Academic journal article Global Economic Observer

Impact of the Financial Crisis on Small and Middle Enterprises in Romania. the Differences between Urban and Rural Evolutions

Academic journal article Global Economic Observer

Impact of the Financial Crisis on Small and Middle Enterprises in Romania. the Differences between Urban and Rural Evolutions

Article excerpt

1. Economic background

The beginning of the new millennium meant economic recovery for Romania, driven by the implementation of the acquis communautaire, expansionary fiscal policy, increased banking flows, the contribution of foreign direct investment and the favorable external circumstances. All of these have created a favorable macro stabilization in a post-transition economy in Romania and facilitated recovery of domestic production.

The global economic crisis was felt in Romania beginning with second half of 2008. This was imported to some extent, in particular by reducing external demand and foreign investors' reluctance to allocate resources in a turbulent environment. But the most important effects occurred due to an overlap of external shocks and a much deeper structural crisis, which the Romanian economy dragged over time.

One of the causes of the economic crisis in Romania was the very engine of economic growth which proved to be unsustainable in the long term. Consumption credit needs, based on current and real estate speculation (at the expense of investment in human capital or fixed capital accumulation) have also contributed to the economic growth once the international context has worsened.

Moreover, fiscal policy was a pro-cyclical one and expansionist budget deficit increased from 0.8% in 2005 to 5.4% of GDP at end-2008. As government revenues were boosted by an overheated economy, increasing govermnent spending in projects with low multiplier effects as well as increasing public wages above productivity. This policy significantly affected the much needed fiscal space for economic recovery.

In early 2009, in order to avoid a bottleneck in financing external deficits and to pay pensions and salaries of civil servants, the government resorted to loans and assistance from the International Monetary Fund, World Bank, European Bank for Reconstruction and Development and the European Commission worth about 20 billion euro. Moreover, policy makers have been forced to cut wages by 25% from the public department due to the steep drop in revenue from the state budget.

The evolution of the structure of GDP shifted over the past 20 years in the Romanian economy. From a share of about 44% of GDP in 1990, the industrial production has come to represent 31% in 2000 and 26% in 2008, amid operating under potential or even closing representative factory in monoindustiial cities. The services sector has significantly increased its share in GDP from 26% in 1990 to 55.6% in 2010, but it's still far from the EU mean (73.7%) (Lazea,V., 2008, p.231). In what follows, the author analyzes the impact of the economic crisis on the Romanian enterprises and how their dynamics influenced the sectoral share of GDP.

2. Impact of the economic crisis

The exceptional economic context of the last decade reflects some of the vulnerabilities and difficulties faced by businesses in Romania. Despite the large turmoil on financial markets, small and middle enterprises (SMEs) were one of the vectors of post-crisis job recovery and an element of overall economic recovery. This article attempts to perform a comprehensive analysis regarding the role of active enterprises in the internal economy, marking the SMEs demographic issues and their contribution to economic progress.

With the adoption of Law no. 31/1990 and Decrees-Law no. 66 and 67/1990, has been registered a veritable "explosion" of new private businesses due to reduced role of SMEs in the pre-transition period. The transition to a market economy in Romania in the 1990s meant, essentially, the evolution of two major components for the local suppliers of goods and services on the market: transfer of ownership of enterprises from state to private individuals (privatization) and the emergence of new enterprises, as a result of private initiative. These two evolutions occurred more or less simultaneously, and at different rates, which generated large effects on the labor market. …

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