American Journal of Applied Sciences 1 (2) 121-128, 2004 ISSN 1546-9239 © Asian Network for Scientific Information, 2004 121 A Causal Relationship between Inflation and Productivity: An Empirical Approach for Romania Nikolaos Dritsakis Department of Applied Informatics University of Macedonia, Economics and Social Sciences, Thessaloniki, Greece Abstract: This study attempts to analyze the relationship between the productivity and the inflation for a transition country of European Union as Romania. For this purpose we use quarterly data from 1990:IV to 2003:I and the causality analysis, which is based on an error correction model. The results of the empirical analysis showed that there is a causal relationship between inflation and productivity in Romanian economy. Key Words: Productivity, Inflation, Granger Causality, Cointegration, Romanian Economy INTRODUCTION The starting point for the transition process in Romania was more difficult than in other countries in Central and Eastern Europe. Pre-transition policies emphasized self- dependence, putting excessive focus on heavy industry and large infrastructure projects. This strategy led to the depletion of domestic energy sources and induced costly dependence on imports of energy and raw materials. During 1980s there was no growth in exports in order to repay the debt imports from the West. The technological lag increased significantly as a result. Towards the end of the 1980s the Romanian economy was on the verge of collapse and, unlike other transition economies, no attempts to reform had yet been tried. Given this difficult legacy, the dominant political forces in place since the early 1990s advocated a gradualist approach, seeking to minimize the social costs associated with the transformation to market. The 1993 OECD Assessment of the Romanian economy pointed out clearly the risks associated with the delaying structural reforms. A key point in the Assessment was that, without deep restructuring of the economy, macroeconomic stabilization could not be sustained. Therefore, since 1993 the boost in exports and the apparent success in reducing inflation under the stabilisation policy of Romanian economy were noted. The Seville European Council (1996) encouraged Romania to pursue its efforts for accession in European Union and also reiterated its commitment to provide full support to this candidate country. Romania is expected to join the European Union on the basis of the same economic and political criteria that had been set by the Copenhagen and Madrid European Councils (1993, 1995) as well. As confirmed by the Laeken European Council (2002) the accession process is now irreversible. The European Commission recommended, on the basis of Copenhagen criteria, that Romania shouldn’t be included in the first group of countries with whom negotiations should be opened. Finally, Romania was invited at the Helsinki summit meeting in December 1999 to start negotiations for membership. The substantive negotiations started in March 2000. Romania on the basis of last Regular Report of European Union fulfills the political criteria as defined by Copenhagen European Council (1993). However, Romania still needs to improve legislative and decision making processes, while judiciary reforms should be made political priority. The government’s policy supports the institutions of human rights and protection of local minorities. Important steps were taken to implement the National Strategy for improving the Condition of Roma. Romania has continued to make progress towards being a functioning economy with competitive market. Sustained and full implementation of planned measures together with the completion of the reform agenda should allow Romania to be able to cope with competitive pressure and market forces within the Union in the medium term. The historic decision adopted by EU at Helsinki meeting in December 1999 to include Romania in the group of candidate countries, signifies that Romania has moved to a new stage of its European integration process. Economic integration is to be facilitated by bringing new opportunities for trade, and as the economic environment becomes more attractive, by increasing foreign direct investment inflows. To this end, ‘‘Europe Agreement’’ provides the chance to Romania to have easier access in the economies of the European Union’s member states.