Romania - Administration and Control of the Economy

Revenues

Profits from state enterprises and heavy turnover taxes levied on consumer goods, farm products, and farm supplies accounted for the bulk of revenue for the state budget. In 1989, for example, these two sources were expected to generate 69 percent of total revenues. Another large contributor was the tax on the "overall wage fund," which, though paid by the enterprises rather than individuals after 1977, was actually a tax on the work force. During the 1980s, taxes levied directly on individuals accounted for an ever larger share of revenues. For example, between 1981 and 1988, personal taxes rose by a total of 64.8 percent. The official claim that individuals paid only about 1.2 percent of the total tax bill ignored the reality that both the tax on the wage fund and the turnover tax directly affected individual purchasing power. The source of a large part of budget revenues was not identified in official announcements. In the 1989 state budget, for example, more than 6.3 percent of total revenues were not explained.

Ownership of Economic Assets

When the Constitution of 1965 declared Romania a socialist republic, the country had already made substantial headway in socializing its economic assets. And judging by Ceausescu's words on the occasion of his sixty-ninth birthday in 1987, the campaign to eliminate private ownership appeared irreversible: "One cannot speak of a socialist economy and not assume the socialist ownership of the means of production as its basis." The state owned and controlled all natural resources except for a steadily declining amount of agriculturally marginal land still in private hands. All of industry had been socialized, but for a small number of artisan workshops, which contributed less than 0.5 percent of total marketable output in the 1980s. Even cooperatives, categorized as socialist forms of ownership, had fallen into decline at the very time they were enjoying a renaissance in the Soviet Union and the other members of the Council for Mutual Economic Assistance (Comecon). Cooperative farms, for example, were considered ideologically less acceptable than state farms, which had priority access to rich land, fertilizers, machinery, and other inputs. And cooperative industrial enterprises accounted for only 4.3 percent of national output in 1984.

Expenditures

Financing the national economy (including capital investment) claimed the largest share of the state budget throughout the postwar period. More than 43 percent of the 1989 state budget, for example, was earmarked for this purpose. Social services were the second largest recipient, getting slightly more than 25 percent of 1989 budget allocations. Actual outlays for social services, however, had declined during the belt-tightening of the 1980s. Reliable figures for military expenditures were generally not available, although according to official pronouncements, they were modest and declining as a percentage of total outlays, accounting for less than 3 percent of the 1989 budget, as compared with 6.1 percent in 1960. Allocations for the police and security service were never published. A large portion of total budgetary expenditures (more than 27 percent) was not itemized in the 1989 state budget, as compared with 14.8 percent not itemized in the 1984 budget and only 1.7 percent in 1965.

More about the Economy of Romania.

Administration and control

The Romanian economic model retained all the salient features of Stalinism, including state ownership of the means of production; communist party control of economic policy making and administration through interlocking party and state bureaucracies; democratic centralism, including concentration of decision-making power in the highest party executive organs and particularly in the person of the general secretary; annual and five-year economic planning; nonreliance on the counsel of technical and managerial experts in setting economic goals; forced deliveries of economic output to the state; pricing based on political and ideological considerations rather than market forces; reliance on mobilization campaigns in lieu of material incentives for workers; inflexibility and resistance to reform.

Planning

Beginning in 1951, following the Soviet economic model, Romania adopted annual and five-year economic planning. As in the Soviet system, the principle of democratic centralism applied. Thus, the economic plans compiled by the central planning organs became the law of the land, and compliance was mandatory.

In theory, the Unitary National Socioeconomic Plan, as economic plans were officially called after 1973, was based on information on current plan fulfillment, requests for resource allocations, and recommendations for investments that originated on the lowest echelons and rose through the bureaucracy to the central planners. Such a system involved a certain amount of give and take as enterprises and centrale "negotiated" with the ministries for favorable production targets and resource allocations. In turn the ministries lobbied for their respective sectors to gain priority consideration in the state budget. But during the 1980s, input from lower echelons in the planning process received less consideration. In part, this development was due to the unreliability of information reported by the managerial cadres, from the local level up to the heads of the economic ministries themselves. Plan fulfillment data were supposed to serve as the basis on which future economic plans were compiled, but in the 1980s data became skewed when salary reforms--the so-called global accord--began linking managers' incomes to the performance of the economic units under their supervision. In 1986 this remuneration system encompassed nearly 11,000 managers and bureaucrats, even including the heads of ministries and the deputy prime ministers. In order to maintain their incomes, officials simply falsified performance reports. As a result, aggregate production figures were grossly inflated, and annual and five-year plan targets based on these figures became increasingly unrealistic.

Besides distorting production reports, managers resorted to other income-protecting measures that impeded the flow of accurate information to the central planners. Because wages and salaries were tied to plan fulfillment and severe penalties were levied for shortfalls--even when caused by uncontrollable factors such as power shortages, drought, and the failure of contractors to deliver materials and parts--it was in the interests of the enterprises, centrale, and ministries to conceal resources at their disposal and to request more inputs than they really needed. Managers concealed surplus operating reserves to ensure production in the event of unforeseen bottlenecks. This practice made accurate inventories impossible, resulting in inefficient use of resources.

Pricing and Profit

Because the market forces of supply and demand did not operate in the centrally planned command economy, prices were calculated and assigned to goods and services by a governmental body, whose decisions were shaped by political and ideological considerations as well as economics. Following the tenets of Marxism, prices for basic necessities had been maintained at artificially low levels throughout the postwar period until 1982, when 220 different food items were marked up 35 percent. Even after the increases, however, food was priced below the cost of production, and state subsidies were required to make up the difference. At the same time, prices for what the party categorized as luxury goods--blue jeans, stereo equipment, cars, refrigerators--were far higher than justified by production costs. Consequently, per capita ownership of consumer durables was the lowest in Eastern Europe except for Albania.

The inflexible system of centrally controlled prices created serious economic dislocation. Lacking the free-market mechanism of self-adjusting prices to regulate output, the economy misallocated resources, producing surpluses of low-demand items and chronic shortages of highly sought products, including basic necessities. This serious failing notwithstanding, the Ceausescu government in the late 1980s adamantly refused to modify the system and in fact was moving to strengthen the role of central planners in setting prices.

Wholesale and retail prices were assigned by the State Committee for Prices, with representation from the State Planning Committee, the Ministry of Finance, the Ministry of Foreign Trade and International Economic Cooperation, the Central Statistical Bureau, and the Central Council of the General Trade Union Confederation. The committee computed the price of an item based in part on normative industry-wide costs for the materials, labor, and capital used in its production. In addition, the price included a planned profit, which was a fixed percentage of the normative production cost. After a pricing revision, approved by the GNA in December 1988, the profit rate was set at between 3 and 8 percent of cost. An additional profit margin was factored into the price of commodities destined for export--6 percent for soft-currency and 10 percent for hard-currency exports.

Because prices were based on industry-standard costs, enterprises with lower than average costs earned above-plan profits, but those with high costs ran deficits and had to be supported by state subsidies. The New Economic and Financial Mechanism had called for making all enterprises self-financing, and those unable to break even were subject to dissolution. But as of early 1989, no instances of plants closing because of unprofitability had been reported. A pricing law enacted in December, 1988, would allow enterprises to retain all above-plan profit earned in 1990 but would require them to transfer half of such profits to the state budget during the subsequent four years. The enterprises channeled their share of profits into various bank accounts and funds that provided working capital and financed investments, housing construction, social and cultural amenities, and profit sharing. The last fund paid bonuses to employees if any money remained following compulsory payments to the state and the other funds. But if an enterprise failed to meet its production target--an increasingly common occurrence in the 1980s--the profitsharing fund was reduced accordingly.

Dominance of the Romanian Communist Party

The Romanian economic structure was unusual in the extreme degree to which party and governmental hierarchies were intertwined and even formally merged. This fusion of bureaucracies was even apparent in the architecture of the capital city, Bucharest, whose skyline in the late 1980s came to be dominated by a massive new Palace of Government, housing both party and state agencies. All state administrative offices, from the national to the lowest local levels, were filled by carefully screened PCR careerists. As early as 1967, Ceausescu had called for administrative streamlining by eliminating the duplication of party and government functions. His solution was to assign responsibility for a given economic activity to a single individual.

Throughout the 1970s and 1980s, the merging of party and state organs gained momentum, affording the PCR ever tighter control over the economy. The process culminated in the emergence of national economic coordinating councils--administrative entities not envisioned by the Constitution of 1965. These party-controlled councils provided Ceausescu, who after 1967 held the dual titles of general secretary of the PCR and president of the Council of State, the means to dominate the economic bureaucracy.

One of the most powerful of the new joint party and state bodies was the Supreme Council of Economic and Social Development, which Ceausescu chaired from its inception in 1973. The new 300-member council coopted the authority to debate and approve state economic plans--authority constitutionally granted to the Grand National Assembly (GNA). The latter's role in the planning process became increasingly ceremonial, as real policy-making power shifted to the Supreme Council's permanent bureau--also chaired by Ceausescu. At a joint meeting of party and state officials in June 1987, Ceausescu announced the conversion of the permanent bureau into a quasi-military economic supreme command, further tightening his grip on planning while reducing the role of the governmental institution created for that purpose--the State Planning Committee. That same year, he signed a decree endorsing the 1988 annual economic plan even before obtaining rubber-stamp approval by either the Central Committee of the PCR or the GNA. Thus the general secretary had assumed absolute authority in setting economic policy.

Among other important joint party and state economic councils to evolve during the Ceausescu era were the Central Council of Workers' Control over Economic and Social Activities, which oversaw economic plan fulfillment; the Council for Social and Economic Organizations, which controlled the size and functions of the ministries and enterprises; and the National Council of Science and Technology. The latter was chaired by the general secretary's wife, Elena Ceausescu, who was emerging as a powerful political figure in her own right. In June 1987, it was announced that this body thereafter would collaborate with the Supreme Council of Economic and Social Development and would draft development plans and programs, thus giving Elena Ceausescu much of the authority constitutionally vested in the chairmanship of the State Planning Committee.

Ceausescu consolidated his control of the economy not only by creating new bureaucratic structures, but also by frequent rotation of officials between party and state bureaucracies and between national and local posts. In effect after 1971, the policy was highly disruptive. For example, twenty economic ministers were replaced in September 1988 alone. Rotation enabled Ceausescu to remove potential rivals to his authority before they could develop a power base. He justified the policy by attributing virtually all the country's economic problems to inept and dishonest bureaucrats intent on sabotaging his policies. Another control tactic was making highly publicized visits to factories, state farms, or major construction sites, where--usually accompanied by his wife-- Ceausescu would interview workers and front-line managers and solicit complaints about their superiors. The threat of public humiliation and removal effectively deterred the managerial cadres from independent thinking.

Administrative Hierarchy

The government body constitutionally endowed with supreme authority in administering the PCR's economic program was the Council of Ministers, whose members simultaneously held important positions in the party. The number of ministries fluctuated over the years because of repeated reform efforts to improve efficiency; in 1989, there were twenty-five ministries with a strictly economic mission. Supra-ministerial bodies known as branch coordination councils synchronized the activities of ministries in related sectors, for example, mining, oil, geology, and electric and thermal power; chemicals, petrochemicals, and light industries; machine building and metallurgy; timber, construction materials, cooperatives, and small-scale industry; transportation and telecommunications; investment and construction; and agriculture, food processing and procurement, forestry, and water management. The ministries were responsible for accomplishing the economic goals set forth in the Unitary National Socioeconomic Plan. They assigned production, financial, and operational targets and made investment decisions for the economic entities subordinate to their authority.

The first echelon of administration below the ministries consisted of the industrial centrale (sing., central). The centrale were analogous to the production associations of the Soviet Union and other Comecon countries. Conceived in the economic reforms of 1967 as autonomous economic entities vertically and horizontally integrating several producing enterprises as well as research and development facilities, the first centrale appeared in 1969. Their number rapidly dwindled from the original 207 to only 102 in 1974. Although in theory the centrale were created to decentralize planning, investment, and other forms of economic decision making, their functions were never clearly delineated, and in the 1980s they appeared to have little real autonomy. Their authority was limited to monitoring plan fulfillment and designating production schedules for the plants under their jurisdiction.

At the bottom of the administrative hierarchy were the enterprises and their individual production units. They received highly detailed production plans, operating budgets, and resource allocations from superior echelons and were responsible for accomplishing the economic directives that came down to them through the hierarchy. Notwithstanding official proclamations of enterprise self-management after the New Economic and Financial Mechanism became law in 1978, the managerial cadres on this level enjoyed autonomy only in the mundane area of streamlining operations to raise output.

State and cooperative farms held a position in the administrative hierarchy analogous to that of industrial enterprises. They received detailed production plans that specified what was to be sown, what inputs would be provided, and how much farm output was to be delivered to the state. After 1980, county ( judet) and village people's councils were responsible for fulfillment of agricultural production targets by the farms in their jurisdiction. Machine stations, analogous to Stalin's machine-and-tractor stations, had been set up to control access to equipment, thereby ensuring compliance with the PCR agricultural program. The manager of each machine station coordinated the work of, on average, five state and cooperative farms. In 1979, the stations became the focal point of a new managerial entity, the agro-industrial councils, which were intended to parallel the industrial centrale.

In addition to its sectoral administrative structure, the economy was organized on a territorial basis. In every judet, city, town, and commune, so-called people's councils--among their other functions--supervised the implementation of national economic policy by the enterprises and organizations located within their territory. The permanent bureaus of these bodies, without exception, were headed by local party chairmen, whose political credentials were validated by Bucharest. In 1976 a permanent Legislative Chamber of the People's Councils was established. Its membership--elected from the executive committees of the regional and local councils--debated economic bills before they were considered by the GNA.

The State Budget

The Ministry of Finance directed the formulation of a detailed annual state budget, which was submitted to the GNA for approval and enactment into law. In theory, budget allocations took into account the analyses performed by the branch coordinating councils, the various ministries, their subordinate centrale and enterprises, and the executive committees of judet and municipal people's councils. But in reality, as the instrument for financing the Unitary National Socioeconomic Plan, the state budget was under Ceausescu's firm control. The Council of Ministers had responsibility for supervising its implementation. The state budget typically was approved in December and went into effect on January 1, the beginning of the fiscal year, with expected revenues precisely offsetting authorized expenditures. Actual revenues and expenditures realized during the preceding year were officially announced at the same time, and the balance was carried over into the new state budget. Revenue estimates were set at the minimum level, while expenditures represented absolute ceilings. Consequently, budget surpluses were not unusual, particularly during the austere 1980s, when the top economic priority was elimination of the foreign debt. For example, a total surplus of 102 billion lei was accumulated during the years 1980-84, and in 1987 alone a 53.2 billion lei surplus was registered.

The consolidated state budget was divided into national and local budgets. In 1989 local budget revenues were forecast to be 25,446.8 million lei, while expenditures were set at only 14,078.7 million lei. The surplus of more than 11 billion lei was to be transferred to the national treasury to finance "society's overall development," a euphemism for centrally controlled capital investment at the expense of consumer goods and services.

Integrated Administration and Control System - SIVECO Romania
ROMANIA, NATIONAL AGENCY FOR FISCAL ADMINISTRATION
PHARE 2003 STANDARD SUMMARY PROJECT FICHE
Cristina Iordache - Administration, Finance and Control
Romanian Government - Government of Romania