Romania - Overview of economy

Romania is well-endowed with minerals, natural fuels, and rich agricultural land, and has a good trading location on the Black Sea. But a turbulent history, culminating in the repressive communist regime of 1947 to 1989, have kept it from turning its natural advantages into profit. Originally settled by the Dacian tribe, the region now known as Romania fell under Roman rule in the 2nd century A.D. The Romans abandoned the area less than 2 centuries later, and Romania was split between local fiefdoms until the medieval period, when it fell under Ottoman rule.

Over the next few centuries, Hapsburg forces from Austria-Hungary took over the northwestern region of Transylvania and gradually pushed the Ottoman Empire south. But it was not until the 19th century that the Ottomans finally left Romania. Europe's other powers were anxious to stop Austria-Hungary and Russia from dominating the region, and their pressure led to Romania being declared a nation in 1878 under the German prince Carol of Hohenzollern. For the next 50 years, the country struggled to establish a liberal democracy. It cultivated links with the West, particularly France, and fought with the Allied forces in World War I. But, by 1938, it had become a dictatorship, and the country entered World War II on the side of Nazi Germany.

The country fell under full communist control at the end of 1947 after Soviet troops moved into Eastern Europe. The country's first communist leader, Gheorgiu-Dej, was originally a Stalinist but gradually loosened ties with Moscow. That process was completed by his successor, Nicolae Ceaucescu, who started to improve relations with the West. During the 1970s, he borrowed heavily abroad to build up Romania's infrastructure and heavy industry, often building plants without any commercial rationale. Then, in the 1980s, he adopted a policy of isolationism and self-sufficiency. Industry and infrastructure was starved of investment as Romania strove to repay all of its foreign debts .

Nicolae Ceaucescu was overthrown and killed in 1989 in a revolution that officially cost 689 lives. He was replaced by his former aide, Ion Iliescu, who called elections in 1990. Despite protests, these resulted in Iliescu being elected president, while his party headed the government. Since then, Romania has worked towards becoming a democratic, Western-style economy. This has involved breaking up and privatizing its huge industrial plants, reviving foreign trade, and allowing the growth of small businesses.

The process has been difficult, and Romania has not progressed as fast as some of its Eastern European neighbors. A decade of stop-and-go reforms meant that Romania's first post-communist recession was followed by another 3-year slump in the mid-1990s. By 1999, the country's GDP was just 76 percent of its 1989 level, according to the Development Ministry. Romania has struggled to maintain its infrastructure and restructure its outdated heavy industry. Agricultural output has fallen, largely because the land has been split up into tiny subsistence farms . Many of the country's largest companies are still state-owned and loss-making.

With the help of the World Bank, Romania has drawn up a list of state companies to be closed or sold in an attempt to improve the government's finances. But progress has been slow because of the job losses involved. The transition to a market economy has also put an enormous strain on the country's social support systems. Unemployment has risen rapidly and the World Bank estimates that 22 percent of the population lives in poverty.

The year 2000 may be the start of a turnaround, however. Romania's economy started growing again and is expected to continue growing for the next 2 years at least. High world commodity prices in the past 2 years have boosted exports. Meanwhile, the service sector has expanded quickly, with new private shops and trading companies springing up. Romania's tourism industry, centered around the Black Sea coast and the beautiful mountain resorts, is reviving. There has also been some limited foreign investment, notably the acquisition of the Dacia car plant by France's Renault in 1999.

Romania's main aim for the next few years is to reduce inflation (45.7 percent in 2000) and boost growth, partly by attracting more foreign investment. Longer-term, the country hopes to join NATO and is 1 of the 10 Eastern European countries negotiating to join the European Union (EU). Romania's own target date for EU entry is 2007, but the latest progress report from the EU Commission in October 2000 was not encouraging. It put Romania in last place out of all the current candidates, saying that the country did not yet have a functioning market economy, a prerequisite for entry. Most analysts expect it to take Romania at least another decade to pass the reforms necessary for EU entry, even if the political will is there.