[Update Jan. 14, 2015: A recent example from one retail sector HERE)
(Originally published in the Winter 2013-2014 issue of Esquire magazine.)
Even if all your holiday shopping is over, let me do you a favor and give you some advice.
The next time you buy a TV for the holidays, a computer for your office, an iPad for whatever, expensive perfume for your girlfriend, a fancy watch for yourself and even some maple syrup for your pancakes – pack them all up in a big cardboard box and buy them a plane ticket from New York to Otopeni. With the money you’ll save, you can thank me later.
Yes, as much as Romania has become part of the international community (think EU and NATO memberships, IMF handouts, missile defense shields, Ikea furniture, and awful TV commercials for American products that don’t work here either) this country resolutely remains in a sad consumer ghetto.
Of course I know you can find just about anything here (except a good newspaper, competent drivers, and Cheerios without sugar). But every time I spend nearly twice as much for some ink for my printer, I wonder just when did this country repeal the god-given law of supply and demand.
In other words, why do I pay two times the amount for my Converse sneakers in Bucharest than I do in New York (you know, the ones made in Vietnam)? And three times more for my Levis –made in Guatemala or wherever? And four times more for real maple syrup? (Ok, demand for that last one is probably not so high here.) The fact is I can have someone buy me those things in the States and mail them to me for less than I pay here.
Yet with all these imports, wouldn’t it be nice if that old equilibrium of supply and demand could be imported as well? It’s the one where supply increases to meet demand and prices go down to match those of shared markets?
After all, we can get clothes from Pakistan sweatshops and tropical fruit I’ve never heard of from South America. So, if bananas are priced rationally, why does an iPad cost two-thirds more? And why does Chanel #5 Eau de Parfum cost 50 percent more here than what Bergdorf Goodman charges in its store on Fifth Avenue? (After all, it IS made in France and we’re both in the EU family, right?)
You can start with the fact that for most overpriced luxury goods, retailers here generally assume that if a Romanian can afford it, they’re probably rich enough not to care. Then there’s the cozy, if not also corrupt, relationship between local buyers and suppliers with retailers squeezing as much money out of the public as possible. In other words, there’s that common Romanian businessman’s approach to live for the present, make as much money today, and worry later whether the company will survive.
If that’s not enough, there’s no shortage of reasons. (Then again, it’s Romania, so mostly you have your politicians to thank.)
“It’s such a combination of things and prices get outrageous,” said Gregory Mills, the American owner of two companies in Bucharest that import goods to Romania and the EU from the US, Japan and China.
Different outrageously priced products will require different answers. But on the surface, much of the reason has to do with competition.
The early dominance of franchises helped set many of the high prices, according to Radu Craciun, a well-known economist and deputy general manager at Eureko, a large insurance and pension company, in Romania. As these retailers were often the first and only businesses to import many brands, they could charge what they wanted. And with the booming economy several years ago, there was little incentive to keep prices low.
High prices here have also been maintained by companies illegally pushing out their competitors, something the government is responsible to protect us against. Indeed, at the economy’s height in 2005, more than 44 million Euros in fines were imposed on companies for anti-competitive practices here. But now, says the Romanian Competition Council, things are looking a bit better.
So maybe that’s true and once all that is fixed, it will be a short hop back to the law of supply and demand. Merely bring in more goods and down will go prices. But wait, not so fast.
“The specialty markets are not large enough to attract more than one dominant supplier,” observes Daniela Bazarea, owner of Eurokalis, which imports bio food products from England and Greece. (Like many people here who are lucky enough to travel, she enjoys shopping more cheaply when she goes to London on business.)
And even when the markets are big enough, look at the cost of doing business. As an American, Mr. Mills points out that operating a business here is more expensive almost every step of the way, from incorporating the company, to buying office equipment and supplies, to being forced to have an accountant do his taxes.
Then there’s also import duties and the game called VAT. When the public gets restless, politicians lower the VAT on bread but keep the 24 percent (among the highest in Europe) on healthier food items (it’s zero in England). When they need some more money they raise the taxes on alcohol and luxury goods. But all that’s ok because it’s still only 9 percent for entering amusement parks. (I’m sure you see the logic.)
And now once importers sell to suppliers, they’re due a refund on the VAT and of course, they’ll get it – some day when the government decides to send them a check. In the meantime, they try to collect from their customers, only to discover that maybe one-third of them haven’t paid. So they turn to the courts, which make it almost impossible to collect. All that adds cost – at least 20 percent more to the price of a product, Ms. Bazarea estimates.
Add all this up, and as all our salaries decrease, we have the privilege of paying for the short-sightedness, the bureaucracy, the restrictions, the requirements, the bad laws, the illogic and the political games every time we shop.
One would think it’s not that difficult for Romanian politicians to understand EU requirements, to work with IMF economists, to look at other countries, and to write tax laws that have a little bit more logic and then to be smart enough to step back for a while and leave them alone.
This “lack of coherency and consistency in adopting fiscal measures as well as the frequent and unpredictable interventions of the Government in the economy distorts market mechanisms, [and] generates difficulties in business planning, with severe consequences for the Romanian business climate and Romania’s overall attractiveness for investments and its economic competitiveness,” the American Chamber of Commerce in Romania recently remarked.
Or as the Competition Council carefully explained: “the retail sector is the final link in the supply chain for most of the day to day consumption goods, so it tends to reflect most of the competitive, regulatory, efficiency or other types of problems that the different consumption goods markets face.” Well said.
All of which helps explain the appeal and the vigor of this country’s booming black market. After all, that underground economy might contain the only true marketplace efficiency you see here. The only place where people can do business in a free market state, unencumbered by government interference, where Adam Smith’s invisible hand still rules and basic Nash equilibriums are free to be established.
How could legitimate business practices (and prices) become normal here when the government, it seems, does everything it can to ensure they do not? And thanks to that, the country’s finances suffer further as the mess the politicians create causes businesses and the economy to continue to slide.
Then again, come to think of it, that just might be good news (if you still have a job). Because with businesses suffering, unemployment will increase, which means consumer spending will fall, which will lower demand, which might lower prices.
Or possibly smart retailers from outside Romania will see the opportunity in the midst of this mess. Consider the success of the retailer H&M. Mr. Craciun points to that company’s decision to enter this market (with company-owned stores) for shifting the focus from high prices to high volume.
How simple that sounds. Maybe we can get some Chanel or Apple-owned stores to come in here next. Then again, when that might happen is anyone’s guess. So if I were you, I’d go ahead and book the plane ticket for your box on that flight next Christmas to Otopeni from New York.