Consolidation of positive development?

Creating positive expectations – Analysis by Florin Pogonaru

Statistical data published by CNS and NBR, as well as statements made by Romanian officials and Western analysts are arguments that confirm the tendency for economic recovery. Macroeconomic indicators suggest favourable developments against past periods. At the same time, there are favourable signals from international financial institutions, which were manifest in the release of the IMF loan instalment and the opening of capital flows from World Bank and EU programmes. A clear definition of the objects of negotiations with these institutions, the firmness in abiding by economic legislation measures and those targeted at reducing fiscal pressure contribute to re-establishing economic agents’ confidence in stabile rules of the same (by contrast with the previous periods). All these factors materialise in positive perceptions of economic growth and in turn create positive expectations for the future. Creating positive expectations deserves so much more praise given that it takes place in an election year (when, paradoxically, there have been no major populist moves meant to affect economic growth), by contrast with the previous year, when all expectations were for economic collapse. It is for the first time in the last four years when economic developments create positive expectations. But it is still hard to determine to which extent these developments are only circumstantial and whether they will attain the critical mass needed to generate real economic growth. It is premature to say, for instance, whether a lower profit tax on export activities has generated structural changes in export production and in conquering new markets for Romanian products, or whether it has only stimulated hard currency repatriation. In the second case, effects would only be beneficial in the short term. But they do reflect the heightened sensitivity of economic agents to reducing fiscal pressure and opportunities for reinvesting hard currency from exports, as trust is regained in legislative stability. All of this clearly demonstrates that in Romania, too, reducing fiscal pressure is important for economic growth. The question is whether there is sufficient trust in the monetary and fiscal system, and in rulers’ capacity to size the budget deficit so it can ensure a sustainable economic development. At the same time, it remains to be determined whether the private sector has the real capacity of transposing fiscal incentives into structural changes (whether the stage of primary accumulation has been swapped for accumulation and qualitative thinking based on profit centres, marketing activity, etc). Concerning the state sector, both recent talks with unions and utility restructuring are positive signals. Consistency in their privatisation is determining for real economic growth. Examples could continue. They only confirm that we are at a favourable junction when expectations of economic growth can create realities. This is the circumstantial result of measures designed to relieve fiscal pressure (especially in exports), as well as to increase the firmness of the government act and the ability to negotiate with trade unions and international institutions. Consistency in the government act and qualitative mutations at a microeconomic level can transform the circumstantial into critical mass to ensure long-term economic performance.

Nothing new on the Western front – Analysis by Valentin Lazea

Results of the last half-year come to validate the consolidation of gains in the first months of the year at the level of macroeconomic aggregates. Unfortunately, in microeconomic terms, things are still trailing behind, and the approaching elections are not a reason to accelerate reform.

Among successes, the most important aspect is the resumption of GDP growth, which in Romania has strong social implications. Speciality studies revealed that in our country, poverty is not “deep” (extremely poor people are rare), but is very widespread, and the main variable that influences the people’s state of poverty is GDP growth. The 3.9% GDP growth in 1996 pulled 1.2 million people out of poverty, while a 6.6% decline in 1997 pushed 2.7 people into poverty, according to a study by the World Bank. The projected 1.3% growth of GDP (even with a very weak agricultural year) may improve the life of millions of Romanians. What is important is the fact that this time, unlike 1996, GDP growth is not based on financial stratagems such as farming and energy subsidies or fixed exchange rate, providing sustainability.

Other successes are the maintaining of inflation and trade balance deficit in the vicinity of early-year targets. Even if both targets are missed, the difference will be very small and this combination itself is a positive signal. This will avoid the experience of the previous years, when exceptional performance of one indicator was obtained at the expense of the other. For instance, in 1998, a 40% inflation (lower than in that initially projected) was obtained at the cost of a $3bn current account deficit, and in 1999 the deficit reduction to $1.3bn was accompanied by a 54% inflation, double compared to the initial target. In other words, the macroeconomic environment is becoming increasingly more sustainable and stable.

In the microeconomic sector, the good news is that streamlining continues in the financial-banking sector. The populace is not only beginning to understand the essence of bankruptcy, but often it calls itself for bankruptcy, thus castigating a faulty and fraudulent management.

As to the rest, aside for numbered instances of privatisation (Resita Metal World, Rulmentul BOrlad), privatisation was apparently “frozen,” especially in ministries, which seemed more interested in the electoral aspect than in the need to bring money to the budget. A budget which they are preparing to assault during the budget correction. High expectations, small contributions; but is this not the general image in Romania of the year 2000?

Conditions for resuming growth – Analysis by Claudiu Doltu

Economic developments in the first five months of the year show that Romania may enjoy a positive economic growth this year. The sustainability of this growth is conditioned by the goal of attaining other goals assumed by Government earlier this year: lower inflation, resumed investments and savings, consolidation of foreign balance. Abandoning these goals might mean another failure in these “stop and go” politics. It is true that such a policy would allow better performance in economic growth this year. The Romanian economy has (naturally) shown signs of invigoration, when money started flowing in larger volumes. The relaxation of monetary policy was always followed by growing loans for state enterprises, and since they have been (and still are) predominant in the economy, the immediate favourable effects were not long in coming.

If, only a few months ago, positive economic growth in 2000 was being questioned, today many more questions are appearing around the other targets, on which depends the sustainability of growth. Already, it is almost certain that inflation will exceed the initial target. But it is still too early to tell whether savings and investments will react significantly through the fiscal reform initiated early this year. The appreciation in real terms of the leu could temper the momentum of exports, which is not the only certain element in explaining the growth of output in the first five months of the year.

Even if inflation does exceed the targeted level, chances of overcoming the recession will still remain, as long as the target of lower inflation is not abandoned to obtain a better economic growth. But abandoning the goal of curbing inflation would discourage savings and would tend to rule out potential gains fiscal reform would assume. Abandoning fiscal reform (postponing or delaying it) would virtually rule out chances of resuming private investments and therefore, two of the three essential conditions – lower inflation and resumed savings and investments – would not be met. In such a context, exports alone will not pull the economy out of a recession.

Keeping the goals set forth at the beginning of the year is preferable to a stronger economic growth, which might be obtained by sacrificing one of them. No matter how “strong” economic growth would be this year, it would still fail to bring significant changes into the average man’s life. At the same time, however, abandoning the assumed goals would erode authorities’ credibility, and the final toll will be supported by the average man again.

Walking slowly up the right path – Analysis by Lucian Croitoru

What everyone is hoping for this year is that economic growth will continue. Resumed economic growth is announced as the primary target of the Government’s economic programme for 2000. Still, to be what Romania really needs, economic growth must be founded in long-term, sustainable action factors. Repeating the economic growth of 1993-1996, that is, a growth that undermines the current account would only lead to a resurgence of problems we have been facing in 1997-1999. Already, we are witnessing the first signs of recovery. The foreign component of aggregate demand is growing, which helps exports. The industry grew 0.5% in the first four months, compared to the same period last year. Domestic lending to the enterprise sector is growing in real terms, suggesting that economic activity is warming up.

We will not discuss what causes these movements. We did so in a previous article.

But we must talk about the concrete conditions in which economic growth seems to be picking up. I will begin with a factor which apparently is loosely connected to the subject. We all know that the country’s image affects the behaviour of foreign investors and politicians toward Romania. An image suggesting the country is filled with impaired and homeless people will never encourage foreign investors and decision makers. This year, the issue has been receiving much more attention from Romanian authorities and budget funding to handicapped children grew 21%. Funding to adult handicapped people also grew about 6% in real terms. There are signs that the country’s image is already improving, if only because of these priority changes in budget expenses.

Another major factor is, as often was said, the economic and business milieu. In the government’s action plan for the next four years, there is a chapter dedicated to creating a friendlier and more stimulating business environment. But the good news is that the action plan is conceived as an instrument designed to interrupt the practice of “stop and go” economic policies, which have been going on for the last ten years, leading to incomplete reforms and making the economic environment unpredictable. Obviously, the weak point in the government’s action plan is that its enforcement will depend on the future political alliances that will lend a political structure to the government.

The last factor that needs attention is of particular importance: the microeconomic restrictions with which Romania’s economy operates. When they are strong, financial discipline is solid and economic growth, once resumed, becomes sustainable. Strong microeconomic restrictions press for increased competitiveness of the economy and therefore for lasting economic growth. The general perception is that microeconomic restrictions are weak. Still, my point is that these assertions are only half true. Together with Mark Schaffer of Heriot-Wat University in Edinburgh, under the aegis of the Romanian Centre for Economic Policies, I have studied these restrictions for the period 1994-1998. An analysis of changes in the relationship between entrepreneurs and their credits has, essentially, led to the following conclusions: (i) companies have learned to impose mutually strong budget restrictions, maintaining a proper financial discipline. This is the best sign that healthy economic growth might have resumed; (ii) the banking system has contributed to financing losses in the enterprise sector, especially in the first years of the interval, but this behaviour improved visibly in 1998; (iii) the growth of budget arrears is the most serious route for weak budget restrictions in the economy. From this perspective, the emphasis the government placed this year on reducing arrears in tax payment was correct, necessary, and needs to be intensified. However, these measures will have little efficiency lacking a clarification of property issues.

My conclusion is that, at last, we are going on the right path. But the tendency is modest and in an election year, it could easily be reverted. Will we lose the chance of turning this tendency into something vigorous?

Circumstantial or certain? – Analysis by Lucian-Liviu Albu

Most international organisations believe Romania has not yet developed to the status of a functional market economy. Recently, one of these (Standard and Poor’s) used performance criteria to rank the Romanian economy along with Bulgaria’s, behind the other countries in Central and East Europe engaged in EU accession talks. Other studies by Western organisations note recent positive results, finding good chances for entering a longer period of economy recovery and even sustainable economic growth starting with 2003.

According to statistical data for the first part of the year, economic recovery is already showing its signs. In the first quarter, GDP was almost 1% above that achieved in the first quarter of 1999, and for the first six months, we estimate a 1.2% growth. The main factor has been foreign demand, especially between Romania and the EU. In the first three quarters of the year, we expect a GDP growth around 1.8% and an inflation rate around 24%, compared to 39% in the first nine months of 1999.

The analysis of the exports structure revealed that recovery was mainly based on traditional industries, which are sensitive to fluctuations in demand on EU markets. Exports grew most in traditional products, such as textiles, clothing, metal products and oil products. Still, there is a gradual transition toward high-tech products, such as electrical machinery and transportation equipment. On the other hand, in imports, there is a decline in demand for energy and raw materials, which can be attributed to industry restructuring action. Still, considering the still insignificant volume of the direct foreign investments flow for modernisation of the industry, acceleration in the near future of structural changes remains uncertain.

Foreign demand can generate a circumstantial economic recovery, but domestic demand is still the factor that will allow transition toward sustainable economic growth. But here, the crisis has not been overcome yet. The experience of other countries in transition shows that the lack of massive funding for new investments is not necessarily a major hindrance to a recovery period, as long as major capacities are already under-utilised. But fast economic growth, as it is needed in Romania to advance its preparations for EU accession, first requires investments to stop declining and the flow of foreign investments to rise.