Date:16 June 2004

Speakers:
Anand Seth, World Bank Country Director for Croatia, Bulgaria and Romania
Rosalina Quentanilla, Senior Economist, World Bank, author of the report
Discussants:
Nicolae Tanasescu, Minister of Finances of Romania
Alexandru Farcas, Minister of European Integration of Romania
Mattias Reute, Director, DG Enlargement, European Commission
Jacob Wegener Friis, DG ECFIN, European Commission

Anand Seth, World Bank Country Director for Croatia, Bulgaria and Romania, declared that Romania is known for being a slow reformer, but that the pace of reforms has recently accelerated. Momentum has been picking up most notably in the areas of macroeconomic adjustment, the banking sector, privatisation and institutional and governance reform. Mr Seth indicated that growth in the past years has averaged 5 % of GDP and inflation has been reduced to 13%. Romania has achieved a high level of trade integration with the EU market and per capita income has increased by 10% since 2000. These figures led Mr Seth to conclude that Romania has evolved in recent years from being a reluctant reformer to becoming a reformer. He further mentioned that Romania still faces an ambitious reform agenda, including institutional and governance reforms completing the structural transformation process, in particular, the privatisation of large state-owned enterprises. The World Bank official underlined the importance of excellent partnership between the European Commission, the International Monetary Fund and the World Bank, for Romania’s reform programme.
 
Rosalinda Quintanilla, Senior Country Economist and lead author of the Romania Country Economic Memorandum (CEM), presented the Romania Country Economic Memorandum. She argued that Romania’s reform programme is closely linked to the process of EU integration, through the accession negotiations, the adoption of the acquis communautaire, institutional and governance reform as well as the economic restructuring. She further noted the remarkable progress that Romania has made in the past four years in terms of stabilisation, growth and poverty reduction, observing that this is due in large part to its strong performance in trade integration with the EU and global markets.
 
Romania has managed to achieve rapid trade expansion in EU markets since 2000, despite adverse external market conditions and slow growth in the EU economy. Although Romania has one of the lowest levels of FDI among the countries in the region, the FDI has had a magnifying effect on employment and exports. There has also been a clear shift in the nature of exports comprising light manufactured goods, clothing and textiles, but more recently also electric machinery and other manufactures. Since 2002, Romania’s exports to the EU have picked up strongly. However, important challenges still lie ahead: there is a continued domination of unskilled labour-intensive products and the end of restrictions on textiles and clothing will come into force in January 2005 under the WTO Agreement on Textiles and Clothing. Finally, Romania’s solid export performance is concentrated in only a few activities around large unrestructured segments of the economy.
 
According to the World Bank report, Romania needs to increase the pace of reforms in order to catch up with other CEECs and to succeed in its integration with the EU. Several main areas of reform were identified. First, Romania needs to proceed with institutional and governance reform, most importantly, reform of its judiciary and public administration. Secondly, the enterprise sector needs to be restructured through, in particular, implementation of the large privatisation agenda. Thirdly, agricultural transformation presents a huge challenge, considering that nearly 5 out 22 million people in Romania are active in the agricultural sector and that productivity is amongst the lowest in the region. Regarding the agricultural transformation, Romania needs to complete the privatisation of state farms and the land restitution process as well as adopt market-driven mechanisms and consolidate the small-scale farming sector. Fourthly, Romania needs to increase the flexibility in labour regulations and invest more in human capital. Fifthly, there is an urgent need to reform the energy sector and to tackle the implicit subsidies by the Romanian state. Further, tariff and collection rates need to be improved. Finally, Mr Quintanilla urged the Romanian government to complete the bank restructuring and to strengthen the financial infrastructure.
 
Romania’s Minister of Public Finance, Nicolae Tanasescu, first made some general comments on the World Bank report, which he felt offered a complete picture of Romania’s achievements and could serve as an important pillar for the Romanian government in preparing Romania for EU accession. He emphasised that it is crucial to remember where the Romanian economy was not too long ago and where it is now, as well as where it intends to be in the coming years. He mentioned for instance the dramatic drop in the inflation rate (from 88% in 1999 to 13% in 2003), the high economic growth since 1999 which is forecast to settle at around 5% for 2004, as well as the reduction of poverty and unemployment (from 10% to 8%) and the increase of the per capita income and external trade. He pointed out that all this remarkable progress by Romania is clearly reflected in the report published by the World Bank. Mr Tanasescu also enumerated certain factors that will allow Romania to move forward in its reform process, such as the implementation of prudent fiscal and monetary policies, tax and tax administration reform, reform of the public institutions, the speeding up of privatisation and liquidation of state-owned companies.
 
Mr Tanasescu considers that a positive climate for investment has been created in Romania, but that substantial challenges still lie ahead. In the area of institutional and governance reform, more attention has to be paid to judiciary reform. Romania needs to further decrease inflation as well as its current account deficit. Further steps have to be taken for the liberalisation of capital and above all Romania needs to increase its capacity to absorb pre- and post-accession funds from the EU, which are quite substantial.
 
Mr Alexandru Farcas, Romanian Minister for EU Integration stated that in the context of EU integration, the Romanian government has to deliver. He reminded the audience that according to the latest Eurobarometer polls, 81% of Romanians are in favour of EU integration. This support gives the Romanian government some leeway in carrying out painful reforms, but at the same time also puts an enormous pressure on the government. Mr Farcas reported that Romania has to date closed the first 24 and more than half of the measures of chapter 31 have also been agreed upon. He underlined the importance of the close partnership between the EU, the World Bank and the IMF in ensuring that Romania moves ahead on all other points on the EU integration roadmap.
 
Matthias Reute, Director in DG Enlargement of the European Commission, stated that certain chapters that are still being negotiated between the EU and Romania are very closely related to the analysis in the report of the World Bank. Mr Reute also declared that the European Commission will be tasked by the European Council to draft a report in order to assess the ability of Bulgaria and Romania to assume all their obligations of membership by 2007. The European Commission will come forward with recommendations and delay the accession of the candidate countries by one year if the negotiated commitments are not met. In the words of the EU official: “We will keep pressure on Romania and Bulgaria”.
 
Jacob Wegener Friis, Administrator in DG ECFIN of the European Commission congratulated the World Bank on a very useful country report and considered that this report is exhaustive in tracing the developments in Romania. Mr Friis decided to dwell on certain technical issues springing from the World Bank report and stated that the most difficult balance to strike is between Romania’s progress and many outstanding issues which are deep-rooted and hard to tackle. In particular, Mr Friis stressed the need for Romania to achieve fiscal sustainability and budgetary stability in the medium-term. He also expressed concern at the fact that Romania is already facing unbalanced pension and health systems, unlike other states in Central and Eastern Europe. He urged the Romanian government to liquidate all loss-making enterprises. The Commission official regretted that the World Bank report has not included data from 2003, which would have made visible the latest trends. He also stated that on one issue he was not in full agreement with the report, namely the World Bank’s recommendation to Romania to limit its customs tariffs as soon as possible. According to Mr Friis, Romania needs revenue from its exports and therefore he is not fully convinced that this measure is advisable three years before Romania’s accession to the EU.