Kissing the Frog

Reforms in Romania had to be initiated under lack of political pluralism, no articulate union pressure prior to 1989,1 and lack of openness and transparency. In economic terms, the system was plagued by a structural strain (Daianu, 1998) characterized by severe resource misallocation. This misallocation was so extensive, that the economy has suffered from its energy-intensiveness for many years after the start of the reforms. Moreover, almost all productive assets were state owned and private property was non-existent. Furthermore, at the start of the transition process the Romanian economy suffered from the attempt of the communist regime to repay all foreign debt ahead of schedule. Consequently, in 1989, Romania had no foreign debt, but it was all at the expense of domestic consumption and technology upgrading. Given the magnitude of the required resource reallocation following liberalization (strain), and all against the backdrop of structural rigidities, disorganization (Blanchard and Kremer, 1997) and scarce domestic resources imports played a major role in the ailing Romanian economy. Thus imports boomed immediately after the fall of the communist regime. This was coupled with a sharp decline in technologically redundant exports and the collapse of the common market of the former communist states COMECON in 1990. The economic basis for reforms in Romania was therefore very weak, and many economists consider that this poor legacy led to a path-dependency explaining why Romania still lags behind the front-runner transition economies (Daianu and Voinea, 2003).