Economy
of
Romania
Romania is a country of considerable potential: rich agricultural lands, diverse energy sources (coal, oil, natural gas, hydro, and nuclear), a substantial industrial base encompassing almost the full range of manufacturing activities, an educated work force, and opportunities for expanded development in tourism on the Black Sea and in the Carpathian Mountains.
The Romanian Government borrowed heavily from the West in the 1970s to build a substantial state-owned industrial base. Following the 1979 oil price shock and a debt rescheduling in 1981, Ceausescu decreed that Romania would no longer be subject to foreign creditors. By the end of 1989, Romania had paid off a foreign debt of about $10.5 billion through an unprecedented effort that wreaked havoc on the economy and living standards. Vital imports were slashed and food and fuel strictly rationed, while the government exported everything it could to earn hard currency. With investment slashed, Romania's infrastructure fell behind its historically poorer Balkan neighbors.
Since the fall of the Ceausescu regime in 1989, successive governments sought to build a Western-style market economy. The pace of restructuring was slow, but by 1994 the legal basis for a market economy was largely in place. After the 1996 elections, the coalition government attempted to eliminate consumer subsidies, float prices, liberalize exchange rates, and put in place a tight monetary policy. The Parliament enacted laws permitting foreign entities incorporated in Romania to purchase land. Foreign capital investment in Romania had been increasing rapidly until 2008, although it remained less in per capita terms than in some other countries of East and Central Europe.
Romania was the largest U.S. trading partner in Eastern Europe until Ceausescu's 1988 renunciation of most favored nation (MFN, or non-discriminatory) trading status resulted in high U.S. tariffs on Romanian products. Congress approved restoration of MFN status effective November 8, 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. include shoes, clothing, steel, and chemicals. Romania signed an Association Agreement with the European Union (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 December 2004, the European Commission concluded pre-accession negotiations with Romania. In April 2005, the EU signed an accession treaty with Romania and its neighbor, Bulgaria, and in January 2007, they were both welcomed as new EU members.
Romania suffered through a deep economic recession beginning with the 2008 global financial crisis, but should return to positive if very modest growth by the end of 2011. Due to rapidly deteriorating economic conditions, a ballooning budget deficit, and large external imbalances, the Romanian Government was forced to conclude a 2-year, $27 billion financial assistance package with the International Monetary Fund (IMF), the European Commission, and the World Bank in March 2009. Under the terms agreed with the IMF, the Romanian Government embarked on a difficult austerity program to reduce the budget deficit, cut public sector employment, and restructure local and national government agencies. Austerity measures included a 25% cut in public sector wages, a hike in the national value added tax (VAT) rate from 19% to 24%, and thousands of layoffs. GDP declined by 7.1% in 2009 and a further 1.3% in 2010, but the government succeeded in meeting IMF-agreed deficit targets despite strong opposition to the austerity measures from labor unions. In late 2010 and early 2011 the government also pushed several important pieces of reform legislation through Parliament, including pension reforms, an overhaul of public sector pay systems, and modernization of the labor code. The final IMF review under the 2009 agreement, conducted in February 2011, declared the agreement a “success” in stabilizing the economy and setting the stage for a return to growth. A new 2-year “precautionary” agreement between Romania and the IMF, effective March 2011, focuses on deepening structural reforms and restructuring or privatizing unprofitable state-owned enterprises.
Privatization of industry was first 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 the assistance of the World Bank, European Union, and IMF, Romania succeeded in privatizing most industrial state-owned enterprises, including some large state-owned energy companies. Romania completed the privatization of the largest commercial bank (BCR) in 2006. Two state-owned banks remain in Romania, Eximbank and the National Savings Bank (CEC), after an attempt to privatize CEC Bank was indefinitely postponed in 2006. Four of the country's eight regional electricity distributors have now been privatized. Privatization of natural gas distribution companies also progressed with the sale of Romania's two regional gas distributors, Distrigaz Nord (to E.ON Ruhrgas of Germany) and Distrigaz Sud (to Gaz de France). Further progress in energy sector privatization has been delayed as the government is contemplating the creation of two integrated, state-owned energy producers. However, this “bundling” scheme has been challenged in court and is also under review by the Romanian Competition Council and by competition authorities at the European Commission. Romania has a nuclear power plant at Cernavoda, with one nuclear reactor in operation since 1996 and a second one commissioned in the fall of 2007.
The return of collectivized farmland to its cultivators, one of the first initiatives of the post-December 1989 revolution government, resulted in a short-term decrease in agricultural production. Some four million small parcels representing 80% of the arable surface were returned to original owners or their heirs. Many of the recipients were elderly or city dwellers, and the slow progress of granting formal land titles remains an obstacle to leasing or selling land to active farmers.
Financial and technical assistance continues to flow from the U.S., European Union, other industrial nations, and international financial institutions facilitating Romania's reintegration into the world economy. The IMF, World Bank, European Bank for Reconstruction and Development (EBRD), and European Investment Bank (EIB) all have programs and resident representatives in Romania. U.S. Agency for International Development (USAID) programs were phased out completely in 2008, except for Small Project Assistance Grants, which are still available through the Peace Corps. According to the National Office of the Trade Register, which measures foreign direct capital registered and disbursed to firms, between 1990 and November 2010 Romania attracted a total of $37.91 billion in foreign direct investment, of which the U.S. represented 2.59%. The actual level of U.S. investment, however, is underreported as much of it flows to Romania through European subsidiaries of U.S. companies.
After years of consistently high inflation in the 1990s, Romania's inflation rate steadily decreased through 2004, only to rise again along with high GDP growth rates of 4% to 8% through 2008. The deep recession beginning in late 2008 dramatically reduced inflationary pressures, but the VAT tax hike from 19% to 24% imposed in mid-2010 reversed that trend and pushed prices higher. Stoked also by rising global food and energy prices, inflation hit an annualized rate of 8% at the end of 2010, the highest in the EU. The IMF has been critical of Romania's low rate of tax collection and poor enforcement mechanisms as a medium- to long-term impediment to growth. Tax arrears are slightly decreasing, but Romania still has one of the lowest percentages in the EU of revenues collected, at 33% of GDP in 2010. The current account deficit had been a concern, as it reached 13.6% of GDP in 2007 and 12.4% of GDP in 2008. However, due to the recession, the current account deficit dropped to 4.2% of GDP in 2010. Deteriorating education and health services and aging and inadequate physical infrastructure continue to be seen as threats to future growth.
Romania's budget deficit dropped steadily from 4% of GDP in 1999 to only 0.8% in 2005, but then skyrocketed, peaking at 7.2% in 2009. The major culprits for the rising deficit were tax evasion and lax enforcement; runaway government procurement spending; and big increases in public sector wages, retirement pensions, and social assistance. Under the IMF agreement the deficit was pared to 6.5% of GDP in 2010 and is on track to reach the target of 4.4% in 2011, though additional austerity measures may be needed to get the deficit under 3% by 2012.
Driven by the recession, official unemployment peaked at 7.8% in December 2009 but then dropped to 6.9% by the end of 2010 despite substantial layoffs in the public sector, and declined further to 6.74% in January 2011. More public sector layoffs are expected in 2011, though a gradual return to growth in the private sector should fuel a correspondingly gradual recovery in job creation.
GDP (2010): $162 billion.
Annual GDP growth rate (2010): -1.3%; latest IMF 2011 growth forecast: +1.5%.
GDP per capita: $7,538.
Natural resources: Oil, timber, natural gas, coal, salt, iron ore.
Agriculture (2010): Percentage of GDP--6.0%. Products--corn, wheat, potatoes, oilseeds, vegetables, livestock, fish, and forestry.
Industry (2010): Percentage of GDP--26.4%. Types--machine building, mining, construction materials, metal production and processing, chemicals, food processing, textiles, clothing. Industrial output increased by 0.9% in 2008, decreased 5.5% in 2009, and rebounded with a 5.5% increase in 2010.
Services (2010): Percentage of GDP--47.6%.
Construction (2010): Percentage of GDP--8.9%.
Trade: Exports--$48.8 billion. Types--textiles, chemicals, light manufactures, wood products, fuels, processed metals, machinery and equipment. Exports to the U.S. (2010)--$734.0 million. Major markets--Germany, Italy, France, Turkey, Hungary. Imports--$61.2 billion. Types--machinery and equipment, textiles, fuel, coking coal, iron ore, machinery and equipment, and mineral products. Imports from the U.S. (2010)--$750.4 million. Major suppliers--Germany, Italy, Hungary, France, China.
Exchange rate (March 2011): 3.01 new Lei=U.S. $1.
Government
of
Romania
Romania's 1991 constitution proclaims Romania a democracy and market economy, in which human dignity, civic rights and freedoms, the unhindered development of human personality, justice, and political pluralism are supreme and guaranteed values. The constitution directs the state to implement free trade, protect the principle of competition, and provide a favorable framework for production. The constitution provides for a president, a Parliament, a Constitutional Court, and a separate system of ordinary courts that includes a Supreme Court.
The two-chamber Parliament, consisting of the Chamber of Deputies and the Senate, is the law-making authority. Deputies and senators are elected for 4-year terms by universal suffrage. The president, mayors, and county council presidents are elected individually; members of Parliament are elected under a mixed election system (majority and proportional); and local and county council members are elected on party slates, in proportion to party choices made by the electorate.
The president is elected by popular vote for a maximum of two terms. The length of the term was extended from 4 to 5 years in an October 2003 constitutional referendum. He is the head of state, charged with safeguarding the constitution, foreign affairs, and the proper functioning of public authorities. He is the commander-in-chief of the armed forces and chairman of the Supreme Defense Council. According to the constitution, he acts as mediator among the power centers within the state, as well as between the state and society. The president nominates the prime minister, who in turn appoints the government, which must be confirmed by a vote of confidence from Parliament.
The Constitutional Court adjudicates the constitutionality of challenged laws and decrees. The court consists of nine judges, appointed for non-concurrent terms of 9 years. Three judges are appointed by the Chamber of Deputies, three by the Senate, and three by the president of Romania.
The Romanian legal system is based on the Napoleonic Code. The judiciary is to be independent, and judges appointed by the president are not removable. The president and other judges of the High Court of Cassation and Justice are appointed for terms of 6 years and may serve consecutive terms. Proceedings are public, except in special circumstances provided for by law.
The Ministry of Justice represents "the general interests of society" and defends the legal order as well as citizens' rights and freedoms. The ministry is to discharge its powers through independent, impartial public prosecutors.
For territorial and administrative purposes, Romania is divided into 41 counties and the city of Bucharest. Each county is governed by an elected county council. Local councils and elected mayors are the public administration authorities in villages and towns. The county council is the public administration authority that coordinates the activities of all village and town councils in a county.
The central government appoints a prefect for each county and the Bucharest municipality. The prefect is the representative of the central government at the local level and directs any public services of the ministries and other central agencies at the county level. A prefect may block the action of a local authority if he deems it unlawful or unconstitutional. The matter is then decided by an administrative court.
Under legislation in effect since January 1999, local councils have control over the spending of their allocations from the central government budget, as well as authority to raise additional revenue locally.
Principal Government Officials
President of Romania--Traian Basescu
Prime Minister--Emil Boc
Minister of Foreign Affairs--Cristian Diaconescu
Other Ministers
Minister of Regional Development and Housing--Vasile Blaga
Minister of Justice and Citizens' Freedoms--Catalin Predoiu
Minister of Defense--Mihai Stanisoara
Minister of Administration and Interior--Dan Nica
Minister of Economy--Adriean Videanu
Minister of Public Finance--Gheorghe Pogea
Minister of Labor, Family and Social Protection--Marian Sarbu
Minister of Agriculture, Forests, and Rural Development--Ilie Sarbu
Minister of Transportation and Infrastructure--Radu Berceanu
Minister of Education, Research and Innovation--Ecaterina Andronescu
Minister of Culture, Religious Denominations and National Heritage--Theodor Paleologu
Minister of Public Health--Ion Bazac
Minister of Communication and Information Technology--Gabriel Sandu
Minister of Environment--Nicolae Nemirschi
Minister of Tourism--Elena Udrea
Minister of Youth and Sports--Monica Iacob Ridzi
Minister of Small and Medium Enterprises, Trade and Business Environment--Constantin Nita
Minister for Liaison with the Parliament--Victor Ponta
Romania maintains an embassy in the United States at 1607 23rd St., NW, Washington, DC 20008 (tel. 202- 232-3694, fax: 202-232-4748).
November 2008 parliamentary elections resulted in a virtual tie between the center-right PDL and the center-left PSD, with each holding between 34%-37% of the seats in each chamber. The ruling center-right PNL finished a distant third, and PNL Prime Minister Calin Tariceanu resigned. After intense negotiations among various configurations of the PDL, PSD, and PNL, a majority PDL/PSD coalition government was formed in December 2008 with Emil Boc as new prime minister. Among the new government’s top priorities were addressing the effects of global economic turmoil on Romania’s economic development, and coping with significant fiscal challenges facing the Romanian Government’s budget.
In October 2009, the PNL, PSD, and the Democratic Union of Hungarians in Romania (UDMR) filed a no-confidence motion after Prime Minister Boc dismissed Deputy Prime Minister/Interior Minister Dan Nica of the PSD. The no-confidence motion carried, ousting Boc’s minority government, and marking the first time since the revolution of 1989 that a no-confidence motion toppled a Romanian government. However, difficulty in nominating and approving a new cabinet allowed Boc to remain in power as a caretaker through both the November and December 2009 rounds of the presidential election.
Concerns over Romania’s economic situation dominated the November 2009 presidential election, contested by incumbent Traian Basescu of the PDL, Mircea Geoana of the PSD, and Crin Antonescu of the PNL. Basescu (32.8%) and Geoana (29.8%) advanced to the second round of elections in December. Despite charges of electoral irregularities, the Constitutional Court certified Basescu the winner over Geoana by 0.7%, or 70,000 votes. Following his victory, Basescu asked acting Prime Minister Boc to again form a new cabinet. The Parliament approved the new government in late December, alleviating 2 months of political instability. Dedicated to modernization, education, and judicial and government reform, the Basescu administration’s main focus remains Romania’s continued recovery from economic recession.
Romania has made great progress in institutionalizing democratic principles, civil liberties, and respect for human rights since the 1989 revolution. Political parties represent a broad range of views and interests, and elected officials and other public figures freely express their views. Civil society watchdog groups remain relatively small but have grown in influence. The press is free and outspoken, although there have been incidents of politically motivated intimidation and even violence against journalists and media management, particularly prior to the 2004 national elections. Independent radio networks have proliferated, and several private television networks now operate nationwide. In addition, a large number of local private television networks have emerged.
Through support of or participation in consecutive government coalitions, the UDMR has ensured the continuing influence of the ethnic Hungarian minority in national government, and presently serves as part of the ruling coalition government. Consecutive governments have sought to improve the socio-economic situation of the Roma minority, which continues to suffer from severe poverty in many areas and from discrimination. According to government statistics Roma officially represent 2.5% of the population, although Romani organizations claim the figure may be as high as 10%.
The restitution of private and religious property seized under communism or during World War II continues to move very slowly. Particularly problematic is the return of Greek-Catholic churches, which were given to the Romanian Orthodox Church by the communist regime. The Romanian Orthodox Church thus far has turned over very few of these churches, many of which had belonged to the Greek Catholic community for hundreds of years. Romania has repealed communist-era legislation criminalizing homosexual acts and banned xenophobic and racist groups and their activities. Romanian law does not prohibit women's participation in government or politics, but societal attitudes remain a significant barrier. Women hold some high positions in government and roughly 10% of the seats in each chamber in the Parliament.
Type: Republic.
Constitution: December 8, 1991, amended by referendum October 18-19, 2003.
Branches: Executive--president (head of state), prime minister (head of government), Council of Ministers. Legislative--bicameral Parliament. Judicial--Constitutional Court, High Court of Cassation and Justice, and lower courts.
Subdivisions: 41 counties plus the city of Bucharest.
Political parties: Political parties represented in the Parliament are the Social Democratic Party (PSD); the National Liberal Party (PNL); the Democratic Liberal Party (PD-L); the Hungarian Democratic Union of Romania (UDMR); the Conservative Party (PC); the Greater Romania Party (PRM). Other political parties include National Democratic Christian Peasant Party (PNTCD), the New Generation Party (PNG), National Initiative Party (PIN) as well as political organizations of minorities.
Suffrage: Universal from age 18.
Defense: 1.8% of GDP.
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