Area Handbook for Romania Part 28

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 partic.i.p.ation 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 a.s.sumed 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 a.s.signment 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 a.s.sociations 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 antic.i.p.ated 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 a.s.sets 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 a.s.signment 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 a.s.signed to enterprises and their a.s.sociations 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 a.s.sume 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 ill.u.s.trated by the Grand National a.s.sembly'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.

Partic.i.p.ation 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 a.s.sured 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 quant.i.ties 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 a.s.sembly. 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 ent.i.ties 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 a.s.sembly. 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 const.i.tute 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 inst.i.tutional 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 Inst.i.tutions

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 reconst.i.tuted 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 inst.i.tutions, 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 partic.i.p.ation 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 partic.i.p.ates 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 doc.u.mentary 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 partic.i.p.ate 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 a.s.sets 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 a.s.sured 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.