The goal was to pay as quickly as possible the external debt (goal achieved).
These objectives generated a weak economic growth, reflected in weaker and weaker growth rate and reduction of consumption. The “shock therapy,” that was applied to the economy in the ‘80s, magnified the differences between the economic sectors.
The communist economy is a command economy (an economy in which the government determines prices and production; also called a centrally planned economy).
The “sickness” of Romanian economy was caused by the supra centralized way to take decisions. The decisions determined the allocation of resources for production of goods and services, education, research and culture.
After the ’89 revolution, Romania’s objective was, and still is, to became a part of
Euro-Atlantic organizations (European Union, and NATO). After many years of waiting to “became a part of Europe”, Romania sees the light at the end of the tunnel: 2002 brought the admission of this East-European country in NATO. Regarding the admission in UE, The Economist wrote on its September 4th, 2002 edition: “Because of poverty and corruption Romania will have to wait until 2012 to be admitted.”
At the Bruxelles meeting (September 2002), a couple ideas were formulated. Among them, the members said that many of the ex-communist countries will adhere to European Union in 2004 or 2005, but Romania will have to wait until 2007 (the best scenario). To make possible the admittance of Romania in E.U., Romania started to change all its standards to those of European countries. There still is work to be done to change the percentage of people that work in different areas of the economy.
Because almost 2/3 of the Romanian exports are orientated towards the European community, the new currency—EURO—will bring benefits to the Romanian economy. Until the introduction of the EURO, the currency used in by Romanian firms was U.S. dollars. But, because of the fact that the rest of the European currencies fluctuate in comparison with the dollar, Romanian firms were losing money (they were buying products with dollars and were selling for European currencies). “For the first few months, Romanian firms should use EURO and U.S. dollars in transactions to get used with the new currency” said Mihai Ionescu.
EURO will reduce the costs that Romanian firms have because of currency exchange. These costs were estimated at 1-2% of the value of the transaction. Also, the new currency will save time because the firms will not spend time analyzing which currency is stabile and which fluctuates.
After 1989, the Romanian economy changed from command economy to market economy (an economy characterized by freely determined prices and the free exchange of goods and services in markets). But this change didn’t occurred without problems. In the period immediate after the ’89 revolution the production went down. Because of the fact that the old economical structures were “demolished” and new ones were not built, the comportment of the economic institutions changed. Many of the factories tried the feeling of “nobody’s child” because nobody provided for them the funds necessary to function (during the communists, the factories received money from the state; now they were on their own).
The decrease in production that followed the first three years after the revolution was caused by the decreased in the industrial production (over 63%).
YEAR199091929394959697IND. PROD %-19-22.8-18.104.22.168.49.9-5.9
In the old system, the structure of industry showed a tendency towards the creation of giant factories, neglecting the small businesses. At the beginning of 1989, a number of 336 factories (16% of all existing factories) with 3000 employees (53% of the industry’s workers), were producing over 50% of all industrial production. The factories that employed between 1000 and 3000 employees (in number of 739 – meaning 35% from the total number of factories) were producing a little over 35% of industrial production. At the other end were small businesses with little than 500 workers that were producing just 6% of the industrial production.
Unemployment rate went up, and is expected to increase in the next years because of the reduction of the number of jobs in the state owned companies, especially in oil processing industry. In 1999, the rate was 11.5% compared with 10.4% in 1998, 8.9% in 1997 and 6.5% in 1996. The unemployment rate goes up so fast because many firms go out of business. The reason is that they don’t have the money to pay their debts, or they can’t compete (costs are too big). At the end of 1998 there were 2,250,000 workers, a reduction with 56% of the number of workers that worked in 1990.
Ceausescu’s objective to create a trade-surplus and a balanced budget (money in =money out) was achieved at a high human cost (everything that was produced was exported). Following the December 1989 revolution, the subsequent governments weren’t able to maintain this sound financial situation. Romania steered between rapid privatization, fiscal stabilization, and price and exchange liberalization on the one hand, and giving the vested interests of the still entrenched Communist bureaucracy, management and labor unions on the other. The budget balance was in surplus by 3.3% of GDP in 1991 (inheritance from communists), but plunged in deficit by 4.6% of GDP in 1992. Because of UN trade sanctions on Serbia, Romania’s main trading partner, country’s trade performances were affected. Prices were liberalized from May 1993 and TVA (tax on the added value—the value of firm’s production minus the value of the intermediate goods used in production) was introduced. The GDP shrinkage was reversed and grew by 1.3% in 1993 to 7.1% in 1995.
The economic recovery did not last. The fiscal year 1997 saw a decline in GDP of 6.6%; the first quarter of 1998 was hardly any change: GDP fell by another 5.7%. In 1995, inflation (the percentage increase in the overall price level over a given period of time) was 32.3%. During 1996, inflation was 18.8%, but during 1997 the government lost control and inflation climbed to 154.8%. The rate of inflation fell in 1998: in December was 40.6%. The government plans to reduce inflation to an annual average of 25-30%. The worst decline was in the processing industry of durable goods, which shrank by 43.8% in comparison with the year before
In spite of an ambitious program, introduced in 1994, privatization (the process of converting a government enterprise into a privately owned enterprise) proceeded slowly.