Studies Eastern European Markets
Eastern European Markets
August 2007

Tauno Tiusanen
Northern Dimension Research Centre
Publication 44
Lappeenranta, 2007

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In the pre-communist era Bulgaria and Romania were agrarian societies with modest living standard. In the period of central planning both countries went through a shock therapy of industrialization and urbanization. Both societies changed fundamentally in a very short period of time.

Rapidly built industries in Romanian and Bulgarian communist era did not follow market rules, but directives fixed in state planning units. After introduction of market rules in the early years of the 1990s it became clear that many industrial outlets in Bulgaria and Romania are not viable under circumstances of global capitalism. In both countries unemployment started increasing rapidly. Some de-urbanization took place: people started to migrate to the rural economy in order to survive. Large-scale emigration took place. In economic policy-making there were attempts to mitigate the effects transition by subsidising industries and postponing privatisation. Therefore, these two countries were called laggards in the sphere of economic reform which resulted in relegating both Bulgaria and Romania in the list of EU-candidates in the historical Eastern enlargement of EU in 2004.

Obviously, this is an extremely superficial description of economic history in Bulgaria and Romania in the early period of transition. This short report tries to shed light on the very clear turnaround, which has taking place in the economies of Bulgaria and Romania in the turn of the century. Both EU newcomers have very clear dynamism in their respective economies combined with rather well advancing stability. However, inflation rates are clearly higher than in Western Europe. Current accounts show high deficits in Romania and Bulgaria, but strong FDI inflows in both countries help to finance these deficits conveniently.

Bulgaria and Romania are at the bottom of the living standard scale in EU-27. Thus, these two countries cannot afford to have a tight social safety net. Rather massive emigration from post-communist Bulgaria and Romania has taken place. Both countries have still relatively high unemployment rates.

Therefore, it is obvious that there is plenty of social tension in the newest EU member states as income differentials are high. Corruption and organised crime do not vanish with EU membership. Political stability can obviously not be guaranteed under present circumstances. In the near-by Hungary, with essentially higher living standard than in Bulgaria and Romania, opposition took to the streets in 2006. There were violent clashes between local police force and demonstrators.

Bulgaria has amazingly low nominal wages which are essentially below the Romanian wage level. Bulgarian’s currency is extremely strongly undervalued. This fact gives supplementary competitiveness to Bulgarian labour intensive manufacturing branches, and in addition, enhances Bulgaria’s price advantage in tourist branch. However, Bulgaria’s current account is in relative terms in deeper deficit than Romania’s with its less pronounced undervalued currency.

It can be assumed that Romania and Bulgaria will compete with each other in attracting FDIs. In the early years of the 21st century, FDI inflow in both countries show rather rapidly increasing trend. This positive phenomenon is highly likely to gain momentum by EU membership.

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