A few years ago, the Romanian translation of “The economy lesson,” the famous book by American professor and journalist Henry Hazlit, saw the light of day. In the same spirit, Prime Minister Isarescu recently offered five lessons for the recovery of economic growth in Romania. After so many years of recession, they appear to be no less than “miraculous solutions.” They could mean new jobs, more money and better-off living. The academic and business milieu prepared to listen. At the core of these lessons was the “growth-inflation link.” If inflation is low, it can spur growth. This is why professor Milton Friedman calls it “prosperity inflation.” In fact, one of the goals of the former National Bank governor is to reach a single-digit inflation rate (presumably in 2003). Back at the bank, he could begin energising the leu and give it weight by slashing three zeros off its tail. This is a plausible argument for maintaining an austerity policy in 2000, too. This approach would, first of all, keep budget deficit in check.
Of course, no one is happy about a restrictive economic policy. Often, the question is asked whether monetary and budget policies should be relaxed. Therefore it is not surprising that the inflation “targets” that have been painted require a good judgement on the part of the Government. The problems posed by inflation are entirely caused by uncertainty. What is grave is not the dwindling value of the leu, but the fact that its future value cannot be assessed. Oftentimes, as the prime minister’s “economy lesson” acknowledges, a high but stable inflation rate (reliable and predictable for all the Romanians) would create much fewer problems than a low but unpredictable rate.
Thus, the productive contribution of a “healthy leu” is connected to the stability of its value. In this regard, the domestic currency is for the economy what the Romanian language is for communication. Therefore, in the absence of words with clearly defined meanings (for speaker and listener alike), communication becomes impossible. The same happens with the leu. If it lacks a stable and predictable value, it will be much costlier for borrowers and lenders to work along. Savings and investments will carry additional risks, and the time frame of a given transaction (for instance, the purchase price for a house) will be burdened by extra risk. When the leu’s value is unstable, the exchange is delayed, and gains from specialisation, mass production and social cooperation are smaller. This is pointed out by Mugur Isarescu: “the anticipation of high inflation increases the cost of capital acquisition and thus decreases accumulation, affecting growth.” In fact, the premier suggests that higher demand for goods and capital means investments and therefore new jobs. This increases revenues (as many of the social security recipients become producers), which will better the prospects of recovery in sectors that make consumer goods and services.
The cause of the instability is no mystery. As in the case of other commodities, the value of money on the market is dictated by supply and demand. When money supply is constant or grows slightly (at a continuous rate), the leu’s buying power will be relatively stable. On the contrary, when money supply grows fast and unpredictably compared to the supply of goods and services, prices inflate and the buying power goes down. This is what would happen if the Romanian state were to print money or borrow from the NBR to pay its debts.
This is why the prime minister has (often) tried to explain why the “printing rolls” should not be subordinated to the governor. “Stay close to the honey jar, and you’ll lick your fingers,” the saying goes.
“Domestic credibility is a significant investment in the reputation of monetary authority.” This was achieved when Parliament regulated the independence of the National Bank of Romania, placing the “honey jar” in a safe place. Over the years 2000-2003, this will ensure a process of falling inflation, ultimately producing that one-digit rate. The logic of these arguments is obvious. A moderate monetary policy (promoted by the NBR) leads to growing money supply in accordance with the growth of economic goods, which translates into lower inflation (that prosperity inflation mentioned by Friedman). In this case, the buying power of the leu will stabilise, bringing price stability and attractive signals to foreign capital. The Americans take pride in their $200 billion-plus budget surplus, obtained through a very low inflation. The payments balance would even out, and the exchange rate would become favourable. In 2003, it will make sense to talk of an “appreciated leu,” perhaps even of a “heavy leu.” The deflation eyed by the prime minister for 2000-2003 (expressed in a growing value of the leu) is a problem just as important for the society as inflation. And it can bring elements of uncertainty into entrepreneurs’ business plans. So even deflation, premier Isarescu’s “darling,” can bring trouble. Some economic agents are unable to anticipate it correctly when they draft their long-term plans.
Our politicians have blamed inflation itself on greedy retailers (who pump up price margins), on trade unions that monopolise the labour market, on oil and gas companies that raise the price of production factors, or on foreigners, whose financial and currency policy constantly strips the leu of its “hide.” But the premier has tried to explain that all their efforts are merely a “trick.” Therefore, he has attempted to explain to everyone’s understanding that the persistent inflation in Romania stems from a single cause: rapid growth of money supply.
Any country in the world that had low inflation in the last decades has taken on a policy of gradual monetary growth. Conversely, any country that suffered a swift inflation followed the course of rapid monetary expansion. This connection between rapid monetary growth and inflation is one of the most constant relationships in the entire economy. Monthly bulletins published by the NBR highlight this link permanently. Hence the prime minister’s conclusion: “Economic growth and inflation are positively correlated.” His theoretical approach could (in the short and medium term) serve as the starting point for scenarios of economic recovery. It has been argued that the economy has already reached the “invigoration point” of the business cycle. But there is the risk that it could be annihilated by the evolution of the electoral cycle.
At any rate, the Isarescu government is not exactly the genie in Aladdin’s lamp, who submits to political commands and delivers on everything it is required to. Although vested with decision-making power, ministries operate through human beings. Although the government “belongs to the people,” it will not necessarily do what the majority of the Romanians may like. The government’s policy will always reflect the interests of those people who are in the position to extract benefits (at a low cost) for themselves at the expense of the political process. But “the people” are those who suffer the consequences. The late academician Grigore Moisil used to ask his students: “But did you account for the cost of incompetence?” Post-revolutionary governments have often relied on “stop-and-go” policies that made the future uncertain and gave birth to numerous mistakes. They became the fundamental causes of recession and growing social costs.
The populace must cope with them under the slogan “let’s tighten our belts.” The zigzagging trajectory of economic reform has drifted away from the final (relative) target. In all the Romanian cities, “dying standing” as they are, people can hardly wait for the recovery of economic growth. Austerity policies cause suffering. Therefore, the “sacrificial generations” of the third millennium are expecting a miracle from the scientific character of the “Isarescu Plan.” Amateurism in economic policies must be ruled out. Otherwise, opinion polls will always say we are moving in “a wrong direction.”