ROMANIA: DIFFICULT ADJUSTMENT TO THE FINANCIAL CRISIS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89T00295R000200200001-6
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• Document Page Count: 34
• Document Creation Date: December 22, 2016
• Document Release Date: May 20, 2011
• Sequence Number: 1
• Publication Date: July 1, 1986
• Content Type: REPORT

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Directorate of Secret
to the Financial Crisis
Romania: Difficult Adjustment
pRO3 T NUMBER -v-. C O U 3~ -
IOW M. J K
PAGE NUMBERS
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Secret
EUR 86-10020
July 1980
354
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Directorate of Secret
Intelligence
to the Financial Crisis
Romania: Difficult Adjustment
This paper was prepared by I Office
of European Analysis. Comments and queries are
welcome and may be directed to the Chief, East
Euro can Division, EUR
Secret
EUR 86-10020
July 1986
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Romania: Difficult Adjustment
to the Financial Crisis
Key Judgments President Ceausescu's obsession with paying Romania's foreign debt has
Information available exacted a heavy toll from the economy and population, but his policies
as of 15 June 1986 offer little hope for recovery in the foreseeable future. Misplaced priorities
was used in this report.
and excessive demands have drained the economy, leaving Bucharest still
dependent on foreign creditors and more vulnerable to Soviet enticements.
These problems do not appear to threaten Ceausescu's control, nor are they
likely to force him to abandon his maverick stance vis-a-vis the USSR and
Warsaw Pact, which has served US interests for the past two decades. But
the departure of Ceausescu, who is 68 years old and rumored in ill health,
and the transition to a successor regime struggling to establish itself and
cope with a seriously weakened economy could open Romania to increased
outside influence-from either the East or the West. Western policy
toward a post-Ceausescu regime could be critical in shaping the new
leadership's foreign policy course and the thrust of its economic policy.
Romania's current economic dilemma has its roots in Ceausescu's reaction
to the debt reschedulings of 1982-83. Humiliated by having to accept
Western creditors' terms in return for debt relief, Ceausescu opted for
rapid debt repayment to eliminate foreign interference with his policy
prerogatives. But, as efforts to expand export earnings have failed, the
regime has resorted to ever deeper cuts in imports and consumer welfare to
generate the required trade surpluses and protect the country's industrial-
ization drive through high levels of investment. Ceausescu's adjustment
priorities have differed sharply from those of other East European
countries, which, for fear of popular discontent, have given greater priority
to protecting consumer welfare and less priority to investment and trade
surpluses.
The financial recovery that Ceausescu hoped to buy with this painful
strategy has been short lived. Although Bucharest cut its debt by 35
percent during the period 1982-85, the economy probably will be unable to
sustain trade surpluses sufficient to meet debt service obligations in 1986-
88. After getting through 1984 without financial assistance, Bucharest had
to borrow $150 million in 1985 when a hard winter in the face of virtually
no energy and raw material reserves disrupted economic and trade
performance. The Romanians already have requested a rescheduling of
$260 million due this year to banks on the 1982 rescheduling agreement,
and we think they will need more relief to help cover the expected
financing gap of at least $500 million.
Secret
EUR 86-10020
July 1986
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The terms and amounts of financial help obtained for 1986-88 will
determine to a large extent whether Bucharest can make any progress
toward financial recovery. A multiyear rescheduling of much of the $2.8
billion in principal owed to banks in these years appears to offer the best
prospect for a more balanced adjustment. But arranging a multiyear debt
rescheduling would encounter several obstacles, not the least of which is
Ceausescu's opposition to International Monetary Fund (IMF) supervision.
Bucharest may well continue to push for large export gains and to request
only small amounts of debt relief-an approach that would not ease the
strain on the economy. Although the direct US role in commercial debt re-
scheduling is small, US views could be influential in setting the terms
should Romania request a rescheduling of its debt to Western govern-
ments.
Romania is likely to hold to its present economic policies and priorities for
the foreseeable future. Ceausescu maintains his intransigent opposition to
any diminution in his personal control over decisionmaking or to any
faltering in his drive to industrialize Romania and eliminate the country's
debt. We believe the result is likely tobe continued economic stagnation
and grinding austerity. In our view, intimidation by the omnipresent
security apparatus will probably keep popular protest in check.
Continued large financing gaps or a possible succession to Ceausescu,
however, could produce major policy changes. A return to some type of
IMF supervision or monitoring would seem the most likely departure from
current policy in the near term if Bucharest concludes it has little
alternative in the face of worsening financial problems. IMF guidance
would probably have little impact on Romania's economic situation under
a Ceausescu-led regime determined to minimize compliance. Fund mea-
sures to improve efficiency and balance Romania's economic resources
with its needs could yield improvement under a successor regime commit-
ted to more rational economic policies. Alternatively, Bucharest might
make political concessions to the USSR in return for economic assistance,
but this seems more likely under a successor regime than under Ceausescu.
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Contents
Key Judgments
The Causes of the Debt Buildup
Adjustment Strategy
Protecting Investment
9
Energy Shortages
11
Deteriorating Infrastructure
15
Impact on Industry
15
Impact on Agriculture
15
Energy
18
Falling Real Incomes
18
Increased Mortality
18
Unrest, Apathy, and Regime Responses
19
Catalysts for Change
23
Implications f
or the United States
25
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Romania: Difficult Adjustment
to the Financial Crisis
Since Romania slid into arrears in 1981, the foreign
debt problem has shaped the country's economic
policy and performance. Embarrassed by the need to
request debt relief from creditors and take policy
guidance from the International Monetary Fund
(IMF), President Ceausescu resolved to pay Roman-
ia's hard currency debt by the end of the decade. To
this end, Romania has moved its trade balance from
large deficits to large surpluses through deep cuts in
imports and a drive to expand exports. This has
required domestic austerity that has deteriorated into
draconian stringency and raised doubts about the
Table 1 Thousand metric tons
Selected Imports of Raw Materials,
1970 and 1980
Copper
15.2 b
43.8 d
Ginned cotton, fiber, and yarns
106.4 a
140.7 a
Iron ore
6,267.8 a
15,984.0 a
economy's long-term prospects.
This paper will discuss the regime's adjustment strate-
gy and its impact upon trade, economic performance,
investment, and consumer welfare. It will examine the
prospects for financial recovery, economic growth,
popular welfare, and a closer economic relationship
with the USSR. In considering Romania's economic
outlook, the paper will assess alternative strategies
that the current regime or a successor regime could
adopt and their implications for the United States.
The roots of Romania's financial problems lie in
Ceausescu's effort to transform the country into a
modern, industrial power. His program of rapid indus-
trialization launched in the early 1970s was built on
costly imports of Western machinery and equipment.
These required increased imports of raw materials
and energy to cover the gap between the country's
expanded industrial capacity and limited resource
base (table 1). Romania's highly centralized and
bureaucratic economic system compounded the prob-
lem by fostering inefficiency and poor competitive-
ness. The quality of many manufactured goods was
a Anuarul Statistic al Republicii Socialiste Romania, Bucharest,
1981.
b Comertul Exterior al Republicii Socialiste Romania, Bucharest,
1973.
c US Bureau of Mines, Minerals Yearbook, 1982.
d Economic Memorandum, Bucharest, 1982.
inferior to Western products, a serious problem for a
country that needed gains in exports to cover its rising
need for imported energy and materials.
The most serious consequence of the industrialization
program was the rapid increase in Romania's depen-
dence on imported oil. Formerly self-sufficient in oil
and natural gas and a net exporter of both, Romania
in the 1960s began to develop an industrial base
heavily weighted toward oil refining and petrochemi-
cals production. Bucharest expanded its refining ca-
pacity even as mismanagement of oil and gas reserves
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Table 2
The Oil Trade, 1976-84
Crude Oil
Imports
Refined
Products
Exports
Net
Imports
1978
259
153
106
1979
286
150
136
1980
320
178
142
1981
254
165
94
1982
218
133
86
1983
248
185
63
Sources: Derived from data in Anuarul Statistic a! Republicii
Socialiste Romania, various years.
led to declining production. Oil production peaked at
308,000 barrels per day (b/d) in 1976 and fell to
242,000 b/d by 1980. To feed a refining industry with
a capacity estimated at 600,000 to 700,000 b/d,
Bucharest increased crude oil imports to 320,000 b/d
in 1980, almost twice the 1976 level (table 2). The
sharp rise in imports, coupled with reduced profits per
barrel from refined products, turned Romania's small
oil trade surplus of 1976 into a $1.5 billion deficit by
1980 (tables 3 and 4). Romania was hard hit by the
runup in world oil prices in the late 1970s because,
unlike most other East European countries, Bucharest
received little subsidized oil from the USSR.
Bucharest's deliberate neglect of agriculture for the
sake of industrialization also damaged Romania's
hard currency trade. Meager investment in agricul-
ture-which received less than 15 percent of total
investment in the 1970s-limited gains in output.
Increases in crop production did not keep up with
expansion of livestock herds, and, as a result, Bucha-
rest had to increase feed imports sixfold over the
decade. Hard currency outlays for agricultural items
rose from $488 million in 1975 to over $1.1 billion by
Table 3
Price Differential Between
Crude Oil Imports and Oil Products
Exports, 1971-84
a Defined as revenues from oil products net of outlays for crude oil
purchases.
Sources: Derived from data in Economic Memorandum, 1982,
1983, 1984, 1985, and partner country trade data.
1980. This increase together with a decline in earn-
ings from agricultural exports turned Romania's bal-
ance on agricultural trade from a peak surplus of
$190 million in 1977 to a $231 million deficit by
1980.
Rising deficits in oil and agricultural trade coupled
with weak growth of manufactured exports pushed
Romania's hard currency trade balance into the red in
the late 1970s. The trade balance shifted from a small
surplus in 1976 to a $1.6 billion deficit by 1980, and
the current account deficit rose from $61 million to
$2.4 billion over this period. Bucharest financed these
deficits with readily available hard currency credits;
by 1981 Romania's debt had mounted to $10.2 bil-
lion, nearly three times the 1977 level (figure 1). The
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Table 4
Value of Petroleum and Petroleum
Products in Convertible Currency Trade
Figure 1
Romania: Cumulative Hard Currency
Debt, 1971-85 a
Imports
Petroleum
Products
Total
Exports
Crude
Oil
Total
Imports
1976
0.7
3.4
0.7
3.3
1977
0.7
3.7
0.9
3.8
1978
0.7
4.1
1.2
4.6
1979
1.7
5.5
2.1
6.6
I I I I 1
0 1971 75
Romanians relied heavily on short-term borrowings
that left them particularly vulnerable to liquidity
problems when Western banks, alarmed over the
Polish debt crisis, began to withdraw credit lines from
Eastern Europe.
In early 1981 Romania negotiated a three-year stand-
by credit and stabilization program with the IMF in
hopes of reassuring bankers that Romania was bring-
ing its balance-of-payments problems under control.
But the bankers were not reassured and, by late 1981,
the loss of credit lines had trapped Bucharest in a
serious liquidity crisis with unpaid obligations mount-
ing. With arrears a violation of the IMF charter, the
Fund suspended drawings under the standby only a
few months into the program.
Realizing that Bucharest's relations with foreign
creditors had sunk so low that bankers were unlikely
to resume normal lending soon, the IMF persuaded
Bucharest to negotiate rescheduling agreements with
its creditors. The negotiations proved long and conten-
tious, but by late 1982 Bucharest had rescheduled the
80
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1981 arrears and 1982 obligations with Western
banks and governments. To reinstate the standby
program, the IMF set new performance criteria that
called for Bucharest to take additional actions on
prices, exchange rates, and interest rates.
Although negotiations on 1983 debt reschedulings 25X1
went more smoothly, the Ceausescu regime was em-
barrassed by the need to reschedule and was growing
weary of foreign involvement in economic decision
making. Highly sensitive to measures that would
lessen his control over the economy, Ceausescu balked
at IMF requests for additional information on the
economy and for further policy changes. The regime
embarked upon a "go-it-alone" course that would
avoid new borrowings and further reschedulings and
pay off Romania's debt by the end of the 1980s. The
IMF, with Bucharest's agreement, canceled the last
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year of the standby arrangement in early 1984, and
the regime reversed earlier policy actions recommend-
ed by the Fund. On numerous occasions since then,
Ceausescu has denounced the IMF and called on the
Fund to cease imposing economic conditions as the
basis for its lending.
Adjustment Strategy
Ceausescu's decision to rid Romania of foreign debt
and creditor "meddling" required an adjustment
strategy that placed top priority on running large
trade surpluses. But Ceausescu also wanted to protect
investment to preserve the industrialization program.
Romanian authorities drafted a plan for moderately
rapid growth that would provide the output needed for
increased exports and growth in investment. The
planners were less supportive of the consumer who
was to receive a smaller share of output.
The regime's plan to run large hard currency trade
surpluses hinged on rapid growth of exports. The
revised 1981-85 economic program released in 1981
called for 12-percent average annual growth in total
trade and implied that this growth would originate
mostly from increases in exports, apparently at levels
well above 12 percent a year. Most of this growth was
probably intended to be in exports to the West in
order to generate cash needed for debt service. Much
of the increase was to come from sales of machinery,
which Ceausescu said should double over the period.
Although the plan said little about imports, provisions
for improved efficiency in use of raw materials and
energy and more intensive development of domestic
resources suggested that imports would be curbed, if
not cut. Cutting the oil import bill was particularly
important to reversing Romania's trade deficits. This
required channeling imported crude into refining for
export rather than domestic use, increasing domestic
energy output to substitute for the imported crude
used for nonexport purposes, and, finally, improving
the efficiency of energy use.
Previously planned increases in investment were pro-
tected in order to fuel economic growth. Growth in
industrial investment was to improve Romania's ex-
ports of manufactured goods and machinery and
thereby lessen its dependence on refined oil exports.
Sizable investments in energy production included
plans to more than double coal output, construct a
large nuclear power plant, and build more thermal
and hydroelectric plants. Investment plans for agricul-
ture emphasized increased machinery deliveries and
land reclamation in order to expand crop production.
Planned improvements in consumer welfare, however,
were less than in the original guidelines, suggesting
that the regime would sooner cut consumption than
investment if resources were to grow scarce.
Bucharest's foreign trade strategy, the linchpin of the
1981-85 plan, failed. Instead of increasing in 1982
and 1983, the value of hard currency exports declined
18 percent from 1981 (table 5). Romania's expectation
of strong gains in sales of machinery and equipment
proved unrealistic as exports of these items fell by
more than 20 percent. Soft prices and reduced sup-
plies of crude cut earnings from oil product sales from
their 1981 peak. Hard currency exports rebounded by
about 9 percent in 1984 as increases in exports of
refined products, chemicals, and consumer goods-
largely diverted from domestic uses-more than offset
a further fall in sales of machinery and equipment. In
1985, however, hard currency exports fell back to the
1983 level. The declining quality of Romanian export
goods and domestic production shortfalls largely ex-
plain last year's disappointing results.
The decline in export earnings, loss of supplier financ-
ing, and the regime's determination to pay down its
debt forced a sharp cutback in imports after 1980.
Hard currency imports declined by 13 percent in 1981
when short-term credit dried up. Bucharest cut im-
ports by an additional 40 percent in 1982-83 to swing
its current account balance from a $2.1 billion deficit
in 1981 to more than $900 million surplus in 1983.
Imports grew only marginally in 1984-85 as the
regime continued to run large surpluses to cover its
obligations.
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Table 5
Value and Composition of Hard Currency
Exports and Imports, 1980-84
Total
6,335
7,112
6,006
5,833
6,347
Machinery and equipment
1,039
1,821
1,705
1,413
1,207
Fuels, minerals, and metals
3,154
3,208
2,406
2,737
3,329
Chemicals and fertilizer
526
590
529
512
603
Total
7,967
6,902
4,604
4,321
4,283
Machinery and equipment
1,147
847
468
545
366
Fuels, minerals, and metals
5,330
4,472
3,404
3,123
3,251
o Defined as trade with nonsocialist countries. Total figures for
hard currency imports and exports as given in tables 4 and 21 are
higher because they include some hard currency trade with socialist
countries.
Bucharest has focused the import cuts primarily on
items that are not essential for current production,
such as capital and consumer goods, and has given
priority to goods needed to produce exports, such as
oil and raw materials. Imports of machinery and
agricultural products have borne the brunt of the
reduction, falling by more than two-thirds between
1980 and 1984. After making cutbacks in 1981-82,
Bucharest resumed substantial imports of crude oil
because refined petroleum products have remained
the major hard currency earner and Romania has
been unable to raise production of crude. Failure to
increase mining output significantly has led the re-
gime to continue large imports of iron ore, coking
coal, and metallurgical coke; purchases of some min-
erals and metals were continued in order to maintain
steel output, another significant hard currency earner.
Likewise, the regime has continued large imports of
various ferroalloys needed to produce export items
such as oil drilling equipment, automobiles, railway
rolling stock, and ships. Finally, the regime last year
resumed imports of spare parts for energy equipment
in belated recognition that the lack of such parts was
causing serious disruptions to the economy.
The trends in hard currency exports and imports
measured in constant prices show that the adjustment
effort has produced a substantial outflow of resources
from the economy. Although the value of exports fell
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The Quality Problems in Export Goods
The failure to maintain production equipment, cuts in
research and development, the meager supply of
skilled workers, and shortages of specified inputs
have contributed to the falling quality of output in
several key export sectors, such as machine tools,
construction materials, oil drilling equipment, refin-
ery equipment, and railway cars. Deteriorating pro-
duction in the machine-building industries has forced
planners to divert chemicals, fuels, steel, and food
products from the domestic economy in a faltering
attempt to meet ambitious export targets:
7the Arad railway-car
p ant produces a large share of the 6,000 to
7,000 railway cars exported annually, Romanian-
manufactured lathe machines required frequent
repairs. Approximately 60 percent of the needed
repairs were caused by negligent maintenance, such
as poor cleaning and a shortage of spare parts and
lubricating oil. In recent years, the factory has
received numerous complaints from foreign custom-
ers about welding seams breaking apart,
attributed to the low quality of Roma-
nian welding tools and poorly trained welders.
? The Yemen Arab Republic in 1985 rejected a
Romanian proposal for construction of an oil refin-
ery and pipeline after concluding that Romanian
technology lagged Western expertise.
? Expert analysis of the Romanian "state-of-the-art"
numerically controlled machines and machining
centers exhibited in early 1985 concluded that their
quality was below not only Western but also other
East European products.
a sample of Romanian televisions produced for
export, the sets were technically outdated and the
internal soldering and wires were unsafe.
? The low quality of Romanian steel used in the
production of cars and machine tools has caused
foreign customers to refuse delivery of several
shipments. In order to compensate for the lack of
high-quality steel, more poor-quality steel is used,
causing the product to be heavier than specified.
? Brazilian officials told the US Embassy that recent
Romanian efforts to increase imports of Brazilian
iron ore have been hampered by Brazilian reluc-
tance to accept Romanian manufactured goods in
countertrade, primarily because of their poor quali-
ty. Brazil no longer imports Romanian offshore
drilling equipment because it is obsolete.
Complaints about Romanian goods are not limited to
more discriminating nonsocialist trade partners. East
German, Bulgarian, and Polish officials have indicat-
ed that the refusal of importing enterprises to accept
Romanian exports limits the growth of bilateral
trade. Chinese diplomats told US Embassy officials
recently that China is reluctant to increase exports of
crude oil to Romania in exchange for barter goods
because it does not need the rudimentary machinery
and shoddy goods the Romanians are trying to
exchange.
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Figure 2
Romania: Volume of Trade by Region,
1980-85
40
Exports
Total
I I I I I I
85 1980 81 82 83 84 85
in 1981-85, they increased by nearly 20 percent in
volume over the 1980 level (figure 2). Imports, on the
other hand, fell by nearly 35 percent in volume in
1982-83 from their peak in 1980 before recovering
slightly over the past two years. The large shift in the
net flow of resources (real exports less real imports)
resulted not only from the need to move trade into
Figure 3
Romania: Terms of Trade With Socialist
Countries and the West, 1970-84
I I I I I I I I I I I I 1 1
40 1970 75 80 84
surplus but also to offset unfavorable price move-
ments that produced a nearly one-third decline in
Romania's terms of trade with the West in 1980-84
(figure 3).
Trends in exports and imports with the socialist
countries have not eased the burden placed on the
economy by the massive adjustment of hard currency
trade. A deterioration in Romania's terms of trade
with the East-albeit more modest than that with the
West-has required the economy to produce a greater
net flow of resources to socialist countries. This has
come about through a decrease in real imports over
the 1981-85 period. The decline occurred in the first
three years of adjustment when real imports fell 10
percent; gains over the past two years have offset only
about half of the reduction. By contrast, real exports,
which fell in tandem with imports in 1981-83, re-
turned to their 1980 level by 1984.
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Figure 4
Romania: Regional Breakdown of Exports, Imports,
and Total Trade in Real Terms
Socialist Market
43. economies 63.3
56.9
Changes in the regional distribution of Romania's
exports and imports show that the West benefited
much more than the East from the shift in resource
flows. Romania's overall trade in real terms moved
only slightly toward the socialist countries in 1981-85;
however, the regional shares of exports and imports
changed dramatically (figure 4). Bucharest's drive to
pay down its debt has increased the West's share of
Romanian output at the East's expense while the East
is supplying a much greater share of imports.
This trend, however, does not represent a reorienta-
tion of the Romanian economy to the socialist coun-
tries. The overall decline in real imports from all
sources indicates that the Romanian economy has had
to reduce its reliance on foreign resources in general
(figure 5). The decline in Western imports has simply
been greater than in Eastern imports.
The failure of Romania's trade strategy doomed
Bucharest's plans for moderately rapid growth and
debt reduction. By calling for increases in output
without growth in imports, the plans from the outset
made highly unrealistic assumptions about gains in
efficiency and import substitution, thus putting the
economy under considerable strain. The economy was
stretched even further when export shortfalls forced
import cuts and the investment program failed to
improve efficiency and produce import substitutes,
particularly for energy.
Unrealistic expectations for trade performance and
investment payoff led Romanian economic policy
makers to overestimate by a wide margin the econo-
my's growth potential during the initial adjustment
period of 1981-82 (table 6). Growth fell far short of
plans by comparison with previous periods because the
planners counted on greater resource availability
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Figure 5
Romania: Volume of Total Trade,
1980-85
I I
60 1980 81 82 83 84 85
through imports, domestic production, and efficiency
gains. This slowdown led planners to adopt a more
realistic target of 3.5-percent growth in national
income in 1983-the lowest goal in the nearly two
decades of Ceausescu's rule.
A small revival in performance in 1983, however,
rekindled the leadership's ambitions for rapid growth.
Planners raised the target to 7 percent in 1984 and to
10 percent in 1985. Together with ambitious plans for
1986-90, released in 1984, these goals suggest that the
leadership believed it had weathered the debt crisis
and could resume its pursuit of rapid growth unfet-
tered by foreign creditors and the IMF. Economic
growth strengthened in 1984, and the overconfident
regime accelerated sharply both investment and ex-
ports of refined oil products. These decisions prevent-
ed an easing of bottlenecks and drew down the
economy's energy reserves, choking off the economic
recovery in 1985.
Despite the resource constraints resulting from the
trade strategy failure and lower-than-planned eco-
nomic growth, the regime opted to protect its invest-
ment goals as much as possible and to place the
burden of adjustment on the population. Investment
corrected for price inflation dropped only 0.1 percent
in 1981-84 compared with 1977-80. Although this
small decline was a major change in the trend of
investment, which had shown average annual real
growth of 10 percent in 1966-80, the reduction pales
in comparison with the estimated decrease of at least
20 percent in the standard of living in 1981-85.'
Moreover, the regime cut investment only in 1981-82
during the initial liquidity squeeze; the regime accel-
erated investment more rapidly than originally
planned in 1983-84 when it perceived an easing of the
pressures for adjustment.
Ceausescu's adjustment priorities have differed sharp-
ly from those of other East European countries. The
other financially strapped regimes, for fear of popular
discontent, have given greater priority to protecting
consumer welfare and less priority to investment and
trade surpluses. Despite shortfalls in economic growth
and exports, Bucharest has not abandoned its overrid-
ing objectives of elimination of foreign debt and
preservation of the industrialization program through
high levels of investment.
Investment Priorities: Winners and Losers
Although real investment in 1981-84 equaled that of
the previous four years, large shifts occurred in
allocations among the various sectors of the economy
and among the branches of industry. These shifts have
been consistent with the priorities set out in Buchar-
est's original adjustment strategy and reflect an effort
to deal with the imbalances that produced Romania's
' The per capita consumption of basic goods and services was
estimated and weighted by household expenditures for each catego-
25X1
25X1
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Table 6
Economic Plans and Results, 1966-90 a
National income
produced
8.4
11.0-
12.0
10.3
7.1
8.8
7.0
5.5
3.5
7.3
10.0
7.6-
8.3
Gross industrial
output
11.6
11.0-
12.0
10.7
7.6
11.4
7.0
4.7
3.5
6.7
7.5
6.0-
6.5
Gross agricultural
output
4.7-
5.7 b
6.3-
8.3 b
6.5-
8.6 b
4.5-
5.0 b
4.7-
6.0
NA
6.0-
7.9
5.1-
5.6
5.4-
6.0
6.0-
6.8
5.4-
5.8
4.9
4.4
5.0
1.5
4.0
8.3
1.8-
2.5
Retail sales
9.2-
9.7
7.0-
8.0
8.1
4.8
9.3
6.0
4.6
3.0
3.0
1.0-
1.5
1.7-
2.0
National income
produced
7.7
11.3
7.2
4.4
Gross industrial
output
11.9
12.9
9.5
4.0
6.5
2.6
1.1
4.7
6.7
4.9
Gross agricultural
(1.9)
4.6 b
4.8 b
2.0 b
-4.3 b
-0.9
7.5
-2.0
13.3
0.1
output a
a Average annual real growth.
b Annual average real growth, 5-year average over preceding 5-year
average.
Note: The 1981-85 plan results for industry are inconsistent with
the annual plan results reported for each of those years.
debt problem. Romanian planners have focused in-
vestment on improvement of agriculture, domestic
energy production, and industrial exports:
? Long-starved agriculture was the only sector to
receive an increase in investment, amounting to
nearly 25 percent in real terms over the four-year
period (table 7). The biggest losses were felt by
sectors serving the population's needs, such as mu-
nicipal services, education and health, and housing,
and by sectors supporting the economy's infrastruc-
ture, such as transport and communications.
? Planners largely protected industry as a whole from
any significant loss of investment but shifted re-
sources heavily toward energy production and away
from those branches whose rapid expansion in the
1970s fostered the economy's appetite for energy
and raw materials (figure 6). Investment in electric-
ity and thermal power nearly doubled and increased
by half in fuel production (table 8). Ferrous metal-
lurgy, the chemical industry, and construction ma-
terials suffered major losses in resources. Although
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Table 7
Investment by Sectors, 1980 and 1984
1980
(billion
1977
lei) a
1984
(billion
1977
lei) a
Percent
Change
Total
210.45,
205.31
-2.4
Industry
105.88
104.12
-1.7
Agriculture
27.70
34.37
24.1
Construction
9.55
8.01
-16.2
Research and development
1.33
1.16
-12.8
Transport and communications
25.01
22.08
-11.7
Education and health
3.77
1.53
-59.4
Housing
21.69
19.45
-10.3
Municipal services
6.39
8.78
-37.4
Retail trade
4.52
4.25
-6.0
Other
4.61
1.56
-66.2
a Romanian official investment numbers in current lei were deflat-
ed by an implicit index derived from various Romanian data
concerning total investment growth in real and nominal terms.
Sources: Derived from data in Economic Memorandum, 1985, and
Anuarul Statistic al Republicii Socialiste Romania, various years.
investment in machine building contracted by near-
ly 30 percent, planners allocated more resources to
expanding industrial exports-primarily autos and
trucks-and to building an electronics industry
virtually from the ground up. More investment was
put into food processing, presumably to keep pace
with the planned increase in agricultural output
and to support an expansion of food exports. Invest-
ment in production of nonfood consumer goods,
however, fell by nearly half.
Although targeted to the economy's priority needs,
investment did not produce the increase in supplies
and efficiency needed for strong growth and improved
trade performance. Clearly, too many resources were
spent on projects whose payoff will come only in the
long term-if ever-but not in the period of greatest
need. Comparatively small expenditures for the repair
and maintainence of existing capital stock and infra-
structure were slashed while substantial resources
Figure 6
Romania: Share of Energy in Investment
Allocation to Industry
Other Energy
75.7 / I \ 24.3 63.0
flowed to still uncompleted projects. Excessive micro-
management from central authorities, including
Ceausescu himself, resulted in the irrational use of
resources at the producer level. As a result, industry
and agriculture suffered from tightening bottlenecks
as the impact of inadequate supplies of domestically
produced and imported inputs reverberated through-
out the economy.
Energy Shortages
The energy program has been the weak link in
Romania's domestic adjustment effort. Although Bu-
charest has reduced its oil trade deficit, increases in
domestic production have been far below plan, and
energy efficiency has not improved sufficiently to
meet the regime's ambitious goals. Bucharest's effort
to force rapid growth has depleted the economy's
energy reserves and produced widespread shortages.
Romania substantially reduced its reliance on import-
ed energy for domestic consumption between 1980
and 1984 (table 9). Net oil imports (oil not refined for
reexport) decreased from about 142,000 b/d to 57,230
b/d over this period, and the oil trade deficit was
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Table 8
Investment in Industrial Branches, 1980 and 1984
1980
(billion
1977
lei)
1984
(billion
1977
lei)
Percent
Change
Total industry
105.88
104.12
-1.7
Electricity and thermal power
11.45
21.84
90.7
Fuel (coal, coke, crude oil,
natural gas, and propane)
13.93
21.00
50.8
Ferrous metallurgy
12.34
7.59
-38.5
Nonferrous metallurgy
2.61
3.50
34.1
Machine building and
metalworking
30.57
21.55
-29.5
Chemicals
14.80
10.79
-27.1
Construction materials
4.44
1.94
-56.3
Forestry and woodworking
1.92
2.50
30.2
Light industry
5.51
2.77
-49.7
Food industry
4.68
6.85
46.4
Other
3.63
3.79
4.4
Sources: Derived from data in Economic Memorandum, 1984, and
Anuarul Statistic a! Republicii Socialiste Romania, various years.
Table 10
Net Imports of Primary Energy, 1980, 1983, 1984 a
1980
265
142
24
96
2
1983
196
63
28
94
10
1984
212
57
30
109
15
a Thousand barrels per day oil equivalent.
b Because of rounding, components' totals may not add to the totals
shown.
c Estimate.
Sources: Derived from data in Economic Memorandum, 1984, and
Anuarul Statistic al Republicii Socialiste Romania, various years.
Table 9
Share of Net Imports in Domestic Energy
Consumption a
1973
22
1,031
2.2
1974
5
1,044
0.5
1975
29
1,125
2.6
1976
73
1,219
6.0
1981
212
1,355
15.6
1982
198
1,347
14.7
1983
196
1,375
14.3
1984 b
212
1,415
14.9
a Thousand barrels per day oil equivalent; the heat. value of crude
oil equivalent for all energy sources is assumed to be 10,010
Kcal/kg.
b Estimate from Economic Memorandum, August 1984.
Sources: Derived from data in Economic Memorandum, 1984, and
Anuarul Statistic al Republicii Socialiste Romania, various years.
Table 11
Romania: The Energy Balance, 1980-84 a
1980
1,367
1,102
265
1981
1,355
1,143
212
1982
1,347
1,149
198
1983
1,375
1,179
196
1984 c
1,415
1,203
212
a Thousand. barrels per day oil equivalent.
b Consumption is assumed to equal production plus net imports.
c Estimate.
Sources: Derived from data in Economic Memorandum, 1984, and
Anuaral Statistic al Republicii Socialiste Romania, various years.
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Table 12
Primary Energy Plans and Production, 1980-85
1980
1981
1982
1983
1984
1985
Plan
Actual
Plan
Actual
Plan
Actual
Plan
Actual
Plan
Actual
Plan
Actual
Oil (million metric tons)
15.0
11.51
12.57
11.64
12.50
11.74
13.50
11.59
13.0
11.45
12.6
10.70
Methane (billion cubic meters)
27.13
28.16
29.55
29.26
32.98
28.62
NA
27.70
33.50
28.10
32.85
27.20
Coal (million metric tons)
54.09
35.16
50.84
36.93
44.00
37.86
52.21
44.52
61.71
44.28
64.3
46.60
squeezed down to about $500 million by 1984. In-
creased purchases of natural gas, coal, and electric-
ity-mostly from the Soviet Union-offset about 30
percent of the energy value of the decreased oil
imports (table 10). Q
By 1984, Romania was able to increase domestic
energy production sufficiently to offset the decrease in
total imports and boost domestic supplies. Domestic
energy production was 9 percent higher than in 1980,
and total energy availability was 3.5 percent greater
(table 11). Nonetheless, production and availability of
energy were substantially below planned levels. The
growth in energy production came from coal, particu-
larly lignite; output of methane and oil declined
slightly over the period 1980-85 (table 12). This trend
combined with the reduction in net oil imports shifted
the composition of domestic energy supplies toward
lower grade sources.
Compounding the shortfall in production, the Roma-
nian economy did not achieve any improvement in
energy efficiency. The ratio of GNP to energy use
stayed at roughly the same level after 1980 (table 13).
Moreover, energy
was reallocated away from "nonproductive" uses,
particularly the household sector, to industry. This
suggests that the efficiency of energy use actually
declined in industry and possibly in transport. The
decline in industrial efficiency probably resulted from
reduced imports of energy-saving Western equipment;
increased output of energy-intensive products, such as
steel and heavy machinery; the changed composition
of energy supplies; and bottlenecks in distribution.
These developments, along with the effort to push
economic growth, resulted in continually worsening
energy shortages. Such shortages became acute when
severe winter weather struck the country in early
1985, disrupting energy production and increasing
demand when energy reserves were seriously depleted.
Energy shortages continued throughout the year as
energy output fell below 1984 levels. In October,
Ceausescu declared a state of emergency in the
electric power system and placed it under military
cosupervision. Energy shortages in the winter of 1985-
86 were less severe than during the previous winter,
probably because of the relatively milder weather.
Romania's failure to get much return from the sub-
stantial investments made in energy over the past few
years reflects inappropriate priorities and bad luck.
Half of energy investment has been spent on develop-
ing oil, gas, and coal production even though Roman-
ia's reserves of hydrocarbon energy sources are declin-
ing. Moreover, the plan to increase the use of coal has
limited potential because coal reserves are largely
lignite with very low energy value. Finally, the Roma-
nians cut back imports of spare parts and neglected
maintenance needed to keep existing gas and oilfield
equipment functioning. In 1985, the Romanian press
complained that the operating life of drilling equip-
ment for these reasons had decreased by 40 percent.
the inabil-
ity to service imported gas turbines impeded the flow
of natural gas to Bucharest during the severe 1985
winter.
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Table 13
Energy Efficiency of GNP,a 1973-84
1973
100.0
1974
107.4
1975
105.5
1976 ?
l03.1
1977
105.6
1978
104.6
1979
108.4
1980
106.7
1981
107.9
1982
109.5
1983
107.8
1984
106.7
a Calculated as thousand lei of GNP per consumption of energy in
barrel per day oil equivalent. GNP in 1977 lei used in this
calculation excludes agricultural output to remove the sizable
fluctuations introduced by weather.
Complementing the effort to boost output of hydro-
carbon energy sources, Romanian planners have allo-
cated an additional 15 to 20 percent of energy
investment to building coal, oil, and gas-fired electric
generating plants. The 17-percent expansion in ther-
mal power capacity between 1980 and yearend 1984,
however, has outstripped increases in fuel supplies,
resulting in continuing declines in utilization rates
(figure 7). Poor maintenance of equipment, restric-
tions on imported parts, and the burning of coal of
lower quality than specified for the equipment have
further depressed capacity utilization and energy effi-
Production
I I I I I I I I I I I I I I I I I I I
0
0 1965 70 75 80 84
ciency.
The overexpenditures on hydrocarbon energy re-
sources and thermal plants have taken away resources
from the development of alternative sources that offer
the best prospects for significant increases in energy
supplies. Nonetheless, existing investments in hydro-
electric capacity and nuclear power have not helped
ease Romania's energy constraints over the past few
years. Hydroelectric capacity has increased by 18
percent since 1980, but bad luck in the form of
drought has reduced power output to less than a third
of capacity and below 1980 production. The first unit
of the massive 3,500-megawatt, 5-unit nuclear power
complex at Cernavoda is not likely to come on line
until 1990 at the earliest. Meanwhile this much-
delayed project is tying up resources that produce no
return at a time of great stringency.
Figure 7
Romania: Thermoelectric and Hydroelectric
Powerplant Capacity and Production, 1965-84
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Deteriorating Infrastructure
Misplaced priorities and bottlenecks have degraded
other elements of Romania's economic infrastructure,
particularly transportation. Romania has carried out
some investments that could improve efficiency and
productivity in transportation-for example, electrify-
ing railroad trunk lines and upgrading facilities at the
Port of Constanta. In general, however, Bucharest's
approach has been penny-wise and pound-foolish.
Substantial resources have been poured into ill-con-
ceived projects such as the Danube-Black Sea canal
while comparatively small outlays to maintain exist-
ing facilities have been neglected:
the lack of
materials and fuel to operate repair equipment has
led to a serious deterioration in highways that in
turn has caused expensive damage to cars and
trucks.
? Some 25 to 30 percent of state-owned trucks are
down at any given time awaiting repairs and spare
parts, and vehicles are often cannibalized for parts.
This deterioration in transport capacity coupled with
the regime's excessive demands have snarled freight
movement. Total tonnage of freight stagnated in 1983
and fell 4 percent in 1984. Despite Ceausescu's harsh
public criticism of the transport sector, performance
did not improve last year. Truck transport has suf-
fered because of the lack of fuel and the large number
of vehicles out of service. Efforts to shift freight to the
railroads have been hindered by shortages of railcars
and engines and by manpower shortages that have
delayed the loading and unloading of railcars.
The erosion of transport facilities is symptomatic of
the general deterioration in Romania's capital stock.
The cutbacks in imports of Western machinery and
equipment have increased the share of less productive,
less efficient Romanian machinery in new investment.
the quality of Romanian
machinery has declined even further because short-
ages of standard materials and parts have forced
machine builders to use less desirable substitutes.
Finally, the lack of parts and appropriate lubricants
has resulted in increased wear and breakdowns of
engines and machinery.
Import cutbacks, diversion of goods to export (table
14), energy shortfalls, deterioration of capital stock,
and transport snarls have combined to take a heavy
toll on industrial production. Industry initially fal-
tered badly as a result of the sharp import cuts of
1981-82 (table 15). Some recovery appeared in 1984
when supplies of energy and raw materials improved.
But the fuel shortages in 1985 produced the most
serious disruption in industrial production. Basic in-
dustries operated on reduced schedules, steel and
aluminium output dropped, and manufacturers depen-
dent on steel, aluminium, and other metals experi-
enced slowdowns and shutdowns. Output in machine
building, shipbuilding, and auto industries dropped
while shortages of oil reduced operations in the
chemical and petrochemical branches. With output
down in most branches of industry, the plan fulfill-
ment report for 1985 omitted direct comparison with
branch results in 1984. The officially reported growth
of 4.9 percent in industry as a whole for 1985 hardly
seems plausible given the performance of the subcom-
ponent branches.
Despite the sizable increase in investment, agriculture
has suffered even more from Romania's adjustment
problems than industry. Agricultural output and pro-
ductivity have been poor during the period of adjust-
ment to the financial crisis. Average grain production
for the 1981-85 period was less than for the 1976-80
period (table 16), and the returns to capital stock
increments fell sharply from those of the previous
five-year period (table 17). Agriculture has experi-
enced the shortages of fuel, parts, and machinery that
have disrupted other sectors of the economy.
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Table 14
Net Exports as Share of Domestic
Production
55
60
62
Cargo railcars
54
68
84
Aluminum and aluminum alloys
36
50
50
Processed fruit
43
37
41
Processed vegetables
21
27
28
Edible oils
18
25
30
Refined petroleum products
26
37
41
Sources: Anuarul Statistic, 1981 and 1984, and Economic Memo-
randum, 1985
But agriculture has also had to contend with severe
drought and-perhaps most important-Ceausescu's
bizarre guidance. No other sector has suffered from
Ceausescu's petty tutelage as has agriculture. He has
brought the many details of farm management, rang-
ing from size of the feed rations for hogs through
production goals for honey under his purview. For
example, in a two-hour diatribe to the National
Council of Agriculture in early 1985, he mandated:
? That no soybeans or seed corn be imported.
? That fruit trees be planted closer together.
? That sheep and cattle not be stabled during the
winter.
? That each cooperative farm produce five kilograms
of silkworm cocoons per year.
? That only certain varieties of wheat be planted.
? That farms decrease fuel consumption and avoid
"the excessive use" of fertilizers and pesticides.
Ceausescu's directives were totally ill suited to the
problems of Romanian agriculture. Romania could
not forgo soybean imports given the serious protein
deficiences in animal nutrition and the poor prospects
for increasing domestic production of soybeans. Seed
corn imports were also necessary because of shortfalls
in production of high quality seeds. Hampered by the
severe shortages of fuel, fertilizer, and pesticides,
farmers could hardly be chastised for overexpending
these items.
Although increased investment in agriculture has
provided more field machinery and irrigation equip-
ment for Romanian farmers, the sector has suffered
serious shortages of inputs during the adjustment
period. Decreased allocations of medications, feed,
pesticide, fertilizer, electricity, and fuels have de-
pressed agricultural productivity. These shortages
have resulted from cuts in the imports of some inputs
and from increased exports of domestically produced
items. This approach to improving trade earnings has
been counterproductive. By reducing production be-
low levels that would have been possible with ade-
quate supplies, this strategy has lessened the availabil-
ity of agricultural products for exports-items which
the Romanians could have bartered with the USSR,
in particular, for more oil. Energy shortages have
prevented sufficient use of the expensive additions to
the irrigation system to offset the dry conditions of the
last three years.
To add to the woes of the farm sector, President
Ceausescu has tried to coerce private agriculture into
boosting deliveries to the state marketing system.
These measures have backfired because the private
sector, which accounts for about half of the output of
livestock products and of some crops, has reduced
production and market supplies. The initial regula-
tions-price ceilings on private sales-caused farmers
to reduce their sales in village and urban farm
markets. Because the excessively low state prices did
not allow farmers to recover their production costs on
sales of surplus meat and produce, they stopped
raising more animals than needed for their own use.
In response to this development, Ceausescu in early
1984 mandated compulsory deliveries to the state,
which in turn apparently caused a further drop in
private agricultural output. The authorities responded
by curbing sales of livestock products in state retail
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Table 15
Growth in Industrial Output, 1978-85
Electric and thermal
power
Ferrous metallurgy
Machine building and
metalworking
Forestry and wood-
working
Leather goods, furs,
and footwear
6.2
1.8
1.7
8.7
8.0
1.0
4.3
-0.2
3.2
12.3
-4.2-
14.3
11.4
10.1
2.2
3.5
5.3
9.0
9.6,
7.2
4.8
4.9
7.2
8.3
8.6
Sources: Economic Memorandum, various years, and Agerpres, 21
Feb 1986. Output by branch for 1985 is extrapolated from the
1981, 1982, 1983, and 1984 plan fulfillment reports and the 1985
plan fulfillment report, which gave only 1981-85 total growth for
some branches of industry, apparently to disguise poor performance
in 1985.
stores in rural areas to force the populace to increase
private farming and become self-sufficient in these
foods. In addition, supplies of animal feed and other
agricultural inputs to private plot holders have been
made contingent upon whether private farmers deliver
animals to the state.
rations of basic staples in many
villages are not provided to rural residents unless they
deliver a certain quota of animals to the state for
slaughter. Nonetheless, inventories of privately owned
animals appear to be decreasing, and private-sector
output of livestock products is likely to continue to
decline.
The problems in production, the shift of resources to
the external sector, and the priority given to sustain-
ing investment have drastically reduced domestic
consumption-which already was lower than in all
other East European countries except Albania. Two
critical components of consumer welfare-household
energy use and food availability-have been affected
most severely. During the harsh winter of 1984-85,
25X1
25X1
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Table 16 Million metric tons
Grain Production, 1976-85
19.4
1981
17.6
1982
19.8
1983
18.4
the populace experienced hardships probably unprece-
dented since the immediate postwar period. This
decline in consumer welfare apparently has contribut-
ed to a sharp rise in mortality rates.
Energy
To shield industry from energy shortfalls, the authori-
ties cut supplies to the household sector and increased
consumer prices for energy by 80 percent in 1980-83.
Between 1983 and 1985, the government mandated
cuts of up to 75 percent in household energy consump-
tion and shut off gas and electricity to residential
neighborhoods for several days at a time during the
exceptionally cold weather of 1984-85. Households
were limited to one 15-watt lightbulb and one appli-
ance with the militia inspecting residences, fining
violators, and sometimes plastering over electrical
outlets. During the winter of 1985-86, energy supplies
to households were not cut as severely; nevertheless,
even in Bucharest many residential areas received
power for only a few hours each day.
Food
The regime reacted to food shortages in late 1981 and
early 1982 by imposing formal rationing on sugar,
flour, and cooking oil. As agricultural production
continued to falter, the regime decreased food supplies
to local distributors, causing a reduction of about 25
percent in rations. Livestock products-especially
Table 17
Returns to Capital Stock Increases in Agriculture
Marginal Rate
of Return a
1976-80 average 0.50
1981-85 average 0.38
'Defined as the ratio of percent change in gross agricultural output
to the percent change in capital stock. Calculations for each year
were averaged by periods.
Sources: Derived from data in Anuaral Statistic al Republicii
Socialiste Romania, various years.
meat and milk-have become so scarce that they are
not even formally rationed. Although Bucharest
claims per capita consumption of meat supplies is
about 60 kilograms per year, our analysis indicates it
is less than half this amount. Moreover, food prices at
state retail stores have surged by over 50 percent since
1980, with only bread prices remaining relatively
stable (table 18). Embassy reporting indicates that
food supplies in the winter of 1985-86 were even
worse than during the previous winter.
Falling Real Incomes
Despite official data to the contrary, we believe real
incomes have fallen sharply-at least 20 percent-
during the 1980-84 period. In addition to increases in
prices for energy and food,
rents have doubled, the prices of clothing and
durable goods have jumped steeply, and the quality
and variety of consumer goods have deteriorated.
Meanwhile, some 2 to 5 percent of worker wages are
being withheld under a mandatory "investment" pro-
gram.
Increased Mortality
Poor nutrition, inadequate heat, and the unavailabili-
ty of medications have increased mortality rates in the
past few years. Infant mortality, already significantly
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Table 18
State Retail Food Price Increases, 1981-84
Coffee
Butter
106
35
higher than elsewhere in Europe (table 19), climbed
by 35 percent in November 1984-January 1985 com-
pared with January-September 1984
Official Romanian statis-
tics reported infant morality at 26.5 per 1,000 live
births in 1984. However, according to official statis-
tics, the infant mortality rate in eight judets that year
exceeded 30 per 1,000 live births, and in two judets
the rates were between 35 and 40 per 1,000. In some
areas, baby formula is not available and young chil-
dren can obtain milk only with a doctor's prescription.
a jump in the death rate
among the elderly. The crude death rate (the rate
unadjusted for shifts in the age and sex composition)
for the entire population since 1980 has increased far
more rapidly than in any other East European country
(table 20).
Table 19
Romania and Selected Countries:
Infant Mortality Rates, 1983 a
16.5
19.0
Sources: Anuarul Statistic al Republicii Socialiste Romania, 1984;
Statisticheskiy yezhegodnik stran-chlenov Soveta ekonomicheskoy
vzaimopomoshshi, 1984; World Bank, World Development Indica-
tors, 1985.
Unrest, Apathy, and Regime Responses
Since a spate of quickly suppressed popular unrest in
1981-82, the populace has been demoralized by the
seeming futility of challenging the regime. Although
popular dissaffection continues to surface in occasion-
al strikes and industrial sabotage, the regime's main
worry now seems to be absenteeism, which appears to
have worsened even as many factories have required
employees to work double shifts and holidays. Buchar-
est's concern about the effect of deteriorating popular
morale on worker productivity has resulted in a steady
increase in coercion, a heightening of the campaign to
foster Romanian nationalism, and exhortations to
work harder. The security apparatus has increased its
surveillance of workers in industrial installations
where unrest has occurred in past years and also
among the Hungarian minority. Except for special
food supplies for coal miners and workers in some
large plants, the regime has not relied upon positive
incentives.
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Table 20
Romania and Other East
European Countries: Crude Death
Rates, 1980 and 1983
Percent
Change
The turnaround in Romania's trade balances after
1980, produced by import suppression and painful
austerity, enabled the regime to reduce its dependence
on foreign lenders for only a short time. Annual hard
currency trade surpluses of over $1.5 billion in 1982-
84-compared with a $1.5 billion deficit in 1980-
12.3 18 helped Bucharest cut its hard currency debt by 30
11.4 3 percent to $7.2 billion by yearend 1984. Thanks to the
13.9 2 large trade surplus and a nearly 50-percent fall in
13.3 -6 scheduled repayment of debt from the 1983 level,
9.5 -4 Bucharest met its 1984 obligations without further
Czechoslovakia 12.2 12.0 -2 debt rescheduling or new medium- and long-term
Sources: Anuarul Statistic al Republicii Socialiste Romania, 1984;
Statisticheskiy yezhegodnik stran-chlenov Soveta ekonomicheshoy
vzaimopomoshchi, 1984.
? The regime in 1983 raised production goals and
installed a new wage system closely linking salaries
to production targets. Workers in factories where
targets are not met may lose 25 to 30 percent of
their monthly base wages. In addition, workers
receive only a small portion of their base wages
when a factory shuts down for lack of energy or
other raw materials. In late 1985, an even more
punitive system of wage reductions was imposed on
economic managers who failed to meet production
goals.
? Retirement ages have been raised, pensions cut, and
workers in some factories and mines forced to work
double shifts.
? The regime has cracked down on black-market
activity to limit shortage-caused disruptions in retail
markets.
? The regime has announced programs to redistribute
the rural population to centralize distribution of
services and to resettle urban elderly to rural areas
to free up housing in cities for the working-age
population. Little has been done to implement these
programs, however.
borrowing.
Bucharest's strategy for financial recovery began to
falter, however, in early 1985. The disruptions in
production caused by the harsh winter and energy
shortages cut hard currency exports by 25 percent in
the first quarter compared to 1984. This loss of
earnings coincided with an increase in debt service as
the first payments on the 1982 bank rescheduling
agreement fell due. Romanian financial authorities
had to request an $80 million short-term bridge loan
from Western banks to cover these payments.
Financial pressures eased only slightly after the first
quarter of 1985. The Romanian economy was able to
squeeze out more hard currency exports in the second
and third quarters, but the widening effects of energy
and steel shortages caused exports to plunge late in
the year. The hard currency trade surplus slipped to
$1.4 billion from $2.2 billion in 1984, but this was still
large enough to cut Romania's debt to $6:6 billion by
yearend. Nonetheless, Ceausescu had to.ease his
dictum against new medium- and long-term borrow-
ing in order to meet all obligations. After prolonged
negotiations, a syndicated credit of $150 million was
obtained in December from Western banks.
Romania's financial position has deteriorated further
in 1986. Export performance has continued to falter,
and expected repayments of about $500 million from
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Romania's Middle Eastern debtors failed to material-
ize as the price of crude oil declined. As a result,
Romania has again been running arrears. We esti-
mate that, by the end of April, Bucharest had either
rolled over on a short-term basis or missed approxi-
mately $300 million of the $650 million in payments
due in January through April.
In late April,
Bucharest
requested
a rescheduling of the $260 million due this year on the
1982 rescheduling agreement and later asked the
banks to consider rescheduling similar amounts in
1987 and 1988. The need for new financing is becom-
ing increasingly acute. With some $800 million due in
May through July to banks, governments, and multi-
lateral institutions, Bucharest appears to have entered
a period in which arrears will mount up rapidly. A
financing gap of at least $500 million this year seems
likely; even with rescheduling of the $260 million,
Bucharest will need more financial assistance.
The financial outlook for 1987-88 is no more encour-
aging. Romania is unlikely to earn the hard currency
trade surpluses necessary to cover debt service pay-
ments averaging about $2 billion (table 21). Buchar-
est's ability to sustain the hard currency trade surplus
of even $1.4 billion earned in 1985 will be increasingly
difficult as declining product quality, decreased price
spreads between imported crude oil and exported
petroleum products, and disruptions in industrial pro-
duction depress export earnings.
The terms and amounts of financial help obtained for
1986-88 will determine to a large extent whether
Bucharest can make progress toward financial recov-
ery. A multiyear rescheduling of much of the $2.8
billion in principal owed to banks in these years
appears to offer the best prospect for a more balanced
adjustment. Short-term extensions on obligations
would not provide any breathing room for Romania
and would foster a climate of worry among banks that
might hamper Bucharest's ability to obtain trade
financing. Medium-term financing of about $250
million would probably enable Romania to get
through 1986 but would not relieve the substantial
financial pressure coming in 1987-88. In any event,
voluntary lending of that amount by banks seems out
of the question; in recent months, two efforts to raise
considerably smaller amounts have failed.
Arranging a multiyear debt rescheduling would en-
counter several obstacles. First, the banks might not
agree to reschedule debt in amounts sufficient to
allow Romanian planners to increase imports and set
more realistic targets for growth and exports. Second-
ly, banks probably would insist that Western govern-
ment creditors provide a comparable rescheduling of
obligations due them. The Romanians, however,
would probably not want to reschedule debts owed to
governments. Finally, even if all parties agree to
multiyear rescheduling, creditors probably would in-
sist on some type of IMF oversight during the re-
scheduling period, as banks did when Romania re-
quested multiyear rescheduling of rescheduled 1982
debts coming due in 1987 and 1988. The Romanians
almost certainly would reject this condition again and
indeed possibly the whole idea of a multiyear resched-
uling because it would end Ceausescu's hopes for
ridding Romania of debt and IMF "interference" in
the near future.
The need for change in economic management is
acute. Yet Ceausescu has vehemently ruled out both
systemic reform and changes in economic policy. As
long as he maintains his dominance, we see little
chance for the emergence of political support for
economic change. His control over policy extends
from setting overall goals down to interference in
minor operational procedures in enterprises and
farms.
Ceausescu's refusal to delegate significant authority
in economic planning, his refusal to accept alternative
views, and his sensitivity to any lessening of personal
control have largely squelched discussion of new
policies in the press or, apparently, among top offi-
cials. Because of Ceausescu's insistence upon absolute
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Table 21
Financing Requirements and Sources, 1982-90
Financing requirements
4,160
2,094
452
968
406
501
717
603
654
Current account balance
655
922
1,536
915
1,574
1,619
1,500
1,345
1,240
Trade account balance
1,525
1,688
2,186
1,445
2,090
2,060
1,870
1,650
1,500
Exports
6,235
6,246
6,902
6,280
7,380
8,270
8,650
8,900
9,200
Imports
4,710
4,558
4,706
4,835
5,290
6,210
6,780
7,250
7,700
Net interest
917
737
706
649
565
478
385
300
245
Other services
47
- 29
56
119
49
37
15
-5
-15
Debt repayments
3,170
2,152
1,578
1,659
1,761
1,818
1,912
1,483
1,344
Medium- and long-term
2,081
1,211
1,045
1,269
1,258
1,361
1,402
978
794
Short-term
1,089
941
533
390
503
457
510
505
550
Net credits extended
-502
-476
-410
-224
-219
-302
-305
-465
-550
Arrears from previous year
1,143
388
0
0
0
0
0
0
0
Financing sources
4,065
1,791
418
988
406
373
580
853
848
Credits
1,372
903
602
478
776
662
838
853
848
Medium- and long-term
657
503
274
292
390
400
500
450
450
Short-term
414
268
272
361
462
510
505
550
505
301
132
56
-175
-76
-248
-167
-147
-107
Debt relief
2,718
976
0
0
260
0
0
0
0
Change in reserves
-25
-88
-184
510
-630
-289
-258
NA
NA
Errors and omissions
95
303
34
20
00
128
137
250
194
Sources: Romanian reported data for 1982-85 and Romanian
projections for 1986-90.
agreement with his ideas and the pervasiveness of the
internal security apparatus, Romanian officials ap-
parently view themselves largely as executors rather
than shapers of policy. Only a few signs of dissent at
the top have appeared in recent years, and the
attitudes of current top government and party
cials on economic policies are not known to us.
The recently intensified discussion of economic re-
form in the Soviet Union and reform measures adopt-
ed in some East European countries are unlikely to
influence Ceausescu. He deeply mistrusts any mea-
sures that would move Romania's economy toward
free market mechanisms. His lengthy diatribe at the
November 1984 Party Congress against systemic
change was probably a message to other countries in
the region that Romania will go its own way, as well
as a warning to Romanian officials and economists
not to question his management of the economy.
The financial crisis appears to have stiffened Ceauses-
cu's aversion to change. The regime has relied on the
traditional central planning apparatus to reverse its
payments deficits. And, as the economy faltered, it
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efficiency over the longer term.
has increased the use of administrative fiat along with
high-level supervision of enterprise operations. Al-
though Romania's highly centralized economic plan-
ning has produced current account surpluses, it has
not done well in allocating resources to promote
export earnings and debt reduction.
Romania's need for borrowings
last year spurred Ceausescu to impose even harsher
regulations to push exports at the expense of the
domestic economy. Furthermore, Romania's request
for only $260 million in debt relief for 1986 when its
needs seem twice as great indicates that Ceausescu
will continue to press for the maximum possible
goals.
Financial pressures and inflexible policies will prevent
improvement in economic performance. The regime
will keep pressing for rapid growth, but we expect
inadequate imports of fuels, raw materials, and ma-
chinery to tighten bottlenecks and retard, if not
prevent, gains in productivity. The deterioration in
Romania's capital stock and infrastructure over the
past five years will also brake economic growth.
Without better allocation of resources and necessary
inputs, Romania's investments in energy, industry,
and agriculture will continue to yield limited returns.
GNP growth is unlikely to exceed 1 to 2 percent
annually on average over the next few years, and the
Romanian economy will fall far short of 1986-90 plan
upward trend.
The outlook for living standards is not promising, in
our view, because Ceausescu's drive to eliminate the
debt and sustain investment will claim the bulk of
available resources. Economic plans for 1986-90 allo-
cate nearly all growth to investments and exports.
Life for the long-suffering Romanians will continue to
be a struggle. Since goods and services needed to
maintain health and welfare are likely to remain
curtailed, we expect mortality rates to continue their
with worsening living conditions.
Nonetheless, we do not foresee serious popular protest
in the near future. The population is preoccupied with
day-to-day existence, and the security apparatus
maintains tight control. However, if rumors of
Ceausescu's ill health prove true and he were to die in
office or be incapacitated for long, the situation could
deteriorate quickly. Unsure of the leadership's stabil-
ity and resolve, the population could start to vent its
frustrations. Despite the population's current passiv-
ity, discontent appears high and is certain to grow
Catalysts for Change
We expect Romania to hold to its present economic
policies and priorities for the foreseeable future, but
further economic deterioration or a possible succes-
sion to Ceausescu could eventually produce major
changes. A return to some type of IMF supervision or
monitoring would seem the most likely departure
from current policy in the near term if Bucharest
concludes it has little alternative in the face of
worsening financial problems. The impact on Roman-
ia's economic situation would probably prove minimal
under a Ceausescu-led regime but could be more
significant under a successor regime committed to
more rational economic policies. Alternatively, Bu-
charest might make political concessions to the USSR
in return for economic assistance, but again this
would seem more likely under a successor regime than
under Ceausescu.
Return to the IMF
If Western creditors demand and Bucharest acqui-
esces in renewed IMF supervision in conjunction with
a debt rescheduling, the Fund would have to adopt a
more innovative approach to make any progress
against Romania's economic problems. The conven-
tional IMF prescription of domestic austerity to cor-
rect external imbalance is ill suited given the already
deep cuts made in domestic demand. Moreover, the
Fund's market-oriented policy recommendations in
the 1981 program seemed to have had little influence
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on resource allocation in the highly centralized Roma-
nian economy. In its 1985 report on Romania, the
IMF argued that the severe cuts in demand and
imports risked serious damage to the economy and
that more gradual adjustment was needed. To deal
more effectively in Romania, the Fund concluded that
it needed better statistical data and that it had to play
a more direct role in the formulation of plan targets
and implementation measures. Such an effort-if the
Fund is capable of mounting it-would push creditor
"interference" deeper than ever into Ceausescu's
management of the economy. For this reason, we
believe that the IMF probably could not bring about
the structural changes needed for improved economic
performance under the current regime.
A Succession
A successor regime, in order to ease Ceausescu's
austerity and gain popular support, might be more
willing to request extended debt relief and accept
IMF conditions for a standby arrangement. A new
leadership could point to the large reduction already
made in Romania's debt and argue that, under a
regime committed to more balanced economic poli-
cies, Romania would be a more attractive candidate
for Western financial support. On the other hand, a
successor regime might well be dominated by individ-
uals who would attempt to carry on Ceausescu's
tradition of resistance to outside "interference" or
who would look to Moscow for support.
In our view, a multiple stage succession characterized
by significant instability and confusion, particularly
initially, is not unlikely. The policy goals of the
various officials who might come to power are un-
clear, although a regime headed by Mrs. Ceausescu,
who is likely to take power if only briefly, would
probably not find new solutions to Romania's serious
economic problems. Over the longer term, we think a
regime at least somewhat more pragmatic and moder-
ate than the current regime is likely to emerge.
The Soviet Factor
Although rumors of Romanian political concessions to
Moscow in return for economic aid have been fre-
quent in recent years, Romanian-Soviet trade actually
slumped over most of the 1981-85 period. Bucharest
sought greater deliveries of Soviet energy and raw
materials on concessionary terms, but Moscow did not
abandon its demands for balanced trade, world mar-
ket prices, and high-quality goods. Production prob-
lems and Bucharest's need to earn hard currency in
trade with the West limited Romania's ability to
supply the goods required by the Soviets in return for
oil. But after declining in 1981-84, trade grew strong-
ly last year. Bucharest bartered more food products
and other hard goods in return for desperately needed
oil. Nonetheless, Romania apparently did not receive
concessionary terms, and its dependence on Soviet oil
and gas remained very small in comparison with the
rest of Eastern Europe.
The new Soviet regime has made it clear that econom-
ic relations will be transacted on a strict "quid pro
quo" basis. Although economic cooperation will in-
crease somewhat because of Romanian participation
in joint energy deals and Soviet efforts to develop
intra-Bloc cooperation, growth seems likely to remain
slow. We believe Romania's dependence on Soviet oil
and gas will increase over the next several years but
will still be below the level of the other East European
countries. Furthermore, given the recent declines in
the price of oil in world markets, the Romanians
might well increase purchases from the spot market if
they perceive Soviet terms to be too onerous.
Substantial Soviet aid would probably materialize
only in the unlikely event that the Romanians agreed
to major concessions on participation in Warsaw Pact
activities and support of Soviet foreign policy. Mos-
cow's insistence on quid pro quo trade arrangements
suggests that the USSR sees little purpose at present
in trying to buy greater foreign policy compliance
from Romania. The Soviets do not appear to regard
Ceausescu's behavior as a sufficient threat to their
interests to warrant expending substantial sums to try
to rein him in. They probably realize it would be a
feat nearly impossible to carry off.
But the USSR will want to influence the choice of a
successor who would be more cooperative and compli-
ant than Ceausescu. Should a succession occur or
appear imminent, the Soviets might well attempt to
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woo the new regime or potential successors with
promises of economic concessions. The confluence of a
more energetic Soviet leadership, deteriorating condi-
tions in Romania, and a new regime struggling to
establish itself could set the stage for a more active
Soviet policy in which Moscow would use any influ-
ence it has to push a post-Ceausescu leadership to
publicly endorse Soviet foreign and military policies.
We do not know whether Moscow has a favorite
candidate.
In the unsettled political
climate likely to follow Ceausescu's sudden departure,
however, the regime's current bulwarks against Soviet
influence might be so weakened as to afford Moscow
a more significant role in the successor sweepstakes
than current evidence suggests it will have. Soviet
willingness to extend economic assistance to Romania
in the next few years, however, may be limited by the
USSR's own economic problems and the new Soviet
leadership's determination to pursue its industrial
modernization program.
Should Romania go into default and be unwilling to
conclude rescheduling arrangements, the country
might become more vulnerable to Soviet pressures.
The resulting disruptions in economic activity, as
international banks refuse to extend trade financing,
would make it harder for the leadership to maintain
stability and control. Foreign policy and Warsaw Pact
concessions in return for economic assistance might
then seem more attractive to the Romanians.
Implications for the United States
US policy distinguishes Eastern Europe from the
Soviet Union and recognizes and encourages differ-
ences among individual East European countries to
the degree that they distance themselves from Soviet
policies. This distancing can take several forms: adop-
tion of distinct and more individualistic foreign poli-
cies, greater political and economic exchange with the
non-Communist world, greater tolerance of emigra-
tion and other human rights, encouragement of a
more flexible climate for political expression and
economic change, and experimentation with economic
US interests have been served largely by Romania's
maverick foreign policy over the past two decades,
which the United States has tried to encourage by
granting most-favored-nation trade status for over a
decade. While carefully avoiding direct challenges to
Moscow, Ceausescu has expanded the scope of policy
differences permitted for a Warsaw Pact member,
disallowed joint Warsaw Pact troop maneuvers on
Romanian soil, acted as a thorn in Moscow's side
during Warsaw Pact and Council for Mutual Eco-
nomic Assistance (CEMA) meetings, maintained ex-
tensive trade ties to non-Communist countries, and
provided the United States with an East European
country in addition to Hungary as a focus for its
policy of differentiation. Domestic repression, howev-
er, has seriously tarnished Romania's reputation in
the West and diminished the value of its foreign
policy assertiveness. Except for making some improve-
ments in the area of emigration, the Ceausescu
regime has generally resisted Western urgings to
moderate its harsh human rights practices, branding
them as interference in Romania's internal affairs,
and has rejected economic liberalization.
As long as Ceausescu stays relatively healthy and in
control, we believe Romania is unlikely to get in step
with the other Warsaw Pact members. Neither is
Ceausescu likely to ease his repressive internal poli-
cies significantly. Even if the Romanian economy
continues to perform poorly and the regime faces an
increasing need for financial assistance, we think the
West will have only limited opportunities to exert
pressure on Ceausescu on foreign policy and human
rights. In the absence of nondiscriminatory trade
treatment by the United States, however, we believe
Bucharest would experience more difficulty in sus-
taining its policy of diversified trade and might
increase the share of trade with socialist countries.
This would also leave Hungary in the uncomfortable
position of being the only East European Warsaw
Pact country that receives favored US trade treat-
ment.
Once Ceausescu passes from the scene, however, US
opportunities to influence Romanian policy may
change significantly. The successor regime or the
liberalization.
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Comparing Official and Reconstructed Growth
Two frequently used measures of economic activity
are the official national income produced (NIP) used
in Marxist national income accounts and GNP as
conventionally measured in the West. NIP and GNP
differ in three ways: services, prices, and depreciation.
Marxist national income accoujits exclude as nonpro-
ductive most services, including housing, education,
government administration, and consumer services.
Prices also distort Marxist national income accounts.
Goods are valued in purchasers' prices that include
turnover taxes-taxes on sales to consumers that
vary from item to item. Western-style GNP accounts,
on the other hand, value goods and services used in
their production. A change in turnover. taxes will,
therefore, erect Marxist national income, but not
Western-style GNP. NIP measures also suffer an
upward bias resulting from underestimation of price
increases in official indexes. This upward bias is due
to two factors: (1) the declining quality of goods while
their prices remain the same and (2) the introduction
of new products whose prices are set excessively high,
although the new product may be in reality an older
product with some insignificant alteration. The third
difference is that GNP measures do not deduct
depreciation from gross fixed capital formation while
Marxist national income measures do.
As a result of these accounting differences, growth
rates measured in Western-style GNP terms differ
contenders for power may be more willing to listen to
economic reason. In our view, the new leaders will be
wary of each other, less confident of their ability to
control the country and keep the Soviets at bay, and
more anxious for rapid, large infusions of aid in order
to satisfy popular demands for a better life. Under
such circumstances, the opportunities for both East
and West to influence Romania's policy would im-
prove markedly.
Western policy toward a post-Ceausescu regime could
be critical in shaping the new leadership's foreign
policy course and the thrust of its economic policies.
Western banks, taking note of the lower debt burden
markedly from growth rates expressed in Marxist
national income terms. Movement in Western-style
GNP growth measures tends to be less extreme than
their Marxist counterparts because services, exclud-
ed from Marxist accounting practices, usually are
more stable on a year-to-year basis than the other
components of production.
Romanian national accounting methodologies are
more upwardly biased and historically have produced
NIP growth rates higher than those of other East
European countries. In addition, the new-product-
pricing problem is particularly acute in Romanian
value of production subindices and, with the increas-
ing substitution of domestic goods for imports, has
caused greater distortion in recent years of industrial
output measures. Finally, the Romanian leadership's
highly punitive wage policies appear to have motivat-
ed economic managers to engage in more statistical
falsification in recent years than formerly.
The following tabulation compares percentage growth
for Romania in NIP and GNP terms for 1971-85:
left by Ceausescu and impressed that the successors
are more rational and flexible, might judge that
Romania is a somewhat better credit risk. But the
banks are unlikely to respond in that manner early in
a succession, when support is most needed, without a
lead from the United States and other Western
governments.
25X1
v
25X1
Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP89T00295R000200200001-6
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP89T00295R000200200001-6
Secret
Secret
Declassified in Part - Sanitized Copy Approved for Release 2011/12/29: CIA-RDP89T00295R000200200001-6