Domestic capital: to be or not to be?

(story to be published in tomorrow’s issue, March 8)

Romania’s deep economic crisis can only find solutions through reconsidering the issue of foreign investments and capital accumulation. An ample and fair evaluation of Romanian economic realities is also needed, of the existing and potential interconnections between economic branches, of the mechanisms and techniques of doing business, and, not least, a knowledge of the place we are aiming for in the global economy, which is so much connected today to the process of globalisation. We are helplessly witnessing increasingly paradoxical experiments which over the years have eroded the significant capital potential inherited from the old regime. A lot can be said about how privatisation is done today, about its concept and evolution in the last three years, but what matters today is the conclusion: a significant drop in Romania’s ability to compete with countries in the region that are engaged in the European integration process. In the ten years since the Revolution, Romania has achieved the “performance” of attracting little over $4 billion in foreign financing, an insignificant amount compared to its economic potential and to what other countries in the accession race have managed to draw in. Also in the last years, because of the negative economic growth and crumbling industrial output, Romania has largely neutralised its domestic capital, which tends to become peripheral. After a comparative analysis of the situation in Romania with that of other countries in our geographical area that can realistically pose as comparison elements – Greece and Turkey, the latter being itself engaged in the accession process, but along a different line – we must remark that both feature significant segments of the economy controlled by domestic capital, which additionally is solidly intertwined with foreign capital. It is a necessity and also an opportunity when domestic capital is complementary to the foreign one. A necessity because political and economic stability, and the emergence of a strong middle class, cannot be achieved without the contribution of domestic capital. Once consolidated, this stability allows the massive access of foreign investments, whether direct or portfolio ones. An opportunity in light of the fact that often in emerging countries, foreign capital is not prepared to immediately assume the full range of risks, in sectors undergoing ample restructuring. The combination of domestic and foreign investments provides the best risk control while establishing a wider investment base, preventing gaps between sectors. The problem that stands acutely in Romania is that on one hand, domestic capital is exhausted in an incipient stage by the fiscal and monetary milieu, without ever having the chance to consolidate, and on the other, the existing economic growth rates do not encourage a natural dynamic rate of accumulation. Under these circumstances, foreign and domestic capitals can only be complementary as a marginal trend and volume. Additionally, the lack of foreign capital contributes to lagging economic growth, placing a potential partnership in a vicious circle. Another trait of domestic capital in Romania is its connection to the banking system. Historically, private domestic capital has been established via the immediate support of the banking system. This has been possible and necessary because of the lack of private accumulations before 1989. Post-revolutionary political structures have had the wisdom to make a state policy out of creating a class of domestic capitalists that would interface differently with the foreign capital component, compared to the structures of state ownership. The practical pursuit of this aspiration has failed short of the goal, as famous cases of corruption immediately sprung up, along with economic structures based on principles that had nothing to do with fair, normal and transparent business. There are many reasons why things took this path, including economic, social and not least importantly, political causes. The human component must not be neglected either, because in Romania, the level of economic and financial culture has been and still is precarious. We are witnessing today the emergence of a new generation of managers, with a well-articulated understanding of the business environment and of the realities of our decade. Lately, however, the blows dealt to the Romanian banking system and the lack of consistency on the domestic capital market have deepened the erosion of national capital. As for the banking system, we can say that the disappearance of the state component is only a matter of time. With the swift privatisation of Banca Agricola, BCR and CEC, domestic capital will face the following options: either an organic, lasting but difficult growth within the existing economic climate, or with Romanian private-capital small and medium banks that are unprepared to sustain sizeable investment projects, or with foreign banks. Existing foreign banks or those with largely foreign capital, as well as those to be privatised, will have a great responsibility; that of financing Romania’s economic recovery. A passive attitude on their part, or one focused on international firms operating in Romania, will continue to affect and erode domestic capital. On the other hand, it is an illusion to think that these banks will finance loss-making or obscurely dealing companies. In other words, domestic capital needs to make a sustained effort to measure up to this maturity test – adopt and conduct business under international accounting norms, properly train personnel, and increase overall efficiency. This must undoubtedly happen in a context of fiscal and legislative stability and transparency and monetary predictability. This is where the country’s rulers will have the biggest responsibility. The risk of foreign capital migrating according to competitive advantages is a reality that could serve as significant ballast in the accession process. The tendency has already been observed lately – particularly fuelled by the fiscal inconsistency – world-wide brand names withdrawing their investments, including Amoco, Tenneco, Colgate-Palmolive, Algida, Perrier, etc. In conclusion, it can be said that the problem of domestic capital is one of national interest, which can bring economic and social stability. Authorities can properly address it only by recognising the importance and role of domestic capital in the Romanian economic complex and through coherent action that will eliminate past mistakes and present disruptions. In its turn, domestic capital must be prepared to pass the test of complementarity and that of potential financing sources. Besides the steps listed above, the immediate future will be particularly encouraging to mergers between domestic components of the capital, allowing it to consolidate a market position by its own means and attain a critical mass that will generate attractiveness for major foreign investors. Notable surprises should not be expected this year in terms of foreign investments, because of the pre- and post-electoral period, but once the equation is sorted out, foreign capital can become a significant presence. At that moment, domestic capital will stand before the question: to be or not to be?