Chapter

I Introduction

Author(s):
Mohsin Khan, and Dimitri Demekas
Published Date:
June 1991
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In December 1989, with the fall of Nicolae Ceausescu, Romania reached a turning point in its history. The provisional Government that took over announced immediately a sharp and permanent break with the past, both political and economic. With respect to the latter, Romania was to abandon the central planning model under which it had operated since the late 1940s, and was to move as rapidly as possible to establish an economic system in which private sector activities would be given maximum scope and market forces would play the predominant role in economic decision making and resource allocation.

The provisional Government designed and implemented a comprehensive reform program aimed at achieving the desired economic transformation. While political leaders recognized that the task of moving from an economic system that was tightly controlled and repressed—possibly more so than in any other Eastern European country—to a market economy would be a daunting one, they nevertheless agreed that there was no alternative. Thus, in 1990, the provisional Government launched a major reform program to restructure the economy, of which two features are particularly noteworthy. First, the program was wide-ranging, touching on all the important aspects of the economy. This is not to suggest that the Romanian reformers possessed a well-defined blueprint for reform; on the contrary, it is apparent that the reform process has been as much of a learning experience for the reformers as it has for the economic agents. Second, the program was essentially “homemade,” in that it was developed almost entirely by the Romanian reformers themselves, who put together the overall strategy and the main elements of the program without the assistance of foreign advisers and multilateral institutions. Only after the basic groundwork had been laid did they solicit and obtain external support and advice.

With the start of the reform program in 1990, Romania joined the ranks of the other reforming Eastern European countries. Broadly speaking, its goals and many of its policies were similar to those of other countries in the region, but with important differences in detail. However, while there is an abundance of literature documenting the experiences of the other countries in the region—notably, Poland, and, to a somewhat lesser extent, Czechoslovakia and Hungary—very little is available that describes the Romanian reform program. This paper, in outlining the program’s main elements against the background of the system that has been operating over the past forty years, aims to furnish the historical perspective from which it will be possible to appreciate the scale and magnitude of the efforts that Romania has made and must continue to make if it is to realize its fundamental goals. Although the Romanian reformers have moved decisively to transform the economy and have achieved much over the past year or so, the reform process is still in a fragile state, and the transition to a fully market-based system is fraught with risks. This paper highlights the strengths and weaknesses of the Romanian economic reform effort at both the conceptual and operational levels, but does not arrive at an overall judgment on the program precisely because its final outcome is not yet clear.

The reformers recognize that their efforts can succeed only in an environment of macroeconomic stability. Accordingly, in January 1991, they launched, with IMF support, a strong and comprehensive macroeconomic adjustment program to complement their reform effort and to put the economy on a sound noninflationary path. The main components of this adjustment program are tight fiscal, monetary, and incomes policies; an appropriate exchange rate policy; and the implementation of a social safety net to give partial protection to the population from the dislocations and costs arising from the transformation of the economy. Because this paper focuses primarily on Romania’s structural reform policies, it does not examine in any detail the macroeconomic adjustment program, which is still under way. It covers elements of the authorities’ macroeconomic strategy only to the extent that they have a bearing on the overall economic reform program.

The remainder of the paper proceeds as follows: Section II describes the economic system before the start of the reform program. Section III discusses the overall design of the program, focusing on the economic, legislative, and institutional initiatives that were taken. Section IV describes the implementation of the main objectives of the reform program—that is, the introduction of market forces in economic decision making; the transfer of ownership of state assets to private agents; and the reduction of the role of government in the economy. The concluding section summarizes what has been achieved to date, and offers some views as to where Romania stands in the spectrum of reforming economies.

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