Under the prevailing price system, which assured high profits to many enterprises and provided subsidies for unprofitable ones, there was no incentive for enterprises to reduce costs. This tendency was reinforced by the methods used to calculate costs and prices. The fact that cost calculations did not include any charges for rent or capital induced waste in the use of land and equipment. Prices included an element of planned profit determined as a percentage of cost. In the price-setting procedure it was therefore advantageous for enterprises to overstate actual costs. This practice has been widely prevalent in fixing prices for new products.
Prices for raw materials, including products of the extractive industries and agriculture, were generally set below the cost of production. This policy has been responsible for a wasteful use of many materials in manufacturing. A price discrepancy also served to negate the official fuel policy. Efforts to increase the use of coal in electric power production were frustrated by the relatively much lower price for natural gas. This led some economists to advocate that prices for fuels be based on their caloric content. The price system has also been reported to have produced various other inimical results, such as inhibiting innovation and rewarding the continued production of obsolete goods.
Procurement prices for farm products have been deliberately kept low in relation to industrial prices; prices for farm requisites and consumer goods, on the other hand, have been fixed far above cost through the medium of a turnover tax channeled into the budget. In this manner the price system has served to transfer resources from agriculture to industry and to keep consumption low for the benefit of investment.
Pending the completion of price reform legislation, a provisional measure was adopted in 1970 to lower wholesale prices for export goods and to reduce excess profits through a so-called regularization tax on domestic sales of the main products manufactured by state industry. The measure involved a recalculation of wholesale prices, based on the average cost of products within an industrial branch and a profit allowance of only 10 percent of cost. The difference between the recalculated prices and those in effect at the time was to be channeled into the budget by the tax. In the case of high-cost producers who would suffer losses under this procedure, the profit margin included in the price could be raised to a maximum of 15 percent. The new price measure put pressure on enterprises to lower the cost of production.
The comprehensive new law on prices for goods and services that will come into effect in March 1972 will have no immediate impact on prices. On the basis of criteria outlined in the law and upon approval by the State Committee for Prices, economic ministries, central government agencies, collectives, and other public organizations are supposed first to issue norms for establishing and correlating prices within the areas of their respective jurisdictions, in accordance with the specific conditions of each producing branch, subbranch, or group of enterprises and the specific features of each product and service.
The law makes provision for fixed and ceiling prices. Both types of prices may be either uniform or differentiated. Uniform prices will apply throughout the entire country and will be applicable to the main products and to services of major importance to the economy and the standard of living. Differentiated prices for a product may be set at various levels depending upon territorial or seasonal factors and the nature of the producers or buyers. These provisions will also apply to agricultural procurement prices.
As in the past, uniform wholesale prices will be based on pre-calculated average costs for each product at branch level. For the first time, however, cost will also include taxes on capital and land (interest and rent) and expenditures for the introduction of new technology. An important change will also be made in determining the profit element of the wholesale price. In the future the planned profit level for enterprises, differentiated by branch and subbranch, will be calculated in relation to the fixed and circulating capital employed rather than in relation to cost.
The new law also contains provisions for pricing imports and exports and for establishing retail prices of consumer goods. Retail prices will include a profit for the trade organization and a variable turnover tax applied to the wholesale price. The tax is to be relatively low on goods produced for children and high on those manufactured in small quantities and on luxury products. Changes in retail prices may be made only in the light of planned provisions for the real income of the population.
Authority to set prices and control over the implementation of price policy will be shifted from the Council of Ministers to the Council of State and the Grand National Assembly. The Council of State will make decisions not only concerning general price levels and price changes but also about specific prices for products and services of particular importance to the economy and the standard of living and on prices of products earmarked exclusively for the defense sector. In an effort to ensure a uniform price policy under a decentralized process of price fixing, the law spells out the responsibilities of all entities concerned with pricing, from the Council of State down to the individual enterprise. Jurisdiction over prices for products and services is to be allocated among the various sectors and levels of the economy, and the State Committee for Prices will be responsible for the correct application of the law.
In order to prevent further abuses in the formulation and changing of prices, a state price control inspectorate is to be created within the State Committee for Prices with power to supervise price control agencies in each county. Penalties for infractions of trade regulations have been increased to 2,000 lei, and persons guilty of price irregularities will be subject to prosecution under sections of the penal code on profiteering and fraud, which provide for imprisonment of from six months to seven years.