History of Romania Economy

Before World War II

GDP of Romania between 1870 and 2003 in 1990 International dollars.

After World War I, the application of radical agricultural reforms and the passing of a new constitution created a democratic framework and allowed for quick economic growth (industrial production doubled between 1923–1938, despite the effects of the Great Depression). With oil production of 7.2 million tons in 1937, Romania ranked second in Europe and seventh in the world. The oil extracted from Romania was essential for the German war campaigns. Before World War II, it was Europe's second-largest food producer. In 1938, per-capita national income reached $94, surpassing other present-day developed European countries such as Greece ($76) or Portugal ($81). However, the Romanian economy still lagged behind its Western European counterparts.

Economy during 1944-1989

1947 stamp

After the Second World War, Romania became a member of the Eastern Bloc, and switched to a socialist-style command economy. During this period the country experienced rapid industrialization in an attempt to create a "multilaterally developed socialist society". Economic growth was further fueled by foreign credits in the 1970s, but this eventually led to a growing foreign debt, which peaked at $11–12 billion; the latter was largely paid off during the 1980s by implementing severe austerity measures which deprived Romanians of basic consumer goods. In 1989, before the Romanian Revolution, Romania had a GDP of about 800 billion lei, or $53.6 billion. Around 58% of the country's gross national income came from industry, and another 15% came from agriculture. The minimum wage was 2,000 lei, or $135.

Free market transition

Romania's GDP drop during the 1990s

Privatization of industry was pursued with the 1992 transfer of 30% of the shares of some 6,000 state-owned enterprises to five private ownership funds, in which each adult citizen received certificates of ownership. The remaining 70% ownership of the enterprises was transferred to a state ownership fund, with a mandate to sell off its shares at the rate of at least 10% per year. The privatization law also called for direct sale of some 30 specially selected enterprises and the sale of "assets" (i.e., commercially viable component units) of larger enterprises.

As of 2008, inflation stood at 7.8%, up from 4.8% in 2007estimated by the BNR at coming within 6% for the year 2006 (the year-on-year CPI, published in March 2007, is 3,66%). Also, since 2001, the economy has grown steadily at around 6-8%. Therefore, the PPP per capita GDP of Romania in 2008 was estimated to be between $12,200 and $14,064.

Financial and technical assistance continued to flow in from the U.S., European Union, other industrial nations, and international financial institutions facilitating Romania's reintegration into the world economy. The International Monetary Fund (IMF), World Bank (IBRD), the European Bank for Reconstruction and Development (EBRD), and the U.S. Agency for International Development (USAID) all had programs and resident representatives in Romania. Romania also attracted foreign direct investment, which in 2008 rose to $72 billion.

Romania was the largest U.S. trading partner in Central-Eastern Europe until Ceauşescu's 1988 renunciation of Most Favored Nation (non-discriminatory) trading status, the latter of which resulted in high U.S. tariffs on Romanian products. Congress approved restoration of the MFN status effective 8 November 1993, as part of a new bilateral trade agreement. Tariffs on most Romanian products dropped to zero in February 1994 with the inclusion of Romania in the Generalized System of Preferences (GSP). Major Romanian exports to the U.S. include shoes and clothing, steel, and chemicals. Romania signed an Association Agreement with the EU in 1992 and a free trade agreement with the European Free Trade Association (EFTA) in 1993, codifying Romania's access to European markets and creating the basic framework for further economic integration. At the Helsinki Summit in December 1999, the European Union invited Romania to formally begin accession negotiations. In 2002, the target date of 2007 was set for Romania, along with Bulgaria, for its accession efforts. This was confirmed in 2003 at the Thessaloniki Summit and then in early 2005 Romania and Bulgaria signed the adherence treaty to EU. They formally joined the EU on January 1, 2007.

During the latter part of the Ceauşescu period, Romania earned significant credits from several Arab countries, notably Iraq, for work related to the oil industry. In August 2005, Romania agreed to forgive 43% of the US$1.7 billion debt owed by an Iraq still largely occupied by the military forces of the U.S.-led "Coalition of the Willing", making Romania the first country outside of the Paris Club of wealthy creditor nations to forgive Iraqi debts.

Growth in 2000-07 was supported by exports to the EU, primarily to Italy and Germany, and a strong recovery of foreign and domestic investment. Domestic demand is playing an ever more important role in underpinning growth as interest rates drop and the availability of credit cards and mortgages increases. Current account deficits of around 2% of GDP are beginning to decline as demand for Romanian products in the European Union increases. Recent accession to the EU gives further impetus and direction to structural reform. In early 2004 the government passed increases in the Value Added Tax (VAT) and tightened eligibility for social benefits with the intention to bring the public finance gap down to 4% of GDP by 2006, but more difficult pension and healthcare reforms will have to wait until after the next elections. Privatization of the state-owned bank Banca Comercială Română took place in 2005. Intensified restructuring among large enterprises, improvements in the financial sector, and effective use of available EU funds is expected to accelerate economic growth. However, the Romanian economy was affected by the late 2000s recession and is expected to contract in 2009, with a slight recovery predicted in 2010.