Romanian economy

Velicioiu Miruna-Iulia gr 973

Our economies evolved around challenges and responses. Societies responded to the

challenges of instability, growth, and domestic externalities by updating their economic logic, by

innovating, and by introducing new coordination mechanisms (hierarchy, markets, networks,

eco-system awareness).

Modern economics has followed an hourglass-shaped path over the past century.

Originally a branch of moral philosophy, political economy up through the 19th century was a

broad-ranging discipline that touched upon issues in history, politics, sociology, and philosophy.

But during the 20th century was seen with a striving for formal rigor and precision. As we ended

the 20th century and the 21st began, the technical discipline of economics was once again

transformed into political economy. Spurred in part by the renewed emphasis on the importance

of institutions in analyzing the big questions of political economy, in part by the indeterminacy

of equilibria with the growth of game theory, and in part by the growing ease of quantitative

empirical work, economics also witnessed a movement in which “grand theory” took a back seat

to more empirically-oriented projects that examine the institutional features of the world that

underlie the rules governing social, political, and economic interactions.

Talking about Romania, I consider that 1989 may be taken a marking point, as so, the

next part of the paper will consist of information about Romania econoy starting with the year of

1989 and ending in the present day, with a few previsions for the following years.

Since 1989, Romania has made impressive strides in establishing political and economic

institutions that are accountable and a free civil society. However, certain pillars of democratic

governance, most notably the independence of the judiciary and the media, remain weak.

Governance at the national level has been partisan and often unstable, and political corruption is

prevalent.

Romania has a developing, upper-middle income market economy, the 17th largest in the

European Union by total nominal GDP and the 13th largest based on purchasing power parity.

The collapse of the Communist regime in 1989, reforms in the late 1990s and early 2000s and its

2007 accession to the European Union have led to an improved economic outlook. Romania has

experienced growth in foreign investment with a cumulative FDI totaling more than $170 billion

since 1989.

Romania’s economic freedom score is 66.6, making its economy the 57th freest in the

2015 Index. Its score is 1.1 points better than last year, reflecting improvements in freedom from

corruption, labor freedom, and the management of government spending that outweigh a decline

in business freedom. Romania is ranked 27th out of 43 countries in the Europe region, and its

overall score is higher than the world average.

Romania’s transition to a free-market economy began with the adoption of its new

constitution in 1991. In the post–Cold War period, Romania developed closer ties with Western

Europe and was accepted into NATO in 2004 and the EU in 2007. President Traian Basescu has

served since 2004 and has survived multiple impeachment attempts. We can say that in the last

20 years, Romania has made considerable progress developing institutions compatible with a

market economy.

For the past 10 years, Romania has been finagling to get into the European Union. The

almost unanimous hopes of the nation were realized on January 1, 2007 when Romania, together

with Bulgaria, became the newest members of the EU. The massive structural aid has stabilized

the government, spurred investment and curbed corruption. After years of growth, however,

Romania experienced a deep recession as a result of the 2008 global financial crisis. Modest

growth has resumed, and the government has made progress in reducing the public debt and

budget deficit. Privatization of major state corporations has contributed materially to private-

sector growth. All this progress has been possible with the help of the EU. But Romania is

postured to give much more than it gets from the EU. Romania represents a large population (22

million consumers), cheap labor, and abundant natural resources that are already being bought up

by the west. In addition to its strategic position on the Black Sea, Romania has extensive natural

resources, a productive agriculture sector, and the potential for strong growth in industry and

tourism. In fact, Romania's Prime Minister says that it will take some 40 years for Romania to be

on par with the rest of the EU.

What are the outcomes of 2015, a few years after the tragic fnancial crisis that affected

not only Romania, but the whole world? Today, Romania presents itself as a country who has

surpassed the financial crisis. As so, Romania’s net international investment position indicates

some remaining riskk, but key imbalances have been corrected. The still significantly negative

net international investment position remains a source of macroeconomic vulnerability.

However, export growth points to improved macroeconomic resilience. Formerly unsustainable

current-account deficits have been corrected and are expected to remain contained. Labour

productivity started to improve only recently, and cost competitiveness is still not ensured. Non-

cost competitiveness is still hampered by low investment and innovation and an unfavourable

business environment.

Moreover, private debt has been contained and financial sector stability has been

preserved, but external and internal vulnerabilities remain. The Romanian banking sector is well

capitalised and liquid, and non-performing loans are on a decreasing trend. Still, deleveraging

pressures remain and impaired loans weigh on banks’ profitability. Banks remain vulnerable to

adverse developments in the euro area and particularly to home-grown initiatives which may

have an adverse impact on the sector that could be mitigated under the balance of payments

programme. Private-sector indebtedness remains contained.

As we can see, many of the situations that affected the country are now contained,

although not all of them are totally resolved. In the future, however, the lasting economy

problems will be resolved. Along this problems we can include: th unstability of tax policy,

persistant weekness in public administration and other small businesses and also poverty and

social exclusion. According to UNICEFF, poverty is a critical factor that influences the evolution

of a country’s economy. Romania is still batteling with this issue, improvement being very

difficut. 16 years after the revolution, about 20% of the country's children live under the poverty

line. Furthermore, it has been established that a little over 1,000,000 children lived in poverty in

2004, while some 360,000 lived in abject poverty, accounting for 24.4% and 8.2%, respectively,

of the total number of children under the age of 18. The year 2015 brings no good news, as the

highest at-risk-of-poverty rates were observed in Greece and Romania (23.1 % and 22.4 %

respectively).

Romania tries to change, but before change comes great struggle. Factors like emigration,

corruption, poverty, and so on affect the immediate change of the country. Challenges to

accelerate growth in the country include uncertainty in the Eurozone and exports markets,

political developments in the context of local and parliamentary elections, and absorption of EU

funds. In the medium term, the key challenge for Romania is to achieve steady economic growth

and improve living standards while meeting fiscal targets, and to continue structural reforms and

the modernization of the public administration.

Sustainable long-term growth entails that Romania adopt measures that assure

compliance with fiscal targets while clearing arrears and improving quality of spending and

strengthening tax collections; progress on the structural reform agenda with a focus on energy

and transport sectors; and ensure continued financial-sector stability.

The National Bank of Romania (NBR) and the government took strong measures to

safeguard the stability of financial markets, and banks weathered the stress well. Monetary

policy is officially based on inflation target¬ing but, in practice, the National Bank of Romania

also aims at a certain degree of currency stability and, since 2009, attempts to steer credit growth

and liquidity. Indeed, the key policy interest rate has been steadily lowered since March 2009,

despite considerable inflation volatility until mid-2013. Since September 2013, headline

consumer price inflation has rapidly fallen and has been below the NBR's inflation target of

2.5%±1pp (set at the start of 2013) since early 2014, reaching 0.4% in January 2015, mainly due

to declining food and energy prices. Consequently, the NBR has accelerated monetary easing,

cutting its policy rate to 2.25% in February 2015 (down a cumulative 300bps since mid-2013).

Euler Hermes expects some further monetary easing to come as inflationary pressures will

remain low in H1. From mid-2015, inflation is forecast to pick up slightly.

All the information from above tells us that Romania has the potential for strong catch-up

growth over the medium and long term. With an improving policy background and the adoption

of modern information and communications technology (ICT), productivity growth will be

relatively strong. Labour productivity growth is forecast at 2.9% per year in 2015-30. Following

a sharp slowdown in 2014, there should a slight improvement in economic activity and moderate

growth in 2015. Internal demand will be boosted by the relaxation in fiscal policy which could

encompass a reduction in social contributions, a reduction in VAT (VAT cut down from 24% to

9% in June 2015  for agrofood products), and a revaluation of pensions and public sector wages.

In addition, the Central Bank will hold its policy interest rate at a low level (1,75% in

May 2015), at least whilst inflation remains below the target level of 2.5%, and could further cut

the mandatory reserve rate for credit. Against this background the continued reduction of foreign

currency denominated debt (more than half of credit outstanding is in foreign currencies) by the

economic players should end up being offset by the increase in their debt denominated in the leu.

This expansion will, however, be moderate because the local banks, 90% of which are

subsidiaries of Austrian, French, Greek and Dutch groups, will continue to repay their debts to

their parent companies, whilst increasing their domestic deposit base. In addition, caution

remains the order of the day given the scale of non-performing loans and the problems of

enforcing the guarantees. Consumption will also be boosted by increased private sector wages, as

well as a programme to assist debt repayment by low and medium income households.

Bibliografie:

1. http://wordmadeflesh.org/the-situation-in-romania-16/

2. http://www.heritage.org/index/country/romania

3. https://en.wikipedia.org/wiki/Economy_of_Romania

4. http://ec.europa.eu/economy_finance/publications/occasional_paper/2015/pdf/ocp223_en.pdf

5. http://ec.europa.eu/economy_finance/eu/countries/romania_en.htm

6. http://www.worldbank.org/en/country/romania/overview

7. http://www.peterleeson.com/The_Evolution_of_Economics.pdf

8. https://www.presencing.com/ego-to-eco/economic-evolution

9. http://ec.europa.eu/eurostat/statistics-explained/index.php/

People_at_risk_of_poverty_or_social_exclusion

10. http://www.eulerhermes.com/economic-research/country-reports/Pages/Romania.aspx

11. http://www.coface.com/Economic-Studies-and-Country-Risks/Romania

12. http://country.eiu.com/article.aspx?

articleid=1603402544&Country=Romania&topic=Economy&subtopic=Long-

term+outlook&subsubtopic=Summary