1993 – 1996: Stop of Romanian Reforms, Large Subsidies and Fragile Growth

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

The next years brought a significant deceleration of reforms and privatizations for Romania, while a “fragile growth” (ibid: 13) was induced via massive subsidies for loss-making (Maniu et. al. 2000: 50ff.) and import-dependent (cf. OECD 1998: 2), heavy industries, which’s main output were immense arrears (some estimated 36 % of GDP by the end of 1996; cf. ibid: 4).

Privatizations so far covered only most of the small enterprises and the land reform. Huge farms (mainly cattle) and the large industrial companies remained state controlled. “Strategic” enterprises (contributing to 20 % of employment and holding the lion’s share of the arrears) were not even included in the privatization programs (cf. ibid: 10). The environment for SMEs remained complicated and underdeveloped (cf. ibid: 15).

After a peak in 1994 (about 11 %) Romanian unemployment was reduced to 6.6 % by 1996 (Ianoș 2006: 609ff.). Nonetheless, social systems came under pressure as the contribution base continuously eroded while the number of beneficiaries increased (cf. OECD 1998: 6f.). The rise in production was not met by demand what resulted in a large accumulation of stocks (Maniu et. al. 2000: 50ff.).

Inflation in Romania decreased during 1995 and 1996 but experienced the next “sharp rise” already by the end of 1996 (Dăianu 2000: 14), due to the unsustainable subsidies. Excess demand established black market exchange rates while the official exchange rate of Romania were mainly allocated to subsidized industries (cf. OECD 1998: 5). The policy-mix lost any credibility and required urgent changes (Dăianu 2000: 14). International financial institutions froze their support (cf. OECD 1998: 3). By the end of 1996 the opposition came to power for the first time.