Romania - Europe's Heart Failure

By: Sam Vaknin, Ph.D.

Also published by United Press International (UPI)

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Written February 2002

Updated January 2007

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 - had ended 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 (it ultimately joined the EU in January 2007, together with another paragon of rectitude and capitalism, Bulgaria).

The EBRD doubled its lending in Romania to $250 million in 2001. Its portfolio there reached $1.8 billion. The EBRD further held its 2002 annual meeting in Bucharest. "(Romania) could be the Poland of the region (Balkan)", gushed The Economist.

But that was then.

In January 2002, 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 2001-4 CAS (Country Assistance Strategy) envisaged another $1.5 billion in investments. Romania was included in the then 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 in 2002 (down from 41% in 2000). The trade deficit was "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 has been 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", retorted the IMF).

But the upbeat press releases hide a disturbing reality.

The average monthly salary in Romania is still less than $120 ($150-450 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 $3600 (World Bank 2006 figures). 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.

Relationships with the IMF are stormy. Five years ago, for example, 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, the 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 between 2000-2005.

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 often find themselves in coalition with the Hungarian Democratic Union in Romania (HDUR). A few years ago, 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. When it unravelled, Romania was cast back to darker - and, alas, more familiar - days.

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