Nicolas Holman
Senior Sophister
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Romania is an important country to study for many reasons. The fact that it is an example of a command economy which took Stalinism to its absolute extremes without any previous attempts at reform makes it an ideal case study for transition economists and theorists. Furthermore, it is also a country which had no national debt immediately after the revolution yet seems to have received no economic benefits from this fact. Finally, it is adopting the gradualist approach to transition as opposed to the ÒBig BangÓ approaches of Bulgaria and Poland and thus the effectiveness of this approach remains to be seen.
However, to be able to understand the current Romanian economy fully, it is important to understand the huge personal impact that Ceausescu[[Otilde]]s ideals had on his country. For example, the desire that he had for Romania to be completely independent of the West caused him to adopt a policy of depressing consumption to pay off the foreign debt which resulted in a huge decline in living standards and eventually sowed the seeds for revolution. This paper, therefore, seeks to outline the key features of the Ceausescu regime[[Otilde]]s policies before discussing the relevance of these to current economic decision making in Romania.
The Ceausescu Regime
Although originally regarded by the West as a sort of maverick Communist, due to his opposition to the 1968 Soviet invasion of Czechoslovakia, it soon became apparent that he was one of the most brutal leaders that Europe has ever seen through his attempts to personally dominate the Romanian people.
Nevertheless, Ceausescu was actually very consistent in his policies. His unyielding Stalinist ideology to create a `homogenous Socialist population out of the traditionally peasant based Romanian people' was what caused Romania to be in the situation that it is today. To achieve his aims, the population would have to be subjected to his control - most easily achieved if they were contained in large urban centres.
The economic consequences of such a policy was an all out drive to create a heavy industrial base in Romania and a determination to make Romania self sufficient through the elimination of its foreign debt. A policy of `systemisation' was also proposed in which the rural population was to be moved to larger urban centres - but this was later abandoned.
Initially, the development strategy was very successful, as vast pools of underutilised labour in agriculture was mobilised for industry with the proportion of the non-agricultural labour force increasing from 30.3% in 1956 to 63.5% in 1977. However, this growth was not sustainable - being based on structural shifts - and soon the labour force was faced with inadequate employment and income opportunities with a reduced supply of food and other consumer goods. However, Ceausescu[[Otilde]]s ideological inflexibility allowed for no changes in his policy and the regime resorted to coercion to achieve the production targets which enterprise managers were then forced to fabricate.
The effects of this flawed system soon became apparent as the benefits from the labour force shift were reduced. Economic growth fell from 10% in the early 1970[[Otilde]]s to 3% in 1980 with food and other consumer goods becoming very short in supply.
The situation was worsened by the energy crisis of the early 1980[[Otilde]]s. Despite the fact that Romania had one of the best endowments of natural resources in Europe and in 1985 produced more electricity per capita than Spain, Italy or Portugal (excluding imports of electricity) the streets were dark and people died from the cold in their homes. In 1989, household consumption of electricity accounted for only 5.1% of the total.
This crisis was a consequence of the continuation of the drive towards heavy industry, making Romania a net importer of electricity at a time when World energy prices were at a peak. When the crisis became apparent, instead of curbing this drive, it was, in fact speeded up - hitting the population more.
Apart from the obvious social consequences of this policy, the demand for many household appliances fell sharply while light industry was often forced to run at less than full capacity. Agriculture was also affected as a high proportion of irrigation couldn[[Otilde]]t be used.
Yet Ceausescu[[Otilde]]s vision was not swayed and he turned to even more ambitious projects such as the Danube-Black Sea canal and the Bucharest civic centre - to create a capital worthy of the New Socialist Man. All this while his people starved and sat in the dark at night.
Ceausescu's policies soon became seen for what they were as the economy became unable to meet the basic needs of the population such as food and health care. In 1981, rationing was reintroduced as agricultural output fell sharply. This was mainly due to unrealistic food prices and agricultural wages that were too low. As a consequence, the private sector became more important for providing food and by 1985 it accounted for over half the total production of milk, wool, eggs and potatoes despite only holding 13% of arable land.
Ceausescu[[Otilde]]s response? The `new agrarian revolution'. A plan which aimed to incorporate the agricultural sector properly into the plan. Economically it made no sense as farmers were now forced to deliver quotas of food to the state at a third of the market price - with these quotas being even higher for private farms. University graduates were forced to spend several years in the countryside and the introduction of the `closed town' scheme made it very difficult to get back to the cities.
To worsen the situation, in 1988 Ceausescu announced that systemisation was being reintroduced. The idea behind this was to structure all villages into a well-defined hierarchy with some 300-500 villages selected for promotion into modern towns while another 6, 500 villages were to be phased out entirely.
It can be seen, therefore, that by this time Ceausescu had completely lost control of himself. He was now insisting on visiting factories himself and choosing their production targets according to his own personal whims. In other words, by 1989 he had succeeded in subordinating the entire Romanian economy to his own personal `off the wall' ideologies. Happily, Ceausescu was deposed before either the New Agrarian revolution or systemisation could do damage but it is clear what their effects would have been. Firstly, the agricultural production base would have been eroded further while removing any form of production incentives from the farmers. Furthermore, the systemisation imposed rural-urban migration would have reduced the supply of labour further while alienating the Romanian peasantry even more. Ironically the net result of this would have been to increase the population[[Otilde]]s dependence further on private production - something which Ceausescu abhorred.
Eventually, in 1989 as GNP fell by 10%, shortages became more pronounced and unemployment began to rise, Ceausescu was deposed. The economy was in a shambles. The entire information base for planning had been eroded and physical infrastructure was severely run down - despite high government investment rates. The actual physical well-being of the population had deteriorated through malnutrition, pollution and the decline in the health sector. Furthermore, the fall in investment in education had been so severe that the numbers enrolled in University education had actually fallen despite the increases in the size of the 18-22 age bracket.
Thus, Ceausescu left Romania with an ineffective, underproductive industrial base, a highly weakened, unmotivated agricultural sector and an unhealthy, unproductive population. It is this legacy which provides the foundation for the `basic needs' approach to the Romanian economic programme. Many economic resources have been diverted back to the population with the net effect of providing confidence in the economy and through the increased supply of food, reducing the need to hoard.
Nevertheless, it would be wrong to think that all of economic problems have been resolved. Although the population has a sense of real improvement, the macroeconomic indicators show a bleak situation. Output has plummeted, labour productivity has fallen and hard currency imports have risen significantly.
Much of this decline is merely due to the adjustment process that is necessary in economic transition. However, it would be wrong to underestimate the extent to which structural factors such as oversized industries, price controls and highly inefficient managers have contributed to the decline. It is these factors for which the Ceausescu regime is responsible and it is these distortions which will prove the greatest challenge to reformers.
The dire structural damage that Ceausescu had done to the Romanian economy, in addition to the massive decline in living standards that had occurred, posed a dilemma for the post revolution government. It was clear that something had to be done quickly if the economy was to have any success in recovery. However, due to the hardships that had already been suffered the social costs of any reform programme had to be minimal. Thus, a policy of `gradual reform at a rapid pace' was adopted. The key features of this policy were as follows: firstly, introduce market forces into economic decision making; secondly, privatise State Owned Enterprises, housing and land; and thirdly, reduce the role of the government in economic decision making.
The crucial need to raise living standards, however, has severely curtailed the government in achieving these objectives. It is politically difficult to impose positive real interest rates on the population, and any attempts so far to do this have resulted in debts being reneged upon. Clearly, this has made monetary policy very difficult and, so far, ineffective. On the fiscal policy side, despite plummeting revenues it has been difficult to curtail expenditure on such items as food subsidies and, of course, social welfare benefits. Finally, on the privatisation front, many of the state owned enterprises are so hugely inefficient with little prospect of profits that nobody wishes to buy them. Nevertheless, it is difficult to shut them down as often whole towns depend on a single firm for employment. This of course raises many questions about the whole privatisation process. Up to now it has been an elaborate charade with a series of mutual funds being established to manage the newly privatised enterprises. As expected, few firms have actually been sold.
It is clear, therefore, that although the Romanian economy is slowly reforming, the structural distortions are deeply embedded in the economy. Ceausescu[[Otilde]]s attempts to run Romania as a firm failed because he neglected his own people for the purposes of gaining international prestige. Furthermore, the `export at all costs' policy resulted in Romania[[Otilde]]s natural resource base being eroded significantly. Thus, where Romania was once self sufficient in energy, it is now a net importer; something which could prove to be disastrous if World energy prices rise.
In conclusion, therefore, Romania under Ceausescu will go down in the history books as a sort of economic curio; a failed social experiment. However to the Romanian people his policies were very real and his legacy will undoubtdedly affect many generations to come.
Bibliography
Ronnas, P (1991) "The Economic Legacy Of CeausescuÓ in Economic Change in the Balkan States
Demekas, D, Borensztei, E & Ostry, J (1993) "An Empirical Analysis of the Output Declines in Three Eastern European CountriesÓ in IMF Staff Papers, March 1993.
Earle, J, Sapatoru, D (1992) "Privatisation in a Hypercentralized Economy: the case of RomaniaÓ in Privatisation in the Transition to A Market Economy
Teodorescu, A (1991) "The Future of a Failure: the Romanian EconomyÓ in Economic Change in The Balkan States
OECD, (1993) Romania: An Economic Assessment