ECONOMIC GROWTH

 

Romania under Communism

by Anthony Hania

 

East European countries underwent great changes from the time they adopted communism.  Romania went through the communist era mostly under one man's reign, Nicolae Ceausescu.  This President brought about some very good times for the Romanian people during the early 1970s.   This was done by concentrating on industrialization rather than agriculture.  Consequently, there was high investment, but also tremendous debt.  Ceausescu began exporting so much to cover the debt that he was hurting his people more than helping them.  The country went from a state of euphoria to a time of suffering.

While under communism, Romania used a developmental strategy that was originally formulated by Stalin.  This was an extreme version of the import-substituting industrialization policy that was also adopted by other developing countries.  "The strategy was influenced by pre-war Romanian protectionist economic nationalism."(The Economist).

Although Romania had very fertile land and a lot of Romania's resources could have been put into agricultural development, Ceausescu decided to implement industrialization.  This put an accent on industrial development.  "About 50% of all post-war investment was channeled into industry, and 80% of that went to producer goods."(The Economist).  Ceausescu put a lot of emphasis on heavy industry such as fuels, metallurgy, machine building, chemicals, and non-metallic mining.  "The share of the heavy industry in output rose from 35% in 1950 to 52.4% in 1970."(The Economist).  Romania, unlike some other countries, persisted with this strategy and the share increased to "59% in 1979 before steadying in the 1980s."(The Economist).

High industrial concentration was also used in order to ease planning.  In 1990, enterprises with over 2,000 employees accounted for almost two-thirds of employment.  Less than 1% of the workforce could be found in firms with less than 200 workers.  When a country is implementing heavy industrialization, there tends to be less focus on consumer goods production and personal consumption.  This is precisely what happened with Romania.  Among all of the Eastern European countries, Albania was ranked last under personal consumption.  Romania was second last because 30% of its GDP was set aside for domestic fixed investment.  This continued on well into the 1980s.  Romania fell into tremendous debt because of heavy foreign borrowing to help with industrial policy.  One would assume that Ceausescu would do as much as he could to repay the debt.  Naturally, in order to do so, there would be no room for any investment whatsoever, but Ceausescu felt very differently.  He still managed to increase investment despite the debt payback policy.

Approximately two-thirds of the population in Romania still lives in rural areas yet less than a third of the national income is produced by the agricultural sector of the economy.  "The reasons for this include opposition of the peasants to collectivization, emphasis on industrial investment and neglect of agriculture, high taxation, inadequate mechanization, continuation of certain backwards methods, mismanagement and efficiency, and droughts."(Staar).  Industry accounted for 58% of total investment while agriculture received 16%.  As a result, Romania's rapid growth was due primarily to relying upon its own resources.  Naturally there was a very high demand for workers in order to satisfy the plan.  Workers were taken out of the agriculture labor force, and placed into industries.  In addition to the need for more workers, there was a requirement for higher financial demands.  This was met by restricting consumption.  Between 1950 and 1977 Romania maintained one of the highest growth rates in the world.  "Industrial output grew at an annual rate of about 12.9%, industrial investment averaged 13% per annum, while the industrial labor force grew at the rate of 5% yearly, with labor productivity averaging a growth of nearly 8%."(Shafir).   Approximately 8.5% of all funds, in the first half of the 1970s, were invested in industries involved with consumer goods.  One would assume that with this amount put into consumer goods the population would somewhat suffer.  This was not the case during this period.  Ironically, there was still some progress in the standard of living.   

 In addition to putting all of its resources into industrialization, Ceausescu was in pursuit for maximum self-sufficiency although western equipment was imported. Romania pursued self-sufficiency to the point of obsession, but was poised about joining the international division of labor.

  Romania's policy for self-sufficiency had two distinguishing features.  First, the centralization of power and decision-making was unusually high.  Second, it was pursued with unusual obstinacy while other countries decided to abandon it in the 1970s.  While other countries may have gone through a period of reform, Romania practically did not. 

In the 1970s, Romania's primary source of growth (in the form of labor and domestic inputs) began to diminish.  In order to continue its developmental strategy, Romania had to increase its imports.  Romania therefore increased its imports of western capital goods and technology in addition to intermediates.  These were taken in the form of credit to be repaid by exports from the new plant.  Unfortunately, Romania ran into some trouble.  Instead of relying on its strengths such as agriculture and light industry, Romania persisted with its emphasis on engineering.  Therefore when crude oil prices went up, food supplies from Iran ceased in 1979, and natural disasters such as the 1977 earthquake and 1990 floods emerged, a debt crisis emanated.  A sudden change in strategy was needed.  In order to maximize growth, a ruthless debt repayment policy was needed.  As a result of primary emphasis on heavy industry, the composition of Romanian exports and imports had changed considerably.  "Before the war, exports of cereals, oil, timber, livestock, and animal derivatives compromised 90% of the total."(Staar).  By 1961, machinery and equipment accounted for 16%.  In general there has been a change toward an increasing proportion of finished products.  Between 1948 and 1958 the proportion of food exports dropped from almost half to 15% of the total.  The current principal imports -- industrial machinery, vehicles, machine tools, iron ore, and coal -- also reflect the emphasis on industry.

Romania experienced tremendous economic growth under its industrialization program.  Both imports and exports were oriented toward industry.  In order to increase the steel production it was necessary to import large quantities of iron ore, coke, and rolled metals.  Throughout the 1960s Romania saw many Western European countries helping to build industries within the Romania borders.  A few examples were : "In 1962 Bucharest contracted with West European suppliers to build the largest steel plate mill in the world.  A tire factory costing $22 million and two cellulose plants for making paper and related products, obtained from Britain, were set up during the summer of 1963.  In 1965 an American company was granted a permit to construct an oil cracking plant.  West Germany, Romania"s largest trading partner outside the Soviet bloc, had built an iron and steel mill at Hunedoara in the central part of the country.  The French also installed a winery and processing plant for sugar beets."(Staar).  Romania paid for all this advanced technology with its exports and by credits.

            As was mentioned earlier, the program focused less on consumer goods and more on producer goods.  This put great pressure onto the population.  When Romania noticed how unsuccessful Hungary was doing with regards to pleasing its population, Romania decided to increase the share of consumption and social services.  Romania decided to repeat this scheme in the mid-sixties when Czechoslovakia suffered from political instability.  While still wanting to satisfy the population, Ceausescu decided to allow more importation from the West as well as securing capital investment.  Unfortunately for the people of Romania the country became more isolated from the West and East during the 1970s causing Ceausescu's economic and social policies to begin diminishing the welfare of the people.

    When comparing Romania to the rest of the Eastern European countries, it had the second lowest standard of living during most of the communist era.  This was primarily due to Ceausescu's implementation of industrialization in lieu of using resources for Romania's strength : agriculture.  Industrialization also caused Romania to spend very little on defense.  At one point, Romania had the lowest defense expenditure as a percentage of GNP of all the Eastern European countries.  In conclusion, Romania suffered more under the reign of Ceausescu during the communism period than it benefited.  One can immediately see how the Soviet-type economy led to significant changes in Romania, but also the fact that when there is one central figure making all of the decisions, a whole country suffers the consequences.

Sources :

1) The Economist Intelligence Unit.  EIU Country Profiles. November 1, 1994

2) Shafir, Michael.  Romania. Lynne Rienner Publishers, Inc.  Boulder  Colorado. 1985

3) Centrally Planned Economies.  IBC USA Publications Inc.  February, 1989. 

4) Staar, Richard.  The Communist Regimes in Eastern Europe : an Introduction.  1967 by the Board of Trustees of the Leland  Stanford Junior University

 

 

 

 

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