the goods were sold abroad. Imports were also obtainable only through foreign trade enterprises at domestic prices, regardless of their acquisition cost. Foreign trade losses were covered out of the state budget, and enterprises assumed no risk whatever in foreign trade transactions. Producing enterprises had no interest in marketing their output abroad or in making their products competitive in world markets; neither were they interested in using domestic substitutes to avoid the need for imports.
Under the new law authority to engage in foreign trade has been granted to some of the industrial ministries, trusts, and enterprises. Others must continue to trade through foreign trade enterprises. The delegation of authority has not involved a transfer of basic decisionmaking powers, and the continuance of central control is therefore assured. All trade must be conducted in accordance with binding state plans and guidelines issued by the minister of foreign trade. Every transaction requires approval by the Ministry of Foreign Trade in the form of an import or export license. Central controls have also been retained over foreign exchange and over export and import prices. The main advantage of the new regulation lies in the opportunity it provides for producers to develop direct customer relations, thus enabling them to learn at first hand the preferences of buyers and the nature of the competition they must face. It also encourages them to exercise initiative in seeking out potential customers.
Under the law production for export must be given priority. Failure by economic units to discharge their export obligations adversely affects their profits, even if they meet their total output target, because in these circumstances the production plan is considered underfulfilled by the value of the undelivered exports. This provision applies equally to suppliers and subcontractors of export manufacturers. A positive incentive to exceed export quotas has been provided in the form of export bonuses. Export manufacturers, however, have a greater interest than their suppliers in exceeding the export plan because they are entitled to keep for their own use a portion of the above-plan foreign exchange earnings, whereas their suppliers have no opportunity to do so. This difference of interests has been interpreted by foreign observers as a weakness in the law, in that it may hamper manufacturers' efforts to maximize export production because the requisite supplies and components may not be forthcoming.
The decentralization of foreign trade activities necessarily entails an increased need for well-qualified specialists in foreign trade and international finance, both at home and abroad. The shortage of experts in these fields is to be alleviated through an intensive personnel training program.
Western economists believe the new law to be a step in the right direction in that it promotes an orientation of the economy toward exports. They hold the view, however, also shared by some Romanian economists, that, as long as the country's currency remains nonconvertible and prices fail to reflect the relative scarcity of goods, it will not be possible properly to calculate the profitability of foreign trade nor to improve the structure of the trade on the basis of such a calculation.
In the 1960-70 period the annual trade turnover increased by 2.8 times to a volume of 22,8 billion lei. Exports rose at an average annual rate of 10 percent to 11.1 billion lei, and imports grew by 11.7 percent per year to 11.7 billion lei. From 1965 to 1970 the rise in trade was more rapid; the rates of growth were 11 percent for exports and 12.7 percent for imports.
Although trade relations were officially reported to have expanded from twenty-nine countries in 1960 to 110 countries in 1970, the bulk of the trade was carried on with members of COMECON and the industrial countries of Western Europe (see table 6). Only 15 percent of the trade in 1970 involved countries outside these areas. Between 1960 and 1967 trade with COMECON members increased by little more than half, whereas trade with Western so-called capitalist countries rose almost fourfold. The difference was even more marked in the case of imports from the West, which increased ninefold, so that imports from this area in 1967 were larger than imports from COMECON. The trend was reversed after 1967, mainly because of increasing balance of payments difficulties with Western trade partners.
With a turnover of 5.5 billion lei in 1969, the Soviet Union has been by far the most important of Romania's trading partners. Czechoslovakia and the German Democratic Republic (East Germany) were next in importance within COMECON, with a trade volume of 1.5 billion and 1.2 billion lei, respectively, in 1969. Among trading partners in Western Europe, West Germany occupied first place, with a trade volume of almost 1.8 billion lei, followed by Italy with a volume of 1.2 billion lei and France with 0.9 billion lei. The People's Republic of China has been the main communist trading partner outside Europe, with an annual volume of about 0.5 billion lei in 1968 and 1969.
_Table 6._ _Foreign Trade of Romania, by Groups of Countries, 1960 and 1969_ (in millions of lei)[1]
---------------------------------------------------------------------------- 1960[2] 1969[2] ------------------------- ------------------------ Country Group Exports Imports Total Exports Imports Total ---------------------------------------------------------------------------- Western industrial states 918 913 1,831 2,980 4,432 7,412 COMECON[3] 2,821 2,636 5,458 5,042 4,819 9,862 Other communist states 318 206 524 781 506 1,286 Developing countries 245 131 376 996 686 1,682 ----- ----- ------ ----- ------ ------ Total 4,302 3,887 8,189 9,799 10,443 20,242 ---------------------------------------------------------------------------- 1: For value of leu, see Glossary. 2: Totals may not add because of rounding. 3: Council for Mutual Economic Assistance. Source: Adapted from U.S. Department of Commerce, Office of Technical Services, Joint Publications Research Service--JPRS Series (Washington), _Translations on Eastern Europe: Economic and Scientific Affairs_, "Foreign Trade Reform Analyzed," _Vierteljahresshefte zur Wirtschaftsvorschung_, West Berlin, July-September 1971, (JPRS 54,691, Series No. 580, 1971).
Trade between Romania and the United States has been small because of legal restrictions in the United States against trade with communist countries. The trade volume doubled from about US$40 million in 1969 to US$80 million in 1970 but declined to about US$65 million in 1971. About 80 percent of the trade in 1969 and 1970 was accounted for by Romanian imports; in 1971 the trade was more nearly balanced. Comparable Romanian statistics are available only for 1969. They show a lower volume of trade and a smaller trade deficit. No explanation of this discrepancy is available.
Measures to exempt Romania from the restrictions directed against trade with communist countries have been taken in the United States. In November 1971 exports to Romania were made eligible for Export-Import Bank financing. With support from the administration, legislation has been introduced in both houses of the Congress of the United States to accord Romania most-favored-nation treatment. Sources in the United States, however, believe that Romania will not be able to balance its trade with that country even in the event that the proposed legislation is enacted into law.
Imports have been overwhelmingly weighted in favor of capital goods. Machinery and equipment, fuels, and raw and processed materials constituted about 90 percent of all imports in the 1960s. Manufactured consumer goods accounted for from 5 to 7 percent of imports. Raw and processed food products made up the small balance. Machinery and equipment, including plant installations, were the major single import category; the share of machinery and equipment in total imports rose from about 33 percent in 1960 to 49 percent in 1967 but declined to 44 percent in 1969 because of payments difficulties. Imported machinery and equipment covered about 30 percent of requirements in 1970.
Exports in the 1960s consisted mainly of raw and processed materials and foodstuffs, about equally divided between products of agricultural and industrial origin. As a result of progressive industrialization, the proportion of these products in total exports declined from about 78 percent in 1960 to 63 percent in 1969. During the same period the share of machinery and equipment rose from about 17 to 22 percent, and that of manufactured consumer goods increased from about 6 to 16 percent. Official foreign trade policy is directed toward increasing the proportion of processed goods in total exports.
In the 1960-70 period the annual balance of trade was negative, with the exception of the years 1960 and 1965. The cumulative trade deficit at the end of 1970 amounted to about 5.1 billion lei--the equivalent of about US$850 million. The overall deficit, however, obscured the severity of the foreign exchange problem facing the country. Trade with the communist and developing countries during the period produced an export surplus that offset, in part, the deficit with Western trading partners. This surplus, however, could not be used to reduce foreign indebtedness because it did not generate hard currency earnings. The cumulative hard currency trade deficit with the West reached US$1.2 billion in 1969 and an estimated US$1.5 billion in 1970.
Information on the country's balance of payments has been kept secret, so that it is impossible to know how the trade deficit has been financed. Hard currency receipts from tourism, which could be applied toward repayment of the debt, equaled only a fraction of the annual trade deficit. Western sources estimated Romania's indebtedness to her Western industrial trading partners to have risen from about US$300 million in 1966 to US$800 million in 1968 and to have increased further by 1970.