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U.S. DEPARTMENT OF STATE ROMANIA: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES BUREAU OF ECONOMIC AND BUSINESS AFFAIRS ROMANIA Key Economic Indicators (Million of U.S. dollars unless otherwise noted) 1992 1993 1994 Income, Production and Employment: Real GDP (billion 1992 lei) 5,982.3 6,060.0 6,181.2 Real GDP Growth (pct.) -13.8 1.0 2.0 Nominal GDP (billion current lei) 5,982.3 19,737.2 50,000.0 Nominal GDP 18,407.0 25,901.8 30,300.0 By Sector: Industry 8,227.3 9,505.9 12,784.0 Agriculture/Forestry 3,477.5 5,568.7 7,990.0 Construction 803.0 2,590.1 1,053.9 Transport/Telecommunication 1,176.9 1,295.1 1,663.4 Trade/Tourism 2,430.7 2,745.5 3,533.2 Other Services 2,291.6 4,196.5 3,275.5 Net Exports of Goods & Services -1,588 -1,239 -300 Real GDP Per Capita (USD) 807 1,136 1,328 Labor Force (millions) 11.4 11.3 11.3 Unemployment (pct.) 5.4 9.3 10.2 Money and Prices: Lending Interest Rate (pct.) 39.1 56.7 88.7 Rate on Deposits (pct.) 29.7 34.3 72.5 Retail Inflation 210.9 256.1 70.0 Official Exchange Rate (lei/USD) (annual average) 325 762 1,652 Balance of Payments and Trade: Total Merchandise Exports 4,363 4,892 5,900 Exports to U.S. 84 39 144 Total Merchandise Imports 6,260 6,521 6,600 Imports from U.S. 223 202 220 Trade Balance -1,846 -1,631 -700 Trade Balance with U.S. -139 -163 -76 Aid from U.S. 20.1 34.7 44.1 Aid from Other Countries 156 180 180 Debt Service Payments 185.9 369.2 958.1 Gold and FOREX Reserves Net (1) 44.0 315.0 951.5 (1) Total banking system net foreign assets; end of period. 1. General Policy Framework With a population of 22.8 Million, a highly educated labor force, and substantial exploitable natural wealth, Romania offers a potentially attractive market for U.S. trade and investment. For the next several years, however, Romania's economic performance -- and thus its demand for imports -- will continue to be constrained by the slow pace of privatization and the decline of its traditional heavy industries. In the years immediately following the December 1989 revolution, the Romanian economy was buffeted by the shock of adjustment to international price levels (especially for energy and raw materials), the elimination of the former central planning apparatus, and the collapse of its traditional COMECON markets. From 1989 to 1992, Romania's GDP contracted by 29 percent; industrial production declined 38 percent; and output in the transport and telecommunications sector fell 50 percent. Exports dropped 60 percent (from $10.5 To $4.3 billion), limiting the country's ability to pay for much-needed imports of fuel and capital goods. More than one million workers lost their jobs in the state sector and open unemployment -- not seen for decades in Romania -- rose to about 10 percent of the labor force. Job-holders also suffered as average monthly wages fell to around $115 per month -- about one-half the pre-revolution level. The economy bottomed out in 1993 and may have grown by up to 1.0 percent due to a 14-percent weather-related surge in agricultural output and anemic growth in industry. However, declines continued to be registered in construction activity and especially in services, where the growth of private retail and service establishments failed to offset the continuing decline in some consumer services and in goods and passenger transport volume. Preliminary estimates for 1994 indicate that the economy may have finally turned the corner, to achieve unambiguous growth in most sectors. The consensus is that the nation's GDP will have grown by about 2.0 percent in 1994 due to an anticipated 5-percent jump in agricultural production, the small private sector's growth, a revival of building activity, and a mild export-led recovery in industry. However, the pace of growth is unlikely to be sufficient to prevent a further rise in unemployment, to perhaps 11 percent, by the end of 1994. Although Romania is committed to the development of a market economy, state ownership of most means of production continues five years after the overthrow of communism. Nevertheless, steady -- if slow -- progress toward privatization is being made. Ninety-six thousand square kilometers of arable land have been returned to private farmers (benefitting over 5 million individuals in the process), nearly 400,000 new private companies have been created, and some 850 state enterprises have been privatized through management and employee buy-outs. In September, 1994, the government submitted its long-awaited mass privatization legislation to the parliament, proposing the privatization of an additional 3,000 state-owned enterprises via a modified voucher system. This law cleared the Senate in December 1994. If implemented in its entirety, the bill would transfer an estimated 10-12 percent of Romania's GDP to private hands by the end of 1995. Progress has been much more visible in the non-state sector, which now makes up an estimated 35 percent of Romania's economy. In late 1994, private firms and individuals accounted for about five percent of industrial output, 25 percent of construction activity, 40 percent of services turnover, and 80 percent of farm production. More significantly, the private sector now employs an estimated 50 percent of Romania's occupied labor force (5.0 million out of 10.1 million) including 3.0 million farmers, 1.5 million owners and employees of private firms, and 0.5 million self-employed individuals. The reintegration of Romania into world markets is a central feature of the government's economic policy. Romania signed an association agreement with the European Union in December 1992. The European Union is by far Romania's most important trading partner. In 1993, it took 39.3 percent (or $1.924 billion) of Romania's total FOB merchandise exports of $4.892 billion, and provided 42 percent ($2.741 billion) of its total CIF merchandise imports of $6.525 billion. In contrast, the United States accounted for only 1.3 percent ($61.9 million) of Romania's exports and 4.3 percent ($282.1 million) of its imports in 1993. Despite this difference in relative trade flows, Romania places special emphasis on improving bilateral economic relations with the United States. As a result of the restoration of most-favored-nation tariff status with the United States in November 1993; U.S. ratification of a bilateral investment treaty in December 1993; and the return to Romania of the U.S. Export-Import Bank and the U.S. Overseas Private Investment Corporation; prospects for expanded bilateral trade and investment are much improved. For example, in the first nine months of 1994, Romanian exports to the United States increased 182 percent, while imports from the United States rose 12 percent. Since late 1993, the National Bank of Romania has implemented a tough IMF-backed macroeconomic stabilization package that has succeeded in cutting annual inflation from around 300 percent in 1993 to less than 70 percent in 1994, restored real positive interest rates in the financial sector, increased domestic bank deposits, and stabilized the leu. A parallel Government of Romania austerity program is holding the central government fiscal deficit to about 3.0 percent of GDP. In the Fall of 1994, the Romanian government implemented painful budget-driven personnel reductions in the headquarters staffs of most non-defense-related ministries. For example, the Bucharest staffs of the Ministries of Agriculture and Food, Industry, Transportation, and Commerce were all reduced between 40-55 percent. 2. Exchange Rate Policy As a part of its macroeconomic stabilization package, the National Bank of Romania liberalized the foreign exchange auction system in April 1994. The reform, which replaced the former administered rate with a market-clearing rate, substantially eliminated the gap between the official rate and that prevailing in the system of legalized exchange houses. The relative stability of the leu since that time (it has gone from lei 1650 to lei 1750/$) has generally restored public confidence in the national currency and allowed the National Bank to implement a second-stage liberalization -- involving the creation of an interbank market -- beginning in August 1994. As of November 1994, six commercial banks have been authorized to freely trade the Romanian currency. However, any number of corporate customers can theoretically buy hard currency through these authorized broker/dealers. In late 1994, the interbank market appeared to be performing well without any noticeable shortage of dollars. Moreover, the spread between the leu/dollar rate of exchange on the interbank market and the exchange house rate was holding stable at around 6-8 percent. Despite the substantial liberalization of the foreign exchange regime, the leu is not yet freely convertible. The National Bank of Romania maintains a number of restrictions aimed at preventing capital flight. Thus, the removal of more than token amounts of lei from Romania remains illegal. Romanians are prohibited from holding foreign bank accounts, though they are permitted to own U.S. dollar-denominated bank accounts in local banks. Foreign exchange restrictions, though somewhat liberalized, also remain in effect. For example, Romanian citizens are allowed to buy only $1,000 worth of hard currency per year on an unrestricted basis. For those traveling abroad, the limit is set at $5,000 per person per trip. Furthermore, commercial companies must obtain an import license prior to buying hard currency, though this appears to be less of a problem in late 1994. In September 1994, the National Bank issued a directive requiring all domestic transactions between Romanian individuals and/or legal entities to be conducted in lei. 3. Structural Policies Economic reform has entailed creating new laws in virtually every sphere: finance, commerce, privatization, intellectual property, banking, labor, foreign investment, environment, and taxation. Among the more recent developments are the July 1, 1993 introduction of an 18-percent value added tax; the May 24, 1994 government ordinance reforming local taxation, the August 11, 1994 passage by the parliament of a securities and exchange act; and the August 31, 1994 promulgation of a new tax ordinance on corporate profits. Despite these achievements, several gaps remain in the legal framework. Chief among these are the absence of a modern bankruptcy code, a modern copyright law which includes protection for software, legislation on the restitution of properties nationalized during the communist era, and the previously-mentioned mass privatization bill. Draft bills on all of these subjects were before the parliament in late 1994. Since 1989, Romania has gradually liberalized prices and eliminated most direct producer and consumer subsidies. The main areas of exception are coal production, public transportation, and household energy and heating. In food products, the principal remaining subsidies by summer 1994 were on bread and milk. However, in October 1994, the government announced its intention to reimpose "temporary" wholesale price controls on pork, chicken, eggs, cooking oil, and sugar. The major sources of central government revenue in Romania are an 18-percent value added tax, a 38-percent tax on most corporate profits, and a salaries tax which rises to 60 percent for the portion of salary in excess of 816,000 lei per month (about $470). Together these three taxes accounted for about 83 percent of total central government revenues in the first half of 1994. Romania's generally high customs duties make up only 6 percent of total central government revenues. Gradual adjustments to the tariff schedule will be required to bring Romania into harmony with the European Union by the end of the decade. As a result, rate differentials will increasingly favor imports from the European Union. 4. Debt Management Policies During the 1980's, former dictator Nicolae Ceausescu directed the liquidation of all foreign debt via accelerated repayments and forced exports in order to reduce foreign influence over Romania. By April 1989, Romania's debt was virtually zero and the country was a net external creditor. After December 1989, foreign borrowing was resumed, and by the end of 1994, medium and long-term external debt amounted to about $4.3 billion (and overall the country was again a net debtor). Nonetheless, in 1993, debt service payments still amounted to a mere six percent of Romania's exports of goods and services. However, debt service is now growing and in 1994 is expected to reach about 15 percent of exports of goods and services. Romania signed a standby agreement with the IMF in May 1991, which provided for $500 million in balance of payments assistance plus up to an additional $400 million in contingency and compensatory assistance. This program was terminated in February 1992 by mutual agreement when, as a result of the buildup of debt among state-owned enterprises (essentially soft supplier credits), it became evident that Romania would not be able to meet the IMF target for monetary growth. Another standby agreement was negotiated in May 1992, providing for assistance totaling $440 million. This program was also terminated by mutual agreement before the final tranche of assistance had been drawn. Negotiations for a third program began in March 1993. In February 1994, the Romanian Parliament approved the draft "memorandum on economic policies" and a preliminary 1994 budget in line with the proposed program. In May 1994, the IMF approved Romania's request for a 19-month standby arrangement in the amount of SDR 131.97 million and a first drawing under an SDR 188.5 million systemic transformation facility. 5. Significant Barriers to U.S. Exports There are no laws which directly prejudice foreign trade, investment, or business operations in Romania. Traditionally defined trade barriers are generally not a major problem, though there exist areas of exception. In mid-1994, Romania imposed a system of reference prices for imports of chicken parts (about 85 percent of which came from the United States) in order to protect its largely state-owned chicken industry. In fall 1994, Romania also sharply increased import tariffs on new and used automobiles in order to support its struggling domestic manufacturers. The Government of Romania welcomes foreign investment and generally makes good faith efforts to assist in resolving disputes involving U.S. and Romanian firms. However, impediments to bilateral trade and investment can arise from cultural differences, the nature of the reform process, or attitudes and practices carried over from the days when Romania's economy was centrally planned. Formal 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, but under the constitution are prohibited from owning land. Governmental approval of joint ventures is required but has not impeded the formation of such ventures. The Romanian Development Agency attempts to match foreign investors with Romanian partners. In 1994, the Government raised the minimum investment requirements for registering foreign investment to $10,000 from $100. Despite the best efforts of the Government of Romania, a number of problems continue to restrict the level of foreign investment to relatively low levels. For example, gaining clear title to property remains problematical and any purchases are potentially subject to legal challenge by former owners or managers. The situation is further complicated by the absence of bankruptcy legislation and, hence, a means for pressing claims against debtors. The large amount of red tape which accompanies many transactions and the need to deal with overlapping local bureaucracies can prove frustrating to foreign investors. Corruption is a major problem and, in certain instances, can pose an actual business risk. The changing legal and regulatory environment has created difficulties which affect foreign participation in the Romanian economy. There are few legal specialists qualified to interpret the commercial implications of recent Romanian legal developments and there is little experience in Western methods of negotiating contracts. Once concluded, there is often no effective means of enforcing agreements. The cost of doing business in Romania can also be unexpectedly high, particularly rents for offices and charges for telecommunications and business services. The lack of an efficient modern payments system (checking accounts do not yet exist) further complicates transactions in Romania. Payments can only be made in cash. Corporate income is generally taxed at a rate of 38 percent. In addition, the government levies a 10 percent dividend withholding tax. The recent revision of the corporate profits tax eliminates nearly all future investment tax holidays. However, foreign companies investing over $50 million may still qualify for a seven year tax exemption. Romania has no income tax, but instead imposes a steeply progressive salary tax which rises to a 60 percent marginal tax rate on all salaries above $470 per month. Since 1990, Romania has registered over 38,000 commercial companies with foreign capital participation. The total value of foreign investment surpassed $940 million in October 1994. The overwhelming majority of the investment is small scale. U.S. company investments range from a few hundred dollars to many millions and are increasing in value and number steadily. As of October 17, 1994, U.S. investments in Romania were worth $95.7 million, a virtual tie with the value of investments from Germany, Italy, and France. 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. A September 1994 government decision permits the Romanian Export-Import Bank to engage 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 goods and technologies. For example, the Government has, on occasion, banned the export of various commodities (especially foodstuffs) due to domestic shortages. There are also export controls of imported or indigenously produced goods of proliferation concern. Romania is not a signatory to the GATT subsidies code or government procurement code but has indicated its eventual intention to subscribe to both codes. 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. New patent and trademark laws have been enacted. A new revised copyright law, which will provide protection for software, is expected to be submitted to the parliament shortly. All legislation in this field has been modeled after international standards and norms and has been reviewed by international experts. The Government of Romania has expressed its intention to have in place in 1995 a complete set of intellectual property laws consistent with European Union norms. Nonetheless, the lack of copyright protection has caused some American firms to be reluctant to invest in Romania. Pirated copies of audio and video cassette recordings are openly marketed and inexpensive. Some are apparently produced locally, but many appear to be imported from elsewhere in the region. The U.S. Embassy in Bucharest is not aware of pirated goods being produced in Romania for export. 8. Worker Rights a. The Right to Association Current labor legislation adopted in 1991 guarantees all workers except government employees, police, and military personnel the right to associate, to engage in collective bargaining, and to form and join labor unions without previous authorization. The right to strike is specifically guaranteed, although union members have been frustrated with the courts' propensity to declare illegal the major strikes on which they have been asked to rule. Legal limitations on the right to strike exist only in certain critical industries involving the public interest, such as defense, health care, transportation, and telecommunications. Union members have continued to criticize certain aspects of the 1991 legislation, but no consensus has been reached on how the laws should be amended. Past studies have indicated that the legislation falls short of International Labor Organization (ILO) standards in several areas, including the free election of union representatives, binding arbitration, and financial liability of strike organizers. Although the legislation is supportive of collective bargaining as an institution, the contracts that result are not enforceable in a consistent manner. This situation is caused in part by inadequacies in the law itself and by problems created by continued state ownership of most major industries. In 1994, the government and the major labor confederations moved to promote a new tripartite collective bargaining relationship among the government, labor, and private sector. Current legislation stipulates that labor unions are independent bodies, free from government or political party control, with the right to be consulted on labor issues. No worker can be forced to join or withdraw from a union, and union officials who resign from elected positions and return to the regular work force are protected against employer retaliation. In practice, the government does not seem to exert any control or influence over labor union activities. In 1994, however, several steps were taken toward politicization of the Romanian labor movement. In July, Miron Mitrea, the Executive President of CNSLR-Fratia, Romania's largest labor confederation, was selected as the president of a dormant political party created by the trade unions. Fearing that party might merge with the ruling Party of Social Democracy, Victor Ciorbea, President of CNSLR-Fratia, announced in August that he had formed an alliance with the opposition Democratic Convention and the National Trade Union Bloc, another major confederation. In a declaration signed by the three parties, each pledged to develop joint programs but to maintain "complete independence." In October, Ciorbea set up a new labor confederation, "The Confederation of Democratic Trade Unions of Romania." The majority of Romanian workers are members of some 18 nationwide trade union confederations and smaller independent trade unions. Virtually all unions concentrate on economic issues to protect their members' standard of living, which has continued to decline because of increases in consumer prices and uncertainty caused by the transition to a market economy. Labor unions may freely form or join federations, and affiliate with international bodies. The Alfa Cartel and CNSLR-Fratia are affiliated with the World Confederation of Labor and the International Confederation of Free Trade Unions, respectively. Representatives of foreign and international organizations freely visit and advise Romanian trade unionists. The Committee of Experts at the 1994 ILO Conference observed that the treatment of the Roma and Magyar minorities continued to be the subject of debate in the UN Human Rights Committee. It noted that the government, which asserted there were no discriminatory standards against the Roma, had reported that some 22 percent of Roma men and 71 percent of Roma women were unemployed. The committee noted with interest the measures taken by the Government to promote better integration of the Roma in the society and the government's establishment of the Council for National Minorities, which monitors the problems of persons belonging to those minorities. The committee urged the Government to supply information about the work of that council, and information about the programs being taken to provide education, training, and employment for the ethnic Hungarian population. b. The Right to Organize and Bargain Collectively Current legislation permits workers to organize into unions and to bargain collectively. In January, the Locomotive Engine Drivers Federation lost an appeal in which it tried to overturn an original court decision that had declared its August 1993 strike illegal. As a result of that strike, several union leaders and strikers were summarily fired. The absence of effective employer groups, because of continued state control over most industrial resources, complicates collective bargaining efforts. c. Prohibition of Forced or Compulsory Labor The constitution prohibits forced or compulsory labor. The Ministry of Labor and Social Protection (MOLSP) effectively enforces this prohibition, and no instances of abuse were recorded in 1994. d. Minimum Age for Employment of Children The minimum age for employment is 16, but 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. The MOLSP has the authority to impose fines and close sections of factories to enforce compliance with the law. No violation of this policy was documented in 1994, and child labor did not appear to be a problem. e. Acceptable Conditions of Work Most wage scales are established through collective bargaining. However, they are based on minimum wages for given economic sectors and categories of workers set by the government after negotiations with industry representatives and the labor confederations. Minimum wage rates are generally observed and enforced, although employers' financial difficulties often result in nonpayment of wages or postponement of payment. The labor code provides for a work week of 40 hours or five days, with overtime to be paid for weekend or holiday work or work in excess of 40 hours. Paid holidays range from 15 to 24 days annually depending mainly on the employee's length of service. Employers are required by law to pay additional benefits and allowances to workers engaged in particularly dangerous or difficult occupations. Draft legislation regarding occupational health and safety is still pending in parliament. The MOLSP has established safety standards for most industries and is responsible for enforcing them. Enforcement, however, is not good because the MOLSP lacks sufficient trained personnel, and employers generally ignore its recommendations. Some labor organizations have pressed for healthier, safer working conditions on behalf of their members. Though they have the right to refuse dangerous work assignments, workers seldom invoke it in practice, appearing to value increased pay over a safe and healthful work environment. Neither the government nor industry, still mostly state owned, has the resources necessary to improve significantly health and safety conditions in the work place.