Romanian economy referat

Between 1950 and 1990, Romanian economy was characterized by a supra-centralization in planning, command and control. The economy manifested through an extensive development, being extra-dimensioned, consuming too much energy and having, in many fields, old technology.

Romania's economical structure in that period of time was based on the raw material market of Council of economic help (CAER ). In that time, the communists tried to change the agrarian economy (rudimentary equipped) to an industrial one. The general tendency was industrialization at any price and to distribute the industrial centers in all the country. In order to achieve their plans, the communists allocated more than 1/3 of the national savings (aggregate income minus consumption minus government purchases) for development, meaning that each unit from national savings was produced with bigger and bigger spending.

The economic objectives that characterized the last two decades before the 1989 revolution were forced industrialization, the reduction of imports (the total value of the goods and services that people in one country buy from people in other countries), and the increase in exports (the total value of the goods and services that people in one country sell to people in other countries). The goal was to pay as quickly as possible the external debt (goal achieved).

These objectives generated a weak economic growth, reflected in weaker and weaker growth rate and reduction of consumption. The "shock therapy," that was applied to the economy in the '80s, magnified the differences between the economic sectors.

The communist economy is a command economy (an economy in which the government determines prices and production; also called a centrally planned economy).

The "sickness" of Romanian economy was caused by the supra centralized way to take decisions. The decisions determined the allocation of resources for production of goods and services, education, research and culture.

After the '89 revolution, Romania's objective was, and still is, to became a part of

Euro-Atlantic organizations (European Union, and NATO). After many years of waiting to "became a part of Europe", Romania sees the light at the end of the tunnel: 2002 brought the admission of this East-European country in NATO. Regarding the admission in UE, The Economist wrote on its September 4th, 2002 edition: "Because of poverty and corruption Romania will have to wait until 2012 to be admitted."

At the Bruxelles meeting (September 2002), a couple ideas were formulated. Among them, the members said that many of the ex-communist countries will adhere to European Union in 2004 or 2005, but Romania will have to wait until 2007 (the best scenario). To make possible the admittance of Romania in E.U., Romania started to change all its standards to those of European countries. There still is work to be done to change the percentage of people that work in different areas of the economy.

Because almost 2/3 of the Romanian exports are orientated towards the European community, the new currency-EURO-will bring benefits to the Romanian economy. Until the introduction of the EURO, the currency used in by Romanian firms was U.S. dollars. But, because of the fact that the rest of the European currencies fluctuate in comparison with the dollar, Romanian firms were losing money (they were buying products with dollars and were selling for European currencies). "For the first few months, Romanian firms should use EURO and U.S. dollars in transactions to get used with the new currency" said Mihai Ionescu .

EURO will reduce the costs that Romanian firms have because of currency exchange. These costs were estimated at 1-2% of the value of the transaction. Also, the new currency will save time because the firms will not spend time analyzing which currency is stabile and which fluctuates.

Industrial crisis

After 1989, the Romanian economy changed from command economy to market economy (an economy characterized by freely determined prices and the free exchange of goods and services in markets). But this change didn't occurred without problems. In the period immediate after the '89 revolution the production went down. Because of the fact that the old economical structures were "demolished" and new ones were not built, the comportment of the economic institutions changed. Many of the factories tried the feeling of "nobody's child" because nobody provided for them the funds necessary to function (during the communists, the factories received money from the state; now they were on their own).

The decrease in production that followed the first three years after the revolution was caused by the decreased in the industrial production (over 63%).





In the old system, the structure of industry showed a tendency towards the creation of giant factories, neglecting the small businesses. At the beginning of 1989, a number of 336 factories (16% of all existing factories) with 3000 employees (53% of the industry's workers), were producing over 50% of all industrial production. The factories that employed between 1000 and 3000 employees (in number of 739 - meaning 35% from the total number of factories) were producing a little over 35% of industrial production. At the other end were small businesses with little than 500 workers that were producing just 6% of the industrial production.

Unemployment rate went up, and is expected to increase in the next years because of the reduction of the number of jobs in the state owned companies, especially in oil processing industry. In 1999, the rate was 11.5% compared with 10.4% in 1998, 8.9% in 1997 and 6.5% in 1996. The unemployment rate goes up so fast because many firms go out of business. The reason is that they don't have the money to pay their debts, or they can't compete (costs are too big). At the end of 1998 there were 2,250,000 workers, a reduction with 56% of the number of workers that worked in 1990.

Ceausescu's objective to create a trade-surplus and a balanced budget (money in =money out) was achieved at a high human cost (everything that was produced was exported). Following the December 1989 revolution, the subsequent governments weren't able to maintain this sound financial situation. Romania steered between rapid privatization, fiscal stabilization, and price and exchange liberalization on the one hand, and giving the vested interests of the still entrenched Communist bureaucracy, management and labor unions on the other. The budget balance was in surplus by 3.3% of GDP in 1991 (inheritance from communists), but plunged in deficit by 4.6% of GDP in 1992. Because of UN trade sanctions on Serbia, Romania's main trading partner, country's trade performances were affected. Prices were liberalized from May 1993 and TVA (tax on the added value-the value of firm's production minus the value of the intermediate goods used in production) was introduced. The GDP shrinkage was reversed and grew by 1.3% in 1993 to 7.1% in 1995.

The economic recovery did not last. The fiscal year 1997 saw a decline in GDP of 6.6%; the first quarter of 1998 was hardly any change: GDP fell by another 5.7%. In 1995, inflation (the percentage increase in the overall price level over a given period of time) was 32.3%. During 1996, inflation was 18.8%, but during 1997 the government lost control and inflation climbed to 154.8%. The rate of inflation fell in 1998: in December was 40.6%. The government plans to reduce inflation to an annual average of 25-30%. The worst decline was in the processing industry of durable goods, which shrank by 43.8% in comparison with the year before

In spite of an ambitious program, introduced in 1994, privatization (the process of converting a government enterprise into a privately owned enterprise) proceeded slowly. The privatization from 1999, brought $740 million to state revenues. In 1998 a number of 1,650 companies were privatized. The government also sold big companies, like oil refinery PETROMIDIA, plane maker ROMAERO and ROMANIAN BANK for DEVELOPMENT (BRD).

Foreign direct investment increased considerably from $417 million in 1995 and $415 million in 1996 to $1,267 in 1997 and $2,079 in 1998. However, Romania's external debt steadily increased during the last years from 24.5% of GDP in 1996, 26.9% in 1997, to 23.9% in 1998 and 25.7% of GDP in 1999 (about $9 billion).

Agriculture crisis

During Ceausescu's ruling period, the agriculture was state owned: the land, machines, and farms. The process (ended in 1962) of "taking the agriculture from the peasants" improved somehow the production because, now the state could spend more money to produce a lot more.

After the change of regime, Romanians wanted their land back. So the new government gave it back glad that they don't have to "bother" with it. The law no.18/1991 and 1/2000 were the laws that established the rights of ownership to the population. But the new owners did not have any machines to work the land (there was a tractor to 56 hectare compared with 12.7 hectare for each tractor in E.U.), no money to buy them, no fertilizers, and no nothing. And so their "happiness" didn't last long. The production decreased, people were unhappy, so the state had to do something. And it did. It started to issue certificates in various denominations. With those certificates, the owners of land could buy machines, fertilizers and improved seeds. The certificates were given in function of the number of hectare each family had. This decision of the government improved somewhat the deplorable situation of Romanian agriculture.

Now, almost 40% of the active population is involved in agriculture (compared with 10% of E.U.). The percent of land used in agriculture is 62% of all the land . Even though Romania has a good soil, the exploitation of the land is the extensive type, with 70% of the surface being used for grains. This type of agriculture has a low efficiency when compared with vegetables and technical herbs, such as flax or hemp.

If, before 1990, there were 3.2 million-hectare ready for irrigation, in1998 the number dropped to ¼ of what used to be because of destruction and theft. The same fate was shared and by the ex state-owned farms: they were demolished, everyone stole whatever they could. In this way were lost 3776 farms, the total value being 90 billion lei (1 dollar=25000 lei) . When the people realized that those farms could be used to make profit, it was too late: almost 80% of them were unusable.

In 1999, 65% of the land was under the possession of elder people, 16% under the propriety of active people (those people are practicing a new and original style of agriculture: weekend agriculture), and 17% under the proprietorship of families that have as objective the growth of plants.

The import of grains grow with an average of 1.8 million tons per year, compared with 0.08 million tons that were imported in 1989. The increase in imports was caused by the destruction of agriculture, not because of increase of population.

Another reason for the disastrous state of Romanian agriculture is World Bank. This bank asked (to put it in polite terms) the Romanian government to close two of the biggest centers for growing pigs and chickens: COMTIM and AVICOLA. At the end of the 1999, one of the Romanian newspapers was writing: "The loss of the market, especially the Russian and internal markets, made COMTIM to become one of the biggest borrowers in Romanian economy. For Agricultural Bank, COMTIM become a hopeless client: 80% of all the uncorrectable accounts were from COMTIM. COMTIM's processing capacity would have covered ¼ of all Romanian agricultural production." The production of meat dropped with 40% of what used to be in 1989, and because of this Romania started importing meat instead of exporting (as it was doing before '89). Another example of how World Bank gets 'involved' in Romanian economy is the recommendation (January 2000) to sell the IAS . In total, around 80% of agricultural companies were privatized by the end of 1998, with or without the "kind" recommendation of World Bank. However, supported by the World Bank's Private Sector Adjustment Loan (PSAL), privatization efforts were accelerated significantly.

The government did more than just issuing certificates. It started a couple of programs to help the agriculture. One of these programs, The project to help private farms started on July 11, 1992 and ended on November 30,1998. The total cost was $164.7 million. The World Bank came up with $100 million and The Agriculture Bank and Romanian Bank for Development (RO) came up with $64.7 million. The project's goals were to help rural areas to develop and to increase the offering of goods and services. Another project that ended in 31 December 2000 was ASAL (loan to improve agriculture). The cost was $350million from World Bank. The goals were to help the privatization of the IAS, liberalization of the market, creation of opportunities for investment (foreign or domestic) and the increase of competitiveness.

Among the programs that are planned to begin in 2003 are the project to repair the irrigation systems, to develop the rural areas, and the program to improve the exploitation of the forests.

The transition didn't occurred as it was hoped it would, and the process is not over yet. There are still many things to be done to bring the Romanian economy to the level of the rest of East European economies. Even though, there is still a long way to go, there is a slight improvement in the Romania's economy. However, the average Romanian can't feel this improvement. Average wage per capita decreased from $159 to $121 in 2000 and is estimated that around 40% of the population lives below poverty line . About 31% of young Romanians intend to leave the country, hoping to find better opportunities elsewhere.

In conclusion, the transition to an market economy can be made if there is a good strategy, in which all the aspects of economic life can "live" in harmony and if all that is being done, its done to bring Romanian economy at the European levels.

Romanian name

Vice-president of Romanian Association of Importers and Exporters.

ABN Amro, Emilian M. Dobrescu, page 79.

See appendix A

in 1995

Adevarul, Nov. 15, 1999

Romanian name meaning State owned farm.

CIA- The World Factbook 2000.