Sandra L. Goodman, who joined the staff of the University of Portsmouth (England) in January, prepared this article while working as a research assistant for PERC in Bozeman, Montana.
Those of us who enjoy the benefits of a market system can learn a lot from the recent experiences of Central and Eastern European countries. For me, spending a year in Romania teaching economics to university students reinforced three important lessons.
Lesson #1: Resources are scarce, and, one way or another, people will compete for them.
At any point in time, resources are limited. Therefore, people are forced to make choices about how to use available resources to their best advantage.
Because of scarcity, people must compete for what is available. The form competition takes is shaped by the constraints and incentives people face. In markets, prices reflect competitive pressures. Producers bid up the prices of resources they believe will help create goods to satisfy consumers’ wants. Consumers bid up the prices of goods they value. Goods are distributed to the people who value them the most, as indicated by the prices they are willing to pay.
Under socialism, where prices are fixed and thus not allowed to reflect a good’s value, other methods develop to distribute goods to the people who want them. Queuing is one of the most noticeable systems. In Romania in 1993, most prices remained fixed, and the money price of goods was very low. A more accurate indicator of a good’s value was the amount of time people had to spend waiting in line to buy it.
Periodic announcements of price increases by the government fueled inflationary fears and encouraged hoarding. Queues appeared, which heightened people’s fear of future shortages. When an increase in the price of gasoline was announced, lines of sputtering cars, filled with empty plastic containers, snaked through city blocks and along highways waiting for gasoline. When sugar prices were slated to increase, people rapidly depleted the kilogram-sized paper bags of sugar from store shelves.
Not far from my flat was an alimentara, a state-run grocery store that sold a limited selection of canned foods, dairy products, bread, and, every Thursday, toilet paper. Late in the evening people would place their pungas, the plastic shopping bags Romanians carry everywhere because you can never be sure when and where you’ll find what you’re looking for, along the concrete porch outside the front door. By 6:00 a.m., when the alimentara opened, people had joined their pungas in the queue. I never figured out what kept people from cheating in this arrangement-stealing bags or jumping ahead. But there was some sort of monitoring system because the line of pungas was always there.
Just as prevalent as queues is the unofficial distribution system. Whatever you call it—graft, political favors, backscratching—unofficial connections pervade transactions in Romania. As a student told me, “It helps to have an uncle somewhere.” Grocery clerks routinely hold back part of the store’s merchandise to sell to friends and relatives.
In the past, instead of waiting months for shoddy and indifferent medical treatment, patients and their families provided doctors with fresh meat and other payments in kind to obtain timely and adequate care. Now they must supply hard currency to obtain a private room instead of a crowded ward, or to get prompt surgery and periodic doctor’s visits while recuperating.
Lesson #2: There are no markets without private property rights.
To work, markets must be based on a system of functional property rights that is generally accepted as fair. To be fully functional, property rights must be clearly defined, enforced, and readily transferable. Unfortunately, the property rights regime in Romania, like some of the others being established in Eastern Europe, is incomplete.
For example, consider Romania’s 1991 Land Law. This law returns agricultural lands that were confiscated after World War II to their former owners. Additionally, workers on cooperative farms, Romanian city-dwellers who move to the countryside and work the land, and civil servants in rural areas are eligible for redistributed land. This latter group is barred from selling land they receive for ten years.
By mid-1992, only about 75 percent of the 5 million former owners whose land had officially been returned actually had titles to their land.[1] And much of Romania’s fertile agricultural land lay fallow in 1993.
A university professor I knew in Timisoara, a city located on the far western side of the country, had inherited an apple orchard near the Ukrainian border on the eastern side of the country. He knew nothing about growing apples, had no desire to be an apple farmer, and had no money to hire someone to tend the orchard. And, of course, he had no ownership title or other documents which he would need to sell the land to a real farmer. So, for lack of a tradeable property right, the orchard remained untended, and the apples rotted on the ground.
Peasants didn’t know who would own the crops they harvested, so they didn’t plant. From train windows I saw untilled fields of brown stubble extend to the horizon.
Occasionally, I would see men hunched over hoes, standing above a row of crops (most likely potatoes or cabbage). They rarely had more than a hoe, horse, cart, and wooden plow to work their land. The process of privatizing state property had not yet extended to state-owned farm equipment. And, in any case, large-scale equipment designed for industrial collective farms is useless on small, individual plots.
Problems caused by insecure ownership rights to land and crops forced Romania to import grain and foodstuffs in 1993. Historically, Romanians have taken great pride in their reputation as “the breadbasket of Europe.” Passing along stories from their grandmothers about former bountiful harvests, students told me with shame that potatoes had been imported into the country for over two years.
Not only must private property rights be complete, but public acceptance requires that they be perceived as fair by the majority of the populace. Romania’s land law distributes land to former owners that might not be the same property that was previously owned, nor is it necessarily in the same area. The amount of land that can be returned to an owner is restricted to ten hectares (22 acres), regardless of the size of the original holding.
These elements of the law erode public support. And because ownership shares are determined by local governmental authorities, many Romanians feel that the privatization scheme is merely a continuation of political favors and government’s control over production.
Lesson #3: Entrepreneurs move resources toward higher valued uses.
As the government of Romania gradually became less oppressive during my stay, I was able to compare government’s waste of resources with the use of resources by private entrepreneurs. It was clear that entrepreneurs, however new to the task, were moving resources toward the people who value them.
The Electromotor factory in Timisoara illustrates how resources are wasted under socialism. Electromotor was the largest user of copper in the Banat region through the 1980s and early 1990s. The factory makes industrial motors whose bobbins are spun with copper. By local standards, its operations are considered efficient. Motors are spun with the correct amount of copper, and most of the copper allocated to the firm finds its way around a motor.
But the fact is that, before 1990, Electromotor’s major customers, French and Italian manufacturers, bought the motors merely for the copper they contained. Buying Romanian motors, disassembling them, and using only the copper was cheaper than buying copper at world prices.
When Ceausescu’s Communist government fell in 1990, Electromotor was forced to pay world prices for imported copper, and the price of Electromotor motors increased to world levels. The French and Italian customers halted their orders, but Electromotor continued to produce motors. In 1993, some 80 percent of their production was unsold, piled and rusting behind the factory.
Other Romanian factories produce chlorine products with a mercury-based production process that uses a great deal of energy. In the West, this now-wasteful process is largely obsolete, phased out in the 1970s as energy prices rose and worry about the dangers of mercury increased. To maintain their profits, Western firms minimized costs by reducing their use of energy and avoided liability by stopping the use of mercury. But Romanian companies, following a fixed production plan and operating without a legal system that protects the rights of others, had no incentive to upgrade their products or improve their processes.
The state-owned bread company wastes precious food resources. Bread produced by the state is heavy, tasteless, and inedible within 48 hours. Yet, before the price of bread started to increase, people bought ten to 12 loaves a day and fed it to pigs they were fattening for slaughter. It was cheaper than corn or any other feed.
During the year I spent in Romania, prices were slowly being freed and private businesses were emerging. The most noticeable impact was an increase in the availability of consumer goods. Since most Romanians lack access to the capital required for industrial production, the country’s fledgling private sector centered around retail activities. Things people wanted began to appear in shop windows: jeans and t-shirts from Turkey, appliances from Germany, video and stereo equipment from Korea and China, canned foods from Italy and Greece, fur caps from Russia, and locally grown houseplants and flowers.
Cottage industries such as handicrafts, woodwork, and art shops sprang up, too. Copying services were also available at many small shops. My university students no longer had to copy entire lectures by hand (textbooks were rarely provided). Now I could easily make copies for them myself. Private seamstresses and tailors had long existed, but now they began to produce dresses that resembled the French and Italian imports that had recently appeared in private shops. Although bread from private bakeries cost more than twice as much as state bread, bread sales from private bakeries were thriving. The smell of fresh, hot, edible bread had people lining up on the sidewalks when loaves appeared from the ovens. This bread was not fed to pigs.
Even in industry, which remained largely state-owned, there were changes. Before 1990, factories received quotas of steel and other metal inputs. Factory managers usually requested more metal than they needed for production, for a variety of reasons–to trade metal on the black market, to meet unrealistic production quotas, and to cover the losses of metal stolen by workers.
Now that factories have to buy metal at world prices, they use it much more conservatively. Before 1990, they were required to return a specific percentage of metal to the Ministry of Industry (supposedly for recycling but mostly to ensure that it wasn’t all stolen). Ministry officials report that the amount of steel returned for recycling is less than half what they received before 1990, a sign that steel is being used in production, not wasted or stolen.
Conclusion
F. A. Hayek identified the basic problem facing an economy as that of identifying and choosing among all the possible ways that resources might be used to satisfy people’s wants. Central planners simply don’t have enough information or the incentives to make resource-use choices that can sustain consumer satisfaction and economic growth. In Romania, this meant that products were produced that nobody wanted and raw materials were wasted.
In contrast, markets channel competitive pressures into a process in which individuals, acting as entrepreneurs, have the incentive to discover new and better ways to use resources. Facilitated by a legal system that protects private property rights, markets create a level of social wealth and satisfaction unrivaled by any alternative structure. In Romania in 1993, the importance of that system became clearer to me than ever before.
1. Roman Frydman, Andrzej Rapaczynski, John S. Earle, The Privatization Process in Central Europe (New York: Central European University Press, 1993), p. 255.