Romania - Industrialization of an agrarian economy under socialist planning (Vol. 2 of 4) : Main report (continued)

I RETURN TO 1 2 Report No. 1601'-RO JWREP'ORTS DESKI Rornania '~~~~~~~~~ I WJITHIN The tntI-li Strindi-7-za n of an ATrnrirna ONE WEK El lALI.Ll ILIi...L.LI'11 I'4JI i/ , Lii 1I14.1 LEc o in o iy 'Jn I So 1cIIIL P ilCn, , ig (in Four Volumes) Volume 11 March 31, 1978 Country Programs Department I Europe, Middle East and North Africa Region FOR OFFICIAL USE ONLY Document of the World Bank T his documelnt has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank autlhorization.  CURRENCY EQUIVALENTS 1. Official Rate Lei 4.47 = US$1.00 1/ Leu 1.00 = US$0.22 2. Tourist Rate Lei 12.00 = US$1.00 Leu 1.00 = us$o.08 3. Conversion Rate for Traded Goods Lei 18.00 = US$1.00 I' Leu 1.00 = us$o.o6 FISCAL YEAR January 1 - December 31 1/ Conversions from lei and lei valuta into dollars in the report are made using the exchange rates in force at the time. Exchange rates and the periods in which they were in force are given in the footnotes to pages 37 of the Report.  FOR OFFICIAL USE ONLY - 146 - PART III GROWTH AND PROSPECTS OF IIAJOR SECTORS CHIAPTER TEN; INDUSTRIAL SECTOR DEVELOPMIENTS ANID PROSPECTS A. The Pattern of Industrial Development (1) The Relative Importance of Industry in the Economv 10.01 Romania's perception of industry 1/ as the key to economic progress has, as noted earlier, determined its overall development strategy. This concentratd effort to expand industry has had impressive results. According to the Romanian statistics, gross industrial production grew at an average rate of 13 percent per vear during 1951-75; a nace whirh was one of the highest among developing countries and can be compared with the rates of Japan, Spain and Greece. WJorldwide nnlv Korea, Singapore and Iran appear to have showed significantly higher growth rates of industrial production. 2/ As a result of this stronp nprfnrmancen indiutry's share in social product, expressed in current prices, rose from about 47 percent in 1950 to 65 percent in 1975, about five times the contribution of agriculture. In national income, also I/ Industry is defined in Romania to include the following economic act4- vities: (a) the extraction of fuels and mineral resources; (b) the production, transm.iSsion and distribution of thermozand hydroelectriC energy, excluding the distribution of such energy by general public utilities enterprises; (c) the processing of mdaterials, except in cottage industries (defined as the processing of raw materials in the same peasant family household tha t produces them'; (d) repairs of machinery and equipment, and of consumer goods; and (e) cold storage plants. On the basis of this broad de f4r.ition, the lomianian clsi=--4 fication of economic activities divides industry into a total of 18 bDranch-es, wilth thL'e4individual activi ti es in these brar.ches bueing further LiltLLCtL~~ WLLI LII LIUJ.VL.L ~Lu L L.LV _LL. .LL L1 O LLc~ ULI UL I 11L classified according to the predominant destination of their output. GrroUp A compr i4ses thIe production ofj producer goodus and group B that of consumer goods. The industrial classification is uniform in all pub- lished basic Romanian statistics, except foreign trade stat'stics, and provides the main yardstick for the planning process. Cottage industries are listed in tIhle Romanian classification or economic activities under "Other branches of the economy". 2/ Any growth comparisons with market economies are subject to considerable margins of errors due to the different conceptual and pricing procedures applied in calculating relevant aggregate data. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - 147 - expressed in current prices, the share of industry increased more siowly, from 44 percent in 1950 to 56 percent in 1975. This may be explained by a higher rise in the material costs of production which (as is shown in Appendix 4) are not a component of national income. Because of the exclusion of material costs and depreciation, the national income concept reflects the relative weight of industry in the economy better than any other global concept used in Romania. 10.02 In this context, it should be recalled that industry as defined in Romania (see footnote on page 146), comprises mining and the extraction of hydrocarbons. Thus it includes activities that had been rather well estab- lished before'manufacturing was given the impetus to develop on a broad basis. This and the fact that industrialization in Romania actually began sometime before World War II -- even though on a relatively small scale -- may explain why already in 1950 industry had made a rather significant contribution to the economy. Recognition of this belittles by no means the achievements of the past 25 years. 10.03 Added to these achievements are the two million industrial jobs created since 1950 (discussed in more detail in Chapter Eight). Total indus- trial employment rose to 3.1 million in 1975 compared to about one million in 1950; industrial labor's share in total labor force grew from 12 percent in 1950 to 31 percent in 1975. Labor force absorption in Romanian industry has been greater than in countries with similar records of industrial growth. (2) Growth and Structural Change in Industry 10.04 Romania's gross industrial production, calculated in comparable prices, rose at an average annual rate of 13 percent a year during 1951-75, with the output of producers goods growing at an average annual rate of 14.5 percent, faster than that of consumer goods (10.5 percent per annum). 10.05 In Romania, the gross industrial production indicator is the aggre- gated value of the productive industrial activities. It is calculated from the enterprise level up and comprises mainly the value of finished and semi- manufactured products manufactured for delivery, the value of industrial services rendered to other enterprises, repairs, and changes in stocks of semi-manufactured and unfinished products. It may have an element of over- estimation mainly due to the effect of double-counting in the process of adding the productions of the individual industrial units. 10.06 Table 10.1 below comDares the index numbers of gross industrial production with those of gross industrial product and net output for the past 25 years It shows that net nroduction; obtained by deducting material inputs from the value of gross production, has grown more rapidly than gross produc- tion and gross nrneiiict refplcthny incrrPPad effiripncies of nroduction. including the effects of vertical integration. However, it may be more appro- priate to compare net productinn and gross product sincp hnth are exnressed in delivery prices while gross production is expressed in producer prices.  - 148 - Table 10.1: INDICES OF INDUSTRIAL GROWTH, 1950-75 (-in compa~rable 1963i prrices) 1950 1955 1960 1965 1970 1975 Gross Production (Productia glob-ala) =- incomarable 11 21 ~.LUa I LL t. LUilpa u.c producer prices 100 202 340 649 times times G1ross Plroduuct, IT)rodlusul global) - in comparable delivery 10 18 prices LIU '-]Vx JJV LVVV LtL:iCO L L1UO Nlet Production (Productia neta) - in co u1I1 bldIe delivery 1 24 prices 100 218 372 710 times times Average Growth Rates 1951-55 1956-60 1961-65 1966-70 1971-75 1951-75 (percent p.a.) Gross Production 15.2 ii.0 13.8 ii.9 12.9 13 Gross Product 15.0 10.9 12.4 11.5 12 12 Net Production 16.9 11.3 13.8 12.8 13 13-14 Source: Anuarul Statistic 10.07 The published indices of gross industrial production suggest that the rate of industrial growth has been consistently in excess of i0 percent in each of the five planning periods since 1950, with producer goods industries (group A) maintaining higher rates of growth than the consumer goods branches (group B). Due to the strong emphasis given in industrial policies to basic chemical and engineering goods industries, the difference between the growth rates of group A and group B industries actually widened during the first three five-year plan priods (1951-65). It was only during the last two plan periods (1966-75) that the difference between the growth rates of groups A and B industries diminished as consumer goods industries were given greater scope, although the leading role of the group A industries was maintained (Annex 6.1). 10.08 Table 10.2 below gives an indication of the growth performance of major industrial branches for the five five-year periods since 1950. It shows that the leading growth sectors of industry were chemicals and engineering goods, whose output grew consistently faster than the output of industry as a whole. The chemical industry exceeded other branches of industry for nearly 20 years until about 1970, when it lost its leading position to the engineering goods sector due to lower growth rates of chemical production. Other producer goods industries also showed periods of overproportionate growth. In iron and steel, for example, output grew faster than gross industrial production during the five-year periods of 1956-60 and 1966-70. In other periods under review, including the 1971-75 period, ferrous metallurgy production grew at lower rates  - 149 - thaIl ildustry as a whIoULe. LThis gLhWLLI PattLeLL[L ua foUrLL Usuch indus- tries as iron and steel since it reflects the various stages in capacity build-up. A similar feature, that is, the erection of comparatively large production units, exists in the particular growth pattern of the construction materials industry. With the exception OL Lhe 1956-60 and 1971-75 periods, construction materials output was expanding faster than the output of industry as a whole. Throughout the 25 years under review, it also exceeded the growth of the construction sector, thus permitting the export of a significant propor- tion of production (e.g. of cement). Table 10.2: GROWTH OF GROSS INDUSTRIAL PRODUCTION, 1950-1975 (Average Annual Rates in Percent) 1951-55 1956-60 1961-65 1966-70 1971-75 TOTAL INDUSTRY 15.2 11.0 13.8 11.9 i2.9 Electric Power 18.4 12.7 20.6 16.6 9.8 Fuels 13.3 7.6 8.i 6.0 5.3 Ferrous Metallurgy, including Mining and Dressing of Ferrous Ores 8.8 19.8 11.4 12.3 11.3 Ferrous Metallurgy only (8.5) (20.2) (11.7) (12.3) (11.5) Non-ferrous Metallurgy, including Ilining and Dressing of Non- ferrous Ores 16.4 12.7 13.4 12.4 10.0 Engineering and Metalworks 22.7 16.1 16.9 15.8 18.1 Chemicals 24.0 17.5 25.5 21.4 15.8 Construction Materials 20.3 10.2 16.0 13.0 10.0 Lumber and Woodworking 12.7 8.0 13.1 6.5 6.4 Woodworking only (12.7) (11.7) (15.1) (9.0) (7.9) Pulp and Paper 6.5 10.9 19.1 14.3 9.1 Textiles 11.7 6.2 10.5 11.1 12.1 Clothing 8.4 10.0 11.2 12.4 17.1 Leather, Furs and Footwear 11.3 7.6 10.2 9.5 9.1 Food Processing 11.1 7.1 8.5 6.5 7.4 Soap and Cosmetics 17.6 4.3 8.5 9.3 10.7 Printing 16.0 10.8 14.8 _ 7.1 1.7 GROUP A 16.8 12.8 15.7 12.9 13.7 GROUP B 13.1 8.4 10.5 9.8 11.1  - 150 - 10.09 The table above reflects another important feature of past indus- trial development in Romania; the lagging growth of some industrial branches that supply basic inputs for expanding industries. In domestic fuels (petro- leum, gas, coal) but also in iron ore and timber, the domestic resource base became a major constraint as available raw materials could not fully support the rapid industrial expansion. Particularly in the case of oil and iron ore, where output has been growing more slowly than the main user indus- tries, this has led to a substantial increase in the import dependence of user industries over the years, thereby affecting their cost structure. To cope with this situation, the Government recently introduced a catalog of measures aimed at reducing the specific consumption of basic industrial materials in the manufacturing process. Similar measures were taken earlier with respect to the consumption of electric energy (in late 1973). They were successful in reducing considerably the growth of energy consumption and explain in part the slower growth of power output during 1971-75. 10.10 As stated earlier, the growth of consumer goods industries has on the whole been lagging behind that of total industrial output. This has largely been the result of the relatively slow expansion of food processing activities which weigh heavily on the groun's nerformance and is closely related with the development of agriculture. It should be mentioned that clothing and, since 1966. textiles have represented imnortant excentions. Expansion of output in these two branches was above the average of the group; in clothing it has even exceeded the average of 211 indiiutripe (sinrp 1966) Since both branches were particularly apt to provide employment for the female l,hanr reseprveo in Romania -- incl'irling ::aransc in which inrdiustrialI7ation hador lopsidedly promoted the employment of male labor -- and to achieve a better hnlnnrc in rpeional devTelnment, theseQ. indtAli-rias oninuoye crrat-er gvemrn- ment attention than did other consumer goods industries. In addition, both branches have become important convertible foreign exchange earners, owing to considerable labor cost advantages. It is interesting to note that the export potential in clothing and textiiles was only recently fully ut4l4zedA in.ii The fnllnwing tahlp shnow thrh nroduitioin levelq reac'hed in some principal industrial commodities in 1975, expressed on a per capita basis (see also Annex 6.2)= Tn this cntet it hl h.e pintared o,t,- t-hat- the favnorabl-e picture in basic industrial product is only one aspect. In many consumer goods, particularly in durable 4 .til tLit a-.L-- Litt L ,i. -a- reace in o countries is still relatively wide and a result of the comparatively low prior4t. y that has been give in Roit ania t to non-essential consumter emsitU.  - 151 - Tabie i0.3: PER CAPITA PRODUCTION OF SELECTED INDUSTRIAL COMU10UDITIES, 1975 FR of Romania Poland Germany Spain USA Crude steel (kg) 449 440 653 313 546 Sulphuric Acid, 100% H so4 (kg) 68 100 66 66 121 Caustic Soda (kg) 27 12 40 10 43 Plaqtircs And Svnthptic Resins. 100% (kg) 16 16 82 16 38/1 Synthetic Rubber (kg) 5 3 5 5/2 9 Nitrogeneous Fertilizers (kg of N) 61 43/2 25/3 23/2 41/3 Phosphate Fertilizers (kg of P n0) 19 24/2 15/3 19/2 28/3 /7 Cement (kg) 542 544 542 675 273 Paper and Paper board /4 (kg) 28/2 33/2 97/2 55/2 232/2 Cotton Fabrics (sq.m) 28/5 .. Woolen Fabrics (sq.m) 5/6 .. Shoes (pair) 4 .. 2 4 Sugar (kg) 24 47/2 40/2 19/2 24/2 /1 Dry basis only. /2 1974. /3 1974/75, July I-June 30. /4 Except newsprint. /5 Compares to 7 sq.m in the Republic of Korea, 19 sq.m in Japan, and 26 sq.m in the USSR. /6 Compares to 0.5 sq.m in the Republic of Korea, 3.2 sq.m in Japan and 2.9 sq.m in the USSR. /7 Shipments only. Sources: Anuarul Statistic; UN Statistical Yearbook 1975; UN Mlonthly Bulletin of Statistics, Oct. 1976; EEC Eurostat No. 2-1976, and Anuario Estadistico de Espana, 1976. 10.12 As a result of the strong growth in the output of producer goods, their share in Romania's gross industrial production, expressed in comparable nrices. rose from approximately 50 percent in 1950 to 72 percent in 1975. Chemicals and engineering goods, representing the main components of the prodiicers' goods ontput. reached a combined share of 44 percent in total industrial output in 1975. Table 10.4, showing structural changes in gross in1iii.trin1 nrnfi,ctinn in greater detail. reflects the relative decline in the share of the production of fuels, iron ore and timber, which was referred to earlier in this capte-pr. Th npetroleum sertor, in Darticular, the largest branch of group A industries in pre-war Romania (13 percent of total industrial output in 1938), had its share in grnss induistrial nroduition dwindle to 2 percent by 1975, following the rapid increase of the processing industries.  - 152 - The food industry, (with 24 percent) in 1950 had the largest share in total industry (typical of an agrarian economy with a weak industrial sector). As a result of the rapid growth of the other industrial branches and the level of development in agriculture, its share in gross industrial nroduction had declined to 13 percent by 1975. The food industry was then about two-fifths the size of the engineering and metalworking industries and only marainally larger than the chemical industry. Table 10.4: STRUCTURE OF GROSS INDUSTRIAL PRODUCTION, 1950-75 (in percent) 1950 1960 1965 1965 1970 1975 --in 19 p}rices-- --in- 19 p-ri-cs-- TOTAL TNDITJTRY 100.0 100.0 100.0 1o0. inn0n inn0. Elertric Power 1.9 2.5 3.2 2.6 3.2 2.7 Fuels 11.3 9.1 7.0 7.0 5.3 3.6 (Petrole-um and Methane C-as) I80 I66 (.) 5-) 3-7) t (2-) A Ferrous Metallurgy, including Mining and Dressing of Non= ferrous Ores 5.4 6.3 5.6 8.3 8.5 7.9 ("Ferrous Metallurgy only)/ (5.1) (I6 (5.5) (8.1) (8.2 (f7.8) Non-ferrous Metallurgy, includ- igMning and Dressing of Non-ferrous Ores 2.1 2.1 2.1 3.2 3.3 2.8 EnginLeering arid iMetalworks 13.3 24.0 28.3 21.2 25.0 32.4 Chemicals 3.1 6.1 10.0 6.7 10.1 11.3 Lonstruction Materials 2.4 3.2 3.6 3.3 3.4 3.1 Lumber and Woodworking 9.9 7.5 7.1 8.2 6.4 4.7 (Woodworking only) (5.5) (5.1) (5.3) (5.9) (5.2) (4.1) Pulp and Paper 1.3 1.0 1.2 1.2 1.4 1.2 Lextiles 11.1J. 7.9 60.8 7.4 7.2 6.8 Clothing 7.5 5.6 5.0 4.2 4.3 5.1 Leathier, Furs and Footwear 4.0 2.8 2.4 2.4 2.1 i.9 Food Processing 24.2 18.9 14.8 22.0 17.3 13.1 Others 2.5 3.0 2.9 2.3 2.5 3.4 GROUP A 53.0 62.9 70.0 65.2 70.5 72.3 GROUP B 47.0 37.1 30.0 34.8 29.5 27.7 Source: Annex 6.3.  - 153 - (3) The Size of Enterprises 10.13 The industrialization process in Romania has given rise to generally large-scale industrial enterprises and this trend has not been limited to heavy industries only but is also evident in consumer goods and other more special- ized branches of industry. Size considerations have usually turned the scale in investment decisions as large enterprises were considered essential for the application of advanced technologies and for achieving economies of scale. Also, large industrial enterprises are more apt to industrial planning and plan control than a multitude of smaller production units. It was generally considered that any disadvantages such as domestic market constraints and some management difficulties were temporary and that later benefits from economies of scale would justify the investment preference. 10.14 The following data reflect the changes in the size structure of industrial enterprises since 1960 (Table 10.5). Although no information on this subject is available for the period from 1950 to 1960, the general lines of this process of size concentration appear clear. As the table shows, there was only an insignificant change in the number of industrial enterprises between 1960 and 1975 despite the intensive diversification of the industrial structure during this period. However, the average employment per enterprise doubled, from 748 in 1960 to 1,554 in 1975. The trend to larger enterprises appears evident in both state enterprises and handicraft cooperatives. But it has been particularly strong at the level of the handicraft cooperatives, in which the average employment per unit rose to almost 670 persons. An interesting development is the consolidation of local state enterprises in recent years. As a result of sweeping reorganization of local industries in 1973, their number was cut in half. At the same time, average employment in local enterprises has quadrupled to over 2,600, well above the average of other state enterprises. In 1977, the main part of the local industrial units has been transferred to the state enterprise sectors.  - 154 - Table 10.5: SIZE STRUCTURE OF INDUSTRY State Enterprises Total Republican Local Handicraft Industry Industry Industry Cooperatives No. of Enterprises /1 1960 1,658 1,001 318 339 1965 1,572 1,065 207 300 1970 1,731 1,126 246 359 1974 1,699 1,251 102 346 1975 1,731 1,276 99 356 Employment ('000) /2 1960 1,241 1,003 149 89 1965 1,648 1,409 137 102 1970 1,997 1,629 207 161 1974 2,565 2,072 258 235 1975 2,691 2,191 262 238 Average Employment Enterprise 1960 748 1,002 469 263 1965 1,048 1,323 662 340 1970 1,154 1,447 841 448 1974 1,510 1,656 2,529 679 1975 1,554 1,717 2,646 669 /1 At end of year. Excluded from the number of enterprises are the units without a legal status, which are considered economically independent (see glossary). /2 In determining the number of employees used by industrial enterprises, the number of employees used in all shifts has been considered (included the number of employees under training for new enterprises). Source: Anuarul Statistic 10.15 In republican industry, which comprises about 80 percent of total industrial employment and 88 percent of gross industrial nrodirtionn average employment per enterprise is largest in ferrous metallurgy, including mining and dressing of ferrous ores. In this branch of industrvy it rpeahpd nver 4,700 persons in 1974, up from about 3,700 in 1960. In non-ferrous metallurgy (including mining and dressing of nnn-ferrotis ore) nq wpll ns in enaineering and chemical industries, enterprises employed an average of 2,000 to 3,000 Dersons in 1974. Comnared to 196n, auerage employment per enterprise more than doubled in both the engineering and the chemical branches. In lumber and wnnd-wnrkina nilln snnl nnapr glascs andl cerami-c, txrtfles, leathergo anndc n ~~-- X r- "- I r ---- - r-r-- X -_ - ', 1 5-~ ---~- e - _ shoes, the employment average per enterprise reached a relatively uniform high of 1 ,600,-1,700 psns. Only construct4on materials, food processing nd  - 155 - printing ~ ~ p4 4 hav reaie sustntf 4qialy beo In the lip ag siz of an indi1qt-riq1 enterprise in Romania (Annex 6.4). This may be explained by the fact that these branches of industry normally have a more limited scope of operations, both from the point-of-view of the materials they process and the markets they serve. Ti_s makles Che' clearly less suitable for consolidation 10. B 1 Ly LIeLLnaLional standarId, 1- '--y.a has p ly heJ of employed persons per industrial enterprise. This is illustrated in Table - lA . lITTh~lE'f nL1 V') TflTCL'n nVh D QnXOCTh DfD ThjTNThTLTC TAT V7J'rP'IDDTC5 T aUle I . LI :L U U D X Ur "2-rS? LJi rL_X,J110 f ?