Report No. Iu I-RO u FURN TO 11uIl I Idi114 1 (1e 11lUUSLIiIdiLdLUI I UI di I 71"1GI I r s I P L O r l. .. __ __._ _ _ conomy Unaer Sociaist rLann in (in Four Volumes) Vobl imp I March 31, 1978 Country Programs Department I Europe, Middle East and North Africa Region FUK OFFICIAL USE ONLY oce...nt of the Wrld Ranl This document has a restricted distribution and may be used by recipients vtely i it; i tse be d isc sd It Irl Ba nkl A LLt hri atio.J. L'.LLtr 1111 u otherwise be disclosed without World Bank authorization. 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$0.08 3. Conversion Rate for Traded Goods Lei 18.00 = US$1.00 4 Leu 1.00 = us$0.06 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 11MD1DrL uo1z"L Page No. Basic Data .....x.............................................. xi Maps ...... ....................................................... xiii Glossary .......................................................... xxi Abbreviations ..................................................... xxv Preface ........................................................... xxvi Summary and Conclusions .............................................. xxviii PART I DEVELOPMENT OBJECTIVES AND PLANNING CHAPTER ONE: INTRODUCTION - GEOGRAPHICAL AND HISTORICAL PERSPECTIVE ................................... I A. Introduction ............................. 1 B. Topography ........ ............................ . 1 C. Climate ........ ..........................1.... . I D. Natural Resources ......... I E. Population and Education ................. 3 F. The Economy before 1950 .................. 3 CHAPTER TWO: DEVELOPMENT OBJECTIVES AND STRATEGY .... 5 A. Development Objectives ......................... 5 B. Development Strategy ........................... 6 CHAPTER THREE: NATURE AND TECHNIQUES OF ROMANIAN PLANNING .... 13 A. Introduction ............................ 13 B. Evolution of Development Planning . 13 C. The Principles of Plannine ............... 15 D. Institutions Involved in the Process of Plannine ....... .............................. 16 E. Planning Techniques ..................... 18 F. The Ifl% nf Plnn Indicntors and Norms ..... 21 G. The Planning Process and Types of Plans .. 22 H. Financial Planning------------------27 H. Plan Fulfillment and Control ............. 29 T A Further Asoeument ---- ---- 30 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. - 11 - Table of Contents (Continued) Page No. CHAPTER FOUR: OTHER MANAGEMENT INSTRUMENTS ............. 32 A. Prices and Pricing Policy ................ 32 B. Foreign Trade Pricing and the Exchange Rate .................... ....................... 37 C. Incentives and Penalties ...................... 41 D. Financial Instruments .................... 42 E. Monetary Instruments .................... 43 PART II DEVELOPMENT TRENDS AND STRUCTURAL CHANGES CHAPTER FIVE: LONG-TERM TRENDS - 1950-75 ................. 48 A. Introduction .......................... 48 B. Economic row~th an Sructura~l Chng .... 48 CHAPTER SIX: THE FIFTH' PLAN (1971-75)........... 58 B. The Major Features of the Plan ........... 58 D. Economic and Technical Efficiency ........ 69 E~. Regionld Dve~lopment......................................3 RELATIONS ....... .................................. 78 A. Introduction ......................... 78 B. The Role of Foreign Trade ................ 79 C. Foreign Trade Planning .............. 80 D. Foreign Trade and international Economic Relations in the Fifth Plan (1971-75) .... 85 CHAPTER EIGHT: HUMAN RESOURCES - POPULATION, MANPOWER PLANNING, EDUCATION AND TRAINING ....................... 98 A. Population and Manpower Planning .. 98 (1) Population ............................... 98 (2) Urbanization ............................. 99 (3) The Labor Force ...................... 102 (4) The Role and Functions of Trade Unions ...... ............................ 107 - 111 - Table of Contents (Continued) Page No. (5) Manpower Planning .......... ....... 108 (6) The Efficiency of the Manpower Planning System .................... 113 B. Education and Training .................. 114 (1) The Development of the Education System .... ............... 114 (2) Management and Administration of the Education System ................ 116 (3) Educational Planning ................ 117 (4) The Contribution of the Education System to Romania's Growth .......... 118 (5) Education Finance ................... 124 (6) The 1976-80 Plan for the Development of Education ........................ 127 (7) Assessment of the Performance of the Education System ................... 128 (8) Conclusion ...... ........................ 129 CHAPTER NINE: CONSUMPTION AND THE STANDARD OF LIVING ........ 130 A. Consumption, its Comnosition and Groth 130 B. Incomes ........ ............................. 134 C. The Planning of Consumntion and Personal Incomes . ................................. 139 D. 1976-80 Plan Targets .n....................140 VOLUME TWO PART III GROWTH AND PROSPECTS OF MAJOR SECTORS CHAPTER TEN: INDUSTRIAL SECTOR DEVELOPMENTS AND PROSPECTS 1L6 A. Th Pater of indU~J. Lustr ia De. Jve~lopment . ... 146U B. Industrial Investment and Employment ..... 156 C. Cordnaton nd pecilizationLU......... 164 D. Industry, Foreign Trade and Inter- nat jinal Cop r to dL£1................................... 168 E. The 1971-75 Plan and Current Development issues iu inuustry ....................... I F. The 1976-80 Development Plan and Prospects until 1990 .................... 176 Table of Contents (Continued) Page No. CUAhD "TTETR. EVNU: T DTVEPTDMEN AM CONTDTUTITTTA F Ut ARDT CULTURAL SECTOR ...... ............................. 181 A. The Position of Agriculture in the Rumanian Economy ......................... 1oi B. Institutional Development and Planning ... 183 u. Trends in Agricultural Production ........ 1oo D. Foreign Trade ...... .......................... 204 E. Development Prospects and Five Year Plan for 1976-80 .............................. 209 CHAPTER TWELVE: THE CONSTRUCTION AND HOUSING SECTORS .......... 218 A. The Construction Sector .................. 218 (1) The Role and Performance of the Construction Sector ................. 218 (2) The Organizational Structure and the System of Planning .. ............. 225 (3) The Present Position and Prospects for Construction .................... 232 B. Housing ................................. 233 (1) An Overview .......................... 233 (2) The Structure of the Housing Sector ............................... 234 (3) The Performance of the Housing Sector .... ................... 236 (4) The Achievements 1971-75 and Planned Targets 1976-80 ..................... 243 CHAPTER THIRTEEN: THE DEVELOPMENT OF THE TRANSPORT SECTOR ....... 247 A. Government Strategy and Policies .. 247 B. The Sector's Role in the Economy .. 251 C. The Transportation System ................ 253 Dv The Onration of the Transnort System ... 257 (1) Organization and Management 257 (2) Planning and Coordination ........... 258 (3) Efficiency, Costs and Quality of Construction ............................. 259 ( e T oe Enrgy . n. .mt ..n f th2 Sector.................................. 260 E.* The 1976-80 Plan .................... 262 Table of Contents (Continued) Page No. CHAPTER FOURTEEN: THE CONSUMPTION AND PRODUCTION OF ENERGY RESOURCES .......................... ....... 267 A. The Energy Strategy .............. ..... 267 B. Energy Management ................. ..... 268 C. The Supply and Demand for Energy Resources .............................. 270 (1) The Resource Base ............ 270 (2) The Consumption and Production of Energy ...... ............................ 273 (3) Foreign Trade Aspects .................. 276 D. The 1976-80 Plan ......................... 276 E. Long Term Energy Requirements and Resources ...... ... .......... . 286 F. Environmental Considerations ............. 288 CHAPTER FIFTEEN: TOURISM: ASSETS AND DEVELOPMENT .............. 289 A. Tourism Assets and Attractions ........... 289 B. Government Policy and importance of Tourism Sector ........................ 289 C. Organization of the Tourism Sector .... 292 D. The Demand for and Supply of Tourism Se v ce ... .. . . . .. . . . . 292' E. Supply of Tourist Facilities and Services. 295 F. Cots,L Taiffst, ProitsL atiu Contl ..... 29 G. Development Prospects ......... .......... 298 DADT TIT CHAPTER SIXTEEN: DEVELOPMENT PROSPECTS ...................... 302 A. Plan Perspective to 1990 and the 1976-80 Five Year Plan .......................... 302 B. Major Issues and Problems ............. 311 C. The March 1977 Earthquake and its Economic Impact ........................ 316 D. Bank Projections of the Balance of Payments ...... .............................. 317 E. Other Alternatives ...................... 318 F. Creditworthiness .............. ......... 321 Table of Contents (Continued) A WD VWM T 0 V C ,ME K Li" M.L %, J APPENDIX 1: Council of Ministers 2: The System of Regional Government and its Financing 3: Industrial Organization - Ministers, Centrals and Enterprises 4: National Accounting - Social Product and National Income 5: Planning A. Quantitative Techniques B. Project Selection Criteria C. The 1976 Annual Development Plan D. Achievements in 1976 E. The 1977 Annual Development Plan F. The 1976-80 Industrial Sector Targets 6: Stages of Economic Growth, 1950-75 7: Mobilization of Resources and Investment Finance A. Centralized Financial Plan B. The System of Investment Finance and Financial Sources of Fixed Investment 8: The Banking System A. Banking Structure B. Resources of the Banking System C. Monetary Instruments 9. Wage Determination 10. The Social Welfare System 11. Scientific and Technological Research VOLUME FOUR STATISTICAL ANNEX A. ANNFYRS 1. POPUATION IURRANTZATTON AND EMPLOYMENT lei Past and Projected~ Popula.tion hv Sex. 1948-2000 1.2 Principal Demographic Indicators, 1948-76 1 Ang and Sex Structe of Ponulation and Denendency Ratios. Selected Years 1.4 Population by Rural and Urban Areas, 190-77 1.5 Population by Judet and Rural-Urban Areas, Selected Years Table of Contents (Continued) * Aa 1L JJUoulation, LUulaLUn Uf WUL LH , L 1 t-LLV C rUPUidLLUI and Participation Rates, by Sex and Rural-Urban Areas 1948-76 1 -7 nl - - -! ! i 1 1 - - -- I ^In ./ egiAegonal isLriDuL1on oi urDanizaTLion, 13U-17 1.8 Population of Seven Largest Urban Areas, 1930-77, and 1966 Population by Year of Arrival 1.9 Migration Balance by Urban, Suburban and Rural Areas, 1968-73 1.10 Net Migration by Age Group in Urban and Rural Areas, 1968-73 1.11 Structure of Occupied Population, by Major Sector, 1950, 1955, 1960, 1965 and 1970-76 1.12 Employment in the State Sector by Professional Category, 1950, 1955, 1960, 1965, 1970-76 1.13 Growth in Gross Output, Employment and Productivity, by Major Economic Sector and Plan Period, 1950-75 1.14 Average Monthly Wages of Employees, by Branch of the Economy 2. EDUCATIO9 AND TRAINING 2.1 Education Sector: Schools, Enrollments, Staff, 1950-77 2.2 Educational Attainment of the Population in Rural and Urban Areas, 1956 and 1966 2.3 Comparative Education Indicators 2.4 Secondary Education: Specialized Lyceums, Enrollments, Staff, 1966-77 2.5 Vocational Education: Schools, Enrollments, Graduates and Staff, 1950-77 2.6 Education Sector: Graduates by Level of Education. 1950-76 3. NATIONAL ACCOUNTS 3.1 Growth of Social Product, National Income and GNP, 1950-76 3.2 Structure of Social Product, National Income and GNP 3.3 Gross Investment in the National Economy 1949-76 3.4 Gross Investment in Socialist Sector by Branch of the Economy, 1950-1976 3.5 Socialist Sector Investment by Judet, 1965-1976 3.6 Financing of Investment, 1951-76 3.7 Structure and Evolution of Fixed Assets, by Major Sector, 1950-76 3.8 Socialist Retail Trade, 1960-76 4. INTERNATIONAL ECONOMIC RELATIONS 4.1 Volume of Foreign Trade, 1950-76 L 7 Fnorts h Country nf nect4nntnn 1960-76 4.3 Imports by Country of Origin, 1960-76 4.4 Comodt CopoIFo ofVXp-rts, 1950-76 4.5 Commodity Composition of Imports, 1950-76 4.6 Structure of imports and Exports by End Use, 1950-76 4.7 Exports by Commodity Group and Trading Area, 1975 4.8 imp rt byI Com d t Grou an 1 .lJLILJI C ..13ISF I I Tr1.ading. AreaI. , 197 - vii - Table of Contents (Continued) 5. PUBLIC FTNANCE 5.1 Revnue an Exenitre of-, te State Budget 105-0-76~ 5.2 Revenues and Expenditures of Local Budgets, 1950-76 0 xtaralExpev 0.1 GoWL 01 ILUS iIU L LLial r-UUCLluH 6.2 Structure of Gross Industrial Production U.J Output o Selecteu industrial Proaucts 6.4 Size Structure of Industrial Branches 6.5 Size Distriution or industrial Enterprises 6.6 Sector Allocation of Industrial Investment 6.7 Composition of industrial Gross investment 6.8 Investment per Job Created 6.9 increases of industrial Employment during the Five Year Plan Periods since 1950 6.10 Labor Productivity in industry 6.11 Industrial Exports by Commodity Categories 6.12 Industrial Exports by Branch of Industry (Romanian Classification) 6.13 Industrial Output and Exports 6.14 Trade Balance of Major Commodity Groups 6.15 Exports of Selected Industrial Commodities 6.16 Imports of Selected Industrial Commodities 6.17 Planned Expansion of Selected Industrial Productions during the 1976-80 Five Year Plan 6.18 Branch Coefficients of Industry 6.19 Indicators of Regional Distribution of Industry by Groups of Judets 6.20 Indicators of Regional Distribution of Industry by Industry Groups 6.21 Indicators of Regional Distribution of Industrial Employment and Gross Industrial Output by Judets 6.22 Relative Changes in Industrial Structure of Less Developed Judets (Group 1) 7. AGRICULTURE 7.1 Index Numbers of Social Product, National Income and Fixed Assets of Total Economy and Agriculture 7.2 Index Numbers and Structure of Gross Agricultural Production 7.3 Land Use and Irrigated Area 7.4 Area Under Crons- 1954-76 7.5 Area Under Crops by Type of Production Unit 7 6 Cron Production 1956-76 7.7 Crop Yields Per Hectare 7 A Tiavcntck Numbers at Berinninc of Year 7.9 Livestock Production - lx - Table of Contents (Continued) 7.10 Principal Indicators of State Agricultural Enterprises 7.11 Principal Indicators of Agricultural Production Cooperatives 7.12 Principal Indicators of Stations for Agricultural Mechanization 7.13 Number of Agricultural Tractors and Machines in the Country 7.14 Chemical Fertilizer Used in Agriculture by Type of Production Unit 7.15 Irrigated Area by Type of Production Unit and Land Use 8. CONSTRUCTION AND HOUSING 8.1 Construction Work by Branch of the National Economy 8.2 Construction Work (Lucrari de Constructii-Montaj), Share by Branch 8.3 Construction Output by Category of Object 1960-76 8.4 Manpower and Ratios 8.5 Structure of Investment, 1950-76 8.6 Housing Turned Over to Occupancy 9. TRANSPORTATION 9.1 Transport of Goods by Subsector. 1950-76 9.2 Transport of Passengers by Subsector, 1950-76 9.3 Rates of Growth of Transport Modes 9.4 Rail Transport of Goods by Commodity Group, 1950-76 9.5 Road Transnort of Gondq hv Commodity Grotin 1990-76 10 ENFRGY in 1 Prim,ru Vnav n qinnlAyQ0 ( 17 Pnrn rt4nnc t-n 1Q0 (Physical Quantities) 102 Primary Enerx Sunnly 1950-79 nnd PrnPctions to 1980 (Thousand Tonnes Oil Equivalent) 10.3 Secondary Energy Production, 1950-75. an. Poecinst 1980 10.4 Internal Energy Consumption by Sector, 1970, 1975, and 1980 10 r m nergy Droducon, 180, 1098 and 1900 11 TATIDTCM Areas, 1975 11.L L'ULIUL UL ULign 1 UULLSL LLLVILO UY %.Li ULLly C. oLU 11.3 Regional Distribution of Foreign Tourist Nights: Organized lOULil~11 Utily 11.4 Romanian Tourists Abroad i.) Capacity of Accommodation in 175 11.6 Capacity Utilization in Period when Accommodation can be Provided 1970-75 11.7 Capacity Utilization (Bed Occupancy Rates) 1973 Table of Contents (Continued) B. CHARTS 1. Population Pyramid, 1966, 1975 2. Structure of Education System, 1975 3. Organization of Education System C. ORGANIZATION CHARTS 1. Government Structure 2. Ministry of Agriculture and Food Industry 3. Ministry of Agriculture and Food Industry, Judet Level 4. State Agricultural Enterprise 5. Agricultural Producer Cooperative 6. Ministry for Transport and Telecommunications 7. Ministry of Mines, Petroleum and Geology 8. Ministry of Electrical Energy 9. Ministry of Tourism TOTAL 237. ROMANIA REP. OF - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2) ----.. tt -- -- - -- - -- - -- - -- - TOTAL 237.5 MOST RECENT AGRIC. 149.0 1960 1970 ESTIMATE YUGOSLAVIA ITALY GERMANY FED. REP.0F*** GNP PER CAPITA (US$) ). 550.0** 1450.0** 830.0* 1910.0* 4420.0* POPULATION AND VITAL SA:.TSLS POPULATION (MID-YR, MILLION) 18.4 20.3 21.4/a 20.4 53.7 61.6 POPULATION DENSITY PER SQUARE KM. 77.0 85.0 90.0/a 80.0 178.0 240.0 PER SQ. KM. AGRICULTURAL LAND 126.0 136.0 144.07 139.0 266.0 439.0 VITAL STATISTICS CRUDE BIRTH RATE (/THOU, AV) 23.9 19.0 19.7 21.0 18.6 17.3 CRUDE DEATH RATE (/THOU,AV) 10.9 8.9 9.3 9.1 9.7 11.6 INFANT MORTALITY RATE (/THOU) 75.7 49.4 34.7 55.5 29.6 23.6 LIFE EXPECTANCY AT BIRTH (YRS) 65.9 67.7 69.1 67.7 71.9 70.3 GROSS REPRODUCTION RATE 1.2 1.3 1.3 1.3 1.3 1.2 POPULATION GROWTH RATE (%) TOTAL 1.2 1.0 1.0 1.0 0.8 1.0 URBAN 3.6 3.4 2.1 4.6 0.8 4.1 URBAN POPULATION (% OF TOTAL) 32.0 40.8 43.0 38.7 51.5 62.4 ACF STRiCTURF (PERCENT) 0 TO 14 YEARS 27.9 /a 25.9 2 .4/a 28.3 24.4 23.2 15 TO 64 YEARS 64.97a 65.5 6 *ft 64.3 65.2 63.6 65 YEARS AND OVER 7.27r 8.6 9.8/a 7.4 10.4 13.2 AGE DEPENDENCY RATIO 0.5 0.5 0.5 0.6 0.5 0.6 ECONOMIC DEPENDENCY RATIO 0.7/b 0.7/a 0.7/a,b .. 0.9/a 0.9 FAMILY PLANNING ACCEPTORS (CUMULATIVE. THOU) .. .. .. . USERS (% OF MARRIED WOMEN) .. .. .. * EMPLONMENT TOTAL LABOR FORCE (THOUSAND) 9600.0 9900.0 10200.0/a .. 19600.0 26500.0 LABOR FORCE IN AGRICULTURE (%) 66.0 49.0 36.0/a .. 19.0 8.9 UNEMPLOYED (% OF LABOR FORCE) .. .. .. .. 3.1 0.7 % OF PRIVATE INCOME REC'D BY- HIGHEST 5% OF HOUSEHOLDS 15.1 HIGHEST 20% OF HOUSEHOLDS 41.4 LOWEST 20% OF HOUSEHOLDS 6.6 LOWEST 40% OF HOUSEHOLDS 18.4 DISTRIBUTION OF LAND OWNERSHIP v OWND BY TfnO in0 OF nWNFRS 15.1 /a % OWNED BY SMALLEST 10% OWNERS 84 9 /b HEALTH AND NUTRITION -------------------0s POPULATION PER PHYSICIAN 740.0 680.0 620.0 1010.0 550.0 580.0 POPULATION PER NURSING PERSON 300.0 200.0 180.0 410.0 470.0/b 350.0 POPULATION PER HOSPITAL BED 180.0 /c 140.0/b 120.0/C 170.0 90.0 90.0 PER CAPITA SUPPLY OF- CALORIES % OF REQUIREMENTS) 105.0 118.0 ie.0/d 124.0 126.0 121.0 PROTEIN (RAIM 8Yi.0 2.0 90.07T 92.0 100.0 88.0 -OF WHICH ANIMAL AND PULSE 24.0 28.0 .. 29.0 42.0 56.0 DEATH RATE (/THOU) AGES 1-4 4.9/a 2.4 2.1 2.6 1.0 0.9 EDUCATION I.Ie contCNIT DATIn -- - ..n ... .,no -- S.TE! E L N 98.U 113.U 1uo.U 94.0 110.0 129.U PRIMARY SCHOOL SECONDARY SCHOOL 24.0 44.0 49.0 45.0 60.0 66.0 YEARS OF SCHOOLING PROVIDED *9.o 13.0 15.0 (FIRST AND SECOND LEVEL) 12.0 1i4.0 0_0 VOCATIONAL ENROLLMENT (% OF SECONDARY) 54.0 58.0 67.0 72.0 26.0 4.0 ADULT LITERACY RATE (%) .. .. . 5.0 97.0 99.0 HOUSING PERSONS PEN NUUM (URBAN) .3/c OCCUPIED DWELLINGS WITHOUT PIPED WATER (%) .. 88.0/d 0.3/b ACCESS TO ELECTRICITY (% OF ALL DWELLINGS) .. 49.0/C -- RURAL DWELLINGS CONNECTED TO ELECTRICITY (%) .. 27.0/c CONSUMPT ION RADIO RECEIVERS (PER THOU POP) 109.0 152.0 146.0 165.0 21a.0 318.0 PASSENGER CARS (PER THOU POP) 35.io 2- ELECTRICITY (KWH/YR PER CAP) 414.0 1615.0 2411.0 1288.0 2262.0 4128.0 NEWSPRINT (KG/YR PER CAP) 2.1 2.6 2.1 A.3 D.3 17.7 -------------------------------------------------------------- ------------------------ SEE NOTES AND DEFINITIONS ON REVERSE xii N0TES Unles otherwise notod, dato for 1960 refar to any yer betwso 1959 and 1961, for 1970 batvean 1968 ond 1970 and for Host Recent Etimate between 1973 ond 1975. * G per capita data ar bassd on tho World Bank AtlAs ~rhdlogy (1974-76 hali - 0* Not cotpor«ble to those for other Catrally PlUnnad Eco~als. D*riv.d by saing the Bank Atlas methodology, by adjusting official Romsantan N4ttonsl Account, data and convertiag thm teo US dollars at the effactivo exchnge rate for foreign trade transoctions which opproximates lo! 20 peor U5 dollar- o*e Tho Fnderal Rpoblic of Crmany has bsn Gelected as an objective country becauso it ts an indu.trialized European country with mjor trade tios with 1rnia.- R~ANA 1960 a 1962; /b ato of population under 15 and 65 ond over to total labor force; Le Hospitals only, excluds onitaris ond ~atstty hcao.. 1070 'a l atie of population u,e 15 end 65 and ovr to total laber forc.; No-p - - oly, -xlu-e manitar-& and natornity he.; Jr 1966; d Inoido odly. MOST RECENT ESTINATZ: Ja 1976; /b Ratio of populotion ander 15 end 65 ond over to total labor force; c ioepitals only, enolod. -t - and motorn-ty hoxua; 1969-71 åvrage; 197., official estimote s 100 Percet. Y0SLAVIA 1970 /a Agriculture land held by social sector "Eehfnto"; /b AgricuItura land held by private esel-holdere '1 het:re:m /, cluding midvas, assiatant 1d.ovös, assistant ures and nursing auxlties. ITA1Y 1970 la Ratto of population under 15 and 65 and over to total Isbor force; h Hospitl persoonnel. CEMMt2Y FED. REP. 07 1970 Tota, urban and rural; 1 inåtde o . R18, February 21, 1978 DEPInMT0 OF SOCA, INDICATMS Land Oroa ukm Population per marsing parson - Population dtvtdd by onber of prai,ing Total - Total aurface oroa campristng land ors and inland ratse. nol. and fneal grduate ourseas, "trlned" or "rertifiod" nura, and Aeri.a- Most recent ostieae af agriculturol *reausd tomporarily or pe.s- auailitry personl with training or experience. netly tor cropo, postures, moar & kitchbe gordena nr tn lis fellow. ~onPlaton pot opantal ,b - Prpul-tion divlded by number of hotsial bada rvalaoblo in public ond prate genrol sod spooialied bosPit-I ond 11P e capita (US$), - GRP per capita ~stinote, at current market prcs, r-habilitation centers; saclass oure s homo and establita,snts fot occulared by se converson eethod as World Bank Atl.. (1973-75 basis); c~oodisi and prevantive care. 1960; 1970 and 1975 data. Per capta supply of caloro« (7 of requir~mnte) - C~mputed %ron enorgy qvl on fo-d suplFs ailsbie fn country per cpito per day; opulation ond citat otatitc available supplt.o roaprie deoaatic produrtio, Import loss xports, sed Paolation (old-yoar tilion) : Aa of July fine: tf nnr -vail.bl., avrSa changes In otack; nt -upplifte 0cluds animal fed, oaod, quadiies ud of tro end-ear stimates; 1160, 1970 and 1975 dat. in food procssIng and 1.ose ta dietribution; requtemns wsre etisat.d bo PAn be-d or phYXIologicl noneda fr normal activity and heiah cnid- Populion doenity - per square km - Mid-yar population per aqusre kiloarte arg envit~ l tmpera~tr, body rwighto, ege and ss dstributon@ of (100 hectarea) of to! ~a populotton, and olloing l10 for wasta et horshoId lvl. PsoPultion dena-t, per squae km of arlc. land - Caput-d as bve for Por ca.lta supply af protein (gr par day) - Protein conent of per capito artculta&l lord only. not suppiy of fond nr dsy. rt opply sf fond i, d_-ing :~ &b~ve; ~Z- -nto for all rountries estobliahed by USDA eonomtc Res~eth Se_..r 0ital statlotico provido for e ninort alleosncs of 60 grosa Of total protein per day, and Cride birth reta per ch~.,and. avtr - Annual livs birthe per thouand of 20 groso of asimsl and pula proteio, of which 10 gra ahould bs sonal i'd-year pooulation; ten-ror aritimatc average. endtog in 1960 and 1970, protein; rhse atandard ars loo-r then thoso sf 7S sr- f tota! preteir .nd fie -yr a nding in 1975 for most rcont -iat . and 23 g-ra of a.nal protein as t n averago for the world, proposed by FAO Cr.d death ra, pra thoeand, aercap - Anmual dearha per thosad af mid-ynar in rhe Third World Ford Sur-ey. population; ton-yar arithnatic verages ending in 1960 ord 1970 and fivo- pZ capita protoin suppy fron aabel and pul-e - Prtetn oupDl, of food yaroverage .nding in 1975 for most recent osttmate. derv ELd fron anima ond puls. to gama per dey. Infant ota onto (thou; - Anual death. of Infanta under ~ ar,f ge earo ratt (Jth-uI 0p00 1-4 - Anrual deaths per thouoand in ag group 1-4 per thonsad ios birtho. yoso, to childr-n to thil Iae group; SuggeStad sa sr inLdt_or nf Lif0 texectancy st birth (yre) - Average nubaer of yemra of Life rmaintng at nalnut,ton. birth;, uually fivs-y-ar averoges nding is 1960, 1970 and 1975 for davelop- log contris. Education Gros reprodcono rae - Average number of Lire da.ghtora a women mill beer ådstd enrollnnt rato - Primayt, -ool - Enroilmort sf eli agos as per- lo hestrnoa rsprrdaotive perIod If abe operienoes prost ag-specific c"tago of primery school-ega population; Lolud.s childrn ogod 6-11 years fertilty raro; tnou-lly five-ynar sv.rags ending i. 1960, 1970 and 1975 bot adJusted for different length of prinary educatton; for coustrise with Ir devoloplag contris. unIverc l edu-cation, en-ollnont ny eed 1C0 sie se pupils are bo Popylation groth rato (Q) - total - Conpound annual growth rats of mid-year or abo tho official .hooel 0g. population for 1910-6l, 1960-70 and 1970-75. Adbusted enrollmnt rotio - secondar school - Caputed as obove; scond,ry Population growth rat) - ur - Ccputed libe groth rete of total ducatioo requirs at let for yesof s pproved prisar7 inotruction; population; different definitorn of urban atsasses' offect comparability of provides gemeral, ~nestional r , ch tra_ing intruction for pupl. dato omong 'ountris of 12 to 17 years of agr; orespondence -oros oro gonerally excludod. Urban poulatio (% of tr.ota - Ratio of urban to total popul.tion; different Yeato of schooton providd (firt and second level ) - Total ya of d.finition of rban aras y affect coprability sf dats o cntria. schooling; st secndary lavel, 2 oational inatruetton oy bo patially or clroplty rlmded. oas arructure (prans-t) - Children <0-14 years), rking-ag (15-64 years), Vosatios.l enrolhset ( of condary) - Voational tnatitutlon trncludo ord rtrto,!d<b on ond vest) s prcentsges of sid-ynor pophlatioo. technical, industrial or Other progr~a which operate ind.pondently or as Age dependenr ratio - Ratio of population under 15 and 65 and ovr to thoso departmnto of secondary int itutiona. cf age 15 through 64. odult literacv tate () - Literae ädr;- (4lbe Cc read and rtv' ap -oosoic dependency ra tio - Oato of population order 13 ond b5 ord over tc centge of total adult populattor agod 15 years std oer. the lobor force in age group of 15-64 years. Faily platning-acctoro (cumulative, thou) - C-oulative number of acceptors Housing of bIrth-crtrol devrces noder sspices of national family planring progran frsons rp io (ban) - erage rouber of perna Pr- ronom in c ed n nonv tlsnal dwlling in orb.n roe; dwIllngs eooluds non-prmert Fairy planning - caers (3 cf marrted wr,n) - Percenteges ol marrid sonen of structures and unocoupled pat. child-bearlng oG (15-44 yer) nbc uss birth-control devirea to elI married OccUied dwellins without piped vatra (1) - iccöpird onventtonal doelliogs mern lo i ons age group. ln urbön snd -ri aeae without in.tds or outside ppd water facilitien ss p_teentage of elI occupied drelltngo. E.Ploment acce to electricity (. of all wlling) - Conventioal dwellings with Total .bo force (thouand) - Econmic.lly actt persona, isclding arod eloctrlcity is lIving quarter- ae per,et of totl dwcllfng- in urban and forces and unploysd borecluding bouae1ivos, stusdento, etrc.; definittos rotat areao. lo vario co trtesar ot nmprtable. morab dwlling connectad ro elcrricity (3) - Camputed as ebove for ra Labor force in aariculture (M) - Agriculturel labor foro (to foaring, fotstry. dellngs orly. hu,ing ond ft.hing) .s percsntege öf total l.bsr fore. Uneployed (M of labro fort.) - Utemployed are uually defined as persons who Consapton ort able ond milling to take a Ib. out of . jb on a oivso da, remand ort -ado recei r r tou po - AlL types of receiverr far radio broadrate of 0 joh, er,! ooektng work for a speclioid ninimuom period not osceeding on. tn gsneral publio per thouoand of populotion; excludes unltcensed receirers cook; may rot be ompereblr between contre dos te ifferent defnitos In countrios and in yar ohen cgitratin of radio set. wso in effert; of uremployod and source of dato, og., npimyront office stattuttc, sapl data for recent year my not be comparable aIne mnost cotrie, sbolibod urvy., complsory nemployoent inuan.licening. Papseng"r toa (per thou pop) - Paenger tore copre motor cor sa ting Jncom. distribution - Percentago rf patve inse (both is c.h med knd) os that sight pereone; exctudes aulens , he.oares and mitrty receivod hy riohot 5%, trh-t 20%, poor.st 20M, ard pooroot 40% of house- rehicie. holds. Electricty <kob/or on,rosip - nu. l cen~~sro on of induatrlol, ro cia, public and Private clectricity in kilsort hour per cpita, generally Dis.cribution of oanonehp-Percentages of tand owned by weolthiet 1% basd on production data, rithout allowance for lonses in gride br alIla- er,! pooest 10% of land orners. ing for impotts end exporta of electrcty. Nerprit (ln/ r ~r col - Per tories l naptjer ton i ,logrm oealth and tritt , ton dstintsd afrs domesott production plus not importe of esprint. Poul ettan pet physiciao - PoplatUor dirido by tubae of practcing phyoittao qualtfted frm a medical achool at uniorsity tevol. 1 BRD 11718R 方么 IBRD 11719R DECEMBER 1977 22' 24' 26' 28. 24" 26° 26' u. SOCIALIST REPUBLIC OF ROMANIA u W- o Major To . ,,Y~-t" - - nternatior.1 I: - .i -- 0 25 50 7 o -- - rd o0s 50 -' v- ' - 6° s'c4- AGR CLRLRD TO AE Ti Anr P, -t'i''l .t 04 oflé'..eflý 0 r00-.. - 60440 mrsfve i ti u L G 8 D --K nteoet pol~ ~~~AGRICULTURAL POUTO RA AVERAGE ANNUAL RAINFALL t- PROUGIO AREAS - - i Areos f cro s and livestock, crops predominant Mos than 400 mm. OutÆA ·· r-c.- a f ..r an ivestokr b et ockti o i n tes0 -hn00 mmBAA Areas with predominant frult production 500-6OO0rfflSii IEER 1aa Arecis with predominant vinicUjlture - 600 - 800 mm. rr ~ "AreaIs af jivestockO - 800 -l000 mm. b" ' u. etheforests < 00- 100 mm. r "' i.i ouoide, af foresls 1200 - 400 mm. ~..- More than 1400 mm, sun1réa~~ j, > BEGRV-- -- . intenisive sigor beet production ALAA N>RI Årec- al intensive sunflaower productian 24' 24 26° . 28' 2iI 13RD 11815R 一止 一 q1 ぷり ロ りー』 へ』 『り 0 ア〕 IBRD 12731 MARCH4 977 U. S 5 R 7A SOCIALIST REPUBLIC OF ROMANIA .J CTRANSPORTATION Ralways 7)19079T, I I LTRACK. STA D GAUGE USINGLF TRA , STANDARD GAUGE 0.s SIECINDARYSINGLETRACK,STANUARDGAUGEL 0RADEANARW UG J WIDE GAUGE R~ RFST NATIONAL CAPITAL DSTRlIcTCAR1.A 9VASLUI HINTERNATIONAILBOUNDARIES T a UAc.clucILOMETERS -~~~~E LLa- , Cps TIrg BTor TIMISCARA ITOUAFCA Lugo ,Agav D UAL. y. °. -~~~~~~ P os uq ¯ ar ulcan stemA -- SLTI cu e oE Vmp4N MCOATNNUH RSTSTaoaA NT CRATA 3AUSTR IA - IIUNGARY ClrtAEADI -k \-N ROMANI YUGOSLA BUUlLk A R, ARH,, 긔 IBRD 12732 u. s s R. SOCIALIST REPUBLIC OF ROMANIA ENERGY RESOURCES r B- MAE XBB0O -~L.IGNITE , ana,1Flicn H b, BROWN COAL 1 - -BIUM80U,00 A & URDUC 0001 Ts -H A- V E V COasT) 0 -l-D R-BT OUNDARHES- oRA DEA f 't tT INTERNA NAl WOUNDARIES B - RIvERs BRATCA pt k MAEM)- N E A M VALUf AR H TA COMAN TI ALU ARAD AMIERCURA- Facu b- 0U V.TI J- U 0 M- C) - s \RARAEL S E V E RNA D S C H E SA " C P L L U IN T R O S U RF a1 3 T OTNSOTN ( o01R T1 lI0~~ l M i 2~~~~ Oo 00'~ o-B.3ZA N NEIA C EA TGOV - B \ Hec.n '4 S-SEVERIN SCHLiC Bo131\OOdB:9ý'd0 SCHELA4 TtOA ALBEN¼ ?\-[/ F-. jETUUA 5U IN ,:" 0<T R B I 53, MO7 OVN8 V-0 COZK -A OU ALOM T SLAT-INA UCHAREST/ enodaa - M~EHEDINTI- OLT WNST-T,kV 0 ss DOL\ C R- d T- CONSTANTA ROMANIA CalaiatALE XANQFH A N YVGQSLAV1A BULGARIA/ 7 c. B u L G A R, 1 A MRH17 斗 GLOSSAR Y Accumulation Fund: Ine part of national income used uin te foUm of investment and change in stocks in both the productive and non-productive sectors. Benetit: The difference between the value of output mea- sured in delivery prices and total costs of production plus turnover tax; the equivalent of gross profits. Central: An economic unit subordinate to but separate from a ministry, with responsibilities tor planning, supervising and coordinating the operations of enterprises under its jurisdiction. It is also responsible, through subordinate enterprises, for research, design and foreign trade. Combinat: A large, usually vertically or horizontally- integrated enterprise. Comparable Prices: A form of constant prices used to value many statistical series, particularly social product, national income and aggregated production data. Romanian statistics covering the period 1950-76 and expressed in comparable prices present data in 1963 prices. However, such series are not equivalent to a pure constant price measure, since the aggrega- tions are made in terms of different price weights; for 1950-59. the aggregations are made on the basis of weights derived from 1950 prices, for 1959-65, on the basis of 1955 prices and for 1965-76, on the basis of 1963 prices. Consumption Fund: The part of national income allocated for the con- sumption of material products and services. Con- sumption of non-productive services is included only insofar as they constitute part of material expendi- tures. Cooperative: A form of economic organization in both productive nA nnn-nrndiuctivP Apctors in which assets are collectively owned by its members. There are four tvnac nf rnnrvtixTPQ naricul tural - craft consumer and credit. Their activities cover arable agricul- produ v n lsvce, cr1t-Sn1e indetisrua nlsn- productive services, credit and retail sales in - xxii - Delivery Price: Producer price plus turnover tax, that is, a whole- sale price at which goods are delivered to retail outlets. Employed Population: The total number of wage earners in the socialist sector; it includes workers, technical and economic personnel, engineers, managers and administrators. Enterprise: The basic unit of economic and social activity. Published statistics include only those enterprises with legal status (see Chapter Ten, Table 10.5). For details of industrial enterprises, see Appendix 3, and of agricultural enterprises, Chapter Eleven. Global or Gross A gross output concept, measured in delivery prices. Product: which measures and aggregates the production of enterprises; it includes (and thus double-counts) the value of intermediate goods used as inputs except those produced in the same enterprise. The sum of global products of all productive sectors equals social product (see gross production and social product). Gross Production: A gross output concept, valued in producer prices, which measures nnd avgregates the nrodurtinn of enterprises; it includes the value of intermediate crnndtq iigpd i nnia-c. whethe-r prntidri in rHao m enterprise or purchased from other enterprises. (See globaql prodhint- nnd anrim n roduc,t). Groupn A TnA,,icrr xr Producer goodsA i~ndustry. juden Pt: A.r Tneritoria nd~ 4amnstaie,nt.rrr__ see Appendix 2. Labor Productivity: Measured as social product per employee, it is a gross output concept Ut Lte value Ut produuCtion per employed person in the socialist sector. Leu Valuta: The 'foreign exchange leu', a unit of currency expressing the formal gold price o tne ieu wnich is termed the official rate. At present, the offi- cial rate stands at 4.47 lei valuta: US$I. The leu valuta is used only for expressing the value of foreign trade in government scactisics. Local Budget: The budget of judets, under the management of the People's Councils. - xxiii- - Local Sector: State enterprises and institutions which are respon- Mateia vaane A physical. measure,ue ntep anin ----- 1 . .C In L . LU J. L _L L i.L6 L _O, jJL the sources and uses of a product or resource. (See Chapter Tnree.) MdLLial ExpenLuiLures. 1he COSt o all materlal inpUtS linclUding depre- ciation) used in production. National Income: A value-added concept measured in delivery prices and the sum of net products in the productive sector, where net product equals global product less material expenditures. It does not include the net products of the non-productive sector, or depreciation expendi- tures; these items constitute the main difference between national income in the Romanian definition (System of Material Production) and the UN definition (System of National Accounts). (See Appendix 4). Non-Productive Sector: Includes those activities not directly related to production: municipal services (not including dis- tribution of water, gas, electricity and urban transportation), housing, education, health services, scientific services (not including scientific research related to production), finance, administration, and political and social organizations. (See Appendix 4). Norm: Quantitative expression of existing rules and standards e.g. time per operation, material expendi- tures per unit of output. Occupied Population: The total number of persons working in all sectors of the economy. People's Council: Local body of state power in judets, towns or villages with responsibilities for planning and management of economic and social activities under its jurisdiction. Producer Prices: The ex-factory price, defined as the branch-average cost of production (including a profit margin), and the price at which state enterprises conduct transactions for inputs and outputs in the process of production. (See Chapter Four). - xxiv - Productive Sector: Includes industry, agriculture, forestry, construc- tion, transnrt trade tAlprommun,cntins and other productive branches. Since 1970 it has specifically tural mechanization stations, veterinary dispensaries, pasegr tralnport, teco mn, i c I0m ar,,, the population and administrative and socio-cultural in hospitals and health resorts, scientific research dyeing and photographic shops. (See Appendix 4). Real Incomes: Personal incomes of the population in money and kind (goods and services) coming from labor and social funds. Real Remuneration: Real wages, that is, money wages deflated by the retail price index. Regularization Tax: A tax on excess profits, established in 1970 and abolished in 1977. (See Appendix 7). Republican Sector: All state enterprises of national importance respon- sible to ministries and other central state bodies. Socialist Retail Trade: Distribution and sale of goods through socialist sector outlets. Socialist Sector: The state sector plus cooperative sector. Social Product: The sum of global products of the productive sector. Socio-Cultural The costs of education, health, arts and culture, Expenditures: physical education and sport, social assistance, etc. State Budget: The state financial plan including centralized incomes of the state and their distribution. Synthetic Indicator: A measure that summarizes and aggregates values of other variables e.g. national income. Titular: An administrative body responsible for implementing specific tasks of the plan. Tiirnovpr Tax: A tax levied on a good between production and whole- sale (see producer and delivery prices, and Chapter Four). Wage Fund: Thp total value of wage payments to employees. - xxv - ABBREVIATIONS ARCOM: The foreign trade enterprise in the Ministry of Industrial Construction BAFI: Bank for Agriculture and Food Industries CAP: Agricultural Producer Cooperatives CFR: Romanian Railways CMEA: Council for Mutual Economic Assistance - also referred to as COMECON CNST: National Council for Science and Technology CPPC: Committee for the Problems of the People's Councils GIGCDC: General Inspectorate for Guidelines, Control and Directions in Construction FAS: State Agricultural Units ICA: Inter Cooperative Association TCOR: Incremental Canital Outout Ratio TOVR: Military Pension Scheme TTA, State Warehnnuing and DiRtrihiition Comnanv ORDC: Oranizantion for Reseavrh npsian and niiidplinpQ~ in Construction RCP: Romanian Communist Party SAM: Stations for Agricultural Mechanization SCESD: Supreme Council of Economic and Social Development SGIIC: State General Inspectorate for Investments and S1NA ytmo t-LonaLL M-tUiLL %U.L"/ SPC: State Planning Committee t.o.e.: tonnes of oil equivalent - xxvI - PREFACE 1. This is the Bank's first basic economic report on the Romanian economy. Romania joined the Bank in December 1972 and since that time the Bank's economic work has been oriented towards obtaining a gradual 1/ under- standing of the economy chiefly in support of its lending operations. Sector work in this country has been undertaken in connection with the Bank's lending operations, and the only sector report published to date has been on agricul- ture. 2/ It is against this background that the present report has been pre- pared. Its intent is to provide for the first time a comprehensive review of the development of the Romanian economy and its prospects, and also to estab- lish a data base for future economic and sector work. The report is intended to be both descriptive and analytical, but makes no attempt to be exhaustive. Only the most important economic sectors are examined; and in a number of areas it is not overly analytical since the data available although sufficient for a general economic review, was not sufficient for an in-depth analysis of certain important sectors. 2. In addition, the report contains a chronological limit: it examines the economy to the end of July 1977. Since that date, the Government has announced a number of important changes in plans and policies. In December 1977, the National Conference of the RCP adopted a supplementary program con- taining higher targets for the 1976-80 Plan period (including the increases in targets for livine standards and pensions originally announced in July). In March 1978, the Plenum of the Central Committee of the RCP announced meas- ures to ennhl workers to narticinnte in the nrofits of enternrises and to improve the functioning of the economic system through greater use of self- management eachnniioc n"d finn"rinl ine-irnontg As a result- it is olanned that workers' bonuses will be based in part upon profits and foreign exchange nor-n,ra0 rs- nerDs w~i1 ho lI;nkoa fn not n-rnAiirftinn inctpn,d of alnhAl mitmnuf and that enterprises will be able to retain part of profits for the construc- tion of workers'huean other soco-cultural. activities. Intespeeo planning and implementation of enterprises' activity, the measures announced Will LZU ±L1LLtbC Lilt LUC UYL jJLUL-L. LLte LIJL £Liu taLLt --aL W -Lo w n [1- formance is to be measured will be net rather than gross production and each - -- :U_ L1. 1- C-. .-. economiC UnIL will be givenLI 8dLL LCpUL1bLU11L LUL k_dLiLyinL Ut 1LO ecL- nomic and financial plan within both the domestic and export markets. As a concomitant or these self-management measures, IL is intended that financial institutions will have a strengthened role. These measures, which are now being debated in detail within the country, are not Ui6UcdbU in tkC teport since they have not yet been analyzed by the Bank and discussed with the i/ Two economic reports nave been issuea: Ine Economy of Romania (Report No. 18lb-RO) in November 1973, and Current Economic Position and Pros- C~~I nr.! n .. a fn % nt 20, A - pects ot Romania (Report t. 4Ya-O) in October 1974. &E1 Economic Memorandum (Report No. 818a-RO) was also issued in December 1975. 2/ Agricultural Sector Survey (Report No. 953a-RO), October 1976. - xxvii - Romanian authorities. They will be reviewed during the Bank's forthcoming economic work on Romania. 3. The report is divided into three parts. Volumes one and two describe the organizativc, and operation of this centrally planned economy and its major sectors, reviews and assesses the economic achievements of the last twenty- five years (1950-75), both at the macro level and in selected sectors, and discusses the prospects for development during the next decade. Particular attention is given to the manazement tools. especially the plans used in planning and administering the economy; the 1971-75 plan and the prospects for the 1976-80 plan are treated in detail. Volume three orovides additional information on issues and subsectors not discussed in the main report, but are of importance in convevine a comprehensive view of thp Peonnmy vnlumP four, along with the text tables in Volumes one and two, provide a detailed data base. makine use chiefly of nublishtd inform;tin hut rnntnining onme pre- viously unpublished data and discussing data interpretation. 4. The findings of two missions have been particularly important for thp romnlptinn of this reonrt. A baicenmc4,sso -;.4- -44-A R----,-i4 October/November 1976. It consisted of Messrs. A. Tsantis (mission leader), R- Ppnnpr (an rnl Tr'1-;-- ( ----. . 1 is. n. L. 1n .. __ _ _ rr~~~- -u-om 45-/~O LJ. L L / ral t= ~ I L cL qLtY (energy sector specialist), W. Wipplinger (industrial economist) and H. Van Helen conultnt,transport sector specialist). the basic ,- missio had-bee preceded by a preparatory special economic mission in March 1976 consisting of Moesr. 0 Maiss (mi1sion leader)N A. m-* I- neraR"Pepe 1m- -xu %-a c " o LbUULLib kYtheid I :!UL1Q[R18L), M. repper (general economist), P. Biraben (general economist), T. Lejano (national r ' "L.-LL;L"t. P M Iquive pune, M. 0dUot (manpower economist), J. Theodores (education sector specialist), S. Yusuf (fiscal LII kdF..ul UILna IrL o agLL;U1LU1t! 1s based On Ene DanK s Agricultural Sector Report and that on Tourism on the findings of Mr. Snoy, who visited Xman a a tinay inr15. Tme country economic team ultimately responsible for this report consisted of Messrs. A. Tsantis and R. Pepper, assisted by ULL. r. -Lvves in -ne earlier stages of the report. *. ULdLL Of this report was discussed with Romanian otticials in October/November 1977 and in February 1978. - xxviii - SUMARY AND CONCLUSIONS Tntro6uction 1. Thp nurpose of this reDort -- the Bank's first basic economic report on the Romanian economy -- is to provide a comprehensive review of the coun- ev' laxyoInnmnt and nrnqnPrfs and to establish a data base for further J - -----------------I__ economic and sector work. The report is intended to be both descriptive and analytica1 hut make no attemnt to hp exhaustive. Only the most important sectors have been examined and in a number of areas the analysis and discus- sn of ises is cmewhAt piurt ead hrcuse the data available, although sufficient for a general economic review, was not sufficient for an in-depth report on Romania, the procedures and institutions involved in the planning and management of th cnm r described 4in somei dea1l over the last twenty-five years, the economy has experienced a major transfor- mation. Prior L rWUliu War LXUtiuLa waone on u e least develoed coun tries of Eastern Europe. Its economic structure was predominantly agrarian, WLi APP1UrL.l1LCLy Li1lit-_uCAtecto -L 11- v AvA areas and a similar proportion of the labor force working in agriculture. Organized mainly in large estates, deSpite -p mU- _ and limte a em at land reform, agriculture was poorly developed, providing at a low level the subsistence requirements of the population and oriented towards the production of export crops for sale in Western Europe. For the majority of the popula- tion, economic and social conditions were poor. SLandadsu vt ing, UCOfA--Ant largely upon low-productivity agriculture, were low and the limited access to education and medical services was illustrated by high rLes UL l1LeLay aLIU infant mortality and low life expectancy. Despite the efforts of successive governments to stimulate industrial development, industrial production ana employment had grown only slowly, the latter constituting only 8 percent of the labor force in 1938. Such industrial development as occurrea was limited sectorally and regionally and was mainly in consumer goods and associated with the production of raw materials for export; little heavy industry existed and the only large-scale modern industry was oil. Furthermore, industry and commerce were concentrated in a few urban areas, evidence of the limited progress made in transforming the economy from its backward state. 3. By 1975, the economy had made considerable progress towards the Romanian Communist Party's (RCP) long-term development goal of a highly indus- trialized economy providing a high standard of living for the population. The more important progress had been made in expanding the economy's productive base. The level of industrial production had increased rapidly and, with the creation of a broad industrial base, especially heavy industry, the composi- tion of output had been diversified, thereby providing the means for the modernization of other economic sectors and a general increase in labor pro- ductivity and national income. Standards of living although they remained below levels in most other European countries, had improved substantially, not - xxix - only because of the growth of personal incomes resulting from both general wage increases and the transter of labor from low-productivity agriculture to higher-productivity industry, but also because of the provision through the state budget of expanded medical services, housing and other social ex- penditures. Per capita gross national product in 1975 was approximately US$1,170. I/ Development Strategy 4. The changes in the level and structure of economic activities between 1950 and 1975 represent the outcome of a development strategy, the aim of which has been to accelerate the growth rate and to catch up as soon as possible to the level and structure of economic activities in the presently-developed socialist and capitalist countries. The essential features of this strategy can be summarized as: (a) high and increasing rates of saving and investment. This has been a key element in the strategy. An acceleration in the economy's growth rate has required the diversion of a high proportion of incremental income to investment and its allo- cation so as to generate the maximum increase in production. This is seen as necessary for providing a steady and sustained growth of the nonulation's livine standards. (b) the ertation of a broad IndustriAl hanR ahlp on nrovidp hath capital and consumer goods. Industry has been viewed as the lepv tri aprinrnin nrnoaac, rha nyr icfi nf h4oh 14-~tncy a-o"A_ ards and economic and political independence. Industrializa- tion pol4^cy has st-ressedl t*he creaton of t-he capItal goods industry which can provide the meAns for modernizing and incrangr the producive p.oenti-al of other- sor. It- also stressed the production within Romania of a wide range technological gains through the use of the most modern tech- ization strategy has shifted in emphasis from the creation of a wiU U C UL Dbasic induLiLe LUWald Le UVeUWnL UL technologically advanced secondary industries, chief of which are Ln tIIe en1gieerinIg, metaldJ.lurgicld ad chem1ia suDbsctorUs. (c) the development of local natural resources. Tne strategy has given importance to the exploitaton of all local resources of fuels (oil, gas, coal and hydro-electric power), metals and minerals, so as to ensure to the largest possible extent self- sufficiency in these areas and to meet the needs of industry and its related sectors. 1/ Utilizing the UN methodology and calculated from official statistics on national income. Under the World Bank's Atlas methodology, per capita gross national product in 1975 is estimated at $1,300. - YYY - (d) the reorganization and modernization of agriculture. Agricul- because of its important role as a sector and employer of the popul.at in. I.s L ol 'a bee to supl food~~IL ~U~ jLJL ani.. ALip. forU industry and the newly-urbanized industrial work force, to proviue a source or liveliood for a large percentage of the population and to produce a surplus over domestic requirements for export and thus permit the import of goods needed for indus- trial development. In view of the fragmented and underdevel- oped nature of the sector, the RCP' s strategy has had two major components - reorganization and the expansion of production. Reorganization into large-scale units, that is state farms and cooperatives, has been seen as necessary for planning effectively the growth of the sector and making use of modern techniques of management and mechanization. The policy for stimulating production has centered upon the development ot arable production through irrigation, improved inputs and better management. The aim has been to increase the share of land used for industrial crops and the production of fodder for the livestock industry whose share in total agricultural production has increased substantially and is planned to increase further in the future. (e) the balanced regional distribution of production and incomes. Increasing attention has been paid during the last three plan periods to the distribution of investment and economic activi- ties within Romania, with the purpose of reducing inequalities in levels and structures of production and incomes in each judet. In view of the unified national wage structure, the allocation of investment is seen as a means of improving the regional distribution of personal incomes. (f) the expansion of foreign trade and international economic relations. While the development strategy has emphasized self-sufficiency to the largest possible extent, Romania is too small and not endowed with enough natural resources to be totally self-sufficient. Certain raw materials must be imported because they are not available locally and others must be purchased from other countries because the growth of the economy has out-run domestic raw material resources. Furthermore, the industrialization strategy's change of emphasis over the past decade towards the development of sophisticated manufacturinv embodying technolov not yet available within Romania has generated the need for capital good imports. Thus it has been an important element of Romania's development strategy to develop foreign trade at a sufficiently rapid rate to ensure the Pconomy i sunnlied with raw materials and capital goods. To this end, it has been government policy to expand exports to nny fnr imnnrtg Tmnortant elements of the export promotion policy have been the expansion of trade with all conre,atmt olpoethe efficiency of trqding - YWi1 - activities by increasing the share in exports of highly- prr.oese goods, particularly. produc.tso f the enlgineeringF metallurgical and chemical industries, and, furthermore, the signin1g U£ IJJjJ at L LU 05 LWL =6& CULC Li U W -±L U -1 at- --LI jatLS JU W. tie trade more closely to joint production, technological and decade, the government's view of the role of foreign trade has been modified by Romania's success ino industrializing. Whereas in the past participation in foreign trade was viewed largely as a means or securing resources not avaliaue dumestically, a more positive role has been ascribed to exports now that Romania's economic structure produces a comparative advantage which it feels permits it to compete on a more equal basis with other developed countries. Exports are promoted as a means of improving enterprises' efficiency and quality of production, as well as obtaining faster growth and economies of scale not available through the domestic market. (g) the development of human resources; in order to meet the objec- tive of improving the standards of living of the population in its role as beneficiary of the development process, the govern- ment has pursued policies to make better use of the population in its role as factor of production. The most important policies in this respect have been a commitment to full employ- ment, the introduction of an education and training system geared closely to the needs of economic growth, the transfer of the labor force from rural areas and agriculture to urban areas and industry and the transformation of some rural towns into urban centers. It has been an essential feature of the overall manpower policy to raise participation rates and to stimulate an increase in birth rates. 5. The main instrument for carrying out this strategy has been the system of comprehensive central planning and management. Upon taking power in 1947, the RCP began steps to bring all activities under social control, in keeping with its belief that the transformation of the economy could not be achieved under a decentralized market system. Since then, the RCP has empha- sized the need for the creation and continued improvement of the planning and management system and for the involvement of the population in the formulation and implementation of plans. Economic Development 1950-75 6. Between 1950 and 1975 the economy grew rapidly within the framework of comprehensive economic nlanning which was made possible by the state's control of the major productive resources and its monopoly over foreign trade. Th-na th-iic rnnfrnl the state was able to mobilize the resources required for the economy's rapid growth rate and to finance the development programs i out in the five-yar nans. Develonment planning has been in a con- tinuous state of evolution, changes being introduced periodically to deal with weaknesses in previous raccesn and tn respond to changes in the level and structure of activity. Until the middle 1960s, planning and implementation by central d irective wa_S raobly e ffoctrf 4xpn a innplP errinnmy~ hill- f- became necessary to adapt it to a more complex economy. As a result, new measures have been Intr--Au,e- in the, pat dAde, With]- thepu~ ' nc ri4nr_nring3 the planning process and securing better results in plan implementation. 7. Between 1950 and 1975, according to official statistics, the Romaian economy sustained the highest growth rate ;inEastern Europe and one of the highest in the world. Over the period, social product and national income greW dL 7.0 petent anu 9U 7. 1 petenr CU annum, y t; p ne population growth was of the order of only 1.1 percent per annum, per capita growth of social proauct ana nauional Lncome was -I-- 1Ii*11 I_ *y-U)-Zu u standards, 8.7 percent and 8.6 percent per annum respectively. The driving force behind these growth rates was the high anu imCreabsui vu1ume or u -_ ment. Between 1950 and 1975, investment grew at an annual average rate of 13.1 percent. As a result of this high marginal propensity to invest .appLUx- 1ih aely 0.4 throughout the period and approaching 0.5 in some years) which documents clearly the government's ability to mobilize resources for growLn and to maintain the growth of consumption below that of national income, the economy raised the proportion of national income utilized as the accumulation fund from 17.6 percent between 1951-55 to 34.1 percent in 1971-75. 2/ The sectoral allocation of investment throughout the period reflected the priority given to industrialization; approximately 50 percent was allocated to industry and, of this, by far the largest part was directed to the producer goods sub- sector. 8. As a result, the leading sector in the economy was industry which experienced an average annual growth rate of 13 percent between 1950 and 1975; the output of producer goods increased at 14.5 percent per annum, faster than that of consumer goods (10.5 percent). During the first three plan periods, 1951-65, the difference between growth rates of producer and consumer goods widened, due to the strong emphasis given to engineering goods and basic chemicals industries. It was only during the last decade that this trend was reversed, as consumer good industries have been given more emphasis without, however, affecting the leading role of producer good industries. As a result, the share of producer goods in total industrial production rose from approx- imately 50 percent in 1950 to 72 percent in 1975. Throughout the period, the leading sectors of industry were chemicals and engineering goods and, pro- Delled by high and increasing volumes of investment, their joint share of total industrial production rose from 16.4 percent in 1950 to 43.7 percent in 1975. Another important feature of structural change and growth within indus- try was the lagging growth of some branches which supply raw materials and of thp conm-,nnpr Priods industry. With the output of domestic raw materials, 1/ The interpretation of these figures should be done with care, because of the statitical mehothn1nipe used to calculate them. See Chapter Five for details. 2/ Gross investment amounted to 36.6 percent of national income in 1971-75, --I-"I - - - --- nded to- aprxma1te~l17 99 n,-rpnt- of GNP. WIL-i jicil - _ - particularly oil, gas, coal and iron ore growing less quickly than the user increase in import dependence. 9. While this report provides a largely statistical picture of the im- pressive rate of inaustrial growtn, i1L 15 unaUle to provur a full assessment of the sector's past developments. It does, however, draw attention to a number of the sector's characterltiCS which reflect upon the efficiency of the industrialization process and industrial production. Industrialization has given rise to generally large-scale enterprises in many branches. Large size (by international standards Romania has a very high number of employees per enterprise) seems to have been seen as necessary for the application of ad- vanced technology and for securing economies of scale. Between 1960 and 1975, average employment per enterprise doubled, reaching 1,554 persons in 197/5, when 82 percent of gross industrial production and the industrial labor force was concentrated in enterprises employing more than 1,000 persons. The growth of average enterprise size reflected normal expansion of existing production lines, the addition in existing enterprises of new lines and administrative reorganization. Enterprises employing more than 2,000 persons have in recent years been the major generators of new employment. This may explain why as yet labor productivity increases in this group have been below average and why economies of scale have not been fully utilized. Some inefficiencies in the utilization of capital are also identified. In some branches, such as machine- building, wood processing and some light industry enterprises, as a result of investment decisions being determined by technological scale rather than the size of the market, capacities have exceeded domestic market requirements, thereby leading to under-utilization of capital stock or the production of surpluses for export of goods in which Romania has had no particular advantage. In addition, in the past, there has been a certain non-coordination between policies to modernize production and to reduce the wasteful use of capital which has led to obsolete machinery being retained or new equipment being used alongside older and less productive processes. Such difficulties have stood in the way of greater efficiency in the use of the capital stock. 10. One industrial sector (as categorized in the Romanian methodology) which receives especial attention in the report is energy. Rapid industriali- zation has brought about a large growth in energy consumption, at a rate of about 8.6 percent per annum, that eventually outpaced domestic production of energy. In 1950, Romania was a net exporter of energy, as a result of crude oil exports. Over the next two decades, despite large investments in oil, gas and coal which resulted in significant Droduction increases, domestic consump- tion expanded more quickly. In 1972, according to Bank estimates, Romania berAmp a npt imnnrter of energv. largely in the form of crude oil imports, which had begun in 1968. In anticipation of this as well as because of the nr>.a in 1Q71 in thp nrip of crudp nil- n1ans were made to increase domestic supplies of coal and to economize on the consumption of all energy suppnlies. - xxxiv - 11. The large volumes of investment directed towards new production facilities necessitated the rapid expansion of the construction sector. In 1975 construction was the third largest sector in the economy, providing 7.6 percent of national income and having grown at an annual average of 11.3 percent between 1950 and 1975. Construction's share in total investment, however, has been diminishing, particularly during the last decade. This appears to reflect two aspects of the sector; first, the diminishing share of construction in investment as there has been a gradual but continual shift in the allocation of investment from new facilities to the modernization and expansion of existing enterprises; and second, the reduction in the relative price of construction resulting from substantial improvements in its effi- ciency in the last decade. 12. In 1950, the sector was labor-intensive, unmechanized and unsophis- ticated; by 1975, construction was mechanized and efficiency conscious. For much of this period, growth of the sector was propelled by increases in labor and capital, but in the last plan period, difficulties in recruiting labor led to accelerated capitalization of the sector, at an increasing cost. The result of these efforts to prevent construction becoming a constraint was an attempt to increase efficiency by increasing the sector's mechanization, eliminating overdesign of construction work, economizing on materials, improv- ing desian work and improving training. Successful implementation of these measures has become more urgent following the 1977 earthquake. The recon- struction nrogram imnoses additional tasks- hpvnnd thoAp alrpadv Rpt nit in the 1976-80 plan, upon the construction sector, especially in the field of housinc. I ~~ Thp n,th,-r mninv QA,-tnr w.hip'h linc ar,vnwn v'~nniduli in racnnnc t- Hn, -h demands of industry is transport. In 1950, Romania had a fairly well devel- oped andA evenly dis-1 tribu,ted rail sOyste-m. OveCr thepas two4 a.nd 0a hatlf dcade ns, government policy has concentrated chiefly upon improving all transport and u-onn mlninmizing. tb ae t f t-r,nsp--t4n- goods. Betweeon 195 an,l0 1 07q #1N- growth of goods transport grew at an annual average of 11.7 percent, somewhat faste than n.,JUUaLtonal incomeJU aund Sa.la. prodJ~ucIt, LJuLL LIIe grwt ofLI pAjassenger traffic was substantially smaller. As a result of government's policy to improve Lue existung system anu to cuncentrate traffic on L a rLLWayb LIUe sector has exhibited rising capital productivity. However, there have been inUications in recent years that the capacity of the ral system is Deing reached and that further increases in traffic will necessitate costly upgrad- ing and construction programs. Road transport has expanded rapidly over the past decade, carrying as much tonnage in 1975 as rail, but much less in ton/km terms because of the limitations imposed on length of haul. The development of road transport has also been inhibited by the condition of the road system. An expanded use of road transport is becoming more urgent with the development of trading and tourist links with Western Europe where speed of transport and delivery service for goods are regarded as more important than in the Romanian context. 14. As a basic branch of the economy, agriculture has contributed to the economy's development over the past two and a half decades. Between 1950 and 1975, social product and national income in agriculture increased at average annual rates of 5 percent and 3 percent respectively. This growth in produc- LLLJU WOO DCLUL U CVCH LL1UUg11 Lilt LUL. b El1dlLjUWL ULHDCLIU au ±U LU tripling of labor productivity between 1955 and 1975. The growth of produc- tIoU was greater in livestocK than crop production, 4.3 percent per annuu compared with 2.1 percent between 1955 and 1975. As a result the share of livestock production, as a proportion of total agricultural production, increase from 35 percent in 1955 to 43 percent in 1975. The major features of agricultural development over the period were reorganization into state rarms and cooperatives between 1949 and 1962, and irregular improvements in produc- tion. With regard to the latter, the major features were an increase in cereal production generated by large increases in yields - as a result of improved farming practices, improved inputs and irrigation. This permitted the acreage devoted to cereals to be reduced and on the land thus released, the cultivation of other food crops (such as potatoes, vegetables and fruit), fodder crops (green feed and silage in particular) and industrial crops (flour, sugar, beet, sunflower, tobacco, etc.) was expanded, to provide inputs for industry and feed for the livestock industry, the chief components of which are cattle, Fork and poultry. 15. However, in spite of these improvements, agricultural performance throughout the period seldom approached the sector's potential. During the 1950s, the sector received relatively few investment funds despite its under- developed state and most of the gains from production in this period reflected recovery from the war, reorganization of land into larger units and price incentives given for private farmers. Since 1960, investments have increased more rapidly and the growth rate of gross agricultural production accelerated, as irrigation, improved inputs and mechanization were provided. In no period, however, have steady gains been made in production because of annual fluctua- tions in rainfall. In sDite of such difficulties, the sector has played an important role in the economy. It has provided sufficient food for the popu- lation to increase nutritional standards and to supplv a surplus for export; it has also supplied the non-agricultural sector with labor while maintaining and incrpasing nrodition and in addition it has sunolied inDuts for industrial expansion. 16. As a result of the above sectoral developments, the structure of the economy undprwent cnnsiderable chanqe between 1950 and 1975. with industry assuming the mantle of the dominant sector. Between 1950 and 1975, the nronortion nf nntional innnmp aninatinc in indistrv rns from 44 nercent to 56.2 percent in current prices, while agriculture declined from 27.8 per- cent- ton 16 percent-. Reauseoa%fthaelarge rolnt-up price chngesp orrurring over the period, the extent of the structural change is somewhat veiled. Exrse in, con-st-ant~ tho daplinp in agcricultre and incrrPaqP in industry would be more prominent. The employment figures express the change more clearly. Whereas in 1950 74.1 lercent nf the 1hor force was emploved in agriculture, the proportion was only 37.8 percent in 1975. This reallocation of: employmet. invlved an ... 4-rs ,vunn po%pulation, althougah a- a qlower rate than the creation of non-agricultural jobs. This is an uncommon feature c and.u laor een andi;-e 4n P,nn hu th ordinat-d control of employment and labor movement and by official policies to distri- bute new caL..LLCO CVCLLJJ ILL .L'iy~ ~ - xxxvi - 1979, the nronortion of the nonulation living in urban areas increased from 23 percent to 43 percent. In spite of these policies, the demand for housing has hon cith thnt 1n-1i nPrrPnt of n1l investment over the nPrind hnR hppn Alln- cated to housing, investment in which grew at some 12 percent per annum. The ca ,--rnl nnlnnn-4nri nf a~mrYnymnrt n1cn c cncr,fte1 tho nae fnr o1qiiPntinn, and training. Very comprehensive efforts have been made to provide for the proper tranng., of nall the popu,lationo One, of the fi4rst - nn om r.n 0 literacy training and since 1948, when the basis for the present system was estalishedOLOU, theO edcatiLonJA aindtrinin systemL± 1-,a beer Aeveope LJCL'0VC jCh,O.1t6W. the manpower planning system, to meet the needs of the economy. The achieve- mUiL U Lhe yLs teVm UC LU impLUVe Lhe CuUcanULal qualifictiUn UL LC labor force and to adapt continually to the needs of the economy for trained manpower. 17. The pattern of development in Romania has had implications for the level and structure of foreign trade and for its economic cooperation with all trading partners. Between 1950 and 1975 the volume of foreign trade increased at an average annual rate of almost 13 percent. Throughout the period, foreign trade played an important role in the growth or the economy and also served as an index of the success of development policy. The total level of imports rose in response to the need for raw materials and capital goods. Tne policy of diversifying sources of supply of raw materials and the industrialization strategy stressing the development of technologically advanced industries led to a more rapid increase in trade with developing countries and developed market economies, particularly after 1965. The structure of exports in turn mirrored the transformation of the economy. Between 1950 and 1975, the struc- ture of exports moved away from being predominantly raw materials towards industrial products. Whereas in 1950, 75 percent of all exports were raw materials, in 1975, industrial goods constituted 55 percent of all exports. The extent of Romania's industrialization have been shown, however, by the structure of trade with developed market economies, where, in contrast to its trade with developing and socialist countries, raw materials and relatively unsophisticated products continue to comprise a sizeable share of the exports although industrial exports are increasing at a rapid pace. In its trade with developed market economies, Romania has typically been in deficit and has financed imports by recourse to suppliers and financial credits. As a result, Romania has increased its external debt in the past decade, but it is clear from government actions that a conservative debt policy has been followed so that financing the debt imposes no undue burdens on the economy. 18. The changes in the level and structure of economic activity have been accompanied by changes in the population's standards of living, although in view of the increasing saving and investment rate they were less substan- tial than the increase in national income. In the early years of the period under review, the authorities took on the commitment of providing for all the nonilntion hnsir needs nackaee. nartlv through the provision of a iob and a wage for all people of working age and partly through the provision of npinl onneimnftion such as education- hnlfh nnd houiqinq. From thiR Riihiq- tence level, the government planned annual increases in living standards. - xxxvii - Between 1950 and 1975, real incomes of the population rose at an annual aver- age of 6.2 percent, with the growth rate gradually increasing. The main component of real incomes, wages and salaries, increased at 4.8 percent per annum while socio-cultural expenditures. measured in cnrrPnt nrices inrrPnQPd annually at 11.6 percent. 19. The above paragraphs provide a brief summary of the major features of Romania's develoPnment inr 1950 The main bnd of the ort exmines the period in more detail with the purpose of illustrating the processes and nnlirp dpPi-rmining the growth of the economy and idnifigh1ptnta for future growth and possible constraints. The major conclusion to be -------------------yo.L .lO. -4- Lta&Ja a.LL*IJU611 DLXL Lt_UIa.LL1XL16 a developing country, has been successful to date in its development efforts -n tha suc prblm as ar idetiie have not prvente~dL Lagt being mfet t although they may have increased the costs of meeting them. It is, however, ne LULiLoatg nIypuLICD. u Lll repUt LL Lul Luu1ai1an economy has reached an important phase in its development. Maintaining the high growth rates of .!-. ___ -. - - - - _ * ,.- - - te past e-Ue migl vcme increaSngly ext1icuLL ana require new measures to deal with some problems that in the past have not been serious constraints vu which might become so at the new stage or Romania s development. Future Plans and Prospects 20. The assessment of Romania's development prospects in the report is based upon the government's proposals for the next fifteen years laid out in the perspectives for 197/6-90, and more specitically in the tive-year plan for 1976-80. The perspectives provide in general terms an impression of where the economy will stand in 1990. In short, it will have caught up with the more developed socialist countries in terms of living standards and level and structure of production, having a national income of some $3,000 per capita (Romanian methodology) in 1963 prices. National income will be, it is planned, 3.5-3.8 times the 1975 level; growth will continue to be fueled by increases in investment which in 1976-80 will be 1.8 times more than in 1971-75 and in 1981-90 two times larger than in 1971-80 and by increases in efficiency; the allocation of investment will continue to favor industry whose growth will lead to a gross industrial. production in 1990 of 3.5-4.0 times the 1975 level. As a result, industry will produce about 70-75 percent of national income in 1990. Within industry, the major sectors, constituting 55-60 percent of indus- trial output by 1990, will remain chemicals and engineering. Complementary investments will be made in energy resources, and these will be coupled with a program to conserve energy which, it is planned, will contain the rate of growth of energy consumption to approximately two-thirds that of national income. 21. In agriculture, the emphasis will be placed upon livestock devel- opment which will amount to 50 percent of gross agricultural production in 1990; upon the irrigation of all irrigable land of about 5 million ha by 1990 (amounting to half of the arable land); and upon increased fertilizer use, reaching around 300 kg per ha by 1990. Furthermore, the perspectives envisage a reduction in the agricultural labor force to 12-15 percent of the - xxxviii - t-nf-.q nnci thtic, a Pnrrepndlng ;nrasern4"mchnzation. In forein tade the perspectives anticipate more than a three-fold increase, in constant 2.The perspectives. aIso - p rov id e t a rrgets fo c mto n and liin standards. They provide for almost a doubling in real wages (a 5.6 percent - - F- ULl ILU&J L LL Lease inl OtUL_ £ L4JULILL L LULL UU L LL 1 L Wt1LV:: ~ LL accounts for 30-32 percent of total incomes, and the reduction of the working A - - - -0----- planlQ-7f -Or% t ives t. kn LmpdLAUL U1 Lte 1/ UOV 11Ve-yeaL PLLL WLLL1 Lilt PtPUCL1VP5 LO 1990 indicates clearly that the fifteen year period breaks down into two dis- tinct parts. Between 9io-ou, the high growth rates or iii-75 are to be continued, after which the momentum is expected to slacken. The high growth rates of 1976-80 support the contention that the 1970s nave been viewed as a decisive period in the achievement of long-term development objectives, during when the economy is planned to burst through the constraints upon its transi- tion from a developing country to an industrially-based and technologically advanced economy. 24. Between 1976 and 1980, national income is planned to grow at 10-11 percent per annum, only a little lower than that achieved between 1971 and 1975. Gross industrial production will increase at 10.2-11.2 percent per annum, a little lower than before, but gross agricultural production is expected to overcome its previous poor results by increasing at 5-7.6 percent. In addition, investment is due to increase considerably more quickly than before, at 12.7 percent per annum. The volume of foreign trade is planned to double in real terms, which is a much faster growth rate than in 1971-75 when trade merely doubled in current prices. Furthermore, the growth of exports is intended to exceed that of imports, to allow the liquidation of most external debt and the accumulation of international reserves. The targets for consump- tion growth are below those of production, but with a target of 6.2-7.0 percent growth in real incomes, the increase is similar to that attained in 1971-75. Real wages for all workers are due to grow at 5.4 percent per annum. 25. The picture for 1981-90 is considerably different. While the pers- pectives indicate a constant growth in standards of living, the production targets imply a relative deceleration in the growth rate. National income would grow at 8-8.4 percent per annum which remains high by international standards, and gross industrial production would increase at 8-8.9 percent. Investment growth would decelerate, and growth of foreign trade would also be slower. 26- Both the perspectives and the sixth five-year plan specify a number of additional objectives. These are improving regional distribution of nrO,diction And income: encouraging internal scientific and technological development; reducing consumption of energy and raw materials; and improving efficinrv of nrMicrion and analitv of goods. Improved regional development is to be achieved through distribution of industrial and agricultural invest- ment. Sciantific and technnlogical devlonment is to be secured through organizational improvements gearing scientific work more closely to industrial needs and simply allocating more funds to it. Control of consumption of raw materials is oLue aciteveu turougu planuiug anu design anu tne institution uf norms and indicators. And improvements in efficiency and marketability are sought from improvements in the use of capital and laDor and more rigorous use of tools already in existence e.g. prices, product planning, export incentives, etc. 27. It is to these aspects of the Romanian plans that the report turns in attempting an assessment of the targets. The ambitious levels at which targets are set are not sufficient grounds for doubting that they can be achieved, for the government has succeeded in implementing ambitious plans before. In assessing Romania's plans, the report focusses upon two major issues. On the one hand, the gradual shift of emphasis from an extensive to an intensive development strategy with its implications for increased com- plexity and interdependence of the economy and its impact upon the planning system and efficiency of production. And, on the other hand, the deteriora- tion in Romania's energy and raw material balance with its implications for foreign trade and the marketability of Romanian exports. The interconnection of these two issues in the foreign trade sector provides the basis for the report's conclusion that implementation of Romania's present five-year plan will be more difficult than in the past. This conclusion is drawn without taking into account the impact of the earthquake; it is, of course, clear that the damage caused by the earthquake will make implementation that much more difficult. 28. During the 1976-80 Plan period, the high target for foreign trade is generated by the ProJected increase in imports of raw materials and capital goods. In toto, imports will grow, it is planned, at more than 10 percent per annum. Having become a net energy importer in the early 1970s. Romania will be importing some US$1.2 billion of crude oil in 1980 to meet forecasted demand and will also have increased imnorts of raw materials needed to keen industry running at full capacity. In addition, imports will increase because of the nPPd for ranital ands to develon ndvanred soonndary indsitries In chemicnls. engineering and metallurgy and thereby push these leading sectors toward the technoloaical frontier. Thus not only the continued operation of the economy but also future investment will be more heavily dependent upon foreign trade and thus the ability of Romania to increase its exnorts. Exnorts are rpnnired to increase at 11.2 percent per annum in real terms. 29. The ability to fulfill this trade plan will be constrained in some deree hv th Pnnditinn nf tha wnrld aonomy over which Romana has little control, but it will be affected also by internal developments. First, it will depend upon whether imports cnbe limited to i-he naqget levels- which were drawn up on the basis of the norms laid down for the reduced consumption of raw materials. in viLew of previous performance, it- wouvldi seem nmbhitilu to try to trim material expenditures by 8.5-9.5 percent per 1,000 lei of mar- 1 tb ep odc n Se o , 11A4.-- 4 --,- , sl ,-n t- rll nAn- n iirnnn domestic sources of raw materials being developed on schedule. The 1976-80 hdle L U L L.Lince lriuie ii pand coa imo s moread th schedule and threatens to increase crude oil and coal imports more than planned. Third , it depends upon the ability of the economy to generate - xxxx - marketable exports, particularly in the sectors of chemicals, machinery and equipment and industrial consumer goods. It is planned that the majority of export growth should originate in these industrial sub-sectors, and achieve- ment of total exports will require a substantially higher growth rate of exports from these sectors than has been achieved in the past. These are product areas requiring high quality, responsiveness to customer demand and, in addition, the intended destination of these products, the developed market economies, are highly competitive markets protected frequently by tariffs and quotas. Through vigorous negotiations bilaterally and multilaterally Romania is trying to break down such barriers to market entry, but merely gaining the opportunity to compete does not guarantee export sales in these areas. 30. The achievement of export targets will require improvements in the quality of products and responsiveness to customer demands, areas in which the economy appears to have lagged behind targets in past years. In spite of measures taken to improve performance e.g. by giving enterprises more direct contact with foreign customers, by repricing products to give a premium for quality and export suitability, progress has been limited in making the trade sector very responsive to world markets. This, again, requires further improvements in planning to incorporate into economic management more effec- tive tools for meeting the diverse and multitudinous objectives of an in- creasingly sophisticated economy. The report focusses upon the existence of important problems concerning the stimulus for standardization, the emphasis on volumetric indices, the need for improvement of investment criteria to establish optimum resource allocation, etc. 31. The report also examines alternative possibilities should the foreign trndp rontrninf nnPrAt (for external or intprnnl reasons) and concludes that the most likely possibility would be to choose to expand external borrowing within nrudent limits and h,vnnd thnt to maintin tight control ovpr imnorts. in the future, the report does not attempt to belittle the achievements of the economy or to suggest that it faesisumunalepOms Whilen He report concludes that although the issues discussed above are not easily resolved, it probabl that Romania will -ontinue to- en;o on of heihstgot rates among developing countries over the next decade and that it will largely bULL~CU i M Ll tLlLt-11L.LLL, J.LO UEVC.LUJjLlCil LL6C O EL.- report L alo conc*ludes. that, as a result of the comprehensive control of economic activities and the cautious policy of the GovernLLL1L1L LUWdiuds the use of foreign borrowing, external constraints will not result in any reduction in the country's credit- wortniness. PART I DEVELOPMENT OBJECTIVES AND PLANNING CHAPTER ONE INTRODUCTION - GEOGRAPHICAL AND HISTORICAL PERSPECTIVE A. Introduction 1.01 The Socialist Republic of Romania, which covers an area of 237,500 square kilometers shares common borders with four countries: to the south Bulgaria, to the west Hungary and Yugoslavia and to the north and east the USSR. Romania is not a land-locked country, however; it has a 245 kilometer- long coast line on the Black Sea and along much of its southern border with Bulgaria flows the Danube, the largest navigable river in south-east Europe. B. Topography 1.02 Romania has a varied topography with three principal relief zones of approximately equal size. In the middle of the country lie the Carpathian mountains, part of the Alpine chain, which rise to over 2500 meters. Aroind this mountain core there are hills and tablelands ranging in height from 200 to 500 meters. and finally there are the lowlands. the largest of which Are the Tisa Plain (Cimpia Tisei) in the west and the Romanian Plain (Cimpia Romana) in the south. Reflecting the relief fpatuires drainne iq hq.ieA1lv radial, although in the north of the country it is largely westwards into the Tisa via the Mire.iO1 nnd the nmn,t1_ PArtq of the fnhlan"Ac nf th northwest, particularly where glacial soils are found, have poor drainage. In the Rmith- the mainr riuar, -he tanlt-l qirpt-iil and Avcaul, flow toArdS the Danube. All these tributaries have large seasonal and annual variations in flonw and innna of hieav ralnf. al floo-A 4_ occurs. The last major flood was in 1975 when all the rivers overflowed, damaging crops and physical structures. 1.03 Romania' s climate can be described generally as continental, but there is considerable local variation because of relief features and thLu A LUHLCL fL UL LeL CeaL. LidferD Ut Le year U Lhe AtLidnLic Oce, Le Mediterranean and the Eurasian land-mass. In the north and northeast uLan UL.L L A.L.LC AALY, LlUaLLUUg, ULHgag heaVy strong winds (the crivat) in winter. The Danubian plains are influenced . . . .. . , ,0,, in summer Dy tropical air masses that produce temperatures or up tO 44 U. In general, rainfall declines from northwest to southeast, with annual precipitation of up to 1500 mm in the mountains and as little as 4UU mm in the southeast where the substantial variation in rainfall has made agricul- ture an uncertain undertaking in non-irrigated areas. At the same time, the low rainfall on the Black Sea coast, coupled with mild winters and moderately hot summers, has encouraged tourism. D. Natural Resources 1.04 Romania has a wide range of natural resources of varying size and quality. More than 60 percent of its area is suitable for agriculture, - 2 - farming. The plains consist largely of fertile soils that permit the cultiva- + 4QL6 on. of aUU wide rag cral,fosa'industrial crops. A1~J~aLLk ture, especially vineyards and orchards, can also be carried out in much of the a aJl edo Waire LE -WL LL tUmLai s LULdi idLa1Htora Lb LfUinU WH L ever grazing is available. Twenty-seven percent of the country, chiefly upland and mountain areas, is forested; the lowlands have been largely deforested for farming. Forestry has been an important industry for many years with replanting and forest management programs renewing and conserving the lumber reserves. The delta, the rivers and the Black Sea also contain large fish resources. 1.05 Romania has significant resources of fossil fuels, comprising oil, natural gas, coal and lignite, but because of their quantity and quality, the capacity of reserves and production to meet the country's needs vary consider- ably. The high-grade fuels, oil and gas, are in increasingly short supply, while the largest deposits of solid fuels are predominantly low-grade lignite. Oil and gas are found in an extensive belt around the east and southern flanks of the Carpathian mountains and in the Danube plain bordering it; the area has a history of commercial exploitation going back to 1860 but the largest deposits, in the Ploiesti region, are in an advanced state of depletion and the present oil production level of around 14 million tons annually is obtained from a large number of wells having low individual productivity. Exploration continues for deeper producing horizons and for new production on the conti- nental shelf of the Black Sea, but this is not expected to lead to significant production increases in the short term. Non-associated natural gas is found in the Transylvanian Basin and has been extensively exploited since the Second World War, supplanting oil as the largest single source of energy in the Romanian economy. Oil and natural gas between them supply the greater part of the needs of the Romanian economy for fuels at the present time and also form the basis of an extensive refining and petrochemical industry. Romania also has substantial reserves of solid fuels, the greater part of which are lig- nites of relatively low calorific value. These are nevertheless being rapidly developed as a fuel for industry and for thermal power generation and it is intended that they will replace oil and gas as the main source of energy in Romania. The nrincinal mining district is Gor_ in the southwest, where lig- nite is mined by both opencast and underground methods. Bituminous coal is mined in relativelv small ntantities in thp southwest also. nPar PPtrnsnni_ but geological conditions in the deposits are very difficult and no significant nra-dn-tion nrlPnP nrP fnrPRPPn. Some of the nls have wpnk rnkin nrnnper- ties and are used in the metallurgical industry. There are also small deposits of brown coal and of anthracite which are mined, but they7 are not of Major- economic significance. Romania has an appreciable hydroelectric potential, most of itcnetae on the Danube. in the iron Gates region it is being- developed jointly with Yugoslavia. Elsewhere most of the hydroelectric power generation, and are relatively small in size. 1.06 Romania possesses a wide range of ferrous and non-ferrous minerals but few large deposits and inetinugly relies upon imports, especially of iron ore, for its rapidly expanding industrial needs. Iron ore is mined in the southwest, while non-ferrous metals, particularly copper but also gold, silver, lead, zinc and bauxite, are found in the north and west. Romania also has deposits of non-metallic minerals, most notably salt in the foothills of the Carpathians in the oil-field belt; many of the oil-bearing structures are associated with oalt plugs and extrusions. In some areas, the salt plugs in- clude potassium salts in addition to common salt. Also found are deposits of refractory sands, the basis of a long-established glass industry, materials for the brick and cement industries and in smaller quantities, sulphur, mica, talc, asbestos and gypsum. E. Population and Education 1.07 The population of Romania at the time of the January 1977 census was 21.6 million and is increasing at approximately 1 percent per annum. The present crude birth and death rates, 19.5 and 9.6 per 1,000 respectively in 1976, are low by international standards, and have fallen steadily from levels that produced population growth rates of approximately 1.2 percent per annum during the 1950s. The decrease in the birth rate, which continued steadily until 1967 when the Government introduced measures to reverse the decline, reflects in large part changes in social habits associated with industrial- ization and urbanization. The measures succeeded in almost doubling the birth rate in the late 1960s after which a new decline has occurred. The decrease in the death-rate. and more snectacularly the decline in infant mortality, from 142.7 per thousand in 1948 to 31.4 per thousand in 1976, attests to imnrovements in standards of livine and increased access to medical services. 1A08 Rv 1977 thp irhan noniation had risen to 47.5 nercent, the steady (but compared to many other countries relatively slow) increase since 1947 r-111ting f-rm tho -rninnt-n nf Pnnomic dpvplonment And qelemPnt nat- terns. Considerable internal migration has taken place in the last three attempts to distribute economic activities equitably throughout the country. improvements in education. Illiteracy, about 40 percent in the 1930s, has developed to improve the skills and cultural level of the population. F. The Economy before 1950 1.09 Before the outbreak of the Second World War, Romania was one of L " l 1' L u V i u U 'LU I L .~ L- - - - - of Wallachia and Moldavia which united in 1859, Romania became an independent state in 10/1. UVeL LUe LULLUwing L -u cade reflecting the unstable political and economic conditions in the country and withIn south-east Europe iu general. Iransylvaniaued Romanua in-1918 forming a unified Romanian state and the potential for development improved. But because of war damage and in spite of Government actions to Ostmula industrial development through protective tariffs, state investment in infra- structure and direct assistance to private enterpeiie, the RumauIan economy remained a peripheral appendage of industrial Western Europe, serving as a -4- Up) L V~. 1 L % L. .L L UI. PLJLUU%UI. CL L~U 11LLCLC IL CLLIU LILL LC0~UUL%L_1- 0. .LLIUUb- trial production and employment grew slowly, the latter constituting only 8 peLcetL 01 L11 Idl LULce 1i 1JU. OUch ilndIULLdi UVeUelpmeLt as occurreu was limited sectorally and regionally and was mainly in consumer goods and as sociatea wit tle prouuctlon or raw matierialS for exporc. ILLIue neaVy industry existed and the only large-scale modern industry was oil, much of which was controlled by foreign firms. Industry and commerce furthermore was concentrated in a few urban areas, evidence of the limited progress in diffus- ing industry throughout the economy. Ine great majority or the population lived in the rural areas working in a low-productivity agricultural sector. Organized largely in large feudal estates (despite spasmodic attempts at land reform) agriculture was poorly developed, providing at a low level the subsis- tence requirements of the population and increasingly oriented towards the production of export crops. For the majority of the population, economic and social conditions were poor; illiteracy rates were high, intant mortality rates the highest in East Europe and life expectancy low. 1.10 Just as the First World War damage to the economy posed massive reconstruction problems which further impeded the largely ineffectual efforts of the Government to develop a comprehensive industrial base, so the Second World War severely affected the country, weakening the economic base and des- troying much of the industrial capacity. A popular uprising removed from power the representatives of the pre-war regime; a broadly-based progressive government formed in 1944 prepared the way for the People's Republic estab- lished in 1947. Under the guidance of the Romanian Communist Party (RCP), reconstruction of the economy began and coordinated programs of development in all sectors were initiated, with the intention of converting the backward agricultural economy into a modern industrialized and independent state. In the early years, however, the extent of the war damage and scarcity of investment resources constrained economic growth. It was not until 1950 that national income reached 1938 levels and not until 1953 that the pre-war level of agricultural production was attained. From then on, development proceeded at a rapid pace. CHAPTER TWO DEVELOPMENT OBJECTIVES AND STRATEGY A. Development Objectives 2.01 The long-term economic objectives of the Romanian Communist Party, established by the 11th Congress of the RCP in 1974, can be summarized as: (a) the transformation of the economy, through rapid and sus- tained growth in the production of goods and services and by the application of science and technology, into a technologically-advanced and multilaterally-developed state; (b) the predominant position, and thus rapid growth, of indus- try and agriculture as the material basis of the economy; (c) the balanced and equal development of the whole country and the elimination of regional disparities in production and income; (d) the elimination of rural-urban inequalities and the diminu- tion of differences between manual and intellectual work. through education, mechanization and automation; (e) the restructuring of the labor force to increase the weight of nonagrienltural Pmn1oyment! Cf)Roan~'sparticipation in the -r A -nmy"o a eua basis" with developed economies, that is, as an exporter of hIghly-processed industrial and agricultural products; (a)~ the p-rovicion of an impiroviced sadard o2- f livtingr for thehol population at a level comparable to that in developed countries. 2.02 These goals represent one major element of the overall development 4 - - 9~4 LLL L. LLl JULWL. .U%L. L LJ_ L .L.LDu d U LLM~ J_~LU~ transition to a communist society. Interpreted in terms of the materialist framework 0M mufUc pro oucuLMon, Luh= conomic IuJ dLs arecUnLcLnU WLih LHe development of the forces of production and are regarded by the RCP as neces- sary £L 1 the LUL cJ retvn fsc' a" I s. .L L. 'Te second major element of the uRCPs 1/ "We set out from the fact that the development of the productive forces propels social development, the general progress of mankind", N. Ceaucescu, speech to the Plenary meeting of the Central Committee of the RCP, November 23, 1976. - 6 - nvprnll anl has hPon tHia wnuti-nn rf tha cnrinl rglAt-in nf nrnd1t1inn, that is, the economic, political and social relationships between classes and individuals within society. While Romanian government saeet ndvlp ment stress both elements, this report concentrates its attention upon the only indirectly, insofar as the impact upon economic growth of the planning, organizat.Lin ad im±1plementionLUL o proucio isonered Deelpmn StraLP1~L JLtegy .a Any description of a development strategy must be anchorea to a particular period since, as the economy progresses along a development path, the details, emphases and, in some cases, foundations of the strategy change. In the case of Romania, the fundamental features of the development strategy have remained unchanged throughout the period with which this report is con- cerned; the strategy can be summed up as the rapid and diversified indus- trialization of an initially agrarian economy through high rates of investment and under comprehensive central planning of economic activities. The changes in the strategy over time largely concern the attempts of the RCP to move the economy from an 'extensive' to an 'intensive' development path after the mid- 196U's. The emphasis of strategy between 1950 and 1965 was upon unbalanced growth, centered upon the creation of new industry, in particular, the pro- ducer good sector, with the intention of eliminating what was seen by the RCP as the uneven development of the economy inherited after the Second World War and establishing a broad base for a "sustained drive towards socialism". After 1965, while the emphasis remained upon industrial growth, greater attention was given to a more intensive strategy -- capital deepening as well as broadening, the development of specialized secondary industries and obtaining greater efficiency from existing inputs as well as additional endowments of capital and labor. Furthermore, greater emphasis has been given to the development of agriculture, with increased investment funds being applied to mechanization and the development of the productive base. This chapter discusses the present development strategy as it is laid out in the 1976-80 Plan and the 1981-90 Perspective Program. 2.04 The major components of the strategy are: high increasing rates of saving and investment; rapid and comprehensive industrialization based upon modern scientific and technological methods: the development of local natural resources, including the modernization and reorganization of agriculture; halanrpd rpqional distribution of nroduction and income: exDansion of foreign trade to meet the demands of industrialization for raw materials and capital gnndQ Andi finnlly thp Pfficipnt iitilizqrinn of himn rPsouircs. The main instrument for achieving the development strategy is comprehensive and com- (1) Cofnsu,mptionn 0a investmennt 2.05 A ke featu-ire of Roman4-'S developmennt strategy, m-A n f oQcnrv condition for implementing the other components of the strategy, has been the mltIn the abn ofgh a cap 4it flow sa-- -----A ofLA an size,athse ment. In the absence of capital flows of any size, it has been necessary -7- to achieve this by increasing the rate of domestic savings. During the first CJLi jJL.LU, LI L LUJIL lL ULA-V LU U LLC L. LU LLCL L J - W L - r - - investment in such a way as to provide for the basic needs of the population. Siuce then, iL na8 beeU gOvernMlent pulicy to plian r a sCady grOwCl consumption wHile channelling a large proportion of incremental income towards investment. he allocation of national income between consumption and invest- ment has been based upon the fact that, while investment and consumption constitute competitive claims on resources in any single period, a high rate of growth of accumulation and thus of national income is in the long run the only viable basis tor a high and increasing level or consumption. Thus, high rates of investment generate high levels of income which permit in the future higher absolute levels of consumption and investment than would have been the case with a lower rate of accumulation. 2.06 The planning of consumption in aggregate terms has therefore been bound up and generally subordinated to the growth of accumulation and national income. The development strategy has provided for the steady growth of both private and social consumption from the level of basic needs established by the government during the first plan period, and the development of a coun- trywide network of socialist retail outlets. The growth of private consump- tion, and its increasing diversity, has been correlated with the increased remuneration of the labor force, so as to avoid excess demand and forced savings; it has also been government policy to expand, through state expendi- tures, the level of social consumption. (2) Industrialization 2.07 Industrialization has been the core of Romania's development stra- tegy. Comprehensive industrialization is seen as necessary for the creation of a modern and developed socialist society, for raising the standard of living and for ensurine the country's economic and political independence. Furthermore, the importance of industrialization, and particulary heavy indus- try, in develonincy the echnical hasqi of other sectors. esnecially asricul- ture, raising the productivity of labor in all sectors and in stimulating the more efficient exnloitation of raw materials has been emphasized in the dev- elopment plans. The program of industrial development has laid great stress un" the revantion of hqvy inditrV nnd th rnnq-ruction of new nlants. 2.08 The 4nfhiatrin1izanHn strat-egy places great emnhaRi.q inon the use of the most modern technologies and the incorporation of scientific and techno- i^"n4,l anna wh-la &-at affryta hav7 hoan mndp in RomaniA to develon the required technology, it has been necessary to import much in the form of inetmn gods It4 4, a*- o-i,~4 ht'-' " ' "~ef differenf components of the development strategy appears most clearly. An increased A49uJ....L Ly tt J,LmportLL ta ' 1 -(ad*heawmtrlsnddf0rindu -_ has depended upon the growth of exports which, especially in the 1950s and "it A .1..4C1. 1,,..4-ural..-. ra .,..A4 a's andrc food products .17uvs, were cLI.Lekl.y agricul_ L~~n.~.'"- ~ growth of exports has depended upon increases in agricultural production which tat isL duL iLULL Uods. rVC tLhls e La LmrbnLLcLLLedex,port that is, industrial goods. During the last decade, a more balanced export structure has been developed aSa reSult of I4t - Il - - -8- exports. Romania's development strategy for industry has thus required com- plementary investment in all other sectors of the economy and the development of foreign trade. (3) Development of Natural Resources 2.09 The development of industry generates both the potential for using more effectively natural resources and an increased demand for such resources. To supply the rapidly expanding needs of the Romanian economy, the state has instituted comprehensive planning of the exploration for and exploitation of raw materials, combining these efforts with policies to economize upon their use wherever possible. Investment funds have been allocated throughout the 1950-75 period for production of ferrous and non-ferrous metals (notably iron ore, manganese, copper and bauxite) and non-metallic minerals (such q. i1nhir_ mica- gypsum and limestone). However, local resources have increasingly been insufficient to meet demand and imports have been neces- ary. Parti1nlarlv in thp last decade, the Government has secured such raw materials under long-term supply agreements and furthermore has shown interest in inverting in joint nroduction facilities abroad. 9-in Ernnomic growth has also generated increasing demand for energy re- sources. The development of the four major energy sources - oil, gas, coal and hydroelectric po)r - h h n lcsrkd nit Pynlicitlv within the framework of a national energy plan, the chief goals of which are to maximise the use of domestic energy, resources and to minimize wastage of energy resources. As a result, the Government has invested heavily in the production of energy and ha l-,,. ..1. into~- it plnnn tagt -nllr'if indirnrr rpniiirinq Pntprnr-ises to reduce energy consumption; in addition, new factories are designed for the most--------------_ _------------- ---------n -'-,~ ,~~h ~~c has been conducted to devise less-energy intensive methods. It has, further- more, Deell anH impULLt paantarameter u __v1m 4 ,f1-f theus of o Il and gas as fuels should be minimized and that they should be used in higher value-added activities. They LULU tue vabi u a rapxdy expanding chem4C_l_ industry. Oil production has been stabilized during the last decade, an expanding excess demand being met by imports oL uue v41, chemicals works have been established to provide for both domestic needs and the export market. 2.11 The present energy strategy foresees the major sources of power for the future as lignite, HEP, and somewhat further into the future, nuclear power. Production of lignite has grown rapidly since 1947, particularly in the last decade, reflecting the world energy situation and mechanization of mining operations. The first national plan tor HEF as a source of power and irrigation was drawn up in 1950; a national grid system for electricity distribution has been established to supply electricity to all parts of the country and thus to permit an equitable distribution of industry and rural electrification, two important features of development policy. (4) Modernization of Agriculture 2.12 The interrelationship of industrial and agricultural development in terms of foreign trade and imports of investment goods and industrial raw materials has already been pointed out. There are other aspects of this rela- tionship that demonstrate not only the role of industry in modernizing agri- culture but also the role of agriculture in stimulating industrial expansion and the overall development of the economy. In addition to providing, through exports of agricultural goods, the means of importing investment goods (espe- cially in the 1950s before the industrial sector itself was large enough to generate a significant export potential) the development of agriculture has been required to provide food for the industrial work-force and raw materials for processing in the industrial sector, as well as providing a source of labor for industrial expansion and a source of surplus for investment before the industrial sector became large enough to generate its own reinvestable resources. The fulfillment of these functions has required investment in agriculture so as to raise the productivity of a declining labor force. 2.13 Government strategy in agriculture has had two major components; reorganization and the growth and diversification of production and its reorientation to high value-added goods. The purpose of reorganization, accomplished primarily through the creation of state farms and collectives during the 1950s and subsequently through refinements in their basic organi- zation, was to create large farming units capable of utilizing efficiently modern agricultural techniques. The strategv for the growth of production has been to reduce the land area used for grain production (production levels beina increased through investments to produce higher vields) and to use the land released for industrial crops and fodder crops for livestock. The main source of production increases has been investment in mechanization. imoroved inputs such as seeds, feed concentates and fertilizers, and irrigation, so as to increasp both land ani labor nrodurtivitv and to rpducp rh imnar- of tht climate. The restructuring of production towards products for industrial nrnpaccina, and( 1 ixpafnPV vpfla~pta t-ho nn m,,- i pir tnr nirnAi,no 114acho,- value-added goods in agriculture, as does the decision to divert grain output from dirppt onort inrn livPtork nrndiition- a nArf of whose ounut is designed for export as processed products. (5) Development of International Economic Relations 2.14 Rapid income growth based on the creation of a modern industrial scto -r nrate.s a reat-A 4--- nr-aA A-"nA f--4 nf-nn r,nnAr -rA r materials. As industry's demand for raw materials has outgrown domestic pro- ment of advanced secondary industries has generated a demand for imports of OUI±LULCCU 1:UP_LLa. gULPUb WIELULI,~ UCbJJ.LLR LLIC _L1ULuUt:LLC f_UJULL UL LIU! domestic capital goods sector, cannot be produced yet in Romania. Consequently, tue continued growth U the Romanian economy has depended a great deal upon the steady expansion of foreign trade. Throughout the 1950-75 period, foreign trade policy has been primarily geared to the expansion of exports to pay for necessary imports. In recent years, however, the stimulation of exports has - 10 - UCCHn attempted nUL Unly LU Linance ImpULts vut -1D LU1UL 4utHin LUL U LI L I9LU LUL U iL L U L £LL IL .LMPUJ.LbLZ UL1 6t.LOV LU LUILLiiLUC LI.LrLLi 6L UWV-L rates in sectors where the size of the domestic market constitutes a constraint to coninued growth or t[e acuievemeut of economies of scale. It alsu appears to be the case that, especially in the leading sectors of industry, chemicals, metallurgy and engineering, foreign trade is viewed as a means or improving efficiency and product quality by having these sectors exposed more to inter- national markets. 2.15 For diverse reasons, Romania has, particularly since 1960, followed a policy of diversifying the source of its imports and, thus in turn, the destination of its exports. While the volume of trade with socialist coun- tries has increased within the framework of bilateral agreements, trade has been expanded more rapidly with non-socialist countries in the last decade, so as to obtain the capital goods and raw materials required for the development program. In particular, it has been government policy to develop trade with the developing countries to secure directly materials previously obtained through intermediaries in the developed market economies. At the same time, Romania has attempted to change the structure of its exports so as to sell goods embodying a higher domestic value added than agricultural products and raw materials. Successive five-year plans have included ambitious targets to expand the sale of manufactures, both investment goods and consumer products, to all trading partners. 2.16 Romania's attempts to increase and diversify its foreign trade have been carried out within the wider context of a very active policy of interna- tional cooperation. It has been government policy to establish agreements with trading partners covering not only trade but also joint production facil- ities, scientific and technological exchange and a wide range of economic cooperation activities. Furthermore, the government has joined several multi- lateral organizations, particularly IBRD, UNCTAD, IMF and GATT. (6) Regional Development Policy 2.17 Within the last decade, more explicit attention has been paid to the equitable distribution of production throughout the economy and the Government has introduced an active regionalization policy designed to dis- tribute more equitably industrial investment and production and thereby, through the growth of industrial employment in each judet, to equalize income inequalities existing within the country. The regional policy has been three- prongd. First, the basis for effective implementation of regional policies has been laid through the creation of machinery for regional planning and management. Snnd- measures are taken to limit the further concentration of the population and to correlate the movement of the population with the labor requirements nf thp aronomy. The mnnRt imnortant features have been balanced urban growth, restraining the growth of Bucharest, expanding small anA,. me4MSe urban, cetr nn,ri iincr.-aring x7i1 1ncri-s in to qmql 1 townshins. In addition, all manner of public services have been extended to villages. which A littl indust (nt hds cneqn uetl,- wbe e ofeasiben to iudets which have little industry (and consequently, because of the national incomes policy, 'Lower personlal incLoms. - 11 - (7) Development of Human Resources 2.18 Romania's deveLopment strategy has also emphasized, as a means to ad anL enLU oii development~L, iml-JLU--V=em=nt0- L l 11i iL L V - i-* through the relocation of the labor force, education and training and improve- ments in living bstandard.S. IL ab ueent goVelLLlUmLL pUiLty, paLLLL UL Y u the mid-1960s, to stimulate population growth, both by encouraging, through a wiae range or measures, the birth rate and by imprOving WeUULaI bCLVILrb aLu nutrition. The growth of population, however, remains about one percent per annum and the accomplishment of the development program has necessitate majUo changes in the location and structure of the labor force. The government has implemented an urbanization program and through investment and training programs has enabled population to be transferred productively from agricul- ture to industry and other non-agricultural sectors. 2.19 The education and training system plays a major role in preparing the population for employment and it is an integral part of government stra- tegy to tie education and training closely to the needs of the economy. To ensure that education programs are an efficient and effective investment for economic development, the Government carries out periodic reviews of the sector and restructures enrollments and program content in keeping with projections of manpower and skill requirements. 2.20 The comprehensive and coordinated planning and management of eco- nomic activities is viewed by the RCP as a necessary condition for the imple- mentation of its development strategy. "To accept the idea that the economy should be left to develop by itself, through the spontaneous mechanism of the law of value, means to give up one of the most important advantages of the new system: the conscious direction of the economy with a view to ration- ally utilizing all the country's resources to the satisfaction of the general interests of the people". 1/ Accordingly, under the overall guidance of the RCP, the country's economic resources were brought under the control of the state and comprehensive economic and social planning was introduced. The basis for management of the economy was laid during 1948 and 1949, with the nationalization of large-scale industry and banks, the establishment of a State Planning Committee and legislation providing for the collectivization of aericulture. The centralized control of the economy's resources provided the necessary condition for an integrated program for economic growth, and the establishment of a State Planning Committee and planning bodies in all sectors and at all levels of activity provided the means by which develop- ment could be Manned and administered. Details of this system are given in Chapters Three and Four. 1/ N. Ceaucescu, Speech to the National Conference of the RCP, December 6, 1967. - 12 - 2.21 Centralized economic control has remained strong in Romania. In the 1950's and 1960's, when the industrialization strategy focussed on a limited number of strategic choices, centralized planning and control by directives provided an effective way for targets to be met. However, increasing sophisti- cation of the economy produced strains upon this system and towards the end of the 1960's, as Chapters Three and Four show, a more detailed planning struc- ture embodving some elements of decentralized management and planning evolved. In general, however, central control has remained strong and such reforms as have been introduced in the name of decentralization and efficiency have been concerned largely with improving the implementation of plans, the outlines of which rpmnin fixed by the center, and improving the flow of information on which decisions are based. - 13 - CHAPTER THREE NATURE AND TECHNIQUES OF ROMANIAN PLANNING 1/ A. Introduction 3.01 Development objectives, as outlined in Chapter Two, are being pur- sued within the framework of comprehensive economic planning. The major instrument of economic management is the national plan for economic and social development. which sets out for the nnnmy a hnnen by ctor and brnch, and on a regional (judet) basis, specific tasks and activities for economic -- ~ ~ ~ ~ * -- - - - - J - - --& LU _LI1JU .L1_LULL this plan is ensured through a financial plan prepared concurrently. In addi- tion o--Ine. spplmentry nstrmens a e.ein used (e.g. prices , taxes, credits) to help achieve the socio-economic objectives set by the RCP and the Government. Comprennvy planngs.aciituated by the socl owner- ship of the major productive resources of the country and the state's monopoly B. Evolution of Development Planning J.U1 Development planning in Romania, as an instrument of the state's economic management and control, has been in a continuous state of evolution. it began with the development of two one-year plans in 1949 and 1950. The basic planning period of five years was introduced with the first five-year plan in 1951-55. As economic needs and priorities have been changing through the different stages of the country's development, so has the system of plan- ning as it adapts to new goals. At times, this has required major organiza- tional and procedural changes involving the creation of new institutions or the modification and abandonment of existing ones. With the 1966-70 Plan, the principle of "continuous planning" was introduced and for the first time the plan contained sections for each year, sector, ministry, region and enterprise. The number cof targets was increased in the fifth Plan (1971-75). and this and the sixth Plan (1976-80) are the most detailed ones yet devel- oped by the authorities. 3.03 In addition to the scope of the plan itself, the process of n1n elaboration has also changed substantially. Three periods can be distin- guished in this respect: 1/ This chapter presents Romani's nlannina rrndace mc n staff hve come to understand it in their discussions with central authorities. The obiprt of thi-s chapter is primari'ly to -oney an undersadn ~-.r ofmho planning is reported. to be organized and undertaken. The principles of r 5 - U uULcqueML OCL;LUL CUaFt!E6L* LL 1 LUL the intention of this chapter to provide a Bank assessment of the actual operation of Romania's planning system and techniques. - I' L (a) Up to 1959, plan elaboration was centralized and targets were handed down to lower-level units. The State Planning Committee drafted the plan's targets based on the Directives of the Party. Upon Government approval these were given to ministries, which allocated control figures to their general departments; these, in turn, applied the targets to their enterprises; (b) During 1960-66, the essentials of a dialogue in plan elabora- tion were established. The ministries drew up proposals for the plan after discussion with their subordinate units; these were submitted to the State Planning Committee. The State Planning Committee then drafted a plan based on the Party's directives and the proposals. The plan, after anroval by the Government, was divided by ministries and subsequently by each ministry's subordinate units. (c) Since 1967, the present more elaborate system has been used in which plan preparation QtArfg hnth at the enternriRP Invpl- the State Planning Committee and other agencies for economic analysis, with an extensiu rarnnrijiAtin nrnrARa at national, ministry and district levels when differences exist. This process is explained in furtherk-1 1967 called for the "raising of economic activity onto a higher qualitative level"!/ and for the "strengthening of the role of the plan in guiding socio- economic processes" 2/ the Romanian authorities have undertaken a wide range of institutional, economic and procedural changes designed to improve tne planning system and to increase the efficiency of economic management. The changes have not been confined to the institutional organizations alone but have included changes in the policy and practice of pricing, in financing and investment procedures, and in the conduct of foreign trade among others. 3/ Many of the new procedures have been introduced recently and most of these are discussed separately in this report. 1/ Report of the National Party Conference, December 1967, p. 6. 2/ Ibid. p. 54. 3/ The range of changes is illustrated by the passage of several new laws including the following: 71/1968 The Law of Economic Contracts 72/1969 The Law on Planning and Execution of Investment 2/1970 The Law on Assurance and Control of Product Quality 1/1971 The Foreign Trade Law 9/1971 The Law on the Transfer of Fixed Assets and Supply of Materials 14/1971 Thp Law on Organization of State Socialist Units 8/1972 The Law on Planned Social and Economic Development of Romania 9/1979 Thq Financial Law XJ C. The Principles of Planning 3.05 Planned economic management is viewed as an essential attribute of Romanian sovereignty and national independence. It is an attribute which follows logically from the social ownership of the means of production and the state's control of distribution and exchange. Apart from this, four major principles can be distinguished in the Romanian planning system: (a) The Comprehensiveness of the Plan; (b) Continuity of Planning; (c) Complementarity of Economic Activity; (d) Democratic Centralism. 3.06 In Romania, the plan is a comprehensive instrument that covers the hulk of economic activity in all sectors and administrative Jurisdictions (judets). Even the limited resource requirements of sectors outside the diret nrviaw nf thp n1an (P.P nrlvatp farmina and housing) are includd when establishing material balances in the economy for any period of time. time. 3.07 The process of planning is continuous. During each of the planning periods, all economic units sek rconIciliation of present achievements and medium-term plans, adjusting these to coincide with longer-term perspectives. Monthly, quarterly and annual plans are constantly auusteLO rive year pLans are made compatible with the perspective program reflecting longer term trends. It is difficult for an outside observer to understand how this con- tinuous reconciliation process works with many intricate adjustments required in diverse economic activities. It appears likely that the microeconomic implications of new directives or national campaigns are left to the enter- prise to reconcile in the course of plan implementation. 3.08 Economic activities are viewed as complementary, not competitive; they are oriented towards achieving a common end: the objectives set out by the RCP, as discussed in Chapter Two. Competing demands are reconciled in the formulation of the plan so that.it can be derived either from an aggregation of sector/subsector plans (vertical aggregation) or of judet plans (horizontal aggregation). Participation in the production process is undertaken under the framework of contractual obligations resulting from the plan and is encouraged by material, financial, pricing ant other incentives. Despite an emphasis recently on achieving improvements in product quality, performance is still largely judged on the basis of achieving volumetric targets. Increasing importance is, however, being given to improving efficiency. 3.09 Democratic centralism denotes popular participation in the formula- tion of the plan at the enterprise level. However, this deliberation can only be undertaken in correlation with central decisions concerning the growth rates and resource mobilization since resource allocation in the economy at large is a political option. The draft plan is elaborated through a combina- tinn nf rpntral directives and individual aggregation; that is, draft planning - 16 - is both downwards and upwards and any differences are reconciled through a continuous dialogue between the ministries, the judets and the central plan- ning authorities. While this dialogue provides a degree of particintion for the entities in the planning process, some proposals of these entities cannot always h included in the final nlan. D. n Tntunvlved in the Process of Planning 3.10 All State~ a,nd Socialis,t insituton aresr~ inole in th rceso planning and plan execution. The following paragraphs give a brief description U Lle UVisiUn UL reponsiolxities eOween the majut inutitLULIn iVULVCU. (see also Organization Chart 1). (a) The Romanian Communist Party (RCP). The Congress of the Communist party, which is usually held every five years, is the supreme forum for the determination of the direction of Romania's development, and issues the directives that become the preliminary basis for the formulation of each five year plan. The last Congress, the Eleventh, was held in November 1974. In the period between Congresses, the Central Committee of the Party deals with most of the important issues. When necesary, National Party conferences can be convened to discuss important problems arising between Congresses. (b) The Grand National Assembly. The assembly is the Romanian parliament. It is the supreme legislative organ and adopts the laws concerning the annual and five-year plans. It has permanent commissions in some branches and fields of the economy that advise the Assembly on the passage of legisla- tion. The Assembly elects the State Council, which acts for it between sessions and controls the application of laws and the activities of all organs of state administration. After adoption of five-year and annual plans, the Council of State divides the plan targets among the ministries, other central bodies and people's councils. (c) Thp Sunreme Council of Economic and Social Development (SCESD), Established in 1973, this Council is the chief advisory and .dlihrative agney in the plannino field Tt is composed of 150-260 members who represent all areas of Romanian economic and social life. As a joint state-party organ, the SCESD presents studies and conclusions on the long-term prognoses also reports to the Grand National Assembly on the efficiency ad consiste~ncy of theive yea an ~dLd anuale plansb. (a) Te Legislative nouse of reople s Councils. The nouse consists of deputies-members of the executive committees of the people's councils of each administrative jurisdiction (judet). its - 17 - responsibility is to ensure the correlation of centrally plan- UL~ ak.k LJLa1 CI L..L .L L. ~IU L U.Lb jp UV dLU UJhiL U the National Assembly those measures affecting "local" activities, ke) The Council of Ministers. This is the highest body of state administration. It is responsible for the management of all economic and social activities. i/ in the area of planning, it has responsibility for elaboration of plans and submits these to the National Assembly and to the State Council. After their adoption, it supervises their fulfillment. (f) The State Planning Committee (SPC). The SPC, which is rep- resented by its President in the Council of Ministers, is responsible for the actual elaboration of the draft plan and for technical tasks involved in planning. The SPC designs a number of plan variants based on its own studies and on the proposals from the technical ministries, other central agen- cies and the People's Councils. It proposes which indicators and which norms will be used for such matters as raw material use, inventory levels, employment and remuneration. It draws up synthetic balances of the national economy as well as material balances for strategic products decided upon by the Council of Ministers. In terms of plan implementation, the SPC, along with other agencies, oversees plan fulfillment, proposes corrections of imbalances and reallocates resources. Together with the Ministry of Foreign Trade, the SPC works on five-year plans with other CMEA members. (g) The People's Councils. The local elected governing body in each of the 39 Judets and Bucharest is called the People's Council. The Executive Committee of the Council, consisting of a chairman, two or more deputy chairmen and a number of other members chosen for the life of the Council, is the chief administrative organ of each district Council and directs the planning activity in each district for areas in which it has direct responsibility (housing. maintenance of local public facilities, certain education levels, etc.) The Council also plays a maior role in coordinatine all economic activities in the region. 2/ Meeting every five years, the Congress of the District Peonle's Councils and of the Presidents of the People's Councils has been established to discuss com- mon nrnhlmR anrd servp qq q forum for workinc out nrocrams under their jurisdiction and the means of implementing them, Wi-fthin t-ho frnnn,Tu nf t-ha nnt1innnl r1quoFpent pn.n 1/ The composition of the Council of Ministers is given in Appendix 1. 2/ The system of regional government and its financing is discussed inA - 18 - ~jjI echnical. Minis tI ries , Centls anJb Enterprises. p Eac m~I ajorJI sector of the economy has a technical ministry responsible forJ itL: pJLanning11r. ThLe central-s are independent units of the ministries, and were set up in 1968 to assist them in economic administration. The centrals, each of which directs the opera- tions of a group of enterprises (horizontally or vertically integrated) perform important tasks in the planning process. I/ They elaborate their own plans based on the proposals of their constituent enterprises, then pass them upwards as proposals to the ministries. They also disaggregate final plan targets of the ministries to their enterprises. The centrals have become "titulars" to the plans of their respective ministries with responsibility for the fulfillment of plan targets. The enterprise is the unit that executes the plan and has to achieve its targets. Enterprises exist not only for production but also for distribution of goods, trade and services. (i) The Agencies for Economic Synthesis. These agencies, many of which are ministries, deal with aspects of the economy which are not specific to particular sectors. The agencies repre- sented in the Council of Ministers that are involved in the planning process are the Ministry of Finance (assisted by the banking system), Ministry of Labor, Ministry of Technical Material Supply and Fixed Assets Administration, the Ministry of Foreign Trade and International Cooperation, the National Council for Science and Technology, General State Inspectorate for Investment and Construction, the State Committee for Prices, the General Directorate of Statistics, the General State Inspec- torate for Production Quality Control and the Ministry of Domestic Trade. These agencies collaborate with the State Planning Com- mittee and with the technical ministries to coordinate plan aggre- gates within their respective fields of competence. E. Planning TechniGues 3-11 While econometric models are used as a ieneral reference and compara- tive framework, their use is rather recent and not extensive or sophisticated. Traditional Eastern Rurnopnn nlanning techniqnes still nredominate. These consist of synthetic and material balances drawn up for the major products by the Council of 'Ministers, minitripc nnei rpnfrnlq nnd thp PInhnrnfinn nf special programs for various branches and sub-branches of economic activities programmes were developed. 1/ Industrial organization is discussed in Appendix 3. - 19 - (1) Balances and The System of Advance Contracting 3.12 . During plan elaboration macro-economic equilibrium is achieved thrnih thp liq of q nnmhr of vnthetic balances. The process of preparing synthetic balances is essential in the planning system. Synthetic balances v cnmpiled f..r suh fnrt-nrQ as nAtionAl inrnmp- Rnial nroduct. labor force. production capacity, foreign payments, incomes and expenses of population. But the most- nueru baacs which areals discussd moIre extensively below, are material balances. Balances are compiled at all levels to ascer- tain the feaSibilit- of plan proposals* in the cae f an Jhalne-on organization must negotiate with another in an attempt to reduce demand or Inraespl.4 - ang n. 4 n quntt ma necessiat chne in other variables, which may generate more imbalance and a new series of negotiations. 3.13 In the determination of material balances, each balance has two sections. one which 11sts Lue source oL a particular Lesurce anu ne otere which enumerates its uses. Before the balance can be made final (which is done by successive approximations), and its components incorporated in the plan sources must be made equal to uses. The Council of Ministers determines the products for which material balances should be compiled (these are Le products of major importance) and designates the coordinator of the balance, (usually the unit which directs the largest snare or the production or con- sumption of the product). With the help of the State Planning Committee, the Council of Ministers is responsible for the compilation of about 200 material balances for products of national importance. Balances for other products are struck by the ministries and centrals. The basic form followed in determining the balances is presentEd below: Sources Uses Beginning Stock Consumption Production Production Imports Investment Releases from State Reserve Export Other Sources Other Uses Increased State Reserve Plan Reserves Ending Stock 3.14 The coordination of material balances by the central authorities is a difficult process. It. has encountered numerous problems in the past. An inefficient geographic distribution of local and central agencies and their warehouses, and growing shortages of some materials at a time of accumulation of unwanted inventories, led to two reforms in 1968 and 1971. These reforms included: (a) changes in the norms of inventories to be held and (b) the establishment of a new institution in planning and management, the Ministry of Technical Material Supply and Fixed Assets Administration. This ministry, in consultation with the State Planning Committee and other state agencies, has the resnonsibility for drawing up the plan for technico-material supply and for determining the allocation of stocks, supply contracts, and the like. - 20 - 3.15 The equilibrium in material balances is crucial to plan implementa- tion. As a rule, for the enterprise plan to become effective, enterprises must complete contracts for the purchase of inputs and sale of output con- sistent with the plan. In this way the planning authority attempts to ensure that the actual demand for inputs and supply of output (including changes in stocks) are balanced and consistent with the plan. The enterprises are lon1l1v hmind to thtir nrocurement contrqct-. Tf changpq in an enternripp'q plan targets require modifications to these contracts, these changes cannot h. PffPrePd withmit the renegntiation of rhp rnnfraft with thp rnnqnt of the supplier. This encourages strict adherence to initially established plan targets.* However, in Such, casesc as the recent campaign for the reduc- tion of consumption of raw materials, a process of accommodation is impli- can be achieved. Except for items covered by material balances at the level it h UIc entrLI. Lal, andc abo e tJL h C U. nLL I L F IU. - -.C 5Lge-n - a.L, a.L tI e- #1 h. eI f eeAo t oC. cr U.I).i oJ o C the suppliers or buyers and such factors as quality, size and delivery date are subjec to L nLegotiLat L i. This must. LIeU L f U- ignHic.LLL L .61.. .Lanc.e Lo most enterprises, however, because of the limited number of suppliers, particularly tor industrial aid intermediLate guous. uisputes among Le contUrcting parties are submitted for settlement to the Ministries concerned or the Ministry of m iLdi iLC 'a' Supply an"U F-e Asset 11M n-stri~LaLion. (2 Econometric Models 3.16 The quantitative technical basis for Romanian planning is provided primarily by two research institutes under the State Planning Committee. The first of these, the institute of Planning and Prognosis, is concerned with overall planning methodology and long-term forecasting techniques. The other, the Computer and Cybernetics Center for Planning, does all the computations connected with the plans and develops the sectoral models that form the basis of the sectoral plans. The models can be divided into three categories: (a) models for long-term prognosis, covering the period 1976- 1990, with extensions up to 2000; (b) medium-term models, focusing on the five-year plan; (c) sector models for important sectors of the economy. These are discussed in more detail in Appendix 5. 3.17 While the use of input-output tables has had limited significance so far in Romanian planning, their obvious relevance to planning problems has resulted in extensive research efforts. A 27-sector input-output table was completed about four years ago with the sectors roughly corresponding to the structure of the ministries and was used to establish macro-economic balance for the 1976-80 Plan. This table was actually reduced from an earlier (and the first) input-output table prepared in 1972 that contained 74 indus- trial sectors. Its application, though, to the Romanian planning was found to h Pytrpmply difficult. - 21 - 3.18 Despite the problems in developing and applying the new technique, experimentation wiLth tiie models. .s coninin and~ soeueu apiain have been observed. They have helped to identify those branches and sectors which contribute most to national income in reUation to the energy, materials, national resources and especially, to imports required. In addition, they have indicated some discrepancies in the balance between sectors. F. The Use of Plan Indicators and Norms (1) indicators 3.19 The responsibilities of the various economic units are estabiseuu and monitored through the use of indicators, which are in essence obligatory targets through which the economic activities of enterprises, centrals and ministries are controlled. Generally, such indicators are established at three levels: (a) for the macro-economic parameters of the economy; (b) for the various branches of economic activities (that is, for ministries and centrals); and (c) for enterprises. The indicators of the national plan, which include, for example, gross value of output, wage bill, outlays per 1,000 lei of marketable output, labor productivity, investment levels, sup- plies for domestic markets and exports, are established by law when the plan is approved. The rest of the targets are established by the ministries, centrals and people's councils and enacted into law by a Council of Ministers decree. 3.20 At each level of economic activity, responsibility for performance rests at the next higher level. Thus, the ministries establish the targets for the activities of the centrals, and the centrals for the enterprises. This decentralization in target-setting has introduced a certain flexibility in meeting overall plan targets. A central, for example, could accept reduc- tions in the targets of some of its constitutent enterprises if these reduc- tions have no effect on the central's performance as a whole, that is, if there nrP indications that they would be offset by above-target performance of other units. Similarly, changes in targets of a central of a certain ministry are c_onsidPrPd in the context of the ministry's overall performance. Reduc- tions or substantial modifications of targets approved for a ministry are --nhbet on apnroval hy the State Council. 321 The natro and nartinlar use of indicators in Romania's planning have encouraged a growth-oriented economic performance. One of the most important indctoens, for axamnle- is that of gross value of output. Because a bonus system is partially tied to this indicator (as explained in Chapter 'rou .11 l uni-ts sie movmimiz ount to meet estahlished tareets. A corrective measure was introduced experimentally in 1973, incorporating net - 22 - ou t into a target AnUiatu, vut its ube is still limiteU. 1/ Tue emphasis on improving product quality and efficiency in the production process has, however, been gradually wLCLeaSilg anu currently a number of indicators address such factors as improvements in labor productivity and reduction in the consumption of raw materials. The fulfillment or underfulfillment of such indicators has also been incorporated in the bonus/penalties system. Iue general ruifilment of such indictors has, however, proven to be dif- ficult. (2) Norms 3.22 In Romanian planning, norms, which are quantitative expressions of existing rules, are prepared for virtually all activities in both productive and non-productive sectors. Among the most important norms are work-time necessary for the completion of an operation, fixed assets required per unit of output, working capital consumed per unit of output and material input per 1,000 lei of output. A system of progressive norms is applied in the elaboration of all plans. This means that future input requirements are not determined by reference to an average result of the past but are based on a combination of the best and average results. 3.23 Norms are established in many different ways. Where information is abundant, norms are fixed on the basis of time, production and staffing studies of specific industries or even plants. When data are limited or a technology is imported, norms are purportedly based on cadre-personnel- production structures in similar sectors in other countries. However, it is apparent from plant visits that this is not always the case as overmanning of enterprises, including those with imported modern technology, has been observed. Norms are also calculated by extrapolating from enterprises of the same size and with the same production profile. If a norm is inaccurate, it would affect target fulfillment. G. The Planning Process and Types of Plans 3.24 Plan preparation is a very lengthy and time-consuming process in which n1l Pntitipq nrp inunIvod- The manr undertaking is the formuiaion nf the five-year plan. Preparations for the elaboration of the five-year plan begCi n w.ith the1 issua I_qne of the plaM n ietivesn by- the1 Party Congress.Th preparation of these begins two to three years before the end of the five-year plan then current. Avial stdis r ronoesa .ue and ,new ones are 1/ 1he Use UL eL output as a Ldr L iiULaLUL differs LrUm LL UL gross production (which includes both material inputs, goods in process, servLces anu uepreciation; vecause it tmpu'112L6UZe LLe pLUUULnLLU) uL a finished product, net of input. This indicator discourages physical output maximization and, since it makes no allowance for raw material input, it also discourages enterprises from adopting a product mix favoring heavy or high value products. commissioned at selected levels of organization and economic activity in order to provide the foundation for arafting tne pian UireCLiVeb. IUbC bLUU.eC, which usually cover each branch and sub-branch of national and regional eco- nomic activity, pinpoint products of special importance to the development effort and of strategic value to the country. A subsequent effort is under- taken to establish macro-economic balance by aggregating the results of these studies in elaborating the draft outline of the plan. 3.25 The draft outline of the plan together with the long-term macro- economic prognosis, drawn up by economic branch and by district, is analyzed and approved by the Council of Ministers and then submitted to the Political Executive Committee of the Party. Shortly after the Committee's approval of the outline and prognosis, the draft directives to be issued by the Party Congress are elaborated. A version of the emerging concensus is then received by the SCESD and submitted for adoption first to the Executive Committee and then to a plenary session of the Central Committee of the RCP. The current five-year plan outline and the prognosis up to 1990, as well as the draft directives, were approved by the Political Executive Committee in June 1974. The draft directives for the plan period 1976-80 and the principal guidelines for development for the subsequent 10 year period (1981-1990) were adopted by the plenary session of the Central Committee of the RCP in November 1974. (1) The Five-Year Development Plan 3.26 Within the bounds of the issued general directives, the five-year development plan is elaborated by the ministries and judets. This process involves the participation of all economic and administrative units in the state hierarchy, which then engage in a successive submission and consolida- tion of Information "unwards" from the enterorise and "downwards" from the plan directives as follows: (a) On the basis of their current operations and their expected ePancinn of nitnit and cnnarity- Pntprnriss submit to the centrals estimates of their production, together with their nede fnr rirrPnt innts and for investment and working capital. At the same time, these estimates are submitted This enables the regional plans to be elaborated simultaneously LJ A-L. Iao -.J to ela o _ aa a pla for its a- icular branch of industry. Enterprise plans are in this way c.Loso~ldaatd -in a firstOL degree of .aggrgaio, takingt account both the suggested plans of other enterprises and the oveal Plan 4i4rectives.* After dsuiowIhtheir consti- tuent enterprises, the centrals arrive at agreed first drafts UK Lheir plin;, WiLLIH CLLt-e LLLI UU[.LL u L U LUAL Aa ministries. - 24 - (C) The function of the Ministries is to prepare the plan fr- their fields of activity. They try to achieve sector consistency priorities. The ministries bear primary responsibility for prUubiLHU Ln.6 - LtdLUio U new eLLpilbe UL [1 eAdHlUn- UL existing ones, and, together with the local authorities, for the location or new plants. (d) At the same time, regional and local authorities are required to prepare regional development plans for the rational use of resources within their respective areas. In continuous con- sultation with the respective ministries (who have their own representative in a coordinating function attached to the People's Councils), the local administrative bodies play an important role in proposing the nature and location of new investment projects in this area so regional plans are not in conflict with each ministry's plans. (e) Together with other "organs of economic synthesis" 1/ the State Planning Committee (SPC) is responsible for correlating the projects proposed by ministries and local authorities and for ensuring macro-economic consistency of both the material and synthetic balances. The SPC together with other organs of eco- nomic synthesis is elaborating the draft of the plan and pre- pares it for submission to the Council of Ministers. 3.27 Once the plan reaches the stages of final draft, it must be approved successively by the various government and party organs in hierarchical order. First, review and approval is obtained from the Council of Ministers. The endorsed plan is examined by the Supreme Council of Socio-Economic Development and subsequently submitted with recommendations to the Central Committee of the Communist Party. The latter, in its plenary session, authorizes the plan objectives as contained in the draft. The plan is finally discussed, approved and ratified by the Grand National Assembly, which passes the enabling legis- lation. Cetr. S t iL isica aOf fLi o Fnce and others engage in t eomi Central Statistical Office and others engaged in the economy in a generld capacity, see para 1.10f4% - 25 - 3.28 This Law of the Plan provides the only available published informa- tion on thp fivp-vpnr nlAn. 1/ Because the information nr ntod in tho T.nw of the Plan is in an aggregative form, it is possible to know the plan's inter- and intra-sectoral resources allocation except in very general terms. 3.29 The Law of the Plan provides the macro-economic policy objectives '. LLi~~ J U I ,,J .. g targets Lior thJL le =%.;VLVuLIy CLrCL.LL L WLLULI Ft-LLULLJIaLICU will be evaluated and (b) establishing the basic themes for the plan's imple- mentatiuu four example, improvement in efficiency, technology, product quality, energy conservation). Included in the document are such macro-economic targets as naional ncome growt'U, 'Iuvestment level, gross production for the indus- trial and agricultural sectors and for their major products, employment and productivity, standards of living, increases in the volume of international trade. 3.30 The investment requirements are determined in aggregate terms. Apparently only a small number of projects, the major ones, are identified at that stage; for most projects included in the total project analysis is under- taken after their inclusion. This leads to a double bind situation at the time of project analysis for subsequent non-approval of a project would jeo- pardize the investment target fulfillment of an entity. 3.31 While sector targets may be summarily presented in the most aggre- gate form in the Law of the Plan, each sector ministry is fully aware of its being a titular of the plan. And, in order to ensure plan fulfillment, performance indicators are developed for each ministry, to be achieved at each level of responsibility by the centrals. The centrals in turn set the targets for the enterprises. This disaggregation of indicators, eventually to the enterprise level, is exercised within a range of discretion, accommodating as much as possible the economic conditions prevailing in different centrals and enterprises as long as the aggregate targets are met. 1/ In its final non-published form, the plan is comprehensive and extremely detailed with some 21 chapters. Each chapter, a self-contained plan for each respective field, forms an integral part of plan as a whole. The principal chapters of the plan are: (1) Industrial Production, (2) Agriculture, (3) Water Administration, (4) Forestry, (5) Transportation and Telecommunications. (6) Technological Research and Development, (7) Improvement of Product and Production Quality, (8) Investment in Construc- tion. (9) Geological Exploration, (10) Technical Material Supply, (11) Foreign Trade, (12) International Economic Cooperation, (13) Training and Tmnrnvpmpnt nf thp Labor Forrp. (14) Labor Fnrrv- Popiilntion Wnae And Incomes, (15) Production Costs, (16) Prices, (17) The Supply of Goods and Sprvirpq for thp Ponulation (1A DPvlonment of thp Matsmrinl Rncia nf Education, Health Care, Culture, Housing, Local Public Facilities and nvCe naent Prntnction, (9) Pn i, a PBraeou t nd nm aina n Ine, n (2) Centralized Financial Plan, Balance of the Incomes and Money Expenses of - 26 - (9) Tha A-nnul Plnn 3.32 Following practically the same procedures as those for the elabora- tion of the five-year plan, the draft of the annual plan is prepared in detail aout.~U si monthsLi before it- is due Lo e exeute , i.e. Uy the M IU.3U.1J L1 preceding year. It contains the same chapters as the five-year plan and in its pubisheu furm it is almost a replica u Lue Live-yeL uune in structure, content and style. As an illustration, an informal translation of the 1976 AnnuaL rlau is given Appendix 5. The targets of the annual plan are Dased on: (a) The provisions within the five-year plan for the year in question; (b) The availability of new resources or reserves and the pos- sibility of using more fully existing production capacities as well as of increasing labor productivity; (c) Achievements in the previous year, the rate of growth of domestic and external markets, and other factors warranting an adaptation of the original five-year plan targets. 3.33 Because of some flexibility in the planning process, which is finally made concrete in the annual plan, it is not necessarily true that a summation of the annual plans for five years will yield the targets of the five-year plan. It also follows that enterprises may not meet annual plan targets but still meet and surpass the five-year plan, depending on the level at which the former are set. 3.34 In the process of annual plan elaboration, many new projects are introduced. As a rule, these have to be fully prepared about six months before the year of execution, including relevant techno-economic studies and information on the financing and procurement of supplies. In earlier years the proportion of prepared projects was much smaller and this may explain occasional lags in fulfilling investment targets. The project selection criteria combine technical/economic and social considerations 1/. As many as 17 technical and economic indicators are legally specified for considera- tion in the case of each proiect but in reality a smaller number is used in approving the projects. Decisions to invest are a matter of policy priori- ties and a proiect must integrate first into the plan priorities. Once it is approved, resources will be allocated for it. So, implicitly, a decision to incornorate a project in the plan implies that there is no alternative use of funds that can provide a higher rate of return. Also, since the merit of Pnch invPsfmPnf iq iidapd individually and there is not a inolp rritprion I/ For a detaild review of prt selction and investment5. ci see Appendix 5. - 27 - upon which all costs and benefits can be measured, trade-offs between the individual criteria used must be established at some stage of the appraisal process. This calls for a decision on the weights given in each project to each criterion. In many cases the weights can be derived by the priorities in the government's strategy. Finally, to the extent that prices used in evaluating costs and benefits differ from border prices the real net benefits cannot be easily determined. 3.35 After the drafting of the plan, the State Planning Committee, the ministries, centrals and enterprises begin the process of arranging for supply and marketing contracts (para 3.15), in order to make the plan concrete. In the fall, the final amendments to the draft plan are incorporated to include the most updated information on economic performance under the current plan, i.e. harvest results and preliminary estimates of performance for the other maior sectors. This draft plan is then presented to the Supreme Council of Economic and Social Development, subsequently to the House of People's Coun- cils, the plenum of RCP and finally to the Grand National Assembly. 3.36 When the nlan Is annroved. the nrocess of its disaggregation begins. This involves among other things what is called the "nominalization" of pro- d,inffc,n fnrod 4e.. the qettin of fl3ed nnd obligatory obiectives in stated --------o------0- production lines. The Grand National Assembly, through the State Council, and the Council of Ministers nominalize targets only for a rnnge of maior nroducts (in 1977 the Assembly nominalized about 60 products, the State Council about 1,0) The\ ministri,4 ~,es -1, cntrals n1 1^Pnt ni-n4lI - for VhP_qP rpn- trally nominalized products and specify the different types and qualities ofte producJtts Lto be U produeA the.C..l~ y als.oL nominLkalize. an aduiionl rageo products for the enterprises. Thus the enterprises receive some targets that are nominalized U)y ti1e Stat CoL~unil., some~ by LLIe M4k. nistie an otesb the centrals. Such capacities as the enterprises may then still have avail- able can be used to produce products of their own choie, pAuv4Ade supply and purchase contracts can be found. I/ Once the enterprise, in consultation with the central, has decided upon its additional targets ntese tUUme oULgatory and are entered as such in the plan of the enterprises and centrals. In the end, therefore, nominalization is always 100 percent. In the process of elaboration, however, there is a range of discretion in setting targets at each level, from ministry and central to the enterprise. H. Financial Planning 3.37 As already mentioned, parallel with the major national efOUrt to formulate the five year and annual development plans, the various units pre- pare financial plans that identity the resources they will require to imple- ment their physical plans. Financial planning plays a significant role in helping the government attain its development objectives. It has these main objectives: I/ An enterprise cannot enter production of any product before contracts have been completed. - 28 - (a) ensuiring thet aanilabnMIlity oF finacia resourcesA 1 the economic development plan of the country, and establishing th neesr corl Clnsbtentee1: a,Ca resources and the various programs of development; (b) ensuring a financial balance within the economy, -- a financial equ "uui between resources an expendtures, a monetary equilibrium between the money supply and the availability of goods and sevice and a currency equiiuriuim between resources and expenditures in foreign currency; (c) enhancing economic efficiency in all sectors of activity, both productive and non-productive. 3.38 The responsibility for financial planning at the national level is that of the Ministry of Finance, which works in close collaboration with the banking system and other agencies of economic synthesis. The banking system consists of the National Bank of the Socialist Republic of Romania and four specialized banks: the Investment Bank, the Bank for Agriculture and Food Industry, the Romanian Bank for Foreign Trade, the Savings Bank (See Appendix 8 for more details). (1) The Centralized Five-Year Financial Plan 3.39 The centralized financial plan for the five-year period provides a synthetic balance sheet for the entire economy. The financial plan is pre- pared with reference to the targets set forth in the development plan and its main purpose is to consolidate the relevant financial information and to determine the consistency of the planning effort. Included in the central- ized financial plan are all financial resources and their respective uses; equilibrium between resources and expenditures thus is supposed to become a test of the financial consistency of the comprehensive plan. The centralized financial plan is elaborated on the basis of established value relations especially concerning the domestic and foreign price levels. When preparing the centralized financial plan annually, the impact of changing domestic and foreign prices is considered and, accordingly, the five-year centralized financial plan is corrected. For example, the centralized financial plan for 1976-80 was originally finalized in the prices prevailing at that date (the domestic prices were expressed in 1963 prices). A number of modifications have been introduced, however, with the 1974-76 resetting of production and delivery prices. First, the State Budget for 1977 was expressed in 1977 orices, which were known when the draft budget was being prepared and. second. the 1977-80 centralized financial plan was also corrected to reflect the diffprpnr nrice has 3.40 Concu.rrnt- W4,4 .he drawing up of the annual -a fteeoo- the annual centralized financial plan is being prepared. Initially, the data disposal of the ministries, the purpose being to provide guideposts for the - 29 - preparation of the annual plan. Preparation of the annual financial plan also leads to the -- rn-r%n n'f thp f4rQt- eiraff nf thp qtnt-p Rijapt- hv thp Minis- try of Finance. The annual financial plan is an operational document, which presents the targets and fin-ancia ;1 Aa ia fnv Hh t-ymna yeanr And nc4tc in checking the feasibility of governmental directives and the intersectorial k1i' Plan -LmuPI-CL-UVLiLeL'-LUL- 3.41 The Council of MinliSlers Oversees Lhe execution UL Lhe plan but LtE centrals also play a key role in supervision since the enterprises are directly responsible to their centrals for the plan's implementation. rtan execution is monitored continuously by the centrals, the ministries, local administra- tive bodies, financial and banking institutions, the State Planning COmmILLee and the Central Council for Workers Control of Socio-Economic Activity, all of which report systematically on progress in target rulfilment. Inus at any given time, the central authorities have an updated and accurate knowledge of the state of national economic performance. An incentives/penalties mechanism is also built into the monitoring system, designed to promote ful- fillment, even overfulfilLment, of the plan's targets and a more efficient use of resources. (2) Financial Control 3.42 Financial control is exercised in two ways: preventive and audit- ing (ex-post control). The main role of preventive financial control is to identify and eliminate non-legal spending and, thus, ensure that business is being conducted efficiently and according to the plan. It is continuously exercised at various levels. At the enterprise level, the chief accountant reviews and approves all financial transactions. The Ministry of Finance and the Bank ensure that no transfer of funds is permitted except within plan guidelines and according to the approved techno-economic documentation for specific investments. Finally, the Superior Court of Financial Control, as a body of the State Council, exercises control functions for the ministries and other centralized state agencies. Ex-post control is undertaken in order to check whether the financial transactions have been performed in accordance with the plan. First, there is internal financial (budgetary) control organ- ized at the enterprise, central and ministries level. This is undertaken at least once a year. Second, the Ministry of Finance has its own control organizations, the State General Financial Inspectorate and at the district level the Territorial Financial Inspectorate, that check on economic, finan- cial and exchange transactions to ensure that they conform to existing laws. Third, the National Bank and the other specialized banks use their inspectors in connection with their credit operations, investment financing etc. Fourth, the Sunerior Court of Financial Control undertakes similar control for the ministries and other state agencies and checks up on the Ministry of Finance. - 30 - * .3liJ'n.L£ t.OC LtLL tJ£ C IC pt. U UL . L CiC U L J L . L U.JjCLL LLL L_C1L U1= made by the authority that approved it at each level of responsibility pro- Lb~~~~~ UiU LULLL U Sj . .J . " Y.L L LILL outsidLeper= mission, an enterprise can change an output target nominalized at the level uson etepL ie, pro vie noC c1 ontracL s are VruKen or new legally acceptale contracts concluded. For an enterprise to change an output target assigned by the central, it must demonstrate justilialie cause and the central can authorize the modification only as long as the central can continue to meet output targets assigned by the ministry. LiKewise tne ministry can approve, again given sufficient reason, only those plan changes by the centrals which do not adversely affect the output targets set by the State Council. J. A Further Assessment 3.44 Romania undertook in the late 1960's and early 1970's measures in planning and management which were intended to increase the responsibility of the enterprises in elaborating and implementing the plan and to orient the economy to a more efficient use of its resources. While these changes were not broad in nature and scope, they were of significance in the context of the centrally planned and managed Romanian economy. Success in their implementa- tion, however, has varied. In the course of the discussion above, some of the implications and difficulties arising have been highlighted. Additional selected topics are being reviewed briefly in this section and the following chapter. 3.45 One of the more important new measures was the introduction in 1969 of a newly found entity: the central or industrial association. It was established as an organ of management between the enterprises and the minis- tries. The centrals were supposed to assist the ministries in a more effi- cient management of their constituent enterprises by taking over some of the enterprises' functions such as marketing and budgeting, but not production. However, the potential Rains from that reorganization cannot be realized in all cases. While not involved directly in production, the centrals have been responsible for overseeing the productive activities of the enterprises. Some of the centrals maintain a role which is not dissimilar to previous functions of the ministerial directorates that they replaced. In spite of these decen- tralization measures, therefore, decision making has remained centralized. DAcPntrA1i7Atinn of Authnrity would allow the centrals to seek economies of scale in production operations and internalize externalities. 3.46 Certain conflicts have developed from the role of prices in the r o e 1 - tin pr oc ss M n n av m n u h PeIi T~t Pt tonii us ~r t q in m At Pi n ~1Q when they can meet cost reducing targets by selecting alternate inputs. For coaml, whichwee incude inten tan-f-rt- t various7v enprcrsu frei tlg C4~4j-- - WI CLI -_ _ -__ ---~~ --- -_ _ - -~ -_ coal, which were included in the targets of various enterprises, were largely rutatL becaus of~ unchange lowe 5g"aStfbC 3-. --- t----( - 1 - CHAPTER FOUR OTHER MANAGEMENT INSTRUMENTS 1/ 4.01 A wide range of instruments is used by the Government to assure the implementation of the Plan and the mobilization of resources required for its success. These include: the system of prices; the institution of a uniform exchange rate to serve not only as a means of linking Romanian prices to world prices but also as an efficiency indicator at which goods should be traded; financial incentives to stimulate workers and management to meet or surpass production targets; and finally, financial instruments that include the State Budget, the banking system and the use of credit, interest rates and money supply. A more detailed discussion of the State Budget and its components and domestic resource mobilization is given in Appendix 7; while the banking system and other monetary instruments are dealt with in Appendix 8. A. Prices and Pricing Policy 1. Role of Prices 4.02 The present system of prices in Romania dates from 1950 when, with the issue of Decree 142, responsibility for setting prices was removed from individual producers and given to responsible government bodies - the Council of Ministers, relevant Ministries and People's Councils. The decree also established three basic pricing principles which have governed all subsequent price regulations: (a) uniformity of orices of similar commodities throuehout the country; (b) stability of prices through permanent control; and (c) monitoring of prices with respect to costs, quality of nrndnrt w-,qndcrPnPrnl Pernnamir rnnditinnq. 4.-03 Thp nrinoipnl Fiiptinn,- nf pirinc at, the nv&Q t t-4-a n fn nll y laid out in the Law on Prices and Tariffs, No. 19 of 1971 which was updated and republished on ianuary, 1, 1077. These fulnct4--- 4- ~~,4-- the il role of "attaining the economic policy objectives for socialist industrialization trade, ensuring monetary stability and elevating the people's standard of ii..ving" are: as Bank staff have come to understand it in discussions with central authorities. The objective of this chapter is primarily to convey [uw the instruments are reported to be used, not to provide an assessment of how they operate. - 32 - (a% .o ser ve as a me~anso Of aggreationL an.. a meLasure oit value for the measurement of inputs and outputs and contribu- tion of each enterprise and ecOuumic u1it to sucial prou- uct and national incomes; (b) to reflect the social costs of production and thereby to contribute to the allocation of resources to different sectors of the economy; (c) to stimulate econoT.ic efficiency and qualitative improve- ment of production and to encourage reduction of the costs of production and increases in labor productivity; and (d) to distribute national income and goods. 4.04 In this formal sense, therefore, the role of the pricing system in Romania is essentially similar to that of all other economies, that is, it provides data for the valuation of goods and economic calculations. However, since prices are only one of a number of measures and instruments used for and subordinated to the coordinated planning and impleme:tation of development objectives and are established by the state at fixec levels or within narrow boundaries, a more detailed examination of prices at wholesale and retail le--1s and their relationship to other instruments available to the Govern- men is required to explain the specific functions of prices in Romania. The operation of the pricing system is discussed in paragraphs 4.09-4.16. 2. Categories and Components of Price 4.05 The principal categories of prices in the Roma.ian economy are: (a) in industry li) wholesale. prices - nrodnirer nricPA - delivery prices (ii) retail prices (b) in agriculture (i) producer prices (ii) contract prices (iii) acquisition prices (iv) delivery prices (v) retail prices 4.06 Wholesale prices have been defined as "the economic means whereby economic enterprises and organizations in the socialist sector conclude the process of buying and selling in the delivery of goods among themselves." 1/ Producer prices constitute ex-tactory prices usually paid by enterprises in their sales to each other, while delivery prices (producer prices plus turnover tax) are the prices obtained by enterprises when selling to internal trading enterprises. 2/ Retail prices are the prices at which goods are sold to the population by the trading enterprises. 4.07 Producer prices consist of the planned branch-average unit-cost of production (i.e. branch-average production cost) covering all direct and in- direct outlays; plus a pre-defined profit (beneficiu or benefit) which ensures a reasonable profitability for all branches, for a majority of the enterprises in each branch and for most products within each enterprise. The production expenditures entering into the calculation of the producer price were estab- lished under Law (No. 19) on Prices and Tariffs, 1971 as follows: (a) Raw Materials (b) Fuel, Energy and Water (c) Wages and Social Security Contributions (d) Depreciation of Fixed Assets (e) Tax on Production Funds (Capital) (f) Land Tax (g) Research and Development Expenses (h) Interest on Short-Term Credits and Other Financial Expenses (i) Profit The Law also made allowance for the levying of a regularization tax upon the profits of enternrises in rases where. result -of dprronmes in pnrodution expenses over time, excess profits were made. In January 1977 the Law on Prirp.q and T;;riffq was rcpmih1i_hPd to incorporna some chnane in the system of price formulation. In. the first place, the tax on land was no longer countd ~ produtiov n expenditure but became a tax to be paid fro profltS; in the second place, the tax on productive assets was abolished and a separate tax on nrnfirq wns intrndiirPd. thrniah tha T.qw nf Taxes on Profits Macrea 391). Finally, the regularization tax was removed. 4.08 For the LAS sub-sector of agriculture, the pricing structure is similar to that in industry; there is a single wholesale price, known. as the delivery price, at which all state farm produce is sold to state trading enter- pie.P rA and~ prv aLat fa, *",,etre are thre.t pr i~t£Ce - L-1-1 , i .ULC can dispose of produce. Most produce is sold to the trading enterprises at 1/ Dr. G.H. Sica, "Projection and Planning of Wholesale Prices", Bucharest, 1I ., 2t koods delivered for export are sold to foreign trade enterprises at producer prices. - 34 - cuntract prices conracsL Dbeing arawn up at tne beginning of tne crop year); produce in excess of contracted amounts is also usually disposed of at these prices, contracted amounts simply being increased to cover the surplus. Produce can also be sold to trading enterprises at acquisition prices. Since they are generally lower than contract prices, they usually apply to unforeseen sales made when a CAP member or private farmer needs to dispose quickly of a few animals on small amount of produce. Produce from CAP members' private plots and private farmers is also marketed directly to the population in peasant markets, at flexible prices within bounds established by People's Councils. For state-sold produce, fixed retail prices, uniform across the country but incorporating seasonal variations, are established. 3. Price Reassessments and Operation of the Pricing System 4.09 The functions of the pricing system presented in para 4.05 represent the legislative culmination of a debate on the role of prices, profit and the socialist market which took place in Romania during the 1960s. The debate arose from the increasing complexity and interdependence of the economy and the recognition that the planning and implementation of economic activities required more indirect and decentralized instruments to complement or replace the system of directive planning. In 1967, the Central Committee of the RCP issued directives 1/ proposing a number of changes in the planning and admin- istration of economic activities, in which consideration was given to the active role prices could play in implementing and planning development objec- tives. Until this time, for many products prices had had largely an accounting function only; their role in the allocation of resources in the socialist sector and in providing appropriate signals concerning economic efficiency was small. This was, perhaps, for the best, since, as the Directives put it, "one of the main drawbacks of the price system in our country lies in the fact that a series of prices are established without the social expenditures incornorated in the given products being taken into account and that the criteria of the lnw of value which Rtill governs in one form or another any economy haRed on commodity production are being ignored." If prices gave the wrong signals to economic un its thp imnnct ws nelor1 ble lonq a th alnIntion of resources and the implementation of production plans were governed by other instruments and management tools which took lftl. accont- o%f prifCs. The increased sophistication of the economy and the increasing impossibility of covering all ecnmcactitt-esW4tth phys-ical indicators raised the posai- bility that economic units would pursue their financial interests as indicated thL stroL. LL,utr o. prices~~ at.-.LLdAteeb mak more dihficult the fulfillmento development objectives. As the 1967 Directives stated, the use of inappro- priate prices, in partic±ular, mUadeit - -1 .oL rais teeficecyo production, to lower the consumption of inputs and improve the quality of goods. Thus, the major concerns of pr ice ass-ssments have been wholesale prices. 1/ On the Fertecting or Management ana Planning or tne National Economy. - 35 - 4.10 In 1956, a State Committee for Prices was established to administer the pricing system and. followinv discussions of thp Cpntral Committtpp'q directives by the National Conference of the RCP and its Tenth Congress, an Inter-Ministerial Commission was annnintAd to makp nrnno;n1.q_ undpr thp supervision of the SCP, for improving wholesale prices. Out of these pro- Dosals camp thp 1971 T.r on Prir- anA Tmr4ffe wh4eh nershi the laaml an analytical framework for the new pricing policies. In 1974, the application of new produceor andl deiry prcehbn. I/ Tf Wa- foralycmpe-da the end of 1976, although some corrective changes have been made since then. As the Commission on Price indicated in its report, it- can only_A-1 process, in view of the past decisions that have shaped Romania's economic k ubv- W A j 00 ~alG UC U L JU5lL IIUDC~L LU DLUL idi Val di. U t iUbL U Wil LILIL measured in terms of internal values or international prices. 4.11 The price reassessment can be most usefully discussed from two angles; first, the extent to WhiCh tne price changes reflecL more accurately and fully the social costs of production, and second the extent to which the price bybLeM wOrKing wiLn oLner managerial cools has Deen aDle to carry out the functions delineated in the 1971 Law. 4.12 In one sense, the price reassessment unequivocably led to improved calculations of social costs of production, since between 1963, the date of the previous price resetting, and 1974 producer prices and actual production costs had diverged as a result of technological change and changes in factor productivities. However, the major discussion on prices as a measure of social costs of production centered upon what should be included within the producer price as an appropriate charge for the use of capital. Before 1974, improvements in producer prices (which took place in 1955 and 1963) had not dealt effectively with the question of the calculation and distribution of net profit. Producer prices before 1974 had included charges for capital only insofar as depreciation expenditures were concerned. Thus no charges for the use of capital stock were incorporated, because funds for these purposes were generally provided through the state budget. Once the overall amount of profit and thus the average rate of profit had been determined for each indus- trial branch, the rate of profit for each enterprise and each product was determined on the basis of production expenditures. The 1974-76 producer and delivery price reassessment introduced for the first time explicit charges on total assets and working capital as a component of production expenditures so as to stimulate a more efficient use of fixed assets and to prevent over- capitalization of production. The rate of profit for each product was recal- culated on the basis of all production expenses and the average branch rate of profit so as to take into account fixed assets and working capital. Beginning in January 1977, the tax on productive assets was abolished (para. 4.07); at the same time, a tax on profits was introduced as a means of trans- ferring to the state budget the difference between producer price and produc- tion expenditures in excess of planned profit (see Appendix 7). This was done because the authorities wish to increase the role of profit, in cooperation with other indicators, as an instrument for stimulating greater efficiency at the enterprise level. 1/ For the stages of iimplementation, see IBRD Current Economic Position and Prospects of Romania, Annex B, No. 492a-RO, October 11, 1974. - 36 - 4.13 insofar as the functions of prices in planning and implementation of economic activity of enterprises are concerned, producer prices are more impor- tant in the implementation of plans than in determining the allocation of resources. The allocation of resources is made chiefly through the planning process and the fact that the allocation is made increasingly by indicators of value reflects the fact that the overall structure of producer prices has been made consistent with the country's development objectives. This is of prac- tical importance in the planning process because the reconciliation of enter- prise plans aggregated upwards and the macro-economic plan parameters of the State Planning Committee can only be achieved speedily and efficiently if the combination of physical, financial and pricing instruments applied at the enterprise level orient units in the same direction as the central plans. 4.14 In the areas where physical indicators do not constrain the alloca- tion of resources, producer prices clearly do have an impact on production planning. This is most obvious in agriculture where the structure of input and output prices clearly affects the production of goods by private farmers and members of CAPs on their private plots. but it also occurs to some deRree in industry, particularly where enterprises have some discretion over product mix and factor utilization. 4.15 Producer prices are also used to orient enterprises towards fulfill- ing their plans and to evaluate performance in executing plan objectives such as reduction of cost and imoroved auality of goods, insofar as the structure of prices provides appropriate signals. The fact that specific plan targets for cost rpdnition and new imnroved nrodirts have been neressnry snggests that the structure of prices while improved by the recent exercise is not yet suf- ficrieantly finel y-tuinedl to ac-t- in evry ncs in favonr of thes ojeties The Law on Prices and Tariffs provides for the continuous review and improvement of prices and the Government has indicated that, in future, more frequent reviews of price levels will take place, although it remains government policy for continued improvement is shown by the adjustments which have been made, *AVLnu.Le tue governmentL polUicies towatus produceL anu delively prices have led to considerable change in their levels and structure, it is the relative lack of change which demonstrates government policy towardUs retalL prices. It is government policy to maintain as stable a level of retail prices as possible. To this end, the five-year plan contains a target for the maximum permissible increase in retail prices, the fulfillment of which is the primary responsibility of the Council of Ministers, the State Committee or Prices and the People's Councils. B. Foreign Trade Pricing and the Exchange Rate 4.17 Just as the planning and organizational changes stemming from the Directives of the 1967 National Conference of the RCP concerned both the internal organization of the economy and external economic relations (see Chapters Three and Seven), so the reorganization of the pricing system affected both internal and external transactions. The major impact of the pricing reforms upon external transactions has been to expand the influence of international prices upon Romania's domestic price levels and to make use - 37 - in a limited way of the relationship between domestic and international prices to help determine the zoods suitable for exoort and imnort. This has been achieved through the institution of an exchange rate in 1973 and a more nnnronriate domestic nricing svtem which together nprmit a more insfr1ictive comparison of Romanian and international prices. 4.18 Prior to 1973, there was no link between internal and external the profitability of Romanian participation in foreign trade or to give signals to enterpr ise s th at good s could be oro 4motd #-n, vA4--Iew - 4 of this, and the fact that domestic prices themselves had a number of defi- ciencess U J 00 La U=±LL6 ULOO IM..±L U%J ULIC &L11LCLL1LL&UL1C&F __0L 1. %A%- OLULUC, the profitability of foreign trade could only be calculated through shadow pLi c es. 1HCeC W-L- CaLLLCU UUL LdLILy WILLILLI LLIC pL.L&HLLL prU cess; the decision to import was taken mainly on the basis of the comparison between the domeseti economy n nEeU anU Lne resources avallaVie LU LULnILI the plan, and exports were established chiefly to finance the imports. More- over, tne financial resuits or foreign transactions were not reflected In Lne books of producing enterprises; they paid for imports and received for exports the domestic price of the good, irrespective of its foreign price. Thus, the gains from trade flowed directly to the state. 4.19 For these reasons and because the leu was not freely convertible, the exchange rates quoted by the government under this foreign trade regime were of limited application. Two rates were quoted. The official rate, which was and remains the official gold price of the leu, 1/ is used only for expressing the value of foreign trade in official statistics, the unit of currency is known as the leu valuta, or foreign exchange leu. The official rate with premium, 2/ which was and remains in use for non-commercial trans- actions, among others for tourist transactions, was the only operational rate, in the sense that it was the only rate at which non-Romanians could obtain lei. In 1973, the government established an exchange rate (also known as the trading rate or internal conversion coefficient), at a rate of 20 lei: US$1, which was intended for use in the comparison of foreign and domestic prices of goods. The rate was fixed at 20:1 because it approximated the weighted average of all actual exchange rates for export and import transactions over the previous three years: it therefore represented the average rather than marginal cost of foreign exchange. Its introduction as an efficiency indicator which would show more clearly the comparative advantage of Romanian producers in international markets followed from the recommendations of the 1967 National Conference Directives and subsequent studies that economic calculations in the allocation and utilization of resources should be influenced more directly than previously by the level and structure of international prices. In March 1978 the trading rate was revalued to 18 lei: US$1. 1/ Defined equal to 0.148112 grams of fine gold, yielding an exchange rate against the US dollar of 6:1 before December 1971, 5.53:1 until February 1973, 4.97:1 until March 1978 and 4.47:1 from then. 2/ Before December 1971 18 lei: US$1. 16 lei: US$1 until February 1973, 14.38 lei: US$1 until October 1974, since when the rate has been 12 lei: 19s1 - - 38 - ciple, a particular good should be traded or not, and as a starting point for u tu~l~i in LHI U LV ID lul UI LU L Ln eALud ~ gau v11 etween tLue state anu U producing enterprise. The ground-rule for determining whether a product DhUUU Ue AULLU L LildL L-1 LULL Aign ecLalig eLLImU -11UOL WHL LULVCLLCU into lei at the trading rate, be equal to or greater than the domestic price of the good; in other words, the export of a good must cover the fuli costs of production, including the profit margin. In principle, the basic decision to import is determined in a similar fashion; the foreign price or an imported good is compared with the domestic price at the trading rate. Because the structure of Romanian relative prices is not in line with the international price structure and because enterprises may not see reflected in their domestic costs the full foreign exchange cost of imported inputs (see para. 4.24 for details) or in their receipts the full foreign price of an export (para 4.22) the basic comparison of foreign and domestic prices using the trading rate is complemented by what amounts to a comprehensive shadow pricing operation. For each tradable good, the profitability of trade is also calculated by costing all inputs (traded and non-traded) and outputs in international prices. These calculations are first made in the techno-economic study at the time production of a product within Romania or the expansion of production is being considered. They are also made annually by the foreign trade enterprises, and more frequently for commodities whose international price fluctuates a great deal. These calculations also provide the basis on which the Council of Ministers determines whether products with an effective exchange rate less favorable than 18 lei: US$1 can be authorized for export. 4.21 Because the structure of Romanian prices does not fully correspond with international price structures, the shadow pricing calculations produce situations in which the export of goods may be economically profitable, even when the basic ground rule cannot be met. (Conversely, there may be cases where the ground rule is met but export is not profitable.) Such cases may also reflect situations where enterprises have not yet attained planned pro- ductivity levels. In these cases, exports may be authorized for a year by the Council of Ministers, after individual review at the time the annual plan is prepared. Enterprises exporting under this approval have to take measures to improve their productivity and export performance so that they can export pro- fitably at the trading rate in the future. In the meantime, the enterprises, which exchange the foreign exchanze earned from export into lei at the trad- ing rate, receive a payment from a trade equalization fund to help to recover the full producer price. 4.22 The exchange rate also enters into the process whereby foreign exchange gains are distributed between producing enterprises and the state. For enorts, ctandard forein nrices nrP Pstah1iAhPd annuallv calcilatd on the basis of external prices obtained by enterprises in the previous period and undated to account for theexPeted world market situation. These nricps are used to express in value terms the volume of exports included in the annual nlan and to prnore balance of nyments nroction- hut their mnior onra- tional role is to serve as a benchmark for determining the division of foreign equa t In thegcase of goods which are o rhat i the price equalization fund. In the case of goods which are exported profitably, i.e. the price obtained is higher than the domestic price converted at the trading rate, the producing enterprises receive LILU UUmUeL.L PLU u L=, MnU Lu= difference between the standard foreign price and the domestic price is paid into the equalization fund, that is, the profit from traue accrues to tne state. In the case where the enterprise secures an actual price above the standard price, it receives all of the difference as a bonus. Conversely, if it can secure only a lower price than the standard price, the enterprise must pay into the equalization the difference, so that in effect the fund receives the full difference between standard and domestic price. (See para. 4.21 for details of what occurs if exports occur when the actual foreign price is below the domestic price). Thus, the standard foreign price serves as an incentive for firms to seek the most profitable market. 1/ Enterprises also receive bonuses in lei for distribution to employees if they overfulfill their foreign exchange targets. 2/ 4.23 For some 'conjunctural' goods, 3/ those goods with large and unpre- dictable short-term fluctuations in their foreign prices, the system of dis- tribution between producing or importing enterprises and the equalization fund has been modified to protect exporters and importers from exchange losses and gains. For these goods, the equalization fund absorbed all but five percent of any difference between the actual price and standard foreign price. 4.24 The arrangements for imports have also undergone considerable change over the past few years. When the trading rate was introduced, it was intended that the cost of all imports be translated into domestic prices at the trading rate, thereby eliminating the need for a price equalization fund, and that differences between international and domestic prices be dealt with through a system of tariffs. In 1974 import tariffs were established and for a few months the equalization fund was abolished. However, the international infla- tion of 1974 and 1975 necessitated the reintroduction of the equalization for raw material imnorts to orevent the profitability of import-using enterorises being impaired and financial flows through the economy being disturbed. Since enternrises recived fixed nrirpq for niifnnts increasing outlays for raw material inputs would have reduced their profits. At present, enterprises nay the established domestic orice for imports, any differences between domestic price and foreign price converted at the trading rate being settled wit-h thoP ininli7-ntinn fund. As in the case of exoorts, a standard price system operates to induce enterprises to seek the most economical source of supply For the imnort of machinery and Pcninment- the domestic orice 1/ Foreign trade enterprises are encouraged to seek high-priced markets for the producing enterprises hecaue their rnmmi.sion is a nercentage of the price. 2/ Before 1974, bonuses were in foreign exchange and usable for additional imports. 3/Conj unctural * commodit_ies are wheat, maize, sunflower oil,, suanr- RhPn_ cattle, live pigs, meat, softwood and beechwood lumber, cement, gas, diesel oil, blacK oil, nitfogenus fertilizer, caustic soda, sheet iron, concrete iron, profiles, rolled metal and aluminium in lumps. - 40 - pai by thaiacue setablished by the onutr-sion of the foreign price at the trading rate plus the appropriate tariff. In the case of consumer goods, t ULLe L foreign pr iscnetda h rdngr-adt nnnrAi tariff added to form the domestic cost of the import. Any difference between LHC VCUb L I i1 ---u~ ----- -- -- -..- -~ importing enterprise. Thus, for investment goods and consumer goods, their import is regulatedLII though tIIe tariffad LIintL at eot heise trade licenses. In 1977 new custom tariffs were established, to take into account the changes since 1974 in domestic-international price relationships. C. incentives and Penalties 4.25 The present system of wage ana salary bonuses nas evolveu iace 1970 when substantial changes were made in the prevailing one, which lacked a sufficient incentive effect. In the earlier system, the bonuses had amounted to a substantial 20-25 percent of the wage fund; and they were paid out of the wage fund. Because they were linked only to the fulfillment of plan indicators, almost nothing additional was paid out when targets were over- fulfilled. In the case of plan underfulfillment, penalties were not imposed on salaries. Thus, in practice the system did not provide an incentive effect. 4.26 The 1970 measures raised basic wages and salaries to incorporate previous bonuses. Basic wages and salaries now average about 95 percent of total earnings. Integrated into the wage system is a new incentive scheme that rewards performance above plan targets and penalizes shortcomings. The maximum impact on wages under this scheme is plus or minus 20 percent. Additional end of year bonuses are also available to workers and these are discussed further below. Wage/salary increases or decreases are usually determined mainly on the basis of the fulfillment or underfulfillment of four indicators. These are divided into quantitative indicators (planned output targets and exports where applicable) and efficiency indicators (labor produc- tivity and material costs per 1,000 lei of marketable output). Some minis- tries and centrals may establish other indicators as well depending upon the patterns of production of their constituent units. As a rule, the above four indicators have the same weight, but ministries can also set different weights. 4.27 Salaries of employees, technical and administrative personnel are increased or decreased by one percent for each percent of over- or under- fulfillment of the indicators, up to a maximum salary increase/decrease of 20 percent. For management staff, a one percent over- or underfulfillment of the indicators leads to a four percent salary increase or decrease up to a maximum increase or decrease of 20 percent. The salary increases or decreases nrp nnlied monthly but an enterprise can make up partly or fully its short- falls in these indicators in subsequent months and salaries will reflect that. Tncreq'P nr dPrrPnRPR of salaries in centrals and ministries for over- or underfulfillment of indicators are subject to the same rules. 4.28 End of year bonuses can also be paid to an enterprise's (as well as a central's and ministr'c) staff_ The hnnu ftind amounts to two percent of the wage fund. If excess profits are realized, the bonus fund can be augmented - 41 - and reach a maximum of eight percent of the wage fund of an enterprise. 1/ different activities would be allocated to the bonus fund. 2/ While the Mmavim bonusi fulnd cresnnnA,4 a to a month' wae an sa risfr nnti- bonuses can reach up to three monthly salaries for individuals. The existing bonus fund is distributed according to salaries but half of the fund uvelUpeU from excess profits is distributed by the management according to salaries and tne rs soecetively. In auuition, Lhe management UL a UnIL nas at its disposal another bonus fund amounting to one percent of the wage fund which it i entitledo ute r uLLLUL UULIg the course of the year to reward exceptional performance. Similarly, the management is entitled to penalize an individual up to 10 percent of his monthly salary if he has underfulfilled personal tasks, even if the unit at large may have overfulfilled its targets. 4.29 While the new scheme provides substantially more incentives than those prevailing before 1970, its effects have not yet been fully assessed. To an outside observer, it is not clear what trade-offs the enterprise estab- lishes between consistent and significant target overfulfillment that leads to increased salaries as well as bonuses, and the risk that its targets and/ or norms may be reassessed if it continues to be a consistently successful performer. D. Financial Instruments 4.30 The objective of the public finance and banking measures in the early 1970's was to introduce additional elements of profit orientation in the economy and assist in the decentralization of decision making by devolving more resources to local governments and enterprises. The measures have been implemented with some success but, for various reasons explained in Appendices 2, 7 and 8, some of their initial impact had dissipated by 1975. Thus, the dependence on fiscal flows through the state budget has continued to increase. In the remainder of this chapter, only the role and functions of the principal financial instrument, the state budget, and of the major monetary aggregates are discussed. The State Budget 4.31 The principal financial instrument for plan implementation is the state budget, which in Romania includes the republican and the local budets. Under the law, it is drawn up balanced but when executed, it is regularly in surplus and the Government has never had to borrow from the National Bank to 1/ Before July 1, 1977 these percentages applied to the gross wage fund. Since then they are anlied to the net wage fund as the enternrises (centrals and ministries) now pay a tax calculated on their wage fund. 2/ The following formula was used before July 1, 1977 and it has been ightly mneaefA prodcti ny n rrnt nf rorf infts ri s,n from increases in productivity and from decreases in material costs, 16 percent frOm, increaSs_~ in output and 10 percent from other activities. - 42 - cove expInrIifitirPa_ TVioca nc vcitn ciirnIluces mia not-ncsaIydfa tionary in a planned economy like that of Romania, and they may be explained h'%7. Wno-in,10 fnrnnnf-, suc for example r. 4nn ..e A 4nn n,-.nca, -- -- - - f 4 -.#- ment funds due to shortages of materials and machinery. The budgetary balance of the financial and banking system. 4.32 The resources of the republican budget are collected mainly from state enterprises ana institutions operating on a repUD.lcan SCale, and from taxed paid by the population. The republican budget finances national eco- nomic and social objectives such as fixed investments and other important economic projects, socio-cultural activities, national defense, etc. The local budgets of districts, municipalities, towns and villages are financed by transfers of profits from local enterprises and institutions and from taxes paid by individuals, cooperatives and economic units of other public agencies. The local budgets finance the economic and social activities carried out by the Peoples Councils and local administration. 4.33 Both the republican and local budgets include reserve funds for con- tingencies. The use of the reserve funds and any additional financing require- ments that develop unexpectedly during the year have to be thoroughly justi- fied and ultimately may have to be approved by the State Council. 4.34 The high growth rates of the Romanian economy attest to the gover- ment's ability to mobilize domestic resources and this is discussed more exten- sively in Chapter Five. The chief instrument for resource mobilization is the system of profit transfers, taxes and other quotas and the government appears to have used it with considerable effect in meeting its needs for investment capital. Most of the resources are collected at the enterprise level since the strict control exercised by the State over individual incomes makes it un- necessary to tax the population heavily. 1/ Most of the taxes are state taxes, but as mentioned earlier, there are some local taxes. A synopsis and defini- tion of the taxes, quotas and other payments to the state and local govern- ments, including the new 1977 measures, are given in Appendices 2 and 7. E. Monetary Instruments 4.35 The role and function of the three major monetary instruments (bank credit, interest rates and the money supply) are discussed briefly below. Rpcpnf rhnnapq nd thpir viirrpnt lpvl.q qrp viven in Annendix 8. 1 Rnnk Credit 4 .A An 4mn-vrtant finnnninl inctrim.nt dvelpnnud in rprPnt vars has hen bank credit. This instrument was improved in 1970 and the current lending A 4-~ -r a - 4. -e *4,,n- i In.,,fN i,hr 17 imnlo .mant~aj conLI. it.Jio art se out. 1Jnt theFnaca LawU010...1~ of Noeme 97, ------ of January 1, 1973. The law states that credits can be extended only for I/ AIft UL July 19717, Lhe peLUal saLy La wao rovur n in is p a tax on the wage fund paid out by the enterprise was introduced. - 43 - specific purposes such as production (including working capital), marketing, investments or minor improvements in an enterprise's plant, and are to be secured by the unit's assets. Credits can only be extended by the banking system and never by enterprises. The government's decision to substitute certain financial for fiscal flows is an important recognition of the compet- ing demands for capital and its cost. Further, the measures adopted on credit terms recognize the need for a more efficient capital use by the enterprises: the average interest rate for such credits increased and the terms were estab- lished to reward efficient performers and penalize less efficient enterprises. The total planned increase in funds under the Plan indicates how many new crpdits rnn he i.q.iiP while the increases in the individual categories for which credit funds are used are, in effect, limits beyond which banks cannot 4.37 The level of short-tprm rrpdit in the economy is provided in the quarterly Credit Plan, drawn up by the National Bank in collaboration with the MnIstry of Finance, theother banks and othpr Aopnpigs of economic synthesis. It is based on an analysis, undertaken with the sector ministries, of the activities deemie by the, develoment4 pla andA the state budget. The Investment Bank and the Bank for Agriculture and Food Industry draw up, for in1vestmentH purposes, tLePla fo Me~ A4~J u-'m an LogTr v i, nniiinr the Short-Term Credit Plan. Bank credit can be divided into three categories: fi-rst, long- and medium-t:erm credit, primar4ly to finance investment- needs of enterprises; secondly, short-term credit to finance working capital needs; and finally, consumer credit extended to te pLui UuA urablev d uhases and housing. Long- and medium-term credits can be granted to: (a) finance centrally-planned investments; it should be noted that the extension of long-term creUit LoL tUs pupuse is a recent phenomenon and of small scale. About 88 per- cent of long-term investment by enterprisees L Linactu through the state budget and depreciation funds; (b) supplement internal resources of the cooperatives and economic units of other public organizations; this might involve a new investment such as the modernization of facilities, or in the agricultural sector it might be used for the purchase of animals for breeding. The maturity for long-term credit is up to 10 years (for agricultural coopera- tives some credits are extended for up to 12-25 years) and for medium-term credits up to 5 years. Two fundamental provisions for the extension of any bank credit are that the items financed must have been included in the annual plan and their production must have an adequate level of profitability to cover the repayment of the loan within 10 years. Investment credit is also available, with one-year maturity, to offset frictional disturbances in the investment program of the firm, when rescheduling of a project causes a higher level of disbursement. -44- 4.38 The lags pecntg of bakcei prtos-n cUmni.L ovw- posed of short-term credit, chiefly to meet the working capital needs of enter- V, - - - .*. 6~ , ~.C C .~u . L.L U LI. UJ4S.ULC2.L UL6CLLLi.LL.UL1b aLV~ the biggest users. The annual growth in this credit is, of course, dependent upon uC L=LC%aCO In PLUULL.LULV. ' 1L dVt:Lg:, L+J t:LCL1L 01 Re WorKing capital requirements of the enterprises is financed by bank credit, while the working capital needs ot new enterprises are meL Dy the state DUdget. BanK credits are repaid from the enterprises' profits or other specific funds. The repayment period is 12 montns Dut it can vary for some branches of the economy. For example, in agriculture, the repayment terms are longer and in industry they are shorter. The National Bank extends credits to industry, trade and transportation. BAFI extends credit to agriculture, forestry and food indus- try. Agricultural cooperatives and private farmers can borrow from 45 to 60 percent of the value of their contracts with state organizations to finance working capital needs. Finally, the investment Bank extends credits to the construction sector. The funds of the last two banks can be supplemented by the National Bank. Foreign trade enterprises engaged in exporting borrow from the Bank of Foreign Trade (para. 3.38), repaying their debts once they receive payment from their foreign trading partners. 4.39 Consumer credit is extended through two banks and its availability and terms, as well as the items for which it can be used, vary, depending on the consumer credit policy of the government at any period of time. Install- ment credits are extended by the National Bank through the state trade units. Consumer demand for the purchase of particular goods can be manipulated by changing the credit terms for these goods, as illustrated by the 1974 case in which the government eased credit terms for passenger cars to eliminte an accumulation of unwanted inventories. In general, changes in credit con- ditions are used for inventory control. Credits for housing are extended through the National Savings Bank and these usually cover 70-80 percent of the total housing costs with a maturity of 15-25 years. Low income earners obtain the most favorable terms. 4.40 It has already been mentioned (para. 3.42) that the banking system fulfills a complementary auditing function in supervising the financial and economic operations of enterprises. specifically their use of credits and of state budget funds. In actuality, the banks supervise the operations of the enterprises in many diverse ways. Because of the limitations placed on cash transactions, the enterprises depend on them to settle their accounts. Banks may extend credits to economic units for un to 90 days, if they are in temporary financial difficulties. In more severe cases, when an enterprise, for example. encounters certain onerational difficulties it may remet tho bank for extension of special credit which would be extended conditional upon rpTnpd i~ al Pnnomir mP..QirP-z tn hp~ vineiart-meon by Hen nterpris. Such credits are extended for a maximum period of six months and the interest rate is set two percentage points higher thann cur-rent- appicbl rates -ustnd ing credits and for credits without guarantees, a penalty interest of maximum peren is. -etied by~ ~t'ULban.4 in 1974, onlAy f.L ie. pe- LL rce t a.. IC.an loans were at the penalty rate reflecting the financial discipline of most canLfore te L e n-t st LesLL k-.LIL tcp Ul wPl.CLL Uih th P can force the enterprises to comply with the Plan. - 45 - 2. Interest Rates 4.41 Interest rates are paid on all credits. These rates are set by the central authority and are not Influenced by the demand for and supply of capital nor do they reflect risk since there is no money market in Romania. Conceptually they are more a tax on the use of capital than a price of capital. By the same token, they do not necessarily reflect the social opportunity cost of capital because the return on capital investment is derived not only from interest payments but also from taxes and the net surplus after operations returned by the state enterprises to the state budget. Interest rates, therefore, are relatively low. However, since there is little price increase in the economy, the relatively low rates result in real rates quite high in comparison with those prevailing in many other countries today. 4.42 The Government looks upon interest payments as a device for increas- ing the efficiency of resource use. Enterprises can borrow only for those projects that have an adequate rate of return and all interest obligations are serviced out of the firm's profits. While it is difficult to know the sensi- tivity of enterprises and consumers to interest rate levels, undoubtedly it exists. It induces enterprises to follow their stock position more closely and the penalty interest of 12 percent induces enterprises to take measures for a more efficient utilization of resources. The consumer's increased propensity to save and his response to credit charges for some categories of consumer goods also suggest responsiveness to the level of interest rates. 4.43 Interest rates are pegged at a level somewhat below the average profitability of enterprises and the rate structure favors sectors with a particularly heavy demand for working capital. Trading enterprises pay the low rate of three percent on their borrowings; agriculture is charged four percent and industry pays the top five percent. A State Council decree in December 1974 simplified the regulations on interest rates but left the rate structure largely unchanged except for some special credits which were lowered from the 6-12 percent range to 4-7 Dercent. The rate structure now in pyiRf- ence is given in Appendix 8. 3. The Money Supply 4.44 Money supply is defined as the sum of (a) the balances in the bank accounts of enterprises. oreanizations and institutions qnri thp qnt Eniocp* (b) the savings deposits of the population; and (c) the currency in circula- tion. Cash in circulation is mainly limited to individitiQ annA nricac from their transaction with enterprises and among themselves. All other transac- tions are non-cash. Settlempnt takps t-hP form of n trnnsfor nf funds fr-nm nn bank account to another. 4.45 Since consumers are free to use their cash income for current con- SUMption n, qisJtInof dwellings, durable goods and savings deposits, the Government pays particular attention to the planning and control of the money exedtLLuO aULdcas, LpL UaoLLLU UL oanus,r cida o iaelraue aLiU expenditure, and cash plans, is drawn on a quarterly basis. The purpose is - +U - to match that portion of the income of the population devoted to consumption with the output of goods and services available to consumers. The cash plan is thus a component of the annual plan and it attempts to project the future behavior of households, in terms of expenditure and savings, with the objec- tive of attaining an equilibrium in the cash circuit of the economy. 4.46 Every effort is made to keep the increase of cash in circulation in line with the output of consumer goods, taking into account the requirements of stable retail prices and the increasing monetization of the economy. How- ever, as the money supply is basically determined by the level of production, and current credit and cash plans, its effectiveness as an instrument of eco- nomic management is actually rather limited. - A7 - PART II DEVELOPMENT TRENDS AND STRUCTURAL CHANGES CHAPTER FIVE LONG-TERM TRENDS, 1950-75 A. Introduction 5.01 This chapter examines the changes in the Romanian economy over the past two and a half decades; it traces the performance of the economy through its major macro-elements and examines the most important issues arising during the period. Further details on the stages of economic growth between 1950 and 1975 can be found in Appendix 6. In addition, the chapter provides the general background for the detailed examination of performance between 1971 and 1975 (see Chapters Six and Seven) and the more specific discussions of plans and performance in various economic sectors contained in subsequent chapters. B. Economic Growth and Structural Change 5.02 Between 1950 and 1975 the Romanian economy underwent a radical trans- formation (Figures 5.1 and 5.2). The level and diversification of industrial production increased rapidly, providing the basis for the modernization and expansion of other economic sectors and a general increase in labor produc- tivity and national income. With the transfer of labor from agriculture to industry, the population became increasingly urbanized. Standards of living improved substantially, not only because of the growth of personal incomes but also because of the provision through the state budget of expanded and improved education, medical services (both of which are free), housing and social expenditures of all kinds. Finally, reflecting the changes in economic structure, Romanian narticination in the world economy changed significantly as the level of trade rose and its composition altered. In the following paragraphs, a largely quantitative picture of the transformation is provided. While the data clearly indicate the extent to which rapid economic progress has been madp Romp rare is rpaiirpd in internretina them because of the methodologies used in their computation by the Romanian Statistics Office. I/ 5.03 According to official statistics, the Romanian economy sustained the highoet arnwth rnp of thp Etprn Euronpan rointrips hptwppn 1950 and 1975 and one of the highest in the world. Over this period, social product and national income increvcase approximately ten ties Measuiredi n comnqrAh1'0 prices 2/, social product rose from 83 billion lei in 1950 to 864 billion in 1975,, whil1e national income grew fro 35o billio lei to 362 1,1i" The average annual growth rates of social product and national income over the I/f oe LI Lu L d u~LL L.L L I .JL iILLUi~ L U~~~A -~' in Romania, Appendix 4 on Social Product and National Income and on the Romanian data. 2/ See the glossary for an explanation of co[mparable prices. Graph 1: Major Economic Indicators, 1950-75, Graph II: Incomes Indices, 1950-75 (1950=100), in comparable prices 3000 - -- - - 3000- -- Investment 2000 --- - -- ------Gb Industrial 2000 - Production So::lo-cultural Expenclitures Irom Sitate Budgot Social Product SocialistiRetall 1000 -- - National Income 1000 --- - --Tras 900 -- - 900 - -- 800 800 ---- National 700 -- - ---- - ---- - -- - --- 700 -- -- - - - - ncC taE 600-- 600 -- -er Capit - F ixed 500 -"_____ __ rotat Roeli 500 Assets - income of the Population 400 --- 400 - -aIncoma Per Capita .0____ ____ Real Wagas - lobtal 300 - -of all Employees Production 200 --- --_ --- 200 --- - H 100 1 .C . ..i. 1950 1955 1960 1965 1970 1975 1950 1955 1950 1965 19713 1975 World Bank-17028 - 49 - Figure 5.2 Structure of SOc.-i P.odu.-, 195-C-75 Structure ol Natio--no 4 1-7 (calculated in current prices) (calculated in current prices) 1950304.6% 25.7% 24.7% j 228.2% 195 I4 j 93, N2W% J 14~ 1955 2417% 322S 1955 21.2% I2 j. 1965 1970 4<" I t i * I31970 1975 J 6J'' 220. 2 [i 0 2' 8'% 1975 0 100% 0 100% Structure of Employment, 1950-75 Industry 1950 i20 74.1% 13.91% Agricuflture 395569.15% 17.4% 17.%Other Producive Services, including construcion, transport and telecommunications 1960 51% 19.5% 1965 2%24.3% 1970 23 91% 27.9% 0 137.8%×rl Bann-31.6% 0 100% Wor,d Bank---l7027 - 50 - twenty-five years have therefore been 9.8 percent and 9.7 percent respectively. Since the population growth rate over the same period was only 1.1 percent per annum, per capita social product and national income nave also risen at very high rates compared with other developing countries; the average annual growth rates have been 8.7 and 8.6 percent respectively. These aggregate figures should, however, be regarded as approximations of the real economic growth rather than precise measures of it for a number of reasons. In all economies, problems exist in valuing outputs over a period in which there has been sig- nificant structural change and large relative price changes. In Romania, these problems have been compounded by the fact that comparable price series are not exactly constant price series and that gross output has been used as the primary plan target at all levels of the economy over the period 1950-75. Nevertheless, all such caveats aside, it is clear that Romania has enjoyed what has been internationally a high economic growth rate over the past two and a half decades. 5.04 The driving force behind the high rates of economic growth has been the high and rapidly expanding volume of investment that has resulted from the government's ability to maintain a growth of consumption below the annual increases in overall productivity and so to raise the saving rate. Between 1950 and 1975, gross investment increased 22 times, from 6.3 billion lei (measured in 1959 prices) to 137.7 billion (in 1963 prices) (Annex 3.3); this represented an average annual increase of 13.1 percent, considerably more than the growth of national income. This growth can be represented more dramatic- ally by the fact that in each plan period the volume of investment has exceeded the volume in the previous ten years. As a result of the high marginal pro- pensity to invest, which in some years has approached 0.5, the proportion of national income allocated to investment rose from 17.6 percent in 1951-55 to 34.1 percent during 1971-75 (Table 5.1). Table 5.1: UTILIZATION OF NATIONAL INCOME, 1950-75 (in comDarable prices) National Consumption Accumulation Tnrnmp Find Fnd 1951-55 100 R9-L 17.6 1956-60 100 84.0 16.0 19Al-r 100 75. 7 A 43 1966-70 100 71.2 28.8 1971-75 100 65.9 34.1 Source: Anuarul Statistic. Note: See technical glossary for a definition of terms. - 51 - 5.05 The mobilization and allocation of savings and investment in all sectors has been under full central control. The largest, by far, proportion of domestic savings has been appropriated and deployed by the state budget which in turn has operated as a component of the central planning mechanism.. All other resources which fall out of the purview of the budget (for example, depreciation funds and savings by agricultural cooperatives and individuals) have been closely regulated and monitored to ensure that their use complements the budgetary resources in the implementation of the development plan. 5.06 Romania's fiscal system has been shaped to provide consistently the bulk of the resources required for the country's planned development effort. Over the last 25 years, the growth of budget revenues has exceeded that of national income and their structure has changed markedly denoting the expansion and deepening of economic activities as well as the effects of the government fiscal measures to enhance the financial viability of the state enterprices. The aim has been to make the economic activities of these enter- prises more orofitable in the context of the Romanian pricing system, and this is clearly reflected in the sharply increased share of enterprises' profit remissions in total budvetary revenues. 507 Tn 1950-75 rpvniios of the st-ate hidept increased at an averace annual rate of 10.5 percent, from Lei 20 billion to Lei 239 billion, versus a correonngn natinanl inconme growth rna of 9.7----------nn* s-ni0)- 1! As a proportion of national income budget revenues have remained consistently in th hg ran 4g osf .0-65 percet. They, hav been, at- aboutif 50l pe~rpcentf G~NP in the 1965-75 period. 5.08 The impact of the high rates of investment upon the growth of social jJ U U. dLU ii L LULL LtL. L 1420 nJ Ll ULa6L .LUL. Y -- r . ~**' productive sector in its allocation. Approximately 80 percent of total invest- meHitL UVe LHe pCLLUU WdS dilUCALdU LU LLIt PLULUtL.LV" 0ocUL nLIU InUO UL LuLaL allocated to the non-productive sector was used to support the expansion of productive activities; for example, investments in education anu Iousing for the newly-urbanized labor force. The high growth rate of net investment, embodied Largely in the ou of new plants an the UiVeCiication of the production base, led to a constant increase in the volume of fixed assets. Between 1950 and 1975, tne average annual growth rate of fixed assets was 6.9 percent. 1/ National income data is available in comparable prices while budget data is in current prices. Accurate direct comparability of the data is, therefore, not possible. Also, it should be noted that if allowance was made for the expansion in 1955 of the activities included in the socialist sector and the respective growth rates were calculated for the period 1955-75, the respective growth rates would be 8./ percent per annum for national income and 8.8 percent per annum for revenues. - 52 - 5.09 The patterns of investment financing reflect the nature of the centralized economic system. As alreadv noted (para 5.04 and Table 5.1) the dramatic growth of investment is highlighted by the fact that in each plan period the volume of investment has exceeded the volume in the previous ten years. The volume of investment in 1971-75 amounted to about nine times that of 1951-55. State funds account for the financing of most gross investment in the economy. Of these the centralized funds and particularly the budget n1nv th mainr rol. Thi. i.q illistratpd in Table 5.2. TnvPqtmPnt finanri by foreign borrowing is included in the amount reported for state budget fi- nnrlinac mnl -ic nnt nunilnhlp QPnnarntplu- - 53 - Table 5.2: FIXED INVESTMENT BY FINANCING SOURCE, 1951-75 /1 1951-55 1956-60 1961-65 1966-70 1971-75 Amt. % Amt. % Amt. % Amt. % Amt. % Total 61.9 100 100.2 100 199.7 100 330.8 100 549.0 100 of which: T.-Sociais t Sector 57.7 93.2 88.2 88.0 187.7 94.0 314.5 95.1 516.7 94.1 A.State Saetor 7 01 4 .5 8 4. 3 172 7 87 A 2907 8 QO 0 .6 9 0. 2 ized State Funds 55.0 88.9 79.7 79.5 168.9 84.6 286.5 86.6 478.0 87.1 2.Enter- Own Funds .7 2.7 '4.0 4.0 4.0 2..4 10.8 3.3 17.6 3.2 B.Coopera- tive Sector 0.9 1.5 3.0 3.0 12.6 6.3 15.5 4.7 18.9 3.5 1.Coopera- tive and Mass Organ- izations Funds 0.5 0.8 0.9 0.9 1.6 0.8 4.2 1.3 6.4 1.2 2.Agricul- tural Coopera- tives 0.4 0.7 2.1 2.1 11.0 5.5 11.3 3.4 12.5 2.3 C.Contribu- tion of Popula- tion /2 0.2 0.3 0.7 0.7 1.4 0.7 1.7 0.5 2.1 0.4 II.Private Sector 4.2 6.8 12.0 12.0 12.0 6.0 16.3 4.9 32.3 5.9 /1 Data for 1951-65 in 1959 prices and for 1966-75 in 1963 prices. /2 Services contributed for community works. Source: Anuarul Statistic - 54 - 5.10 Just as the overall level of investment and its distribution be- tween productive and non-productive sectors illustrates the priority given by the RCP to rapid growth of production and national income, so the sectoral distribution of investment reflects the priority given to industrialization. Throughout the period, approximately 50 percent of total investment was directed towards industry and, of this, by far the largest amount was allo- cated to the producer goods industry (Table 5.3). The importance of industry and related sectors in the allocation of investment is reflected in sectoral growth rates and the changing structure of social product and national income since 1950. Compared to the 9.7 percent average annual growth rate of national income, national income from industry increased at 13.5 percent, construction 11.5 percent and transport 11.5 percent, while agriculture grew at only 3.1 percent. Relative growth rates were similar in terms of social product. Con- seauently. the structure of social product and national income chaneed signif- icantly with industry becoming the leading branch of the economy. Figure 5.2 illustrates to some degree the change in structure, but essentially underesti- mates the extent of the changes since relative prices over the period moved heavily in favor of _gricii1tural croods. 1/ Table 5.3: DISTRIBUTION OF INVESTMENT BY SECTOR. 1950-75 in 1959 prices in 1963 prices 1951-55 195A-A 1961-65 1AA-70 1971-75 Total investment 100 100 100 100 100 Industry 53.8 44.9 46.5 50.0 50.5 f. which r u A~t .4 SS U41 1X A f '4 Q 10 .) A 1 1. Ai 1. . 1 B 7.0 5.7 5.0 7.6 8.4 1 ') 7 1)/ 10 I A . -7 LUL15LLUULLLUL1 .J.1 L..J J. J.7 9t.1 Agriculture and Silviculture 11.3 17.3 19.4 16.0 14.4 n, I 0 1 Ic A I Transport 7.4 / 0.1 7.0 7.1 Telecommunication 0.9 0.6 0.7 0.7 1.1 n I i I n A 1) C Trade L 4 4. 1 4 . - L .7 -3. ) Non-productive services 18.5 25.1 19.5 17.0 16.7 of which: housing 10.1 15.6 11.6 9.5 9.3 education 1.5 1.3 1.7 1.5 1.6 health 1.8 1.7 1.2 1.2 0.9 Source: Anuarul Statistic. 5.11 The changes in economic structure between 1950 and 1975 were accom- panied by changes in the growth and distribution of population, the structure of the labor force and the level and diversification of its skills. The 1/ Between 1950 and 1959, the price of agricultural goods tripled in rela- tion to industrial goods. Thus, the change in structure during the 1950's is greatly underestimated in figure 5.1. growth of population and of the labor force was quite low over the period; population grew at a little over one percent per annum while the labor force increased still less quickly, at 0.8 percent per annum. (See Chapter Eight for details). The most notable changes in employment were in its regional and sectoral distribution. Between 1950 and 1975, the rapid growth of industry and its related sectors resulted in a transfer of labor from agriculture and an associated increase in urbanization. During this period, the agricultural labor force fell from 6.2 million to 3.8 million, while non-agricultural employment almost tripled, rising from 2.2 million to 6.3 million, that is, from 26 to 62 percent of the labor force (Figure 5.2). Urbanization progressed with industrialization, but at a slower rate; Romania has been one of the few developing countries in which growth of non-agricultural employment increased more quickly than the growth of urban areas. In 1950, 75 percent of the popu- lation lived in rural areas and 72 percent of the labor force worked in agri- culture. In 1975, the proportions had changed to 57 percent and 38 percent respectively. These trends reflected the government's efforts to locate industrial employment in both rural and urban areas and the attempts to control the influx into cities and thereby economize on housing expenditures. (For further details see Chapter Eight). 5.12 The increases in national income and the transfer of labor from low-income agriculture to higher-income industry have generated substantial improvements in the population's standard of living since 1950, although the increases were below the growth of national income per capita. While the latter rose at 8.6 percent per annum betwen 1950 and 1975, the total real income of the population rose at an annual rate of 6.4 percent. As Figure 5.1 shows, a maior reason for this increase has been the rapid increase in socio-cultural expenditures which grew at an annual rate of 11.4 percent. Wages grew At a more mnodest rat. 6-6 nprcpnt nPr qnnum- (Fnr firthPr details, see Chapter Nine). 5.13 The growth of the economy has had implications for the level and structure of f0reign trade. Retwnn 1950 and 1975, the unlm i f fnricn trade, measured in current prices, rose from 2.7 billion lei valuta to 53.1 h4114nn an M7OVqCO nnial orinwth rate nf nlmnct 1 nprrnt. Throghout the period, foreign trade both played an important role in the growth of economy and als a mirrored the surrccss ofa devloment poiieso thrn,,ch rhnmn;n1 oa,nl a and structure of exports. The level of imports rose throughout the period, moeo ess at- the sfame rate as natinal 4--- (A-n. - - -~ t.hi fh tu ture of the import bill was dominated by capital goods and raw materials L LL U6L UL LiAC j.J L tU *u i/C LLL C rC .CLIII L.)6 U.0 LIj iVCLL -- alt. - -J S.tl-V capacity of its capital goods industry, Romania's industrialization strategy comprised some 35 percent of total imports during the period. As Romania's ret4uirLemet1Lb LUL LCPiLL iLP LL . eccutte Ljain uJaiLU.OCu usu ±1 ne UL v' 0z so Romania had to develop its trade with the developed market economies largely because such gUous Wee U avaLaUle WLLt.L1 m LIIULLO k aW materials also maintained their high share of the total, reflecting the rapidly expanding needs of industry for materials either not availLaCe in the country or for which domestic reserves and production were inadequate. The - 56 - other category of imports indicative of the growth trends in Romania is indus- trial consumer goods, whose declining share throughout the period demonstrated in part the success at the final stage of Romania's import-substitution stra- tegy and also the limitations maintained during the period upon the imports of such goods. 5.14 It was, however, in the structure of exports that the transformation of the Romanian economy between 1950 and 1975 was most clearly mirrored. As exports increased between 1950 and 1975 at virtually the same rate as imports, so their composition changed significantly. In 1950. 75 percent of all exnortRs were raw materials, chiefly agricultural products and oil, while industrial goods constituted only 11 percent of the total. In 1975. industrial exnorts had risen to 55 percent and raw material exports, while growing at an annual average of approximately 10 percent, had diminished to 34 nercent nf the tnem1 While of lesser relative importance in recent years, exports of industrial raw materials and agricultural products have nlayed an imnortant rl'o in financng imports from developed market economies. Unlike other European countries, which apnerally ran a deficit in noriiiliirn1 trnad nomania's surlunabled the country to expand trade with the West in advance of developing competitive industrial exnorts. One other narricular finture nf 'omania's xpvorts ha been the very rapid growth of capital good exports, from 4.2 percent of the total in 1990 rn )i_' nprrint in 1975 an Increae oF some 190 times. Further details of the export trends are given in Chapters Seven and Ten. CHAPTER SIX THE FIFTH PLAN (1971-75) A. Introduction 6.01 The purpose of this chapter is to complete the assessment, started in Chapter Five, of Romania's economic performance since 1950, by examining development policies, plans and achievements during the fifth Five-Year Plan period, 1971-75. In looking at the policies, the indicators and targets of the Directives and the final plan, the process of implementation and the over- all achievements of the economy during the five years, the chapter uses the 1971-75 plan period to illustrate, in concrete terms, the operation of the planning and management system that was outlined in Chapters Three and Four. The chapter does not discuss in detail the performance of each economic sector - such discussions are found in the relevant sectoral chanters - bif provides an overall assessment of developments in the economy and discusses the most imnortant macro-economic issues. in nartirinlar regponal develpmentI qualitative improvement and efficiency of production. Because of the impor- tance qivRn to fnrpian tr;idp hv the Romanian Government and hv the rannrt in its discussion of Romania's prospects, the discussion of foreign trade between 1971-75 is inrcluded in. a Stenarnte hne Chnntov -ran, R_ Tha Mainr Feat-wres of: the Pla2n T1 - - - - -JL L~.ItA -LL j. -4un of +h i t Plan. began L. foLUa.l.ll' in. .1n 74n - L U L I . 1-i Congress of the RCP with the publication of general guidelines for the devel- opmen Lut oLUHeeconmy ULWeen 17I1 aniu 17UU d spU ciLLic ULLeCLiVs LUL LH preparation of the 1971-75 Five-Year Plan. The guidelines for the decade emphasiz,u in view U te prugress maude etween u16 anu 179o in fuilling the targets of the 1966-70 Plan, the continuation of a high rate, and even an acceleration, of economic growth. Iney also Indicated a continuation of the strategy adopted in previous plan periods - high rates of investments, the primary impurtauce of inUuStry, iucreases in labor productivity and economic efficiency and the introduction throughout the economy of improved technolo- gies - while introducing new emphases which mirrored the progress made by tne economy in the previous decade. The guidelines gave particular attention to improvements in the structure of industry (a reflection or concern about the appropriate division of national income between investment and consumption) and the increased importance of electro-technical, chemical, metallurgical and engineering industries; the promotion of technical progress in all branches of the economy and the development of indigenous technological and scientific research; the improved regional distribution of production; and changes in the level and structure of foreign trade. 6.03 It was within this framework that the Directives for 1971-75 were prepared. Measured against the 1966-70 Directives, they represented the RCP's commitment at least to maintaining the rate of economic growth (see Table 6.1). A comparison of the two sets of Directives produces a number of noteworthy points: first, despite a slowdown in the growth rate of gross - 58 - Table 6.1: ECONOMIC INDICATORS FOR 1971-75 PLAN 1975 Level Compared with 1970 (in comparable 1963 pricesT (1970 = 100) Indicators Directives of the Law of the Achievements 10th Congress of 5-Year the RCP Plan 1. Social Product 165 2. National income 145-150 169-176 170.6 3. Gross industrial production 150-157 169-176 184.7 4. Gross agricultural production 120-131 136-149 125.4 5. Volume of freight transport 130-142 - 154.8 6. Volume of foreign trade 2/ 14U-15 2/ 161-172 2/ 2061 3/ 7. Volume of investment from state funds 1/ 148-153 165 168.3 u. ir-,t -J ±xeJ capitlUu activatdbwleefQLU i iron state funds 1/ - - 167.8 in the national economy 107.8-109.8 119.6 123.3 10. Labor productivity per rsnror in - republican industry 137-140 142 137 - eonstrintinn and a-enmb1v 127-111 195 146-1 - railroad transport 133-135 133 127.2 11. Reduction of exDenses per 1000 lei in commodity output in national industry 6-7% 11-12% 9.2 12. Socialist retail trade sales 130-135 14o-i7 148.,3 13. Volume of services for the population 14o-145 155-161 168.6 14. Number of houses constructed 4/ 500.000 522.000 511,700 15. Wage fund 130-135 153 - 16. Real wages of personnel 116-120 120 120 17. Real incomes of peasants 115-120 122-130 - 18. Total real income of the population - 140-146 146 19. National income per capita 137-142 162.6 1/ 1971-75 annual average compared with 1966-70 annual average. 2/ 1971-75 volume in 1970 prices compared with 1966-70 volume in current prices. 3/ 1971-75 volume in current prices compared with 19bb-70 volume in current prices. 4/ From state funds and with assistance of state funds. Source: Directives of 10th Congress of RCP Comw Un.i rLEardingLI f>lt-ot Pa v 1 Communiqu'e regarding fulfillment of the Plan over 1971-75 industrial production and the same rate of growth of investment as between 7UU an 9i7u, national income was projected to grow more rapidly than in the previous plan. It is assumed that this resulted from both a planning assump- tion of lower CORs and lower unit expenditures on raw materials and labor and also from anticipated improvements in the performance of non-industrial sec- tors, especially agriculture. Second, the 1971-75 Directives envisaged a sig- nificant deceleration in the expansion of wage-earners, thereby predicting the success of steps to economize on labor (as well as other inputs), to obtain most of the planned production increases from more efficient use of existing inputs and to strike a more desirable balance between labor in the spheres of production and administration. In both of these cases, it might be said that the targets reflected the anticipated impact upon the economy of the reforms in planning and management approved by the National Conference of the RCP in 1967 (see Chapter Three). Third, the Directives indicated the continuing increase in the proportion of national income allocated to investment. The increase in the consumption fund (which was to comprise 68-70 percent of national income between 1971-75), measured indirectly by the growth rates of wages, retail sales, services and socio-cultural expenditures, was to be below that of national income; indeed, the Directives for 1971-75 indicated that the growth rates of wages and retail sales were to be a little below the rates in the 1966-70 Directives. 6.04 Between the 10th Congress and the publication of the Law of the Plan in November 1971, the indicators were revised upwards several times in response to progress during the last two years of the 1966-70 Plan and the gradual refinement of the draft Plan. In May 1971, targets were raised following a more optimistic assessment of the impact of the 1970 floods: further increases were built into the plan in October of the same year, due to expectations that Romania could anticinatP ftirthpr imnrnuPmPnt in hpr fnrpicn trade nrformance. As Table 6.1 shows, the final draft published as the Law of the Plan envisaged that the Pronomy would grow at a substantially faster rnat than originally intended, 1/ and that the additional resources and growth possibilities identi- fiedl di-ng the prearation of the Plan were to be directed largely towards 1/ Since the projected 1975 1-.1.~ hre baedupndifeet 1070 leel 4n the Directives and the Plan Law (in the former, it is an estimate of the Law on the Plan may indicate not only a real increase but also a chauge thn bu ase-year figureso. A Srmla wu1 U_ --uAo -: -- -qui___ -u LlII~ I LIL~ Uab ~ A L L.gue LMULa L WULLU UL lU . LVLL LO L U4UL . U concerning an evaluation of plan achievements. Straightforward com- paiUnbU Of5 tar6gets anL aacUalb r-,.Ven.In.l ~ -U.C1InLdLrt- L _LLILb UU LIVLncs sarily show whether targets have been met or not, because targets are based upon preliminary rebuLs of the previous planUing peL U anU achievements upon actual results of the previous period. For example, in year t, the preliminary production estimate is 100 units. Tne plan target for the following year t + 1, requires growth of 10 percent, mean- ing 110 units. Suppose actual production in year E is iu unIts and production in year t + 1 is 110 units. Target output in year t + 1 is attained, out not the target growth rate. - 60 - investment rather than consumption, so that the accumulation fund between 1971- 75 would amount to some 30-32 percent of national income. National income was planned to grow at 11.1-12.0 percent per annum compared with 7.7-8.5 percent in the Directives; gross industrial production was planned to grow at 11.1-12.0 percent per annum compared with the earlier target of 8.5-9.5 percent and gross agricultural production at 6.4-8.3 percent compared with 5.1-5.6 percent in the Directives. The targets in the Law of the Plan indicated that the increased growth would be assured both by increases in resources and through their more efficient utilization. On the one hand, a larger volume of investment - some 470 billion lei instead of the 420-435 billion lei of the Directives - and a larger increase in personnel - one million instead of 400,000-500,000 - were planned. On the other hand, targets for increased labor productivity and reductions in the costs of production were increased, in keeping with the attention given to more efficient utilization of productive resources and the embodiment of technical progress in new investment. The increased tarRets for production and investment generated greater import requirements of raw materials and investment goods as well as greater export potential; the Law of the Plan projected a substantial increase in Romania's foreign trade, a 1971-75 volume 61-72 nercent above that of 1966-70, comoared with a 40-45 percent increase in the Directives. 6.05 While the Law of the Plan projected larger increases in targets for the productive ertor, fnroeq fnr rnnsnumntion wpre changpd leR the lafpr maintaining the rates of per capita growth planned for the previous plan nprindi Thep inreaseQ in the arrnwth rntp n~f thp wnae fuind (53 nerrPnt, nupr thp five years compared to 30-35 percent in the Directives) represented a revised tagtfor the nimo -f anersv andl a 20 perce nt- ;incea -An rel -ae per employee. The upgrading of targets for socialist retail trade and ser- the requirements laid out in the Plan for diversification of consumer goods prouu.- -n Zu--aie mrovemento - imp u o ec a c t A " 1 o 11v u ut 4 p JU%_tLLJLLj 4UaiL L LU V LLUPLJVUILLO aLLU improJ.ved terr-.LLoria -ilur LLS ULi oI production were an aggregate of measures to meet the population's needs more efecivly Te la asoprlete i-------- r L#UU"bi othte CUmPet o S-Co0 eLieLLiveiy. 10le ridiH d150 PiUJCLLCU iiLLLdBCS 10 ULHCL LUW UHCHILD UL bULLU cultural expenditures, notably pensions (planned to increase by 18 percent Detween 17/U anU 197/J chil1ren s alLowances (plaune to increase by 2i percent) and housing, in which 522,000 units were to be constructed from state funds. Finally, one area in which the Plan did envisage a larger increase than the Directives was the real incomes of peasants; this reflected the Party's wish to reduce the gap Detween wages or cooperative memDers and state employees and to stimulate agricultural production through price and wage incentives as well as greater volumes or investment. Taking these elements of private and public consumption together, the Plan projected that the real incomes of the population should increase 40-46 percent over the five-year period. 6.06 Further revisions were made in the Plan following its publication as law. These occurred in 1972 when the National Conference of the RCP passed a resolution calling for fulfillment of the Plan in four and a half instead of five years. This acceleration was planned on the basis of the successful fulfillment of targets for industrial production and investment during 1966- 70 and the achievements of the 1971 annual plan; during 1971 the growth of industrial output exceeded the target and agricultural production grew rapidly - 61 - following the poor 1970 harvest. As a result, the Conference stipulated that 1^7' levels ofinutra outputIeJ should LLU . L AU Lu L ,I- i1_*E ili initial targets, thereby permitting national income to be 20 billion lei above the level in the Law o the Plan. To obtain this impruveU perotrmance, emphasis was to be placed. not upon increasing the volume of investment but upon improving the efficiency of production through fuller utilization of capacity, technical progress, reduction in the use of fuels and raw materials, improved organization and reallocation of personnel. C. Plan Implementation and Achievements 6.07 The achievements of the Fifth Plan period are shown in Tables 6.1 and 6.2; they demonstrate that the Romanian economy enjoyed considerable success in meeting the targets laid out in the Law of the Plan, and thus in overfulfilling the Directives of the 1969 Congress. Indeed, industrial pro- duction and investment overfulfilled their respective plan targets. However, the economy fell a little short of the accelerated targets adopted at the 1972 National Conference. 6.08 Over the five years, social product and national income, measured in comparable 1963 prices, increased from 523 billion to 864 billion lei and from 212 billion to 362 billion lei, respectively; these increases represented average annual growth rates of 10.5 percent and 11.3 percent, respectively, the latter just exceeding the lower bound of the Plan target. In keeping with the priorities and targets established in the Plan, the sector with the highest rate of growth was industry, which overfulfilled its aggregate plan target. while the growth of aericulture was considerably below target. Gross industrial production, 1/ measured in comparable 1963 prices, rose from 319.5 billion lei in 1970 to 586.9 billion lei in 1975, the average annual growth rate of 13 percent exceeding the Plan target's upper bound of 12 percent. AR a rpAti1t the Plan target was fulfilled two months before the end of 1975 and some additional 30 billion lei of production was obtained; achievements therefore fell only a lit-tle shArt nf the rpviqpd target adonted by the 1972 National Conference. Both Group A and B industries exceeded the upper limits Of their rpRnprtive plan farqets. with Groun A industry. as in previous plans. exceeding the target by a wider margin; the average annual growth rate of Group A was 13.7 percent comnared tn the Plan tarat nf 11e7-13 narcnt-2 and of Group B 11.1 percent compared with a target of 9.5-11.0 percent. (For ....................................Ten) rose from 68.6 billion lei in 1970 to 93.8 billion lei in 1975, a 37 percent terms of a Plan target which required the average annual production during 7111J LU U JU-97 pLLcL 1i*gethan Lue annua averageor 96-70 v the increase was only 25.4 percent. As Table 6.2 shows, the major gains in agri- cuturaL prouuction uring tne periu we moUE - .s ,w. - 19 percent after a poor harvest in 1970, and again in 1972. As a result, 1/ See the glossary for the distinction between grous industrial (agri tural) production and social product in industry (agriculture). Table 6.2: ECONOMIC INDICATORS MOE T ANNUAL PLANS 1970 1971 197(2 1.'(3 1974 195 AAh4.. AAhiheve- Achieve- Achieve- Achieve- Indicators Units meta Plan mata Plan ments Plan ments Plan ments Plan ments 1. Social product .±e±1/ c:Ah. 4Ion - 708.0 - 788.0 - 863.7 2. National income b.leiV/ 212.124. 2614. 293.0 3.5361.9 3. Gross industrial - - .1/ - -- 414.2- her n em n s,vn 582- s86. production .C1- 319.5 3v.o ni.u auu.t. a.- . 428.7 591 . roduss agricultural A8 oh 816 97.8 89.2 io6.8 89.9 113.0 91.2 93.8 5. Volume of freight transport b.ton/km 93.9 102.4 102.4 110.6 100.3 107.6 107.4 120.0 119.1 129.9 145.4 6. Volume of foreign tracde b..lei8 valut.- 22.9 27.0 25.2 30.3 28.8 35.0 36.0 50.9 49.8 60.7 53.1 7. Volume of investments . . 110 12o7 L7 from state funds b.lei- . w/ ,.u j. A-.J-- 1. 108 91.0 --R-r- -- 04. - 8. Increase in the number j/ 1 of personnel in the 5.lm-V 250,000 205,000 255,000 235,000 185,000 250,000 195,000 6.4m 6.3m national economy 9. Labor productivity 2/ in - republican industry lei- 159,300 168,935 168,441 181,921 180,931 198,650 197,466 216,600 210,794 239,000 225,760 - construction and assembly ceiL 64,100 68,555 69,092 73,300 73,881 78,230 80,622 85,370 87,24o 95,500 94,220 - railroad transport ton/km 343,500 357,420 359,295 378,400 374,572 452,430 454,185 475,000 479,940 498,500 495,780 10. Maximum expenses per 1000 lei of commodity leil/ 872.9 874.1 879.4 852.7 863.7 837.4 853.7 879.7 897.8 875.0 873.6 ntnut in renublican industry 11. Socialist retail trade . als b.lei2J' 93.7 100.4 102.6 108.8 108.8 120.9 117.2 128.7 129.5 14o.8 140.8 12. Volume of services for V 6/ the population b.lei - - 20.1 20.5 22.8 22.8 25.6 25.9 28.4 27.8 13. aumber of uuses constructed b 14. Wage fund b.l2ei 103.0 103.8 109.4 109.3 120.9 117.7 134.0 129.6 154.5 137.1 15. eal wages of persnu-- I /__. 1 14q( i44P 1602 1542 16. Real incomes 2/of the 6/ 6/ 6/ 6/ 6/ 6/ peasantry lei/mo. - - - - - - 950 898 980 17. Total real income of the population b.lei 160 181 191 203 219 234 1) in comparable 1963 prices 7) total number of personnel 2) social product per employee 8) Plan figures are in Projected current prices, 3) i prcesin efec onJanury , 171while achievements are in actual current prices 3) in prices in effect on January 1, 1971 4) fom sate unds9) in current prices 4) from state funds 5)10) total investment in the national economy 5) icluingprocedsof rivae potsSource: Anuarul Statistic, Law of Fi-ve Year Plan 1971-75 6) not available from Plan Law and/or and Annual Plans. achievements - 63 - fl -k * Aurnwrflr A nrr nf, n iA mon n are rctf r,enr r*F.rr r.yr rn A ml%fe 1971-75 (in comparable prices) 1971 1972 1973 1974 1975 1971-75 average Social product 11.7 9.8 10. 11.3 9.6 10.5 National income 13.5 10.0 10.7 12.5 9.8 11.3 Gross industrial production 12.0 11.7 14.6 14.7 11.8 12.9 Group A 12.0 11.7 14.8 15.5 14.4 13.7 Group B 10.7 11.9 14.7 11.9 6.3 11.1 Gross agricultural production 18.9 9.5 0.8 1.1 2.8 6.5 Volume of freight transport 9.0 -2.0 7.0 11.0 21.9 9.1 Construction output 7.7 7.2 7.2 3.8 7.9 6.9 Volume of foreign tradel/ 10.3 14.3 24.8 38.3 6.6 18.4 Volume of investment 10.5 10.4 8.3 13.3 15.1 11.5 Fixed assets 9.2 8.2 8.8 10.4 11.7 9.6 Number of personnel 5.2 4.7 3.8 3.3 4.6 4.3 Labor Droductivitv in - republican industry 4.5 5.7 7.8 6.9 7.2 6.4 - constriitionr an assembly 5.9 7.5 9.0 9.0 7.6 7.9 - rpil transport 4 7 4.O r.5 5 7 32 L.9 Socialist retail trade sales 2/ 9.1 6.3 7.5 70.9 7.7 8.2 Socio-cultural expenditunes 7 9.7 10.6 7 It. 8.4 Real wages of personnel 2.2 1.8 3.2 4.5 6.9 3.7 Total rea=l 4"oeof the population 13.2 6.8 5.6 7.2 7.0 7.9 capita 12.4 8.9 9.8 11.3 8.7 10.2 Sou --rce: Anuaru Statisti -Lf . P.1 p1 L- IL .LU12 UL JVIUL3 , 1> Source: Anuarul Statistic further increases above the Plan targets were anticipated at the RCP Conference UL 171L, vuLagricultural pdUUULLL sLagdLteu in Lhe Lace U pUUL climdLiL conditions between 1973 and 1975. (For further details, see Chapter Eleven). 6.10 The sectoral growth rates led to further structural change within the productive sector, WILLI inuustry streUgL[ening ILs poiIOL as the leading branch of the economy. The extent of the change is shown, in differing ways, by Tables 6.4 and 6.5. The former provides indices or the growth or each sector's contribution to social product and national income measured in com- parable prices and shows the relatively high growth of industry. Table 6.5 shows the changing structure of social product and national income in current prices; between 1970 and 1975, industry's share of social product increased from 61.4 percent to 64.7 percent, while agriculture's fell from 16.5 percent to 13.3 percent and construction's declined from 10.6 percent to 8.6 percent. For national income, Table 6.5 does not show the increasing weight of industry because of relative price changes during the period 1973-75. 6.11 The growth in production and changes in economic structure between 1971-75 were accompanied, and to a large extent generated, by a large invest- ment program designed to ensure "the steady growth of the entire production potential of the country, improvement in the territorial distribution of the forces of production, amelioration in the structure of the national economy, improvement in the population's housing conditions and development of the material resources of socio-cultural activities." 1/ i/ Communique on fulillmient o]. te 17,11/5 Fla. - 65 - Table 6.4: GROWTH OF SOCIAL PRODUCT AND NATIONAL INCOME, BY BRANCH OF THE ECONOMY, 1970-75 (In Comparable 1963 Prices) Transoort and Year Total Industry Construction Agriculture Telecommunications Social Product 1970 100 100 100 100 100 1971 112 111 109 121 108 1972 123 123 117 130 116 1973 135 141 123 132 126 1974 151 159 129 134 135 1975 165 176 1/.0 1390 156 NaionaUiIl incomeU 1971 113 111 110 131 109 1972 125 126 119 140 119 1973 138 147 124 133 132 1974 155 167 131 130 144 1975 171 186 144 130 169 Source: Anuarul Statistic. - 66 - Table 6.5: STRUCTURE OF SOCIAL PRODUCT AND NATIONAL INCOME 1970-75 (in current prices) Transport Other Productive nnti TPIA- Srie n Year Industry Construction Agriculture communications cluding Trade Social Product 1970 61.4 10.6 16.5 4.7 6.8 1071 9 n A 1 r 1Q 1 A r 7 1972 61.1 10.1 17.1 4.5 7.2 1 71.) V U. L 70 .10 U.1I *t . t I. / 1974 63.6 8.9 14.1 4.1 9.3 Li 7 0 . V ~ .' NaLional income 1970 58.0 10.4 18.5 6.0 7.1 1971 56.0 9.6 22.2 5.5 6.7 1972 56.5 9.5 21.25.73 1973 58.1 9.1 18.5 5.6 8.7 1974 56.6 8.3 15.9 5.4 13.8 1975 56.2 7.6 16.0 5.8 14.4 Source: Anuarul Statistic. The Plan target for investments from centralized state funds (which comprised some 87 percent of total investments in the national economy between 1971 and 1975) was slightly overfulfilled, achievements being 8 billion lei above the target of 470 billion lei, and according to the Plan communique, the actual sectoral distribution of investment approximated the planned amounts, with industry receiving 57.2 percent of total centralized state funds, agriculture 16.1 percent, transport and telecommunications 11.4 percent and construction 5 percent (Table 6.6). 6.12 The total volume of investment in the national economy during the Fifth Plan was 549 billion lei, a larger amount than was invested during the Third and Fourth Plans together (Annex 3.3). As a result, the proportion of national income directed towards the accumulation fund between 1971 and 1975 was 34.1 percent (Table 5.1), which surpassed the Plan target of 30-32 percent. This is a strong indication of the efforts made during 1971-75 to accelerate the rate of growth of the economy as well as evidence of the difficulties facing the economy in implementing the targets of the 1972 National Conference. As the later discussion on efficiency indicates in greater detail, the acceler- ated growth called for by the Conference could not be provided for by improve- mpntq in rpqnlrce use and efficiency but had to be secured through additional inputs of capital and labor (see also para 6.14). - 67 - Table 6.6- , IANNED NDTn ACTTAT INT MENTS FOM CENTRALTZED STATE FUNDS, 1971-75 (in comparable 1963 prices) Sector Planned Achievements 1971-75 1971-75 b. lei 7 b. lei % TOTAL 470.0-' 100 478.0 100 of which: industry 281.2 58.1 273.3 57.2 construction 18.5 3.8 23.9 5.0 agriculture 81.4 16.8 76.8 16.1 transport and telecommunications 53.6 11.1 54.4 11.4 trade 13.2 2.7 2/ 2/ municinal services 8.1 1.7 - 2 hcsing 140A 3.0 - edcatin an heath 9Z 2.0 - 2 scientific research n 3.8 0.8 Source: Law of the Plan 1971-75 Communiqu6 on fulfillment of 1971-75 Plan 1/ components do not add to total but equal 484.4 b. lei. Percentages for sectors are based on this higher figure. 6.13 The distribution of the total investment volume followed closely the priorities laid out in Lue rau. Pl.an percent u Lne t vhnI was dLLucateu Lo the productive sector and the sectoral distribution continued the previous plan period's emphasis upon industry (Annex 3.4). Some 277 billion lel (50.5 percent of the total) was directed towards industry, of which 231 billion lei (42.1 percent) went to Group A industries, in particular to metallurgy, machine building, chemicals, fuels and energy. As a result of these allocations, the ability of Romania to supply a higher proportion of its own capital goods in- creased; in 1975, almost 75 percent of all equipment investments were produced in Romania. Group B industries were allocated 45.9 billion lei (8.4 percent) and as a result of this increased allocation and the higher investment during the 1966-70 plan period, light industry enjoyed one of the highest annual growth rates (13 percent) of the industrial subsectors. The next largest investments were in agriculture with 79.2 billion lei (14.4 percent of the total), and transport and telecommunications with 55.7 billion lei (10.2 percent), followed by construction with 25.9 billion lei (4.7 percent). During the 1971-75 plan period, greater attention was given to regional dis- tribution of investment; a discussion of regional considerations is presented in paras 6.26-33. 6.14 The overfulfillment of the plan target for investment was matched by overfulfillment of the target for the number of wage earners. While the occu- pied population increased from 9.9 million to 10.2 million, the number of personnel rose from 5.1 million to 6.3 million, an increase of 1.2 million (23.3 percent above the 1970 level) compared with a Plan target of 1 million (19.6 percent). The increase in the number of personnel involved essentially a transfer of labor from agriculture, the number of whose occupied population declined from 4.85 million to 3.84 million while the number working in industry rose from 2.28 million to 3.11 million. Over the period, 1971-75, therefore, the percentage of the occupied population working in agriculture declined from 49.1 percent to 37.8 percent, while industry's share rose from 23 percent to 30.6 percent. Further details of employment, and in particular, participation rates and urbanization. are discussed in Chapter Eight. 6.15 Tn tprms of the nrcentae of national income allocated to the con- sumption fund, the economy between 1971-75 failed to fulfill the target of 68- 70 perpent, since only 65,9 percent of natinanl innme wasq rPnrfPd nq aning to the consumption fund. However, the growth of national income was such that the growth of the consumptin_ fund, 7-5 percnt per a"num mor the a n pe riod was higher than in previous plans and made possible large enough increases in Plan targets. Total purchasing power of the population, expressed in terms the upper bound of the Plan target. According to the Plan communique, the wage fund rose by 51 billion lei (an increase of 53 percent uuring Le Plan period, denoting a slight overfulfillment of the Plan target which was due to the higher than targeted increase in personnel. Nominal andu real wages mute or less increased according to the targets; through increases in the minimum wage and general wage increases, the nominal monthly wage rose to an average of 1,813 lei in 1975, just over the target set in the Plan and to 1975 lei in December 1975, thereby attaining the goal set out in the National Conference - 69 - of the RCP in 1972. The increase in real wages was 18.4 percent over the five years, just short of the 20 percent target of the Plan. Increases in the incomes of peasants also occurred through the introduction of minimum wage and increases in procurement prices. It is not clear whether the Plan target of a 22-30 percent increase in real incomes was attained, but monetary incomes are reported in the Plan communique to have increased by 28.7 percent. 6.16 Funds allocated from the state budget for socio-cultural needs also increased, by 50 percent over 1970; expenditures totalled 50.9 billion lei in 1975, an average of 7,420 lei per family and financed improvements in educa- tion, health, and pensions (for further details, see Chapters Eight and Nine, and Appendix 10). State funds were also used to construct 511,700 housing units, virtually meeting the Plan target of 522,000 (for further details, see Chapter Twelve). 6.17 In the absence of Plan targets for consumption, its growth must be estimated through the surroRate measures of socialist retail trade sales and the volume of services carried out for the population. In both cases, the upper bounds of the targets established in the Plan were exceeded. SRcialit retail trade sales increased by 48.3 percent over the five-year period compared with a Plan target nf 40-47 nPrrent. Tn 1975 ales totalled 140 8biL114An li measured in current prices. The volume of services for the population totalled 27.8 hillinn 194 mnPnmrPd in 1Q71 nrince in 1Q7S inncv.n ,f AR A n-_II--- over 1970, thereby exceeding the planned growth of 55-61 percent (for further of houses and durable consumer goods, which were in increased supply during the Fifth Plan, also grew. Savings depOsits of the- _-.1-~~ 44.9- t- Z billion lei in 1975, an average annual growth of 16 percent over the plan Av u summary, Rvmania's economic PtuLmaCe UULrng he Fifth Plan indicates that the country succeeded to a large extent in formulating consis- luet plans andU carryiug them out. wicn tne notaoe exception of agriculture, production targets were largely met and while they were assured by additional _necton of investment and labor to offset the less than planned improve- ments in efficiency, the transfer from consumption to investment was not suf- ficient to prevent targets for consumption from Deing mer. . Economic and Technical Efficiency 6.19 it has been shown in earlier chapters and in section C of this chapter that, while the main engine for economic growth has been the expanding level of investment in all sectors and the transfer of labor from agriculture to industry, increasing attention has been paid to improvements in the effi- ciency of economic operations since the beginning of the 1966-70 plan period. This has included measures to improve the allocation of resources (through improvements in planning and management of the economy) as well as their util- ization (through the introduction of specific plan targets for cost reduction, qualitative improvements and reduction in resource consumption). Guidelines - 70 - for specific programs and legislation were mapped out by the National Confer- ence of the RCP in 1967. 1/ They stipulated better organization and manage- ment of the branches of material production by allotting more responsibility to enterprises and by creating large scale units; improved planning at central and enterprise levels; improved organization of the supply of materials for production; better utilization of financial tools and indicators and, in con- sequence, a more effective financial plan; reforms in the price system to pro- vide correct signals to enterprises in their implementation of the plan; and finally, as a major task, the overall improvement of efficiency by shortening the commissioning period for new assets, increasing the degree of capacity utilization, ensuring a high degree of raw material processing, improving the quality of products for both internal and external markets, incorporating scientific and technological research in production and minimizing consumption of inputs. 6.20 After 1967, and particularly during the Fifth Plan period, steps were taken to imnlement these measures throih both lpgislation and new nrno-pilirps The details of the planning and organizational changes are given in Chapters Thrpp Anid Fm,ir- fbic cp~rfin~n 1nnckq Agt tho imnrr nf thoapt nanciirpc inQr%fn-rm an assessment can be made and compares them with the targets published in the Plan - 6.21 ~ ~ ~ ~ ~ ~ _ Two--- efiiec taret weepulsediteln labor produc- tivity per worker in industry, construction and rail transport and the reduc- ti~on of expenses per 1000 lei of marketed industrial output. Both are syn- thetic indicators, combining in a single index changes in more than one eco- --4 v arabl . Thus 4-an ov emen L t~ 4- 1-k- __A _t - # (-h-*_1 ;q AeLLV£ J WneAL as gross product per worker) may measure capital deepening, improved labor rALlLbD, LLiPLUt U L1maLtta e eL,-LL 111LrLLCL_VC1LUt= PLULuULL luLLAJ%, tfLL* Lt::VtELL11"Dbb in the absence of more direct measures of efficiency, they serve as a useful startin1g point1. e nn - !ii-- -___-----"_- - 1 _n -- - - U.M Labor proauctivity in republican inausry ILIcreaseU Vy Jt percen over the plan period, an average annual increase of 6.5 percent, reflecting the infusion or investment and new technology and managerial improvements (see Chapter Ten for further details). The increase, however, fell short of the targeted increase of 42 percent, according to the plan communique because or deficiencies in the organization of production and capacity utilization; it may also have been the result of overmanning (see para 6.14 and Chapter Ten). Labor productivity in construction, growing 46 percent, exceeded its plan target of 35 percent, a performance attributable to the accelerated capitaliza- tion and mechanization of the sector (see Chapter Twelve). Labor productivity in rail transport increased 27 percent compared with a target of 33 percent; the shortfall appears to have been due to a lower than planned increase in goods traffic. 1/ Report Concerning Measures for Perfecting the Management and Planning of the National Economy and for Improving the Administrative-Territorial Organization, Agerpress, 1967. 6.23 The Plan communique also reported an improvement in the efficiency of fixed capital; the volume of gross production per 1,000 lei of lixeu capital increased 8 percent during the plan period. As in the case of the labor productivity figures, this measure is a synthetic indicator summarizing the impact of changes in various variables. In the absence of a plan target or more detailed information, it is not possible to evaluate the result. 6.24 Since both the published plan targets are defined in gross output terms, they contain the influence of many factors. For example, an increase in labor productivity, measured as gross product per worker, could as well denote increased material expenditures or an increase in the complexity and stages of production as increased net output per worker. In principle, more appropriate measures of efficiency would be the proportion of national income in social product and capital-output ratios, but some care is required in their interpretation since the aggregate ratios also measure a number of factors. 1/ According to published data 2/ the capital-output ratio 3/ for the productive sector as a whole did not change between 1970 and 1975; in both years, its value was 2.55 and the incremental capital-output ratio (ICOR) 4/ for 1971-75 was 2.56. Changes in the sectoral ratios, absolute values of which are not available from published data, are shown in Table 6.7. In spite of the constant increase in the ratio for construction and for agriculture after 1973, the stability of the overall rate was maintained by the increasing weight of declining ratios for industry and transport. The decline in indus- try's capital-output ratio reversed itself in 1975; it is unclear whether this was due to inefficient use of new capital assets or to the fact that, with the large effort in 1975 to commission new capital before the end of the plan, gains in output were delayed to the following plan period. The overall incre- mental capital-output ratio of 2.56 for 1971-75 was quite low by international standards S/ While international comnarison of ICORs can be spurious for a whole range of reasons, it remains the only measure of the efficiency of c.ni-Al anbi1.1lP in the nhgpnce nf dptailed data on canital good costs and information on enterprises' activities. In view of the fact that the ICOR during the 1971-75 n1nn wse cimilar to the overAll ranital-outnut ratio and that the Romanian ICOR was not substantially different from those of other Connripc nt n Qimlqr lvPl nf develonment, one may nnnlude that there was no great change during the plan period in the overall efficiency of capital. 1/ Sch,. as naua resource~ eAndo,I ent,I -rset eon--4-~ -friirtiirp, nre.cpnt- level of infrastructure, structure of investment and short-run factors such ascpct_uiiain as well as _V;nnfa nf- A- nhuarl. Ut iSt t ot .'. j1 111t- LClLL iU L L .LAU aoo t. L l- onalttit~. .Lin m . 5/ Comparable figures (19o-73) were .4 for Spain, 3.3 -reece, 2.2 South Korea, 2.9 Turkey, 1.4 Brazil. Table 6.7: SECTORAL CAPITAL-OUTPUT RATIOS 1970-75 Capital - output ratio /I Transport and Year industry Construction AgricuLture TelecomMunicatlons 1970 100 100 100 100 1971 101.8 105.5 84.0 100 1972 99.2 112.6 85.7 98.3 1973 95.2 119.4 98.5 96.2 1974 95.8 128.2 110.0 97.2 1975 99.5 139.6 121.5 92.9 /1 Ratio of fixed assets to national income (in comparable prices). Source: Anuarul Statistic. 6.25 In principle, an increasing ratio of national income to social prod- uct also denotes an improvement in economic efficiency, that is increased value-added for given material expenditures. During the fifth plan, national income grew more quickly than social product, as a result of which the ratio of national income to social product rose from 40.5 percent in 1970 to 41.9 percent in 1975. A similar trend was shown for each sector, with the excep- tion of agriculture where largely because of climatic difficulties increased inputs did not achieve large production gains. Again, these aggregate mea- sures suggest a trend but can not be put forward as certain evidence of increased efficiency because in some cases changes in the ratio reflect changes in sectoral and intra-sectoral composition of output quite unrelated to efficiency. Nevertheless, the above figures and statements from the Plan communique do suggest that progress was made between 1971 and 1975 in increas- ing the efficiency of economic operations, especially by moving towards a product mix with a higher value-added and producing economies in the use of fuels and raw materials. The Plan communique reported that the value of prod- ucts obtained per unit of processed raw materials increased substantially in a number nf hrnrhpq esnecial1y in mechanical engineering and metallurgy where it rose by 43 percent over the five years. Particular attention was paid to incvasing unine-added nd the qnalitv of nrocessing in exported goods so as to improve the efficiency of foreign trade. The Plan also established targets for the redution of matrial rnnlitirc in indntry- material Pxnenditures were to be reduced by 11-12 percent, but a reduction of only 9.2 percent was lLievedL , LLe sorIt fLallb g-l-trbue t- -- - - -- - failure to commission on time and to utilize fully new technologies. Special lowing the rise in the price of oil in 1973 (see Chapter Fourteen for further deta11). SclenLiic LreeLrc was uirected towardosuyvn s niques so as to minimize use of fuels; for example, it was announced in 1975 that improvements in iron-smeling thnlUgy wuul eu aru o n use of coal. Studies were commissioned within government branches to identify economies, for example, in transport fodeas se T -rte> - 71 - sector and subsector-specific targets were established (for example, in 1974 it was announced that in ftuue 2_ percet uf paper neeus was to ve met Lurough recycling used paper). Finally, producer prices of basic materials were reset during 17i4-7o during the repricUg exercise, to reflect more accurately their real cost and to encourage more efficient utilization of resources. E. Regional Development 6.26 Regional development policy, first given special prominence in the 1966-70 Five-Year Plan directives, was emphasized more strongly during the 1971-75 plan period. In order to distribute production, employment, incomes, education and medical services more equitably through the country and to reduce substantially the imbalances in economic and social conditions, the plan stipulated that increased investment in productive facilities and non- productive services should be allocated to less industrialized and poorer judets. The plan proposed that, as a result, industrial production in the poorer judets would increase by 20-27 percent per annum compared with the national increase of 11-12 percent. No further specific targets were pub- lished in the Law of the Plan. 6.27 The implications for location of investment and employment and re- gional distribution of production were reported in more detail in the plan communique. The communique indicated that for the less-developed judets the growth of investment between 1970 and 1975 exceeded the national average. Compared with a 70 percent increase in total investment, investment rose by 220 percent in Dimbovita, 190 percent in Gorj and Tulcea and above 100 per- cent in Dolj, Bistrita-Nasaud, Botosani, Alba, Satu-mare and Vaslui. As a result, these areas experienced a higher than average growth of fixed assets. The poorer judets also enioved higher rates of growth of aross output than the economy as a whole (Table 6.8); information provided by the Government indicates that all but three of the nineteen iudets which had gross industrial production of less than five billion lei in 1970 fulfilled or overfulfilled their olan target 1/ (Table 6.8). As a resn1t- thp niumhr of distrinfs with a low volume of industrial production decreased, as shown in Table 6.9. 1/ The rapid pace of growth in the less-developed judets, however, was not sULLi c IL, WLth Le exLcptiU UL naHgiLa, to meL Lhe amUiLLUUs pro- visions established at the National Conference of the RCP in 1972. In the uirectives, annual growth rates LUr LRe LU_owiLg jUUeLb WeLt giv.L; Bistrita-Nasaud 20.3 percent, Teleorman 21.6 percent, Harghita 15.8 per- cent, Dimbovita 22.6 percent, Salaj 25.4 percent and Tulcea Lo.1 percent. - 74 - Table 6.8: GROSS INDUSTRIAL PRODUCTION, BY JUDET 1970-75 (in comparable 1963 prices) Judet Gross Industrial Production Plan Target 1970 1975 1975 1975 '000 lei '000 lei 1970 1970 Alba 4,409 8,106 124 184 Arad 6,951 11,585 167 Arges 10,441 21,937 210 Bacau 10,659 16,336 153 Bihor 7,738 14,036 181 Bistrita-Nasaud 898 1,808 201 201 Botosani 1,811 3,388 147 187 Brasov 21,838 38,295 17 Braila 6,751 11,198 166 Buzau 3,602 9,05923 % Caras-Severin 8,643 11,478 133 k,-LU --,-qu 20,334-IU Constanta 6,619 12,842 194 Covasna 1,5 3,9011 Dimbovita 4,864 11,372 217 234 Dolij 1016 18,iI n0 178 Galati 10,497 25,425 242 lori 3,374 nR o 173 172 Harghita 3,154 6,579 184 209 Hunedoara 16-747 2l n128 Ialomita 2,872 5,272 161 184 Iasi 8.731 10.13 219 Ilfov 4,312 7,433 170 172 Maramures 5,068 7.952 157 Mehedinti 2,451 6,447 233 263 Mures 10,827 17.171 159 Neant 8,175 15,933 195 Olt 3,858 13,456 341 349 Prahova 20,142 32,247 160 Satu-mare 3,610 7,688 160 213 Salaj 782 2,082 260 266 Sibiu 11,414 21,287 186 Suceava 5,906 9,928 168 Teleorman 3,040 6,970 255 229 Timis 11,544 20,659 179 Tulcea 1,453 2,675 250 184 Vaslui 2,243 4,907 209 219 Vilcea 2,777 5,638 200 203 Vrancea 2,058 4,223 145 205 Bucharest Municipality 55,947 103,147 184 Total 319,476 586,878 18'3.7 Table 6.9: LEVELS OF GROSS INDUSTRIAL PRODUCTION, BY JUDET, 1965-75 (in comparable 1963 prices) Number of Judets Value of Production 1965 1970 1975 < 5 b. lei 30 19 8 5 - 10 b. lei 6 12 11 10 - 15 b. lei 3 5 7 15 - 25 b. lei 3 11 > 25 b. lei 2 Source: 1971-75 Plan Communique. 6.28 The growing importance of an industrial work force in the poorer districts also reflects the increasing industrialization of the less-developed regions; in 1975, the number of districts with more than one-fifth of their inhabitants categorized as personnel was 32, compared with 27 in 1970 and only 18 in 1965. Similarly, the ponulation emnloved in non-agricultural activities was more than fifty percent of the occupied population in 27 districts in 1975 comnared with only 13 in 1970- Arrnmnanving thPR inrrPnQPQ was a trgnd towards greater urbanization, to permit efficient provision of social and rultral servires These included improad medical arvices for emple between 1970 and 1975, infant mortality rates in the poorer districts showed a radical improvement), cnrlzdwtradseagsyem,better educa- tion, etc. Further details are given in Chapter Eight on human resources. 6.29 The above statistics provide some evidence of the positive achieve- ments of regional develupmenu policy. nowever, Luey uemonstrate CUanging levels of production and employment in each judet rather than changes in their distribution or in per capita terms. Therefore, an analysis was carried out of the changes in regional distribution of per capita output. Since figures on output per juuet are not puviLunLu, i PjLUAy WU2 LaUU.LkLt!U Ub.Iug pUU.L.LUU data on social product in industry, agriculture and construction, and con- verLed into per capita terms. Such series were obtained for the years 1967 and 1974 and a coefficient of variation 1/ of this output variable was cal- culated in both absolute and per capita terms, including and excluding Bucharest (Table 6.10). 1/ Co-efficient of variation is a normalized variance defined as cv (x) - Var (x) v 100 x Table 6.10: CO-EFFICIENT OF VARIATION OF PER CAPITA OUTPUT BY JUDET 1967 1974 Absolute (i) 54.09 55.27 (ii) 83.36 90.90 Per capita (i) 42.34 42.84 (ii) 43.26 44.30 Note: (i) excludes Bucharest (ii) includes Bucharest Table 6.11: COEFFICIENT OF VARIATIONS OF PER CAPITA OUTPUT IN INDUSTRY AND AGRICULTURE Industry Agriculture 1967 1974 1967 1974 Absolute (i) 75.45 67.88 46.65 53.06 (ii) 132 111 49.00 54.19 Per capita (i) 66.83 56.37 40.03 41.08 (ii) 68.48 58.47 43.19 43.87 6.30 These calculations show that industrial production has become more eaill Atrih,toj* in other word, thev demonstrate that the onvPrnment' policy for regional development, which is phrased in terms of industrial distribution, hasb hn implamentea sucAcsfully. The conrluinn i Rupnnortd further by a calculation of the coefficient of variation for the distribution o the population engaged in- 4ndustrial productio nnF c t11 niimllar nf employees in industry by judet were converted into a proportion of population to a general increase in the proportion of the occupied population in each jUUtL WUL&.u iL ALLUU Liy, L[L U.L0PciLL.LLy vUewLa judets in the dsruioun of the industrial work force has declined. Table 6.12: COEFFICIENT OF VARIATION OF INDUSTRIAL EMPLOYMENT BY JUDET 1967 1974 (i) 58.66 46.45 (ii) 60.92 48.16 -77 - 6.31 The calculations also show that, between 1967 and 1974, the distri- bution of agricultural production became less equal, and with sufficient strength that the overall distribution of output between judets became no more equal. The increasing inequality in the distribution of agricultural produc- tion results from the constraints imposed by natural conditions upon the regional allocation of investment in the sector. The government has announced that attempts will be made to distribute agricultural production more equit- ably, insofar as there are plans to make each judet as self-sufficient as pos- sible in food production and to distribute large scale livestock operations equitably. However, such measures are unlikely to have more than a marginal impact upon the inequality of the distribution of agricultural production. 6.32 So far, this discussion of regional distribution has been phrased in terms of output and employment. Lack of data on wages by judet prevents any conclusion that the regional distribution of incomes has also improved. How- ever, since the wage levels in industry are higher than those in agriculture, it is likely that a reduction in the disparity in levels of industrialization has also led to a reduction in income disparities between judets. According to the partial data available, (Table 6.13) the gap between the averaze incomes of the richest and poorest judets diminished a little between 1970 and 1975. It is probable that the 2ap is reduced further. in terms of total real income of the population, by the allocation of socio-cultural expenditures on the basis of national norms. TablP 6-13- TNCOME T.YVRT.q RY .TTTTF.T 1970 and 1975 Average income in lei per month Lowest ~____ Judet Judet Lowest 1970 1260 1613 1.29 Source: Data supplied by Romanian authorities. 6.33 As a result of the government's figures and additional calculations, as both industrial investment and production have been directed towards the LcnueveLupeu Juuets. Furtermore, Le udta inuiate [nat tne pace of tnese changes has been in general as fast as or more rapid than planned. 7W8 - CRAPTER SEVEN FOREIGN TRADE AND INTERNATIONAL ECONOMIC RELATIONS A. introduction 7.01 The development of the Romanian economy over the past twenty-five years has been accompanied by the rapid growth of foreign trade and the expan- sion of international economic relations with socialist, developed market and developing countries. Between 1950 and 1975, the volume of foreign trade measured in current prices rose from 2.7 billion lei valuta 1/ to 53.1 bil- lion, an average annual growth rate of approximately 12.6 percent. Over the past decade, there has been a distinct acceleration in the rate of growth, the average annual expansion for 1965-75 equalling 15 percent and for 1970-75 18.4 percent. To some extent, this is explained by international inflation, but more importantly, underlying the current price data there has been a steady acceleration in the real growth of foreign trade. This can be measured not only in terms of the ratio of trade to GNP -- approximate calculations by the Bank suggest the ratio in 1975 to have been somewhat above 20 percent compared to 12-14 percent in the early 1960s 2/--but also by the fact that the sectors upon which the economy depends for much of its growth, e.g. chemicals, metal- lurgy and engineering, have been those in which the importance of foreign trade has increased most. The impetus for the expansion has come largely from the side of imports to meet the needs of Romania's industrialization. On the one hand, the pace of industrial development has outpaced the domestic resource base, initially iron ore and coal in particular and since 1968 crude oil also; on the other hand, the change of emphasis in the industrialization strategy towards the development of advanced secondary industries has generated a demand for imported capital goods. 7.02 It has been the needs of the leading sectors of industry for raw materials and investment goods that have led to larger growth rates of trade with non-socialist countries. Between 1960 and 1975, the average annual rate of growth of imports from developed market economies was approximately 18 per- cent and from developing countries substantially more, albeit from a low base. To nny for thep imort Romania has mndp arat attpmnts to exnand exnorts particularly industrial products, to all three trading areas. Romania has It has formalized trade relations through agreements which have also estab- production; it has attempted to negotiate the reduction of trade barriers; and Lt hasi JoinedU aii par. t4Lipated actvel~ inanme fitrainlogni-- tions such as IBRD, IMF, GATT and UNCTAD. These outward-looking actions have 1/ See the glossary and Chapter Four for the definition of this currency unit. 2/ The figures for the early 1960s are quoted from J.M. Montias, "Economic Development in Communist Romania", p. 14/. - 79 - resulted in large increases in exports and economic cooperation of various kinds, most especially with the developing countries. A surplus on its trade with the developing countries has enabled Romania to finance some of its deficit with the developed market economies, whose markets Romania has had greater difficulty in penetrating. The overall deficit that Romania has typically run with the convertible currency area has been financed by external borrowing. 7.03 The purpose of this chapter is to explain the importance and opera- tion of foreign trade in the Romanian economy. Its specific tasks are three- fold; first, to describe the role of foreign trade in the Romanian economy and the changes in that role as the country's economic profile has changed; second, to outline the foreign trade planning system; and third, to examine in some detail foreign trade and international economic relations during the 1971-75 Plan period. The chapter should be read in conjunction with a number of other sections in the report; the section on foreign trade pricing in Chapter Four; the discussion of foreign trade in Chapter Five and Appendix 5 which examine the development of trade and international economic relations over the period 1950-75: and the paragraphs on trade in the sectoral chapters. Wherever possible, the discussions are supported by official data and also information from unofficial sources, but since information on balance of payments and external debt is given to the Bank by the government on a con- fidential basis the discussion of these elements is necessarily carried out in non-quantitative terms. B. The Role of Foreign Trade 7.04 The major role played by foreign trade in the Romanian economy over the past two and a half deades has essentially hppn to nhtAn rpAouirrP which have been unavailable domestically and required to meet production plans. In base and rapid and comprehensive industrialization, Romania explicitly rejected as it appeared in the period immediately after the war. During the 1950s and foi,.rn,.1 muh f the fo-llow,i.ing, deae,c P,m ,r,i n parn,ticpation in wonrld trade~ was determined largely by the size and structure of an import bill generated 'trog t-ke planin of..4., domsti supply,-.,. and dem-,-1 and; exo.rts weore regrded,a in principle, as desirable only to the extent that imports had to be financed, I. 1U.IU 1. 1k L jJy O asL uC possiable...Lj .~CitnC a i element of the economy, mainly as a result of changes on the sides of exports. Whereas L[e size anu sLLULULce U LLU cUHiLLHUto LU vt lLavru atly fErom domestic supply and demand conditions which are determined within the planning the '~ expoit, witL 1Z_,- process, tne government has become more WLII u tAPIULL, WUL IJ.ULO, a newly-established comparative advantage, especially in industry. As section C of this chapter and the section on foreign trade pricing in Chaperc Four show, planning and pricing reforms have been adopted to reduce the insulation of the economy from international influences and LO aLU t LL UtL1LLt.LtII6Ir,n export activities in which Romania can most profitably specialize. As a result, export activities have an increasing role in exposing enterprises LL - 80n international competition so as to stimulate improvements in efficiency and to improve the marketability of Romanian exports. In addition to providing a more appropriateL bai LLor esa 14hn oai' oprtv datg such measures have had the purpose of securing imports with the minimum expenditure of domestic resources. i.U Export activities nave also a role in maiuaining tne growth rate, particularly in sectors where the size or growth of the domestic market has been a limiting factor. In such cases, exports nave enabled Lie continuation of growth rates beyond the capacity of the domestic market or have allowed production at a level sufficient to secure economies of scale. C. Foreign Trade Planning 7.07 Foreign trade is a state monopoly in Romania. / This monopoly en- compasses not only all import and export operations but also all international accounts, thus creating also a monopoly of foreign exchange. It exists to ensure that foreign trade activities are fully subordinated to the require- ments of the country's development strategy and is implemented through the planning system. Since every branch of the economy is connected directly or indirectly with foreign trade, questions of control and administration of the latter are inseparable from those concerning domestic economic activities. Therefore, this section should be read in conjunction with Chapter Three. The nature of foreign trade planning and the changes it has undergone in the past decade parallel to a great extent the arrangements in the internal economy. This section looks at the institutions and planning process governing the foreign trade sector as bank staff have come to understand them in discussions with Government officials. 1. Foreign Trade Institutions 7.08 The institutions concerned with the planning and implementation of foreign trade operations are set out, and have their responsibilities out- lined, in the Law (no. 1) on Foreign Trade, 1971. Prior to this law, respon- sibilities for carrying out foreign trade were vested in a single ministry, the Miniqtry of Foreign Trade. which had under its general direction a number of foreign trade enterprises responsible for securing imports and selling exports. 1/ The scope of foreign trade is defined in Article 3, Law (no. 1) on Foreign Trade, 171 som ial and aonomic and technico-scientific cooperation transactions with foreign countries with regard to: sales, purcuases, anuu excnuges o c s i tran portation and forwarding, designing and commissioning of projects, technical assisLance dU c *4on sin--- of goods, agencies and commissions, financial and foreign currency operations, insurance, tourism, and in general, any act or facts of trade, as well as market research, tenders, proceedings, negotiations and agreements to such operations". - 81 - By the mid-1960s, the insulation of domestic enterprises from international mArkets wAs hindering the development o-f forelan trade, especially on the side of exports. Along with proposals for improving the organization for do- issued in 1967 as a blueprint for a more sophisticated management system, re- commended that foreign trade be reorganze *1-to carry out its functions more effectively and, in particular, that the Ministry of Foreign Trade's sole resp 4'k41 4#- I- __~ A-A U- *I, -Z _of som foreign trade responsibilities to the sectoral ministries, centrals and pro- ducing enterprises. Between 19 and the present, the goVErnmtL has adopted a series of laws and measures establishing new institutions and delineating the responsibilities ut all uuies involveu in trade. ihe most important and comprehensive of the measures was the Law (no. 1) on Foreign Trade of 1971. THe following paragraph gives a brief description of the present division of responsibilities between the major institutions involved. 7.09 (a) Council of Ministers: The highest body of state administration - it has general responsibility for the administration and control of interna- tional economic relations. (b) Ministry of Foreign Trade: The Ministry has overall responsibility for the planning and implementation of foreign trade activities. The major elements include the preparation, in coordination with the State Planning Committee, and implementation of the foreign trade plan which comprises a separate chapter of the five-year plan; the authorization of imports and exports through the issue of licenses; joint responsibility with the State Planning Committee, Ministry of Finance, National Bank and Bank of Foreign trade for working out and securing the balance of payments; negotiation, in collaboration with the Ministry of Foreign Affairs and other interested bodies, of agreements with trading partners; the investigation of foreign markets; the organization of economic representation through diplomatic missions or trade offices in foreign countries; and the general coordination of external economic relations. (c) Ministry of Finance: The Ministry has major responsibility for foreign currency and controls jointly with the Ministry of Foreign Trade international transactions in which foreign currency is involved. (d) Bank for Foreign Trade: Established in 1968 as a specialized unit of the External Operations Department of the National Bank, the Bank has the primary function of facilitating trade by organizing trade payments, obtaining domestic and foreign credits and concluding such banking arrangements as are required domestically and internationally. It administers Romania's foreign exchange reserves and payments agreements (See also Appendix 8). 1/ On the Perfectine of Management and Plannine of the National Economy. - 82 - (e) Ministries: Each sectoral ministry has responsibility for co- specific to its sector, and ensuring the fulfillment of its part of the for- e ig n t rad e plIan n. The Ministry of Trnsport has the specific- responsibili 4ty for overseeing the implementation of the external transport plan. (f) Centrals, Foreign Trade Enterprises and Productive Enterprises: LL t CI W ULaw 1)1 . StC 5,1L CSC W -LI I U LX tic .a r5,uLY i UI CI. LL. ULI. LOL aULC UV -LL Y out foreign trade, stipulating that trade could be carried out directly by centrals, production enterprises spVeCialized foreign trade enterriss, units supplying services or goods in foreign countries or to foreign interests in Nomaua ke.g. AAnov adU any oLner 5uen economic unts tnat are authorized to trade. In 1969, the majority of specialized foreign trade enterprises pre- viously under the Ministry of Foreign Trade were made the responsiD111ty Of their respective sectoral ministries and since 1971 there have been a number of reorganizations which nave affected both the number or units operating directly in the foreign trade sector and their responsibilities. Since December 1974, foreign trade has been carried out by 41 specialized foreign trade enterprises (34 under sectoral ministries and 7 under industrial centrals) and by export and import bureaus of the ministries and centrals. The foreign trade enterprises, which are jointly responsible to their sectoral ministry and the Ministry of Foreign Trade, are established as separate legal entities with their own management and employees and specific commercial responsibilities established by law. They are required to support all their activities from their revenues and to operate at a profit. At the same time, production enterprises were made directly responsible for their own trade activities, even when they were carried out through the centrals or foreign trade enterprises. Centrals and production enterprises now have responsibili- ties for preparing a trade plan and for implementing the final trade targets built into the annual plan and handed down from the ministry. (g) Other Bodies: A number of other institutions play an important role in Romania's foreign trade. The Chamber of Commerce is responsible for devel- oping relations with foreign firms, economic organizations and professional associations and staging trade fairs at home and abroad. It has affiliated with it an Arbitration Commission for the settlement of foreign trade disputes. Also affiliated with the Chamber is Argus, an agency established in 1971 whose original function was to serve as a representative of foreign firms in Romania but which has recently moved into assisting firms to set up their own offices and acting as the channel through which they recruit Romanian personnel. The State General Inspectorate for Product Quality Control has responsibilities in cooperation with the ministries for controlling the quality of goods and ser- viceA sunolied and nurchased by Romania in the foreign trade sector. In 1967 the Institute for the Study of International Economic Conjuncture 1/ was formed to study the apnronriate develonment of Romania's foreign trade. and in 1971 the Romanian Association for Marketing (AROMAR) was established with respnsibilitien imnrnuv the nality of market research and services for Romanian exports. 1/I D- ,-, 4- 1077 "Tl,.~ T- t-4f-t-p nf WJnvlel F rnn r v 2. Planning Process 7.10 The planning of foreign trade is carried out within the same overall . ewuLN as tne pianing u uumesti activities. InLe five-year plan for tue economy contains a separate chapter on foreign trade and payments which sets out tne overall targets for exports and imports and specifies for each level of organization responsibilities and targets. In essence, the central foreign trade plan is a volumetric and financial projection or exports and imports for the five-year period in the field of trade, which constitutes the main part of the overall balance of payments. The five-year plan does not include a projection of the balance of payments, but this can be put together from the provisions of the tourist and transportation plans and the guidelines for actual capital flows. During the implementation of the five year plan, balance of payments projections are drawn up for use as management instruments for the overall development of international economic relations. 7.11 The planning process for foreign trade occurs simultaneously with that of domestic activities and is essentially similar to the planning for other sectors with a derived demand for goods and services. Each economic unit prepares as part of its draft plan projections of export and import needs based upon investigative surveys of foreign markets and data on domestic pro- duction and demand forecasts. Aggregation of enterprise plans through centrals and ministries to the level of the State Planning Committee produces projec- tions for the economy as a whole of import requirements and permits their com- parison with the results of the SPC's summary schemes and econometric models. The process of iteration and negotiation at each level of the organizational pyramid produces a final plan which after approval is disaggregated and presented to each level in the form of export targets and import allocations expressed in value and volume terms. Because of the inherent uncertainty of foreign trade, targets in the five-year plan are expressed in general terms. More detailed targets are Riven in the annual plans. 7.12 The overall foreign trade plan is divided into two chanters covering separately plans for convertible and non-convertible currencies. Prior to the 1976-80 plan, the plan was also divided into separate chapters for socialist, developed market and developing countries, but no such division is included now. This development. and the fact that it is the total nlan. rather than the two chapters, that is divided into import and export plans illustrates the increasing commercia1 orientation of foreign trade activities. The import plan is specified by various categories; the most important commodities are designated in volume ferms. others are in valiie terms. while there is also a residual category, not specified by commodity but allocated by value and ministry. The nlnn nlqn iq diuided nn the hnQiQ nf n.e n1nl . and calculated according to production norms and (2) parts and other production inputs, designated in volume or value terms. (b) imports for investment: (1) capital goods for specific projects, broken down by project. (2) capital goods not specified by project, for which a total value is given for each ministry and technical specifications defined. (c) imports for final consumption: (1) for important goods, volumes are specified. (2) for all other goods, value terms are used. The export plan is also broken down in to value or volume terms for major commodities. In general, the predominant target for each administrative level is given in value terms but in certain cases volumetric targets are also given. 7.13 In addition to planning foreign trade internally, the Romanian government organizes its economic relations with its trading partners so as to rpdiic A much ns nosihlp thp uncertninty in tht sector and tn avoid jeopardizing internal development programs which are dependent upon foreign innts. Romania ha condiintPd mnst of its tradp and nayments within thp framework of specific inter-country agreements. In the past, these agreements wer a nprnl lu h4ilntsarnl in nnt-iircl fnr 'hnt-h tvnap1 nn nqumPntc1 hut- in T-Prant years the tendency has been for payments to become multilateral, payments with non-s.cni-a-i 01- coul,ntries be.i-Eg ---de AJn,rro.,4ng_l. in cnver-i,le cunrrenci es At the end of 1975, Romania had signed 112 general cooperation agreements, 185 1on- -5-ono~ .sn I J - .,am,r -- - ao,oto cn 1~ a greatF numrn- still under negotiation. 7.14 The most institutionalized trade agreements signed by Romania are LtUe WiLh DULdlibt GUGHLLiEb. 1HCf dit LCgULLLU ULicdLLais, LUL LLVE year period, during the preparation of the five-year plan and consist of a general framework agreement supplemented by annual protocols which settle details of purchases and deliveries. The agreements generally contain binding quotas, i.e., quotas up to which import and export licenses iust be issuea. Prices for transactions are set at "negotiated world prices" which are now based upon moving averages of international prices adjusted for speculation, fluctuations, etc. Settlements for trade under these agreements are carried out in transferrable roubles through the International Bank for Economic Cooperation in Moscow. The institution of a multilateral settlement system within CMEA means Romania no longer has to balance trade with each country. 7.15 Agreements with non-socialist countries have involved similar attempts to guide the development of trade along predictable lines, but in general the stipulations in the agreements have been more indicative than - 85 - binding. The agreement usually runs for up to five years and provides a framework for trade and in many cases scientific and technological coopera- tion, joint production and commercial ventures, exploration for raw materials and technical assistance agreements. Further details of these various agree- ments are given in the following section. D. Foreign Trade and International Economic Relations in the Fifth Plan (1971-75) 716 Thp cnalq qpt for thp dvPlonment of th Romnnian Pronnomy hetween 1971 and 1975 necessitated a further considerable increase in the volume of foreign trAde. rnntinlipti cyrnwth of mnti-rinl prodtio4n pa-rt4iularly in in- dustry, generated additional imports of raw materials and capital goods which, 4- vy4e- oIF Qomannas caut4ius approach tonwards eanding its. externl debt, had to be largely financed by increased exports of industrial and agricultural goods.* Thus, Romanials particpto in. worl tr_Ad durin the- Fift Plan,1_ as before, was largely subordinated to the requirements of the domestic eco- LLJLL~atu .A.. .L U Y ij i. IC C U A.LL y U L ULLL=OL A. L CCS.ULkLC C OILU LI. W LiLa L CLD and the inability to supply internally all the sophisticated capital goods and 111LaidLLUHD LCLuliuUY L11Z OLLLLU-y U.L LU1iLt_A i[uUUbLL.a1LddLLULL. Imb a result, much of foreign trade policy in this period was concerned with the uevelopitent of marketavIe export goods anu with ovtaing stable long-term supplies of raw materials and access to industrial technology. 7.17 The Law of the Plan projected an increase of 61-72 percent in the volume of trade, measured in 1970 prices, during the Fifth Plan compared with the volume achieved during 1966-70; translated into absolute terms, the target equalled 151-160 billion lei valuta. The Plan forecast that imports during the 1971-75 plan period would total approximately 75 billion lei valuta in 1970 prices, an increase of 54 percent compared with the 1966-70 volume mea- sured in current prices; and in keeping with the internal development of the economy, it was envisaged that the major elements of import growth would be raw materials and machinery and equipment. The Plan envisaged that raw material imports would increase at approximately the same rate as total imports, while purchases of machinery and equipment would more than double. 7.18 The Plan established both quantitative and qualitative goals for exports between 1971-1975. The target for the growth of exports, 14.3 percent per annum, was considerably higher than that of imports and reflected the Government's plan to secure a positive trade balance by 1975 in both total and convertible-currency trade and to minimize the growth of external debt. In absolute terms, the target implied a volume of exports totalling 85 billion lei valuta during the plan period. The Plan also indicated that there would be changes in the geographical distribution of trade; while the Comecon coun- tries would remain Romania's largest export market, 1/ trade with developed market economies and developing countries was to increase rapidly to finance the increased imports of raw materials and technology. In addition, the Law 1/ Trade with Comecon was planned to increase by 50 percent during the Plan period. of the Plan required that the efficiency of exports be increased; all bodies involved in foreign trade were to ensure "the increase in export efficiency, the diversification of the forms of foreign trade, the exploration of the foreign market and the study of conjunctural trends in perspective.- I/ Ine increased efficiency of exports, that is, the improvement of Romania's resource terms of trade, was to be brought about largely by the general increase in productivity of the Romanian economy, reductions in production cost, improved quality and the availability of more highly processed and technologically- advanced goods for export. In particular, it was planned that exports of machinery and equipment and chemicals (projected to constitute 41 percent of total export value in 1975 compared with 30 percent in 1970) and the products of light industry, notably clothing, footwear and wood products, all embodying a high degree of added value, would be increased at a rapid rate. While general improvements in productivity and quality and sophistication of products provided an important basis for increased efficiency, it is clear, from the measures proposed at the National Conference of the RCP in 1967, that further improvements in efficiency were anticipated from the more efficient organiza- tion of foreign trade under the Ministry of Foreign Trade and International Economic Cooperation and also from the more direct exposure of enterprises to the international market (for details, see Chapters Three and Four). 7.19 In addition to these policies, a major emphasis in the 1971-75 trade plan was the development of economic cooperation with all trading partners. The primary purpose of agreements for cooperation was similar to the bilateral trade agreements they in some cases replaced, that is, to introduce a measure of stability and certainty into foreign trade. A further purpose was to pro- vide a framework for joint ventures, cooperation in production, the transfer of technology and similar forms of inter-state cooperation. On the side of imports, emphasis was placed upon the negotiation of long-term contracts for raw materials and joint exploration and exploitation enterprises, especially in LDCs. so as to ensure continuity of supply at advantageous terms. Such agreements were also intended to permit the establishment of joint ventures within Romania, to develop economic cooperation and introduce advanced tech- nology, modern management techniques and scientific research into the Romanian economy- On the side of exnorts. the foreign trade plan envisaged the estab- lishment of joint production and commercial ventures in other countries, as n monnq nf Pvnorting Rnmanian-made mnrhinprv and Pnninment qnd ttchnn1ov. While the major emphasis during the Fifth Plan period was clearly to be placed upon the development o-f widespread cooppyrntion wi th the develpe Tnn rkpt economies and developing countries, it was also planned that Romania would including Comecon members. 1. Trade Performance 7.20 The total volume of foreign trade between 1970 and 1975 increased iLUi LL.7 UJ111Ull LU JJ.1 viJlliUL4 eL ValuLa Lu u c an annual growth rate of 18.4 percent. Imports increased 2.26 times from 11.8 1/ Article 24, Law of the Plan 197/1-75). of - Of - billion to 26.5 billion lei valuta and exports 2.39 times from 11.1 billion to 2o.5 oiliton lei valuta over the plan period, average annual growth rates of 17.7 percent and 19.0 percent respectively (Annex 4.1). As a result of the faster growth of exports, Romania succeeded in balancing its overall trade in 1975 (Table 7.1). Measured in the same terms as the Five Year Plan target, the volume of trade during 1971-75 was 106 percent higher than the 1966-70 achievements. An immediate comparison between achievements and the targeted increase of 61-72 percent over the 1966-70 volume is not possible since the former is expressed in current prices and the latter in 1970 prices. In the absence of price indices relating specifically to Romanian trade, it is dif- ficult to separate volume and price effects, especially for trade with non- Comecon countries and to provide an accurate assessment of Romanian trade performance during the period by using these aggregate data. There are two further reasons why an assessment at the aggregate level is not useful; first, Romania participates in two discrete trading areas, the non-convertible cur- rency area of socialist countries and some trade with developing countries, and the convertible currency area encompassing most trade with developed market economies and the developing countries. As the tables on trade balances and commodity structure of trade show, Romania's trading position in the two areas (and within the convertible currency area its position in relation to the developing countries and the developed market economies) differed consider- ably. Secondly, the state's monopoly in foreign trade means that the trade figures reflect changes in trade policy in response to both internal and international circumstances. Thus, the remainder of this section attempts to assess performance of foreign trade during the Fifth Plan by examining more disaggregated figures. Table 7.1: VOLUME OF TRADE BY CONVERTIBLE AND NON-CONVERTIBLE AREAS 1970-75 1970 1971 1972 1973 1974 1975 --------------------------( ------------- A- Tnfnl Trnilp Exports 11105 12606 14373 18576 24226 26547 imports 11761 12616 14465 17418 25563 26548 Balance -656 -10 -92 +1158 -1337 -1 B. Convertible Currency Exports 4980 5950 8181 13016 14110 Import L1no rJ-+ 13 0 rn I /. 2- / Balance -305 -398 -328 -1621 -551 C. Non-convertible Currency Trade Exports 7626 8423 10395 11209 12438 imports 7330 Oil/f 0VU 1 000 Balance +296 +306 +1486 +282 +550 Source: Ministry of Finance - 88 - 7.21 The major features of Romania's trade are shown in Tables 7.1 and 7.2 and Annexes 4.1-4.8. Between 1970 and 1973, the growth of trade proceeded at a fairly rapid rate, although as Table 7.2 shows, somewhat less rapidly than projected in the annual plans; 1/ average annual growth rates for exports and imports were 10.8 percent and 8.2 percent respectively. This permitted a reduction in the overall deficit from its 1970 level of 656 million lei valuta and in 1973 the economy actually had a surplus of 1158 million lei valuta. Furthermore, Romania's trading position with each trading area improved. 2/ Trade with socialist countries increased by almost 40 percent between 1970 and 1973, compared with a target growth of 50 percent between 1970 and 1975, the Rreater growth of exports (49 percent against only 30 percent for imports) leading to an increase in Romania's surplus in non-convertible currency trade. The surplus with developing countries also increased, the rate of growth of imports (mainly crude oil, minerals and metals and raw materials) exceeding marginally that of exnorts (122 nercent romnared with 118 nerrpnt). Tn itq trade with developed market economies, however, Romania succeeded in reducing its tipfirit only A littlP from 1250 million 1ti uqlit-i in 1970 t-n 130 millinn lei valuta in 1973; in that period exports rose by 82 percent while imports inrrAnqPe' hv nnly An nprnpnt, I/ Since the targets tor toreign trade in the annual plan are cast in estimated current prices while achievements are in actual prices, a shortfall in performance may, in principle, be due to either inaccurate price predictions or lower volumes of trade. 2/ Care is required in interpreting the figures for trade with LDCs and developed market economies, since exports and imports are categorized in Romania by country of payment rather than country of origin or des- tination. Thus trade figures quoted by Romania for countries with important commodity exchanges may not equal those countries' own figures. - 89 - Table 7.2: VOLUME OF TRADE WITH DEVELOPING COUNTRIES AND T'XLT ADLM UADVVIrT' LP'AkTTWC 1970-75 ----------------- (in m. lei valuta ------------- A. Total Trade with Develop- ing Countries and Developed Market Economies Exports 4652.3 5448.8 6351.6 8966.8 13726.0 14333.6 Imports 5417.8 5825.3 6995.7 9173.9 15561.7 14990.0 Balance -765.5 -376.5 -644.1 -207.1 -1835.7 -656.4 B. Trade with Developed Market Economies Exports 3284.5 3992.6 4549.0 5980.2 9455.4 8225.0 Imports 4534.0 4880.6 5767.7 7212.1 12108.5 10762.3 Balance -1249.5 -888.0 -1218.7 -1231.9 -2653.1 -2537.3 C. Trade with Developing Countries Exports 1367.8 1456.2 1802.6 2986.6 4270.6 6108.6 Imports 883.8 944.7 1228.0 1961.8 3453.2 4227.7 Balance +484.0 +511.5 +574.6 +1024.8 +817.4 +1880.9 Source: Ministry of Finance Anuarul Statistic 7.22 Trends in trade were much less favorable, however, in the remaining two years of the plan period. In 1974. the surplus on total trade was replaced by a deficit of 1.3 billion lei valuta as exports grew less rapidly than planned and imports increased considerably faster than anticipated. The causes were both internal and external: growth of exports, 30.6 percent compared to an annual plan target of 43.5 percent. was constrained by the failure of the harvest, which reduced agriculture's exportable surplus, and by the world recession, which severely affected the growth of exports of machinery and equipment, textiles and garments. In addition, trade restrictions were imposed on important Romanian exports such as beef. textiles. shoes and fertil- izer. Large increases in the price of oil and other raw materials, and of machinery and Pnninment- raised the r-et nf imnnrt-z ntnliv nni fho ent-fl import bill increased by 46.8 percent compared with the plan target of 38.8 nPrrPnf. CnmnnRmni1v Vhe fnUnrAhla dAveljnnMantQ nf Vhe nri9e017n21 thr-om Vrc were reversed. The trade deficit with the developed market economies grew to 9-65 bill ion lei 1-1hlli- me 4-n-rts -e by, 68R percent w.hileo exponrts increased by only 58 percent; the surplus with the socialist countries decreased to less than half abillion lel valut-, in part because expor goods were ShIf1ted to convertible currency markets. In the case of trade with the developing uu c noa gLLUp, RLXVumaLI.La OU.LLLCU ULLy c O.L.tL U=LCLLLati[H -1H L trade balance, partly as a result of the structure of exports whose prices LUrs LU cUmpenL LUL Lhe i1Lde UbL UL dilU UL L idW er dLLidi imptULL, - 90 - and partly because of the trading and cooperative agreements established with many developing countries during the fourth and fifth plan periods. 7.23 In 1975, the foreign trade sector experienced further problems. Demand for Romanian goods continued to be limited by the world recession, espe- cially in the case of textiles, machinery and wood products, and less foreign exchange than anticipated was earned because international market prices, par- ticularly of chemicals, cement and timber, stopped rising. Internally, severe floods reduced the planned supply of export goods, mainly from agriculture but also from some industrial sectors, by some 1.1-1.2 billion lei valuta. While in 1974 the large deficit had been financed through capital inflows without the imposition of restraint upon imports in 1975, the Government dealt with the unfavorable developments by accepting the need to reduce or delay some planned imports, particularly from the convertible currency area, and by run- ning down stocks. As a result, imports grew by only 3.9 percent and with export growth of 9.6 percent the overall trade account was practically in balance. The deficit with the developed market economies was reduced by a small amount to 2.54 lei valuta, with both exports and imports falling by 13 percent and 11 percent respectively. In the case of trade with developing countries, Romania's surplus increased rapidly, reflecting further success in expanding exports of machinery and equipment and industrial consumer goods to the oil-producing countries; exports to developing countries increased 41 nPrrPnt in 197S whilp imnorfg incrpnd hv 99 nPrrPnt. Tradp with qnmrialigt countries continued to grow steadily, exports and imports increasing by 16.4 nprront nnd 195' nprrpnt rPQnPrtiuP1y 7.24 Thus, in the last year o%f the plan period, theforeign trae sector registered a lower rate of growth than planned, as internal and external in imports of machinery and equipment, in others, the substitution of imports the substitution of local investment goods. 7.25 In the course of the fifth plan, substantial changes took place in Lhe geUgraphical iL.LUtULU al comU U diUULL LLULLULC U LLadU. in cULLCnL price terms, the weight of socialist countries in Romania's foreign trade ln n O I _C_1j --_ j I n_ Uimini5ueu, in 1v, O.1 percet Q1 exports were SoU LU dU 53.7 percent of imports were obtained from this source; in 1974, the percentages had fallen to 43.3 percent and 39.1 percent respectively, before rising again in 19i3 to 46.0 percent and 43.6 percent respectively. In the meantime, both developed market economies and developing countries had assumed more important positions, with the growth of the latter the most striking. While the proportion of exports to and imports from developed countries had risen from 29.6 percent to 31.0 percent and from 38.6 percent to 40.5 percent of the total respectively, trade with developing countries increased over four times in current price terms. A radical change in the level and relative importance of trade with the developing countries occurred with the oil price increase. In 19/4, Romania's trade with them rose by 56 percent (exports increasing 43 percent and imports by 76 percent). A further increase in total trade of 34 percent in 1975 (43 percent for exports and 22 percent for imports) meant that in that year total trade with developing countries was 19.5 percent of overall trade, more than double the 1970 proportion. - 91 - 7.26 The changes in geographical distribution of Romania's trade, how- ever, were less striking once the impact of differential price changes between convertible and non-convertible trade is accounted for. Approximate calcula- tions using world price indices suggest that, measured in constant prices, the socialist countries maintained their share of trade with Romania and that the major change in distribution was the declining share of trade with the devel- oped market economies and, correspondingly, the rapid growth of trade with the developing countries. From an examination of the foreign trade data, one can only conclude that, while the oil price increase caused the terms of trade to move heavily against Romania 1/ notwithstanding the benefits Romania derived from price increases for its chemical fertilizer, petroleum product and energy exports, Romania took full advantage of its economic and political relation- shins with develoning conntrips in general- and the oil-producing countries in particular, by exchanging large amounts of machinery and equipment, food and raw mqtPrial for fnnd nrnditit inn and indiinqtrial consumpr Cnods for the oil it required. 7.27 The commodity structure of trade also continued to change between 1971 and 1975, especially in exports where the changes implied sonme sirce in implementing Plan targets for improving the efficiency of exports (Annex '.A T- st- l,noructu.ral chngnnesm reletedmc rim rel.,r; 1hon ana part the changing needs and productive resources of the economy. In aggre- almost exclusively imports of capital goods and raw materials. The proportion UL LJLLaL gUUUb L1H LULdI LUIPULL U LL.LinCU LLULU tV..J eL%enLL LIn X7 IV LU d1.I in 1975, the decrease occurring in 1974 and 1975, reflecting the foreign exchange constraints In Ltose yeaLs andU t!e 1IL!eeU aUlity of Le fuInauLa economy to provide its own capital goods. The proportion of fuels, minerals and metals rose from 30.4 percent to 38.2 percent during the same period not only because of the increase in the price of crude oil (and increases in the volume of its import) but also because of increased requirements of metals and minerals. If imports of other raw materials are included, the proportion of all imports in the form of raw materials rose from 42.8 percent in 1970 to 52.0 percent in 1975 (Annex 4.5). 7.28 The changes in the structure of exports mirrored to a great extent the progress of industrialization in Romania and also the limitations of the process. Industrial goods (machinery and equipment, chemicals and industrial consumer goods) continued to increase their proportion or exports, increasing from 47.9 percent to 52.2 percent. While the growth of industrial consumer good exports was no more than the growth of exports as a whole, machinery and equipment and chemicals enjoyed the highest growth rates, their combined share of exports rising from 29.8 percent in 1970 to 36.1 percent in 1975 (but fall- ing short of the plan target of a 41 percent share in 1975). Correspondingly, the share of raw materials in exports declined; the decline in the share or exports of foodstuffs and agricultural raw materials reflected the growth of 1/ An analysis carried out by the Bank of Romania's trade with developing countries suggests that a bundle of exports capable of purchasing 100 lei worth of imports from developing countries in 1970 would obtain only 60 lei worth in 1975. - 92 - domestic processing industries and the relatively low growth rate in agricul- ture, while the slight decline in the share of fuels, metals and minerals masked the offsetting effects of price increases and volume decreases as domestic needs took a higher proportion of supply. 7.29 The structure of exports and imports also varied by trading area, demonstrating Romania's position in the world economy (Annexes 4.7 and 4.8). In its trade with developing countries, Romania sold machinery and equipment and other industrial Droducts in return for raw materials: in its trade with socialist countries, Romania appeared as a supplier of capital goods and consumer nroducts in rpturn fnr rAnitAl anade And rAw mtPriAn1- And in its trade with the developed market economies, Romania stood as a developing conntry, exporting rnw materials and simnl indetrial manufactures in rentrn for sophisticated capital equipment and raw materials. 2. Cooperation Agreements and Joint Ventures 7.30 In recent years Romania has become a strong advocate of international and tehia coeaion with all countries of the wold this - repesnt an important change from previous periods when cooperation focused mainly on ticipation since 1971 in GATT and since 1972 in the IMF and IBRD and by the SiguaLu 4e som evin Lnt agreenicue Loveting vatruum Lutinb UL LUUpLaLULL LUL the development of raw material and energy supplies, for access to advanced LClULL ~LU L L LLTUULCL.LULL U.L ALXU nIaILL: D CALJUIL L UL rJLUQ CLILL Lt-%LLLtLL06 I . J u UIIILdLL kUU U dL LULL WiL LLL LU LC 1 1 UULLL D ri O CLLU LULHCUiLLt Wdb ILL- tensified during the Fifth Plan, both within Romania and in developing and leveloped countries. However, it was abroad where most headway was maue in the form of partnerships in the construction of industrial units, provision of Romanian equipment and Know-now mostly in geological exploracion, provision of turnkey projects, the establishment of joint production and commercial ventures and, last but not least, in the field of technical assistance. 7.32 The erection of industrial plants abroad has been an important in- strument of export promotion for machinery and equipment and the composition of such projects gives some idea of the relative strengths of Romanian equip- ment manufactures. In the course of the last ten years Romania has taken part in the construction of over 50 industrial units, of which about 10 were in the chemical industry, seven in petroleum and mining, seven in wood processing and building materials, and six in the field of mechanical and electrical engineer- ing. From the available limited project list, it appears that Romanian efforts were concentrated on countries in the Middle East and Asia. In the field of chemicals and petroleum, plants were set up or are being set up for the produc- tion of sulphuric acid and fertilizers (Turkey, Egypt), sodium products (Iran, Egypt) and for oil refining (Syria, India, Pakistan). Other projects included wood processing plants (Iran, Sri Lanka, People's Republic of the Congo), cement works (Syria), cotton mills (Sudan, People's Republic of the Congo), power plants (Egypt, Philippines), and several production and assembly plants for transport equipment, notably tractors (Iran, Egypt, but also Canada, USA).- - 93 - Of more recent date is Romanian participation in geological exploration, cocnrtdmnlx in d- Middle East Af, .-A Ltn Americ ancvein exploration for phosphates, a wide range of ferrous and non-ferrous ores and il *A lage umbe of rojcts ~ ~ beng ostructed or under negotiation. 7.33 Romania's capital participation in joint ventures abroad rose sub- bLaLaL±y veLwcVL 171V anu X1J. LUuidLLiL . cULLeLtly I/ a shareholder in 28 production enterprises abroad 2/ and in a total of 35 commercial joint ventures. Joint ventures UUoad hve various purposes. ProbaDly a majority of them are geared towards increasing and broadening raw material supplies of Romanian industry; they include both production and shipping companies. Others have been established to promote Romanian exports and to gain a foot- hold in new markets. This type of joint company focuses on production and export of Romanian products and is found both in developing countries and in some industrial countries. Yet others have the more general objective of trade promotion, such as the joint banking companies set up in Egypt, U.K., France and the Federal Republic of Germany. 7.34 Of the 28 production-oriented joint ventures, 11 are in mining, seven in agro-industries, including cotton, four in the exploitation of tropical hardwood, two in light industry, and one each in machine building, construction materials, rubber and transportation. The remaining three companies are servicing and assembling enterprises. Within the total number, Romania also is participating in international consortia for the exploitation of iron ore in Gabon and Guinea and natural rubber in Liberia. Commercial joint ventures serve mainly marketing objectives. They usually provide Romania with access to distribution and servicing facilities for its exports and are important in establishing a more permanent presence in foreign mar- kets. Participation in commercial firms abroad makes it possible for Romanian products to be sold through already existing distribution networks (normally those of the partner firm), to keep adequate stocks of spare parts and to perform essential servicing jobs. Romania has established such commercial partnerships in Western Europe, North America and in some developing countries. 7.35 Finally, Romania has also increased its exports of technical and consultancy services, particularly in chemicals, power and petroleum refining through the agencies RomConsult and ROMENERGY. 7.36 International economic and technical cooperation within Romania has also developed quickly. especially within the last two years. No ioint ventures with CMEA members have yet been established, although at least one is under negotiation, but considerably more progress has been made in joint ventures with non-socialist countries. Following the formulation of a legal framework for the establishment of ioint comnanies in Romania (DlcPrpp no A7h 1/ As of October 1977. 2/ Romania is also participating in three ventures in cooperation with - 94 - of Nov. 2, 1972), Romania has succeeded in establishing to date eight produc- commenced production. The formation of two more such ventures has been announced ut ueuy nave not veen formally estaulisheu yet. ru" e-ueve- ue established to date operate, or will be operating, in the production and marketing of chemical fibers, reducing gears, EDP equipment, electronic- medical equipment, precision chains, feedstuff, and passenger cars, and in the operation of marine transportation. Ie latest two ventures will produce aircraft and petro-chemicals. The foreign capital participation, limited to a maximum of 49 percent, have come from italy, the Federal Republic or Germany, the USA, France, Austria, Japan and Libya. Operating in areas of advanced technological requirements, the companies are expected to contribute to increasing Romania's export potential by providing new production lines and upgrading existing ones. Moreover, training programs in these plants are to contribute to the dissemination of technical and organizational know-how. (Further details on capital plans associated with these ventures are given in para 7.45.) 7.37 Another form of foreign cooperation with Romanian firms within Romania, more important so far than joint ventures, takes place through licens- ing and technical assistance agreements. Some cases of major impact are gen- erally known such as the licensing and assistance agreements between Renault and the Dacia Automobile Works, between the Swedish ASEA and the Electro- puters Works (diesel-electric locomotives), but on the whole little informa- tion is available on this subject. 3. Invisibles 7.38 Romania recorded a deficit on invisible transactions as a whole throughout the fifth plan period, as a result of developments in both trade and capital accounts. An increasing surplus on tourism (for further details see Chapter Fifteen) was more than offset by net payments for transportation and telecommunications and other services, particularly interest on external debt. The expansion of Romania's trade was accompanied by a rapid expansion in payments to other countries for transportation services while the growth of receipts was constrained by the limited growth of Romania's merchant fleet (qPP Chantr Thirtppn for further details). Similarly. net navments for other services grew over the period as interest payments on foreign borrowings were mades 7.39 Romania ran asmall nnnh1 I, invi 1h1pa. with the non-convp ribflP currency area which was insufficient to offset the deficit with the convert- 41-le currency area. The s11-111s bowly dmi issh-A duilncy the pln z nerine from 200 million lei valuta in 1971 to 75 million in 1975. This reflected transition from surplus to deficit in transportation services. The deficit W tLh LIe CUnVeLLie cuttency area uUUU vetween U9;L and 10s15, from 34 million to 750 million lei valuta. Deficits in transportation and other services increased steaduty Ltouguout Le petioU, U tting tLnLe sutrpus on tourism. A major feature of the latter was the very slow growth of tourist payments to convertible currency countries. - 95 - 4. Capital Flows and External Debt 7.40 In overall terms, Romania was a net importer of capital during the fifth plan period, thereby financing a large part of its deficit on trade and services and increasing the size of its external debt. However, an overall assessment of capital flows and external debt is not very useful since Romania's position with convertible and non-convertible currency areas dif- fered greatly. With the convertible currency area, Romania was a capital importer, while with the non-convertible currency area it had a net capital outflow which, in fact, consisted of goods. 7.41 Between 1971-73, the inflow of medium and long term capital from the convertible currency area was sufficient to cover the deficit on current account, to repay credits made available to Romania between 1966 and 1970 and to permit a restructuring of foreign debt. It was government policy during this period to liquidate the outstanding short-term debt and an examination of the capital flow and external debt figures shows that the policv was success- fully carried out to the extent that less than 700 million lei valuta of short-term debt remained at the end of 1975. In 1974, medium and long term capital inflows increased greatly. The inflow was required to finance the 1rge current account deficit and to reduce further short-term debt. In 1975. the inflow declined to 4.1 billion lei valuta, as attempts were made to reduce imnnrtq nf anndq. The nit inflow a1sn derRased substantially since the size of annual capital repayments continued to increase. A further feature of the caital account between 1971 nnd 1975 was the increaRing imnortane of medium and long-term credits extended by Romania to finance its exports of machinery ..ad~ equimen. Hoever t-he grow~th of such crits as limitedI tor so-,ame extent by Romania's ability, in its trade with developing countries in particular, to excang A,.a- A4 -fn1- f-- na -.A- -4 1 .-iA ra- - m - I ala --- -7 I.'1 T.- ~1 ~ ~ . a- a 'I- I--A -riu. .-i4 -h, -ha LII OX years of .L e pIlanJJ periodlS, t.he1 trade -_ Ou rp convertible currency area was offset by a net capital outflow, which consti- tuted chiefl. y r epayments~ oL pr£icipal onl miumUL ant. lUJUL6-Crm loan (glve during previous plan periods to finance investment projects) and credits extendedU Liy Romaiai oni short,i mium an A long termL toJ fiane epors t developing country trading partners. Capital inflows were relatively small, -I In ma-l 1-ns frm h T ,. ,.., 1 T.-.a4,.,4 .d TT1 ai CUU-LjLS_Li16 LUULLJi.Ly _LUc.1 LIeraioa =vesmen Bank U -ii1 andIL'JIX U1 C UUaIItC repayments of export credits advanced by Romania in previous years. 7.43 The implications of the capital movements for Romania's external debt were that between 1972 and 197/5 total external debt almost doubled. The major part of the debt was held in convertible currencies. Repayments by Romania in the early years of the plan period reduced non-convertible currency debt and by the end of 1975, it was a small amount only, the largest part of which was short term. It would appear that Romania is now a creditor country insofar as the non-convertible currency areas is concerned. 7.44 Between 1972 and 1975, Romania's convertible currency debt also almost doubled. At the end of 1975 all but four percent was medium and long term debt, reflecting the successful attempts to reduce the level of short term debt. Almost all of the external debt (about 80 percent) was suppliers - 96 - and financial credits from major trading partners, particularly Germany. Italy. UK and France. Of this, a large portion, about 40 percent, was guaranteed sunoliers credits. Almost alone of Comecon countries, Romania has not greatly expanded borrowing from US and European banks. In 1975, total net borrowing from such sources totalled US$670 million. 1/ approximately US$80 million less than in 1974. The term structure of suppliers' credits, many of which are government gnarantped. is five to eight years at 7-8 nercpnt- while financinl credits have maturities of five to six years at 8-9 percent. As of the end of 1975, annrnwimatply half nf thp elht wn due for renament within thrp yarnv and all but 15 percent.within five years. In 1975, the debt service ratio was 17 percent, nYnpnrnmtp1 v f-ip Ann nQ it had been througihouit- the plan priod since trade receipts and debt repayments both grew rapidly. 7.45 In the past, the Romanian government has displayed a cautious appro.achn to eternLal dt,nL as densnnotrte y the debt -.C~ C.Vi.. a..tjAk attempts both to improve the structure of debt and to expand exports as uLy puoi.JJ. LL hnO alOU Ltc U uveto0tY oULvutLo UL1 vULUWLing aLLU to negotiate long term loans. The operations of the Franco-Romanian and Anglo-Rumadil Banks wpe expLaaded UULing heLLLL h pLL pLLUU all Lin edly 1977, the creation of a German-Romanian Bank was announced. As discussed in paragLpil . JU, lUgLrm. equity Cdpital Ltab UUR:L1 bC=UL Ut in Lb XLLI UL joint ventures; to date, the six ventures which have progressed beyond the s a e o si n n ha e -I -_ _ - - - - I - -X1ir - 61!^nI - - stage of signig have lea Lo an inflow of only u9u-15 milion. Ine ven- tures announced during 1977 will have a far more substantial capital inflow: uLT-CiT, the venture with Citroen for the produccion or passenger cars, is to involve a total transfer of some US$250 million; even larger flows are expected as a result of an agreement with Kuwait, still to De signed, for the construction of a petro-chemical complex costing US$1.25 million. Further- more, it attempted to secure capital from three new sources; the multilateral agencies (IMF and IBRD), bilateral sources including OPEC countries and the Eurocurrency market. Romania joined the IMF and IBRD in 1972. By October 1977, Romania's gross borrowings from the Fund stood at US$363.5 million (not including the gold tranche) with a further US$45.7 million of the latest stand-by arrangement undrawn. Romania became an active borrower from the Bank in 1974 and between then and 1977 secured loans totalling $697 million. To date, IBRD remains the most important source of long term funds available to Romania and only limited progress has been made in tapping other sources. In 1975, a US$100 million loan was negotiated from Kuwait, as part of a general cooperation agreement; the loan carries a 9.4 percent interest rate with a maturity of eight and grace period of three years. In the same year, the US Eximbank, having suspended lending in 1974 following loans of $40 million, approved a $22 million loan to finance machinery imports. The eight year loan carries an interest rate of 8-1/4 percent. Romania has also borrowed on the Eurocurrency market. A small initial borrowing of some US$6 million was made in 1974 to finance the first joint venture, Resita-Renk. In 1976, 1/ The sources of this data were East-West Markets, April 5, 1976 and East-West No. 150, March 25, 1976. East West Markets, October 4, 1976 sugested that total indebtedness to western banks at the end of 1975 was approximately $1 billion. - 97 - arraneements were made to borrow $50 million but the loan was cancelled be- cause the terms were not acceptable to the Government. Subsequently in early 1977. a $50 million loan was successfully floated, at a rate of 1.25 percent above LIBOR and an additional $75 million loan was negotiated in April. 7.46 In conclusion, it can be said that Romania has been largely success- ful in financino its current orrmint deiit with thp cnnvertible currencv area through capital inflows and that it has succeeded in improving the s tructure o-f outsatanng debaAat. Ito haAen lae sCrcefull, ho%weve,D in diversifying the sources of its debt, especially at the long term end of the market -Where TBRDl remains .-he main 1-ender. A S a- resu,4 most4 o,f ROni a S outstanding debt remains in the form of medium term suppliers and financial I.'4 I R d LEHULL UL LUC~ LLAUC RUIU LCaJJLaI U1UVCcULD UCDLLivuU GUUVC, Romania ran a deficit on its overall balance of payments in three of the five plan years but in no year was the deficit sigunican in relation to the SiZe of transactions. It is more instructive, however, to consider separately the balance of payments result for convertie and non-conVertie currency areas. The convertible balance was in deficit for three of the five years, 1971, 1973 and 1975. In 17/1, 1972 and 1974 capital inflows more or less offset the deficit in current account, while the large deficits of 1973 in particular and 197/ were offset by monetary movements, chierly by borrowings from toe ve. As a result, Romania 's convertible currency reserves remained fairly constant over the period, although measured in terms of the import bill they declined markedly. While this decline is not as significant as in market economies in view of the Romanian state's monopoly over trade, it does indicate the scar- city of convertible foreign exchange. 7.48 The non-convertible currency balance was in deficit for four of the five years, capital outflows exceeding the current account deficit in all but 1973. Monetary movement adjustments were made through payment agreements with each trading partner. - 98 - CHAPTER EIGHT HUMAN RESOURCES - POPULATION. MANPOWER PLANNING. EDUCATION AND TRAINING A. Population and Manpower Planning 1. Population 8.01 According to the January 1977 census, Romania's population totalled 916 millinn- Thp nonitinn nramid is w11 atriirtiird with ahout 25 nprant of the people 14 years or younger and about 10 percent 64 years or older. (The 1975 nonplation pyrnmid i egiven in Chart 1 ) Tife expectancy i 70 years. 8.02 For over a decade, government policy has bee strongly pro-natali-t and directed to improve the age structure of the population at large as well as meet the expected needs of the economy ;in the, late_ 1980's, when the, demand for manpower in a rapidly expanding industrial sector can no longer be met by tr ansfersL from the I agricLultur al scor'.~J as "e1 LI past. mid-1950's, the birth and death rates had showed a moderate decline; popula- -----------------.------..nZ-1 tion gLUwLIn LULI Wab PPrXxLLUaLtLy L. pULUtnt a yea L. DLLLI LLeb, afLeL peaking at 27 per thousand in 1949, also began to decline gradually. A uecline in virth rates continueu for the next ten years encouraged by govern- ment legislation that made abortion readily available. By 1966, it had reacned the low point of 14.3 per thousand witn population growth down to 0.7 percent. It was at this point that the Government sharply reversed its demo- grapnic policy. 8.04 The new pro-natalist program was wide-ranging. Abortions were severely restricted; child payments were increased and extra allowances were given to families with more than five children. There were also special tax concessions to parents and a liberal maternity leave policy during preg- nancy and for children raising while retaining 8U percent of wages and full seniority credit. 8.05 The policy had an immediate impact. In one year (1966-67), the birth rate nearly doubled (from 14.3 to 27.4 per thousand); it eventually stabilized at 20 per thousand. The growth of the population rose to slightly over one percent a year, the approximate rate prevailing at the present time. 8.06 A new population census, the first since 1966, was taken in January 1977. Significant new detailed demographic data is expected to be available in 1979. In the meantime, it is useful to look at the UN population estimate issued in May 1975. Using their high variant population projection (with an annual population growth of 1.1 percent), total population is estimated at 28 million in the year 2000. (It is worth noting that even this high variant projection of 28 million is two million under present Romanian estimates for that year.) The table below (Table 8.1) provides comparisons in urban-rural composition as well as by sex and age for the years 1975 and 2000. - 99 - Table 8.1: POPULATION: 1975 and 2000 1975 2000 Actual U.N. Estimate Total (million) 21.25 28.0 Urban (%) 43 63 Rural (%) 57 37 Sex (%) Male 49 50 Female 51 50 Age (%) 0-14 25 27.6 15-64 65 60.8 65 and over 10 11.5 Source: Anuarul Statistic and Selected World Demographic Population Division, Department of Economic and Social Afarso the, Unte.,d-~. Natio4.ns Sertait May 1975. U V1LaLe mos suUtantive trenuC proUjecteLLt..tU.t_LL A. urbanization of the population (over half of it will be urban by 1982), and Lte Licreabsing -rpVuptiO UL LUCe pUpUaLUI 1-t yC L IU yUULr2fL anU u. aLu over. The dependency ratio is expected to increase to about 644 per thousand and life expectancy should reach 72 years. 2. Urbanization 1/ 8.08 The changing pattern of urbanization in the post-15u period is best illustrated by a comparison with the population movement in earlier years. During the period 1930-408, total urban population increased y 22 percent, at an annual growth rate roughly equal to the national rate of population growth (Annex 1.4). Of this increase or 6o2,u0, 60 percent was concentrated in the capital city, Bucharest. During the later period of more rapid urbanization, 1948-75, when urban population increased by 147 percent, Bucharest's popula- tion increase was substantial but its share of the total urban growth declined dramatically to 12 percent. No other city approached its scale however; in 1975, Bucharest was 7.1 times greater than the next largest city, Cluj-Napoca. 8.09 In the late 1940s, the Government instituted a new policy to curb migration into the bigger cities (while these later were referred to as "closed cities" they were not really closed but entry into them was restricted). The 1/ In Romania urban, semi-urban and rural areas are defined by law and not by a common statistical denominator. This makes comparisons of migrant flows with those of other countries very difficult. - 100 - policy is considered to have been successful. It continues to the present day but in more recent years, it has become more closely linked to the dis- persion of employment opportunities outside the metropolitan areas. One measure of its success is the higher proportion of rural migrants in small towns in 1973 than 25 years earlier. While the proportion of population living in urban areas increased from 23 to 43 percent, the number of dis- tricts that were more than 25 percent urbanized nearly tripled. The largest segment of the population, 54 percent, lived in judets 25 to 50 percent urban- ized (Annex 1.7). 8.10 Mieration. rather than differences in birth rates. accounts for the character and extent of urbanization within the country. Actually, it was not until 1974 thqat tht- urhan hirth rate cancht nn with and nqsed thp riiral nnp. A study of the seven largest urban areas (Annex 1.8) provides a detailed nnnl1vQi of the nonulation inflit durinc t-hp entire nPriod- 19W0-71- Cnp nf the more interesting findings is that in 1966, almost 60 percent of the popu- latio,n -in thessee seven rnota-Q wnQ~ hn-r" alcahi-va DariIOA oxyido~nna of thea magnitude and direction of migratory flows for the period 1968-73 may be seen in Figure 8.1 below and Annex 1.9* urban stream was the dominant one. About two-thirds of the migrants were from rural arasanA of these, 60 percent headedA for urban cetr. it sio 1A1 noted, however, that the urbanization of the country has lagged behind the growth in induutrial employmunt CUnsquently, wtlkl Aco Luan ULJ PEL of its labor force is presently employed in agriculture, more than half of the people (abut 57 p~Leent coUinue LU live Lin rurl± areats. 0.12 The pattern of age distribution among migrants remained much the same during this period. The rates of migration from rural areas to urban centers were highest among those 20-24 years old (Annex 1.10). Roughly 60 percent of those arriving in urban areas were between 15 and 29 years of age. Urban net immigration, the balance between departures and arrivals, rose steadily from 9.9 per thousand urban residents in 1968 to 15.3 per thousand in 1973. Correspondingly, rural areas have had a greater net population loss - from 6.3 per thousand to 9.8 per thousand. Variance in the rate of arrivals from other urban areas did not influence the total urban migration balance and the rate of immigration from suburban areas has remained constant, which suggests that virtually all of the increase in the urban migratory balance has been due to an increase in the rate of rural-urban migration. 8.13 The migratory pattern is unlike that of many other countries in which older people leave the cities for rural areas. On the contrary, the net rate of migration into the urban areas has increased for those between 55 and 57 years of age and again for those 60 years and older. It is in the middle years - from 25-54 - that there is a steady decline in urban influx. This may possibly be attributed to the impact of the Government's regional industrialization policy. 8.14 Table 8.2 shows the net immigration by sex within the five districts with the largest gain in population. I flI Figure 8.1 INTERNAL MIGRATION FLOWS ARRIVALS 1968 -1973 In Urban In Subur- In Rural Areas ban Areas Areas 58.5% 5.4% 36.1% ~~t DEPARTURES From Urban Areas 30.1% From Suburban Areas 5.1% V From Rural Areas 64.8% 100 = 1,885,597 World Bank-17024 I An 1 laDie O0.L. IMIGRA11N DY SEA 1N UDIlTRICiS WITH HIGHEST PurUPILLTIO G-LN (1968-73) (Per 1000 Residents) Sex Arad Brasov Bucharest Constanta Timis Male 2.6 2.6 11.5 3.2 3.2 Female 2.7 3.4 15.1 4.4 4.5 Source: Demographic Yaroak of Rmania, 1974. 8.15 Women, apparently, have been mu.ch more on the move than men, espe- cially to the capital city, Bucharest. A partial explanation for this is found enrollments in 1950 to 50 percent in 1973). Finding themselves better equipped cuuat.onally, women may have soug- more persitenutly emplvym.u... .u Last4--. ~~~UX UL Uia y~ WUL ii~y u v~~)ULL L LUA. A .30. L by U ) . UILLL ILLL t-.LIC AC bL- growing urban centers. Undoubtedly, many non-working women have also followed LUd1 ii~U~ U L L ~ ILU lu~ WLIlO iIU I, dLU aiU LLL LU LLI LICW UL UCIL J UUb. 1A tLe LaborL r 0C ka1 Growth and Structure oL Employment o~~ ~ n I~ - !-1 ! 10C -t - - . 0.10 Total employment increased rrom 0.4 miiton in 15u to 1U.2 mittion in 1975 (Annex 1.11), at an average annual rate of 0.8 percent. This is lower than the population growth rate, which will be explained below. As a result of the Government's rapid growth and full employment strategies, employment in the state sector has expanded rapildy. In state salaried activities (agricul- tural and non-agricultural) employment tripled between 1950-75 from 2.1 to 6.3 million. 8.17 Table 8.3 shows the growth of the labor force and the dynamic changes that have taken place in its structure, paralleling the transforma- tion of the economy from a predominantly agrarian to an industrialized one. Table 8.3: EMPLOYMENT: GROWTH AND STRUCTURE 1950-1975 Growth Index 1950=100 Sectors 1950 1960 1970 1975 1975 Total Employment (000 ) 8377.2 9537.7 9875.0 10,150.8 121 percent of which 100 100 100 100 Agricultural /a 74 66 49 38 62 Industrial /b 19 26 39 49 316 Services /c 7 8 12 13 227 /a includes agriculture and forestry. /b Includes industry, building, transport, telecommunications, trade. /c Includes municipal services, education, art and culture, public nealth social assistance, physical culture, science and scientific research administrations. Source: Anuarul Statistic. - 103 - 8.18 In the course of the past 25 years, industry has generated about two million jobs and become the most important source of employment in Romania. Growing at an average annual rate of 5.1 percent during 1951-75. industrial employment rose from 0.8 million in 1950 to 2.8 million in 1975. The emerging job opportunities were largely filled by recruiting agricultural and non-agricultural labor, predominantly people under 25 years of age with no prior job experience in industry. While since the 1948 education reform. the education system has been increasingly oriented toward meeting the training requirements of the arowine economy, narticularly In 1950-60 and In some industrial branches, the demand for trained manpower was not satisfied by the available sunn1v and PypnAiva nn-the-Inh training and 4nnlant short training courses had to be organized to compensate for the excess demand of skilled lhnr- 8.19 Gnornment policIes have- deIbraelsugt- to mobilize female labor for industrial work, particularly during the past decade. As a result of this, fe-mle emlymn in A - Indstr -n.-A From 375, 200 in 1961 to 534,100 in 1967; and its expansion during the past decade brought it to over ~ io7*Jl. .1nL out. lJu L. Jt pecenULt LII LULde t tlIusbLtia labor force were women. Industry now employs more women than does any other branch Of LCLCtat setoroL t LeI economy. ..v.lH in tensity or employment generation in industry had resulted in a rapidly growing demand for physical and social infrastructure and for addi- tional social services. Inis demand has often Deen in excess or supply capa- bilities, involving a considerable strain on existing facilities. Despite the large program of housing in urban areas the demands for housing are still unsatisfied, especially in Bucharest. Elsewhere, too, there have been problems in housing and other social infrastructure but the provision of dwellings and other facilities by the industrial firms themselves has helped to alleviate the situation. In addition, transport facilities have been in increasing demand throughout the country as many industrial laborers have found it necessary to commute, sometimes over fairly long distances. Another conse- quence of the rapid expansion of industrial employment has been the need for extensive training and retraining facilities, both within industrial plants and outside, because of the background and age composition of the new labor force (para 8.18). 8.21 With a substantial portion of the labor force still employed in agriculture where the potential for productivity increases from advanced tech- nology is quite high, Romania's unabated industrialization drive is not yet constrained by any anticipated serious labor shortages. However, some shortages of specific labor exist in the growth industries. The Government has empha- sized the potential contribution of the economy's "labor reserves" to the coun- try's future industrial development. Official reference is made primarily to the "reserves" of the rural sector and the Government has sought either to at- tract them to urban centers or to locate industrial production activities in rural areas, a policy that would probably reduce the social costs of migration. While not yet a problem, the changing age structure of the rural labor force, due to the migration of the younger element, may soon require a more careful selectivity about the type of industry that should be located in these rural - 104 - areas. Already special attention is being given to the "reserve" of rural women capable of undertaking industrial jobs and this consideration has entered into project selection criteria. In this context, the Ministry of Labor has developed a nomenclature of jobs in handicrafts and other spe- cialities more suitable for women, which established the guidelines for the participation of rural women in industrial activities. 8.22 Analysis of labor participation rates and employment practices in the various sectors, which are discussed in more detail later in the report, clearly suggest two additional sources of labor reserves in the economy: urban women and labor reserves in industrial enterprises. (b) Labor Mobility R.23 Tn Romania, everyne nf workina an who desires n inh is entitled to one by law and the State ensures the placement of all individuals. There- fore, non unemployment does not arist'. However, at any given time there are undoubtedly a certain number of labor force members who are not employed. These , nmnia, ar nro nt classified as uAnemployedn butc as.. " 4-i th prnocess o changing work". 1/ (In many respects this parallels the frictional or search connt o-f nemloyenirn,t fond in labonr mrkets aonf indus.,tria lie ec,.Aonomies.) There is no way to estimate the magnitude of this phenomenon or the charac- unemployment, all of which are relevant to the assessment of resource costs. 't~LALULWd. u uiI L UL.~ .L UL %LL .LJ bor forc are freq4uent, anIU rae of1 turnover and inter-enterprise transfers are quite high. Because of the elphdis U Lh ULiatLLUon UL av1 ailable manp U sWeL r add U. 3J} ,Uh shifts are subject to regulation. Withholding one's productive labor from tne economy is considerea anti-sociaL (except, for example, wuere medically justified or in the case of women when child-caring responsibilities are greatest) and is basically not tolerated. At the extreme, they are directed by the government to work in their area of qualification. 8.24 While there are few formal limitations to labor mobility, such mobility is rather restricted. If a worker is not to lose accumulated seniority rights, his transfer to a new job must be agreed upon by his current employer. Where such a job change leads to a promotion or better utilization of skills, the current employer cannot block it in principle. Seeking employ- ment in enterprises in "closed cities" (para 8.09) is difficult but achievable through "temporary" residence obtained with the assistance of these enterprises. In some sectors, possibilities exist to obtain seasonal labor services. For 1/ The "occupied population" working in organizations is counted annually but does not include job-seekers. The "active population", which is larger than the "occupied" population because it includes job seekers and military trainees, is estimated by the census, but there is no dis- tinction between the employed and job-seekers. The latter are classified as employed in the occupation to which they will eventually be allocated; so. in effect. this component of unemployment is statistically defined away. -105- example, an agricultural cooperative worker can enter into a contract with a construction enterprise for a specified number of days' work that also allows him to meet his full working obligations to the cooperative. 8.25 Qualified workers (graduates of vocational and industrial schools) are free to apply for transfer to another enterprise, after fulfilling their contractual obligations to their first employer (generally three years in duration). Non-skilled workers can ask to transfer at any time. Evidence on turnover rates indicates that such shifts are not uncommon among lower-paid and young workers who are seeking higher pay, or among professionals seeking greater job satisfaction. Fulfilling the "employment guarantee" is made still more difficult by the fact that in Romania the aim is not just to provide any job to a seeker but one within the worker's field of specialization. (c) Participation Rates 8.26 Questions regarding the nature of imbalances in the supply and demand for labor are also raised by some labor force trends, in particular those of participation rates. Between 1956 and 1972 the ratio of the total labor force to the population of working age declined steadily (Table 8.4). Table 8.4: PARTICIPATION RATES 1955-75 (Ratio of occupied to working age population (15-59 years) 1955 85.0 1966 831 1956 86.8 1967 82.5 1957 85-0 196A i R 1958 84.8 1969 81.2 1959 Ad 5 1970 A.1 1960 84.8 1971 79.8 1961 R 1079 70 1962 84.3 1973 79.1 1A R A 107/A 7Q 0 1964 83.4 1975 79.0 8.27 In a period when total working age population rose 19 percent, the - F - L L L_ I M~L.L LI ±J. I Fp_L LIL. IIJ-0L J.0 LIVL t-ApidiIItU CLIULIt- UY the expansion of the student population and the increase in the average dura- vU UI II IL16 .L[Lu bLUUCL I U YVCL b ELLU UIUCL dL LHIIcLUUeU II Lte acLIVe population. The authorities have advanced two additional explanations: an Z ~ ~ ~ ----- --------------. - _ __-C __-- - - inUceauIg nuIUeE Ul peIIIUeL LI Lie age group 55-60 years ana tne win- drawal of women for a number of years (up to seven in order to raise children). 8.28 The fall in participation rates may also reflect the lower partic- ipation races in urban compared with rural areas during a period or relatively rapid urbanization. In this connection it is interesting to note that the participation rate for males is virtually the same in rural and urban areas whereas that for females is nearly 50 percent higher in rural areas. This - 106 - probably reflects three factors. First, family incomes are higher in urban a r e as, t h us en c our-aa,gi ng W oma,toSub -aisu r a f nr w o rkr. Second , there may be relatively fewer unskilled jobs suitable for women in urban as com- pnae withl rural areas. Thi; rd, women h na i anne pas rceityAedac les edcmftinn than their male counterparts. (In 1966, the proportion of the male population population.) Women, who in the past had received less education, would be at '3 utsauvant age w-nu --n-----u- Cut -Iv- 4n _1va a--ao ---u-u u c -o 1eg -_ dU. L~U V LL Wkti_i %, L LLLr, LU L JU UM L UL Uatl aa LLLUUrLIlLi ~ L £ lation which stipulates complete income equality between sexes. 8.29 The imbalances which have accompanied urbanization - a scarcity of unskilled urban jobs and current or projected scarCity of skilled urban labor - are not easily susceptible to short-run solutions. As previously noted, the government's pro-natalist policy is designed to meet the needs of a rapidly growing industrial sector that is expected to be skill and capital intensive by the late 1980s. The rapid increase in educational opportunities for women on the post-primary level should also be beneficial. (d) Skill and Educational Attainments 8.30 The substantial national educational efforts of the past twenty-five years are documented in Annex 2.1. From 1950-75 when total population in- creased by about 20 percent, the size of the total student population more than doubled. In 1956, only 13.2 percent of the total male population and 9.6 percent of the female population had attended school for more than four years; by 1966, these proportions had risen to 22.8 percent and 16.6 percent respectively (Annex 2.2). The more substantial increases were those in the rural population, particularly among women. 8.31 The limited published data on the educational/occupational matrix of the labor force show dynamic improvements in its educational/skill com- position and particularly in the increases of technical and administrative personnel. - 107 - Table 8.5: EDUCATION/SKILL COMPOSITION OF LABOR FORCE, 1961-1968 ('000) T.e ..une SeptembeL 1961 1964 1968 Total Employment 3,377.4 3,924.8 4,550.1 (a) Workers 2,456.3 2,888.7 3,403.0 - qualifi1ed 1,939.6 2,225.1 2,777.0 - not qualified 516.7 663.6 626.0 (b) Technical/Administrative 670.2 803.6 967.1 - with higher education 235.5 284.6 337.6 - wth secondary education 434.7 519.0 585.8 (c) Unclassified positions requiring primary or less than primary education 250.9 232.5 180.0 Source: Revista de Statistica, Bucharest, November 21, 1970. 4. The Role and Functions of Trade Unions 8.32 Most of Romania's workers are organized into trade unions, which are established in all enterprises, institutions and communes. These unions have a multifaceted role in the political, economic and social spheres. On one hand, they are the main vehicles for the Party to communicate with the workers, organize mass education campaigns, provide feedback on draft laws, and also to act in an indirect role monitoring worker performance and behavior. On the other hand, the unions exercise the rights and duties of workers as both producers and owners of the means of production. In this role, they may propose legislation affecting the working people, or ensure equity in the distribution of benefits and pay system as guaranteed by law. Because of the multi-functions and mass representations of the trade unions. they have de jure participation in all executive bodies, for example, in the Council of Ministers, People's Councils, the enterprises' or institutions' management committees. The consistency of the unions' activities with national socio- Dolitical and economic obiectives is achieved through the Socialist Unity Front, which is a standing union political body under Party leadership, and also thronih the narticination of the chairmen of the unions in the executive bodies mentioned above. The horizontal and vertical coordination of these activitipq is nrauided hv the General Union of the Trade Unions of Romania under which the individual unions are grouped in 13 branches of economic ar c t i tv - 108- 5. Manpower Planning 8.33 In Romania, in contrast to other countries where it is practiced, manpower planning is not concerned solely with forecasting the demand of the labor market for new entrants from the educational system. Rather, the allocation of the labor force among sectors, occupations and geographical areas, as well as its training, are subject to comprehensive planning. Though subordinated to the planning of capital investment, it is subject to the legal requirements both of full employment of the labor force and of a minimum ten years of education. While responsibility for all decisions rests wholly with the central authorities, enterprises and other institutions participate in the formulation and implementation of the plan, particularly in determining specific labor requirements and equilibrating supply and demand. Manpower planning directs the options available to job-seekers but individuals still have a say in selecting a field of study, career. place of residence and employer. 8.34 The educational system (and its planning) is a means through which mannower Dlanning seeks to attain its objectives. To the extent feasible, the policy aims to bring about the redistribution of the labor force to meet the needs of a rapidly growing economy. Occunational rigidity, for examnle father to son skills is much reduced because of the changing skill requirements and arpnt-or Ptiirtinnn1 )nnnrtiinit-iP. Pmnhncic ic on the oripnfnfinn nf new entrants towards workpaths different from their parents rather than the shift- ing of workersc ftrom ;ciite n which theyj are alradytll esabised The crux of the problem is to orient those who are younger and with minimum or no experience to0 work in the newer and more sophisticated industries. tion with the Ministries of Education, Labor and Finance. The Ministry of LUUaCL LVLL duL UL11Lt L LtlLtLt_ZL1U a6tLL C Lb 1te ob viLL. .LU L UL -UutaL LULL PIClIlIJL6 which ensures that the physical school capacity and teaching staff are adequate to provide the necessary training at each Level of edUcCLUL, LhiS is based primarily upon national and regional demographic projections and estimated manpower requirements. 8.36 The Ministry of Labor planning is concerned with achieving ruture balances between the demand and supply of labor within skill categories. Within this category, demand projections are based on anticipated growth or production as well as on changes within its structure. Other factors are the degree of technological development, the labor intensity of work, the utilization rate of capital and the optimality of the base year employment level. 8.37 Supply projections relate to entrants from the educational system and to losses from deaths and migration or from occupational change. Also considered are changes in participation rates, hours and intensity of work. As a general rule, adjustments in the system are made on the supply side through control of entry and orientation of enrollments in the educational and training system. 8.38 The Romanian projections of labor demand and supply are more com- preeunsive anu more frequently revised than those found in the manpower plans of other developing countries. They cover all categories of labor and are updated annually. Projections are not only made for the four broad occupa- tional categories (workers, foremen and technicians and professionals), corres- ponding roughly to educational attainments (respectively, basic education of 10 years, lycee and higher education), but also for over 100 occupational specializations within these categories. (a) Demand Projections 8.39 In Romania, because the increase in output and changes in labor productivity over the planning period are given parameters, demand projections are restricted to estimates of output elasticity for labor demand. In effect, it is the manpower required to fulfill a production target that is estimated. This does not mean that output targets are determined without regard to condi- tions of labor supply. If labor capacity is a binding temporary constraint on the achievement of the output target in some enterprises, their plan will be adapted and measures will be taken to train necessary labor. If labor is in surplus, adjustments are made in either the output target, the technological configuration of production or a combination of the two or the surnlus lhbor will be transferred to other enterprises in need of it. 8.40 In order to account for the likelihood of technological change, the estimates of the output elasticity of the demand for labor arp haspd on mirrn- studies of the relationship of output to employment in both foreign and domes- tic enterprises of varvine sizes and technological sophiRrnrion From tha perspective of educational planning, the influence of technical change on the occupational comnosition of dpmand is of equal if not nf gater, importance than its influence on the aggregate output elasticity of demand. Disaggrega- tion. therpforp- of thp projected demand for labor is essential There are two procedures for estimating the output elasticity of demand within speciali- regarding the organization of production within sectors. 8.41 Where information is relatively scarce, the "coefficients method" e mnl oyed. First the number of workers required to fulfill the --ge output is estimated. Then estimates are made of the requirements for the other occupantinal cnaegrie no n -hen ba..siS ULC -1..,.r LCILLVb aUtV......2% workers and other personnel. These are disaggregated to the level of the subSector and to enterprise level k......................- 1 Xu UCy k aUaC UL VCL LCid4R L L1IUL IeVeL L1 LeC[I nology and organization of work and hence in the shape of the occupational L.- -- . o UL So V..%.UjZLJ-Ua.LL bLLucture u ueman is Lienl mIo-iaeU LO allow for expected changes during the following five to ten years due to IL L progress V.* Wiere t1nere is MUre UeLailea Knowleage or tne equipment to De aaoptea and the future occupational structure of production, the "job list method" is used. This involves determining the number and categories or worK stations manned by specified numbers of workers at various skill levels that are re- quired to accomplish the enterprise production target, on the basis of studies - 110 - estimating the physical output of each station. The approach requires estab- lishment of "work norms" for each category of workers and tasks. These are determined by time studies of production activities but more frequently by less rigorous methods which may explain some of the overmanning that exists in the enterprises. 8.43 Errors in demand projections can arise either from difficulties in estimating accurately the impact of technical change or from different timing of the education and production plans. The latter is likely to be of greater significance, since the detailed production plans are drawn up only for five year periods and there are no detailed estimates of output on which to base longer run estimates of labor demand and hence the education plan. For Pxamnle. to plan in 1970 the number of first-Vear entrants into a five year training program for each of the years 1971-75, requires production targets for q76-90- Rut in 1970. the nroduction targets for 1976-80 are only indica- tive. The long gestation periods associated with investments in many types of formal traininr and the inabilitv of forecastine techniques to eliminate uncertainty regarding labor requirements five to ten years ahead, suggest that short-rum mh;n1,nc nf ciinnlu and demand are inpvitable- This- in turn. im- plies that when forecasting demand any disequilibrium at the base year must be - ,Aeor i-o accouint. Q .. A Ai~ 1 A pr c d u e f oD4 ii c r , rprj e t in g th e d ep m n d f or notable~~~~~_ fetr_f_h_ --__ - labor is the apparent disregard of changes over the planning period in the level and4 structure of wages. This ;a not- beausei no rhnapc~ nv nnfiinfp~d- on the contrary, wages are expected to continue their steady rise. Not to take account of wan assessingS labo -eu ......quaen to assuming that the wage elasticity of labor demand is zero. However, since production techniques, a zero wage elasticity of the demand for labor would be justified only where, both befULe and after, Lhe elastici of P tution between capital and labor is zero. There is a growing body of evidence that this elasticity of substitution is positive. Thus, it appeas that managers where they have competence to decide, apply economic rules of thumb in determining capital/labor ratios and the IUpLLcLL SadOw wage varies posi- tively with expectations regarding the actual level of wages. While informa- tion on wage trends for the five years following the year in which the man- power plan is formulated is available, there is no firm information for the subsequent five years, the period directly relevant to the demand projecLiOns intended to guide the planning of education. The lack of explicit guidelines regarding procedures to account tor wage changes may result in misestimates on the part of managers of the economic trade-offs involved in the substitution between capital and labor. This situation may contribute to errors in the projections of demand. (b) Supply Projections 8.45 Base year supply for a specialized category of labor is simply the number of employed workers with the requisite training. For subsequent years, estimating gross supply is equivalent to determining (a) the output from the - ill - relevant program within the school system, which is estimated quite systematic- ally and accounts fully for the internal efficiency of the education system (e.g. drop-outs, repeaters, etc.); and (b) the training of active workers in short-term courses, undertaken to meet constraints in the rate of expansion of the school system and unpredicted scarcities in some specializations. Adjustments for natural losses take account of variance of losses within specializations among industries and sexes. For the economy as a whole, the annual reduction of labor force due to retirement or disability is approxi- mately 2.5 percent for men and 2.55 percent for women; the loss due to death is approximately 0.49 percent for men and 0.23 percent for women. (c) Equilibrating Supply and Demand 8.46 The projections of demand for specialized workers by occupation leads to a specification of the future educational composition of the labor force. From the perspective of supply, the educational composition of the labor force is projected initially on the assumption that the distribution of students among specializations will remain constant. The burden of synchronizing the two pictures so as to eauilibrate the markets for specific Occupations five to ten years ahead is borne almost entirely by the institutions on the supply side: the strunture of Pdncational onnortunnitie adinits to the desired fiture occupational structure. Students in some specialized programs will be in- rpnqpd nQ nranortion of the nttal And decreased in other, Howevor since altering the size of an entering class will not affect the supply of labor unITil4 tWo to fiveYarsM lter, theren!3 a few qAd;Ius tmants of thea formal afduc a- tional system that can rectify differences between the supply and demand in the short term. The approach of the authorities in correcting Such imbalan__nces- is quite systematic. 8.47 First, since scarcity or surplus of a particular specialization at L tI CEl L L i leve LOCs no. CVC IC IJ LLLIjJ..y LIOL L Mr6rL 6OLC IE ULL %kUjJ0L .LLOL a U ULC5J Y is out of balance, the first response of an enterprise with an unexpected labor UtiliL1LU UCLCLLLIC 11 LICre 1 an CiL LL Lite W LLI DUL IuAt t ype of labor. There are two institutions that serve to reallocate labor. The and if equilibrium cannot be achieved within a central, it will contact other LLdi ICdUIUdL LCLM L COLULig iUUL dV LUivA Ly aUu Au . WCMU±LCLICLLH LLULL new enterprise begins operations, the central will form a nucleus of exper- ienceu personnel from existing enterprises, deiUguated vy Lce enteprises, to guide and train the workers at the beginning of the new operations. The majority of these workers is recruited frUm amoUg 5noLU graduates who, o LLow- ing their studies, have worked for 2-3 years in enterprises in the same line of production as the new one. The additional new workers are recruited through the mass media or word of mouth. Second, if the imbalance cannot be eliminated by inter-enterprise mobility, the labor office, a municipal specialized organization for registering jobs and job seekers, is contacted for placement of the job seekers in the municipality. Tne labor office does not duplicate the role of the central because employed workers who desire a change of employer, whether or not they are in surplus, will register there and, more important from the perspective of trying to eliminate imbalances, so will workers re-entering the labor torce atter a period or absence. - 112 - 8.48 If there remains a net scarcity within a specialization, the enter- prises' remedial policies to minimize output losses due to the short-term labor constraints include (a) restructuring the workers' work program in that specialty, with the aim of concentrating workers' time on those tasks for which their training is most essential; and (b) providing short-term training courses. Rarely, if ever, do enterprises resort to increasing the working hours as a means of meeting labor scarcities. With regard to the short-term courses, as they are intended to meet immediate staff needs, they are included and budgeted for in the annual plan, not in the five year plan. 8.49 It is conceivable that within a given occupation there could be scar- city at the enterprise level, even though the aggregate output of the school system matches employers' requirements for additional labor and no enterprises have surpluses. Such a situation could arise if workers trained in a specialty enter iobs in another field. In Romania. this is unlikely to happen because of the direct regulation of the distribution of school-leavers. The procedures for assigning students to vacant positions are based on the premise that all school-leavers are expected to work within the broad occupational category for which they have been trained. The adantability of graduates to different tech- nologies has been enhanced by reducing the number of technical specialties at the lvcee level from over 150 to less than 100 and through the organization of in-plant and on-the-job training. 8.50 The distribution plan for graduates of institutions of higher edu- rntinn iq the recnnnQihi1itu nf hfth the chnn1Annd nrcynni7Arinnq in whirlh they will be employed. Students are given the opportunity to express pre- fe'rencesa for particula r vacacie aqnd-PQne thosei Who hAv7P AVl110tl in thgeir Qt1iaC are the most likely ones to have their choices fulfilled. Priority is usually crl,nn -n n,rA,,tn, rhc ,.~n- ; -.4~o t-- t-Va;_ commu 'n n itiesl o- a r tn t-hat in which their spouse is working. Special consideration is also given those who_ requ.4re access to a p-r-1clar area for medical tretmnt assigned, the students sign a contract obliging them to remain in their jobs for hre yearsC beLr ekn Ltransfer. Students~ fromJU voc~ationLal and.. fore - man's schools also sign three-year contracts but their distribution among 111plUyeib 15 UtLULHll1CU LLUL LU LIICAL LL CLL1I Li 6 li.Lb LO LLUC d WCAL UL students of post-secondary schools who receive scholarships from employers. The rest are allocated to jobs upon the completion of ther training. 0.51 Monitoring of manpower distrIDUTion is accomplished through a Dal- ance sheet of labor force utilization, which is drawn up twice a year. It is used for both short-term and medium-term manpower planning and is a basic reference for training plans. 8.52 Students are admitted to the specialized lycees on the basis of their academic performance and other aptitude and psychological tests. En- trance to universities is achieved wholly through examinations, which in effect are also used to regulate the number attending the various higher educational institutions. Student inducement to attend the rapidly expand- ing technical facilities, or other educational areas marked for expansion, is accomplished through provision of a greater number of fellowships and higher salaries of graduates. In recent years, for example, engineers and economists have been the highest paid professionals. - 113- 6. The Efficiency of the Manpower Planning System 8.53 Two criteria can be employed to assess the performance of the man- power planning system in training citizens and directing them to the appro- priate tasks in the community. One is a criterion of the allocative efficiency of the system. The other, a determination of whether the targets specified in the plan for training and for the supply and demand of various specialized categories of labor have been fulfilled. 8.54 The distribution of the labor force among sectors, occupations and geographic areas has dramatically altered in recent decades, with the increased mobility of workers who have been well established in their vocation and re- sidence, and to an even greater extent, the orientation of new labor force members to training and workpaths different from those of the preceeding gen- erations. While the system has demonstrated an ability to shift labor in response to changes in production patterns and techniques, and hence in labor requirements, there is still room for improvement. Manpower plannine has been centralized but certain improvements have been undertaken as explained further below. Its main instrument is the elaboration of manpower balances derived through successive reconciliation between enterprises, ministries and the State Planning Committee. This procedure has some imDortant disadvantages- First, it is a rather static approach in which the emphasis is on striking balances between the manpower needs and existing and anarent Inor reserves Within the reconciliation process mentioned above, this method facilitates the allocation of labor only in aggregate terms. with grater wpight aupn to industry. Despite attempts, it is also obvious it has not always been successful in achieving a balance in labor dAmand and nupply in snme cors This is evident, for example, in the existing excess demand in the construc- tion sector (disciussed in Chanter Twpl1up) 8.55 Thp qprnnd dignanrAgp is that while the method provids4A cm prehensive picture of the distribution of labor, it leaves little scope for subsectors and at enterprise level. This review has become increasingly imnorfant partly because o%f emerging labor short ages in seea moe U trialized regions (for example, Brasov and Bucharest). The Government has in manpower planning and allocation, and it has recently begun to prepare additional labor force balances fUL jude and -0 CLUe ral-re . While this may not be sufficient, it indicates Government awareness that future -y L OD 111 LILUUDLLY CHU iLD kUWPCLV.LLV# P U1 Ol WOrlO markets, will more and more depend on labor efficiency. Reallocation of labor among nduostri, and the prUUtion U LavUL mbUiLty in general, should orer considerable opportunities for improvement. 8.56 The fulfillment of plan targets for recruitment and distribution of the labor force--which presumably has been accomplished to a great degree but cannot be confirmed because of lack of data--is another evidence of the ability of the system to mobilize labor resources. However, plan fulfillment by itself does not imply a high level of allocative efficiency, unless the plan targets for labor utilization were precisely those that would lead to an - 114 - equalization of the social marginal productivity of labor in all uses. Since in formulatiug te pin, no explillt attempt is maUe to 1LtU1L 5[IaUUW prices of labor, fulfillment would not preclude variances in the marginal social productivity of labor between sector or occupatioUs or even between enter- prises within the same sector. 8.57 A close examination of the system of labor allocation in Romania reveals three situations in which people may either not be employed or may be under-employed. The first is the inevitable temporary unemployment of workers who are moving from one job to another or are re-entering the labor force. Both groups need jobs in their specialization (para 8.23). The second is indicated by the evidence tor an excess supply of labor which is concentrated in urban areas and consists mainly of women. Para 8.28 discusses some of the possible reasons for a lower participation rate for women in urban areas. Third, there is underemployment which may occur in the agricultural sector or where workers trained in one specialization or in particular skills end up in jobs requiring a different specialization or skills. In the case of voca- tional school leavers, this problem has been minimized, however, in recent years. Schools are located adjacent to the factories, the school curricula are determined on the advice of the factory managers, the equipment used for training is the same the students will use on the job, and, in some programs, practical training is taking place in the factory rather than in a school workshop. Since, on entering the school, most of the students commit them- selves to employment in the factory for a number of years, the likelihood of a school-leaver taking a job outside of his specialization is remote. B. Education and Training 1. The Development of the Education System 8.58 The education system has been recognized and used effectively as a vital tool for Romania's political, social, cultural and economic development. Changes in its structure and reorientation correspond closely to the trans- formation of Romania's economic policies and have been undertaken to increase the sector's sensitivity to the economy's technological advances and the changing structure and needs of its labor force. 8.59 The program is justified as a national investment in human resource eP,t7,1lnmpnt nt its intet ic fri rpnlivp thp ntpntil of eanb individual within the productive process. Any bias in favor of academic work on the part of parent or Stude nt ; c Q,epivit 4r-q I u n timinpi nnr t-hp youngr are npenqrpf to enter the productive process as soon as they are trained. The concept of 144'e-ong educatio for,-,,- all member o,.c,'f societ- ;Q Hli Mnnuc14Or aA h to the non-formal technically-oriented fields that prepare the labor force to broaden the socio-cultural background of individuals. 8.60 Today's modernized system has evolved from a major reform in 1948 and subsequent correLve aCLiOn in 91056, 1968 1973 and 1977 to increaSe the system's efficiency. The 1948 reform provided for the nationalization of all educational institutis' itS main goals were the prart n ot younger entrants to the labor force for a more effective participation in the cUUtLLy' UVelmLUeL fLULL anu Lhe eradicaiou 01 111LLeracy. Compulsory education was increased from four to seven years, at that time the duration o elementary scnooling. The next adjustmeut in tne eaucational System was undertaken in 1955 in conjunction with the second five-year plan in Romania's industrialization program. The major modification at this time was in the restructuring of secondary schools along polytechnical lines in order to achieve a better synchronization of academic studies with industrial and agricultural production. (The diversification of secondary education was not legislated until ten years later, however.) Under this reform, primary and secondary schools were brought into a unified system of general education, consisting of eight grades with compulsory attendance. In addition, institu- tions of higher learning were organized to bring them into closer correlation with the requirements of the economy and to achieve larger diversification of the social composition of university students. 8.61 Significant shortcomings in the 1956 measures began to emerge in the early 1960's; the system had become overcentralized and it was not keeping pace with technological developments in the society. Their key needs were for new programs and materials in the rapidly advancing sciences, for less fragmentation in academic and scientific specializations, particularly at the higher level, and for expanded studies in such areas as cybernetics, automation, genetics and sociology. A major investigation of all levels of education led to the corrective measures introduced in 1968. 8.62 These measures were designed to correct skill shortages and improve labor productivity, consistent with the country's efforts to improve produc- tion quality and compete successfully in the international markets. In addi- tion to strengthening a more diversified secondary education, new intermediate schools for sub-professional training were established and a national system nf rPfrtnhPr and unorading cntirsq was orcanized. Comnulsorv education was raised to ten years. 8.63 With the 1973 measures adopted in the plenary session of the RCP, efforts were made to integrate training and develoPnment and to strengthen the socio-ideological base of the system. Guidelines were established for integrated with practical production training at all levels and with research ahigher education leVelS Nw. programs wera o up1rnnd for t-he training and integration of women in production activity, particularly in newly developed In ust"~,-4~ 91 T- A 4 -- f-4-- ,-- ;eaa,,mA frr flip patahlichyno~nt nf a n i fip~d education system, beginning with pre-primary and ending with higher education. Pemaen eUfLIIL AU uL.aL.o wasL streng. C6thened by expanding.. coresta ;n-nYe skills, and the social status distinctions between manual and intellectual work were erdicad. 0or I new wer uneraken to stegte the 0 U1+ rinal.Ly, ini 19777, ne efrt wr uLet- link of practical training with the economy's requirements so that secondary graduates can De directly and immediately incorporated In the cunumUy a pr- duction activities. The 1977 measures also included elimination of the one to two years post lycee specialization and the reauction of secoudary ueULCLLUL from five to four years. 8.65 As previously noted, these measures have been generally effective. The education system has been linked to the transformation of the economy in a dynamic way and has provided, both in quality and quantity, the manpower required by the national development efforts. Ine main structural pattern or the system, also depicted in Chart 2 is as follows: (a) pre-primary education of 1-4 years for the age group of 3-6 years; (b) compulsory education of 8 years (grade 1-8) for the age group 6-13; (c) secondary education of 4 years for the age group 14-17, encompassing a compulsory level (grades 9-10) and an optional one (grades 11-12); (d) higher education of 3-6 years. 8.66 Access to secondary and higher levels of education is by examination, with enrollments determined on the basis of manpower demand prognosis (paras 8.39-8.44). Specialized education begins effectively at grade 9, either in specialized lycees or in vocational training schools. There are nine types of lycees (industrial, agro-industrial and forestry, economic and administrative law, medical, pedagogical, mathematics and physics, philosophy, history, science and arts), in which a total of 82 specialties are offered (47 of these are of an industrial nature). Vocational education is offered, either in vocational schools or in on-the-iob apprenticeship programs, with about 40 percent of the students trained in metallurgy and mechanical engineering. An additional tve of vocational training is provided for master craftsmen/ foremen. Until 1976/77 young people have been trained in post secondary Sehnn with q dirnrion of 1-3 vpars for certain technical snecialities. 8.67 The Ministry of Educationadriig(eredtthefers the Ministry of Education) manages and supervises all education activities throughLout Romania. --owve, onl -ighe -ntt osaeamnsee directly by the Ministry; the rest are subordinate to a "dual jurisdiction" system. Wffil LLIe t iiLLLy U EduUation dirLect anv am cuL tional activities (teaching and curricula), the schools are under the admin- IStraLiVe contrOL 01 UlLricL gUVELiUmeULb bpeCLtaistU miL. ntce and other central agencies 1/ (see also Chart 3 in Statistical Annex). 1/ These include the District People's Councils, the Ministries of Netal- lurgy, Industry of Machine Construction, Mining, Oil and Geology, Electric Power, Chemical industry, industrial Construction, Forestry Economics and Construction Materials, Transportation and Telecommunica- tions, Light Industry, Agriculture and Food industry, Domestic Trade, Health, The Council of Culture and Socialist Education and the Ministry of Finance. - 117 - 8.68 District administrative control extends to all schools offering eight years of education, and to about half of pre-primary and lycee education. Only a handful of vocational schools are under local government control. Each district has a school inspectorate, with its education activities supervised by the Ministry of Education and its physical operating reauirements suner- vised by the Executive Committee of the District's People's Council. The other institutions are administered by republican avencies. Thpsp apencipq provide the schools with the resources they require for normal operation and also supervise their administration. At the samp timp- all the ministrieR and central agencies collaborate closely with the State Planning Committee and the Ministry of Education to dptPrminp thpir radrP-nPr_nnnel needs at all levels, including management. 3. Educational Planning 8.69 The links between education and manpower planning have already been ;_iALL f-l. _;f-l _ - 2S 11 *1,4 A-L .LaJL L* £0 j viously noted, education planning consists of two parallel exercises, those 'S.~~~~~~~ L.LLt,m -i. CLA 'I JI .tt tLL.LL O p±ChILI &tI. XLXC LULLUICL k_L1LbL b UL formulation of plans for the compulsory education, for lycee level education 0 tU LL IILL JL 4aLi LU P V_= b LLLC11 WLU%LLiUiL/ Li LiLUg1 8.70 Te school enrollment plan 1o vasi education is very straight- forward. All but the disabled students have to attend school; the latter attend special schools. Ine plan is tnus prepared on the oasis or population data, a yearly census of school-age children and statistical data on student flows in the system of the previous years. The People's Council or each dis- trict prepares the district plan. It is reviewed by the Ministry of Education, which subsequently develops a national plan from an aggregate of all district plans. 8.71 The enrollment plan for lycee level education requires a more de- tailed analysis and it also involves determination of the distribution of enrollments by types of lycees and prospects of enrollments in higher educa- tion. Built-in assumptions in this exercise include estimates regarding enrollments by occupations and take into account dropouts and repeaters. 8.72 The plan for specialized training, known as the training plan, is linked to the estimates of the future manpower needs of the economy. Some of the possible errors that may develop in formulating the quantitative targets of this plan, in view of the fact that the length of training for most specializations extends beyond the five year plan's estimated manpower requirements, were discussed earlier (para 8.43). However, the training plan reflects the needs of a more distant future by orienting the training towards the future qualitative needs of the labor force; that is, for a continuously increasing level of general education, closer linkages of academic education and practical work and a broader curriculum that includes the more recent developments in science and technology. The training plan is based on the data of the balance sheet of utilization of the labor force (para 8.51). - 118 - * F_J It-yes£JI LdcLL. Lea i1LILIHLIg 1i LLIU btCLUL Lb ULLUt!LUMCHI LI parallel with the other planning exercises and is usually based on a two year lead assessment of the adequacy of existig facilties to accommodate future required increases. The evaluation of space use is systematic as it is gov- erned by Ministry or Education norms. Investment proposals are prepared by the agency that has administrative jurisdiction over the school facilities in question and are all aggregated and reviewed, initially by the Department of Planning of the Ministry of Education and subsequently by the State Planning Committee and Ministry of Finance, in the context of the major indicators of the five year plan and budget. Except for universities, all other educational/training institutions are built on the basis of standard design, which reduces costs and minimizes the period of implementation. 4. The Contribution of the Education System to Romania's Growth 8.74 One of the cornerstones in Romania's development effort has been its education and skill development program. As noted in para 8.18, there has been a certain lag in responding to the manpower needs of the economy, especially for the more sophisticated skills required by technological advances. But on the whole, considering the extent of the undertaking, the program has been remarkably successful. (a) External Efficiency 8.75 Improving the Labor Force's Educational Qualifications. There have been dramatic changes resulting from the expansion of the education system and its access for the whole population. Illiteracy, estimated at 27 percent of the population in the 1945 census, was eliminated by 1956 and universal 10 year basic education was attained in 1975. The 1974/75 enroll- ments estimated as a proportion of the respective age groups stood at 101 percent for basic, 49 percent for secondary and 10 percent for higher educa- tion. which compare favorably with similar narticipation rates in most other countries (Annex 2.3). 1/ The disparities in enrollment ratios by region and qpv havp alqo hon Pliminati- 8.76 The. growathl annd c-hangingr sctufire of enrol lmiontc 1i~mmnarly illustrated in table 8.6 (also in Annex 2.1): 1/ Estimated respectively as percentage of the following age groups: 6-14, 15-19, and LU-24 or mid-1974 populations. The excess in basic education may be attributed to repeaters. - 119 - Table 8.6: ENROLLMENTS: GROWTH AND STRUCTURE Lvl7 of Enollm,ents (00) 1 Gro-- (195%0=100) SZtrucrtu-re (7)/ Education 1950/51 1965/66 1974/75 1965/66 1974/75 1950/51 1965/66 1974/75 Primary/2 1,779 2,993 2,890 168 162 84 80 73 Secondary 93 372 708 400 761 4 10 17 General (60) (360) (344) (600) (573) (3) (10) (9) ized (33) (12) (363) (36) (1,100) (1) () (9) Voc. Edu- cation 99 15Z 192 153 194 D 4.3 D Technical Post- Secondary 95 68 35 72 39 4 2 1 Higher 53 131 153 247 289 3 3.5 4 Total 2,119 3,746 3,978 177 188 100 100 100 /1 Excludes pre-primary. /2 Includes 8 years of education. Source: Anuarul Statistic 8.77 The striking impact of the 1966 measures, designed to orient second- ary education to the economy's more specialized needs, is clearly demonstrated. With the attainment of universal basic schooling, primary enrollments have stabilized and so have general secondary enrollments. In fact, since 1966 the full expansion of the system has been exclusively in the non-academic areas, an impressive record (Annex 2.4). The changes in the structure of enrollments illustrate further the growth of middle-level manpower training, an area where shortages developed in the 1960's. This orientation of enrollments to satisfy the demand of the rapidly growing sectors of the economy can also be seen in the growth of the related secondary and vocational schools and university facilities. For example, 61 industrial lycees enrolled 5300 students in 1966; in the 1974/75 school year, their number had grown to 382 and enrollments to 252,000. Agricultural secondary schools almost doubled during the same period and enrollments more than quadrupled. In vocational training, the growth (1950/51-1974/75) in enrollments has been particularly high in such areas as mining (200 nercent). metallurev and engineering (67 percent). industrial chemistry (389 percent) in infrastructure (construction, transport and tele- communications) and in light industries (Annex 2.5). The impact of the formal education system's growth on the diversified secondary level has not yet been flllv fplr hpenp nf t-hp nPriod of training reauired and the rapid enrollment acceleration in the most recent years. For example, only 27,000 graduated - 120 - from specialized lycees in 1974. This is still a remarkable performance, how- ever, as in 1967 there were no graduates at all with such type of training. The growth and distribution of graduates by level of education is given in Annex 2.6. (ii) Relevancy of Training 8.78 The content and quality of education and training programs has been quite efficiently related to the real needs of the economy. The adaptation of graduates to the world of work has been productive and immediate. This is a oroduct both of building early receptive attitudes towards oroduction training and of implementing a curriculum that starkly reflects the nation's priorities, that ig, one thAt haR increaged mnmhasig on xarft sciences anA nrnduction training. To illustrate this point, Table 8.7 gives the basic distribution of subects in 1973-7L for thrpp tnPR of Qrhan1- The narcentas hmae hon drawn on groupings of subjects over the duration of each cycle. Those for Table R 7* DTSTRUTTTTAN O TEACHITC DPA AMS 107317/. General Secondary industria-l Distribution of Basic Education Lycee Secondary Lycee Hours (gaAe 1N(I0ae -n trAsal Exact Sciences 32 39 27 A - -J nl-- V. 10 0 C aILLZJ ULu rhys. EU. 0 0 Production Training 7 17 49 Source: Ministry of Education 8.79 The outstanaing aspect of these programs concerns proauction train- ing. All schools at all levels are "sponsored" by neighboring production enterprises and they are linked in a unique and relatively low-cost training! production program. In essence, what exists is a business arrangement in which enterprises subcontract the manufacture of product components to school workshops rather than to other enterprises. 8.80 For grades 5-8, a sequential series of training modules and related lesson plans, increasing gradually in complexity, are prepared by Ministry of Education specialists for woodworking, electrical and metalworking. From among the products manufactured by the "sponsoring" enterprise, the production components that best relate to the training programs and modules are selected for school workshops production and assembly (in consultation with management from the enterprises and also a sponsoring secondary education institution). Production targets and schedules are established along with the equipment, tools and materials required for production. Pupils in the school workshop receive related instruction with regard to the tools, materials, design and function of the respective components. - 121 - 8.81 In actual practice, a production line approach is generally followed w4#V tne Ulgher graudes proucing tlue more uxititui AUpnlL.Hl lUDS are rotated through the various operations, including quality controls, in od Laer t ailitate Luhei rLL Lkii[u a[nU Lheir understanding of the inter- dependency and need for accuracy in each operation. Finally, each completed traurlng/prouucHIOL 1s I also subJected to a quality control cnecK Dy a representative of the enterprise and, upon acceptance, the school receives full compensation for the work produced. 8.82 For specialized lycees and vocational schools, production training is even more integrated with the enterprises. Partly, this has been designed to increase student exposure to actual working conditions. However, it is also probable that with the rapid expansion of specialized education, qualita- tive training could not have been implemented without use of actual enterprise workshops. Whatever the cause, the combination of training in the academic environment and the world of work has been effectively made. In vocational training, for example, students are trained in the enterprises' workshops during their last year of training; during the second year of training the use of these facilties depends on the availability of facilities on school premises. In the case of specialized lycees, because of comparatively less intensive practical training, the use of enterprises facilities is more common in the advanced grades. 8.83 Efforts are made to relate academic work to real life situations. Thus it is not unusual for higher education students in economics to study and resolve real problems facing the economy or to work on actual draft plans of the country. Technical faculty students participate in research which is incorporated in production projects. 8.84 The State's efforts to increase labor productivity are not limited to the formal education system. In 1971 the concept of life-long education was introduced, providing for the periodic updating of the labor force's skills. Annually about two million workers in almost all fields attend this form of in-service training course. During the 1971-75 five-year plan period, most of the active work-force completed at least one organized form of in- service training, in courses ranging from one week to a few months. 8.85 Finally, adult education courses have been organized in workers and nponnp "iniuprqitip" iindPr the nn nr-hin nf municipalities and larea oner- prises. These offer a wide variety of courses at various levels. In 1971, 171 such universities offered 1 ,11 rorata neanded hy ant 100,)00 pople. Courses were about evenly split among social sciences, natural sciences and foreign lngu,laes (The nuMber of trainees attending vocational courses was relatively limited.) More than half of those attending were over 30 years T, nternaIl £.LLJ.L.L-nc o OL Ic A- Z l O.O i aluLler contrioution 01 Llne system to Ile cOuILry 5 ueve1opmuenlL efforts has been the improved internal efficiency of the education system. Today a greater proportion of students complete their studies and join the labor force with better qualifications than they would have previously. The .uLLt% L An LtUmUFULOty CUULa u LUL UU LCu yeCaL atL C ULIC U. LLC measuts ctULLL buting to that development. Others that have reduced the number of dropouts aU Epeaters dre pLUVVib_ULL LUL bybLULItLLU LimUiL litip LUL bLUUCHLL particularly in the primary grades, parental guidance and special program orrerings. 8.87 One of the greatest accomplishments of the system has been the improvement in the quality of the teaching and administrative staff. Only about four percent of the teaching force for the first eight grades is unqua- lified by current standards; most of these are now enrolled in university correspondence training programs. Romania's success in overcoming what in other countries is a severe constraint to fast expansion of the education system is due mainly to the fact that (a) teaching has long enjoyed an impor- tant and prestigious role in the country; (b) salary scales are considered within the context of a national income policy, eliminating differences in compensation that have discouraged entry to the teaching force in the past; and (c) educational research and educational management are recognized as integral and vital to the development of education at all levels. 8.88 Apart from the relatively high level in the qualifications required of the teaching force, a number of other factors contribute to maintaining quality standards and efficiency. Some of these are: (a) establishment of pupil/teacher ratios and of contact hours at various levels on the basis of on-going research; (b) the requirement that administrators must spend a specified amount of their time (ranging from five to 50 percent) in teaching or other direct pupil contact; (c) restandardization of speciality posts within school inspectorates (on the average one such post for every 250 teachers): (d) t-hp ranuirempnt that general inspectors of the Ministry spend at least 50 percent of their time in field visits at the d 4 tr e--Ipup I To accommodate the changing vant,ivamonte of tho Pronomy And fn Arhipup A hiprh degree of teacher utilization, most teachers are required to be qualified in two specialities, so that later on theyax wann't havep to be rAfrained in A com_ pletely new field. Finally in teacher training programs, emphasis is placed of those students for which he will be responsible during their primary or gymnasium schoulug. 8.89------LI---iCuous ... -- --- "'Ji-ed l-cne has eeon ;I I.O Ine LUpIUU 1L C16aK- Li tUl Op -- teachers of technical subjects. As an interim move, the teaching staff has been augmented by engineers and specialists from enterprises who now make up an estimated 50 percent of the lycees' technical teachers. 8.90 The internal efficiency of the present system, as measured by the extremely hign rates o stuuent promotion, is shown in Table 08.08. This is probably a consequence of the rigorous screening of students through placement exams as well as tne improvements in teaching and administrative start men- tioned earlier. Table 8.8: RATE OF PROMOTIONS (Global by Group) 1970/71 1971/72 1972/73 1973/74 1974/75 1. General Education 92.9 93.7 94.2 97.6 97.9 2. Lycee Level - Humanities 92.6 94.4 95.1 96.3 95.6 - Specialized 93.9 95.1 96.2 97.3 96.4 3. Vocational Training - Vocational School 98.3 98.3 98.7 99.0 99.2 - Apprentice 96.9 97.5 98.3 98.4 98.8 4. Foremen Schools 99.1 99.4 99.4 99.4 99.5 5. Post Lycee Technical Training 95.4 97.9 98.8 99.1 99.0 6. Higher Education - of which - Day students 90.0 92.0 94.2 94.4 93.0 - Evpnina students 97 83.9 90.3 Q 09 A 9. A - Correspondence students 67.9 66.5 66.5 65.7 62.3 U .L W5 A.L Ut z AIC * OO. U AW. LL6 0 6ILL *LO Wz_ LAU -CU.L LL OUtLlAL recent years has been pre-primary education. Enrollments have grown from 1.97,u U 1 7 J Jl LU u s0,uUW iinLz."tf IlI, reyporuLuJnLLig a-uuL U peLrcen t UvI the relevant age group. The fastest enrollment growth has been registered 1Hnce 17UU k\7 percent peL annUm/ dU 15 LE CU L UL LI oUVeL LeCLIL ' SUcia and economic objectives. The first is to affect the development of children's social and personality traits during the formative years and to prepare them for the tasks required by the elementary schools. The economic objective is to assist gainfully employed mothers wItn Cnid care and U reiease women Lo the labor force. As discussed earlier, (para 8.28), however, the lower par- ticipation rates or urban women suggests that this objective is not Deing met and that other factors may have a more serious impact. - 124 - 5. Education Finance (a) An Overview of Education Expenditures 8.92 Romania's budget expenditures on education and training understate the country'R rommitmPnt to the sector and th rpal amount of nationn1 resources allocated to it. Education finance is complex and not all expendi- tes are includo in the nntional hudget which accuntc for nhant 8S nprcent of total expenditures on education/training. The factors leading to the large staff and facilities and workshop equipment use to enterprises increasingly undertaken (as discussed in para. 8.80); (b) materials for workshop training in the formal system, including vocatIonal training, are givenl LU LIe scnoU by the enterLribebs subcontracting the production of goods; (c) payments to schools by the enterprises for the finished products are not reflected in the schools budgets; (d) payment towards vocational student labor in enterprises is reflected only in the production costs; (e) scholarships paid by enterprises for students they sponsor, mainly vocational training, are absorbed in the enterprises' other costs; (f) the financing of upgrading courses from production funds is not included in the training budget (there were reported to be in the order of 1.2 billion lei in 1975); and (g) in-service training expenditures for all agencies are not separately reported. 8.93 Thus in 1975, apparent education/training expenditures amounted to 15.1 billion lei, or about 6.4 percent of total government expenditures (5.5 percent of recurrent and about 2.8 percent of capital expenditures). They represented 3.1 percent of estimated GNP, a comparatively low allocation considering the educational effort of the country and the fact that it is offered free. A more representative estimate of the allocation of national resources to the sector would be close to four percent of GNP, which is within 10 nprcent of the ratio for a "reoresentative" OECD country. 1/ R Q Therp iR a nnrtworthv cnnAtancv in the historic allocation of capital resources to the education sector. The latter's share in total investment 1 / rng 7a pe WNrlo2 RNvme 1t9ff .L VIL 1~ L.yme m Lan, a 0t.t-& rnof. ed~ U. uc~-' a t. ion_a1-x-rendi--1-r Working Papers No. 246, November 1976. expenditures has remained mostly within the range of 1.6 - 2.0 percent (1950: 1.6 percent; 19OU 1.8 percent; 1970: 1.6 percent; and 1975: 1.7 percent), which implies a very high annual growth rate and also demonstrates the Govern- ment's commitment to the provision or training facilities and equipment in order to implement its educational objectives. An evaluation of the historical allocation of recurrent expenditures is not possible because of lack of data series. As the table below illustrates, these expenditures have declined as a percentage of total recurrent expenditures in 1975 as compared to 1970. Also, their share of total socio-cultural recurrent expenditures has declined (a discussion of trends in the latter is given in Chapter Nine). Table 8.9: ALLOCATION OF STATE RECURRENT EXPENDITURES TO EDUCATION 1970 AND 1975 1970 1975 1. Total Recurrent Expenditures (lei billion) 130.9 236.2 2. Total Socio-Cultural Recurrent Expenditures (lei billion) 34.0 50.9 3. Recurrent Expenditures on Education (lei billion) 9.2 12.9 4. 3 as percent of 1 7.0 5.5 5. 3 as percent of 2 27.2 25.3 6. 2 as percent of 1 26.0 21.6 Source: Anuarul Statistic. The commitment of resources to meet the rapid expansion of enrollments in technical and vocational traininq. digrisAd in naraq- 877-A 79 ic illu1- trated in the table below for the period 1960-75. Table 8.10: DISTRIBUTION OF RECURRENT EXPENDITURES BY TYPE OF EDUCATION 19A0 - 1975 Tot.l /nnditur /1 T.P.Yl nnl Tiatv -4h rinn nf RVnond4 n- Year on Education General Tech/Vocational Higher T i mi 1Q0=100 Lei mil 10=100 Ta m;Il 1Q An1lAO T,.4 m1 1 1960 3,496 100 1,968 100 561 100 526 0n0 1965 6,533 187 3,474 177 1,318 235 1,027 195 1970 9,23 264A. 4,65r,7 2317 1,4 346./ 1,8 263lr ) 1975 12,893 369 6,121 311 3,717 662 1,713 326 /o Tu nur - -- -cacsc / I- t[ In ludeb LIIL y/iI51bC alMu gUllUldl bCt U d£al VUW. aLL i . Source: Anuarul Statistic - 126 - During the last ten years especially, while over-all recurrent expenditures on education about doubled, those on technical and vocational education/ training almost tripled. 8.95 A substantial portion (64 percent) of recurrent education expendi- turps is financed by local government. In 1975, local government financed 85 percent of pre-primary education, all of primary, about half of lycee and only fniiv nPi-PPnf nf unrnfinnnl frninino AxnPndifures- TablP A-11 illuqtrnrPq thp division of responsibility in the financing of the main levels of education for that year. Table 8.11: FINANCING OF EXPENDITURES 1975; /I Total Pre-Primary 1,37,0j 203,925 4.7 1,193,928 16.2 Basic 4,723,550 - 4,723,550 64.1 Lycee 2,508,193 1,146,309 27.4 1,361,8084 18.5 Vocational 1,209,055 1,118,261 26.7 90,794 1.2 Higher Education 1,12,522 1,12,522 41.0 - TOTAL 11,551,173 4,181,017 100 7,370,156 100 /1 includes only main levels of education. Source: Ministry of Finance 8.96 The expenditures for materials are clearly limited because, as men- tioned earlier, production-related materials are given by enterprises to be used in the production of goods. This along with factors (a), (c) and (d) and (e) mentioned in para 8.94 above, lead to a considerable distortion of unit costs especially for basic, lycee and professional schools. For example, based upon field data from a few sporadic school visits, the distortion from factor (d) would average about 10 percent of unit costs, while that from factor (e) for vocational schools could amount to as high as one third of unit costs. 8.97 Irrespective of levels of unit costs, what is striking is that the ratios of the unit costs among different levels of education are exception- ally low, about 1:2 for basic to lvcee and for lvcee to university. Even allowing for corrections in the substantial understatement of the levels of unit coRfA thp ratios would not be much affected. This unusual relationship, which in other developing countries is close to the order of 1:5 is explained hx t-ho very limit-Pi tprcher salary differential. as well as the understated expenditures for instruction materials. For example, the salary of a univer- stty prnfan is only about 9.5 times that of a primary school teacher. - 127 - (b) Unit Costs 8.98 An analysis of detailed education cost data for 1975 by level of education and type of recurrent expenditure confirms the understatement of education expenditures and the factors discussed earlier that explain this understatement. An analysis of key data is presented in Table 8.12. Table 8.12: DISTRIBUTION OF RECURRENT EDUCATION EXPENDITURES AND UNITS COSTS. 1975 Total Distribution (%) Tntal Ewnpnditiro Level of /1 Instruction /2 F.nrrin mnqn Slaries Studerlnt Aid Materina Per Ppl4I (Lei m.) Pre-Primary 1,397 77 19 4 1,793 lei 79/. i 011 i- Lycee 2,508 78 19 3 3,479 lei 17o a o al I,)% Lo n. C. '1 £ IA . 1i- - Higher 1,713 69 26 4 13,402 lei IVt lhe L 1L30731+ /1 includes scholarships, students' food and expenditures for materials used in social events. /2 expenditures per pupil have been calculated by averaging 1974/5 and 1975/76 enrollments. /3 special education, sports schools, foremen training, upgrading courses. Source: Ministry of Finance. 6. The 1976-80 Plan for the Development of Education 8.99 The Plan is designed to continue the momentum of the sector's growth and its contribution to the economy's development. The achievement of four key targets is central to the Plan's success. (a) At pre-primary level an enrollment ratio of 89 percent by 1980 in order to provide these children with early socio- political and educational orientation, as well as to tap the urban women labor reserves. (b) A generalized ten-year compulsory basic education plan by 1977, with continuing emphasis in the later years on practical courses. The already successful implementation of this target sets the ground for the gradual introduction of a twelve-year universal and compulsory education plan by 1990. - 1A - (c) Acceleration of the graduation of students from the engineering LaL.Lt_Lic LUJ, . VJj VL H LiV" YCdL F"_LLUUJ da Well d U higher-level institutes at-large (190,000 - 200,000 graduates --------. cc An -I - in71 -7r*% c om a rdL wiLih I- J 5 VVV I I L 7 /L/1J I. Ld) Provision to about one-fifth of the labor force (1.9 million workers) of retraining and refresher courses in the context of the national campaign of lifelong education. 8.iOu An adequate amount of financial resources appears to have been allotted to implement the 1976-80 targets, although the total and specific breakdowns have not been published. The investment allocation to education over the five year period is estimated to be in the order of Lei 16.5 billion, about double the expenditures of the previous five year period. The sector is thus expected to retain its share of about 1.5 percent of the rapidly growing total investment expenditure. The allocations should support a doubling of student places in pre-primary education over the 1971-75 Plan (159,000 vs. 72,000); an over 50 percent increase in boarding spaces (139,000 vs. 88,000); a substantial increase in new classrooms (14,400 vs. 10,900) and a physical expansion in institutions of higher learning of 186,700 m2 (vs. the previous plan's 221,000 m2). 7. Assessment of the Performance of the Education Sector 8.101 There are two further areas that can be assessed with regard to the performance of Romania's education system. First, whether the sector has been successful in its contribution to the country's development efforts and, second, whether the earlier plans (their targets for enrollments, internal efficiency, cost reduction, etc.) have been efficiently fulfilled. Unfortun- ately, information on past five-year plans is hot publicly available so the second iudzment cannot be made. This assessment will be restricted to the first area above. 8.102 The earlier discussion has demonstrated the significant inroads made by Romania's education system. Plannine has been largely successful and contrary to the experience in most developing countries, human resource develonment has not lagged sicnifirntlv hphind the f-nuntrv'q ranid Arnnnmir development. 8.103 The system's capacity to respond in a timely and efficient way to the ecnml a or need-~ is due to a la-eo Adegreeto the -admnistr-ation of education. The ministries are largely the trainers and the users of manpower. -eniy ar LkeenCl ly aware o Lf. thir spe-i product. J iL .tio targe* i.Okts and. technlog.~.6iesC and can develop reliable estimates of their own manpower requirements as well O 1U L U LU Lils UponLIds tUbu uy dmln Lpose byte ara Upi duuuit.L a tion and by specialized manpower needs sometimes exceeding the training capac- ity of the educational system, tne joining of sChooLS an enterprise has emerged as a viable mechanism for manpower training. This wide-scale practice was developed by design and the results appear to be cost effective. it nas enhanced the external efficiency of the education system and reduced, some- times even eliminated, costs associated with the on-the-job training of newly graduated students. The placement of students is also more efficient since most of the graduates of any given training institution are absorbed by one of the associated enterprises. 8.105 A major correction in the system has been a reduction in the number of specialities offered in lycees and vocational training schools. Earlier the training program had been designed to meet the enterprises' own special- ized manpower needs. The broadening of Romania's industrial base and the improving production technology require skilled labor able to adapt quickly to new technologies with limited on-the-job training. Trainees are now being given a much broader theoretical and practical preparation. Until the recent changes in the training programs are fully implemented, however, some ineffi- ciencies are bound to occur and additional in-service training may have to be undertaken. 8. Conclusion 8.106 The educational system has been linked to the transformation of the economy in a dynamic way and by and large has been successful in providing, both in quality and quantity, the manpower required by the national develop- ment efforts. Its growth and diversification has evolved in the context of a continuous self-evaluation. Reforms have brought about a more equitable educational system with access for all, and have provided lifelong learning opportunities through a variety of adult education programs. In addition, cultural standards have been raised, and the mix of anadpmic And mnniAil work has contributed to the lessening of the distinctions between white and blue collar workers. While it is not pnosible ro assess the rnst effectivenes of this impressive record, it is reasonable to conclude that the sector has basically mer ifs challenge As well As the plannerS' expectat-ions and has been a highly effective component of Romania's development effort. 8.107 Romania's decision to introduce universal and compulsory education of 12 vparq A annl Qftad in tha tniintvu a npranno-fiv nr-n oonn a f- 107A-Gn _- --- ---- ----- -- ------------5---- ----.'w (see para 8.99), is based on similar action by developed countries at an be very costly in terms of space, equipment and technical teaching require- ments. Also, the economic 4ustification fr- univeralI midl *1. J.evel t ech nic- training has not been established concretely at this time. The period of u f sU-Chl a -AU6--LaM LD DULLLLCLLLLY LUL16, 1UWEVEL, LU eRaULe L[1e Government to proceed at a pace that is justified by the economy's training an. UI4 I~ .1oumne by~ relvaL stLudies - 130 - CHAPTER NINE CONSUMPTION AND THE STANDARD OF LIVING A. Consumption: Its Composition and Growth 9.01 As discussed in Chapter Two, Romania's development strategy has con- sisently emphasized rai ecnomicn g row,th thog the eansion4 of a moden capital intensive industrial sector. Thus in the allocation of resources, priority nas veeu given to iuvestmeut over cvoumption aong uamtv has been increased with increases in income. The government policy has been LU ensULe th iL iLLLyd Lhe UaiC neU U Le pUpudLUi werC met, aH 1 the long run a high and increasing consumption level is attained. 9.02 As Tables 9.1 and 9.2 show, this policy has been quite effective over the last two decades. The rising proportion of national income accum- ulated, and national product invested, has helped build a strong economic base, which will yield increasing material returns to the population in the years to come. Table 9.1: UTILIZATION OF NATIONAL INCOME (in comparable prices) itnonml -1 Consumption 12 Arcmnlation IA Utilized Fund Fund 1956-60 100.0 84.0 16.0 1961-65 10 0. 75.7 2A. 1966-70 100.0 71.2 28.8 10717' 1AA A AR I nn 1 /1 Excludes non-productive services. k2 Consumption of material products arU services Uy iuudviduals, the staLe, and other institutions. '3 Includes net investment plus change in stocks. Source: Anuarul Statistic. - 131 - Table 9.2: INVESTMENT AS PERCENTAGE OF GROSS NATIONAL PRODUCT /1 (in comparable 1963 prices) 1961-65 24.5 19Q66-70 26.7 1971-75 27.1 9.03 Between 1960 and 1975, national income "/ge ta aeaert of 9.3 percent. Although the consumption fund was allocated a smaller share or itaLtialincomeILI, LL iLcsdbC inl absolute size adU abl 9dI .3 indicates, its rate of growth also went up during the period. In per capita terms, the inease s been substantlal as population growti auring the period averagea less than 1 percent per annum. Table 9.3: AVERAGE ANNUAL GROWTH OF THE CONSUMPTION FUND 1956-60 4.8 1961-65 5.3 1966-70 6.2 1971-75 7.5 9.04 The three chief elements of the consumption fund are: private con- sumption of goods, direct government consumption and consumption by bodies providing social services to the population (for example, health, education, sports). The largest element, comprising approximately two-thirds of the con- sumption fund, is private consumption and this is closely reflected in the volume of socialist retail trade. 2/ Between 1960 and 1975, it increased from 41.5 billion lei to 145.6 billion lei, 3/ an average annual rate of 8.7 per- cent, with retail price inflation under one percent per annum. Significantly, retail sales of food were a high proportion of the total, increasing faster than sales of non-food commodities (see Table 9.4). This is a different pattern than that observed in countries of similar levels of development. 1/ Measured in 1963 comparable prices. 2/ This excludes the retail trade in peasant markets and consumption of self-produced products which in 1975 were about 35 billion lei (showing a rate of increase of about 32 percent over 1970). This also excludes non-socialist retail trade which has been negligible since 1960. 3/ In current prices. - 132 - The authorities have advanced a number of factors explaining this, such as the urbanization process, the increased demand for food products produced by the government and changes in the relative prices of food and non-food products. Another explanation is that non-food commodities have not been always readily available in the required quantities and of sufficient quality, and they may also have been insufficiencies in the marketing of goods. Table 9.4: INCREASES IN SOCIALIST RETAIL TRADE (in average annual Dercentage rates and in current and comparable prices) 1961-1965 1AA-70 1071-75 Current Comparable Current Comparable Current Comparable Total 10.3 9.8 7.4 8.3 8.5 8.2 Foodstuffs and PUU 4 1') .1 A. r, I.7 1.A 0 .J 7 .0 commodities 8.7 9.2 7.1 9.1 8.4 8.4 Source; Anuarul Statistic anu data provided by Romanian authorities. 9.05 in addition to trade, total private consumption includes services for the population that are mainly carried out by the state and cooperatives. Those provided by the state include among others services in transportation and telecommunication while those of the cooperatives include most forms of personal services such as hairdressing, shoe repairs, laundries and main- tenance of housing. The volume increased by 68.6 percent between 1971 and 1975 (11 percent per annum). This increase, however, has not kept pace with demand, particularly in the case of repairs and maintenance of housing, repairs of consumer durable goods (such as televisions) and some domestic and laundry services. 9.06 The other major element of the consumption fund is the consumption of material products in the socio-cultural sector. The more relevant concept for real consumption, however, is the total value of socio-cultural expendi- tures as this includes the value added in the services provided. 1/ The data in Annex 8.2 shows the expenditures by the govenment on socio-cultural activi- ties since 1960. These do not represent the consumption element alone as 1/ For example, with respect to education, the consumption fund as part of national income will include only those goods consumed in education (such as books, pens, electricity) while total consumption, as part of gross national product, will include the total "cost" of education, which includes the valuation of the services performed by the teaching staff. - 133 - pensions and other transfer payments are included in thp tntal- TAking anCin- cultural expenditures as an aggregate, the increase between 1971-75 was 8.4 Dercent Der annum, a fiaurp rrnmnArahlp to the inea 1 C . a budget allocations alone represented a total of 7,240 lei per family in 1975 'Y'--~ - - *..-1L 1 - U 1. L1r, %LIC average wages of 1,813 lei and 1,434 lei per month that prevailed in these vices are provided substantially free of charge to the population. 9.07 State Social Assistance also provides consumer goods and services Adrectly and free to the poulation. Goos, iu te form of material helps , are provided to people in temporary difficulty because of some mishap. The st t ls r v d s f ==- c n e s - L---- z-- - 11- . I jaeao LtvLce Le LCLtLL* UL LIUMC5 LUr tose unaDie to worK and look after themselves. These include homes for the old and the handicapped as well as fo t special children", the 'Vilna' and the dear. 9.0 The final element in the consumption fund is government consumption, which consists of material goods consumed by the state in carrying out its functions. it is a minor part or total consumption, however. In 1975, for example, the state budget allocation for administrative, juridical and other government organs amounted to 2.7 billion lei. 9.09 As consumption includes both goods and services, consideration must be given to the services rendered by the housing stock. In Romania rents are not based solely upon the value of the property but take into account the size of the property and the income of the tenant. The maximum rent is 20 percent of the highest individual income in the household but the average is between 7 and 12 percent of that income. Consequently, the value of housing services must be calculated in a different way to reflect the true return to society. An estimate of these services is given in Table 9.5. Table 9.5: ESTIMATE OF HOUSING SERVICES CONSUMED (1963 comparable prices) billion lei 1965 7.0 1970 8.8 1971 9.2 1972 9.6 1973 10.0 1974 10.4 1975 10.7 Source: Annex 3.2. 9.10 The data shows an average increase between 1971-75 of about 11.8 nercpnt nPr annum AR Against A.8 nerrnr htwppn 1q6-70 and 10.4 nprcpnt between 1961-65. The 1971-75 increase is marginally greater than the increase - 134 - in GDP and national income but a significant housing shortage still exists. The quality of housing is low, particularly with respect to size (the average size of dwellings constructed in 1975 was only 33.7 square meters). 1/ The state envisages that the housing shortage will have disappeared by 1990 and, beginning in 1977, larger minimum sizes for new dwellings have been introduced (Chapter Twelve). B. Incomes 9.11 So far consideration has only been given to consumption. But if a true assessment of the standard of living is to be made. savings as well as consumption should be taken into account. The Romanians do not prepare data on GNP- as such. as thev use a system of Material Product Balances rather than the standard UN System of National Accounts, which values services as well as mntprinl nrndirrinn However thp Bank has made estimates of GNP ner capita (see Table 9.6). 2/ The real rates of growth represent a significant annd -nnt-4niinl 4n,ranca 4 thp ornnnmir q-rAncyth nf thp rountrvan nnp4~r onf the best growth records for any economy during this period. Table 9.Q *RAS NATTONAT. PRODTCT PER CAPTTA (1963 comparable lei) 1965 9,592 1973 17,793 1971 14,895 1975 21,662 1 Q 7 n 1 r I)n 1/ 4 L U, /-V U Average percent rates of growth: 1966-70 6.7 1971-75 10.0 Source: IBRD estimate based on Anuarul Statistic and data provided by Romanian authorities. 9.12 In absolute terms, however, the GNP per capita of 21,662 lei per annum is still low. In terms of the Bank Atlas methodology, this represents a figure of $1,300 per annum. Romania remains one of the least affluent countries in Europe. 1/ Floor area of bedrooms plus living rooms, excluding kitchen and bathroom. 2/ For full methodology and the concept of Material Product Balances, see Appendix 4. -1.)) - 9.13 Even GNP does not fully reflect the standard of living of the Romanian people as .individuals. Because it includes investment from state funds, it represents some elements of national wealth but does not give a feeling of the real income that an individual perceives as his own rather than society's in general. A series is published in index form only, entitled "Real Income of the Population" (see Table 9.7), which incorporates both personal incomes and imputed incomes in the form of government goods and services provided. In other words, it represents consumption (including that self-produced but not housing services), plus personal savings. The rates of growth are substantial, but less than GNP per capita, due to the increasing rate of growth of investment from national income. Table 9.7: INDEX OF REAL PER CAPITA INCOME OF THE POPULATION (in comparable prices) 1950 100 1971 294 1955 137 1972 311 1960 161 1973 326 1965 214 1974 346 1970 263 1975 366 Average rates of growth: 1951-55 6.5 1956-60 3-3 1961-65 5.8 1966-70 ? 1971-75 6.8 Source: Anuarul Statistic. 9.14 With respect to personal incomes, there are two components: the income of the popuaL tionA an incom tL..in the fo AS . Ot Lu od proue -A --iLLLa i iILII~ciA consumed. As stated earlier, little is known about the latter element except that it is an- important factor in the agricultural sector. Moe - ncme con------ sist of wages, bonuses, transfer payments from the state and "other payments". 9.15 Wages are determined by law in Romania and, as Table 9.8 shows, in LH~ DLGLE DLLUJL LH.LV&r U_ bLLL LLWH tUL HL L L LILUL[Ud LtLI1b UUL &L C slower rate than real incomes. This suggests that non-earned incomes (in the LULI UK bUiULUULULL DCLV Lces/ naVe UCCn 6LUWiLL1 LabLCL LLIn eaLUeU inOLUC-S. Cooperative wages are based on identical scales and so similar trends should I-. be expected inI that sector - 136 - m C f . Aren Af n nAmc An ITrTI e%V TTA r' ED Q nvn nu onT Table .O. tiVLruLt- rUALD U vr UKavwin vr Wnva rLax rDAovL All Employees Workers 1961-65 5.5 5.5 1966-70 5.2 4.9 1971-75 4.8 5.3 Source: Anuarul Statistic. 9.16 For workers at all levels, basic wages average about 95 percent of total remuneration (but for any individual, the proportion may be considerably less). These are supplemented by various forms of bonus payments and incre- ments for uninterrupted employment or work performed under extraordinary conditions (paras 4.25-29 and Appendix 9). 9.17 Transfer payments represent the second branch of the social welfare system. The largest part of this is state social insurance (see Annex 5.3), which provides pensions, sickness insurance and recuperation plans for state employees. Expenditures in this category increased by 14 percent per annum between 1971-75 as against 8.6 percent per annum between 1966-70. The plan is non-contributory, that is, it is financed by state enterprises which make payments totalling 15 percent of the wages fund. Cooperative workers are not covered by the state plan but the law requires that they establish one of their own under similar rules. These state and cooperative plans form the backbone of the social welfare system for those who are able-bodied and work in the socialist sector. Those working outside the socialist sector were not covered until 1977 when a new pension plan was introduced (paras 9.41-9.42). 9.18 Various other transfer payments are also made. These include state assistance for children, maternity benefit, educational scholarships and what are termed "money helps". These "money helps" contribute to the comprehensive- neq of th Rncinl wplfArp system. as they involve the provision, for example. of money to those earning less than 3,400 lei per annum. 9.19 The final element is "other payments", the miscellaneous category from the sale of an individual's own produce on the open market. It is not L.toughtL to. be a large JWJ~ componen of JtoCtalincome ao9 Tof obtain a~-,- mor cop e -4t- p f if-n~ f- - -F 1~4-- 4- Romania, it is necessary to go beyond the various components of income and examine their aistrioution. unce again, the unavailUUiiy u a more compre- hensive data base precludes a thorough examination of this problem but there are sufficient published statistics tO givE an inlcation U tLe degrte UL income equality in Romania. 9.21 Taking wages in the state sector first, the minimum wage for un- skilled workers was set in 1975 at 1,200 lei per month and that for skilled workers at 1,406 lei. The average monthly nominal wage in 1975 amounted to Figure 9.1 Distribution of Wages in State Sector 1965, 70 and 75 100 ----0 ,-'' 1965 1975 D E 1970 10 90 ------ -----.·· -- ------1 80.....-.---- ----- ---- --- - --- ------- ----,- ------.-.-- --···---..--.-- ---- - -.----- - -------2 70 - - - - -- - - - - --- 1-- - - --- -- - -- - - _ _ - -- .-- - ~- ----- - --- - - 30 /* 60- --- - --- ------ 40 50 - - -- -- - --- - --- --- - -------------- 50 A 40 --- - -. ----- 60 EXPLANATION 30 --- ·A. Implies that in 1975 the bottom 50% of the population received less ihan the average wage.~- 70 B. Implies that in 1970 the bottom 60% of the population received less than the average wage. C. Implies that in 1965 the bottom 65% of the population received less than the average wage. D. Implies that in 1975 the top 10% received at least 40% more than the average wage. 20 -E. Imples that in 1965 the top 10% received at least 50% more than the average wage. -- 80 F, Implies that in 1970 the top 10% received at least 55% more than the average wage. (the bottom x (the top x %) 10------ - - ------ 90 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.11 1.25 1.43 1.67 2.00 2.510 3.83 5.0 C:umulative wages as proportion of average wage W.5 l hn175 ___ __ __ __ __ _ _ __ __World __ Bak 10 - 138 - 1,813 lei (see Annex 1.14), indicating a narrow dispersion at the lower end. Furthermore the Law on Remuneration 1/ requires that the maximum wage/salary be five and half times the minimum. Table 9.9 shows the distribution of wage earners between income groups within the state sector. This data implies that the distribution of wages within the state sector has become more equal 2/ over the last 10 years. So with respect to the state sector, not only have wages been growing but the benefits have been accrued more by those at the lower end than at the higher. Table 9.9: CATEGORIES OF WAGES BY GROUP OF BENEFICIARY (Employees in the State Sector) in percentage terms 1960 1965 1970 1975 Less than 900 lei 65.4 39.6 7.0 - QAl~~~" 1 A1.I1C '1 9A () - 1,101 - 1,300 lei 8.9 14.2 22.2 3.5 1 ,)A1 1 Cz1 4 /. -7 a 1 7 1 r_ AzJU L .L , .JU.WJ C * I e. .J . LV U. UU 1,501 - 2,000 lei 3.9 10.1 20.8 44.6 More than 2,500 lei 0.3 1.2 6.0 9.3 Source: Anuarul Statistic and data provided y Nomanian authorities. 9.22 Guaranteed incomes also exist in the cooperative sector. 3/ In livestock breeding, the figure is 1,500 lei a month; in vegetable, vine and fruit tree growing, it is 1,200 lei, and for other crops and agricultural works, daily remunertion is fixed at 40 lei. 9.23 Guaranteed minimum wages do not cover those on piece work. It piece workers fulfill their norms, they receive their contracted wage. Over-or underfulfillment of production targets is proportionately linked with increases or decreases in wages respectively. A majority of cooperative workers and a significant number of state workers are on piece work. 1/ No. 57 of 1974. 2/ See Figure 9.1 which plots the cumulative frequency of each wage group expressed in terms of the average wage of that year. The nearer to vertical the graph, the more equal the distribution. The results show that in 1975 only 50 percent of the state employees received less than the average wage while in 1970 the figure was 60 percent and in 1965 65 percent. TI Tntrndiced in 1971. - 139 - 9.24 To put this into perspective, however, it must be realized that in Romania everyone has sufficient food, clothing, housing, education and health care. The basic needs of all people are met. Wages received are only part of real income. The comprehensive social welfare system and state provision of services exists for the benefit of all according to their needs (see also Appendix 10); in addition, the price system attempts to provide goods at prices reflecting their social cost with the result that the basic neces- sities of life are relatively low in price while the rest are relatively high. 1/ C. The Planning of Consumption and Personal Incomes 9.25 A basic tool in determininz the sDlit between consuimprion and investment is the State Planning Committee's Unisectoral Macro-economic Model, whose obiective function is to maximize consumnion over A 15-year nerioA This provides the given consumption/investment split and implicitly deter- mines the low rate of time nrpfprpnrp hy utilizing the 15-year horizon. The extent of the problem can be seen by referring to Figure 9.2, which gives a simplified nif-ttire of the crciular flow of income in Romanra q26 or glen otpu, te prble isto determine the level of house- hold income that is consistent with the given consumption/investment split. In uineofrtkng this calculation, various other cons traints have to be adhered to. First the level of socio-cultural expenditures is predetermined. Such servlces ~ ~ ~ ~ W ar os dr oXLDL FLJJL.LLY d are taeni as d giveni. Second, the taxation system is also a given. Income taxes have been pro- -4-exv w4*1 #-1, a-u -4 Lcating an equitavie diLULrULLOH Of 1HCOme 6- - W- -1 armL V1. %LLCOGLLg CILL t::U.LLd I UL L UULionl or income. Turnover taxes are mainly used to set social prices; they represent the difference Detween financial costs and the derived selling price, which is set low. Third, there is the constraint of the wage structure, which is also 9.27 Tus, the problem becomes two-fold. What level of household income will lead to the desired levels of private consumption, private investment (mainly in housing) and private savings and what wages/profit split will lead to that level of household income. The first problem is dealt with by means of selective consumer budget surveys covering a representative cross section of the population (11,000 families). Each respondent provides in- formation on income, family size and other socio-economic indicators as well as a daily questionnaire showing his expenditure on various items. In addi- tion, systematic and periodic surveys of the population are organized regard- ing the demand, preferences and opinions in connection with existing and new products. Annual consumer goods fairs are also organized in different parts of the country where the appeal of various new products is tested. This information, together with records of actual retail sales and prognosis studies, can then be analyzed and used to project the future pattern of demand 1/ For example, the cost of a new Dacia car is 70,000 Lei, which represents 36 months earnings for the individual earning the average income in 1976; rents average 7-12 percent of income. and to determine the expected propensity to consume and the material balances in consumer supplies. Other conventional and more indirect methods of in- fluencing consumer demand, such as changes in the tax structure or credit conditions, are not often used. 1/ Tax levels and credit conditions are already set at the socially optimal levels. 9.28 The estimation of the wages/profit split, or the absolute level of wages, then becomes an arithmetic calculation given the parameters that are already fixed. Total incomes are already determined by the level of output as is the government/household disposable income ratio. Thus, given the level of disposable income and its structure, which are based on such para- meters as the Law on Remuneration and the level of transfer payments in socio-cultural expenditures, the estimation of the size of the wage fund can be calculated and the system made closed and consistent. D. 1976-80 Plan Targets (1) The Initial Targets 9.29 It has already been seen that substantial progress has been made in recent years in increasing the level of consumption and standard of living in Romania. Table 9.10 gives the main targets for the 1976-80 Five-Year Plan. National income (measured in comparable prices) is expected to continue to grow at 10-11 percent, with the consumption fund (measured in comparable orices) expected to increase at 8 percent remaining at 66-67 Dercent of it. As the rate of increase of both real incomes and retail trade (in volume terms) is planned to be slightly lower. the indication is that the relative price of consumer goods and services will be increasing and that the real share of the consumntion fund in national income will be falling. 1/ Consumer credit is available for most durable goods. Figure 9.2: THE FLOW OF INCOME IN ROMANIA Net Output Gross Incomes --- Profits - From State Funds--- Taxatbion on - Investment - State Investment from Net Government enterprises and---- Gross Private Savings Income cooperatives Profits Private Investment ---- Bonuses --I I I --- axation on - Income I Taxation on II Mxpenditure - Direct State --------- 14 --Consumption --Private Consumption-------- Wages of State Services Net Household Oth-- Paymen .Direct Private ----- Disposable Wages- Income Pensions and _____________ __other Social Welfsxe Payments - 142 - Table 9.10: PLAN TARGETS AND ACHIEVEMENTS 1976-80 Plan Initial Revised Achieved 1971-75 Plan Estimates Percentage increase during period National income 71 61-68.5 Real incomes of nonulation 46 35-40 Real wages 20 18-22 30.2 Rea incomes of naantry 31.6 90-29 30.0 Services 68.6 61-68.6 75.0 Reail~ tr-~a 48 45.0-47.5 52.0 Real pensions 19 15-16 16.0 Housing (number of units constructed) 750,000 815,000 1 million national income 66 66-67 ouLce. Law on doupiu u t LUC unified Natuinal a ut P fcounumic anu Social Development for 1976-80 and data provided by the Romanian authorities. 9.30 Nevertheless, although the momentum may be slightly reduced, living standards should continue to rise rapidly. Real incomes are expected to increase at 7 percent per annum, retail trade at 8.7 percent per annum and services at 11 percent per annum. These are bold targets but if Romanian past experience is a guide, they will at least be fulfilled on average. - 143 - Table 9.11: RETAIL TRADE (in percentage terms) Increase in 1975 Increase in 1980 over 1970 over 1975 Meat and meat products 52.5 55-63 Milk for consumption 50.2 65-78 Butter 41.5 75-108 Cheese 36.1 60-84 Edible Oil 11.7 35-47 Sugar 29.7 30-39 Eggs 115.5 50-60 Vegetables 5.1 65-76 Fruits (including grapes) 63.3 100-154 Knitwear 64.0 60-68 Footwear 38-7 5o-,5 Radios 41.9 55-63 TlPviqion 62 . A-50 Refrigerators 80.7 50-54 Furni tiir 592. Passenger automobiles 78.4 45-50 '~ ~. ~ r~.~jJ. L'.JL I- LI L I nif .=-- hLIL )ia rUL.1 E. ILL 01i ECULLULUIIA aLLU .O I al Development for 1976-80. 9.31 As the increase in real income is generally greater than that of real wages ,para 7.1±;, anu because or tne increases in salaried personnel the greatest increases in consumption can be expected to occur in the socio- cultural sectors. it is known that education, public health services and cultural activities will receive particular attention. It is intended that the building of over one million new housing units 1/ will help solve the chronic housing shortage. Early reports of achievements in 1976, and new targets ror t97, indicate that at least the initial targets for the rive year period should be achieved. 9.32 Retail supplies will, as noted above, increase by approximately 8.7 percent per annum. The increases for some of the major commodities are shown in Table 9.11. During this five year plan, particular emphasis seems to be going to foodstuffs, as before, with the biggest increases planned for fruit, vegetables and dairy products as against staple goods. The increase in con- sumer durables, however, seems to be getting less priority than in the last five year plan. 9.33 The plan law states that measures will be taken for improvement of public supply "through ... rigorous application of the provisions of the programs relating to production and marketing of consumer goods, achievement 1/ This is a revised five year plan target. For details see para 12.69. - 144 - of regularity of supply of commodities as market allocations in a diversified assortment structure and of a suitable quality." In other words, consumer preferences should be satisfied more fully. 9.34 Further improvements are also envisaged that will not be mirrored in the standard indices. For instance, the working week was planned to be reduced to 44-46 hours by 1980 from the present 48, but because of the earth- quake, this will commence in 1978 instead of 1977 and be implemented by 1982 instead of 1980. Also, the minimum sizes of state apartments will be increased and they will tend to be of a higher standard. 9.35 Finally, along with these definitive increases in the standard of living projected for the five year period, 33-34 percent of national income is to be invested in returns for the future. (2) The Revised (1977) Targets 9.36 In mid 1977, a new program with higher targets for wages and pen- RinnA dlring thp l976-An Fiu Ypar Plan nPrind was adntped Rome of the revised targets are given in Table 9.10. (a) Increases in Wages in Non-Agricultural Activities 9.37 An additional Lei 35 billion have been added to the wage fund over and abv the inr-ns- Spcfe 4, t-1- 107A-An V;Y Vn,- Pln-. Th,4 wol entail an increase in real wages over the period of about 30 percent compared LtIlCtC theL '8C1L2 percen enviaged. earlir.L T Ie authi.tiesCOQ..L aulLJue cLajat3Z_ tional increase in the wage fund to "savings realized through lowering of the LUV _OLLLMLLL u U I _LUIt L1CLC L L L bV%I.. L %ULIZ ULUIPL LULL LULU n.JO 111 a tULLLUL1l l cile!se 11 Lile Wage LULlU 15 SUbLaIlLIdl an'1 s[1ulG lead to corresponding increases in the volume of sales of certain consumer goods. However, the net benefit that will accrue to the workers needs to be reviewed within a broader context and is not quite clear at this time. For example, total socio-cultural expenditures which make up a substantial portion of family income are not increasing as much over the previous five-year plan period as they did in the past. The increase in the I1i-6u period was 42.7 percent over the corresponding expenditures in 1971-75, while in 1971-75 the increase over 1966-70 was 53.6 percent. To the extent that this relatively smaller increase is due to "sounder management of social consumption funds" there is a real gain for the consumer but commensurate with that has been a recent government announcement to reduce further socio-cultural expenditures. 9.39 With regard to the savings realized by lowering the costs of in- vestment, there is no published data available to analyze what proportion of these savings has been passed on to the workers. It should also be noted that, concurrent with the revision of the wage targets the initial targets for productivity changes over the plan period have also been substantially increased (in industry for example, by 10 percent). The wage increases are contingent on attaining the revised targets for productivity increases. The last phase of the wage increases is scheduled for 1979/80 which are the last - 145 - years of the plan. Finally, the real wage increase will depend upon the level of thp rptnil price index. (b) ChAage Affecti4ng Tncomea and Pensions of al, Agricultural Workers 9.40 The new program increases further over the 1976-80 period the mWLAD uL M L OLCLLC a6LLLLLULa LILLPLib5, COuperaLlVe farmers and individual farmers. The increases in the incomes of workers in state enterprIseS wILL amount to Ju percent as against 1o-24 percent initially planned. The real incomes of cooperative farmers will increase by about 30 percent wnicn is close to the upper range of the previously expected increase (20-29 percent). The real incomes of independent farmers would increase by 16 percent, but no previous comparative target is available for reference. 9.41 A more important series of measures has been that of increasing the pensions of farmers in cooperatives and the institution of a pension system for independent farmers. The pensions would be funded by cooperative and/or individual monthly contributions and a contribution by the State of 2 percent of the value of products delivered to the state fund either by the coopera- tives or the independent farmers. Without further details on the funding of these schemes it is not possible to assess the net benefits that will accrue to the farmers.
World Bank Group · Pre-2003 Economic or Sector Report
Romania - Industrialization of an agrarian economy under socialist planning (Vol. 1 of 4) : Main report
View original document
The full text is hosted by the publishing organisation. lawenc.com indexes the metadata and links to the official source.
Full text
Key facts
Organisation
World Bank Group
Document type
Pre-2003 Economic or Sector Report
Country
Romania
Source
World Bank