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1996 Country Reports On Economic Policy and Trade Practices

Department of State report submitted to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, January 1997.

1/ All figures for 1996 are estimates extrapolated from data available in November 1996.
2/ GDP at factor cost.
3/ Percentage changes calculated in local currency.
4/ Government expenditure is included in services.
5/ Merchandise trade.
6/ Source: U.S. Department of Commerce and U.S. Census Bureau; exports FAS, imports customs basis; 1996 figures are estimates based on data available through November 1996.
7/ Total banking system net foreign assets; end of period.

1. General Policy Framework

In 1996, Romania made further progress toward privatizing its economy and establishing the legal framework for a market economy. The Parliament enacted copyright and antitrust legislation and partially completed work on a bank privatization bill. A government-supported mass privatization program transferred partial equity in 3,900 state-owned enterprises to the general public. The rest is now in the process of being sold to private investors. In October, Romania inaugurated an over-the-counter stock market (RASDAQ) patterned in part after the U.S. NASDAQ. Cumulative foreign investment in Romania rose $450 million in the first eight months of 1996 to reach $2.05 billion. Finally, in 1996 the country successfully returned to international capital markets, borrowing $1.5 billion.

Preliminary indications are that Romania's economy will grow 4.8 percent in 1996, down from 6.9 percent in 1995. (Per capita GDP measured in dollars has remained stable at around $1,550.) An important factor contributing to slower growth was severe weather, which delayed agricultural planting and sharply cut production. Pushed by election year spending, the consolidated fiscal deficit may reach 4 percent of GDP, considerably above target. This failure coupled with a government attempt to manage exchange rates caused the IMF to hold up planned disbursements of $200 million.

The European Union remains by far Romania's largest trading partner. In the first nine months of 1996, the EU received 54.3 percent of Romania's total merchandise exports and provided 61.6 percent of its merchandise imports. In contrast, the United States accounted for only 2.1 percent of Romania's exports and 3.8 percent of its imports during the same period.

2. Exchange Rate Policy

Motivated by a desire to keep domestic energy prices low, the Romanian government slowed depreciation of the leu through administrative measures. Foreign exchange dealing was restricted to four pliant banks, three of which are state-owned. By late 1996, the system had created a severe disequilibrium in foreign exchange markets, with importers and investors complaining that they could not find dollars at the official reference rate. In late November, the leu was under severe pressure with the gap between the official reference rate (3500 lei/$1) and the rate available at exchange houses (5000/$1) exceeding 40 percent. The administrative controls on the foreign exchange rate are seen factors curbing exports and imports.

3. Structural Policies

Economic reform has entailed creating new laws in virtually every sphere: commerce, privatization, intellectual property, banking, labor, foreign investment, environment, and taxation. In 1995, the Romanian Parliament enacted laws on bankruptcy and mass privatization. This was followed in 1996 by the passage of antitrust legislation and a modern copyright law, which includes protection for software. A draft law on bank privatization was before Parliament in late 1996. Since 1989, Romania has also gradually liberalized prices and ended most direct producer and consumer subsidies. The main areas of exception are energy, public transportation, bread, milk and meat.

In contrast to progress in legislation and price liberalization, Romania has moved slowly to restructure heavy industry, which remains largely in state hands. Private sector job growth and an election year pause in labor shedding by state enterprises pushed unemployment down to 6.2 percent in late 1996, the lowest level in five years. The government maintained a policy of supplying selective indirect subsidies to state-owned industries, many of which are inefficient and highly intensive energy consumers. The backlog of inter-enterprise arrears, both in the public and private sectors, totalled an estimated $6 billion, equivalent to 16 percent of GDP.

4. Debt Management Policies

In 1989, Romania's foreign debt was virtually zero due to the policy adopted by former dictator Ceausescu to reduce foreign influence over the Romanian economy. After the revolution, foreign borrowing resumed, and by the end of 1996 medium and long term external debt amounted to $5.7 billion. In spite of the rapid run-up of external obligations, 1995 debt service amounted to only 11 percent of Romania's exports of goods and services.

Romania has had three standby agreements with the International Monetary Fund (IMF) since 1991. The initial two agreements were terminated by mutual agreement when Romania proved unable to meet targets for monetary growth. Romania is currently out of compliance with the third agreement due to the government's reluctance to liberalize the foreign exchange market and curtail the fiscal deficit. The shortfall of IMF funding has been more than offset by $1.5 billion in borrowings from international capital markets during 1996.

5. Significant Barriers to U.S. Exports

Traditionally defined trade and investment barriers are not a significant problem in Romania. There are no laws which directly prejudice foreign trade or business operations, but high tariffs can make some U.S. goods (in particular, agricultural products, computers and telephone equipment) uncompetitive in the Romanian market. Romania is a World Trade Organization (WTO) member but not a signatory to the WTO government procurement agreement.

The changing legal and regulatory environment has been a source of difficulties affecting foreign participation in the Romanian economy. There is little experience in western methods of negotiating contracts and, once concluded, there is no effective means to enforce contracts. In addition, title insurance is not available for property acquisitions and purchasers are potentially subject to legal challenge by former owners or managers. The absence of effective legal means for pressing claims against debtors is a further complication for foreign investors.

The cost of doing business in Romania is high, particularly for office rentals, transportation, and telecommunication services. Lack of an efficient, modern payments system further delays transactions in Romania. The capital requirements for foreign investors are not onerous, but income taxes are steep. Foreign companies investing over $50 million qualify for certain tax exemptions.

Investment barriers are few in Romania. The Foreign Investment Law allows up to 100 percent foreign ownership of an investment project (excluding land), and there are no legal restrictions on the repatriation of profits and equity capital. Foreigners are permitted to lease land. Governmental approval of joint ventures requires extensive documentation. U.S. investment in Romania is increasing and by mid-October 1996 totaled $164 million, ranking the United States fifth among foreign investors.

Romania will need to attract more foreign direct investment as a source of funding for its current account deficit. This will require taking effective steps to cut both the cost and risk of doing business in Romania.

6. Export Subsidies Policies

The Romanian government does not provide export subsidies but does attempt to make exporting attractive to Romanian companies. For example, the government provides for the total or partial refund of import duties for goods that are processed for export or are incorporated into exported products. The Romanian Export-Import Bank engages in trade promotion activities on behalf of Romanian exporters of goods produced in Romania.

There are no general licensing requirements for exports from Romania, but the government does prohibit or control the export of certain strategic goods and technologies. For example, the government has on occasion banned the export of various commodities due to domestic shortages. There are also export controls on imported or domestically produced goods of proliferation concern.

7. Protection of U.S. Intellectual Property

Romania has made significant progress in the area of intellectual property protection since the end of the communist era. Patent and trademark laws are in place. Copyright legislation, which was enacted in 1996, has sparked new interest among American technology firms in investing and marketing their products in Romania. The Romanian government has proven receptive to offers of international assistance in enforcement, but has yet to establish a strong enforcement record in the copyright area.

Pirated copies of audio and video cassette recordings are available, but not openly displayed. In a few cases, pirated films are broadcast via local cable television stations. Illegal compact discs sold in Romania are imported, but there are no known exports of pirated products from Romania. Prior to the introduction of the new copyright law, 1995 losses to U.S. companies due to piracy of intellectual property were estimated by private industry associations to be in the range of $100 million.

8. Worker Rights

a. The Right of Association: All workers except public employees, police, and military personnel, have the right to associate freely and to form and join labor unions without prior authorization. Labor unions are free from government or political party control but may engage in political activity. Labor unions may join federations and affiliate with international bodies, and representatives of foreign and international organizations may freely visit and advise Romanian trade unionists.

b. The Right to Organize and Bargain Collectively: Workers have the right to bargain collectively. Basic wage scales for employees of state-owned enterprises are established through collective bargaining with the state. There are legal limitations on the right to strike only in industries such as defense, health care, transportation, and telecommunications, which the government considers critical to the public interest.

c. Prohibition of Forced or Compulsory Labor: The Constitution prohibits forced or compulsory labor. The Ministry of Labor and Social Protection effectively enforces this prohibition.

d. Minimum Age for Employment of Children: The minimum age for employment is 16. Children as young as 14 may work with the consent of their parents or guardians but only "according to their physical development, aptitude, and knowledge." Working children under 16 have the right to continue their education, and employers are obliged to assist in this regard.

e. Acceptable Conditions of Work: Minimum wage rates are generally observed and enforced. The Labor Code provides for a standard workweek of 40 hours, with overtime for work in excess of 40 hours, and paid vacations of 18 to 24 days annually. Employers are required to pay additional benefits and allowances to workers engaged in dangerous occupations. Nevertheless, some labor organizations press for healthier, safer working conditions. The Ministry of Labor and Social Protection has established safety standards for most industries, but enforcement is inadequate and employers generally ignore the Ministry's recommendations. On average, women experience a higher rate of unemployment than men and earn lower wages despite educational equality. The average gross monthly wage in September 1996 was around $150, insufficient to provide a decent standard of living for families with a single wage earner.

f. Rights in Sectors with U.S. Investment: Conditions do not appear to differ in goods-producing sectors in which U.S. capital is invested.

(1) Suppressed to avoid disclosing data of individual companies.

Source: U.S. Department of Commerce, Bureau of Economic Analysis

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