TCS Daily

Eastern Europe's Invisible Fists

By Raz Orasanu - November 4, 2003 12:00 AM

How is the free market doing in post-communist Romania?


Consider that medical and bureaucratic services are bought and sold, as are Parliamentary positions. It would be safe to say that market forces do operate, though weak overall competition combined with widespread corruption badly distorts the working of Adam's Smith's "invisible hand."


It doesn't matter if you think telecoms or electricity, hospitals or the parliament; the same theme seems to be recurring.


The Not So Free Markets


This holds particularly true in several important sectors. In the fixed-line phone market, the Greek state-owned company OTE in January 2003 took over Romania's own national telecoms monopoly. It raised its equity stake to 54 percent, fortified management control and promptly set about raising phone bills. Outraged consumers had few options open to them: to, ironically, phone up and complain, cough up the extra cash or fully switch to mobile phones (a minority did just that).


Similarly, in electricity production and distribution, even though the national monopoly was split into seven regional entities, price rises have continued unabated -- 17.5 percent just in mid-September of this year. Whilst distinct regional entities do exist, inertia prompts them to act as the proverbial chips off the old block, collusively behaving just as bad as the old monopoly did. Directors of Electrica S.A., the state-owned holding company, still have higher salaries than the president and the ageing network is losing some 10 percent of the electricity it transports, losses which are paid for by the consumers.


It is no surprise, then, that some Romanians have concluded that "free market" and "liberalization" -- otherwise noble principles -- interpreted the Romanian way translate into an entrenched, top-heavy bureaucracy simply getting bigger.


Reinforcing the anecdotal evidence above, several studies by the Romanian Centre for Economic Policies have concluded that the pricing power of producers remains unusually strong, despite only a modest rise in demand and an increase in private-sector activity. The concrete industry, for instance, is typical of this trend: a market split three-ways among big European firms is now under investigation on suspicion of price fixing. Prices have nearly tripled in a matter of four years to $88-89 per ton. The firms all have prices within a dollar range of each other, similar capacity utilization rates and have all raised their prices around the same time. Some Romanians have now decided it is better to buy from Hungary at around half of the price and there is a roaring trade near the border.


The Market for Bribes


Good for them for discovering the borderless free markets, you might think, but corruption skews the free market in very particular ways in this part of the world. Access to bureaucracy basically functions as a commodity shamelessly bought and sold on the market, often quite openly. Whilst some 5 percent of owners never got their land and/or the property titles to go with it some 14 years after the Revolution (although the law went through Parliament as far back as 1991), others often "solve" everything miraculously within a week, with the help of insiders. It has become common currency -- if you'll forgive the pun -- to pay for access to high ranking officials, which are at a premium. Initially, bribes took the more modest form of bouquets of flowers, imported quality coffee and Kent cigarettes. Now it is only cash being demanded outright and duly received. Alas, Romanians have finally discovered trade in cash is superior to barter.


Medical services are a special category. Although most of the health care centers are, in theory, state-owned, bribes are so widespread that they have become an accepted part of the system. It is often an implicit understanding when people go into hospital that they will not be given their operation unless they "willingly give a contribution" to the doctor. An outraged pensioner recently demanded to be sent home to die in his bed and refused to pay approximately $200 demanded by the surgeon for his stomach operation, which was four times his meager monthly pension. Any hard numbers against this trend are hard to come by because of the intrinsically informal nature of these "market operations," but if stories of doctors refusing to take bribes occasionally hit the newspapers as an oddity worthy to be written about, one can suspect they are fairly widespread. What is more, 35 percent of Romanians, according to a recent Gallup poll, do not see bribes to doctors as an act of corruption as such.


The "Invisible Hand" in Politics


But perhaps the best case for the unfortunate marriage of weak competition and corruption and the key to unlocking all the others is in the political arena. The former communist party (re-branded as social democrat) stands head and shoulders above everyone else, with consistently above 40 percent share of the vote and more than 40 percent of the private assets. By comparison the Liberals are at 16 percent; their oddly-named coalition partner, the Democrat Party, is at 10 percent and the nationalists of the Greater Romania Party have 19 percent.


This has allowed the ruling party to safely shelter a vast swathe of dubious regional businessmen, whose dealings are routinely exposed in the press, but who have thus far benefited from a law giving MPs immunity from prosecution. Over the past couple of years, they were allowed to get away with everything from deadly road accidents to documented million-dollar bank frauds. Many commentators strongly suspect they did this by buying the top positions on party lists in safe constituencies with large donations to party coffers. The "invisible hand" is obviously at work in Romania, not always for the greater good.


Raz Orasanu is a graduate of the London School of Economics and has worked for Shell Business Consultancy and the National Bank of Romania. He is currently working as a teaching assistant at the HEC Paris School of Management.


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