The presence of an IMF mission in Bucharest is an opportunity to count the achievements of the Isarescu government, whose results have an importance for the continuation of the stand-by loan and of foreign financing. But, even more important than the IMF verdict is what was obtained in the ten months of the Isarescu government, when a programme with new elements was enforced compared to the previous three years.
In those three years a fully IMF programme was promoted, through a more or less exact application. We know the result: economic failure, materialised in a collapse of the economy that was unusual for peace time.
By comparison, Mr. Isarescu, it can be said, has experimented with a programme that was 2/3 IMF and 1/3 something else. Coincidentally or not, the programme succeeded only to 1/3!
It is simple to delimit that which, in the Isarescu programme, is inspired by the IMF and that which is not, but it is of course extremely difficult to assert that the 2/3 IMF component was the one that failed, and the “extra IMF” component was that due to which a repeat of the past years’ failure was avoided. But a few conclusions stand out clearly.
The programme went for low inflation, the IMF goal, with which even some Romanian IMF people have been toying, and failed! Just as the previous programmes, also inspired by the IMF, in all previous years!
Once again it was revealed that, regardless of the specific situation in one year or another, setting low inflation targets is completely unrealistic.
And every time there will be explanations, such as the drought this year, the euro’s fall, the oil price growth worldwide.
In fact, Romania does not have and will not have so much resources – not even with any predictable foreign contribution, and much less if it has to do it alone – to cope, without destabilisation, with the overwhelming problems facing it, many of them atypical, for which there are no solutions in the world registry, from the demographics of a developed country in the economic conditions of an under-developed one, to the resumption of the historic process of land and capital concentration in agriculture, however not with industrial growth but industrial restructuring.
Tensions induced by the gap between available resources and necessary ones must be relieved in some way, and the structural inefficiency of the Romanian economy must be allowed to surface somehow.
And inflation is probably the one representing the lowest cost. The alternative is either massive unemployment (up to 30% of the total workforce) or (and) a sudden amputation of social security (to half), which would be unbearable socially speaking and perhaps even impossible economically speaking.
The programme went for new restraints in the economy, the main lever in policies promoted by the IMF, which, this time, took the force of the otherwise extremely necessary but unachievable reduction of arrears (overdue debt).
And, predictably, it failed to achieve this goal! After nothing else than the policy of constraints upon constraints has led arrears to fabulous levels, it was to be assumed that the same politics would not be able to deal with the problem merely by shifting the emphasis from monetary and fiscal measures to the conditioning of salaries with the payment of debts.
Economic data show clearly that economic agents and the populace cannot pay more than they do, and will transform any supplementary constraint into arrears. Therefore, a fast and substantial reduction in arrears is an illusion.
The only solution is in the long term, and lies in a combination between commissioning the institution of bankruptcy and obtaining a sustained economic growth, which would gradually increase the payment capacity in the economy.
To defeat the marshes of the economy, the Isarescu programme, in counter-current with IMF approaches, has relieved somewhat taxation in business, but to maintain the necessary budget balance (more precisely, a low deficit) it forced the populace to take over the bill by raising VAT on products and services with a massive share in consumption (food, electricity and heating).
The results are those we expected. Whereas the burden of indirect taxation has further diminished the already depressed popular consumption, the relaxation, in fact a faint one, of the profit taxation has not been sufficient to invigorate the almost-zero investments.
On the other hand, preferential taxation of exporters’ profits – a recipe not agreed by the IMF because – hear this – it breaches the neutrality of public finance and distorts the market – has ensured the only success of the Isarescu programme: the re-vitalisation of exports and the achievement, on this basis of a modest economic growth, in a net contrast with the fall in the three previous years.
It is not mere malice, but it can still be said that Mr. Isarescu has failed in all IMF components of the programme and only succeeded in the “extra IMF” component of this programme.
It may seem that, whether we like it or not, the recipes applied so far cannot be successful, at least in the case of the Romanian economy. Reality is stubborn to prove this.
But it has always been said – and probably it will be said in the future – that the recipes themselves are a success, but they are not leading to success because they aren’t applied properly. This is how, by not trying anything else, we will never know how things stand!