To clarify what the reform program is trying to achieve and the obstacles it faces, this section describes the main aspects of the centrally planned system in Romania and its development in the 1970s and 1980s.1 It covers first the developments in the economy from the early days through the 1970s, and then focuses on the 1980s.
Origins of the Centrally Planned Economic System
During the postwar years, the Romanian economic system developed in ways similar to those of other centrally planned economies. The state owned virtually all means of production, except for a small proportion of the land cultivated by private farmers. The State Planning Committee (SPC), which prepared the plan targets based on Communist party directives, was responsible for the detailed planning of all economic activity.2 Once the plan was approved, the Government monitored its implementation as well as managed economic activity directly through the branch ministries. The branch ministries, each covering a different sector of the economy, also allocated inputs and decided on product use (that is, consumption or investment) and distribution, using a three-tiered planning process with five-year, annual, and special sectoral plans.
Prices, which were strictly regulated and did not play an allocative role, were determined in the context of the plan on a markup basis. Moreover, until the early 1970s, only labor and intermediate products were taken into account in the calculation of costs: no charge was made for capital, land, or natural resources. Over time, consumer prices were kept fairly stable, while producer prices were adjusted occasionally to reflect changes in costs. The only prices that were market-determined—although at times also subject to restrictions—were those of agricultural produce sold by private farmers in the so-called peasant markets, which were limited in size.
Wages and the allocation of labor were also tightly regulated. Wages were differentiated according to the type of employee (white- or blue-collar) and according to economic branch, hardship, and other criteria. “Base wages” (that is, remuneration per unit of time) were established centrally for all categories of employees. In addition, “norms” (that is, output per unit of time) were established for those categories of workers whose output was measurable. Based on the output target for each enterprise and these base wages and norms—where applicable—the plan determined the wage bill and the internal wage structure of the enterprise, and placed separate constraints on the number of white-and blue-collar employees. The management of the enterprise could not raise wages to attract more labor, and its authority to fire workers was severely limited. Labor was directed to desired industries and regions through direct controls on mobility.
The distribution of raw materials, capital goods, and intermediate products was determined on the basis of the material balance, a planning tool for ensuring that the total sources and uses of a certain product were in balance. It prescribed the distribution of a product according to different economic uses, as well as among different administrative units, such as branch ministries and districts. Consumer goods were also distributed among districts using a similar system.
State-owned and -controlled foreign trade organizations (FTOs) supervised by the various branch ministries managed foreign trade exclusively. All transactions in foreign currencies were conducted through the Romanian Bank for Foreign Trade. Import decisions were made centrally in the context of the plan, by comparing the needs of the domestic economy and the resources available to fulfill the plan, and export targets were set in order to finance the imports. Import and export targets were integrated into a detailed foreign trade plan. Domestic producer and consumer prices remained unchanged in the face of changing world prices by means of a so-called price equalization fund, which covered the differences between the international and domestic prices of traded goods through a system of taxes and subsidies on exports and imports. This system resulted in a vast number of implicit exchange rates. Two exchange rates of the Romanian leu vis-à-vis convertible currencies were quoted officially but had limited application. One was the valuta leu, reflecting the official gold price of the leu and used only for statistical purposes; the other was the noncommercial rate, used mostly for tourism. The exchange rate of the leu vis-à-vis the transferable ruble was set in the context of arrangements with the countries of the Council for Mutual Economic Assistance (CMEA).
Financial policies were designed to ensure consistency between physical plan targets and intersectoral financial flows. Thus, the physical plan was the basis for drawing up the so-called synthetic financial plan. The financial plan was prepared at the Ministry of Finance for the economy as a whole, for which it essentially served as a balance sheet, consolidating the relevant financial information and checking the consistency of the physical plan. The prices used were those prevailing at the time the plan was prepared. The financial plan was updated to take into account current price information, especially changing world prices and trade volumes, in order to ensure the consistency of foreign currency flows on a year-to-year basis, and served as the basis for the state budget. In the context of the financial plan, there was no scope for active monetary or fiscal policies. There were no financial markets, and interest rates, although adjusted occasionally, were not meant to be an instrument for the allocation of funds, which was handled by the Government. The banking system consisted of a number of specialized banks and the National Bank of Romania, which served as a central bank but also had commercial functions. The banks had limited discretion regarding the size and allocation of credit. Use of bank credit for investment by state enterprises was, in any case, limited; the bulk of such investment was financed directly from the state budget.
In theory, the physical and financial plans were meant to be fully consistent, so that the value of the sales of consumer goods at plan prices was equal to the money income of the population (that is, the aggregate of wages, pensions, and so on). In practice, however, as physical plan targets were often unrealistic, the shortage of consumer goods combined with the lack of different forms of financial savings caused a steady increase in money holdings of the population. These money holdings were essentially forced savings, insofar as they reflected the failure of the system to provide the desired consumer goods.
Economic System in the 1970s
In the late 1960s and early 1970s, while other Eastern European economies were making their first attempts at economic reform, Romania also took several measures to improve economic management within the centrally planned framework. These measures, however, did not go as far as did those in other countries and left the way in which the system operated essentially unchanged. It is interesting to note that while the West considered Ceausescu to be somewhat of a “maverick Communist” in foreign policy matters, especially in the wake of his outspoken opposition to the Soviet invasion of Czechoslovakia in 1968, in economic affairs he remained an unreconstructed Stalinist throughout his rule. To him, the need for state control of the economy was unquestionable and the planning mechanism sacrosanct. A good example of Ceauşescu’s thinking on this subject is found in a speech he delivered in July 1974, in which he said:3
To give everyone the freedom of spending society’s money on whatever, and however it might strike one’s mind—this is not possible. We have a planned economy. Nobody has the right to build or produce what is not provided for by the Plan.
The Law on the Organization and Functions of the SPC of 1968, while it increased the SPC’s responsibilities in overseeing plan fulfillment and making adjustments to the targets if necessary, attempted at the same time to decentralize the planning process by giving enterprises a greater role in preparing the plans. The preparation of the draft plan was now supposed to commence at the enterprise level, with the SPC combining the proposals in the final draft. Moreover, with the establishment of the Department of Technical-Material Supply within the SPC in 1969, the SPC was given a central role in allocating inputs. Before this, allocation of inputs had been primarily the responsibility of the Council of Ministers, which, in 1967, for example, allocated centrally over 200 raw materials and intermediate products. The same year, the branch ministries allocated an additional 1,300 inputs (Spigler (1973)).
A further reform was the addition in 1969 of a new administrative layer between the branch ministry and the enterprise: the centrala (plural: centrale), which combined all enterprises with similar activities in a certain geographical area. Between 1969 and 1972, some 200 centrale were created, covering all the enterprises in industry, mining, and construction. The average centrala employed a total of about 8,000 in its enterprises, although a few employed as many as 100,000 (Gra-nick (1975)).
The centrala played an important role in the planning process. Once the plan was voted into law by the National Assembly, the production targets were “nominalized”; in other words, specific quantitative indicators and constraints were placed on branch ministries. They, in turn, distributed these targets among their centrale, as well as nominalized some additional ones. The same process subsequently took place between the centrale and the enterprises. The centrala had wide discretion for specifying different types and qualities of products to be produced by its enterprises, for nominalizing targets additional to those set by the branch ministries, and for revising targets if necessary.
The price system was revised with the promulgation of the Law on Prices and Tariffs of 1971, which was amended in 1977. Although the markup rule remained in place, the law stipulated a more comprehensive accounting of costs in the formation of prices. Most producer and consumer prices, which had remained unchanged since 1963, were reevaluated in 1973-76, based on this revised framework (Tsantis and Pepper (1979)). The law also introduced restrictions on prices in peasant markets in the form of price guidelines (“mercurial” prices), around which peasant market prices were supposed to fluctuate. However, enforcement of these guidelines was weak, especially in the countryside.
Since wages could not be used to influence the allocation of labor among industries or regions, during the 1970s direct controls on labor mobility increased, mainly through the stricter use of the “employment card” and the introduction of the system of “closed cities.” The former was the practice, common among enterprises, of refusing to hire any applicant whose employment card had not been certified by his previous employer. In this way, although the right to quit was in theory unrestricted, in practice, each enterprise could pressure the worker to stay, or postpone his departure, by delaying the certification of his employment card. For the same reason, there was virtually no mobility between small private farms and the state sector. Even in the case of agricultural cooperatives, a worker needed the permission of the manager to leave and move out.
The system of closed cities began in 1976, when legislation restricting migration to 14 large cities was promulgated. Only those who had a resident spouse or relatives, or some predetermined “necessary skills,” could obtain permanent residence permits for these cities. By the late 1970s, virtually all cities with a population of more than 100,000 were closed. Nonresidents were not allowed to move or work there. Temporary residence permits were granted by the municipality, usually for less than one year, with the possibility of renewal. In this way, labor could be directed to those enterprises and cities that would otherwise suffer from labor shortage.
To improve the management of foreign trade transactions, in 1973 the Government established a commercial exchange rate (also known as the internal conversion coefficient) of lei 20 per U.S. dollar, to be used for comparing the prices of foreign and domestic goods. Although all foreign trade transactions continued to be conducted at the implicit rates resulting from the operation of the price equalization fund, the commercial rate was supposed to represent an efficiency indicator for these transactions.
As regards capital flows, Romania was one of the first centrally planned economies to introduce legislation in 1971 permitting the establishment of joint ventures involving foreign equity participation. Although this legislation was rather liberal compared with that in other Eastern European countries at the time, it placed quite restrictive conditions on foreign investment: the foreign share could not exceed 49 percent: profits could be repatriated in foreign currency only after the deduction of foreign currency imports; and the tax rate on profits was initially set at 30 percent, with an additional 10 percent charge on profits transferred abroad.
Finally, with the Financial Law of 1972, which standardized bank lending practices, there was an attempt to increase the use of bank credit for financing enterprise investment and, at the same time, to reduce the budgetary burden. However, the amount and allocation of credit were under central control, and banks had no discretion in their lending activities.
These measures did not change the basic way in which the Romanian economy operated, and, in some instances, led to tighter central control. Central planning remained the mechanism through which production, input allocation, distribution, investment, and pricing decisions were made for the economy as a whole. Although the preparation of the plan in theory commenced at the enterprise level, in practice, the SPC continued to prepare the draft plan based on Party directives, as in the past. Even the attempt to decentralize the planning process through the introduction of the centrala failed to enhance enterprise autonomy, because as the centrale took over many enterprise functions, enterprises were actually left with less power to make decisions. Moreover, although the price measures led to a revision of most producer and consumer prices, they enhanced neither their allocative role nor their flexibility. The single commercial exchange rate introduced in 1973 had merely an indicative value, because the policy of keeping domestic prices stable and the operation of the price equalization fund prevented it from becoming an important policy instrument. Controls on labor allocation increased during the 1970s. Finally, the law on foreign ventures did not have the intended effect: only six joint ventures were established in the early 1970s, while the restrictiveness of the legislation and the economic difficulties facing Romania in the late 1970s and early 1980s deterred new investment (Granick (1975)).
New Economic and Financial Mechanism of 1979 and the Development of the Economic System in the 1980s
The main revision in Romania’s system of economic management was the introduction in 1979 of the New Economic and Financial Mechanism (NEFM), whose objectives were to improve economic efficiency in the context of the planning system, to promote enterprise autonomy, and to increase enterprise participation in the planning process. The NEFM provided a general framework for reform, in the context of which additional systemic measures were taken throughout the 1980s.4 In support of these measures, a three-year stand-by arrangement was negotiated with the IMF in 1981, which lasted until 1984.
Important changes in planning and enterprise management were the replacement of the physical output targets with targets for net production (a concept akin to value added); the introduction of additional quantitative indicators; the imposition for the first time of quality standards and control; and an emphasis on forward contracting by enterprises for inputs and outputs. In spite of these changes, however, the nature of planning and economic management remained the same as in the pre-NEFM years, with the state retaining firm control over economic activity. The SPC, as well as determining plan targets, continued to monitor plan implementation closely by receiving quarterly production reports for some 300 products, as well as monthly, weekly, and daily reports for a smaller number of products. The number of targets and indicators included in the annual plan increased substantially during the 1980s. At the level of the SPC alone, by 1989 the complete annual plan included material balances for 400 products, and up to 452 targets and indicators for each of an additional 2,000 products. Further material balances and indicators were elaborated at the level of branch ministries and centrale.
To discourage production without sufficient regard for the needs of final users and, at the same time, to prevent enterprises from exaggerating production by overstating stockbuilding of finished products, the NEFM introduced forward contracting among enterprises for inputs and outputs as a basis for formulating production plans at the enterprise level. Enterprises were henceforth permitted to produce only on the basis of negotiated contracts with buyers, except when producing for export. However, distortions in the planning system soon rendered the forward contracting system ineffective. Underlying the latter was the assumption that enterprises would fulfill their plan targets, but because these targets were increasingly unrealistic, the system could not function properly. Moreover, it provided an incentive for overstating the stockbuilding of exportable goods, since this had become the only way for enterprises to overstate production.
In an effort to make enterprises less reliant on the budget for investment financing, the NEFM placed much greater emphasis on enterprise self-financing, with the result that the budgetary outlays for investment were reduced during 1980-83. In addition, interest rates on investment credit to enterprises were substantially raised in 1983, in an attempt to make enterprises more cost-conscious and to increase the efficiency of resource use. The same year, a capital charge was imposed on funds advanced from the budget for investment.
The success of these measures was limited. Al though enterprises were required to finance a larger part of their investment, they possessed limited resources owing to the overstatement of their profits and the excessive tax burden on enterprises during the 1980s. Moreover, they were not able to invest their own funds as they wished, because their investment projects had to be approved by the SPC. Consequently, it is doubtful whether their funds were more efficiently allocated. Similarly, as increased interest costs were taken into account in the plan and were reflected in lower planned profits and remittances from profits to the budget, the use of investment funds probably did not lead to greater efficiency. In any event, the role of the budget in investment financing, after declining during 1980-83, started growing rapidly again. Finally, in 1984, after the program with the IMF lapsed, the authorities lowered interest rates, restoring them to their earlier levels.
The policy in the late 1970s of maintaining price stability in the face of changing world prices caused large discrepancies to arise between domestic and world prices expressed in lei at the commercial exchange rate. To offset this effect, the authorities introduced gradually over the 1970s additional “commercial” exchange rates, each applying to a different category of trade transactions. To correct the resulting distortions, they introduced a number of measures in the early 1980s in the context of the NEFM and the stand-by arrangement with the IMF. All commercial exchange rates were unified and depreciated against the U.S. dollar during 1981-83; major domestic price adjustments took place in the same period; and the price equalization mechanism was modified.
Whereas, in the past, the price equalization fund had completely insulated both exporters and importers from world price movements, starting in 1981, the modified mechanism exposed exporters more to world prices. The foreign trade plan began to include explicit export price targets in foreign currency terms. If the target export price was realized but fell below the domestic price when converted to lei at the commercial exchange rate, the price equalization fund paid the exporter a subsidy. If, however, the target export price was not realized, the shortfall was covered by the exporter’s profits. Conversely, if the world price converted at the commercial rate was higher than the domestic price, the difference accrued to the exporter if it was due to a higher-than-targeted realized export price, and, otherwise, to the price equalization fund. The system of price equalization applying to imports, however, remained essentially unchanged.
These measures were intended to increase the incentives provided to exporters to improve export prices as well as to correct the large misalignments between domestic and world prices. Not only did they fail to achieve even these limited objectives, but they also failed to change the role played by prices in the Romanian economy—the plan continued to determine the allocation of resources. The pervasiveness of planning, as well as the increasingly unrealistic character of the export targets included in the foreign trade plan in the 1980s, did little to improve export performance. Moreover, most of the price adjustments of 1981-83 were reversed in 1984, and the exchange rate was appreciated. Finally, the enforcement of guidelines for prices in peasant markets was stepped up sharply starting in 1984.
In the context of the NEFM, the system of remuneration of labor was revised in 1983 and 1985 in an effort to link labor incomes more closely with plan fulfillment. A system of incentives—“global contracts”—was put in place, specifying the performance targets and the corresponding salary levels of each work unit within the firm. In the event of plan over- or underfulfillment by a certain unit, its members’ salaries could be increased or cut accordingly. Similar incentives, based on a number of performance indicators, were established for white-collar workers and managers. Furthermore, a system of distribution of a fixed share of profits to managers and workers was introduced to provide additional incentives to enterprises to maximize profit. Planned profits were allocated in varying proportions—determined centrally—to loan repayments, various enterprise funds (for development, working capital, employee benefits, and employee profit sharing), and remittances to the budget. If actual profits failed to match plan targets, payments to the budget and to the enterprise development fund took priority, in that order. If actual profits exceeded plan targets, workers and managers received higher payments.
The enhanced incentives created by the system of global contracts and profit distribution were plagued by severe problems. First, the incentives were directed more toward penalties than rewards. Second, inputs other than labor continued to be determined centrally through the plan. Finally, the different indicators, criteria, and conditions were complex and occasionally contradictory. For example, exports and efficient use of inputs often carried different weights in the contract for the management of an enterprise and in the system of allocating above-plan profits.
The controls on labor mobility predating the NEFM, notably, the practice of the employment card and the system of closed cities, remained in place during the 1980s. In addition, in the late 1980s, the Ceausescu Government introduced the program of “systematization of localities.” This program was intended to compel the reallocation of labor from small agriculture to state farms and industry by eliminating a large number of villages and moving the inhabitants to large agro-industrial centers. However, because implementation started relatively late in the decade, the program did not significantly affect the allocation of labor.5
Despite the changes introduced with the NEFM, and the brief association with the IMF in the context of a stand-by arrangement, the planning process and the economic management system in the 1980s not only remained essentially unchanged, but the state tightened its control over economic activity and the strict central planning framework. The emphasis on self-financing, the various bonuses and incentives for plan fulfillment, and the forward contracting system did not succeed in effectively increasing the autonomy of state enterprises and encouraging competition between them, because the Government continued to absorb the bulk of profits, to determine the use of investment funds and bank credit, and to limit contact with foreign suppliers. Similarly, the changes in the price and exchange system, as well as the wage system, failed to enhance the allocative role of prices and wages in the Romanian economy. The plan continued to allocate resources and determine exports, imports, and domestic sales of enterprises. Finally, the detailed character of the foreign trade plan and its unrealistic targets meant that the modification of the price equalization mechanism for exporters failed to achieve its objectives.
In summary, the Romanian economic system at the end of the 1980s was one of the most tightly controlled and centralized in Eastern Europe. The Ceausescu regime deprived the country of the experience of any significant economic reform, leaving the administration, the managers, and the institutions tied to a Stalinist model that had by that time been abandoned by almost all other countries in the region. In addition, the economic policies of the regime further distorted the economic system. As plan targets became more and more unrealistic, policies gradually lost touch with reality, misreporting of plan fulfillment grew, forced savings in the hands of the population increased, and the economic system fulfilled its function less and less.6 This led to a vicious circle of tightening of controls, greater disorganization, and further tightening of controls, which, by the end of the decade, had eroded the credibility and effectiveness of the economic management system and had driven the country into an economic and institutional crisis.
Economic Developments in the 1980s and the Situation at the End of 1989
During the 1980s, the evolution of the Romanian economic system, as well as the policies followed, caused economic stagnation and, toward the end of the decade, created the conditions for an economic crisis. The productive capacity of the country, especially in industry, was eroded as capital equipment grew obsolete, energy intensity increased, and the standard of living of the population deteriorated substantially.
Under the Ceausescu regime, economic statistics were systematically falsified at different levels. As a result, one of the first tasks of the provisional Government in early 1990 was to begin far-reaching revisions in the economic statistics for the past. As of early 1991, revisions were still being made, but some reliable data, notably for the national accounts, have become available (Table 1). On that basis, output over 1980-87 appears to have increased by an average annual rate of about 2.5 percent (Chart 1). Consumption, however, increased by less than 1 percent a year, owing to the increasing share of net exports of goods and nonfactor services, which rose from -2.8 percent of GDP in 1980 to 7 percent in 1987. These trade surpluses, especially toward the latter part of the decade, reflected the policy of rapid repayment of all foreign debt.
GDP by Origin and Expenditure
(In billions of lei, at current prices)
GDP by Origin and Expenditure
(In billions of lei, at current prices)
| 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | 1987 | 1988 | 1989 | 1990 Prel. | |||
| GDP | 616.9 | 623.7 | 727.4 | 768.7 | 816.1 | 817.4 | 838.6 | 845.1 | 856.9 | 798.0 | 844.0 | ||
| By origin | |||||||||||||
| Industry | 325.3 | 311.2 | 365.4 | 411.4 | 445.1 | 433.0 | 460.5 | 461.8 | 459.9 | 421.9 | 407.0 | ||
| Agriculture and forestry | 78.0 | 91.6 | 125.7 | 107.9 | 110.7 | 114.3 | 106.8 | 103.4 | 115.6 | 110.9 | 151.9 | ||
| Construction | 47.4 | 44.7 | 47.2 | 52.2 | 53.5 | 57.9 | 59.5 | 60.8 | 60.4 | 50.6 | 47.9 | ||
| Transport and telecommunication | 43.6 | 44.8 | 48.9 | 49.9 | 53.1 | 55.4 | 57.0 | 58.0 | 60.3 | 60.0 | 56.5 | ||
| Trade | 36.4 | 38.1 | 39.5 | 33.3 | 35.3 | 39.9 | 39.5 | 43.2 | 46.9 | 48.2 | 59.3 | ||
| Other | 86.2 | 93.3 | 100.7 | 114.0 | 118.4 | 116.9 | 115.3 | 117.9 | 113.9 | 106.4 | 121.5 | ||
| By expenditure | |||||||||||||
| Consumption | 388.3 | 411.7 | 468.4 | 463.6 | 493.8 | 492.0 | 497.2 | 516.8 | 532.2 | 541.8 | 652.9 | ||
| Gross domestic fixed investment | 212.8 | 209.3 | 216.4 | 230.7 | 244.7 | 246.3 | 249.0 | 245.5 | 240.2 | 236.4 | 168.4 | ||
| Changes in stocks | 32.9 | 17.1 | 28.9 | 30.8 | 34.1 | 23.5 | 39.4 | 23.4 | 3.1 | –23.2 | 120.9 | ||
| Net exports | –17.1 | –14.4 | 13.7 | 43.6 | 43.5 | 55.6 | 53.0 | 59.4 | 81.4 | 43.0 | –98.2 | ||
GDP by Origin and Expenditure
(In billions of lei, at current prices)
| 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | 1987 | 1988 | 1989 | 1990 Prel. | |||
| GDP | 616.9 | 623.7 | 727.4 | 768.7 | 816.1 | 817.4 | 838.6 | 845.1 | 856.9 | 798.0 | 844.0 | ||
| By origin | |||||||||||||
| Industry | 325.3 | 311.2 | 365.4 | 411.4 | 445.1 | 433.0 | 460.5 | 461.8 | 459.9 | 421.9 | 407.0 | ||
| Agriculture and forestry | 78.0 | 91.6 | 125.7 | 107.9 | 110.7 | 114.3 | 106.8 | 103.4 | 115.6 | 110.9 | 151.9 | ||
| Construction | 47.4 | 44.7 | 47.2 | 52.2 | 53.5 | 57.9 | 59.5 | 60.8 | 60.4 | 50.6 | 47.9 | ||
| Transport and telecommunication | 43.6 | 44.8 | 48.9 | 49.9 | 53.1 | 55.4 | 57.0 | 58.0 | 60.3 | 60.0 | 56.5 | ||
| Trade | 36.4 | 38.1 | 39.5 | 33.3 | 35.3 | 39.9 | 39.5 | 43.2 | 46.9 | 48.2 | 59.3 | ||
| Other | 86.2 | 93.3 | 100.7 | 114.0 | 118.4 | 116.9 | 115.3 | 117.9 | 113.9 | 106.4 | 121.5 | ||
| By expenditure | |||||||||||||
| Consumption | 388.3 | 411.7 | 468.4 | 463.6 | 493.8 | 492.0 | 497.2 | 516.8 | 532.2 | 541.8 | 652.9 | ||
| Gross domestic fixed investment | 212.8 | 209.3 | 216.4 | 230.7 | 244.7 | 246.3 | 249.0 | 245.5 | 240.2 | 236.4 | 168.4 | ||
| Changes in stocks | 32.9 | 17.1 | 28.9 | 30.8 | 34.1 | 23.5 | 39.4 | 23.4 | 3.1 | –23.2 | 120.9 | ||
| Net exports | –17.1 | –14.4 | 13.7 | 43.6 | 43.5 | 55.6 | 53.0 | 59.4 | 81.4 | 43.0 | –98.2 | ||
Key Macroeconomic Indicators
Source: Government of Romania.Key Macroeconomic Indicators
Source: Government of Romania.Key Macroeconomic Indicators
Source: Government of Romania.The policy to repay—and, in many cases, prepay—the external debt became the overriding policy concern in the late 1980s. It reflected not only an unwillingness to pay high interest rates and place the country in what Ceauşescu perceived to be an economically dependent relationship with foreign creditors but also the difficulties encountered in rescheduling Romania’s debt. Its implementation required the accumulation of large current account surpluses, achieved mainly through severe import compression and a policy of promoting convertible currency exports at all costs (see Chart 1). The debt repayment closely followed a rescheduling of commercial bank loans that had been agreed upon in 1986, which provided for the rescheduling of 100 percent of the amount falling due in 1986 to be repaid in 1989-90, and of 85 percent of the amount falling due in 1987 to be repaid in 1991-92. Prepayments amounted to about $0.5 billion in 1987, $2.9 billion in 1988, and $1.2 billion in 1989, at which time the entire medium- and long-term external debt had been repaid. Starting in 1987, Romania ceased to avail itself of credits from commercial banks and the World Bank, and had almost stopped using credits from bilateral sources by 1989. A decree promulgated in 1989 actually made it illegal for Romanian entities to contract external debt. Only short-term capital movements continued, mainly reflecting developments in short-term export credits granted by Romania.
In 1988, real GDP fell by 0.5 percent, mostly owing to a decline in industrial output caused by a relatively large increase in material costs. Despite the decline in national income in 1988, however, the net foreign balance continued to increase and reached its maximum level of the decade (9.5 percent of GDP) as the Government decided to generate a large current account surplus to continue the repayment of external debt. To that effect, it imposed draconian restrictions on the household use of energy to ensure that industry would have an adequate supply.
By March 1989, nearly all of the external debt had been repaid, with less than $500 million of short-term credits still owed to foreign creditors. In 1989, however, GDP suffered a further and more significant decline of 5.8 percent because of growing shortages of inputs and the increasing inadequacy of an aging capital stock. A large part of the fall in industrial value added was concentrated in the last quarter of 1989.
The decline in the growth rate of output from very high levels in the first half of the 1970s to negative growth by the end of the 1980s could not be attributed to the changing size of the labor force; indeed, the population of working age has increased at an average annual rate of 0.7 percent since 1975. Rather, the deterioration in economic performance was due primarily to a decline in the quantity and quality of investment. During the decade, gross domestic investment declined from 35 percent in 1980 to less than 30 percent in 1989 (Table 1). At the same time, the material intensity of output rose mainly because of the increasing use of lower-quality inputs, and inefficient machinery that was either domestically produced or imported from CMEA countries in place of imports from the convertible currency area, as the latter were compressed during the decade.
The domestic counterpart of the current account surpluses needed to repay the debt was a large domestic savings surplus, which the Government generated partly through heavy taxation of enterprises and tight control of social spending. The tax burden on enterprises became excessive toward the end of the decade, largely because of unrealistic plan targets—on which the tax liability of each enterprise was based—resulting in large enterprise losses that were financed by bank credit and inter-enterprise arrears. At the end of 1989, these arrears had reached an estimated lei 300 billion (almost 40 percent of GDP in 1989).7
Because the authorities relied on an administratively controlled trade and exchange system and were preoccupied with repaying external debt, they had not attached priority to maintaining substantial international reserves. In the second half of the 1980s, these fluctuated in a broad range of about $0.5-1 billion. However, because the policies of import compression and export promotion continued even after the virtual repayment of the external debt by the first quarter of 1989, international reserves increased sharply in the remainder of 1989 and reached almost $2 billion at the end of December 1989.
Finally, during the 1980s, standards of living declined substantially (Table 2). Consumption per capita stagnated throughout the decade but, perhaps more important, the shortages of basic consumer goods in the latter part of the decade meant that welfare probably fell by more than the consumption-per-capita statistics revealed. The authorities imposed particularly harsh restrictions on household consumption of energy, allowing, in most parts of the country, only a few hours a day of electricity and heating, even during winter, in order not to disrupt the supply of energy to industry. At the same time, most social indicators took a turn for the worse: the average caloric intake of the population and people’s access to doctors and hospital beds declined during 1980–89, as did the life expectancy for men.8
Selected Social and Demographic Indicators
Selected Social and Demographic Indicators
| 1980 | 1985 | 1989 | 1990 | ||||||
| Population characeristics | |||||||||
| Total population (millions) | 22.2 | 22.7 | 23.2 | 23.2 | |||||
| Population growth rate | 0.8 | 0.4 | 0.5 | 0.3 | |||||
| Number of employed persons (millions) | 10.4 | 10.6 | 10.9 | 11.1 | |||||
| Population density per sq. km. | 93.5 | 95.6 | 97.7 | 97.7 | |||||
| Life expectancy at birth (years) | |||||||||
| Women | 71.8 | 72.7 | 72.4 | 72.7 | |||||
| Men | 66.7 | 66.8 | 66.5 | 65.6 | |||||
| Population death rate (percent) | 1.04 | 1.09 | 1.07 | 1.07 | |||||
| Infant mortality (under 1 year) | 29.3 | 25.6 | 26.9 | 26.9 | |||||
| Food, health, and nutrition | |||||||||
| Calorie intake (calories per day) | 3,259 | 3,057 | 2,949 | 3,067 | |||||
| Population per physician | 678 | 567 | 552 | 555 | |||||
| Population per hospital bed | 114 | 112 | 112 | 112 | |||||
| Access to safe water (percent of population) | |||||||||
| Rural | … | … | 16 | 16 | |||||
| Urban | … | … | 100 | 100 | |||||
| Education | |||||||||
| Percent of population between 15 and 18 in school | … | … | 79 | 74 | |||||
| Primary school enrollment (percent) | … | … | 97 | 93 | |||||
| GDP per capita | |||||||||
| (U.S. dollars at commercial exchange rate for exports) | 2,446 | 1,336 | 1,567 | 1,227 | |||||
Selected Social and Demographic Indicators
| 1980 | 1985 | 1989 | 1990 | ||||||
| Population characeristics | |||||||||
| Total population (millions) | 22.2 | 22.7 | 23.2 | 23.2 | |||||
| Population growth rate | 0.8 | 0.4 | 0.5 | 0.3 | |||||
| Number of employed persons (millions) | 10.4 | 10.6 | 10.9 | 11.1 | |||||
| Population density per sq. km. | 93.5 | 95.6 | 97.7 | 97.7 | |||||
| Life expectancy at birth (years) | |||||||||
| Women | 71.8 | 72.7 | 72.4 | 72.7 | |||||
| Men | 66.7 | 66.8 | 66.5 | 65.6 | |||||
| Population death rate (percent) | 1.04 | 1.09 | 1.07 | 1.07 | |||||
| Infant mortality (under 1 year) | 29.3 | 25.6 | 26.9 | 26.9 | |||||
| Food, health, and nutrition | |||||||||
| Calorie intake (calories per day) | 3,259 | 3,057 | 2,949 | 3,067 | |||||
| Population per physician | 678 | 567 | 552 | 555 | |||||
| Population per hospital bed | 114 | 112 | 112 | 112 | |||||
| Access to safe water (percent of population) | |||||||||
| Rural | … | … | 16 | 16 | |||||
| Urban | … | … | 100 | 100 | |||||
| Education | |||||||||
| Percent of population between 15 and 18 in school | … | … | 79 | 74 | |||||
| Primary school enrollment (percent) | … | … | 97 | 93 | |||||
| GDP per capita | |||||||||
| (U.S. dollars at commercial exchange rate for exports) | 2,446 | 1,336 | 1,567 | 1,227 | |||||
The discussion here focuses exclusively on the economic aspects of the Romanian system. Descriptions of political developments during this period can be found in, among others, Shafir (1985), Fischer (1989), and Behr (1991).
In this paper, “the plan” means the overall central plan covering all sectors of the economy. Subsidiary plans, like the financial plan, foreign trade plan, and so on, are referred to explicitly.
Taken from Behr (1991).
A summary of the operation of the NEFM is presented in Sectia Propaganda şi Presă al Partidului Comunist Roman (1987).
However, it is estimated that some one thousand villages were destroyed as part of this policy.
The causes and symptoms of the increasing disorganization of the economic system in the 1980s are discussed in Ronnas (1991).
This amount of arrears had accumulated despite earlier debt write-off operations for agricultural cooperatives under Ceausescu.
Anuarul Statistic, 1990. An account of the deterioration of the standards of living in Romania during the 1980s is also offered in Teodorescu (1991).
