Romanian Economy

1
Romanian Economy

• European Commission, April 2006

2
Outline of Discussion

• Overview 1989
• Transition Process
• Policies in Transition
• Macro-Stabilization Policies
• Structural Policies
• Main Economic Sectors
• Trade Policy
• Investment Policy

3
Overview 1989

• Before 1989 Romania was among the communist
  countries with the most centralized economies
• Followed a policy of rapid industrialization
  prior to 1989

4
Overview 1989

• Deepening structural crisis during 1980s due to
  factors specific to command style economy
• Balance of payments crisis (rescheduling of the
  hard currency debt necessary in 1981)
• Crash program imposed by Romanian authorities to
  pay off entire foreign debt in very short time
• Economic and balance of payments crisis led to
  dramatic fall in life standard of the population
• Romania paid off entire foreign debt by 1989

5
Transition Process

• In 1989 Romania was last of Warsaw Pact countries
  to throw off hard-line leadership
• Faced substantially harder transition compared
  with other ex-socialist Central European
  countries due to complete lack of reforms prior
  to 1989
• Faced following challenges during transition
  process
• Removal of centralized economic system
• Recapitalization of national industrial base
• Creation of institutional structure for market
  economy
• Re-integration of economy into world economy
• Re-orientation of external trade flows

6
Policies in Transition

• Two types of policies conducted to create
  mechanisms necessary for functioning market
  economy
• Macro-stabilization policies
• Structural policies
• Four main objectives for macro-stabilization
  policies
• Reduce inflation rate
• Reduce budget deficit
• Sustain GDP growth
• Decrease unemployment

7
Macro-Stabilization Policies

• Coherent macro-stabilization policies were
  applied starting in 1993 after hesitations and
  inconsistencies in first years following regime
  change
• Gradual price liberalization between November
  1990 and May 1993
• Inflation reduced to 8.6 in 2005 from 154.8 in
  1997
• National Bank moved to inflation targeting
  strategy in July 2005

8
Macro-Stabilization Policies

• Recent improvement of fiscal position due to
  downsizing of public sector
• Major fiscal reform introduced as of January 1st
  2005 (flat tax rate of 16 for corporate tax and
  personal income tax)

9
Macro-Stabilization Policies

• Real GDP growth accelerated from 0.7 average in
  1992-1999 to 4.9 average in 2000-2005
• Increase in GDP growth due to productivity gains
• Robust growth led to downward trend in
  unemployment rate (fell to 6.2 in 2004 from
  11.8 in 1999)
• Decrease in unemployment rate accompanied by rise
  in regional disparities

10
Structural Policies

• Structural policy objective modify entire
  economic system
• Following structural policies had to be applied
• Reform of property
• Reform of financial and banking system
• Reform of taxation system
• Creation of foreign exchange market
• Creation of welfare system
• Restructuring of trade policies
• Romanian authorities wanted to avoid shock
  therapy and introduce reforms gradually

11
Structural Policies

• Structural policies in early to mid-1990s plagued
  by policy reversals, false starts, low government
  commitment
• In late 1990s far reaching structural reforms
  took hold because of threat of financial crisis
  and pressure from international financial
  institutions
• Decision by EU Council of Ministers in December
  1999 to open EU accession negotiations acted as
  further catalyst for reform

12
Structural Policies

• Structural policies enacted since then
• Real restructuring of the banking sector
• Removal of off-budget subsidies and directed
  credit
• Privatization crossed critical threshold and
  moving faster
• State-owned companies no longer subsidized
  through banking system
• Many State owned banks were privatized
• Prices, foreign trade and exchange regimes
  largely freed of State control

13
Main Economic Sectors
14
Main Economic Sectors Labor Force by Occupation
15
Main Economic Sectors - Agriculture
16
Main Economic Sectors - Agriculture

• Forests 26.1 of total area of Romania
• 2/3 rural population dependent on income from
  subsistence and semi-subsistence farms
• Policy objectives food security and
  self-sufficiency

17
Main Economic Sectors - Agriculture

• Government policies
• Restitution of agricultural and forestry land
• Strategy for the Sustainable Development of
  Agriculture and Food Industry (SSDAFI) 2004-2005
  objectives
• Raising productivity
• Increasing quality
• Strengthening competition
• SSDAFI consists in
• Completing privatization of State farms
• Promoting rural development
• Transforming small-scale agricultural farms into
  viable holdings
• Promote modernization of the sector
• Phase in CAP direct payments between 2007 - 2016

18
Main Economic Sectors Mining and Energy

• Mineral rich country
• Largest crude oil and natural gas producer in
  Central and Eastern Europe
• 5th largest European producer of bauxite
• 9th largest European producer of aluminium
• Significant coal reserves
• Leading producer of electricity in the region
• Produces 50 of total primary needs and imports
  the rest
• Problems within the sector
• Arrears in mining and energy impose big burden on
  the budget (10 of GDP in 2003)
• Still suffers from low energy efficiency

19
Main Economic Sectors Mining and Energy

• Government policies
• Give private companies increasingly important
  role
• Mining Industry Strategy 2004 2010
• National Strategy for the Development of Energy
  2004 2015
• Increase role as a transit country for gas from
• Russian Federation
• Caspian Sea
• Middle-East
• Development of
• Constanta-Omisalj oil pipeline (Adriatic Coast)
• Nabuco gas pipeline (with Austria, Bulgaria,
  Hungary, Turkey)
• Participate in Energy Community in South East
  Europe

20
Main Economic Sectors - Manufacturing

• Manufacturing sector
• Employed 48.2 of the labor force in the private
  sector
• Well-diversified
• Labor-intensive textile and clothing industry
• Capital-intensive iron and steel sector
• Private sector is playing an increasingly
  important role and produces most of manufacturing
  output
• State still plays important role in some heavy
  industries, tobacco and alcoholic beverages
• Automotive and electrical machinery sectors have
  grown rapidly over the last few years

21
Main Economic Sectors - Manufacturing

• Government policies
• Aim to raise competitiveness and productivity
• Consist in
• Privatization/liquidation of State owned
  enterprises
• Promotion of outward-oriented, technology
  intensive and high value-added production

22
Main Economic Sectors - Manufacturing

• Important manufacturing sub-sectors
• Textile and clothing industry
• Contributes 9 to manufacturing output
• Employs 24.5 of workers in manufacturing
• Dominated by private sector
• Policies
• Re-organize sector to make it more competitive
• Shift production to higher value-added goods
• Iron and Steel industry
• 27th largest producer of steel in the world
• Operated entirely by private sector
• Restructuring Strategy for the Steel Sector and
  Viability Plans for Steel Companies
• Automotive industry (top vehicle makers Dacia,
  Daewoo)
• Attraceted FDI through incentives schemes

23
Main Economic Sectors - Services

• Main services sectors
• Finacial services
• Banking sector holds more than 90 of total
  financial assets
• Payment system largely cash based
• High banking concentration
• Telecom and postal services
• Rapid growing mobile phone market
• Sharp rise in internet users and personal
  computers
• 60 companies provide telephone services
• 4 mobile phone operators
• 30 providers of pre-paid phone card services

24
Main Economic Sectors - Services

• Sector is being liberalized
• Transport sector
• Policy objectives
• Rehabilitation, modernization and development of
  transport infrastructure
• Improve quality of services, traffic safety and
  transport security
• Encourage efficient freight transport
• Restructure, prepare for privatization and reduce
  subsidies for State owned companies
• Tourism sector
• 6.6 mn visitors in 2004 mainly from neighboring
  countries
• 98 of sector has been privatized
• Considerable potential to provide tourism services

25
Trade Policy

• Romanian trade policy underwent significant
  liberalization after 1990
• State monopoly on foreign trade abolished in 1990
• Trade policies objectives
• Reconstruct Romanias welfare
• Modernize Romania (infrastrucutre, institutional
  capacity building)
• Regional development
• Romania had to re-orient its trade flows follwing
  the collapse of its Comecon markets

26
Trade Policy

• Romania currently participates in several
  regional trade arrangements, with priority given
  to the Europe Agreement
• Romania has the following trade agreements
• The Europe Agreement with the EU entered into
  force on February 1st 1995
• Agreement with the Europe Free Trade Association
  entered into effect on May 1st 1993
• The Central European Free Trade Agreement (CEFTA)
  entered into effect on July 1st 1997 (other
  members Bulgaria, Croatia)
• Bilateral free trade agreements in South East
  Europe (SEEs) with Albania, FYR of Macedonia,
  Serbia-Montenegro, Bosnia-Herzegovina

27
Trade Policy

• Black Sea Economic Cooperation (BSEC) objective
  is for BSEC to become a free trade area by 2010
  Black Sea Trade and Development Bank became
  operational in 1999
• Free-trade agreement with Moldova since January
  1st 1995
• Free-trade agreement with Turkey since February
  1st 1998
• Free-trade agreement with Israel since July 1st
  2002
• Romania was a contracting party to the GATT since
  November 14 1971 and became an original member of
  the WTO on January 1st 1995

28
Main Trade Partners 1992

• Substantial shift in main trade partners after
  1989
• Main trade partners in 1992 the EU, Central and
  Eastern Europe, other European countries, other
  countries

29
Main Trade Partners 2003

• In 2003 over 80 of Romanian trade was with other
  European countries
• 67.7 with the EU
• 9.2 with Central and Eastern Europe
• 7.4 with othe European countries
• Only 15.7 of trade was with non-European
  countries

30
Main Exports

• Increase in share of manufacturing products and
  decrease in share of primary products between
  1995-2004
• Main exports machinery and trasnport equipment,
  textiles and clothing, iron and steel

31
Main Imports

• Increase in share of manufacturing products and
  decrease in share of primary products between
  1995-2004
• Main imports machinery and transport equipment,
  textiles and clothing, fuels

32
Investment Policy

• Government measures to increase FDI inflows
• Established the Romanian Agency for Foreign
  Investment specialized in promoting and
  attracting FDI
• Enacted policies aimed at removing administrative
  barriers to FDI
• One-stop shop office for registration of
  companies
• Simplifying authorization procedures for
  start-ups
• Extending the level of information and
  consultation with the business community before
  making legislative proposals
• Various investment incentive schemes available
  equally to foreign and domestic investors

33
Investment Policy

• Romania attracted over 50 of FDI among all
  countries in South East Europe
• It climbed 8 places (to 38th out of 60) in the
  forecast for attractiveness of the business
  environment in 2005-2009 according to the EIU
• FDI in 2004 reached 4 bn, up from 1.6 bn in
  2003
• Main foreign investor Austria
• Recent major privatizations
• Oil company Petrom
• Utilities companies Electrica Banat and
  Electrica Dobrogea
• Romanian Commercial Bank (BCR)

34
Investment Policy

• Main sectors attracting FDI
• Energy sector
• Electronics and electrical household appliances
• Trade and bank services
• Pharmaceutical industry
• Wood processing and textile industries
• IT, telecommunications
• Automotive industry
• Advantages of investing in Romania
• One of the largest markets in Central and Eastern
  Europe
• Easy access to countries of the former USSR,
  Middle East and North Africa

35
Investment Policy

• Well-developed networks of mobile
  telecommunications
• Skilled labor force with solid knowledge in IT,
  technology and engineering
• Rich natural resources
• Competitive prices for goods transiting between
  Caspian Sea, Black Sea and Western Europe
• Extensive maritime and river navigation
  facilities
• Important potential for tourism
• Investment favorable legislation
• Stability factor in the region