Panel IV :

Relations and
into the
World Economy

External Economic Relations and Integration into the World Economy:
The case of Romania

Lazar Comanescu

As the global economy develops, it is becoming increasingly clear that no country can progress in economic isolation, says Lazar Comanescu. Romania is having a more difficult transition than most of Europe's economies in transition, precisely because its previous regime - besides being a hypercentralised one - also promoted a highly inward oriented economic policy which resulted in a real isolation from the world. Today, Romania has realised that economic prosperity can only come from active membership in the world economy. One of its first steps in this direction has been to build up a system that will inspire enough confidence for foreign investment.

Lazar Comanescu is Director at the Ministry of Foreign Affairs, Bucharest


There is no need to demonstrate the importance of external economic relations for a country's development. In fact, in a world of continuously increasing inter-dependencies, the economic and social development of each and every country and/or region can no longer be conceived and assured without an active participation in the international economic system. The less integrated into the world economy a country is, the less are the prospects for its dynamic development and prosperity. There are a lot of examples to support the statement. Romania's case is one of the most relevant in this respect.

The policies pursued by the Romanian authorities before 1989, particularly during the second half of the seventies and throughout the eighties, clearly point out how counterproductive the autarchic approach is for long-term economic development. It resulted in an almost total isolation of the country's economy, which brought up serious difficulties that add to the unavoidable ones generated by the transition to the market economy.

  1. First, the autarchic approach translated into a strong tendency towards the hyper-diversification of the economy's structure, without any consideration being given to the availability or non-existence of the necessary inputs. The problems the process of restructuring the Romanian economy is confronted with today are to a great extent the result of these industrial policies.

  2. Second, the Romanian economy was almost totally cut off from international technological developments.

  3. Third, as in the case of other former communist (centrally-planned) economies, the priority was given to the producers' needs and not to those of the consumers, with the main consequence being a significant decline in quality.

  4. Fourth, the policy of paying the foreign debt at any cost led to a cut-off from the external financial flows although they were absolutely indispensable for a policy of efficient economic development.

To sum up, the policies pursued before 1989 resulted in a serious decline in the competitiveness of the Romanian economy.

Measures for the Reintegration of the Romanian Economy into the World Economy

Following the collapse of the centrally-planned economic and social system, Romania has rapidly embarked upon the adoption of those measures able to re-establish and assure the functioning of a real market economy and to reintegrate it into the European and world economic flows. Special attention has been given to the setting up of that framework which enables a more efficient use of the (national) resources, while increasing the competitiveness on European and international markets so as to take full advantage of the benefits of an international open trade, which proved to be the main engine of a sustained economic development.

These measures regard both what one could define as the internal level, and the external institutional and legal framework of Romania's foreign economic relations. Internally the measures were conceived as part of the general process of economic transformations and reform that covers simultaneously the norms, the institutions and the mechanisms of the market economy. In this context, priority was given to decentralisation of the decision-making process, de-monopolisation of production and trade, and development of the private sector.

Price liberalisation, an essential step for providing correct signals for the market, has been also achieved. Measures have also been adopted to reform the banking and financial system, to restructure the public sector and to reduce state interference through subventions directed to public enterprises and consumers. Practically, Romanian foreign trade is now completely de-monopolised with the private sector holding more than 35 percent of the activity in the field (see Table 1). Measures were also taken so that at present a currency market is operational. One of the pillars of a genuine market economy - the Stock Exchange - is now a reality in Romania as well.

Table 1
Weight of the private sector in Romania's foreign trade

Exports Imports
Sources: Statistical Yearbook of Romania, 1994; Monthly Bulletin of Statistics, 5/1995

Romanian trade policy has been significantly liberalised after 1990. While direct state control and quota trade were the "pillars" of the trade policy of the former regime, after the breaking of the state monopoly on foreign trade in 1990, international transactions can currently be initiated freely by the Romanian enterprises. The Romanian laws assure the non-discriminatory treatment of the economic actors, no matter the nature of their social capital: private or public, foreign or national. On the import side, quotas have been replaced with customs tariffs.

At the external level, the policies pursued and measures adopted were aimed at re-establishing Romania's foreign economic links to its traditional partners, while at the same time looking for the setting up of a solid system of relationships, as part of the overall strategy of reintegration into the European and Euro-Atlantic structures.

After the signature in 1990 of an Agreement on trade and economic cooperation with the European Communities, a Europe Agreement associating Romania to the European Union was signed on 1 February 1993, and entered into force on 1 February 1995 (an Interim Agreement covering the commercial part of the former had already been operational since May 1993). The area covered by the Europe Agreement is by far the largest compared to any other bilateral treaties signed by the EU (and its member states) with a third country. In fact, it covers almost all aspects of the society i.e.: economy and trade, political cooperation, science and technology, culture, social issues, home affairs, justice, etc.

While the Europe Agreement stipulates that a free trade area between the two parties is to be accomplished, at the latest by the end of the decade, its ultimate objective is Romania's full membership of the EU.

Free trade agreements were also signed with EFTA countries, as well as with the Czech and Slovak Republics, while negotiation for similar treaties are being carried out with the other Central European countries associated to the European Union. As regards the relations with the United States, the MFN status was reinstated, though, for the time being, on an annual basis.

One of the most important steps towards the reintegration into the world economy was the reconnection of Romania to the IFIs. Though the country had been a member of IMF, IBRD and GATT since the early seventies, by the end of the eighties, the links with these institutions had been, from a practical point of view, almost totally interrupted.

Another priority was to create the appropriate framework for reconnecting Romania to the international investment flows, thus stimulating foreign investments in the country, which are seen as one of the main instruments to improve quality, technology, management, organisational and marketing skills. It is worth noting that foreign investors are offered important advantages, among which highly trained labour with low wages. A special law on foreign investments was adopted in early 1991 and this was directly followed by a significant increase in foreign capital entries (see Table 2).

Table 2
Direct foreign investments in Romania (1990-1994)

(mil. dollars)
Source: Monthly Statistical Bulletin, 12/1994
Nevertheless, the level of foreign investments is still low as compared to those in other countries in the region. New stimulating measures have therefore been developed or will be adopted in the very near future. Their main aim is to eliminate the rather complicated institutional mechanism as well as the bureaucracy that prevail today as far as foreign investments are concerned.

Recent Developments and Prospects for the Future

The general reform process as well as the specific measures adopted induced significant, even spectacular changes in the system of external economic relations both at the institutional and the structural level. The number of trade companies participating in foreign trade activities has remarkably increased. Today, 60-80,000 public and private economic actors are registered as international trade operators. One can compare these figures with the 54 state owned enterprises operating in this field before 1990 to realise Romania's huge step forward towards a real open economy.

As pointed out earlier, the role of the private sector in the Romanian economy has continuously and significantly increased. The contribution of the private sector to the GDP has already reached 40 percent and is soon to increase following the implementation of a law recently adopted by the Romanian Parliament regarding the acceleration of the privatisation. The implementation of its provisions will enable rapid privatisation of another 3,000 public companies, so that the contribution of the private sector in the Romanian industry will reach 60 percent. The hope is that the necessary conditions will soon be created so that the process of privatisation and restructuring of the economy will enable a long term economic recovery and growth, and, as a direct consequence, increased export performances.

It is worth mentioning that foreign trade has already become the most dynamic sector of the Romanian economy (see Table 3).

Table 3
Romania's foreign trade (1990-1994)

Trade balance
1990 5775 9202 -3427
1991 4266 5372 -1106
1992 4363 5784 -1421
1993 4892 6020 -1128
1994 5998 6328 -330
Source: National Commission for Statistics, Bucharest, 1995

The point was already made that one of the most significant consequences of the change of system in Romania has been the shift from economic links with the East to relations with the West, from "imposed partners" to "natural partners", the most important one being by far the European Union. Thus, in 1994, Romanian exports which increased by 22.6 percent compared to 1993, were to the extent of 45.6 percent being directed to the EU member states. Romanian imports increased in 1994 by 5.1 percent compared to 1993, 47.7 percent of the imports coming from EU countries, data for the first five months of 1995 indicating that the EU is already holding more than 50 percent of the foreign trade of Romania. With the accession into the EU being Romania's top priority, the prospects are clearly that this trend will continue.

As for the process of accession of Central European countries to the EU, it is often said that "politics is the engine and economy is the brake". I do not share this point of view at least for two reasons: first, the present development of the Union - including the political development - was mainly determined by the continuous strengthening of the economic integration; second, democracy and stability can best be strengthened and preserved by developing a prosperous market economy.

On the other hand, though a significant gap still separates the two parts of the continent, the Central European economies, including Romania's, enjoy, as previously indicated, the important comparative advantage of having lower average labour and other production costs than the EU countries. This situation combined with the high absorption capacity of the Central European markets really opens very good prospects for a sustained economic growth throughout an enlarged European Union into which these countries wish to integrate. It will certainly help strengthen the competitive capacity of the European Union in the competition with other regions of the world. It is, therefore, a logical thing to say that the accession of the associated countries to the European Union is a process beneficial for both sides.

In such circumstances, it is normal for both sides i.e. the European Union and the associated countries - in our case, Romania - to search for ways and means which will enable full use of all the opportunities offered by the Europe Agreement to the development of their mutual trade and cooperation. On the other hand the need appeared for measures to keep in line with developments that followed the negotiation and signature of the Europe Agreement. The adoption of the Essen strategy, as well as the enlargement on 1 January 1995 of the EU and the successful conclusion of the Uruguay Round, are part of these developments.

Encouraging steps were already undertaken in this regard, of which mention should be made of the alignment of the liberalisation timetable in the case of Romania (and Bulgaria) to that of the other associated countries and the starting of negotiations of additional protocols to the Europe Agreements. The analysis of the evolution of trade between EU and the Central European countries associated to the Union indicate additional opportunities for a further and, at the same time, more balanced development of economic ties between the two parties.

Thus, though mutual trade has registered a steady high growth since 1990 (in 1994 only the increase - as compared to 1993 - was 30 percent for EU imports from PECOs and 20 percent for EU exports towards PECOs), the share of the six associated countries was only around 4 percent in the EU's total purchases from third countries, while Switzerland alone accounted for roughly 7 percent (Source: European Commission, 1994).

With the economic recovery in sight throughout the European Union as well as in the associated countries, the fact seems evident that the potential for further development of trade and cooperation is far from being exhausted.

This assertion holds for all associated countries, but in the particular case of Romania - where the GDP growth was around 4 percent in 1994 - it is even stronger. In fact, while in 1994 the value of EU imports from the six countries was of more than 26 billion ECU, that coming from Romania was only of 2.5 billion ECU. As for EU exports, they were 31 billion ECU as a whole, with Romania holding again 2.5 billion.

To take full advantage of the potential mentioned above, the need is to eliminate those constraining factors that still exist.

First, there is room for further liberalisation measures by the EU, particularly in those sectors - the so-called sensitive ones - where the associates have a comparative advantage.

Second, there is need for a substantial improvement in the infrastructure, both the physical as well as the financial and banking one.

Third, but closely linked to the second, a more stimulating environment for foreign investments in the associated countries has to be created. As far as Romania is concerned, new measures were recently adopted in this respect: a significant reduction in the inflation rate (from almost 300 percent in 1993 to less than 67 percent in 1994 and potentially below 30 percent in 1995). Similarly, important improvements were brought to the foreign investment regulations.

One should nevertheless be aware of the fact that, though decisive, the national efforts of each associated country are not enough. They can only be successful when strongly supported by the EU and the Member States within the framework of a genuine partnership for membership.

The full implementation of the objectives set forth in the Essen Strategy - of which those related to investment promotion are among the most important - would clearly be a very significant contribution to the further development of such a partnership.

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