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Romania: OECD Finds Economic Reform Brings Hardship

London, 9 March 1998 (RFE/RL) -- A new report published under the auspices of the Organization for Economic Cooperation and Development (OECD) provides a sober assessment of the Romanian economy, but says present reforms must be given time to work.

The report says the "shock therapy" program of economic reforms adopted by the new government last year has been accompanied by growing economic hardship aggravated by the closure of inefficient companies and the lay-off of workers.

The report cites a drop in industrial production; a predicted rise in unemployment; and estimated inflation in 1997 of 150 percent. But it says: "Nothing would jeopardize the prospects of sustainable recovery more than a retreat from the current reform program."

It says Romanians are paying the price for the "ill-conceived" decision of administrations since 1990 to follow a gradual approach to restructuring rather than a bolder one. Hence, there has been no sustainable gain in living conditions in the past seven years. It says: "The costs of past policy choices are to be borne by the painful adjustment process that the economy now needs to undergo."

The report notes that the 1996 elections brought to power a new administration with a strong political mandate to implement wide-ranging structural reforms, making up for the seven "lost" years.

The new government reestablished a dialogue with international financial organizations, and committed itself to an ambitious shock therapy program of economic and institutional reforms.

The program included the liberalizing of prices in the farm and energy sector; allowing the exchange rate to be market driven; reducing import tariffs; and removing subsidies on goods. The stabilization plan also included a restrictive monetary policy.

So has the reform program produced results? The report says its speed and scope are "impressive", even in comparison with shock therapies adopted in other transitional countries. But Romania faces short-term pressures as it lifts the dead weight from its economy.

The closure of inefficient companies, the lay-off of workers and the disruption of previous economic networks are provoking social strain. High interest rates are depressing demand and investment.

The report says that under the impact of tighter financial policies industrial production fell by 18.7 percent in September last year compared with the same month in 1996. It says some sectors -- chemicals, for instance -- have suffered 40 percent declines.

The report says that Romania's gross domestic product may fall in 1998 by about 6.5 percent. It says unemployment, which remained at a "surprisingly moderate level" of seven percent until late-1997, is expected to rise as restructuring gathers pace.

It says: "Romanian enterprises have shed much labor in recent years, but further restructuring and downsizing is needed."

The report says monthly inflation accelerated to 30.7 percent in March last year under the impact of price liberalization, but fell to 6.5 percent last October. On a 12-month basis, the rate of inflation by end-1997 "will probably be around 150 percent." One goal of the reforms is to achieve a rapid and sustainable cut in inflation.

Economic hardship has been growing: real wages fell sharply in the first half of the 1990s, and a further decline occurred at the beginning of 1997. (Real wages fell more and remained lower for a longer time in Romania than in most of Central and Eastern Europe). The government privatization program for 1997 was "ambitious", targeting more than 2,700 companies, of which 263 were large enterprises, mainly in industry. But the program has run behind schedule, achieving perhaps only half of its targets by end-1997.

But a number of positive factors could contribute to a pick-up in economic activity in 1998. Inflation is expected to slow. Exports should benefit from stronger market growth. Increased foreign investment is apparent. The budget deficit is expected to be cut.

Prospects may be promising in industries that produce light consumer goods such as clothing, furniture, and electrical equipment, as well as in trade, tourism and other private services.

The report says Romania has big development potential. With better management of its natural and human resources, it could join the ranks of the well-performing emerging market economies.

The report says, "In sum, Romanian authorities have embarked on an ambitious but long overdue program of economic reforms. The adjustment process will be difficult over the next few years. . .it may take some time for a strong rebound in activity to occur."

"Nevertheless, this strategy is the only viable option for the government if it is to build the basis for sustainable growth: The costs of slowing down or retreating from the current program would ultimately be higher than the costs of persevering."

The report is published by the Paris-based OECD's Center for Cooperation with Non-members, established in January this year.