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Romania was the last of the CEE countries to be awarded "functional market economy" status (in October 2004). It had a particularly difficult economic legacy, even by communist standards.

Between 1967 and 1980 Romania's communist dictator, Nicolae Ceausescu, borrowed heavily to finance investment in engineering industries, refineries and petrochemical plants, as well as a number of grandiose construction projects, including the Danube-Black Sea canal and the "House of the People" in Bucharest. The country's failure to generate hard currency exports led to a financial crisis in 1981, which necessitated debt rescheduling. Embarking on a policy of rapid debt repayment, Ceausescu imposed draconian cuts in energy imports, consumer goods and equipment. As Alan Smith notes in his article "The Romanian Economy since 1989":

"As a result, by 1989 the economy was on the verge of collapse, with widespread shortages and severe rationing of energy, while the population had endured nearly a decade of deep austerity and the capital stock had become increasingly obsolete."

However, the communist legacy can only partially be blamed for Romania's difficulties in becoming a market economy. During eleven of the fifteen years that followed the 1989 revolution, the political scene was dominated by former communist and/or populist parties reluctant to implement painful economic reforms.

The 1990s were characterised by what Daniel Daianu calls Romania's "boom and bust cycle". Alan Smith describes it as follows:

"Romania experienced the severest 'transition recession' of the non-Soviet former communist economies with industrial output falling by 54% and GDP by 25.1% between 1990 and 1992 while unemployment rose from virtually zero to 8.2% by the end of 1992."

Inflation, meanwhile, was regularly in the triple digits.

From 1993 to 1996 Romania's economy recovered somewhat, but not enough. Between 1997 and 2000, reformers tried to introduce economic "shock therapy", following the Polish example. Liberalisation of prices and foreign exchange markets resulted in an immediate surge in open inflation, resulting in a 25 percent drop in real wages. Attempts to restructure loss-makers contributed to a second 'transition recession', with GDP falling by 18.4 percent and industrial output by 34 percent between 1997 and 2000. Registered unemployment rose to 11.8 percent by the end of 1999.

The process was painful, but set the foundations for a strong recovery. From 2001 to 2008 the Romanian economy grew by an annual average of above 6 percent. Unemployment decreased from over 11 percent to less than 4 percent.

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Foreign direct investment has been a strong contributor to economic growth. After recording dismal levels until 1996, it rose to between 1 and 2 billion dollars per year from 1997 to 2002. After a 16 percent flat tax was introduced, FDI exploded to $6.5 billion in 2004. From 2006 to 2008 it has averaged $11 billion per year.

September 2008

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