Cyclopedia Of Economics 1st edition

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Romania, Economy of

Romanians like to compare their country to the heart of Europe. If so, Europe has been in a continuous state of cardiac arrest. Romania is still so backward and corrupt that even venerable foreign leaders get entangled in its sleaze.

According to various press reports (e.g., in "Ananova"), on July 23, 2001, Tony Blair sent a letter to the Romanian Prime Minister, Adrian Nastase, regarding the privatization of Sidex, a nationalize steel mill with $1.2 billion in accumulated debts. In his missive, Blair made it abundantly clear that Britain's support of Romania's accession to the EU would be considerably enhanced should Romania choose to sell Sidex to LNM, owned by a major contributor to the Labour Party in the UK. Sure enough, two days later, LNM won the bid.

Yet another Romanian false dawn - when the "social democrat" Iliescu was elected for president and the "Thatcherite" Nastase was elected Prime Minister in late 2000 - may be ending penumbrally.

In his first days in office, Nastase, the head of the largest party in parliament, succeeded to reschedule $4 billion in debts and to infuse the nation with hope, purpose, and concrete (and painful) reforms - in the face of strong objections by vested interests, such as the militant trade unions.

The EU was suddenly talking about Romania, with its 23 million poverty stricken citizens, as part of its "first intake", together with the likes of Hungary and the Czech Republic. The EBRD doubled its lending in Romania to $250 million in 2001. Its portfolio there reached $1.8 billion. The EBRD has further decided to hold its 2002 annual meeting in Bucharest. "(Romania) could be the Poland of the region (Balkan)", gushed The Economist.

But that was then.

In the last week alone, the Italian weekly "Panorama" accused Romania's secret service (SRI) of collusion in the sale of arms from the breakaway Dnestr region in Moldova to terrorist organizations and Arab countries, members of the "axis of evil" (accusations it vehemently, though unconvincingly, denied). The Prime Minister admitted that members of the opposition parties were hounded under the cover of an anti-corruption campaign which got off to a "bad start". Parliament cleared the head of the SRI of allegations of involvement in illegal financial dealings. AC International, a software distributor in Romania, said that the country lost $450 million in revenues due to its thriving black markets in pirated software and other intellectual property. The Speaker of the Senate denied charges that he authorized illicit bank transfers while he was president of the Romanian Investment and Development Bank (BID). And a nuclear reactor was shut down due to a "minor malfunction".

It is telling that c. $700 million of $3.3 billion (in 30 projects) committed by the World Bank to Romania since 1991 - went towards the design of "Economic Policy". This is equal to the World Bank's investments in Romania's transportation and finance combined and 25% more than it invested in agriculture. Evidently, Romania has failed to come up with viable economic policies on its own. The new 2001-4 CAS (Country Assistance Strategy) envisages another $1.5 billion in investments. Romania is in the pilot CDF (Comprehensive Development Framework) - a series of public consultations with stakeholders in the country's economy and politics. The Bank's main concerns are the mitigation of the disastrous and destabilizing social consequences of privatization and the support of a nascent private sector and SME's (small and medium enterprises).

Despite acrimonious notes ("We are not prepared to accept recipes, to be told exactly what we have to do" - thundered Romania's Prime Minister), the IMF declared itself satisfied with Romania's economic performance - perhaps because it set its sights low to start with.

Partly thanks to an exchange rate policy of managed float, administered ably by the central bank, inflation dropped to 30% annually (down from 41% in 2000). The trade deficit is "less than 6% of GDP" (i.e., tripled to $1.5 billion in the first half of 2001), foreign exchange reserves have increased (to c. $5 billion, or 3 months of imports), and the fiscal system is being revamped with a new VAT law and the elimination of discretionary tax exemptions. A great surge in farming activity and in domestic demand led to a rise of 5% in GDP (at the expense of stagnating industrial activity). Budget deficit targets were largely met - mainly due to a cut of 3% in state salaries and in energy subsidies ("not nearly enough", retorts the IMF).

But the upbeat press releases hide a disturbing reality.

The average monthly salary in Romania is less than $120 ($150 in urban centers), the price of a good restaurant meal for one in Washington, the IMF's domicile. Most wages are indexed which makes disinflation a daunting task. GDP per head is lower than Macedonia's at $1600. More than 13% of the workforce are unemployed (officially, only 8%). Social unrest is seething. GDP is growing only in nominal terms. The share of industry in the national economy was halved to 28% in 1999. Agriculture and forestry similarly declined. Despite its low foreign debt at 32% of GDP - the legacy of Ceausescu's inane policies - Romania's debt to service ratio, at 20%, is higher than Bulgaria's, Ukraine's, Hungary's, or Slovakia's.

The IMF mission left Bucharest without waiting for a Romanian letter of intent - though it promised to return soon and to release the second tranche of the stand-by arrangement on time, next month.

Privatization - with the exception of the much maligned Sidex - ground to a halt, in contravention of Romania's October 2001 IMF stand-by arrangement. The Law on Privatization was recently amended to disallow non-cash payments for state assets. Romanian Speed News report that the Privatization Agency is involved in over 14,000 lawsuits. The property rights of minority shareholders are still widely abused.

Tax revenues (and payments for heating and electricity) have deteriorated sharply. The agricultural sector - composed of inefficient smallholders - has not been touched. Close to 100,000 homeless children roam the streets. Romania's external environment has worsened perceptibly as all its trade partners were hit by a global recession.

In a flailing attempt to open up new markets and to revive moribund old ones - Romanian high officials have signed agreements or met with decision makers from the likes of Bulgaria, Serbia, Pakistan, and Vietnam. Romania, Bulgaria, and (occasionally) Greece regularly co-ordinate their stances on EU issues (such as the EU's agricultural policy).

Romania's economic policies are dictated by the EU and the IMF. But there is a wilder card at play: the Hungarian minority.

The Socialists are in coalition with the Hungarian Democratic Union in Romania (HDUR). They have signed an agreement with the HDUR regarding the Hungarian "Status Law" (which grants employment preferences in Hungary to Magyars who reside in neighboring countries, such as Romania and Ukraine). This did not stop one third of the parliamentary deputies of HDUR from defecting and setting up the "Civic Wing", thus seriously destabilizing the political status quo. Nastase's government has at least made the right sounds and did push a few important reforms through. Should it unravel, Romania will be cast back to darker - and, alas, more familiar - days.
Romanian President, Ion Iliescu, contests his homeland's geography. On Monday, at a joint press conference with Bulgaria's President Parvanov, he cast both countries as "central-south European" rather than the derogatory "Balkan". Both polities are well on their way to join NATO and the European Union - though the former expressed reservations after embarrassing leaks of classified military data in both Bucharest and Sofia.

Romania - a signatory of a strongly worded letter supporting the war in Iraq - has pledged 278 soldiers within nuclear, biological and chemical decontamination units, medical and engineering corps and military police. Close to 100 of them are already deployed in the Gulf. Romania also opened its airspace and a Black Sea air base near Constanta to 1000 U.S. troops. It shared with the coalition intelligence about Iraqi infrastructure, which it helped construct in communist times.

The United States, peeved by the recalcitrant pacifism of the French and Germans, intends to shift some air bases from Old Europe to east Bulgaria, Poland and Romania. This could signal the revival of the region's moribund defense industries. Potential buyers are taking note.

Colonel-General Safar Abiyev, the Azeri Defense Minister, visited Romania last week to discuss "military cooperation" - mainly training, technology transfer, a scholarship programs and interoperability exercises within NATO's East European program "Partnership for Peace". Romania's trimmed forces participate in peacekeeping operations in Kosovo, Afghanistan and Bosnia.

Romania's Social Democratic government led by Prime Minister Adrian Nastase was elected in January 2001 and immediately embarked on a revamp of the country's obsolete armed forces. The NATO-compatible Romanian army in 2005 will comprise 112,000 mostly professional elite soldiers and 28,000 civilians - a shadow of its former bloated self. The Ministry of National Defense was further depleted by the transfer of the soon to be privatized armaments industry to the Ministry of Industry and Resources.

The defense budget - at c. $1 billion or one fortieth of gross domestic product - barely covers one quarter of the armed forces' procurement needs. Hence the constant stream of welcome donations: two years ago Germany handed over a Gepard antiaircraft system and the U.S. - four C-130B aircraft, part of an Excess Defense Article transfer. Canada and Norway followed suit. The Defense Ministry resorts to frequency spectrum sales to the private sector to make ends meet.

Still, Romania is investing heavily in a military communications network and in the modernization and upgrading of its antiquated tank and armored vehicles fleets. The defense industry is collaborating with the Israelis to produce ammunition for its antiaircraft artillery and to upgrade its ageing MIG-21 "Lancer" fighters. Air traffic management and air space control are also priorities as are attack helicopters.

Romania's outdated weapons manufacturers used to supply 70 to 85 percent of the country's needs and export some $1 billion annually, mostly to other Warsaw Pact members and to Arab and African clients. More than 200,000 people were employed in the sector. Romania even has its own materiel trade fair - Expomil.

The remnants of the industry reap the benefits of the military's all-pervasive overhaul - but the decrepitude is evident. The Ministry of Industry and Resources explains:

"Starting with 1990, following the structural changes in the world arms market and the politic economic and social transformation in Romania, this sector has entered an increasing decline. The drastic decrease of the demand on the world market and lack of local orders, the low level of technology automation and labour productivity, associated with an improper management were the main factors which have lead to this situation. Privatization was started, with some performing companies sold to private local investors."

The sector is undergoing a wrenching restructuring with non-core activities spun off or closed, employees made redundant as functions are outsourced and 12 companies slated for privatization, including manufacturers of ammunition, vehicles, optoelectronics, electronics, airspace companies and a shipyard.

The remaining 15 firms and a research institute are owned by ROMARM, an opaque and ubiquitous statal holding group. Romania also sports 11 contractors in private hands. They are members of PATROMIL, a non-governmental trade association.

But the sector's only hope of survival is foreign. It is a predicament shared by all post-communist applicants and candidates in Central and East Europe. Joint ventures, co-production, technology transfer, offset programs (promoted by the Offset Law) - allow indigenous makers to leap into NATO's lean and mean, hi-tech 21st century. Eurocopter and DaimlerChrysler, for instance, serve as strategic partners to Romanian production facilities.

Aware of this nascent market, Western companies, backed by the political and pecuniary muscle of their countries, are aggressive bidders. BEA Systems just won a $190 million contract to refit two frigates for the Romanian navy. The deal is insured by the British government's Export Credits Guarantee Department (ECGD). The London offices of Deutsche Bank and ABN Amro Bank tackled the financing.

To its delight, Romania is becoming somewhat of a regional defense hub. The premiers of five other ex-communist states that were invited to join NATO next year (Bulgaria, Estonia, Latvia, Lithuania and Slovakia) as well as the foreign minister of a sixth (Slovenia), met near Bucharest to discuss their accession.

Together with Greece, Turkey and Bulgaria, Romania is a contributor to the South-Eastern Europe Brigade (SEEBRIG), established in 1998 by the South-Eastern Europe Defense Ministerial (SEDM), an informal group of the area's defense ministers from Albania, Bulgaria, Croatia, Greece, Italy, Macedonia, Romania, Slovenia, Turkey and the United States. The United States, Slovenia and Croatia serve as mere observers.

Yet, its growing stature aside, Romania is still besieged by its old ills. According to defense analysts, rogue Romanian arms dealers sold weapons to pariah states such as Iraq. Members of the vicious and discredited security service Securitate permeate the upper echelons of the country's defense establishment.

Last May, when the media published a non-flattering article translated from the "Wall Street Journal", the Ministry of National Defense sent a statement to several Romanian newspapers, reminding journalists that "life is short" and they should not "endanger their health by launching stressful debates". Faced with a storm of protest, a Defense Ministry official, George Christian Maior, dubbed the intimidating passages "satirical."

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