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THE REASONS OF CURRENT ECONOMIC CRISIS IN ROMANIA
ECONOMY
Senior lecturer Cristina Teodora Bălăceanu PhD.
“Dimitrie Cantemir” Christian University, Bucharest
[email protected]
Abstract: The international financial crisis has led to significant changes
of behavior economic phenomena and processes, obvious macroeconomic and
regional imbalances as well as to the identification of new facets of basic
economical research in terms of development and implementation of certain
aggregated indicators meant to predict the role of future development of the
economy and to reduce the scale of crisis negative effects. Crisis occurred
against the background of the monetary system failures transmitted through
monetary policy and its instruments. What caused the current economic crisis is
the result of the enhancement measures in the global economy based on a fiscal
monetary policy mix to support an artificial demand for money independent
structural policies, that widening imbalances between nominal and real
convergence.
JEL Classification: A 10
Key words: economic crisis, economic policy, economic behavior.
Economic crisis in Romania
The economic crisis in Romania is caused by multiple internal and external
factors. With increasing global economic crisis, the Romanian economy has been
affected by real and monetary flow channel with the outside: the contraction of
demand in European economies led to a drastic reduction in business
subcontractors and Romanian exporters (many of traders doing business in the
regime subcontracting or outsourcing), which affected the level of production,
income and profits and jobs. Another consequence of global economic crisis on
the Romanian economy concerns speculative attacks on currency by the euro
monetary lane and attempts to stabilize the exchange rate of the NBR through
nominal instruments that have a negative impact on manufacturers, exporters in
this case, with favorable consequences favorable effects on the population (most
of population is indebted with European currency loans and keeping the
artificially low rate of currency confers borrowers a lower pressure of the debt in
terms of coverage of the revenue productivity. The NBR measures aimed at
controlling inflation, the Governor Mugur Isărescu showing that the main risk
factors on inflation forecast are the conduct of fiscal policy and public sector
revenues as well as the economic structural rigidities which means internal events
(Isarescu, 2010, pp.25).
What I want to explain is that the crisis in Romania is rooted in economic
policy mistakes that have marked the whole period of transition, the lack of
continuity of the reform and vision of the political class in terms of concrete
reform measures that ought to be implemented and correlated with long-term
development strategy.
The approach of the crisis in Romania is not done in accordance with an
economic recovery plan, acting sporadically and with discrimination in some areas
and on relatively short periods, such as: the stimulation of job creation in micro
enterprises, of SMEs activities, the car industry petrochemical and mining,
conversions of debt into shares, state aids to unprofitable areas, contributions to the
budget reductions, offsetting reduction in re-exports from EU countries Romanian
exports on the markets affected by the financial crisis in emerging markets (the
export activities could be stimulated by the opening of five centers in promoting
public-private partnership in Moscow, Beijing, Chisinau, Cairo and New Delhi).
Another series of steps to exit from the crisis concerned the launch of the
programs to facilitate constructions, such as “The First House Project”,
agriculture- “The Farmer project”, car industry –“Jalopy Programme” without an
immediate and beneficial effect on the economy. The success of these programs is
the sequence of monetary, fiscal and budgetary measures promoted by
public-private partnership, taking into account the ability of the debtor's debt
related to purchasing power.
At least at the first sight, there are a few measures regarding the causes of
crises in Romania – the sudden break of crediting, the low level of liquidities and
the lack of external commands.
The programme of economic recovery in Romania should focus on the
following types of economic measures (Bălaceanu, 2010, pp. 31):
1. Budget expenses decrease
The budget expenditures in Romania are 40% of GDP, while budget revenue
is 31-32% of GDP. The measures to reduce budget expenditures set up by
government until May 2010 had not the effect of reducing the budget deficit, on
the contrary, they have amplified it. It requires that measures to reduce public
spending should be done while creating the prerequisites for private sector
development: on the one hand to absorb the redundant public sector staff and
secondly to increase the tax base (by increasing the number of firms and economic
activities in the real economy) as a source of revenue available to the public
investment budget for development use.
The measures taken by government as a result of the fourth part according to
the Agreement with IMF, decreasing the budgetary staff’s salaries by 25% and
pensions by 15%, followed some fable trials of diminishing public expenses
achieved at this moment, which made the budgetary deficit overpass the target
aimed by Romania in accordance with IMF Agreement of 5,9% in 2010, and the
rhythm of economic increase be negative for the second year. 1 These tough
measures are the consequences of an obvious social instability which led to the lack
of jobs, increase of energy and fuel price and a lower cost of living. The
1 International Monetary Fund (FMI) reviewed the prognosis of economic growth for Romania
from 1,3% to 0% or event o a negative number, of -0,5%, but the economic growth is expected up to
the end of the year, the chief of IMF mission, Jeffrey Franks, stated on Monday.
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differentiated salary decrease may be a solution to reduce the material and
psychological impact of the crisis for those persons with low and very low incomes.
To reduce budgetary expenditure, the Government has worked with the
abolition of government agencies, a position that has not had the desired effect,
and the entire process has been accused of lack of logic. There were abolished
agencies financed from European funds or that financed themselves without the
effects of spending to be visible. Regarding the budget staff redundancies, the
government has acted very hesitantly. Official pronouncements have created more
confusion and decisions were delayed. Against this background hesitant
advantage of creating pressure unions protest, many of them settled in court,
which created the prerequisites installed a state of unrest and social tension,
resistance from anti-crisis measures that affect society in salary bill. In the
absence of measures to reduce social costs incurred by the Government,
redundancies seem unavoidable.
Besides the internal crisis management, the Government is facing external
pressures in the implementation of measures to facilitate the change over to the
euro timetable or assuming specific conditions required to implement Europe
Strategy 2020. Thus, to enter the euro zone, Romania needs to achieve nominal
convergence indicators that require measures to lower the budget deficit to 3% of
GDP, which means, by default, the device tough budgetary measures such as
freezing wages. Moreover, the changeover to the euro also requires real
convergence measures involving among others, growth of per capita income,
increase of purchasing power, coverage of wages in labor productivity, increase of
capacity to support economic development.
What surprises is the fact that to achieve real convergence necessary to the
changeover to euro area, Romania needs investments, especially public
investments, measures to support private initiative and business through fiscal
and monetary instruments, which implicitly are related to the adjustment of the
budget deficit through increased public expenditures. Thus it becomes somehow
uncertain that the government may adjust economy to fit in certain budgetary and
fiscal targets, and render it more flexible for the needs of growth and development
without using budgetary anchors.
The European strategy for 2020 aims to increase the employability of people
aged 20 to 64 years to a rate of 75%. In this regard, the private sector will be
motivated and supported to absorb labor force: either the market will be
recovered, which implies growth of demand, and by default, the job offer, or there
will be taken measures regarding job- reorientation to new economic innovating
activities that benefit from etatist support to develop, such as the development of
unconventional energy productions, production of ecological goods or that type of
goods and services that are popular on foreign markets.
The fact is that in Romania in the a number of active population in budgetary
sector is very high, the organizational structure of autonomous and public
institutions is crammed which draws inefficiency in public expenditures in an
economy that cannot provide for consumption through domestic production. In
the last three years, namely between 2006 and 2008, the public sector increased
by 250,000 employees, the number of jobs in public sector fell by 36,404 during
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December 2008-February 2010, respectively a reduction from 1398867-1362 .463
jobs1. On medium term, we must return to 2006 level, not in one year, the lays-off
being done over several years. To identify the optimal number of jobs necessary to
public system it is necessary to identify some formula inventory necessary to
identify the need for personnel by activities and economic activities the yield of
which being assessed on the basis of actual benefit to society. Thus, the state will
be driven by corporate principles and the adjustment of costs will be made
according to the state economy and the premises of its growth and development.
The threat cornering our country as a result of the widening the budget deficit and
external debt is loss of sovereignty over the state budget management, by default
on the formation and allocation of public revenues in economy.
2. fiscal and monetary measures for encouraging and supporting
the business field
Overcoming the crisis effects and restoring economic growth are concrete
measures to support its business, able to create jobs and to adjust domestic supply
demand of economic goods. These measures regard direct grants to producers,
support for the economic sectors to ensure production needs, economic
development of zones and regions and decrease of the tax burden.
Grants - is a controversial measure. Mostly taking this action is discretionary,
favoring political clients or certain economic areas. The system of grants should be
directed to priority areas with potential economic development, namely those
endowed with natural resources, labor absorption capacity of economic assets, the
grant thus facilitating the development of economic activities. Among the
economic sectors that are favored by the system of grants, there are agriculture,
handicraft industry, constructions, and facilities of health resorts, rural tourism,
and the development of energy sector using renewable energy resources.
Fiscal tax decrease - meant to attract investors and to facilitate
competitiveness on markets by reorienting capital to those areas where the yield
should be as higher as possible. The fiscal pressure is a premise of development of
underground economy and corruption encouragement. Also, under economic
conditions of legality, the trader will act to increase the selling price of the
product. In any case, increasing taxes in the economy will not act to increase
budget revenues, with revenue channels through which to escape from taxation
trap. Both state and citizen will be injured due to taxable mass loss and the
increased market price of products or loss of employment.
Differentiated VAT practice - to orientate the productive activity in economy
that should attract additional investments and implicitly jobs or to support the
initiative of the local producers that favour and develop an area
Interest rate decrease - to support credits which should stir initiative in
private and business field. As it is known, the crisis was generated by reducing the
interest rate through monetary policy in particular the U.S. economy which
encouraged excessive consumption at the expense of savings. In Romania, the
lenient conditions on the financial market and economic growth perspectives
1
4
Statements according to Finance Ministry Secretary of State George Gherghina.
Vol. II, no. 3/september, 2010
attract a huge flow of capital, especially speculative capital on short-term
2004-2008. These capital inflows were used by the banking system to expand
credit to support unsustainable consumption and investment. Once triggered the
international crisis, the Romanian economic sectors based on foreign capital were
among the first affected, the crisis has occurred suddenly, when interest rates no
longer reflect the cheap money policy with direct impact on private sector jobs.
The solution for this desperate situation consisted of measures particularly severe
adjustment of costs in the private sector, emphasis on policies to boost
productivity, increased competitiveness both in price (cost reductions both
materials and labor but increasing use of intensive technologies and the
production factors) and quality to attract new market segments, particularly on
foreign markets.
What I tried to emphasize is that this crisis (lack of liquidity and limited
access to credit) has regenerated mainly the private sector creating the
prerequisites for certain development strategies based on the intense use of
production factors and compliance with the needs of a certain creditworthy
customer class.
Also, another advantage of the crisis can be identified in stimulating savings
and eradication of wasteful tendencies manifested by a number of economic
agents in a position to absorb the market.
It would have been ideal for most Romanian companies to show that attitude
to the crisis. It is precisely the spending large budgets proliferation of both
companies and individuals or the state during the economic boom period, that
have emphasized the dramatic fall of the Romanian economy with fewer
opportunities for recovery in a short period of time without international support.
IMF together with the European Union in Romania have injected liquidity to
gradually restore growth and reduce the budget deficit, on the one hand, and the
current account deficit on the other hand. The result is far from being a revival of
economy, but deeper disparities when state expenditures also affected the private
sector. The necessary measures aim at promoting policies to support private
sector to generate revenues meant to support an adjusted public sector.
It also intends to stimulate differently the economic sectors according to the
expected competitiveness by promoting technical progress and scientific research,
with positive impact on occupancy rates and long-term average. These sectors
should benefit from interest rate reduction or the possibility of scheduling
investment credits.
3. promotion of measures packages supporting the private-public
partnerships in the field of education and public health
In Romania, public health and education systems are close to collapse. It is
difficult to attract funds from the state budget under the circumstance of negative
economic growth for the second consecutive year and a budget deficit to reach 7%
of GDP in 2010. In these conditions, it is necessary to reinforce measures to
attract private sources of financing for the two sectors to become compatible and
competitive with similar systems in the European Union.
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Education- requires a reorientation of the educational policies to render
more flexible syllabus and adjust them to current and future of the European and
world economy. Educational services should be approached considering both the
flexibility and the efficiency of market structure. Investment in education is
recovered while the productivity proved by labor force dragged into the economic
process. Romania should develop the education system together with economic
growth and development to provide jobs and increase the attractiveness of the
Romanian economy for the younger generation whose education should meet
higher qualitative requirements.
Another measure to improve education is implementing life long learning
active educational policies in order to increase productivity and interest of the
work force according to development requests of the employer and the market.
Health- needs financial, logistic and human capital support. The fact that an
important percent of the revenues of an economic manufacturer or consumer
went in financing the Romanian health system, was not sufficient for the increase
of the system’s competitiveness and the efficient administration of the funds
allocated to its functioning due to various causes such as: deficient administration
of public funds, obstruction of the financing channels between the state budget
and the insurance and health units, insufficient funds compared to the high
number of health institutions managed by the public system. The solution would
be decentralization of the health system and keeping the right number of health
units that would minister the real needs of the population; the privatization of a
number as highest as possible of the health units in order to attract financing
sources that would increase the quality of the medical services and financing of
medical services for that part of the population having financial difficulties or a
low income; the awareness of the population toward the need to use health
insurance policies as a result of the decrease of funds allocated to completely cover
the medical services; in crisis or not in crisis, the Romanian economy can no
longer completely finance the public services because of the decrease of the active
working population; therefore, the health system competition between the public
and private institutions must be supported.
The current problems of the educational and health systems in Romania have
deep causes: the proliferation and externalization of losses, maintaining a diverse
and overloaded organizational structure, with services unadjusted to the present
development requirements and therefore, unwieldy, inflexible on the market. The
state will have to partially give up on managing these entities in order to promote
public – private partnerships for an increased capacity in financing and
management, attracting investments that would develop them into more reliable
and competitive systems.
4. attracting investments and facilitating public-private partnerships
Developing public–private partnerships implies that the state offers techical
support (location and units) and the companies ensure the capital and the work
force. In these conditions, there will be made infrastructure works, utilities,
medical and educational services the high costs of which cannot be covered only
from the budget; the success of such a partnership is represented by the power of
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negotiation and agreement in advantageous terms, having as the consumer as a
final winner.
The idea of launching public–private partnerships is not new. Even since 2002,
the government has launched an ordinance (16/2002) which regulated this type of
business, however its stipulations were extremely restrictive, limiting the partnerships
to constructions field, and the selection procedures were not transparent. For that
matter, the ordonance was revoked in 2006, after numerous failures and from that
moment on there has been a legislative gap. The Government1 wishes the modification
of the Concession Law in order to make the public–private partnerships more
attractive for the business environment and admits that, the present implementation
frame is insufficient for motivating and attracting significant investments through
public–private partnerships type of projects.
The need to implement public-private partnerships is a consequence of lack
of funding in the public sector and reduced capacity to manage public resources to
enhance the competitiveness of public services. It is also important to develop the
public sector and the possibility of acquiring private sector managerial experience
necessary for efficient and consistent management of public resources.
Developing public-private partnership involves firstly the amendment to the
legislation by which the resources and interests of both parties should be
considered and transparency in decision-making process for managing capital
should increase.
5. legislative modifications meant to render labour market more
flexible
It is necessary to liberalize the labor market, to render supply and demand
more flexible as a result of an efficient allocation of labour resources and increase
of staff's remunerations according to the productivity. The quite high pressure of
public employees2 and pensioners3 makes the employees’s yield decrease, unlike
employees in the budgetary sector, mostly with political support and union, who
are paid in accordance with the labor productivity and turnover. Low
remuneration is a consequence of low productivity unlike the EU countries, the
low labor productivity of employees has made multiple causes including: low
competitiveness of economic assets made, particularly in foreign markets, low
capital endowment of labor, low share of domestic consumer goods in a basket,
making the volume to be low revenue producers. A solution to this effect would be
more competitive by investing in quality and research as well as in
professionalism of labour force.
In late December 2009, the number of employees in economic field was
4367.7 thousand, less with 51,500 unlike November 2009 and with 370,900more
1 The declaration of Prime Minister, Emil Boc during the meeting with the representatives of
the Association of Municipalities in Romania, 22nd of February, 2010, dailybusiness.ro
2 Number of posts in public sector employment fell by 36,404 in December 2008-February
2010, a reduction from 1398867-1362463 posts actually filled, according to statements the Secretary
of State in the Ministry of Finance George Gherghina.
3 The Ministry of Labour now are 5521, 5000 retired people with an average pension of 677 lei,
pension point value is 732.8, the minimum wage is 600 lei, the number of registered unemployed is
765,300 people with a unemployment rate of 8.36%
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compared to December 2008. In economic fields, in industry, the number of
employees fell by 214,000 in 2009 (14.4% of the herd), companies operating in
the construction sector dropped to 78 900 employees (17%), those in trade
dropped to 47,900 employees (6.2%), while the public sector - administrative,
army, health and education reduced the number of employees by 10,600 (1% of
total). Since the beginning of the crisis, namely the end of September 2008, the
number of employees decreased by 466,000.
As seen, the crisis seems to have affected only the private sector, meaning
that it moves according to the economy that have reduced the sales and business
performance, staff have been adjusted, as well. The public sector efficiency can be
analyzed in terms of revenue collected to cover expenses through tax levies
imposed to private sector that employed active population: the Ministry of
Finance announced that it has managed to remain within budget deficit target of
7.3% agreed with the IMF considering some budgetary revenues of 31% of GDP
(156.625 billion lei) and expenses of 38.2% of GDP (193.025 billion lei).
Due to the economic crisis, the industrial sector in Romania recorded a
certain growth, particularly through external orders especially in the automotive
sector, facilitated by Jalopy Programme in Germany. Industrial output growth in
November and December 2009 while reducing the number of employees with
14.4%, resulted in a significant increase in labor productivity in industry: +35.4%
in December and +12.5% throughout 2009 against the corresponding period of
previous year. In 2008, labor productivity increased by 4.8% and 9.9% in 2007.
Moreover, last year production increased faster than wages, so in these sectors,
Romanian companies became more competitive. Currently, industrial production
growth is based solely on labor productivity growth, but productivity gains of
20-30% are impossible to be maintained on long-term. It is obvious that once
economic growth and programs austerity agreements are resumed in western
countries, the orders of Romanian products will continue only as long as they are
competitive.
Romania's economy is in a state of collapse due to economic policy mistakes
of the past 20 years. The solution for this situation involves first that each
individual should have a rational behavior, public or private entity and
understanding that once it is a component of an integrated system, either the EU
or the global economy, things will move in the right direction only if we
understand that work and honesty, respect for the laws and their adaptation to
current realities of the real economy will become steps that any government or
citizen will follow. An important element of reform is labour flexibility and besides
it, the change of labor law giving employers the opportunity to adjust the number
of employees according to the needs and actual conditions of the economy, to
impose quality standards for their labor force and thereby raise the level of skilled
labor force. It is necessary for the educational policies to adjust themselves to the
specific of the labor market and business environment for better mobility and
labor flex security. Any curriculum in school and university must include elements
of entrepreneurship to give prospective employee skills and training practice
meant to ensure both efficiency and complementarity with all fields of economy.
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6. reorientation of the State role in Romanian economy
The State should give confidence in the quality acts and deeds done, to guide
the economy through coherent economic policies and development programs to
provide continuity initiated at the national level. In Romania there is no multiannual, strategy for managing the economy, multi-transparent, transparent and
compatible with EU requirements in development that the government and
political parties should implement and that should give confidence to citizens and
institutions in the act of governing. Besides it, the act of government is
totalitarian, unilateral and discretionary, it does not take into account the
interests of citizens, the democratic values are understood and enforced
erratically, and individuals have no common social values because they do not
believe in the idea of community, national interest, achievement of ideals and
welfare through joint activities, group, and society.
Currently, it requires a redefinition of the role in the economy following the
proliferation of the economic and world financial crisis, import of economic
instability and accelerated fundamental economic disparities: the widening
budget deficits and current account deficit, exacerbated unemployment rate and
diminished purchasing power by powerfully contracting the demand.
In this case, the State becomes an active and competitive economic
stakeholder, through pulses of economic, fiscal and monetary policy encouraging
businesses agents to invest in the economy to create jobs. There is no rule that
automatically creates jobs, which is guided by state economic leverage job
creation by subsidies, tax reductions for capital investment, tax reductions or VAT
exemptions for certain commodities to encourage moderate consumption and
support offer.
It is the State that must support large infrastructure works by allocating
public revenues for investment or to support and facilitate public-private
partnerships. For a redefinition of the role in the economy is sufficient to identify
what we expect from the state:
 concrete measures to reduce political clientele in the act of decision in the
economic system;
 accelerate the development programs with European support; it aims at
setting up a buffer fund to absorb European funds used for financing European
projects, initiation and promotion campaigns to inform citizens through
municipalities and territorial agencies need to attract European funds,
particularly in rural development to increase standards of living areas and adapt
to current standards of civilization;
 support the rule of law, rules and procedures to ensure surveillance and
control social-economic activities, adjustment of the current standards of living to
the current standards of civilization;
 identify opportunities for regional economic development and orient
traders through trade policies to export competitive economic goods;
 reclaiming those businesses uncompetitive traders through clear and
consistent application of laws in liquidation and bankruptcy, including the system
of penalties in economy;
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 identify the optimal level of taxation in the state to raise revenue from the
underground economy, including recourse to incentives for traders through tax
amnesty;
 asking advice from the Advisory Board of experts from various economic,
technical, social fields to expertise actions by central and local government, and
thereby increase the transparency, consistency and efficiency of economic decisions;
 filtering of views trainers and decision-makers in the political
environment by an advisory council composed of technocrats to check the power
and effects of short, medium and long term economic policy provisions;
 protection and conservation of work resources by investing in educational
training programs tailored to develop entrepreneurial skills of the company,
motivating increased education and training by awarding scholarships (replacing
camps summer camps for students with creative ones where students develop
skills and practical competences of diagnostic analysis in business);
 introduction of development models for citizens through personal example
and best practice, human behavior and professional rational conduct evolved
through civil society and media;
It seems that the crisis generates a need for switching of government optics,
economic policies and political class’s expectations. At the same time, each
individual need to change his mentality and attitude towards democracy and its
crystallization by making proof of rational behaviour regarding consumption
versus income, savings to protect pensions, professional trainings and lifelong
learning seminars to increase labour productivity as premises of wage growth.
Crisis could mean moving to a complete economic and social maturation stage. On
the other hand, crisis could also mean understanding that unless we produce to
meet a proportion as high as possible of consumption, the debt for import
pensions and salaries in the budgetary system will cost us whole generations of
sacrifice, competent and competitive labor migration, wasteful use of natural
resources still publicly owned and not least the failure of the control right over the
budgetary resources.
BIBLIOGRAPHY
[1] Cristina Bălăceanu, (2010), Sequential approach of the Romanian
economy before and after accession, Universitara Publishing House, Bucureşti.
[2] Mircea Coşea, (2009), Too late, too little, too slow, Business Adviser
Publishing House, Bucharest.
[3] Mugur Isărescu, (2010), Inflation Raport, august, www.bnro.ro
[4] Paul Krugman, (2009), The return of depression on economics and the
crisis of 2008, Publica Publishing House, Bucharest.
[5] Andrei Marga, (2009), The crisis and after the crisis, Eikon Publishing
House, Cluj-Napoca.
[6] Nouriel Roubini, Stephen Mihm, (2009), Crisis Economics, Publica
Publishing House, Bucharest.
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