I guess that when you are the head of such an organization as the International Monetary Fund (IMF) you can only appear to be as good as your speech writer manages to make you. I read the recent speech made by Ms. Lagarde while in Romania and my reaction was to ask myself whether this was actually about Romania! It is not about a Romania that I recognize. I guess their speech-writing is like the IMF’s approach to economic policy making; one-size-fits-all. A quick copy and paste is all that is required for the next country.
I had hoped we were going to see an enlightening of the IMF’s attitude towards Romania, but this appears to be more of the same; it is about IMF self-justification; not about critically analyzing its own performance so far.
Let me mention a few of my own thoughts on having read the speech – that can also be read here.
Taking a fairly random starting point, the speech reminds us that Romania has a large untapped workforce. It does not; its workforce is being tapped by whichever entity that is willing to provide its migrant workforce with better opportunities than its own woefully, austerity-depressed economy. Mass emigration to find work may be some people’s measure of success (and it can be such if you choose to use the official ‘residual’ unemployment statistics) but it is not mine.
This just seems to highlight what I consider a major lack within the IMF’s Romania thinking: that of a thorough understanding of how inhibited by its own bureaucracy Romania’s business and, hence, wealth and employment creation environment is. There is actually a mention of doing something about this towards the very end of the speech, but it appears as little more than an after-thought. It certainly does not carry the weight I would expect to be attributed to the most fundamental of issues in Romania, and the one that is so seriously holding back Romania’s economic development.
Again like so many ‘speeches’ about Romania this one relies on macro-economic figures that are unlikely to give the real picture. Understanding the whole only comes from ‘drilling-down’ through the data and then marrying it up to the acquisition of knowledge about what is really happening on the ground (macro level information is after all only the consolidation of micro-information). Talking about ‘growth’ (as a percentage of what) or budget deficits (as a percentage again, of course) is superficial in the extreme. After several years of being a dictator of economic policy in Romania, it would have been good to have been reading about something more in-depth, thorough and less reliant on these most superficial of statistics.
And then we get the mention of how Romania has stabilized its economy. Okay, great, we have reduced the budget deficit, but at what cost? Austerity has driven down demand and produced growth of barely above zero. Yes, Romania is technically not in recession, but that does little to put food on the table or fuel in the stove. Also would it not be better to ask just how does 1 percent growth in GDP per capita in Romania compare with 1 percent in Germany in absolute terms (EUR per capita)? Yes, Romania does have vast economic potential; and within that context its failures are even greater. Even to keep the pace with the likes of the German population, Romania’s GDP per capita, when expressed as a growth percentage has to grow by several percentage points per year. Please stop insulting our intelligence with such superficial information; give is some real data that reflects reality; the use of percentage growth figures is just ‘spin’.
The budget deficit is another pretty meaningless item of information when taken in isolation from its underlying causes. In Romania the cause was an unreformed business environment that was horrendously exposed once the property bubble burst, a very poor fiscal system, and the weak management of public funds in general and public procurement procedures specifically. These are the reasons why Romania has an underlying budget deficit. It is and was not about excessive public spending on, say teachers or health service workers; they were after all earning what, EUR 200 per month? That was hardly profligate. And austerity for them meant an immediate 25 percent salary cut. Not to mention an increase in their cost of living via an increase in VAT on pretty much everything (including VAT on basic foods, unlike in so many countries). And yes, that also included ‘successfully’ realigned upwards energy cost increases. And one should also ask: what safety nets? Clearly the speech writer had little grasp of that particular reality in Romania.
And before I forget to mention it, I was pleased to read about that other much lauded measure of success, the attraction of foreign direct investment. When this comes in the context of selling the ‘family silver’, is it really that great a success? Just how much of Romanian business is now foreign-owned, exchanged for a one-off injection of capital to balance the national books? It is the solving of a short-term crisis by mortgaging the future of generations of Romanians. At least with a loan there is the possibility of full repayment and, hence, a finite commitment whereas foreign investment means long-term, infinite profit repatriation. There can be positive attributes to investment, foreign or otherwise, but it is a little blasé to assume that it is a fantastic measure of success. Yes, it is a means of acquiring capital but it can also be a very expensive one.
And this links nicely to my concluding point: the success of the Vienna Initiative. I have been reading around a lot recently and the Vienna Initiative has come up in the context of Romania (Romania rarely gets a mention from those who write about the Crisis or Austerity, it is not a Euro country so it is off the radar). As I understand it, the Vienna Initiative was about persuading Romania’s 95 percent or so foreign-owned banks from withdrawing their capital from Romania to prop up their home/core banking businesses elsewhere; to stop them sacrificing their Romania operations for the greater good. Now that sounds laudable and maybe we, taking on a presumptuous position of representing the People of Romania, should be grateful. But here is the link: the foreign direct investment that acquired Romania’s banking system led to contagion; it dragged Romania into the banking crisis through no fault of its own.
So in protecting the capital in Romania’s banking system, the Vienna Initiative was a success; or was it? Now as I understand it, the quid pro quo for the support of those who counted (I think we all know who they are) when it came to persuading the banks not to withdraw their capital from Romania was that Romania should adopt Austerity. I am not sure just how explicit this was as I was not present, but it certainly something that I have read about. If so, why were they linked, one was about stopping a widespread private-sector-created banking crisis spreading to Romania, the other was about reducing a national public-sector budget deficit? If this was indeed the case, Romania got Austerity as a direct result of the banking crisis. Hence, the welfare of Romania’s people, amongst the poorest in Europe, was directly linked to a banking crisis of which they had absolutely no responsibility for.
The imposition of Austerity in itself may not have been so bad if it were not for Austerity being entirely the wrong approach for Romania. Romania got it because it was the current economic-policy fad of the moment (one size fitted all again), not because of an in-depth understanding of what was actually happening in Romania or, indeed, what was needed.
As a consequence Austerity has delivered little; it has contracted demand and reduced the attractiveness of Romania as a place to invest and to create genuine wealth, employment and growth. That is if one believes that growth in consumer demand is what drives business investment decision, and not the austerity-believers idea that austerity drives down salaries, improves profitability and thus stimulates investment, job creation and wealth. From a business perspective I can understand the former whereas the latter is, to me, an unproven theory that will eventually be seen for what it is; a politically-driven mechanism by which yet further wealth continues to be transferred from the austeritized to the few (who are still doing alright, thank you very much).
There now appears to be a growing school of thought that ‘austerity’ is a failed and flawed economic policy and I certainly believe it is and was with respect to Romania’s economic policy needs. But, sadly, judging by what the IMF has to say, it appears ‘steady as she goes’, this particular ship is not yet ready to acknowledge the need for doing a policy U-turn. And that is of course fine, just so long as we are happy to continue to ignore the welfare of the Romanian people.
By Stuart Meikle, guest writer