(story to be published in tomorrow’s issue, March 9)
The commission appointed to substantiate Romania’s medium-term development Strategy has analysed the current state of the Romanian economy after ten years of transition. Its report has served as the starting point for the authors of the Strategy. Below are the conclusions of this report
After ten years of transition, accompanied by social, economic and institutional reforms, the Romanian economy is still plagued by major macroeconomic imbalances that are based on distortions and constraints at the macroeconomic level, as well as delays in social reforms. Still, there are clear signs of reform and restructuring that announce the existence of the conditions needed to initiate a period of economic growth, after two stages of recession that followed a non-systematic approach to the transformations required by the transition to an economic system based on competition mechanisms. In Romania, the eight years it has taken for real privatisation to begin in the industrial sector, added to the lack of restructuring in inefficient sectors, have been major reasons for the economic recession. At the end of 1998, the first decisions were made regarding a real acceleration of privatisation in the Romanian industry. In the last year, the option became clear for “big-bang” reforms, simultaneous and concerted, which would establish a favourable economic environment, both in the real economy and in the financial-banking system, meant to attract foreign investments and encourage domestic investors. The essential change felt by the Romanian economy in the past decade, which gives a real chance to durable growth in the future, is the opening of the old autarchic socio-economic system toward the rest of the world. Integration in world economic structures has been stronger in relation to the European Union states. The liberalisation process, needed to break out of the centralised and autarchic system, has relied – nevertheless – on a miscalculated sequence of steps. The decision to liberalise foreign trade, prior to any other change and reform, has deepened inter-sector imbalances. When foreign trade was suddenly liberalised, in 1990, the centralised price system was still completely functional, and became gradually liberalised between 1991-1997. With distorted information about the domestic market, compared to that coming from world markets, trade companies and manufacturers were unable to adapt fast to the new economic environment. Making non-competitive products because of the old technology, they were forced to downsize output continuously. Their traditional foreign market disappeared, in some cases suddenly, in 1990, when the COMECON was dismantled, and the domestic market was flooded with imported products, cheaper and of superior quality. At least in terms of foreign competitiveness, Romania seems to be the weakest performer in the CEFTA group, after a decade of transition. Between 1991-1999, the average annual rate of decline in industrial output, in real terms, has been 7.15%, placing Romania on the last place among CEFTA country. Additionally, the annual export growth rate (in US dollars) has been only 4%, while all other Central-European countries in transition scored annual rates above 10%.
1.1. The level and structure of Gross Domestic Product
Gross Domestic Product has been in 1999 around 80.3% of its real level in 1990. The components on the side of aggregated demand that had the biggest contribution to this recession have been private consumption, which dropped 14.4% in real terms, and net exports. Poorer competitiveness of the economy generated a chronic deficit of the trade balance, as restructuring was late to start in the industrial sector, with slow privatisation, and subsidies – direct and indirect – have fruitlessly consumed the budget’s financial resources. GDP per capita, calculated at the buying power parity (BPP) in 1996 was 32% of the average level in EU states, whereas the ratio between the same indicators calculated against the exchange rate was 1:14. In 1999, because of the economic decline in the last three years, GDP per capita in Romania, reported to BPP, was estimated at 27.8% of the European Union GDP. The GDP structure is much different from what is characteristic to the EU economy, but there is an increasing convergence trend, and it has been accelerating in the last years. The weight of the agricultural sector in GDP dropped from 20% in the early ’90s, to 13.9% in 1999, industry’s weight dropped 28%, while services contributed in 1999 with about 50% of GDP (compared to 68-69% in the EU), 11 percentage points more than early in this decade.
1.2. Inflation. Employment
The economic decline has been accompanied by hyperinflation spikes, against the background of a galloping inflation, which affected the capacity to recover. Macroeconomic instability was sharpened by a budget policy that allowed the lack of financial discipline and stopped reforms at the gates of enterprises and regies, and by the revenue policies that had no relation to the productivity index, or by inconsistent and passive fiscal policies. Following the disparity between the monetary and fiscal policies, monetary policy became increasingly restrictive, as it gradually exhausted the levers it could use to efficiently deal with the real economy. Inflation has been one of the primary causes of the drop in the economy’s investment rate, due to growing risk in the Romanian business environment and the weakening capacity for domestic savings, generated by high nominal interest rates. Compared to other CEFTA countries, the weight of gross capital formation in the GDP is low, with a minimum of 18.5% attained in 1999. The poor capacity to upgrade technology, induced by slower investment rates, has maintained the loose pace of restructuring. It also owed to extremely low foreign direct investments in Romania, which place our country among the transition countries with low stocks per capita (around 200 euros per capita in late 1999). The lack of attractiveness of the Romanian economy is also caused by other negative forms that manifested during transition. Legislative instability, discriminating fiscal policies applied in a corrective and passive fashion, corruption in public administration, the immaturity of financial markets and the numerous barriers in the circulation of financial capital in the first stage of transition has been important risk factors. To this added the foreign constraints caused by the political instability and the conflicts in regions bordering with Romania. The labour market was affected by significant imbalances, in several ways. The unemployment market had – with some fluctuations related to slower restructuring in some periods – a growing trend, reaching 11.5% at the end of 1999. This happened against the drop in the number of people employed in the economy, a drop largely distributed in the industrial sector. The population working in the agricultural sector accounts for a large portion of the total working population (38%), which differentiates Romania from all European Union countries and represents a risk factor and a priority in the prospect of integration. Existing estimates indicate a large number of people working in the underground economy (around 1.5 million). A major cause is the economic recession and an unstable business environment, as well as the state’s inability to reconsider its role in the socio-economic system. The increase in the number of people living at or below the poverty line is a cause for the growth of the underground economy and for the high number of people working in agriculture. In fact, the correlation between economic recession and the growth of the underground economy is obvious in Romania’s case, as it has grown from 16.6% of GDP in 1995, to 20.8% in 1999.
1.3. Indicators of macroeconomic balances
The attribute of the majority of transition economies has been the double deficit (budget and current account) following the enforcement of the liberalisation policy on poorly structured systems. The current account deficit, caused primarily by the imbalance of the trade balance, is the expression of the Romanian economy’s lack of competitiveness. The budget deficit in Romania conceals beneath it the lack of a systemic vision on the budget construction, the deteriorated revenue collection capacity owed to a non-disciplinary and tolerant policy, an unchanged level of budget spending during a strong economic recession, the lack of transparency that has allowed the inefficient use of budget resources. Another major imbalance that affects the outlook for economic growth is caused by the continuous decline in savings, which has forced a lower investment rate. The gradual drop in the possibilities for domestic financing, coupled with the lack of attractiveness before foreign investors, are the most acute constraint on the economy, one of the few chances for recovery being the establishment of an open economic-social system that converges in institutional terms to European standards.
1.4. Transition indicators. Conditions for short-term economic growth
In 1999, there have been a few instances of restructuring that allow growth opportunities in the near future. The weight of private sector in forming the GDP has reached 61.5% in 1999. The rate of decline in the industrial sector has diminished considerably in the second half of last year, as did the volume of investments. Competitiveness in some categories of Romanian exports grew, and their improvement – during economic decline – was not only the result of improved terms of exchange, but of changes in import structures. The trade gap was also reduced by imports’ poorer revenue elasticity due to fewer imports for energy-intensive branches. The pursuit of this tendency to increase competitiveness, and its acceleration via the expected positive effects of higher inflows of foreign direct investments, will propel Romania along the lines of the EU criteria defined in Copenhagen. Restructuring in the industrial sector has also decreased the weight of the positive variation of stocks in the economy, although these stock remain exaggeratedly high in some low-efficiency branches, such as metallurgy and chemical industry. The Government’s commitment and the support of political forces in abiding by the pledges taken in the recent accords with the International Monetary Fund, primarily the 3% of GDP limit on the consolidated budget deficit, is based on favourable trends that are beginning to shape up. The successful passing of the foreign debt service peak in 1999, along with the rising trend in hard currency reserves, are likely to improve Romania’s domestic and foreign credibility. Romania’s foreign debt, although at 28% of GDP, has entered a saturation level in the last year. The experience of the ten years of transition to market economy points out the need not to limit reforms to the macroeconomic sphere, but extend them into the microeconomic sphere as well. In this sense, the administrative capacity to enforce consistent sets of economic policies will be essential. The beginning of talks on European integration is a positive side for the outside, which can be supported by the common desire to achieve these goals. The expansion of the institutional system specific to the market economy is a determining potential factor in shifting the economy into growth gear.