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Romania Table of Contents


Pricing and Profit

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

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

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

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

Data as of July 1989