Romania - Current economic position and prospects (Vol. 2 of 3) : Annex A : planning and the planning system in Romania

Report No. 492a-RO FILE c Current Economic Position and Prospects of Romania (In Three Volumes) Volume 11: Annex A-Planning and the Planning System in Romania October 11, 1974 Europe, Middle East and North Africa Region Not for Public Use Document of the International Bank for Reconstruction and Development This report was prepared for official use only by the Bank Group. It may not be pubfished, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS 1. Official Rate lei 4.97 = US$1.00 lei 1 = US$0.20 2. Official Rate With Premium Up to 2 Oct.74: lei 14.38 = US$1.00 After 2 Oct.74 lei 1 = US$0.07 lei 12.00 = US$1.00 lei 1.00 = US$0.08 Conversion Coefficient for Foreign Trade Transactions lei 20 = US$1.00 lei 1 = US$0.05 Fiscal Year -- January 1 - December 31  ANNEX A PLANNING AND THE PLANNING SYSTEM IN ROMANIA TABLE OF CONTENTS Page No. I. INTRODUCTION ..................................... 1 The Objectives of Planning .... .............. 1 The Historical Context ..... ................. 1 The Nature and Principles of Romanian Planning .................................. 2 II. THE PLANNING FRAMEWORK ........................... 3 Institutions Involved in Planning ........... 3 Planning Techniques ......................... 6 The Striking of Balances ..... ............... 6 The Role of Markets and Prices .... .......... 7 Investment Criteria ......................... 8 III. PLAN ELABORATION ................................. 8 The Five Year Plan .......................... 8 Chapters of the Plan ........................ 9 The Annual Plan ............................. 9 Disaggregating the Plan ..... ................ 10 IV. PLAN FULFILLMENT AND CONTROL ..................... 11 Economic Stimulation ........................ 11 Economic Contracting ........................ 11 Financial Control ........................... 11 Plan Modification ........................... 12 APPENDICES I. SELECTED CHAPTERS OF THE PLAN .... ................ 1 - The Plan for Industrial Production 1 - The Agricultural Plan. 3 - The Labor Plan 4 - The Investment Plan.5 - The Financial Plan. 6 - The Credit Plan. 8 - The Foreign Trade Plan. 9 - The Territorial Plan. 9 II. TIIE ROMANIAN SYSTEM OF MATERIAL INCENTIVES ....... 1   I. INTRODUCTION The Objectives of Planning 1. Romania is a socialist republic in which the state owns the major part of all productive resources. There is no private industry, the state has a monopoly on foreign trade and it owns or controls most of the resources in agriculture. Given this, the state is in a position to exert direct man- agement over the direction, volume and type of economic activity, in order to achieve the social and economic goals set forth in the program of the Romanian Communist Party. The major instrument for exerting this control is the national socio-economic development plan 1/ which sets out for the economy as a whole, by sector and branch and on a territorial basis, specific tasks and activities for economic and social entities in order to achieve rapid economic growth and a rising and equitable increase in the standard of living of the popula- tion. The state also has direct control over other economic instruments in- cluding prices, interest rates and the money supply, all of which are admin- istered within the framework of development planning. The Historical Context 2. Planning in Romania, as an instrument of economic management and control, is in a continuous state of evolution. As Romania's economic needs and priorities changed through different stages of the country's development so has the system of planning been adapted to e.ffectively achieve the new goals. At times this adaptation has required major organizational and pro- cedural changes involving the creation of new institutions, or the modifica- tion and abandonment of existing ones. In a planned economy institutional change is the major means of achieving improvements in economic management. 3. Romania is at present in an important stage in the development of its planning system. Since the National Conference of the Romanian Communist Party in 1967 called for the "raising of economic activity onto a higher qual- itative level" 2/ and for the "strengthening of the role of the plan in guid- ing socio-economic processes" 3/ the Romanian authorities have undertaken a wide range of institutional, economic and procedural changes designed to im- prove the planning system and to increase the efficiency of economic manage- ment. The changes have not been confined to the institutional organizations in the planning system alone but have included changes in the policy and prac- tice of pricing, changes in financial and investment procedures, and in the 1/ The full title of the plan is The National Unique Plan for Social and Economic Development. The notion of 'uniqueness' is discussed in para 4(a) below. 2/ Report of the National Partv Conference, December 1967, p. 6. 3/ Ibid., p. 54.  - 2 - conduct of foreign trade, among others. 1/ Many of these new procedures have only recently been introduced. Most of them are still being fully developed to fulfill the objectives envisaged in the Party Directives. The text of the main report discusses recent changes in the planning framework and describes their objectives. The Nature and Principles of Romanian Planning 4. The principle of planned economic management is viewed as an essen- tial attribute of Romanian sovereignty and national independence. It is an attribute-which follows logically from the social ownership of the means of production, distribution and exchange. Apart from this there are at least four major principles which underly the Romanian system of planning, as follows: (a) The Uniqueness of the Plan. Planning can effectively achieve the goals of society only to the extent that actual plans are comprehensive and obligatory. In Romania the plans are com- prehensive in that they cover the bulk of economic and social activity in all sectors, branches and territories. Only the private sector (which is small) remains essentially outside the purview of the plan. In this sense the plan is 'unique' since it is the sole basis for the execution of economic activity at any one time. Planning is also comprehensive in a temporal sense, covering both the short- and long-term. In addition to being comprehensive, Romanian plans are (within reason) obligatory since they are published as documents with legal authority. (b) Democratic Centralism and Collective-Management. Democratic centralism, the founding principle on which Romanian political economy is organized, reflects a principle of unity or recon- ciliation between centralized management and the functional autonomy of individual economic units. In planning, this principle is illustrated by the practice of elaborating the plan through a combination of central directives and indivi- dual aggregations i.e. planning is both "upwards" and "downwards." 1/ The range of innovations is illustrated by the passage of several new laws, including the following: 71/1968 The Law of Economic Contracts 72/19.9 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 The Law on Organization of State Socialist Units 8/1972 The Law on Planned Social and Economic Development of Romania 9/1972 The Financial Law  - 3 - Equally, it is illustrated in plan execution by the fact that once the plan is agreed and issued by the central authority responsibility for fulfilling it devolves to the economic units. The principle is also reflected in the fact that all economic, social and administrative units (including the min- istries) are organized to allow for collective management and decision making. Enterprises, for example, each have a Gen- eral Assembly of Workers which discusses and approves the enterprise plan proposals. There is also a Working People's Committee which makes short run decisions regarding plan ful- fillment and other matters, these decisions being executed by the director. (c) The Use of Incentives. The fulfillment of plan objectives is achieved, within the framework of contractual obligations aris- ing from the plan, through the use of a combination of material, financial, price and other incentives to stimulate both manage- ment and workers in production and exchange activities. Since a principal aim of economic activity in a planned economy, as in any other, is the profitable sale of produce, incentives are geared to efficiency and qualitative factors (including the expansion of foreign trade) as well as to purely quantita- tive'production and sales targets. Markets, therefore, provide the final test of the success of planned production, and are not preclusive of it (see paras 10-11 below). (d) The Principle of Continuous Planning. The process of planning is continuous. During each of the planning periods all economic units follow a constant reconciliation between present actual achievements, and future short and medium term plans, adjusting these to coincide with longer term perspectives. In the light of achievements, monthly, quarterly and annual plans are ad- justed. Five year plans are made consistent with the perspec- tive plan which reflects long term trends. Planning is not, therefore, rigid and irreversible but pragmatic and evolving. II. THE PLANNING FRAMEWORK 5. The development plan is first elaborated in the framework of a five year period. This Five Year Plan provides the basic outline, in concrete terms, of the major targets for development for the entire period and for each year during the period. It is the basis for the Annual Plan which is the instrument for actual execution of activity. Annual Plans are elaborated successively for each year through the five year period, making adjustments to the annual targets contained in the Five Year Plan, according to achievements in the previous year (see para 19). Within the framework of the Annual Plan there are quarterly and in some cases monthly plans. This applies, for example, in production investment and export planning. Quar- terly plans also exist for cash, credit, trade and the balance of payments.  - 4 - 6. Planning also extends into the long term, encompassing periods of ten or more years and in some fields for even longer periods. These plans or prognoses as they are called provide the basis for elaborating the Five Year Plan. Institutions Involved in Planning 7. In the nature of the country's organization, all State and Socialist institutions are involved in the process of planning and plan execution. The following paragraphs give a brief description of the division of responsibil- ities between the major institutions involved: (a) The Romanian Communist Party (RCP). The Party Congress, which is held every 5 years, is the supreme forum for the determina- tion of the direction of Romania's development. In the period between Congresses, the Central Committee deals with most im- portant issues. National Party Conferences can be convened to discuss important problems. The Eleventh Congress will be held in November 1974. (b) The Grand National Assembly. The Assembly is the Romanian par- liament and is the supreme legislative organ. It has permanent commissions in some branches of the economy which advise the Assembly on the passage of legislation. The Assembly elects the State Council which acts for it between sessions and con- trols the application of laws and the activities of all organs of state administration. (c) The Supreme Council of Economic and Social Development (SCESD). Established in 1972, this Council is the chief advisory and deliberative agency in the planning field. It is composed of 150-260 members who together represent all areas of the Romanian economic and social life. As a joint state-party organ, the SCESD presents studies and conclusions on the long-term prog- noses to both the State Council and Central Committee of the Party. It also reports to the Grand National Assembly on the efficiency and consistency of the Five Year and Annual Plans. (d) The Council of Ministers. This is the highest body of state administration. It is responsible for the management of all economic and social activities. 1/ In the area of planning, it has responsibility for elaboration of plans and submits these to the National Assembly. After adoption of Five-Year and annual plans, the Council of Ministers divides the plan targets among the ministries, other central bodies and people's county councils, and then supervises their fulfillment. 1/ The composition of the Council of Ministers is given in Appendix II to the main report.  -5- (e) The State Planning Committee (SPC). The SPC, which is repre- sented 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 suggestions from the techni- cal ministries. It proposes which indicators and which norms will be used, for such items as raw material use, inventory levels, and employment and wages. It draws up synthetic bal- ances, as well as material balances for the important products which are allocated by the Council of Ministers. In terms of plan implementation, the SPC along with other agencies, oversees plan fulfillment, proposes corrections of imbalances and reallo- cates resources. Together with the Ministry of Foreign Trade, the SPC, works on general plan coordiiaation with other CMEA countries. (f) The People's Councils. The local elected governing body in each of the 39 counties (judets) and Bucharest is called the People's County Council. The Executive Committee of the Coun- cil, consisting of a chairman, two or more deputy chairman and a number of other members chosen for the life of the Coun- cil, is the chief administrative organ of each County Council and as such directs the planning activity in each county. Each county comprises towns, or urban areas, and communes, or rural areas. These local people's councils, which exist for each town and commune, all have executive committees with local planning functions. (g) The Technical Ministries, Industrial Centrals and Enterprises. There are ministries which deal with planning activities in each major sector of the economy. The ministry is the first "titular" of the plan, being responsible for both the elabora- tion and implementation of the plan for the sector or branches it deals with. The industrial centrals are independent economic units of the ministries set up (in 1968) to assist them in eco- nomic administration. The centrals each of which directs the operations of a group of enterprises (horizontally or vertically integrated) perform important tasks in the planning process. 1/ They elaborate their own plans based on the proposals of their constituent enterprises, passing these as proposals upwards to the ministries. They also disaggregate final plan targets from the ministries to their constituent enterprises. The centrals have become "titulars" to the plan of their respective Minis- tries, having a responsibility for the fulfillment of plan targets. The enterprise is the unit which executes the plan and achieves its targets. Enterprises exist not only for production but also for distribution and trade and services. Some large enterprises are of the nature of Centrals and they report directly to their ministries.  - 6 - (h) 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 and 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 For- eign Trade and International Cooperation, the National Coun- cil for Science and Technology, the State Committee for Prices, the General Directorate of Statistics, the Inspectorate for Production Quality Control and the Ministry of Domestic Trade. These agencies collaborate with the State Planning Committee and with the technical ministries to coordinate plan aggre- gates within their respective fields of competence. Planning Techniques 8. The operational substance of the plan, for both the Five Year and Annual Plans, consists of a number of indicators and norms through which are determined the volume and efficiency of production and distribution and the pattern of resource allocation. Plan indicators are targets established for a subordinated unit by the plan. They are expressed in the form of a physical volume, number of items, lei value or ratio, and include such variables as tons of output, number of workers, lei value of investment and material ex- penditures per 1000 lei of output. The plan indicators used in industry and agriculture are explained in Appendix I. There has been a movement over time to improve the system of plan indicators and change their composition to en- courage the more efficient use of resources. Norms are a quantitative ex- pression of some rules or obligations regarding the consumption of resources designed to constrain performance to successive improvements. A system of progressive norms is applied in the elaboration of plans in Romania. This means that future input requirements are not determined by reference to aver- age past results only but are based on a combination of the best and average results. Among the most important norms are (i) work time necessary for the completion of an operation, (ii) fixed assets required per unit of output and (iii) working capital consumed per unit of output. The Striking of Balances 9. Macro-economic consistency is achieved during plan elaboration through the making of a number of different balances. Each balance has two sections, one which lists the sources of a particular resource, and the other which enumerates its uses. Before the balance can be finalized and its com- ponents incorporated in the plan (which is done by successive approximations), sources must be made equal to uses. Balances are compiled for such factors as national income, social product, labor force, production capacity, and allocation of credit, but the most common balances are material balances which follow the basic form presented below. The Council of Ministers determines the products for which material balances should be compiled (products of major importance) and designates the coordinator of the balance, which is usually the unit which directs the largest share of the production or consumption of the product. With the help of the State Planning Committee,  the Council of Ministers is responsible for the compilation of somewhat less than 200 material balances for products of national importance. Balances for other products are struck by the Ministries and Centrals. The Mate-rial Balance Sources Uses Beginning stock consumption Production Production Imports Investment Released from state reserves Exports Other uses Increased state reserves Other sources Plan reserves Ending stock 10. Romanian planners make extensive use of input-output tables and quantitative models. In 1972, a 74 x 74 matrix table was prepared using the data of 1970. In 1971, a simulation model was developed which covered the period till 1990. The aim was to maximize "extended consumption" (the con- sumption fund and the unproductive part of the National Fund for Development) using the familiar calculation of variations tcchniques. Econometric models are also used. There is a macro-econometric model elaborated on the basis of data for the period 1966-1973 (earlier data is not comparable) which has 27 equations which the planners hope to extend in the near future. The Role of Markets and Prices 11. In the last count the results of the planned economy must be evid- enced in the market. This applies equally to goods produced for domestic consumption and to those produced for export. Thus, plans are drawn up on the basis of an equation between supply and expected demand. If demand is less than expected inventories will accumulate and production plans may be adjusted downwards in subsequent periods. Prices may also be lowered but this tends to be the exception rather than the rule. Prices generally re- main fixed for long periods. 1/ Also, particularly in the export sector, the recent emphasis has been on expanding the demand for products by improv- ing their quality rather than by reducing their price. Price adjustments do, however, occur in the peasant market where they are free to vary, sub- ject to certain limits. 12. In the field of employment there is a free movement of labor and the structure of remuneration is often used to attract suitable categories of labor into job vacancies. The rate of job creation and the allocation of new openings, of course, follows from the development plan (see Appendix I for details of the labor plan). 1/ Recent policy has been to make more frequent adjustments. See Annex B, Prices and Pricing Policy in Romania.  -8- Investment Criteria 13. Before investment projects are integrated into the investment plan (see Appendix I, para 14) each project is analyzed separately in a technical- economic study. Projects may be accepted or rejected, as in any country, for a variety of reasons including economic, social or political and technical reasons, among others. The criterion most generally used to establish the economic validity of a project is the payback period, expressed in the fol- lowing formula: P= T/b, Where P is the payback period in years; T is the total investment cost of the project; and b is the annual average flow of benefits from the project. Ac- tual prices are always used in this calculation. There is no unique critical value for P which determines the acceptability of a project. Hlowever, compari- sons are made with achieved norms for the sector or, in some cases, with si- milar projects. III. PLAN ELABORATION 14. Plan elaboration involves the process of drawing up the actual de- tails of the plan, in several stages of draft. Chronologically the elabora- tion of the Five Year Plan precedes that of each of its individual Annual Plans. The Five Year Plan 15. The Directives of the Party Congress constitute the basis for ela- borating the draft Five Year Plan. To provide foundations for the draft Di- rectives, two to three years before the end of the five year plan then cur- rent, available studies or prognoses are used and new ones are commissioned at all levels of organization in the economy. On the basis of the studies for each branch and sub-branch, for products of special importance, for problems of special complexity and for each region, the State Planning Com- mittee in collaboration with the ministries, central organs, people's coun- cils in the judets and with the principal Centrals, elaborates a draft which is correlated with the outlines for development in the future five year period and in parallel with the prognosis for the longer term. This draft outline, together with the long-term macro-economic prognosis, is examined and approved by the superior bodies of the party and the State. (For the five year plan 1976-80 and for the prognosis up to 1990 this was done in June 1974 at a common session of the Executive Committee of the Party, at the permanent Office of SCESD and at the Council of Ministers.) From the approved outline and prognosis the draft directives for the Party Congress are elaborated. In July 1974 a plenary session of the Central Committee of the RCP and the SCESD adopted the draft directives for the plan period 1976-80 and principal lines for development in the period 1981-90. Before submission to the Con- gress there is now (for the first time in 1974) an open debate on the draft  by the entire populace. An improved version is then approved by the Congress as its Directives for Development in the Future Period. 16. The Draft of the Five Year Plan must then be elaborated on the basis of the directives. Elaboration begins at all levels at the same time, but the process of harmonization starts with the enterprise. For this purpose staff from higher levels assist enterprise planning departments. The system of collective management, whereby representatives from lower level organizations participate in the management of higher level organizations, facilitates the interchange of information. Continued discussion is required before the SPC can prepare a plan draft of the entire economy for the Council of Ministers. This draft is examined by the SCESD and debated in a full meeting of the central committee. Finally the plan draft is submitted for discussion and approval by the Grand National Assembly. 17. The process of preparing balances through negotiation is essential throughout plan elaboration. Balances must be compiled at all levels to ascertain whether plan proposals are feasible. In the case of imbalance, one organization must negotiate with others usually in an attempt to reduce demand or increase supply. A change in one quantity may necessitate changes in other variables, which may generate more imbalance and a new series of negotiations. Owing to such a trial and error process at all levels, the SPC is finally able to prepare a feasible, politically-acceptable nation- wide plan draft. Chapters of the Plan 18. In its final elaboration the plan contains some 20 chapters which comprise the plan objectives in terms of indicators and norms for each pro- ductive sector, for transport and trade, for investment and finance, incomes and employment, social services, regional development and others. 1/ Each chapter, while being a self-contained plan for each respective field, forms an integral and consistent part of the plan as a whole. A brief account is given of the contents and nature of a selected number of chapters in Appendix I to this annex. The Annual Plan 19. Following practically the same procedures as those for the elabora- tion of the Five Year Plan, the draft Annual Plan is prepared in detail six months before it is due to be executed i.e. by 30 June in the year preceding. 1/ The principal chapters of the plan are: (1) Industrial Production; (2) research and Development; (3) Agriculture; (4) Forestry; (5) Transporta- tion and Telecommunications; (6) Domestic Trade; (7) Foreign Trade; (8) Investment-Construction; (9) Geological Exploration and Development; (10) Labor Force and Wages; (11) Training; (12) Production Costs and Financial Indicators; (13) Education - Culture - Health; (14) Public Works; (15) Consumer Services; (16) Tourism; (17) National Income; (18) Standard of Living; (19) Technical-Material Supply; (20) Regional Development.  - 10 - It contains the same chapters as the Five Year Plan. It is at this point that the enterprise can make a number of adjustments such as increasing labor re- quirements, reducing the level of investment, and modifying the output mix. If the enterprise cannot locate additional resources required, or dispose of excess reserves, the Central is handed this task, which the central in turn can hand on to the Ministry. The final magnitudes of the Annual Plan are based on: (a) The provisions for the year in question contained within the Five Year Plan; (b) The availability of new resources or reserves and the possibil- ity of using more fully existing production capacities and of increasing labor productivity; (c) Achievements in the previous year, the rate of growth of do- mestic and external markets, or other factors warranting an adaptation of the original Five Year Plan targets. 20. After the drafting of the Plan the State Planning Committee, the Ministries, Centrals and enterprises begin the process of arranging supply and marketing contracts, in order to concretize the plan. In the fall the Council of Ministers presents the draft plan along with the draft State Budget for that year, to the Grand National Assembly for approval. Disaggregating the Plan 21. After the approval of the plan by the Grand National Assembly, it is disaggregated to the titulars. This process involves a breakdown, for all chapters of the plan, of the indicators to be achieved by each level of responsibility. The indicators become more detailed and cover a wider range of operations of the level of the enterprise. The Council of Ministers (on behalf of the Assembly) stipulates only the central objectives in each chap- ter of the plan, and divides these between the ministries. The ministries then divide them between their respective centrals which in turn do the same for their constituent enterprises. At this stage the plan for the year is also divided into plans for each quarter, where appropriate. The plan is then fully specified in all its chapters at all levels of responsibility for each quarterly period. 22. In the production chapters of the plan this process of disaggrega- tion involves what is called the "nominalization" of production targets i.e. the setting of fixed and obligatory objectives in stated production lines. The Grand National Assembly and the Council of Ministers nominalizes targets only for a range of major products (in 1974 the Assembly nominalized 36 prod- ucts, the Council 500). The ministries and centrals allocate responsibilities for these centrally nomalized products, and specify the different types and qualities of the products to be produced. They also nominalize an additional range of products for the enterprises so that the latter receive targets some of which are nominalized by the Council of Ministers, some by the Min- istries and others by the centrals. Such capacities as the enterprises may then still have available can be used to produce products of their own choice,  - 11 - provided supply and purchase contracts can be found. 1/ Once the enterprise, in consultation with the central, has decided upon its additional targets these are then obligatory to it and are entered as such in the plan. Ex post, therefore, nomalization 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. IV. PLAN FULFILLMENT AND CONTROL 23. The stimulation of both management and workers in the pursuit of the plan is achieved through a system of material incentives and technical assistance to the enterprises. Economic control is achieved through two major means, namely through the system of economic contracting and through financial control. These mechanisms cannot, of course, in themselves guar- antee that every detail of the plan will be precisely executed: inevitably there is an expected margin for contingencies which introduce errors, short- falls and delays, as in any economy. The provisions do, however, provide a framework designed to minimize such occurrences. Economic Stimulation 24. The payment of basic remuneration, bonuses and other rewards for the successful fulfillment or over-fulfillment is a central part of the system of material incentives designed to stimulate the working population. At times, in some sectors, the financial and credit system together with the setting of prices may also be used for this purpose. Under the new law of personal in- comes presently being discussed, there is to be an increasingly close corre- lation between production achievements and personal remuneration, with a de- clining emphasis on straight salary payments. An account of the system of incentives is given in Appendix II to this Annex. Economic Contracting 25. The Law of Economic Contracts (71/1968) is designed to ensure con- sistency between the actual operations of enterprises and the pre-calculated system of material balances. Enterprises cannot begin operations before final- izing contracts for the purchase of inputs and the sale of outputs in accord- ance with the forthcoming annual plan. In this way the planning authority ensures that the actual demand and supply of inputs and outputs is balanced and consistent with the plan. Except for items covered by material balances at the level of the central or above, the enterprises generally have the freedom to choose the supplier or buyer. The buyer and seller are entitled to negotiate such factors as quality, size and delivery date. Often the two parties cannot agree on the contract terms. Such cases of precontractual 1/ An enterprise cannot enter production of any product before contracts have been completed. See para 25 below.  - 12 - disputes are submitted for settlement to the Ministries concerned or the Min- istry of Technical-Material Supply and Control of Fixed-Assets Administration, in the process of which relevant legislation and approved plans are of para- mount consideration. Financial Control 26. Preliminary or preventive control exists in the system of checking and approving financial transactions before they occur, to ensure that busi- ness is being conducted efficiently and according to the plan. Preliminary control responsibilities, which can overlap, are delegated to a number of different individuals and agencies. The chief accountant at each enterprise must review and approve all financial transactions, while the banking system is not permitted to transfer any funds except within plan guidelines. In- ternal controllers appointed by the ministry concerned and approved by the Ministry of Finance can be located in large enterprises to review and report on the enterprise's activities. In addition, local offices of the Ministry of Finance must inspect and advise on more important developments., The Minis- try of Finance monitors nationally important transactions and the Superior Court of Financial Control investigates crucial situations and settles major disputes, as well as monitoring the Ministry of Finance. There is also a system of posterior control (auditing) which checks that all financial tran- sactions have been made in accordance with the plan. The National Bank serves as a running monitor on inter-enterprise transactions since all (non-agricul- tural) enterprises have working accounts at the Bank. Similar checks are made on investment expenditures by the Investment Bank and on expenditures in agriculture by the Agricultural Bank. Plan Modification 27. Modification of the plan during the course of its fulfillment can be made by the authority which approved it at each level of responsibility. Without outside permission, an enterprise can change an output target for a product nominalized at the level of the enterprise provided no contracts are broken and/or new legally acceptable contracts can be concluded. However, for an enterprise to change an output target assigned by the central, it must demonstrate justifiable cause and the central can authorize the modif- ication only as long as the central can continue to meet output targets as- signed by the Ministry. Likewise the Ministry can approve, again given suf- ficient reason, only those plan changes by the centrals which do not adversely affect the output targets handed to the Ministry by the Council of Ministers.  APPENDIX I: SELECTED CHAPTERS OF nIE PLAN THE PLAN FOR INDUSTRIAL PRODUCTION 1. The industrial sector is where planning is most precise, with plan targets the most detailed for both outputs and input usage. Much of the discussion in the text of the annex which has dealt with 'planning' in general has implicitly been about planning in industry. The chapter in the plan dealing with industry, therefore, is the principal chapter of the plan. It contains production targets for all the major industrial branches (elec- trical energy included) expressed in both physical and value terms, as well as efficiency indicators for productivity and profitability. The following paragraphs provide more precise details of the principal indicators in the plan for industrial production. 2. Commodity Production - is the part of production delivered or to be delivered to different customers. It includes: (a) All producti-on costs incurred and profits earned or to be earned on finished and semifabricated goods shipped out or to be shipped out. (b) Value of industrial semifabricated products delivered to other enterprises. (c) Value of industrial semifabricated products used within the enterprise for investment or nonindustrial needs. (d) Internal enterprise repairs executed by the enterprise itself. Commodity production is expressed in money terms using both constant and current prices. It is one of two obligatory plan indicators and provides the base used to determine turnover taxes. 3. Commodity Production Sold and Paid For - contains the value of commodity production delivered and paid for by the beneficiary. It is not a plan indicator (since the enterprise cannot determine when payment is received), but mereiy a calculation indicator and as such is used to deter- mine the speed of working capital turnover and profitability. 4. Gross Production 1/ - reveals the final result of an enterprise's total activity. It includes: (a) Commodity production. (b) Value of changes in stock of goods-in-process. 1/ Referred to as 'global' production in Romania.  (c) Value of production of auxiliary departments (e.g. tools, electricity). (d) Value of work on order by other enterprises on its own assets. (e) Repair of buildings. (f) Maintenance of housing. (g) Servicing of other nonindustrial, nonproductive funds. ;ross production is expressed in money terms using producer prices (both cur- rent and constant). Like commodity production, it is an obligatory plan in- clicator determined by the Council of Ministers. It is used to calculate na- tional income, labor productivity and to express proportions among industries and between industry and other branches. 5. Net Production - reflects the new value created in production in constant prices and can be calculated by two different methods: (a) Production method - remove material expenditures from gross production. They include - - raw materials - other materials - fuel - utilities - depreciation - exploration costs - capital repairs (b) Division of income method - add together - - profits - t,urnover taxes (when applicable) - wages - social security contributions - fund for new technology After lim,1ited experimental application, the use of net output as a plan indicator was extended to all republican industrial enterprises in 1974 (using the production method). Principal Industrial Efficiency Indicators (,. Mlaximum Expenditures per 1,000 lei of Commodity Production - re- lates the value of commodity production to its costs of production. Often the "material" costs of production (materials, utilities and depreciation) are treated as a separate subcategory and target rates of expenditures, declining over time, are stipulated in the plan.  - 3 - 7. Profitability - relates the total profit realized to production costs. Recently, total assets has been used as well as production costs. 8. Labor Productivity - relates gross production to the average number of registered employees in a given period. Productivity growth targets are also stipulated in the plan, generally for republican industry, transport and the construction sector. THE AGRICULTURAL PLAN 9. Planning for agricultural production differs from that in industry first because uncontrollable natural conditions strongly influence produc- tion, second because not all of agriculture is State owned. Production plan- ning takes account of the unpredictability of conditions by setting targets on the assumption that they will be those reigning in a "normal" year. Pro- duction targets in the agricultural chapter of the Five Year Plan are set in the form of a range of planned growth over the average levels of the produc- tion achieved in the previous plan period. In the Annual Plan the chapter contains specific targets set in the light of the present level of produc- tion. Targets are set in physical terms for each major crop or product and an aggregate target is specified in value terms. Targets are also set for the application of fertilizers and other inputs and, in the investment sec- tion, for the expansion of mechanization, irrigation, and other assets. The principal production indicators are: (a) Gross Crop Production - contains the value of all vegetable production plus the increase in the value of unfinished pro- duction (e.g. ploughed land, new plants, unharvested crops, etc.). (b) Gross Animal Production - The value of all animal-related production, as follows: (1) Meat (in live weight) (2) Increase in herd sizes (in live weight) (3) Primary non-meat products such as eggs, milk and wool (4) Secondary products such as manure and feathers (c) Agricultural Commodity Production - The value of products sold outside the producing unit or at the level of the branch, plus the value of the products sold to the non- agricultural population, to industry for raw materials and sales abroad. 10. Account is taken of the different forms of ownership in agriculture as follows:  - 4 - (a) Planning in State Fanns. The planning process for state farms is virtually the same as that for industrial enter- prises. Instead of industrial centrals, the state farms in each country or judet are organized into county trusts wlhich in turn are under the Ministry of Agriculture, Food Industry and Water Resources. Like other state units, the state farms draw up tentative plans for production, invest- ment, financing, labor, etc., and are given indicators that must be followed during the planning period. (b) Planning in Cooperative Farms. Cooperative farms partic- ipate in the planning process only to the extent that they enter into contracts with the local county General Direction for Agriculture, Food Industry and Water Resources for the delivery of individual products to the stafe fund. Each General Direction receives output targets from the state and by a negotiation process with each cooperative farm that permits variations in contract prices, it attempts to meet these targets. The cooperative farm may sell pro- duction in excess of the contracted amount to the General Direction, but the acquisition price at which this excess is sold is lower than the contract price. Cooperative farms prepare their own operational plans which are eventually ag- gregated and made available on the county and national levels, but the indicators in these plans are merely informational not obligatory andl certainly not part of an effort to coor- dinate goals at all levels. (c) Private Farms. No planning is required of private farms al- though they can enter into delivery contracts with the local branch of CENTROCOOP, which receives some delivery targets to the state. Output from private plots which will be sold on the peasant or unorganized market is not included in the agricul- tural nlan but it is included in the evaluation of gross agri- cultural production for the whole economy. THE LABOR PLAN 11. The chapter in the plan on labor force covers employment, training, productivity and incomes. It is based on the aggregate elaboration of man- power balances and a projection of skill requirements and availabilities. In conjunction with the chapter on education it makes provisions for the training of labor needed in the light of the changing structure of the economy. In the national plan there is a target growth in State employment which represents the aggregate of all employment growth planned at the enter- prise level, and in other state units. The employment target is binding as a maximum limit. The realization of this target depends to some extent on the free decisions of individual workers to choose their employment.  - 5 - 12. At the level of the enterprise, the labor plan contains three dif- ferent indicators - labor productivity, labor force and wage fund. The pro- ductivity target is generally successively higher in each Annual Plan reflect- ing the growth in the technical and capital endowment of labor. Labor force needs follow automatically from output targets and expected labor productivity. The wage fund is a function of labor requirements and the structure of skills but includes separate amounts for temporary workers, training and unexpected developments. 13. The values of labor-related indicators included in the plans are binding on the enterprise. After the plan is finalized the enterprise must go through an application process in order to acquire more workers than stated in the plan. If the need is judged unavoidable, the Central can approve a supplementary plan for the enterprise to employ additional workers, provided this is within the farmework of the Central's plan. If this is not possible within the central, the central can then request assistance from the Ministry. If additional workers are eventually acquired, and the wage fund is insuffi- cient to cover their salaries, then the enterprise must apply to transfer funds from one of its bank accounts in excess to its wage fund account. THE INVESTMENT PLAN 14. The chapter in the plan dealing with investment contains the ag- gregate figure for investment and its division between the different sectors and branches and between the different type of investments in the State and cooperative units. The Investment Plan nominalizes all investments, regard- less of values including those for small-scale improvements, for replacements, for expansion of existing plant or works or for construction of new capacity. 1/ For each project, the dates are given for investment start-ups and completion and for the commissioning of new production capacities, and the investment sum and capacities to be completed each year. 15. The Investment Plan is an aggregate of individual investment proj- ects, both ongoing and new. Before being written into the plan each project is analyzed and documented in a technical-economic study and a plan for execu- tion. In this form projects are submitted for approval, depending on their size and importance, through the administration to the Council of Ministers which is advised by the State Planning Committee and other bodies. (See the discussion of investment criteria in the main body of this annex). The final- ization of the investment plan follows from the reconciliation of investment needs with resources available, allowing some reserve for contingencies. The resources available for investment depend partly on national income growth, partly on the decision regarding allocation to consumption and on the availa- bility of depreciation funds. Once this compatibility between needs and availabilities has been made the investment plan is finalized only after addi- tional analysis has been conducted on incremental capital-output ratios and 1/ Note that this means that even investments approved at the enterprise level are entered into the plan, from which time they become obligatory for the enterprise.  -6- on the ratio of gross investment to net investment to test that these corre- late with recent trends. Finally, a balance of fixed assets is struck the outcome of which determines the indicators in the investment plan. THE FINANCIAL PLAN 16. Contained in the central financial plan are all financial resources and their respective uses, the equilibrium between these resources and expend- itures being a reflection of the financial consistency of the national social and economic development plan. The financial plan is elaborated simultaneously with the development plan by the State Planning Committee in collaboration with the Ministry of Finance. Once elaborated the part of the financial plan con- tained in the budget (see para 17 below) is binding. 17. The financial plan contains, along with the incomes and expenditures in the State Budget, also those which are at the disposal of economic units and which are used directly by them (about 40% of benefits, depreciation, small investments, etc.). The Budget, however, comprises over 70% of the central financial plan. The Budget is the major source of funds for the banking system, and is administered by the National Bank which disburses funds for use by the Investment Bank and the Agricultural Bank in accord- ance with the Plan. The major sources and uses of funds in the financial plan are the following:  - 7 - THE CENTRALIZED FINANCIAL PLAN SOURCES USES 1. INCOME FROM STATE ENTERPRISES AND 1. FINANCING OF THE NATIONAL ECONOMY COOPERATIVE ORGANIZATIONS - Investment - Total benefits of state enterprises - Capital replacement/repair - Turnover Taxes - Credit allocations - Regularization Taxes - Working capital - Income from foreign trade and other - Financing price differentials external operations - Reserves - Depreciation fund - Retained benefits fund - Other sources of investment funds - Other - Other payments of enterprises - Income of other econoiic units 2. FINANCING SOCIAL-CULTURAL - Income tax and cooperatives ACTIVITIES 2. RECEIPTS FROM REPAYMENT OF LONG TERM - Education CREDITS - Sciences, Arts, Culture - Health - Domestic - Sports - Foreign - Social assistance - Other 3. TAXES ON THE POPULATION 3. DEFENSE - Income tax - Tax on Agricultural Income 4. ADMINISTRATION - Tax on land 5. FOREIGN CREDITS 4. OTHER INCOME 6. RESERVES ON OTHER EXPENDITURES - Incomes from budgeting units - Growth in balances at the Savings Bank (CEC) 5. SOCIAL SECURITY CONTRIBUTIONS TOTAL TOTAL The Financial Plan of the Enterprise 18. In addition to a general Five-Year Financial Plan prepared along with the Basic Five-Year Plan, each enterprise has compiled for it by the Central a detailed annual financial plan along with its production plan. The annual financial plan specifiqs the distribution of profits, deprecia- tion, collected taxes, drawings for special funds, receipts from the scrap- ping of assets and the distribution of excess inventories, as well as trans- fers from the central and the state budget. As mentioned above, each source  - 8 - of funds has a limited number of possible uses, which may include one or more of the following: loan repayment, investment and the investments from enter- prise own funds, creation of special funds, working capital increases, remit- tance to the state budget and the financing of planned production losses. 19. The equality between sources and uses of funds in the financial plan is guaranteed, so there is never any danger of bankruptcy or of critical short- term liquidity problems. This guarantee follows from the enterprises' access to various forms of financial support. In particular, the amount to be remit- ted to the state budget can vary as long as it exceeds 10% of planned profits and working capital growth, or centralized investment and planned losses can be covered by the central if the enterprise's funds are insufficient. Also, if the central's funds are insufficient the Ministry may seek funds from the budget if no other funds are available. THE CREDIT PLAN 20. The planning of credit is part of financial planning. The Credit Plan is revised quarterly by the National Bank to provide guidelines for the credit activities of the banking system. The total increase in the sources of funds indicates the extent to which new credits can be issued, while the increases in the individual categories for which credit funds are used are, in effect, permissible limits beyond which branches of the National Bank cannot extend credit. The Investment Bank has its own Credit Plan, primarily to cover loans for centralized investment and short-term construction credits. A long-term Credit Plan also exists to monitor long-term loans, which are often extended to cooperative farms. Credit financing is confined mainly to working capital. Credits financed less than 2% of total investments in 1973. The Credit Plan includes the following broad categories: Credit Plan of the National Bank Sources of Funds Uses of Funds Capital reserves and profits Loans for seasonal fluctuations Government balances (including Loans for small-scale mechanization budgetary surpluses) Balances of economic units Loans to bridge payment gaps Balances of nonprofit Loans for wage payments organizations Balances of other banks Loans for investments Currency in circulation Others  -9- THE FOREIGN TRADE PLAN 21. Foreign trade is a state monopoly in Romania. The chapter in the Plan dealing with foreign trade stipulates the goods to be imported and ex- ported, by country, in the plan year. Targets are expressed both in physical terms and in value. The aggregate targets are assigned to the Ministry of Foreign Trade but each technical ministry will also have trade targets where relevant. Most trade is conducted by foreign trade enterprises but some pro- duction enterprises, centrals, and other organizations are also authorized to participate in trading operations. The foreign trade plan is binding but there is some scope for units to trade outside the plan if they have earned foreign exchange retentions from previous overfulfillment of the plan. 22. The foreign trade plan is elaborated on the basis of the analysis in the plan for technical-material supply which reveals both the resources releasible for export and the resources necessary to be imported. The equa- tion also takes into account invisible trade and the balance of payments im- plications (i.e. the financial plan for trade) in order to ensure consistency. This provides the analytical framework for the plan but cannot of itself form the basis of the actual plan because external markets are uncertain. The plan is actually finalized on the basis of actual import and export contracts se- cured by the trading organizations (which serve as the equivalent of purchase contracts in the domestic economy). THE TERRITORIAL PLAN 23. The chapter in the plan which deals with the territories contains the development plans for each judet (or county), as elaborated by the Execu- tive Committee of each judet's People's Council in collaboration with the State Planning Committee. These territorial plans do not aggregate exactly into a national plan because they do not contain all production details of some enterprises and there are some targets (e.g. in transport) which cannot be regionalized. Territorial planning is the principal instrument for execut- ing the country's regional development policy. Role of the Executive Committees of the People's Councils 24. The Executive Committees at the level of the towns or communes, elaborate draft for local social and economic development. In these are contained, as the case may be, the expected value of production, investment, retail sales, stock of animals, exports, employees, and consumer services from all local economic and socio-cultural units, consumer and artisan co- operatives, state, cooperative and private farms and private artisans within their district. All the information is analyzed to ensure local resources are used to the fullest extent possible. A plan draft is transmitted to the Executive Committee of the Popular County Council. The Executive Committee of the Popular County Council then prepares the county-wide plan draft that is sent to the SPC. The draft covers the plans from the popular town and communal councils, economic and social-cultural units directly subordinated to the county and republican industry to the extent that the industry directly  - 10 - affects the county. The Executive Committee supervises the preparation of county and local labor force balances and balances of income and expenditure of the population. It provides advice on development plans and the location of new investment projects. After plan approval and breakdown, each county, town and communal council must oversee the fulfillment of its own plan.  APPENDIX II: THE ROMANIAN SYSTEM OF MATERIAL INCENTIVES Wage Formation 1. The wage structure is designed to reward increased proficiency and responsibility. For operative workers in industry, wage rates are listed in an official catalogue for 6 different skill categories and for 3 grades plus a basic level within each skill category. The basic salary represents the lowest grade in the category. The ratio of the top grade (grade 3) in the highest paid category to the basic level in the lowest paid category is about 2:1. Remuneration levels vary between branches in accordance with the import- ance given to each branch, its technical requirements, working conditions, etc. The highest paid workers are in mining and metallurgy, while those in food industry, trade and local administration receive the lowest level of wages. 2. Employees, who perform technical, economic, other specialities and administrative functions, known as the TESA, also have a scaled system of payments with a basic level and 5-6 grades. The scale is based on the re- lative importance of branches, the degree of training required and the degree of general proficiency and responsibility needed in each case. For manage- ment staff there is a fixed basic payment (not differentiated by grades) and a management premium. The base salary of each class is specified, but addi- tional amounts (set as a percentage of the base salary) can be paid for special education, importance of industry, size of responsibility, etc. For example, as the size of the enterprise increases from size 1-7, salary levels increase by 10% per size level from the smallest, size 1, to size 4 and then by 5% between size 5 to size 7. 3. Both workers and TESA can benefit from supplementary allowances based, for example, on overtime, night work or other conditions under which work has to be conducted. The long service bonus, a new incentive designed to reduce labor turnover, is presently set as follows: Years of service in the same enterprise 5-10 10-15 15-20 20+ % of bonus applied to basic salary 3 5 7 10 4. Remuneration is now designed to cover a greater percentage of gross earnings than previously, about 90% for most workers and even occasionallv as high as 95% for TESA. Each Five-Year Plan promises an increase in the general level of salaries due to the planned increase in labor productivity. By the end of the 1971-1975 plan, average wages are scheduled to be 37.7% greater than in 1970.  -2- Wage Payments 5. To encourage implementation of planned targets, the payments to both operative workers and TESA are made in accordance with the degree of plan fulfillment. Recently the decision was made to extend the system of "global accord" (which has been used experimentally in construction and coop- erative agriculture) to the entire economy. Under the accord system workers do not receive a fixed salary but they share in the output produced, accord- ing to their position in the scale of payments. Under the system, workers are in general paid during the year only 80% of their expected remuneration, with the balance (together with any bonuses due for overfulfillment of the plan) paid at the end of the production period. Where production targets are not fulfilled the final payments are correspondingly reduced, by an amount up to 20%, or in some cases 30%, of the state salary. For the TESA, the planned targets are both quantitative (generally the volume of sales) and qualitative (either the level of expenditures per 1000 lei output sold or the benefit rate). For those units having export targets these are also always considered in determining the final payment. The possibility is presently being studied of extending the accord system to cover the entire enterprise, i.e., including the management staff. Bonuses 6. Annual bonuses are the chief form of bonus. Each enterprise is entitled to constitute in an account at the National Bank an annual bonus fund equal to a fixed percentage of realized profits. This percentage, which can vary from year to year, was determined in 1973 as follows: .02 x planned wage fund 100% Planned profits In some cases, the annual bonus fund may be reduced if certain specified in- dicators are not fulfilled. Twenty-five percent of the annual bonus fund is distributed during the year and 75% at the end of the year to all employees in relation to their realized salaries. 7. In addition to annual bonuses, enterprises are entitled to grant supplementary bonuses during the course of the year. These bonuses generally come from the wage fund, not from profits and can be awarded for-labor savings, quality improvements, increased exports, etc. In the case of material savings, the supplementary bonuses come from the amount saved and represent 30%, 40% or 50% of the amount for materials allocated by ministries, depending on the importance of these materials. 8. A bonus fund composed of profits remitted from each enterprise to the extent of 0.05% of each enterprise's wage fund is constituted at the level of the central. The central's bonus fund is distributed in the course of the year to employees within subordinate enterprises who are responsible for major accomplishments.