by Bartosz Klin (PL)

 
After decades of domination of centrally-planned economic system, countries of Central and Eastern Europe began a long and difficult process of economic transition to market economy. This process consists of economic stabilization, trade liberalization, major changes in social system, development of sound financial system, and many more factors.

Most of economists agree that the most important, and at the same time the most difficult task to face for post-communist economies is to make thorough structural changes of the economy. It is most important, because the structure of economy inherited from communist systems is ineffective and weak, unable to exist without certain political support, which is contradictory to idea of competitive, liberal market economy. And it is most difficult, because however it is possible to change the law, the monetary or fiscal policy comparatively quickly in administrative way, structural changes can not be made by simple governmental decisions. It takes time to draw attention of investors to domestic enterprises, and the only thing that political authorities can do is to prepare a good framework for entrepreneurs, and not to oblige them to do anything.

One of the most important part of economic structural changes is privatization. It is widely known that state is not a good owner. It cannot keep tight control over enterprises' performance, and it cannot give strong incentives to managers and employees in order to make the company competitive. Where majority of economy is state-owned, very often strong corruption exists. For these reasons, privatization of enterprises is considered to be crucial in post-communist countries.

But simple selling property to private hands, although in itself difficult, does not solve any problems with efficiency of economy. The main problem to solve is ill structure of economy and enterprises, which are unable to be managed properly, to product efficiently, and therefore to sell their products. What is needed is restructuring of enterprises, to make them more competitive to foreign companies and able to survive in a liberal market environment.

In this essay I will try to describe process of privatization in Romania after the fall of communist system in December 1989. I will show methods of privatization used by Romanian governments, some details on various privatization programs, and results of the whole process so far. I will describe shortly the prospects for years 1998-2000, presented by the Government of Romania.
Privatization process is strongly connected to other factors of economic performance of the country, so I will mention some data concerning e.g., liberalization of economy, possibilities of foreign investment, and social reforms too. I will try to describe some effects which structural changes makes on life of the Romanian society.

1. Initial conditions of economic reforms in Romania

During the days of communist system, Romania was probably the most centralized country and economy of all "Soviet satellites". Ceausescu's regime carried detailed central planning to extremes. Economy functioned almost like a single firm: enterprises had no possibility to choose their suppliers, buyers of their products, nor wages - all was decided by central administration. Even migration of employees was controlled and limited.

After Ceausescu gained power in 1965, much stress was put on rapid growth of heavy industry sector - Romania, before that being an agricultural country, became an industrial one. Of course, most of heavy industry enterprises were large companies, totally unable to compete in reality of market economy. The level of industrialization was very high; average enterprise size was the largest in Eastern Europe (in 1990, less than 1% of workers were employed in firms employing less than 200 persons!).

So-called policy of self-sufficiency, aimed to pay back all foreign debts, diminishing import and promoting export at all costs, led economic system of Romania to collapse. It is enough to say that, after several years without any growth, Gross Domestic Product decreased in 1989 by 7%.
In sum, after the fall of communist system, the Romanians had no experience even in partial reforms (unlike in Poland or Hungary), and economic standing of their country was very poor. Structure of the economy was ill, with numerous large state-owned enterprises, and with prevalent poverty.

Some researchers, anyway, were finding the hypercentralization of economy an advantage. That was because of very simple and clear property system, where the state had full rights to all property. In such case, the new democratically elected government was able to prepare and carry through rapid and ambitious transition program, having in mind that a strong state can more easily and fruitfully give up its power than a weak one.

2. First privatization programs

The legal and institutional framework of privatization process in Romania was created by Privatization Law, adopted in August 1991. The Law contained very ambitious and radical Mass Privatization Program. It shared some elements with solutions used in other Eastern European countries, and contained some specifically Romanian elements. Whole process of privatization was divided into three steps:

• The reform of state-owned enterprises (commercialization),
• Allocation of 30% shares of privatized enterprises to all adult Romanian citizens, using voucher system (vouchers were distributed for symbolic price, they were tradable);
• Selling of the remaining 70% shares to Romanian and foreign investors (in 7 years, 10% of capital to be privatized yearly).

Not all state-owned enterprises were subject to privatization process. Some branches (e.g., arms industry, energy production, mining, transport, telecommunications) were excluded from it, and that enterprises were transformed into so-called regies autonomes, prepared to remain state-owned.
For all other enterprises, taking part in the privatization program was obligatory (unlike in Poland or Hungary). Method of privatization of a particular enterprise was to be chosen by central administration (SOF) in each case.

Several institutions were created to coordinate the privatization process. National Agency for Privatization (NAP) was responsible for controlling of the whole process, and subsequently for privatization of small enterprises too. State Ownership Fund (SOF) was responsible of carrying out the 3rd stage of privatization process, and of management of privatized companies. It was totally independent from the state budget. Moreover, 5 Private Ownership Funds were created, owning the 30% shares of companies allocated to voucher system, responsible for accelerating privatization e.g. by active participation in privatization of enterprises.

POFs were regional institutions (for Transylvania - the POF III), intended to act as commercial firms. They were obliged to generate profit for the shareholders. At the same time, they were constrained by several administrative obligations - they were obliged to privatize firms even if unwanted from their commercial interest, obliged to gain maximum revenue (while in market economy it never is an obligation, but free will of an enterprise). For these reasons, POFs are claimed to be a strange mix of state and private factors.

So-called insiders (employees and management) played a little role in privatization process (unlike Russia). They had only 10% discount when buying shares of their own enterprise for vouchers. Only small enterprises were often privatized using the method of employee buy-out.

The privatization program adopted in Romania was ambitious, but it had many drawbacks. The main one was the tendency to over-control the whole process using administrative methods, with leaving little space for free decisions to commercial economic agents. This caused an unclear system of privatization institutions, often with overlapping areas of responsibility, which always leads to misunderstandings and decreasing the speed of privatization. Using mainly administrative, not competitive measures to privatize economy was the main issue that was mentioned by economists after adopting the first privatization program in Romania.

3. Process of privatization in Romania in 1991-1996

In a first few years after the development of privatization program, economic reforms in Romania were being performed slowly and were facing many obstacles. Several attempts of stabilizing economy (inflation and exchange rates) failed; Gross Domestic Product was still decreasing. Liberalization of prices was postponed. Banking system was still weak and dominated by 4 big state-owned banks. Four helping programs of IMF failed to be realized.

The only successful attempt of stabilizing the economy was made at the end of 1993. Thanks to strict monetary policy, inflation decreased to 61%, and GDP increased by 3,9% in 1994. But in the following years determination of government disappeared, and most fruitful results of the reform were wasted.
All this is thought to have been so because of lack of strong will to perform rapid reforms from the side of the government.

Progress of privatization program was also small - till the end of 1994, only 3% of capital privatized was actually sold, which is very little when compared to the planned 10% yearly. All agricultural sector was already privatized, but so-called agricultural environment (farm supply etc.) was still dominated by large, ineffective, state-owned enterprises. Almost only small firms were privatized, and large ones, the most difficult to be privatized, were still waiting it, not to mention regies autonomes, making huge losses every year. Large privatizations, involving strategic investors, lagged because of weak political support, and institutional weakness of the SOF.

Structural reforms of the economy were hardly existent, and they were often intentionally slowed down to avoid social costs.

The share of private sector in economy was increasing, but it was mainly because of rapid emerging of new small private firms, an not because of the privatization process.

In order to speed up the process of privatization, the so-called Law for Acceleration of Privatization was adopted in 1995. It contained a new Mass Privatization Program, providing for transferring 30% shares of 4,000 state-owned companies to citizens in exchange for the vouchers issued during the first privatization program. This program was completed in 1996 and it was the first big success of privatization process in Romania since 1989.

4. Program of a new government in 1996 and its realization

After the elections of November 1996, a new right-wing government of Victor Ciorbea was appointed. The new government presented a new economic strategy, providing that economic reforms would be radically quickened, putting special attention to privatization and restructuring of enterprises. The main points of the program were: urgent selling (by all methods) all assets owned by the SOF (by August 1998) even at a cost of less revenues and little restructuring of privatized enterprises, and improving the quality of the privatization process mainly by increasing the transparency and liberalizing access of foreign investors. Loss-making firms were to be offered for sale without any restrictions or liquidated if they failed to attract investors.

Since the appointment of the new government, Romania achieved many political and economic successes. Political relations with Ukraine and Hungary were normalized, the country joined CEFTA, restructuring of mining industry was started, Lei became an exchangeable currency etc.

The privatization process was indeed somewhat quickened (35% of all privatized capital in Romania was sold in 1997), although it is still not so rapid and efficient as to ensure good level of restructuring enterprises. This is mainly because of the very low level of Foreign Direct Investment, which means that foreign investors still don't trust Romanian economy, mainly because of bureaucratic obstacles. In October 1997, 16% of the capital of Romania's commercial companies was privatized, but the enterprises already sold are in most cases small and of little importance. Main obstacles faced by the privatization process are: unclear competencies of privatization institutions, and vague and often contradictory law.

Since publishing a new Privatization Program in February 1997, only little part of it has been actually realized.

Many economists claim that economic reforms in Romania still lack consequence. Inflation and unemployment are still very high, poverty is still prevalent. Privatization process itself should be quickened too. In addition, several governmental crises (the most dramatic in December 1997) and political and economic scandals (including the recent "cigarette-gate") decrease trustworthiness of the government and disturbs economic reforms. In all, many problems are still to be solved, and no one should expect that they will be solved quickly.

5. Conclusions

Several conclusions can be drawn from the effects brought about by the process of economic reforms in Romania in recent years.

Firstly, it is obvious that initial conditions before starting economic reform are crucial to its speed and quality. In Romania, many economic problems have been tried to solve in an administrative way, and not in competitive, market one. This looks as if it was a remaining of the hypercentralized communist system, where all economic activity was centrally planned. Such way of solving economic problems made a bad influence on the whole privatization process, causing its vagueness and low quality.

Secondly, to perform a set of difficult economic reforms a strong determination of the government is necessary. In Romania's case, such determination was often weak, or did not exist at all. Difficult reforms (including enterprise restructuring) have been postponing for years, which always increases social costs of such reforms performed furtherly.

Thirdly, lack of political stability, including frequent changes of government, political weakness of government, or often political and economic corruption scandals do not help to heal the economy. This is because economic changes are always difficult tasks, requiring social acceptance and stability.

What Romania needs most nowadays is, in my opinion, a strong government of "technocrats", with considerable political support in the parliament, who have a strong determination to finish some legal reforms, to keep the state budget balanced, to decrease inflation and to draw attention of foreign investors. Only than the process of economic reforms, including privatization and restructuring of enterprises, can be continued.

References

• Dabrowski, M.: Siedem zmarnowanych lat (Seven Wasted Years), "Rzeczpospolita" No. 64, 1997.
• Earle, John S.: Privatization in a hypercentralized economy: case of Romania, 1992.
• IIF Romania Country Report, IFF, June 1997.
• Plan Ciorbei (Ciorbeia's Plan), "Wprost" No. 2, 1998.
• Romania - an economic assessment, OECD, 1993.
• Romania, Yes! - an Investment Guide, Romanian Development Agency, Bucharest, 1996.
• Rumunia - wykorzystac szanse (Romania - to take the chance), "Polska w Europie", No. XXV, February 1998.
• Swiatelko w tunelu (A Light in a Tunnel), "Gazeta Bankowa" No. 3, 1995.
• The Basic Programme for Romania's Macro-Stability and Development until the Year 2000, Bucharest, December 1996.

last update: 11 JUL 2002 by Ralph