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3 The Romanian Economy


Academic Research paper and Study of the Economy of Romania and Romanian Business

Romania joined the EU in January 2007 and augmented the EU-population by 22 million people. Hence, Romania is now the seventh most populous country in the EU-27 and the second biggest country (and market) after Poland among the NMS. It provided the EU with 100 more embassies, 2,100 additional diplomats plus the biggest and most important port at the Black Sea, which will connect Western Europe with the latter via the Danube (cf. Ungureanu 2006). Two principal pipelines will traverse Romania, thus granting Central Europe access to Caspian oil and gas.[1] Second only to Finland, Romania administers now the largest external border towards the East (ibid.).

Romania joins the EU

But Romania’s accession to the EU has not always been an issue without reservations. The Bavarian Minister Emilia Müller (2006) e.g. welcomed the decision to integrate Romania into the European Union but also emphasized that the accession of NMS should not cause negative externalities for other MS. Likewise, EU accession negotiations with Romania were much stricter than with formerly acceded MS and higher hurdles had to be taken before accession in 2007 (cf. Gabanyi 2006 a). The motives were not always based on calm assessments, only. Sometimes the European Parliament rather used the accession issue to deal with internal conflicts (cf. ibid.).[2]

On the other hand, Romania did few effective efforts so far in communicating its progresses to a broader public. Hence, even scientific literature was sometimes surprised to find “Romanian institutions … better than could be expected” (cf. Kaminski 2004: 13). The huge gap between the widespread image and Romanian realities is frequently reflected in surveys, which investigate the opinion of investors that already do business in Romania on the one side and potential investors on the other side (cf. e.g. Ernst & Young 2008).

Then again, not only Western Europeans but also Romanians have some reservations towards the immediate effects of enlargement. Though the European Union is widely positive associated (Eurobarometrul 2007: 25) and an extraordinary large share of interviewees wishes enlargement, most people seem to know, that they will have to face also hard times.[3] While interviewees who think that enlargement will worsen their situation admit that it will better after some years, those who expect mainly a bettering from enlargement are conscious that it will last some years until the positive effects will manifest (cf. Eurobarometrul Rural 2005: 28f.).

The Romanian Economy in the European Market

As it seems now both sides will be right after all.  Despite all progresses Romania is still a poor country. Although catching-up has accelerated much since 2000 the real per capita GDP in Romania accounted to some 38.8 % of the EU-27 level in 2006 and is expected to reach some 41.5 % in 2008 (cf. Eurostat 2008). This might be comparable to Latvia and Lithuania between 2000 and 2003, or even to Poland in the late nineties. But front-runners like Slovenia, Hungary or Czechia exceeded values between 51 % and nearly 77 % already in 1997 (ibid.). Therefore, catching-up will remain the main goal for several years (cf. EC 2008 a: 10).

Joining the European Union will not only grant easier access to formerly foreign markets but will lead to a convergence of several consumer prices (on a higher level for the Romanians) and requires considerable investments for alignment, which are by no means covered by structural funds Romania might benefit from. Brasche (2003: 159ff.) discusses the costs of enlargement for the NMS by pointing out that structural funds granted to the NMS are much smaller than to the formerly integrated MS from Southern Europe. Disbursements are restricted to the maximal value 4 % of GDP annually, whereas the current GDP is relatively small now and thus, reduces costs of enlargement for the OMS. In contrast to the support from structural funds, which represent the costs of enlargement for the EU-15, the adjustments costs of enlargement are to be found, especially with regard to the acquis communautaire. Brasche estimates them to 5 % – 10 % of GDP just for environmental measures. In addition, rising personnel costs for institutional alignment and a loss of revenues through tariffs[4] have to be taken into account. Furthermore, infrastructure has to be adjusted towards European Union standards. In the case of Poland these adjustments required further investments of 2.5 % of GDP as e.g. about 80 % of dairies and meat processing companies had to be modernized. On the one hand, such adjustments are beneficial investments in the long run, on the other hand, not only the well working rules have to be transposed into domestic laws (ibid: 161). All these adjustment costs have to be paid essentially by the NMS themselves and can be added to the annual club-fee which amounted in the Romanian case to ca. 1.1 billion of Euros in 2007 (cf. Nicuț 2008). This was nearly another 1 % of GDP.

Thus, the question arises how Romania will manage the challenges from enlargement and how real convergence can be fostered. Hence, this chapter will examine the current state of the Romanian economy before further assessments will take place in chapter 4. As Romania entered transition without having any experience with reforms, democratic regulations and free markets the largest part of the 1990s was spent with their development. Only after 2000 Romania could embark on the common catch-up path of the other CEECs.

Assessment of the Economy of Romania

Accordingly, we start with a short resume of the initial conditions in chapter 3.1. Chapter 3.1.1 recapitulates the political inheritance and frame for transition while chapter 3.1.2 gives a quick insight into the economic legacy of communism. Afterwards the big picture of the Romanian economy and its development remains to be drawn (chapter 3.2). First, five stages of the Romanian transition process will be outlined (chapter 3.2.1 and subchapters) and then subsequently reidentified in the main sectors (real, labor, monetary, fiscal and external) of the Romanian economy (chapter 3.2.2 and subchapters). After having drawn this big picture of the Romanian economy and its development from 1990 up to now chapter 3.3 turns to the important issue of regional disparities in Romania. The regional different stages of development and economic performance will be highlighted via an overview following the division of NUTS-II regions. The latter soon will turn out to understate, respectively to exaggerate the performance of the entailed NUTS-III regions. Therefore, every chapter on a region identifies additionally the disparities within the regions. According to their special importance chapter 3.4 takes a closer on labor markets and chapter 3.5 on the FDI-performance so far. This way, some further, more qualitative insights into special weaknesses and strengths of the Romanian economy will be gained. These will be summarized in chapter 3.6 and serve as foundation for the more quantitative assessment of further growth and development prospects during chapter 4.

Footnotes

[1] Barbezet & Neal (1998: 385) even stated, in economic much more difficult times, that Romania’s strategic position is the strongest argument for EU-Accession. Findikci (2006) considers the integration of the Black Sea space via Bulgaria and Romania to be an important part of peacekeeping policies for Europe (ibid: 21).

[2] Göll (2006: 44) even denoted the criticisms that Romania would lack the necessary economic dynamics of some European parliamentarians in 2005 as “amazing” (“verwundern”) when assessed against the available data.

[3] Or as Marinoiu (2006) puts it: “if one wants to see a rainbow, one has to accept the rain” (ibid: 105).

[4] Revenues from tariffs have to be transferred to the EU. Revenues from tariffs are a main resource of the EU-Budget (cf. Weindl & Woyke 1999: 57). According to Gardo (2006: 664) income from tariffs contributed some 6.2 % to total Romanian Government revenues, which accordingly ought to decrease.