2009 Index of Economic Freedom

Quick Facts

Population:

• 21.6 million

GDP (PPP):

• $225.2 billion
• 7.9% growth
• 6.1% 5-year compound annual growth
• $10432 per capita

Unemployment:

• 4.1%

Inflation (CPI):

• 4.8%

FDI Inflow:

• $11.4 billion

Romania's economic freedom score is 63.2, making its economy the 65th freest in the 2009 Index. Its score is 1.5 points higher than last year, reflecting improved scores in five of the 10 economic freedoms. Romania is ranked 29th out of 43 countries in the Europe region, and its overall score is higher than the world average.

Romania has steadily restructured its economy, improving economic freedom in many areas and achieving an average economic growth rate of approximately 6 percent over the past five years. The overall regulatory framework is streamlined and efficient. The top income and corporate tax rates are a flat 16 percent. The financial system is consistent with international standards and has been enhanced by a recent reform and privatization program that has privatized 39 of Romania's 41 banks.

There are several remaining institutional challenges to economic freedom. Labor freedom, property rights, and freedom from corruption lag behind other countries in the region. Although Romania has made some progress in the fight against corruption, the judiciary remains vulnerable to corruption and inefficiency.

Background Back to the top

Romania is a fast-growing member of the European Union and NATO, and the government has been implementing economic reforms that are consistent with the Maastricht criteria. The minority government of the National Liberal Party and the Hungarian Democratic Union in Romania, led by Prime Minister Calin Popescu Tariceanu, remains dependent on the tacit support of the former communist Social Democratic Party. GDP growth rose during the first quarter of 2008 as a result of government spending, foreign investment, and generous expansion of credit. Growth should level off following the 2009 parliamentary elections if, as expected, government spending is reduced. Macroeconomic improvements have spurred the growth of the middle class and have helped to reduce poverty.

Business Freedom 74.9 Back to the top

The overall freedom to conduct a business is relatively well protected under Romania's regulatory environment. Starting a business takes only 10 days, compared to the world average of 38 days. Obtaining a business license takes about the same as the world average of 18 procedures and 225 days. Closing a business can be a lengthy process.

Trade Freedom 85.8 Back to the top

Romania's trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 2.1 percent in 2005. Non-tariff barriers reflected in EU policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent customs administration across EU members. Restrictions on biotechnology and sanitary and phytosanitary regulations exceed EU policy, and corruption and the enforcement of intellectual property rights are problematic. Ten points were deducted from Romania's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 87.0 Back to the top

Romania has low flat tax rates. Both the income tax rate and the corporate tax rate are a flat 16 percent. Other taxes include a value-added tax (VAT), a land tax, and a vehicle tax. In the most recent year, overall tax revenue as a percentage of GDP was 28.1 percent.

Government Size 70.0 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 31.6 percent of GDP. Most small and medium-size public enterprises have been privatized, but privatization of large-scale companies has been sluggish.

Monetary Freedom75.0 Back to the top

Inflation is moderate, averaging 5.6 percent between 2005 and 2007. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. It also influences prices through regulation, subsidies, and state-owned enterprises and utilities. Ten points were deducted from Romania's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom60.0 Back to the top

Foreign and domestic investments receive equal treatment under the law. Deterrents to investment include judicial and legislative unpredictability and cumbersome and non-transparent bureaucratic procedures. Residents and non-residents may hold foreign exchange accounts, subject to some restrictions. All payments and transfers must be documented. Most restrictions on capital transactions have been removed, but derivative-based transactions still require approval. EU citizens may own land in Romania, subject to reciprocity in their home countries, and foreign investors are allowed to acquire non-agricultural land for business use.

Financial Freedom50.0 Back to the top

Romania's financial supervision and regulation are largely consistent with international standards. Significant reforms since the late 1990s include the privatization of many state-owned banks. Of Romania's 41 banks, 39 are in private hands, and foreign-owned banks account for close to 90 percent of banking-sector assets. The five largest commercial banks control 60 percent of total assets, and state-owned banks hold less than 6 percent, down from 75 percent in 1998. Privatization stalled in December 2006 when the state halted the sale of its majority stake in the State Savings Bank. There is no current timetable for reviving stalled privatization. Capital markets are underdeveloped compared to those of other Eastern European countries, and most trading involves government debt.

Property Rights35.0 Back to the top

Investors have expressed concern about unpredictable changes in legislation and weak enforcement of contracts and laws. The judicial system suffers from corruption, inefficiency, and excessive workloads. Romania is a signatory to international conventions concerning intellectual property rights and has legislation protecting patents, trademarks, and copyrights, but enforcement is very weak.

Freedom From Corruption37.0 Back to the top

Corruption is perceived as widespread. Romania ranks 69th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. The government's Anticorruption Strategy, which includes enforcement of laws and procedures to combat money laundering and tax evasion, has produced an improvement in Romania's ranking. Accession to the EU has also spurred gains against corruption.

Labor Freedom57.1 Back to the top

Romania's rigid labor regulations hinder employment and productivity growth. The non-salary cost of employing a worker is very high, and the difficulty of firing a worker creates a disincentive for additional hiring. Regulations related to the number of work hours are not flexible.