Romania - Economy

Before World War II, the economy was predominantly agricultural, with agriculture and forestry contributing 38.1% of the national income in 1938, and industry (including construction) 35.2%. As a result of the industrialization program of the Communist government, this ratio has changed greatly. In 1996, agriculture and forestry contributed 19% to national income; industry, 36%; construction, 7%; and services, 38%. Within industry, structural changes reflected the government's emphasis on the development of heavy industry, particularly machine-building, as opposed to consumer goods. The relative neglect of the agricultural sector, in addition to peasants' resistance to collectivization, resulted in agricultural difficulties, including shortages.

The basic organization of economic management in Romania was highly centralized, like its original Soviet model, with few of the modifications introduced elsewhere in Eastern Europe. During the late 1970s and in the 1980s, the continued emphasis on industrial expansion and consequent neglect of agriculture led to food shortages and rationing. Romania's economic problems in the 1980s were exacerbated by the government's program to reduce foreign debt: the debt was indeed reduced, from $10.5 billion in 1981 to $6.6 billion at the end of 1987, but at the cost of reduced industrial development. In addition, two extremely harsh winters (1985 and 1987) resulted in widespread power shortages and loss of production. In the 1990s, foreign debt has once again been on the rise; after reaching a low of $3.5 billion in 1992, it had risen to $10 billion in 1998.

The transition to a market economy also proved extremely painful. By 1992, grain production was only two-thirds of the 1989 level, GDP had fallen by 30%, industrial production had fallen 47% and inflation had reached 300%. Growth returned weakly in 1993, with GDP increasing 1%, but then gained some momentum, rising 3.9% in 1994, 6.9% in 1995 and 4% in 1996. In 1997, the government entered into an arrangement with the IMF for a standby agreement (SBA) supported by a credit line of $430 million, but the agreement was suspended because of the government's slowness in implementing agricultural reform. At the end of 1997, GDP had fallen -6.6% and inflation had soared to 151.4%. The effects of the Russian financial crisis in 1998, which came to a head in August, spread quickly to Romania, helping produce a further contraction of 7.3% of GDP for the year. Inflation, however, under new government restraints, moderated to 40.6%. Despite an austerity budget for 1999, inflation increased to 54.8% and the GDP contracted 3.2% for the year. In August 1999 the government entered into another SBA with the IMF, and in 2000 and 2001, GDP registered positive growth (1.6% and 4.1%, respectively), and decreasing inflation rates (40.7% and 37.5%, respectively). In October 2001 the government entered into its third SBA arrangement with the IMF, to run to October 2003. In 2002, estimated GDP growth had improved to 4.5% and inflation was on target to reach a relatively low 22%. Unemployment, virtually non-existent under the Communist system, has persistently stayed in the range of 9% to 11% since, averaging 10.6% 1999 to 2002.

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