Introduction
While the gains in political
democracy over the ten years after the fall of the Berlin Wall are significant,
the progress in reforming the economies of former socialist countries is less
obvious. For many people living in
Eastern Europe and the CIS, the transition was an experience similar only to
the 1929-1933 Great Depression, a “human crisis of monumental proportions”, as
a recent UNDP report calls it (UNDP, 1999).
Even now, a decade later, many countries in the region cannot get back
to 1989 levels of production. According
to the same report, the number of people living on an income of USD 4 a day in
the region has risen from 4 percent in 1988 to 32 percent in 1994.
Is hardship inevitable in
the transition process, or was there something wrong with the way in which
policy-makers tackled the issues of economic reform and transition? Perhaps the basic principles of the
“transition” were themselves inadequate.
Ten years ago, when practical questions were raised on how to best
proceed in order to transform centrally planned economies into market
economies, economists realized that they did not have a guiding “theory of
transition” and consequently had little to offer as policy recommendations. A loose consensus emerged however, based on
neoclassical economic theory[1],
on two practical measures to be taken in order to initiate the change: forcing a structural ownership change through
the privatization of state assets, and the liberalization
of prices. Different “models of
transition” were derived from that basic scheme, distinguishing themselves on
the details of practical solutions and the sequencing of events.
A growing mass of evidence
is accumulating after the first ten years of the transition, showing that the
results achieved by different countries depart in many cases from the
prescriptions and predictions conventional reform models proclaimed. Some failures are too serious to be simply
dismissed as due to “good policies being poorly implemented[2]”
and a growing number of economists are taking a critical position. Joseph Stiglitz, Senior Vice President and
Chief Economist at the World Bank, is one of the most prominent critics of the
“Washington consensus” set of policy recommendations, observing that there are
both examples of countries with an impressive record in achieving development
through non-conventional policies (China and other Asian countries) as well as
countries which failed in spite of their more or less orthodox policies (Russia
and other former Soviet Union countries).
The reasons are not simple to explain, but in general, they are
connected to
“reform models based on
conventional neoclassical economics” that are “likely to underestimate the
importance of informational problems, including those arising from the problems
of corporate governance; of social and organizational capital; and of the
institutional and legal infrastructure required to make an effective market
economy.” (Stiglitz, 1999, Abstract)
Privatization versus
Greenfield Choice
The role of the
privatization process in nurturing the development of the private sector and
prompting the crucial structural transformation of transition is now being
re-examined [Nellis 1999; Havrylyshyn / McGettigan, 1999; Earle, 1999]. Conventional wisdom maintains that a rapid
transfer of state assets into private hands is the single most important
measure to be taken in order to create a proper market-driven functioning of
the economy. But experience tends to demonstrate
that economic performance is not directly related to the speed of the
privatization process, but depends heavily on its “quality”. Russia is the most blatant example, but even
the Czech republic is not praised anymore for its innovative privatization
schemes that produced the most rapid and radical change of ownership. On the other hand, Poland is the most
successful transition economy (considering it is the only one having achieved a
17 percent GDP growth in 1998 over 1989) - without distinguishing itself as a
privatization champion (over 400 “hard core” key industrial enterprises are
still state-owned (Blaszczyk, 1999)).
China is an even more striking example: in spite of its ideological
restrictions on the sale of state assets, China has a vibrant private sector
and the world's longest record of years with two digits growth rates in the
last two decades.
For many years, the merits
of different privatization methods and schemes were debated, with authors
pondering factors like speed, social and political feasibility, or the impact
of alternative privatization methods on corporate governance and on the
economic viability of firms. I myself
contended that the issue was overstated and I tried to demonstrate, based on an
application of the Coase theorem (Dochia, 1996), that the privatization method
is not so important, eventually even irrelevant. Indeed, if transaction costs are low, an optimal ownership
structure (that is one using assets in the most efficient way) will ultimately
result through transfers on the capital markets, irrespective of the initial
distribution determined by the application of a particular privatization
method.
Experience proves that,
however, because of the imperfect nature of emerging markets, transaction costs
are high. The initial distribution
resulting from a particular privatization method will not be changed for a long
period of time and assets get locked into less than optimal utilization.
Empirical evidence from a
large number of countries[3]
suggests there is a correlation between the efficiency of economic
organizations and their ownership structure: state-owned firms tend to be less
efficient than privately owned firms, and closely controlled private firms are
more efficient than dispersed ownership structures. Also, companies controlled by foreign investors tend to be more
efficient than domestic ones. These
findings strongly support the allegation that the privatization method matters
and that mass privatization is not conducive to the most efficient corporate
governance[4].
But the same empirical
studies found that country institutional background is of paramount importance
for the performance of economic organizations.
Some authors even conclude that
…there are many cases where privatization has not led to efficiency improvement; these are generally associated with situations where the degree of competition has remained unchanged before and after the privatization…(Tandon, 1995, p. 329-330)
and
that
…the further east one travels, the less likely is one to see rapid or dramatic returns to rivatization. (Nellis, 1999)
with
numbers of examples from Russia, Georgia, Armenia or Mongolia to exemplify the
assertion[5].
Why is that happening?
Basically, economists are brought to admit that
…capitalism is revealed to require much more than private property; it functions because of the widespread acceptance and enforcement in an economy of fundamental rules and safeguards that make the outcomes of exchange secure, predictable, and of reasonable widespread benefit. Where such rules and safeguards, such institutions, are absent, what suffers is not just fairness and equity, but firm performance as well. That is, in an institutional vacuum the chances are high that no one in a privatized firm is interested in maintaining the long-run health of the assets. (Nellis, 1999, p.17)
Finally, new light is shed
on the “building from scratch” path for creating the private sector through
start-ups, or greenfield firms. In many
countries, while efforts and resources were devoted to privatize the
“dinosaurs” inherited from socialism, a silent revolution took place through
the contribution of millions of entrepreneurs that ceased waiting for the state
to perform the reforms and did their own transition. The outcome is so impressive that many authors now believe that
the fundamentals of the reform process should be re-examined: instead of a top-down, government driven
reform centered around privatization, a bottom-up approach should be
encouraged, based on genuine entrepreneurship and resulting in a substantial and dynamic small and
medium-sized enterprise sector.
This alternative path to
transition has already worked remarkably well in many instances. It is widely recognized that
In Poland, for example, small and medium-sized enterprises played a far more important role in the move toward a market economy than the privatization program, which lagged behind other economic reforms.
and
One study of Russia concludes that governments should concentrate more on the development of small and medium size enterprises than on privatization itself. (Havrylyshyn, McGettigan, 1999 p.5)
The same may
be concluded in China, but start-ups have played a role in practically all
transition countries, from Estonia to Vietnam.
Analysts recognize new firms have a wider impact than originally
anticipated.
¨ New firms have substantially
contributed to expanding the size of the private sector, their impact being
usually more rapid and more considerable than the privatization programs.
¨ Start-ups have contributed
to efficiency gains in the economy – all studies indicate that the efficiency
of the new firms is higher than that of ancient ones, state-owned or
privatized.
¨ New firms had a decisive
contribution to fostering the competitive environment in the economy; start-ups
have put an effective pressure on existing firms to achieve efficiency gains
and contributed to price stabilization.
¨ By giving consumers a wider
range of choices, new firms have also directly improved welfare.
¨ New firms are a main source
of economic growth; entrepreneurs have the ability to identify market niches
and to adjust production to the specific needs of these markets. Unlike old
firms, whose resources cannot be easily redirected to other uses, greenfields
are adapted to contemporaneous technologies and markets structures.
¨ It is hard to minimize the
importance of the new firms in restructuring transition economies in multiple
dimensions (sectoral, dimensional, products range, organizational, financial
etc.). The creation of new firms, most
of them small and medium-sized, is part of the restructuring process, and at
the same time facilitates the restructuring of large state-owned firms by
providing alternative uses for resources (assets and personnel).
¨ Last but not least, new
firms bring some fresh “entrepreneurial spirit” into economic and social
settings where initiative was deterred for decades by the central-planning
approach. Managers of state-owned enterprises are unlikely to turn into good entrepreneurs
even after their companies are privatized.
Many authors have also emphasized the social and political importance of the new private firms in the stabilization of democratic political structures or in spreading more open and less bureaucratic cultural models.
Romania is not among the
most successful transition countries.
Unlike other countries in the CEE region, Romania is not firmly
established on an economic stability and growth trajectory -- 1999 is the third
consecutive year of contraction in GDP and the per capita income is still
inferior to the 1989 level. The private
sector’s share of GDP (currently around 60 percent) is lower than in other CEE
countries. But more important is the
fact that the current share of the private sector is not the outcome of the
privatization process (only 20 percent of the state assets have been divested
as of the beginning of 1998), but the result of the activity of hundreds of
thousands of new firms, most of them small and medium-sized.
This is a remarkable
achievement, considering that Romanian authorities have focused on
privatization – as already noticed by early authors:
In Romania, as in other Central and East European Countries, when dealing with transition strategy until now the governmental bodies have placed a major emphasis on the problems related to the privatization (or “de-étatisation”) of the state-owned sector, while those connected to the development of the small and medium enterprises have been considered of secondary importance in the economic policy agenda. In other words, the dominant attitude is that the development of SMEs should come as a secondary consequence of the policy of privatization: in fact the two types of objectives have been almost identified, and even unified under the heading of the National Agency for Privatization (NAP). (Frateschi, 1993, p.33)
- and that the starting conditions were not very
favorable.
In Romania, the entrepreneurial tradition is very weak and general public awareness of the economic importance of SMEs very low: worse, small business – especially in retail trade and still more in wholesale trade – is often associated with fraud, speculation and profiteering. (Idem, p.34)
But unlike their Polish
siblings, the new Romanian firms did not succeed to produce a positive impact
powerful enough to overturn the downward trend of the economy. What happened?
Some Basic Facts about the
Creation and Expansion of Private Firms
In
1998, the private sector was producing between 70 and 80 percent of the GDP in
countries like the Slovak Republic, Hungary, Poland and the Czech Republic,
while in the other CEE countries (Romania, Croatia, Slovenia and Bulgaria) the
share was between 50 and 60 percent (see Chart I and Appendix 1). The difference between the two groups of
countries is due to different starting levels and to the effectiveness of their
national privatization programs. Poland
and Hungary, who had an important private sector before 1990, achieved a doubling
of their shares of GDP (1.7 and respectively 2.4 times more). The Czech and Slovak Republics were
notoriously operative in switching ownership status for the bulk of their state
assets[6]
and succeeded in quadrupling the share of their private sectors over the
period. Romania (with an increase of
2.5 times the share of the private sector in GDP) performed better than Croatia
(2.2 times) but less well than Bulgaria (2.8 times) or Slovenia (3.4
times). It should be noted that Romania
started in 1990 with a private sector larger than countries like Slovenia, the
Czech Republic or Bulgaria.
The same
general picture is offered when comparing the employment in the private sector
(Chart II and Appendix 1). It is
worthwhile mentioning that in Romania the private sector employment was consistently
and substantially higher than the GDP produced by the private sector –
reflecting a lower labor productivity, due to a large extent to the high
proportion of agriculture in the Romanian private sector’s output.
|
Table 1. Cumulative Changes in GDP in Selected Transition Economies,
1989-1997 |
|||
|
(In percent) |
|||
|
|
|
1989-97 |
Peak Decline 1/ |
|
Albania |
|
-20.3 |
-40 |
|
Bulgaria |
|
-36.8 |
-37 |
|
Czech Republic |
|
-8 |
-21 |
|
Hungary |
|
-9.6 |
-18 |
|
Poland |
|
11.8 |
-18 |
|
Romania |
|
-19.3 |
-26 |
|
Average (unweighted) |
|
-13.7 |
-27 |
|
Source: IMF Staff
Country Report No.99/26, Bulgaria.
Recent Economic Developments and Statistical Appendix, Table 18 |
|||
|
1/ Indicates the Lowest Level of GDP Since the Beginning of Transition |
|||
The
private sector is more resilient than the economy in general – it continued to
improve its position in the GDP even during downturns (see Chart III).
At the same time, there are
wide disparities in the participation of private firms to the economic activity
in different sectors: agricultural production dominates at over 90 percent of
the private sector since 1990 (and for certain products even before), followed
by services and construction. Industry remains behind, with only a 44.5 percent
contribution to the value added by the sector.
Private sector
development (as reflected by its growing share of GDP – see Chart V) is
strongly correlated with the rise of employment in the private sector and with
the private sector’s participation in foreign trade (both imports and
exports). The growth of the private
sector is also related to its investments.
However, the private sector is still utilizing a very small proportion
of
the resources in the
economy - less than 20 percent of the fixed assets and of the domestic
credit. Employees in the private sector
represent only 27 percent of the total number of employees, as most of the
agricultural production is obtained using family labor.
The private sector is clearly
dominating by number - an overwhelming majority of 98.4 percent of the total of
761,842 economic agents registered with the National Trade Register between
1990 and May 1999 are private[7]. Most of these private entities (641,163) are
organized as commercial companies, but there are also over 100,000
self-employed entrepreneurs and 5,000 cooperative organizations. The majority of these firms were set up in
the period between 1991 and 1994 (see Chart VI).
It should be noted, however, that the total number of registered private economic agents is to be considered cautiously. It is a well-known fact that many of the registered companies are in reality economically inactive – only half of the registered firms regularly submit their financial statements as required by the law and, on many of them, the basic identification data is missing or inaccurate. More than 230,000 limited liability companies failed to increase their capital to the minimum level imposed by a 1997 amendment to the Company’s Law – an indication that these firms are in fact defunct.
The number of economic agents is not an accurate measure for the “entrepreneurial spirit” either. Many private entrepreneurs were prompted to create a series of firms in order to extend the fiscal facilities granted to new firms until 1995. Sometimes, new “clean” firms were created in order to obtain credit from banks. And there is no doubt that firms were set up as a mere shell for underground activities.
There are over 66,000 foreign owned companies that invested over USD 4 billion since 1991 (Chart VII).
Source: The Chamber of Commerce and Industry of
Romania, Foreign Investment in Romania.
Statistic Synthesis no.16
Most firms, both domestic
and foreign, are dedicated to wholesale and retail sales activities, but the
largest proportion of capital is invested in industry.
Typically, private firms are small (Table 2); micro-enterprises (less than 10 employees) account for more than 92 percent of the total number of private companies. However, the activity is concentrated in the medium and large companies, which make up for 36 percent of the total turnover of the private sector, although it represents only 1.3 percent of the number of firms.
|
Table 2: Distribution of Private Companies (Number and Turnover), by
Size Categories (in Percent) |
||||||||
|
|
1994 |
1995 |
1996 |
1997 |
||||
|
Number |
Turnover |
Number |
Turnover |
Number |
Turnover |
Number |
Turnover |
|
|
Total, of which: -
Micro (0-9 employees) -
Small (10-49 empl) -
Medium (50-249 empl) -
Large (over 250 empl) |
100.0 95.1 4.0 0.7 0.2 |
100.0 54.5 19.7 13.7 12.1 |
100.0 94.7 4.3 0.8 0.2 |
100.0 49.0 21.1 14.0 15.9 |
100.0 93.1 5.7 1.0 0.2 |
100.0 40.9 24.8 15.6 18.7 |
100.0 92.2 6.5 1.1 0.2 |
100.0 37.2 27.2 17.9 17.7 |
Source: Comisia Nationala
pentru Statistica, Evolutia Sectorului
Privat in Economia Romaneasca (1990-1997), Editia 1998
While small firms’ share in
total turnover declined between 1994 and 1997, large firms increased their
share in the total turnover. As a
result, a major structural shift took place in 1998 when privately owned companies
outnumbered the state owned ones in the Romania Top 500 companies
classification (CEMATT, 1999). But with
very few exceptions, all private firms in the Top 500 are either former state
companies recently privatized or owned by foreign capital: domestic new firms remain typically small and very small.
In general, small firms tend
to achieve better economic performance (Table 3), especially in
labor-productivity related indicators.
This is related to the fact that the private firms are more profitable
than the state-owned ones: in 1997, 60 percent of the private firms concluded
the year with a profit and 29 percent with losses, while among the state-owned
firms a similar proportion (57 percent) of firms ended the year with a profit,
but a substantially higher proportion (41 percent) registered losses.
|
Table 3: Economic Performance and Size of companies (relative position, national average = 1) |
||||||
|
Classification By Size of
Firms |
Turnover/Employee |
Gross profit/Employee |
Turnover/Investment |
|||
|
1996 |
1997 |
1996 |
1997 |
1996 |
1997 |
|
|
National
average -
Micro (0-9 Employees) -
Small (10 – 49) -
Medium (50 – 200) -
Large (over 200) |
1.00 2.46 0.63 0.90 0.68 |
1.00 1.41 1.51 0.86 0.83 |
1.00 2.61 2.17 1.14 0.54 |
1.00 1.33 1.96 1.28 0.67 |
1.00 1.51 0.35 0.82 0.89 |
1.00 1.18 0.68 0.68 1.28 |
Source:
[ZAMAN, VILCEANU. 1999a]
The discrepancy between the private and the state firms is even more evident when the volume of profits and losses is considered (Table 4). State firms produce only 7.4 percent of the profit in the Romanian economy and 21 percent of the losses, while private firms contribute 80 percent of the profits and 43 percent of the losses. If the balance for the total economy ended positively, this is due exclusively to the private sector which compensated for the negative balance of the state and mixed sectors.
|
Table 4: Distribution of the Profits and Losses among Private and State firms in 1997 |
|||||
|
|
Gross
Profit |
Gross
Losses |
Difference |
||
|
ROL
bln. |
% |
ROL
bln. |
% |
ROL
bln. |
|
|
Total
Companies, of which: Private State Mixed |
29221.3 23429.3 2169.8 3622.2 |
100.0 80.2 7.4 12.4 |
23165.6 10081.2 4786.4 8298.0 |
100.0 43.5 20.7 35.8 |
+6055.7 +13349.1 -2616.6 -4675.8 |
The better financial
performance in private firms is related to generally lower wages
(Table 5).
|
Table 5: Wage Differentiation Between the Private and Public Sector Mean Private Sector wages, as a Percent
of the Corresponding Mean Values in the Public Sector, 1996 |
|
|
Industries Agriculture Extractive Industries Manufacturing Power, Gas, Water Construction Trade and Tourism Transport, Communication Finance Real Estate Education Health Care Social Services Main
Occupational Groups in the Manufacturing Sector Managers, Intellectual Occupations Technicians, Clerical Staff Manual Jobs: - Machine Tool Operators, etc. - Other Specialized Workers - Unskilled Workers |
Public Sector Wages = 100 96 52 84 66 99 78 87 82 132 77 80 88 94 102 89 83 87 |
Source:
OECD Economic Surveys Romania,
February 1998, p.129
A much more comprehensive
and nuanced portrait of the private sector firm may be drawn from the
statistical survey performed by the National Commission for Statistics (see
Appendix 5). Private firms are not only
smaller in terms of employment (the average number of employees is four times
lower in private industrial firms, as compared to state firms), but also in
terms of capital (the registered capital in industrial state firms are, on
average, 18 times higher than the share capital in a private company). On average, turnover of state firms is five
times higher than that of private firms – but the turnover per employee is only
33 percent higher. State firms outperform the private ones in exports and in
the value added. They do also spend
more per employee – wages in private firms tend to be lower than in state ones. In exchange, private firms are more
profitable (their operating surplus is 13 percent higher than state-owned
firms) and invest more out of their own resources. The same findings do apply (with some adjustments) to other
sectors – construction, trade, services and even agriculture.
The Ingredients of Economic
Success: Entrepreneurs…
Whatever progress Romania
has achieved until now in transition, it is due to a large extent to the
struggle, initiative and risk-taking attitude of hundreds of thousands of
individuals who chose the adventurous path of building a new, different future
for themselves and their families. The
entrepreneurs are largely recognized today as the driving force of economic
progress and, in transition countries, they are also supposed to be on the
frontline of reform.
But along with the merits,
the Romanian entrepreneurial class is also sharing the responsibility for the
failures of economic reform and an accurate view of their role should account
for both the merits and failures.
But who exactly are the
entrepreneurs we are talking about?
Throughout the present section, we will focus on a sub-division of the
entrepreneurial class, loosely defined as “those who count” in shaping the
functioning of the economic system and who influence its evolution. A large number of the “entrepreneurs” as
defined by statistics– like the agricultural family-farmers, some small
economic organizations and a good part of the self-employed - are not directly
our subject here.
The entrepreneurs’ position
and role in the development of the private sector in Romania is the result of
specific circumstances that presided their emergence as a socially distinct
group and the particular features of their subsequent evolution. Early studies (Costariol, 1993, p.23)
noticed two basic differences between Romanian entrepreneurs and typical West
European entrepreneurs: a) different social origins of the entrepreneurs, and;
b) the different approach, attitude and expectations they have towards business[8].
Because the chain of
familiar handicraft tradition was broken during the communist regime in Romania
and the number of entrepreneurs who had been trained in the field as workers or
junior technicians in large-scale enterprises is very limited, the two main categories
that form the backbone of Western European entrepreneurs (sons of traditionally
entrepreneurial families and former blue-collar workers employed in the large
scale industry) are almost completely missing. Instead,
the typical private entrepreneur in Romania is a first-generation person, middle aged, mainly with previous experience in a managerial position with large scale state-owned companies or, if he is young, usually with a University education. (Costariol, 1993, p.24)
This is due to the fact that
workers and technicians in large state companies were given little personal
responsibilities as to the performance achieved by their units and therefore
they now possess little of the know-how, organizational skills and decision
capabilities needed when undertaking entrepreneurial ventures. At the same time, white-collar personnel had
better access to the key business knowledge within the company:
Information concerning strategic factors like the market, clients, suppliers of raw materials, financial tools, and asset availability, accompanied by low salaries in their declining companies, give former managers a better chance to start their own private and often profitable business. This is especially true in a rapidly changing and very troubled system, where a good rapport with a client is of greater use than any technical ability. (Idem, p.24)
There are several important
consequences deriving from that structural feature of the entrepreneurial class
in Romania:
a) On
the whole, the entrepreneurial class in Romania benefits from a higher
educational level when compared to other European countries. But at the same time, it is rather short on
practical experience in real industrial work and is therefore lacking in manual
and technical abilities. This implies
that the average Romanian entrepreneur does not look forward to embarking upon
a manufacturing venture, whereas he usually feels a stronger vocation towards
commercial and sometimes also speculative activities (this is one of the
reasons manufacturing companies are a minority among the newly established
enterprises).
b)
Because
of their higher social class origins, Romanian entrepreneurs are somewhat
insensitive to the issue of mutual solidarity and reluctant to associate with
one another. Private entrepreneurs lack
an associative spirit in general and are scarcely inclined to group themselves
into strong, well-organized associations.
There is a profusion of competing business and professional
associations, each claiming it is the “authentic” representative of the
business community.
c)
Most
private businessmen perceive the business environment as being absolute
competition and act as though every other enterprise was a dangerous adversary,
rather than a potential partner. This
attitude is frequently prevailing within the enterprises themselves, where
personal ambitions and mistrust between partners generate conflicts and leads
to splits and break-ups. Vertical and
horizontal integration and consolidation in general is hindered, contributing
to the weakness of the Romanian private sector.
But by far the most
significant consequence of the white-collar, managerial origins of the Romanian
private entrepreneur is its special relation with the state and state
companies:
a)
Many
private ventures were from the start conceived to gravitate around a state
company. Although some of them are
legitimate and respectable businesses, in a very large number of cases they are
simply devices aimed at siphoning profits and assets from state companies into
private hands. The simplest and best
known mechanism is the “tick firm”:
Two SRL (limited liability companies), usually having deep roots in the political environment, were placed on the “inputs” and the “outputs” circuits of a state enterprise. The first one is selling the raw materials at higher prices. The second one is buying the production cheaply. The “tick firms” are prospering, and the guest company becomes, in a few years, a true “black hole”. (Cercelescu, 1999)
Some authors go
even further and consider that:
after 1989 the capitalist class was formed mainly on the account of the state by rape of real estate, fixed assets and even social capital of state enterprises and organizations. …From state plants’ directors that tacitly transferred to their wives’ tick-firm equipment, raw materials, contracts and bank loans guaranteed with state property, to managers of import-export organizations privatized overnight to continue the operations and cash the dollars into their own accounts, to the relatives of former CPEx (Communist Party Political Executive Committee) members and directors in the old financial institutions promoted as heads of the new banks, they all demonstrated an extraordinary business ingenuity that procured them billions. (Brucan, 1999, p.37)[9]
b)
The
“special relation” is not limited to state companies but is spilling over to
all state institutions
the only form of survival (for the private entrepreneur) was, during the last ten years, the alliance with the political-administrative apparatus. The entrepreneurs that resisted in time did comply with that unwritten rule. (Margarit, 1999)[10]
prompting some analysts to
declare that
Romanian capitalists are a product of the Romanian State and, as such, they are an annex of the state. (Boari, 1999)
c)
When
the political dimension is added to the list of “special relations” between the
private sector and the state, the resulting picture is what is usually called
“crony capitalism”. In fact, “crony
capitalism” is the continuation of the old “kinship socialism”:
The practice of the old nomenklatura of promoting its interests through the politization of economic activities takes, in post-communism, the form of the so-called “crony capitalism” – deeply related to the kinship socialist economy that generated it. The old economic order is therefore shaping the power relations that define the new “order”. (Palade, 1999)
Other authors
see the private sector more like a victim of a battle between the “industrial
elite” and the “financial elite” for controlling political power.
The private sector was too dependent on the (public) administration, whose approvals and decisions were indispensable for any successful business, to be in a position to assume a political conflict with it. (Instead, the private sector) preferred to accommodate, trading the uniformity of economic rules and mechanisms for the singularity of the decision bought through bribery. This allowed them to continue their business and maintain their profits even without getting a first ring position in the power system. So they finally turned out as an unreliable and duplicitary ally. A similar position adopted the foreign capital, capable of accepting any rules, including the one of breaking any rule if this can secure the success. (Pasti, 1995, p.309)
An extremely severe
diagnostic is derived from this analysis.
Today, in Romania, we are dealing with a closed economy that relies in its functioning on the collusion of interests between the state apparatus and an exclusive category of “entrepreneurs”. This alliance sets the structural conditions for the functioning of the economy in Romania. (Boari, 1999)
Understanding
the basic, structural relation established between the state and the
entrepreneurial class helps explain some otherwise surprising facts. The ambiguous attitude of Romanian
entrepreneurs towards the state is one example: the state is to blame for
almost all bad things that happen to the business, but it is the state they
turn to when looking for solutions. And
the solutions demanded are not of a liberal type as one might expect from
private entrepreneurs (the “minimal state” perspective), but are strongly
interventionist (the state should actively protect specific interests –
bakeries, poultry farms, furniture producers etc. - by extending subsidies,
increasing import tariffs, allocating funds and other resources to specific
groups etc.). Every meeting organized
by the different entrepreneurial associations is concluded by a document proposing
solutions for a turnaround of the national economy; but these “solutions” are
nothing more than “wish lists”.
…almost all schemes that, at least in intention, aim at stimulating the economic growth, are based on facilities, exemptions, discrimination, subsidies, protection against competition etc., that is on all elements needed for rent-seeking to remain a modus vivendi in the economy. (Croitoru, 1999)
In general,
Against a background of absence of an anti-state spirit, we do find an activism dedicated to promoting and concluding “deals” with the state to reap privileges, favors, protectionism and rents. (Munteanu, 1999)
The collusion between the
state and the private sector also accounts, at least partially, for the
aggravation of the crisis during the downturn after 1997. Because of its dependency on the state, the
private sector was not capable of taking over and playing a locomotive role in
restructuring. Instead, the private sector was itself severely hit and
contributed to the economic contraction.
The affinity of the private sector
to state firms makes the two almost indistinguishable in their manners; many
state companies take the liberty of behaving like private firms and some
private entities enjoy the privileges of state protection and support. Credit
Bank, a “private” financial institution having state companies as the main
shareholders, was such a strange combination whose private character was
related mainly to the interests it served (see the Dossier in the
Appendix). Banca Dacia Felix, another private endeavor in the very lucrative
financial sector, succeeded to get around 2000 billion lei from the National
Bank before going bust.
But maybe the most harmful
consequence of the “state capitalism” system that dominates economic life is
that it makes it very hard for many other entrepreneurs who are not “part of
the system” to survive and prosper and for free markets to function
properly. The media has recorded
hundreds of examples of Romanian or foreign entrepreneurs who give up or are
defeated in the battle with the “state capitalism” system. Genuine success stories are rare, but very
precious because they give reason for hope (see Europharm Dossier in the
Appendix).
… and Business Environment
A minister of the Romanian Government recently remarked
that:
The business environment in Romania is extremely hostile to investors. It is rendered hostile by corruption and by the bureaucratic system of approvals for any action an investor takes. I have no doubts now that Romania is offering today such a hostile environment. (Minister Traian Basescu, quoted by Oanta, 1999)
Romanian and foreign
entrepreneurs have long complained about it. Up to a point, these complaints
are not unusual – businessmen everywhere tend to grumble about taxes or
cumbersome regulations. Transition
economies, confronted with the huge task of re-building the whole institutional
system in a very short period of time, have explicable difficulties in
harmonizing all the different aspects of the business environment and in making
it work. Therefore, the situation in Romania should be treated with a certain
tolerance.
But what is really
disturbing in Romania’s case is that over the last few years, instead of an
improvement, the business environment seems to have deteriorated. The latest Economist Inteligence Unit survey on the issue is placing Romania
among the most “toxic” environments to business, after Russia, Indonesia and
Pakistan (The Economist, 1999 p.138).
A similar conclusion was reached by a study prepared for the Romanian
government: out of 130 countries analyzed, Romania is among the 20 most
constraining fiscal and administrative regimes.
Practically all elements that compose the business environment are inadequate. We will not insist here on more general aspects like macroeconomic stability, competitive markets, hard budget constraints, property rights, etc. that have been examined in various instances and by different authors. My aim here is to present the business environment as it is perceived by private entrepreneurs, focusing on the problems most frequently invoked by them.
A clumsy and extremely
volatile legislative framework is,
according to many businessmen, a main source of uncertainty in business. There is a profusion of laws, government
decisions, instructions for application and regulations that create confusion
because of their ambiguity, contradictory provisions and frequent
revisions. Legal norms that are crucial
for business are modified again and again: a title like “Law no.148 for
approving Government’s Emergency Ordinance no. 50/1998 for the modification and
supplementing of the Government Emergency Ordinance no. 82/1997 regarding the
level of the excise duties and other indirect taxes” is a common reading in the
Romanian Official Gazette. The excessive use of government ordinances
as legislative instruments is itself a major source of uncertainty – such an
ordinance is abruptly passed, without due review and reaction from interested
parties, and is almost certainly changed later on by the Parliament. To add to the confusion, three legal systems
(the pre-war, the socialist and the transition one) coexist, with many laws
that were never explicitly abrogated invoked by bureaucrats when an initiative
is to be obstructed.[11] The approximation to EU legislation – an obligation
Romania assumed as a candidate to integration – was never addressed in a
systematic manner. A well-known
journalist was summarizing the situation:
One of the reasons foreign investors bypass Romania is the legislative instability. We do not have laws, the ones we have are not adequate for the times Romania is traversing, the ones we make are wrong. When they are not wrong from the outset, when they do not conflict with old, non-abrogated ones, even though they are conceived with best intentions among others for harmonizing the Romanian legislation with the European one, they do leave too many doors open and tricks (that can be used) in order to defy them, the instructions for application are poor and we do nothing in order to implement them. (Munteanu, 1999)
The cluttered legislative
framework is putting a lot of pressure on the judicial system, which is itself not up to the task. Lack of instances, judges and lawyers
specialized and experienced in business matters is part of the problem. Long, complicated and therefore costly
procedures push interested parties to devise side arrangements, creating a
favorable environment for corruption.
Private firms, especially the small ones, do not have the resources to
fight long legal battles, while large state firms are practically immune to the
execution of sentences.
But the situation in the
legislative and judicial area is only creating conditions for the public administration bureaucracy to
develop the most elaborate anti-business practice. A combination of incompetence, apprehension of public servants to
assume responsibility, widespread mistrust in their loyalty and correctness,
and political interference in decision-making—reinforced by strong residues of
the old communist hyper-centralized attitude in the individuals’ and
institutions’ memories and conduct—confront entrepreneurs with the most absurd,
nightmarish situations.
To set up a firm, an
entrepreneur has to obtain 95 signatures of approbation from 15 different
institutions; for each of these, 5-6 sets of documents have to be presented
and, as usually something is missing or has an inadequate form, certain steps
are repeated several times (Pais, 1999).
Local authorities have a heavy hand in running the procedures and are
frequently accused of inhibiting private initiative. A private entrepreneur who endeavored to build a USD 1.2 million
hotel in the Danube Delta declares:
The Tulcea district is still communist. The local authorities would do anything to block private initiative. Why? Because public money can be plundered more easily. I do note down every outlay when there is a matter of protocol, as well as when the (officers) from the (Financial) Guard come to have a meal. They even asked me what I do, why do I note it down and I told them that everything is to be registered in the papers, because I do not want to pay from my own pocket for their meal. The building permit took one and a half years to obtain, while the construction itself was done in just one year and two months. The reason is Tulcea authorities’ mentality, they want to block any private initiative. I had to pay bribes in order to obtain perfectly legal documents. They were asking me all kind of absurd things. For example, in order to get the license for using the water from the Danube (to supply the hotel), I had to submit the written consent of the owner of the dam that I used. Well, the dam was built by myself. They wanted me to write down a paper mentioning that Mr. Gaina is consenting to use the dam made by himself for water supply. (Marinescu, 1999)
The onerous and inefficient
bureaucracy is accompanying the private firm throughout its life; any change in
the firm’s legal status or activities entails repeating the same procedures,
with another set of documents (the old ones are rarely found in the
inadequately organized and poorly housed archives of different
institutions). Even closing down a
company becomes a complicated matter.
Cosmos Development SRL was a small firm set up in 1992 in Bucharest, dedicated to consulting, editing and publishing different economic periodicals. Its single partner, a foreign natural person, decided to close the firm because its business interests moved to different horizons. He started the required procedures in May 1998, pretty confident that for a single partnership, without any third-party liabilities, it should be a simple matter. 18 months later he was still jammed in the process. The stumbling stone was the fiscal certificate that is to be delivered by the fiscal authorities. After many meetings between the accountant of the firm and the tax officer, where some questionable but minor critical remarks resulting in around USD 50 due payments were solved, the delivery of the certificate was still delayed. The tax officer proposed a “private meeting” to finalize the operation, but the owner of the firm refused. Meanwhile, the tax office was re-organized and moved to a different location – all previous files became impossible to trace The firm is now one of the several hundreds of thousands of “dead-alive” private firms that are cluttering the trade register records.
Taxation and the fiscal system are among the main causes of discontent for private
entrepreneurs. The high level of
taxation is suffocating business – that is a recurrent complaint (and of course
not an original one) on which all entrepreneurs, small or large, domestic or
foreigners, share a common judgment.
Entrepreneurs claim taxes take up more than 50 percent of their
revenues. Ministry of Finance experts
counterattack by showing that, compared to other European countries, the level
of taxation (around 30 per cent of GDP) is moderate. Although it seems paradoxical, both figures are correct. The average taxation is around 30 percent of
GDP, but the average involves a lot of exemptions and non-payments (due mainly
to large state enterprises); therefore, a private company may well be paying
more than 50-60 percent of its net income or of its value added as taxes. The heaviest taxation is applied to the most
efficient, highly value added activities, where wages are taxed at the marginal
rate of 45 per cent.
The dispute over the tax
level is lately confused by an innovative approach to taxation adopted by the
authorities – the “special funds”. “Special
funds contributions” are ad-hoc,
special-purpose taxes levied directly by ministries or other public
institutions. They are approved by law
or (usually) by government ordinances and have a disruptive character – they
come unexpectedly and can derail the most cautiously prepared business
plan. One of the first such special
funds was the “agricultural workers pension fund,” a contribution aimed at
providing former cooperative workers with a pension after cooperative farms
were dismantled. As the contribution is
paid for by the agricultural, food producer and distributor chain, an estimated
10 percent increase in food prices results from this tax.
During the last two years as
the constraints on the state budget deficit increased because of strict conditionalities
imposed by the IMF agreements, different Ministries set up their own,
independent budgets fed by newly devised taxes and contributions. The Economic Reform Fund, the National
Cultural Fund, the Social Solidarity Fund for Handicapped Persons, the Fund for
Development and Modernization of Customs, the Fund for Film Production, etc. –
according to some estimates, over 20 such funds exist now but nobody, including
the Ministry of Finance, knows exactly how many such funds exist.
The special fund is one of the greatest tricks ever invented in the domain of fiscal legislation. Not sufficient resources in the budget for education? We create a special fund. Now, all employers have to pay a wage-related contribution for education. The Romanian tourism is agonizing? A special fund, to which all those having the slightest relation with tourism should contribute, is the rescue solution…. The special fund is a direct consequence of the restructuring in the public administration. Instead of cutting down the number of bureaucrats, the ministries create a special fund. As the fund has to be administered by someone, a special direction, a department, an agency or any other institution is set up, with a resonant name. In many cases, half of the money collected in the special fund is spent on paying salaries for the administrators, on offices, cars, materials and pens. In other cases, the special funds indicate a poor management of the state budget revenues. Professor remuneration is an example. It is the State’s obligation to pay professors in the state schools out of the taxes it collects. Because the state is not capable to do so, it institutes a special fund for education. In other words, we pay twice for the same worthless result: schools with no water, professors living on miserable remuneration and classrooms with no desks. (Rosca, 1999)
In addition to frequently
being a double taxation, the noxious character of special funds is related to
the fact that they are escaping the usual political and even administrative
controls.
The fiscal environment is
also made difficult by frequent changes in regulations. A law is passed granting certain fiscal
facilities to investors and, only months later, it is repealed through the
state budget law. Excise duties and
value added regulations have been changed several times in one year.
Accounting rules and changes
in accounting norms also have a dramatic impact on taxation. Romanian firms pay “taxes on inflation” as
the accounting norms (prepared by the Ministry of Finance) are not in line with
the provisions of the IAS 29 standards (International Accounting Standards for
hyperinflationary economies).
Therefore, many firms get decapitalized by paying taxes on apparent revenues.
Besides the level of
taxation and the ever-changing and inadequate fiscal regulations, the fiscal
regime is aggressive to business in its practical, daily application by the
bureaucrats in the fiscal administration.
Tax officers have a deeply rooted attitude of suspicion, especially in
relation to private firms that are presumed, by default, to have fraudulent
intentions and practices. Internal
regulations in the Ministry of Finance and within the Financial Guard prompt
inspectors into having a biased approach when investigating a firm. If they
conclude an investigation with sanctions and penalties, 15 percent of these
penalties are contributed to a fund used to supplement the compensations
received by the Ministry of Finance personnel.
Recently, the Minister of Finance issued an order which imposed minimal
targets on revenues resulting from sanctions and penalties applied to economic
agents for every regional fiscal administration. Failure to realize the minimal target prompts pecuniary penalization
for the personnel in the fiscal administration and even layoffs. In these circumstances, entrepreneurs do
frequently hear from tax inspectors coming to investigate their firm with the
statement: “I will not leave until I find something”.
Abuses are frequently
reported – but they are quite difficult to prove. The most common is excess investigation. According to a survey made by the
Confederation of Private Entrepreneurs in the Timis county, several private firms
complained they had been investigated several times successively within a short
period (30-45 days), on the same issues, and every time fines were
applied. There are reports of firms
being investigated 250 days in one year by the many different, independent and
uncorrelated institutions. As again Minister Basescu states:
Public institutions may kill a business if they want to. It only takes to be a disagreeable businessman and you have 15 inspections that will destroy your business. (Mediafax)
The ambiguities in the norms and regulations leave plenty of room for fiscal officers to place sanctions and fines. When several interpretations are possible on a specific norm, the one less favorable to the firm is applied.
Few entrepreneurs attempt to
fight fiscal administration decisions.
Procedures are long, complicated and costly. Before going to Court, several settlements are provided for in
the fiscal administration system itself.
During the first six month of 1999, the General Directorate for
Complaints Resolution in the Ministry of Finance received 2,390 petitions.
Until September, only 1,523 have been solved (and only 583 companies received a
favorable resolution). (Preoteasa, 1999).
Many claims get lost in the bureaucratic system before a resolution is
reached – time is playing in favor of the administration.
Societe Generale Corporate Finance Advisory is the Romanian subsidiary dedicated to investment banking of the multinational bank Societe Generale. After one year of activity, the firm asked for the restitution of the value-added tax it had paid during the year on goods and services acquired. Two inspectors spent two weeks checking all company books that were kept by the accounting and auditing firm KPMG. In their final report, the tax officers contested almost half of the VAT claimed. SG-CFA and the KPMG accountants prepared and submitted their “objections” to the report conclusions as provided by the law. Although the law provides an answer should be given within 30 days, the financial administration never replied. At the insistence of the claimant, the tax officers said that the answer had been sent by mail – but they could not produce any evidence. As the next steps of the procedure cannot be initiated prior to having a solution to the first “objections”, the firm was practically blocked from pursuing his rights. In the meantime, the value of the sum involved is reduced to half by devaluation.
No wonder many private firms
prefer “shortcuts” – if not straight bribery, then at least more sophisticated
arrangements, by which tax officers are paid as “accountants” or “tax
consultants” by the firms they are supposed to investigate.
Restricted access to institutional financial services is another obstacle to
private firms. Because of the high and
variable inflation rates, interest rates on lending are prohibitive for many
businesses. To cover risks, banks tend
to have very large spreads. As long as
the treasury is hungry for money to finance the fiscal deficit, banks have no
appetite to lend to the companies. Many
companies lack collateral and so are frequently denied access to necessary
financing. While financial
intermediaries are often reluctant to lend to small private enterprises for
sound financial reasons (such as the high transaction cost of monitoring),
badly functioning financial systems, ineffective laws on collateral and poor
enforcement of financial contracts also limit access to credit. Once again, the most effective method to
obtain credit is not a good business plan, but a good introduction to the bank.
Several banks have now failed because of their crony lending practices.
The lack of adequate governmental policies for the
private sector, and particularly for the small and medium enterprises, is also
mentioned by private entrepreneurs and their organizations as one of the major
impediments to growth and expansion.
Special laws and provisions were passed at different moments (Government
Ordinance 25/1993 and, recently, Law 133/1999) aimed to support private firms
through subsidies, fiscal incentives and other preferential treatments. But their effect was almost null – the legal
provisions were much too general to have a practical impact and, when more
specific, they were not supported by adequate resources.
The governmental policies
based on preferential treatment for certain sectors or groups of companies have
rarely produced positive results.
Instead, they contributed to the creation of a distorted system of
incentives, encouraging SMEs to become dependent on subsidies and inhibiting
their growth. But very few entrepreneurs, not to mention politicians, in
Romania do realize that. By asking for
special treatment and favors, they open the back door for bureaucrats to get
back in business.
Conclusion: From State
Socialism to State Capitalism
The conditions of the new
private firms in transition are a good illustration of what has been achieved
in Romania after ten years of economic reform.
The collapse of the old socialist central planning mechanism and the
emergence of new privately owned firms were not sufficient to put in motion a
fully market-driven economic system.
Instead, a hybrid system seems to form in which bureaucrats in state
institutions have an important role in allocating economic resources and
distorting competition in favor of their protégés. Entrepreneurs whose main
capital was made through relations now dominate the business. All the others
are struggling to survive by adjusting to the conditions.
Instead of creating a truly
independent and self-reliant private sector, the Romanian transition has
produced a state-compliant and state-dependent private sector. But this may be an inevitable stage of the
transition. What is really worrying in
Romania’s case is that the process seems to have stopped here:
Romania got stuck in the first stage of the transition. A certain sector, formed either by people from the old nomenklatura, or by individuals who oriented themselves very rapidly in the interstices, created and knew how to take advantage of the opportunities of the initial period, produced a zone of economic and social supremacy, acquired sufficient economic strength and has no interest in generating a second phase where competition may lead to losing its monopoly. (Tismaneanu, 1999).
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