If the European Union (EU) is under stress, one place where it is not encountering great problems is Romania. With a diverse economy and decades of underemployment of resources, Romania is now patiently adapting to EU membership. A third of the country is agricultural, The Soviets developed Romania’s heavy industry so it’s all significantly out of date, and there is a tourist trade – especially along the Black Sea and in the Mountains.
For Romania the possibility of remaining an independent country with a stable economy rests entirely on their ability to survive with bigger and often more aggressive neighbors. During the Cold War Romania was run by an oppressive, brutal dictator, Nicolae Ceausescu. In the post Cold War Romania has sought ties with Western Europe in order to change its long subservience to Russia. The question is how can Romania fit into European plans and European economic growth?
Romania’s industrial sector was led by manufacturing during the Soviet years. During the 1990s the industrial sector declined while the agricultural sector grew. For some this was an indication of a devolving Romanian economy away from high growth industry towards old-fashioned farming. To understand what was happening during that decade requires a comparative look at what was happening in other Eastern European countries that were also shifting away from a centrally planned economy.
Ukraine offers an ideal comparison. Ukraine, like Romania has excellent agricultural land and was also a manufacturing region for the Soviet economy. Ukraine also entered the post-Soviet period with out-dated manufacturing facilities built by the Soviets. In Ukraine the economy has been substantially manipulated by oligarchs who gained control of state assets as they were released from government control. A broad distribution of assets was intended but never materialized and the results are an unstable and unbalanced market economy.
Transition To A Market Economy
Romania’s transition has been difficult partly because communist dictator, Nicolae Ceausescu, was so oppressive, using an internal secret police network that terrorized the country, much as Lenin had terrorized the Russian people. But Romania prior to the Second World War had been tied to Western Europe’s economy where Romanians transacted over eighty percent of their foreign trade. Then for the next forty five years ninety percent of that trade was with comecon countries. During the transition to a market economy the influence of centrally planned industry lead meany to believe the restructuring was turning out poorly. The share of industry in Romania’s GDP decreased from 46 percent in 1985 to less than 28 percent in 1999, which caused concern.
However, there were structural changes away from industrial technologies and towards more modern high technology industry. So during the transition older technologies were dropped and newer technologies were adopted. This forced changes in the labor market and for the first decade of transition a significant percentage of workers wound up leaving industrial work and returning to agriculture. On the surface level economic development looked bleak. Exports were still important to overall economic growth for Romania and in 1999 the share of industrial produced goods in Romania’s exports was over 95 percent. Higher tech industrial production was adapted to Western European markets.
While Romania’s transition to a market economy has been slow and difficult, Romanian oligarchs have not been a problem. Instead, oligarchs who made billions of dollars in Russia and Ukraine are now turning to Romania as a place to buy industrial companies. This problem arises from two sources. First, as the Russian government enforces stricter regulation over industrial methods, processes and finance, Russian oligarchs are forced to look elsewhere to set up tax evasion methods for their business transactions. Buying Romanian heavy industry companies offers means of doing that. Romania might be more able to resist Russian oligarchs and their nefarious activities but as a member (since 2007) of the European Union, Romania has to live with EU regulations that are designed for Western European developed countries. Labor regulations require a commitment to employees that start up businesses can’t easily meet.
Romanian industry tends toward corruption rather than turn away from the EU. Since Romanians can’t live up to EU regulations they live in a gray economy regulated for export, but overlooking other regulation in order to foster industrial growth in small companies. It’s this same gray area of regulation that attracts Russian oligarchs who are masterful at exploiting countries that turn a blind eye on corruption.
Romania is still in transition to a market economy that looks to Western Europe for trade and economic advancement. Exports are important and Romanian industry is adapting to technology that matches their best export opportunities. Because exports are dependent on a stable, expanding international economy, Romania’s debt is dependent on external politics and economic conditions. When the European economy is in decline, Romania suffers and accumulates debt. When international economic conditions are stable and expanding Romanian external debt grows smaller. Due to EU regulation Romania’s transition to a successful market economy that eliminates corruption, will continue to occur slowly. There are opportunities for outside investment in Romania, but investors will have to look carefully at the business practices that are being used in Romania in the sector they are investing in.