Posted by: József Tóth Posted on: Wednesday 13 May 2009, 13:38

Economy of Romania

Romania is an upper-middle income European Union member economy of Central-Eastern Europe.[7] It has been referred as a "Tiger" due to its high growth rates and rapid development.[8] Romanian economic growth is among EU's fastest.[9] Romania has the 11th largest economy in European Union by total nominal GDP and the 8th largest based on purchasing power parity and is one of the fastest growing markets in recent history with consistent annual GDP growth rates above 6% (+8.4% for 2008[10][11]). Romania is a member of the European Union (7th largest country), its most important trading partner. Its capital, Bucharest, is one of the largest financial centres in the region, with a metropolitan area of more than 2.6 million people. Romania has experienced growth in foreign investment with a cumulative FDI totaling more than $70 billion since 1989[12].

Some economic predictions indicate that Romanian GDP will double by 2011,[13] and one scholar has even suggested that Romania will overtake Italy in GDP per capita by 2020.[14] Preliminary estimates for 2008 show a real GDP growth of 7.2%, while the forecasts for 2009-10 indicate an average of 6-6.5% per year.[15] Future prospects are tied to the country's increasingly important integration with the European Union member states. The country is expected to join the Eurozone in 2014.

History

Before World War II
After World War I, the application of a radical agricultural reform, the passing of a new constitution, one of the most democratic on the Continent, created a general-democratic framework and allowed for a fast economic growth (the industrial production doubled between 1923-1938). With an oil production of 7.2 million tons in 1937, Romania placed second in Europe and the seventh in the world.[19]

Economy during 1944 - 1989
On the negative side, the legacy of the Ceausescu's period was a bloated heavy industry using archaic production methods, consuming lots of resources, and producing low-value goods (the refining capacity is over ten times what was needed, the steel production capabilities two-and-a-half times, the aluminum production facilities five times). Most of what was produced could not be sold anywhere, and ended up sitting and deteriorating outside the factories where it was made, while light industries were ridiculously undersized (Romanians had to wait 3 years for a washing machine, 2-3 years for a color TV, 5-10 years for a car), and technologically obsolete. The communication network was, with the exception of the modernization of the trunk railway lines, left at the 1950s' level. Romania had, in 1989, only a 100 km (68 mile) stretch, of motorway, and even that in a very poor state.

Transition towards a market economy 1990-2006

Privatization of industry was pursued with the transfer in 1992 of 30% of the shares of some 6,000 state-owned enterprises to five private ownership funds, in which each adult citizen received certificates of ownership. The remaining 70% ownership of the enterprises was transferred to a state ownership fund, with a mandate to sell off its shares at the rate of at least 10% per year. The privatization law also called for direct sale of some 30 specially selected enterprises and the sale of "assets" (i.e., commercially viable component units) of larger enterprises.

Nowadays, the inflation rate is around 8% annually, although estimated[20] by the BNR at coming within 6% for the year 2006 (the year-on-year CPI, published in March 2007, is 3,66%). Also, since 2001, the economy has grown steadily at around 6-8%. Therefore, the PPP per capita GDP of Romania is $12,285.

Financial and technical assistance continued to flow in from the U.S., European Union, other industrial nations, and international financial institutions facilitating Romania's reintegration into the world economy. The International Monetary Fund (IMF), World Bank (IBRD), the European Bank for Reconstruction and Development (EBRD), and the U.S. Agency for International Development (USAID) all had programs and resident representatives in Romania. Romania also attracted foreign direct investment, which in 1997 rose to $2.5 billion.

Romania was the largest U.S. trading partner in Central-Eastern Europe until Ceauşescu's 1988 renunciation of Most Favored Nation (non-discriminatory) trading status resulted in high U.S. tariffs on Romanian products. Congress approved restoration of MFN status effective 8 November 1993, as part of a new bilateral trade agreement. Tariffs on most Romanian products dropped to zero in February 1994 with the inclusion of Romania in the Generalized System of Preferences (GSP). Major Romanian exports to the U.S. included shoes and clothing, steel, and chemicals. Romania signed an Association Agreement with the EU in 1992 and a free trade agreement with the European Free Trade Association (EFTA) in 1993, codifying Romania's access to European markets and creating the basic framework for further economic integration. At its Helsinki Summit in December 1999, the European Union invited Romania to formally begin accession negotiations. In 2002, the target date of 2007 was set for Romania, along with Bulgaria, for its accession efforts. This was confirmed in 2003 at the Thessaloniki Summit and then in early 2005 Romania and Bulgaria signed the adherence treaty to EU. They formally joined the EU on January 1, 2007.

During the latter part of the Ceauşescu period, Romania earned significant credits from several Arab countries, notably Iraq, for work related to the oil industry. In August 2005, Romania agreed to forgive 43% of the US$1.7 billion debt owed by an Iraq still largely occupied by the military forces of the U.S.-led "Coalition of the Willing", making Romania the first country outside of the Paris Club of wealthy creditor nations to forgive Iraqi debts.

Nevertheless, it is expected that the Romanian economy will continue fast growing based on a bigger strength of the industry, the growth of the global economy and the biggest trade with Russia, Latin America and Asia.

(2000-2007)

Growth in 2000-07 was supported by exports to the EU, primarily to Italy and Germany, and a strong recovery of foreign and domestic investment. Domestic demand is playing an ever more important role in underpinning growth as interest rates drop and the availability of credit cards and mortgages increases. Current account deficits of around 2% of GDP are beginning to decline as demand for Romanian products in the European Union increases. Inflation is under control. Recent accession to the EU gives further impetus and direction to structural reform. In early 2004 the government passed increases in the Value Added Tax (VAT) and tightened eligibility for social benefits with the intention to bring the public finance gap down to 4% of GDP by 2006, but more difficult pension and healthcare reforms will have to wait until after the next elections. Privatization of the state-owned bank Banca Comercială Română took place in 2005. Intensified restructuring among large enterprises, improvements in the financial sector, and effective use of available EU funds should strengthen output growth.

Developed market economy within the EU

(after January 1, 2007)

On 1 January 2007 Romania entered the European Union. This led to some immediate international trade liberalization, but there was no shock to the economy. The government is running annual surpluses of above 2%.

This is to be contrasted with enormous current account deficits. Low interest rates guarantee availability of funds for investment and consumption. For example, a boom in the real estate market started around 2000 and has not subsided yet. At the same time annual inflation in the economy is variable and during the last five years (2003-2007) has seen a low of 2.3% and high of 6.3%.

Most importantly, this poses a threat to the country's accession to the Eurozone. The Romanian government plans for the euro to replace the leu in 2010. However, experts predict that this might happen as late as in 2012. From a political point of view, there is a trade-off between Romania's economic growth and the stability required for early accession to the monetary union. Romania's per-capita PPP GDP is still only about a 60% of the EU25 average, while the country's nominal GDP per capita is about 53% of the EU25 average.

In the winter of 2004 the political leadership of the current government introduced a flat tax of 16% that was introduced on January 1, 2005. This is done in hope for higher GDP growth and greater tax collection rates. The reform, which some called a "revolution" in taxation, was met with mild discussions and some protests by affected working classes.

The accession of Romania into the European Union has brought about new geographical dimensions as the EU has opened up to the Black Sea.

Tiger economy

Romanian economy has sometimes been referred as the "Tiger of the East [-ern Europe]."[8] For purchasing power parity comparisons, the US dollar is exchanged at 1.24. Romania is a country of considerable potential: rich agricultural lands; diverse energy sources (coal, oil, natural gas, hydro, and nuclear); a substantial, if aging, industrial base encompassing almost the full range of manufacturing activities; well-trained work force; and opportunities for expanded development in tourism on the Black Sea and in the mountains.For purchasing power parity comparisons, the US dollar is exchanged at 1.24. Romania is a country of considerable potential: rich agricultural lands; diverse energy sources (coal, oil, natural gas, hydro, and nuclear); a substantial, if aging, industrial base encompassing almost the full range of manufacturing activities; well-trained work force; and opportunities for expanded development in tourism on the Black Sea and in the mountains.