Vol 1, No 4, 19 July 1999

M I O R I T A:
Romanian Economy in Crisis

Catherine Lovatt

On Monday 12 July, Romania was hit by yet another disaster. The collapse of a dam outside Bucharest resulted in the deaths of 19 people. In May and June, freak storms caused flooding and the destruction of large tracts of arable land. This, coupled with the costs of the Kosovan conflict and the problems of transition, is threatening the stability of the Romanian economy. Without economic stability, Bucharest's primary foreign policy aim of EU entry will remain a distant dream.

Disasters, natural and man-made

Ecological disaster in Romania has placed extreme pressure on the economy and country's EU bid. May and June saw agrarian areas hit hard by flooding and mud slides whilst a heat wave in the south of the country also had a detrimental effect. Lives have been lost and harvests destroyed. Next year's agricultural yields are expected to be hard hit: government analysts estimate a wheat harvest of 4.7 million tonnes with consumption set at 3.8 million tonnes; however, others forecast that that the yield will only be 3.5 million tonnes.

If supply indeed fails to meet demand, the hardest hit will be the consumers, whose problems are further compounded by the government's refusal to import extra wheat. Severe shortages may further fuel public hostility toward the ruling coalition.

The storm damage is an additional headache for the government. The costs of rebuilding damaged areas, such as the collapsed dam, will drain valuable funds away from the already ailing economy. The country cannot afford any further strains on the economy or additional assaults on the standard of living; with general elections looming, the reformist government's continued existence is on the line.

Although international support has been pledged to rebuild the economies of those countries affected by the Kosovan conflict, efforts have so far concentrated on Kosova. Romania and Bulgaria incurred severe costs during the war as a result of trade lost due to blocked shipping on the Danube and of lost contracts with Yugoslavia. At present, Bulgaria is rebuilding its links with Yugoslavia, getting a foot in the door before the major rebuilding process begins.

Unlike Bulgaria, the Romanian government are refusing to remove the international ban on the sale of oil products to Yugoslavia. This has raised concerns among some Romanian officials who see the benefits of restoring former trade relations with their neighbour.

Simply put, the Romanian economy is too weak to restrict trade. Mihai Ionescu, General Secretary of the Association of Romanian Exporters and Importers, has argued that the continued Romanian ban could result in the loss of one billion US dollars in suspended contracts. If the Romanian government wish to improve the country's chances of gaining fast entry into the EU, they will have to take the opportunities handed to them. They can hardly afford to sit back and hope that things will get better.

Renewed hopes weakening

Compliance with NATO during the Kosovan conflict brought with it renewed Romanian expectations of gaining entry into international institutions. Bill Clinton, Tony Blair and Madeleine Albright all suggested that Romania would be rewarded for her assistance and that a new plan for fast track entry into the EU and NATO would be established. To some extent their 'suggestions' have been fulfilled. A "new Marshall Plan" has been proposed in the form of the Balkan Stability Pact, and representatives of the British and American governments have been quick to come forward with praise and thanks.

However, their words are beginning to seem empty. The drawing up of the new Marshall Plan has been delayed for at least a year, and the EU have stated that second-round enlargement will not be considered for another year.

Romania's poor economic condition is clearly affecting her prospects for EU entry, and, sadly, the country's economic problems did not simply start with the recent natural disasters and the Kosovan conflict. The problems of post-Communist transition are still taking their toll on the Romanian economy. In order to achieve EU entry requirements, an overhaul of the economy was necessary, but reforms have been slow and costly.

One major area that has been disrupted is the programme to privatise the banking sector. The national bank, Bancorex, has to be propped up by government funding. The problems may not necessarily lie in the reforms themselves but with those controlling and implementing them. Rather than placing privatisation in the hands of specialised government bodies, it has been placed in the hands of the government themselves.

Even before the recent ecological destruction, it had been predicted that the economy would fall to record lows this year. Analysts are now saying that things will worsen still. Romanian Prime Minister Radu Vasile originally forecast that inflation would reach 25%. Estimates now say inflation will rise to the 1998 level of 40.6% while the economy contracts by another 2.2%.

The International Monetary Fund has been forthcoming with financial aid, but a basic economic infrastructure must exist for any benefits to be reaped. The process of constructing such an infrastructure is long and slow and is delaying economic growth and development. In the short term, loans do relieve financial tensions, but in the long run, problems are merely postponed.

This delay, however, creates a limited reprieve in which the Romanian economy may improve.

Transforming hearts and minds

Problems of transition go beyond the issue of the economy. The mentality of the Romanian people also has to adapt to a new way of thinking. This is developing, especially amongst the younger generations, but there are still sections of society that are accustomed to - and subsequently depend on - decisions being made for them: what job to have, where to live and where to go on holiday.

Nor is transition aided by the lack of technological development. It is not easy to establish a competitive market when resources are limited and training is out dated.

Corruption and tax dodging have limited foreign investment and have resulted in the loss of much potential income. Although reforms are now in place to develop a new tax code, reduce corruption and encourage investment, the pace at which the reforms have been implemented has worsened the effects of austerity measures. This puts Romania in a disadvantageous position when dealing with more stable economies. There is a desire to move forward and develop rapidly, but the legal infrastructure is simply not advanced enough to achieve this desire.

Stability, both political and economic, is a prerequisite for entering the EU. In both spheres Romania falls short of demands. This results in discontent among the population. Romanians are increasingly mistrustful of the government and are seeking to voice their resentments in public. Earlier this year, Miron Cozma led miners towards Bucharest in protest against mining reforms and pit closures. Demonstrators marched in Bucharest in opposition to Romanian support of the NATO bombing of Yugoslavia. Industrial grievances are becoming more widespread with both teachers and transport workers recently coming out on strike.

With such levels of open discontent, the elections set for late next year should prove an interesting battleground. Recent polls suggest that former President Ion Iliescu has a 17% lead over incumbent Emil Constantinescu. Memories are obviously short lived. Iliescu, the 'ex-communist', was lambasted by the younger generations as his regime collapsed in 1996; he was regarded as an ardent supporter of Ceausescu and untrustworthy. A desire to return to such a government is a sign of the dire situation that many Romanians now find themselves in. To many, democracy doesn't appear to be working, and they will seek other alternatives.

Fast-track entry into the EU is growing ever more unlikely for Romania. Hit by a series of uncontrollable events, the economy is straining. Although reforms are being implemented, many problems of transition remain unsolved. Discontent among the population is increasing as people are hit by the pressure of austerity measures.

Reliant on the international community for funding, Romania cannot afford to take a lax approach to new business ventures. Much could have been done to soften the inevitable blows of transition, but a slow and lethargic approach to development has hindered Romanian possibilities for early EU entry. Economic instability is breeding political instability, and next year's elections may prove to be the breaking point for a country desiring acceptance in a community that is not her own.

Catherine Lovatt, 14 July 1999





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