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Lessons to learn from the Financial Crisis (Eastern European edition)

Happy New Year! We should congratulate ourselves for surviving the first recession and financial crisis in the history of capitalist Romania. Barely and shaken up, but we’re here, now. In the sumptuous halls of the National Bank of Romania (NBR) building, Oxygen Events recently organized a debate on the topic “What we learned after 5 years of Financial Crisis”. What are the lessons the Financial Crisis(*) taught us and what could have been prevented or avoided based on the experience gained from previous recessions?

During the 2007-2009 Financial Crisis, the U.S. benefited from the experience gained in the Great Depression of 1929-1930. Historically speaking, the monetary policy applied by the U.S. Central Bank (U.S. Federal Reserve or “Fed”) during the Great Depression was not an appropriate one. At the time, the Fed reduced the lending and money supply precisely when they were most needed. The Americans learned a lot from that experience and this was evident in the recent Financial Crisis when monetary policy favored liquidity couples with reduced interest rates. In academic terms this liquidity infusion is called “quantitative easing” but in layman terms you can think of it as “loads of new money at the disposal of those who could use it for economic activities and to create jobs”.

Unlike the U.S. during the Great Economic Depression of 1929-30, Europe was not confronted with such a dramatic situation and did not learn that fiscal austerity measures would not help it overcome the recession “unruffled”. What Europe remembers from that period is the hyperinflation in Germany that contributed to the installation of fascism, which perhaps explains why the IMF recommended massive decrease of public expenditure and the reduction of budget deficits. Moreover, the situation of several more affected Euro countries – Greece, Ireland, Italy, Spain, where budget deficit reduction policies were legitimately required, put additional pressure on the European fiscal and monetary authorities and delayed political decisions. It was only towards the end of the Financial Crisis that the European Central Bank applied incentive monetary policies at the level of the Euro Zone by significantly decreasing the refinancing interest rate and by injecting additional liquidity on the monetary market.

Romania, being faced for the first time with a financial crisis in an open economy, adopted a combination of austerity fiscal policies (drastic reduction of public expenditure and increase of taxes – VAT from 19% to 24%) coupled with restrictive monetary policies (a liquidity deficit on the interbank market of over 10% in 2008-09 and an increase of interest rates). Unfortunately, these measures are the least fortunate options from the possible ones applied across the U.S. and the Euro Zone. As a result, the exchange rate was maintained for a relatively short period of time, followed by an inevitable depreciation, the GDP decreased by almost 10% and we lost one million jobs. The austerity measures have indeed met their purpose, but with such a high price. The budget deficit was substantially reduced from 9% to a current 2-3%, as well as the current account deficit, from almost 14% to less than 2%, at present. At the same time, however, lending in the economy was reduced and consumption dropped.

From the NBR conference I identified 5 lessons that our successors can (and hopefully will) learn:

(1) The economic theory, as taught in school, fails to prevent crises. Macroeconomics, as a discipline, was introduced after the 1929-30 Depression in order to explain and prevent recessions. In time, a number of financial models were developed, laying the foundations of economic research which post-Financial Crisis are being questioned. Economy is a complex adaptive system, in which the network structures involving individuals play a significant role. Silviu Cerna in his paper “The Financial Crisis and Economic Theory” (Academica Journal, July-Aug 2013) proposes that it’s unrealistic to model macroeconomic phenomena strictly based on individuals’ behavior such that the entire economy behaves “rationally” or “irrationally” as if it were a single individual. Philippe Herlin, in his paper “Repenser l’ economie” questions even the premises and analysis instruments of the financial models.

(2) The monetary policy of the World’s Central Banks is converging. In general, the aim of all Central Banks is price stability (inflation control) and financial stability (of the banking system). Unlike Europe, the U.S. also considers employment as an objective. In the recent crisis years we notice that, despite the austerity measures adopted in the Euro countries, the European Central Bank lined up its approach to the recession with that of the Fed, by adopting similar monetary policies, namely decreasing the interest rates and increasing market liquidity. Even the Central Banks in the non-Euro zone adopted lately the same objectives, as did the NBR but only in the past year. Also, financial stability is almost impossible to attain in absence of cooperation between the central banks of various European countries. In order to consolidate and centralize the supervisory measures, the European Union established the Banking Union for the Euro countries and for some non-Euro countries. Romania opted for the Union;

(3) It was proved once more that we need distinctly anti-cyclical monetary and fiscal policies. The impressive growth experienced by Romania in 2004-2008 was supported by public and private consumption, in the context of the possibility to adhere to the European Union and the liberalization of the current account of the balance of external payments. The growth was also stimulated by the flexible fiscal and monetary policies, such as the significant reduction of taxes, the appreciation of the national currency which led to the stimulation of the consumption goods import. Unlimited access to foreign currency loans and financing of real estate projects with extremely flexible lending regulations, led to the unsustainable increase of lending and in the 2004-2008 period no mitigation measures were taken.

Moreover, in the context of a politically-favorable period, income tax was reduced to the global rate of 16%.  Taxes should not be reduced in boom periods! It is a pro-cyclical measure, not an anti-cyclical one! As the Financial Crisis onset, the NBR introduced restrictions to foreign currency loans. The effects of this measure on Romania were the massive capital outflow and the limitation of external financing, corroborated with lower capital inflow (in the form of foreign direct investments and money sent in from abroad by Romanian workers). The Romanian authorities changed the flexible monetary and fiscal policies active during the boom years, to more restrictive ones during the recession period, again, pro-cyclical! During the Financial Crisis NBR adopted the same measures with which the U.S. Fed failed in the 1930s Great Depression.   The lesson is that policies must be anti-cyclical, therefore restrictive during the period of unsustainable growth, and flexible, incentive-oriented, in a recession period. So, all together now: “we increase interest rates during a boom, we decrease interest rates during a recession”.

(4) Economic growth and development policies through private external savings don’t work in Romania (yet?). This refers to how I and many others bought homes using a mortgage loan from a bank, a loan made with money from the savings of the farmers in Denmark, Norway, etc. The access to such foreign currency loans led to an excessive increase of consumption and value of real estate properties. It’s one thing when the value of my apartment increases from EUR 100,000 to EUR 200,000 because Romania has become a strong technology and manufacturing center and attracts capital and know-how that increase income, competition and prices. And it’s a completely different matter when the value increases only because we can all borrow money easily and we can pay more for an apartment. I’m not saying that Romania has not grown at all in terms of added value in the economy, but a significant part of consumption was on credit. The authorities have lost sight of the internal factors that support a sustainable growth: continuing the reforms and structural adjustment, increasing productivity, stimulating internal savings and investments, the development of small and medium-sized enterprises. A detailed report of the World Bank (A Country Economic Memorandum, May 28, 2013, Report No. 74635-RO) shows how the financial crisis in 2008 “revealed fundamental weaknesses in the Romanian economy and policies” and makes several recommendations to make the most of our country’s competitive advantages, particularly in key sectors such as energy, infrastructure and agriculture.

(5) The role of commercial banks and lending policies have barely changed. A few commercial or investment banks made restructurings, on account of being too big, too complex and too volatile and endangering financial stability (too big to fail). In the U.S. the solution was the merger or absorption of investment banks by commercial banks (see Merrill Lynch taken over by Bank of America) thus the big ones became even bigger! The pre-crisis legislation regarding the separation of the investment banks from the commercial ones (Glass Steagall Act) was not reinstated, and the practice and the attitude of the banks towards their customers t seem to have changed much. In Europe, a few states (U.K., Netherlands) proceeded to the restructuring or takeover of several commercial banks, but other than that, almost nothing has happened even in the countries that were most severely affected by the recession! The changes in the field of banking – are rather pro-cyclical, introducing additional restrictions and limitations in a market where bank assets are naturally diminishing. In Romania, where some banks have been affected by the contagion (particularly from parent banks) but also by the high proportion of non-performing loans (20%), they reduced their portfolios and became more prudent, but they are in good condition in terms of capital and solvency. Except for a few small greedy banks, the banking system is sound and continues to grant loans at a much slower pace. Additional supervisory measures discourage foreign currency lending and have tightened the general lending conditions.

Plus ça change, plus c’est la même chose!

(*) In Romania, the most spectacular economic downfall was in 2009 (-6.6%) and 2010 (-1.1%), then we had a slight increase in the following years, culminating with the best year, 2013 (3.5%). It seems we are not completely beyond the recession if we listen to the entrepreneurs (it’s like it never ends!), although the politicians declare loud and clear that “in Europe the crisis is over” (F. Holland). In an outburst of optimism, we have growth forecasts of over 3% in 2014-2015 worldwide, as well as in Europe. In what concerns us, Romania might achieve growth rates as high as 3.5-4.5% in the following years.

Why the IMF had a program in Romania for more than 20 years

On 15 and 16 July 2013, Christine Lagarde paid a visit to Bucharest. I had the opportunity to exchange a few words with her during the dinner and I listened to her brilliant speech the following day delivered elegantly and relaxed. In contrast with the previous IMF executives, Ms. Lagarde has distanced herself from the dull and rigid nature of her position, typical to central bankers, and added a political, constructive and visionary note to her message to Romanian officials and to the public. Exactly 20 years ago, I met another IMF executive, Michel Camdessus, in Washington. Nothing compared to the expanse of these days’ position in Bucharest.

Ms. Lagarde reminded the audience of the long term collaboration between the IMF and Romania, a period during which the living standard of Romanians increased threefold (from an income per capita of $3,000 in 1990, to over $10,000 today), as proof of the success of the programmes carried out together. At the same time, she advised towards the conclusion of a new (precautionary) agreement, “as an element to maintain stability and fiscal discipline”. The IMF can be a partner for Romania supporting our country so that “some state-owned companies may be privatized and other restructured”. Today’s priorities are “fiscal consolidation and structural resources”. It sounds like a structural adjustment programme, atypical for the IMF, but necessary for Romania.

Initially, the International Monetary Fund was established (by the Bretton Woods Agreements, 1944) to maintain the currency stability of the Member States by financing the balance of payments deficits and protecting the foreign exchange rates (which were fixed, at the time). The general globalization and liberalization of the world’s economy, as well as USA’s giving up the free gold convertibility of its dollar (1971) and the liberalization of the exchange rates, were about to end the IMF’s classical mission. Two “historical” events saved the Fund’s role: the collapse of communism, together with the transition to a market economy of the centralized economies (after 1989), and the largest financial crisis since World War Two, accompanied by the recession of Europe’s and USA’s economies (after 2008). And then, having very few partners in the area, the IMF needed Romania, and now all the more so, since it has to recover one of the largest exposure (the fourth largest in the world!).

Being a member of the IMF since 1972, Romania is probably the European state with the longest collaboration in the post-communist period (the first Agreement was signed in 1992), both during the transition to the market economy, and after the accession to the European Union. From financing the balance of payments deficit to a structural adjustment programme (the World Bank’s input), the role and contribution of the IMF expanded substantially. Why has the IMF remained in Romania all this time, even though in 1990 Romania had no external debt (in fact, it had an excess of USD 2 billion)? Having permanent deficits after 1990 and no other international financing source, Romania was “hooked” with a structural transformation programme that outlined its government policies over the last two decades. Could Romania have gotten where it is today on its own, like the other countries in the region? The macroeconomic deviation of 2007-2008, when the Government was not assisted by the IMF, and this second precautionary agreement, prove otherwise.

Today, Romania seems to have the same problems as it did 20 years ago. In April 1993, as minister of state and member of the negotiations team, I prepared, together with the minister of finances and the central bank governor, a report for the President and the Prime Minister regarding the relationship with the IMF in the context of a slight crisis of confidence and the cancellation of the last tranche of the 1992/93 loan agreement. The new agreement then under negotiations for the period 1993/94 provided a loan of USD 300 million, within a total external financing of USD 1.4 billion. The loan was conditional upon Romania implementing several policies, such as: achieving a budget deficit of 4.5%, the foreign exchange market and the exchange rate had to reflect the ratio between the demand and the offer of currency on the market, passing a law regulating the positive real interest rate, restructuring the state enterprises that registered losses, eliminating subsidies and control over prices, continuously aligning the price of energy to the international prices, reducing the state debt, preparing the privatization programme, etc. A legislative package containing the reform of enterprises, capital market development, commercial courts, bankruptcy management, competition, social protection, contractual obligations, public debt, etc.

But these objectives (in technical terms, performance criteria or conditionalities) were precisely the official policies in the Social and Economic Reform Strategy of the Governing Programme approved in the Parliament of Romania (see the Report published in Official Gazette No. 39/1993, Part II). Although the negotiations on these objectives were resumed (see the IMF letter of 17 June 1993 attached), they failed and the agreement was not concluded. To this day I cannot understand who or what was behind this decision. As the minister in charge of achieving the reform programme, and having the IMF as the main (if not the only!) supporter and ally, I found that all of the doors for the reforms were closed. I handed my resignation (23 July 1993, attached) considering that “I can no longer be of any assistance to a Government having a different approach on the fundamental issues of the transformation and evolution of Romanian society and economy”. On 27 August, Decree No. 15 was issued regarding “the revocation from position of a member of the Government and the nomination of a presidential adviser”.

A Memo (attached) regarding economic policy alternatives in order to obtain external financing by the Stand-by Arrangement with the IMF (September 1993) explains the “difficulty” of the negotiations by “Romania’s acceptance, in the agreement concluded in 1992, of too ambitious performance criteria” but appreciates that “the conclusion of such agreement is absolutely necessary, as there is no intention to interrupt Romania’s relationship with the IMF”. Otherwise, the economic and social consequences would have been extremely serious: drastic reduction of external financing, increased pressure on Romania’s currency flow, economic decline and decrease of the living standard of the population, loss of the advantages obtained by the most favored nation status and other international political openings. In fact, it states why the Government cannot implement its own governing programme approved by the Parliament (see above).

This is only the example of one government (which I was part of for a short period), but all of the other governments applied the “gradual” strategy (stop and go), a strategy forced by the IMF’s “push and pull” of the centralized economy. What would the country have been today and how many years would we have saved if the reforms had been made in time and through our own forces? Without the IMF’s contribution, we probably wouldn’t even have the reforms we have today. The IMF actually replaced our governments’ (modest) governing (in)capacity, governments which, without exception, used the Fund as a scapegoat for any “painful” transformation measure. Then there were the negotiations with the European Union and the plan to achieve the acquis communautaire. Ms. Lagarde speaks about further reforms “It is very important to have had reforms prior to the accession to the Euro. In the Euro area you can no longer depreciate your currency in order to restore certain balances. We are willing to become involved if the state assumes certain measures”. There is still a lot to be done!

Ever since Napoleon III, no other foreign or international institution had such a significant impact on Romania’s transformation as the IMF had (the role of the advisers of the League of Nations in the inter-war period was rather… of an accounting nature). Romania has this heritage and it has to appreciate it and keep using it. Maybe this way the country’s governing capacity will increase. As we did at the end of the 19th century, at the end of the 20th century, we have the chance to re-launch Romania’s modernization process. Romania’s elite could have run the transformation despite the differences from the previous century, when the absence of participatory democracy did not reduce or limit the role of the elite. We lacked, however, courage, leadership and vision. That’s why Romania needed the IMF. Historical partnership, on both sides.

To do while waiting for the accession to Schengen

Have you ever crossed the border between the Republic of Cyprus and the Turkish Republic of North Cyprus? It’s an unkempt back alley in Nicosia. The situation denotes the failure of EU and UN to restore normality in Cyprus. Respecting the “do not photograph” signs I don’t have photos of the actual back alley, but the surroundings look like this.

The images made me think of the constant postponement of Romania’s and Bulgaria’s accession to the Schengen area. Cyprus probably won’t get there soon either. I now understand the major concern of some Member States regarding the consolidation and monitoring of the Eastern border (the longest border with non-EU states). It’s obvious that the area requires extensive improvement.

I won’t go into a diatribe about the need for the Romanian authorities to take political actions in terms of strengthening the judicial institutions and the rule of law. Solely from an infrastructure and logistics perspective, we are being assured that the borders with the non-EU countries are well equipped, fitted with sophisticated EADS instruments, and well organized. But what about the “border” between Bulgaria and Romania? What has changed and what needs to be done? Our accession to the Schengen Area means, simplistically speaking, that our land borders with Bulgaria and Hungary will simply disappear, that we can go to Balchik just as we go to Mamaia or we can visit Lake Balaton just like we visit Lake St. Ana: with no one asking us for our passport or identity card, without being questioned by the border police, without even feeling (physically and administratively speaking) that we are crossing a border. At least this is the case between Italy and France, Germany and Austria, Belgium and The Netherlands, Spain and Portugal, etc. Shouldn’t we also prepare “the inside” while waiting for the accession to the Schengen area?

The 28 states of the European Union have different levels of development. Reducing or mitigating such differences is made via nominal and real “convergence” policies. Nominal convergence is performed downward and it refers, particularly, to budget deficit, external debt, but also to democracy and rule of law. Real convergence is performed upward, by each of us, by our individual attitude and our production, by our de entrepreneurship and by adopting the modern values of economic efficiency, by our active participation in the life of our country, by respecting the values of democracy. We shouldn’t try to “be like them”, but “be ourselves”; however, there is a minimum set of values that we need to adopt, both at the level of public institutions and local administration, and in the private environment and among the citizens. Adopting the modern values is one of the advantages of being a member of the EU. They pay as much attention to the “big picture” as to the “details”. We could learn to pay more attention to the details. The details of the borders between Schengen states, in our case.

The border conditions between Romania and Bulgaria haven’t changed much, despite the cooperation between the border police services. The logistic is even worse: large, communist buildings, mostly abandoned, dusty and derelict, sinuous roads, some still preserving the quarantine lines from the old days, access ways full of holes in the ground, useless distances, garbage and dogs. Look at the images.

Does this look like Schengen area? Of course our politicians have to see what needs to be done in our country. Things that cost little or nothing at all. It doesn’t cost anything to maintain the areas clean. Or it doesn’t cost too much for the authorities to send a bulldozer to demolish the old structures, to straighten the roads and connect those on either side of the border (which are in pretty good shape). In each of our countries things look much better than at the common border. It’s not that much to do, only a few touches.

Between Romania and Bulgaria two bridges with symbolical value have been built at a 60 year interval: the Friendship (Drujba) Bridge Giurgiu-Ruse (1954) and the New Europe Bridge Calafat-Vidin (2013). One with the support of USSR, the other with the support of the EU. The difference in their appearance is perhaps as big as the difference between the two systems they marked: Friendship looks like the failure of communism, New Europe expresses the modern future.

But why are we allowing the past to overpower us? Do these two bridges somehow incorporate our old values? The “that’ll do” mentality in the case of Drujba and amazing modernism in the case of New Europe. Why are we letting these resources go to waste? I am sure that there will be new projects offering a way to use wisely these bridges in the Schengen area. They are a source of development and prosperity, at least for the areas near the Danube. The key, however, is in the details.

The goal of accessing the Schengen area shouldn’t bring only the decision to integrate Otopeni Airport, with a dedicated terminal, elegant and modern, but also the ambition of building, at the land borders of our country, integrated into the area, modern, comfortable, fast and effective facilities. To replace our oriental behavior with the western elegance and effectiveness. Romanians have the right to feel European in their own country, before feeling European in Europe.

Are Romanian Capitalists Out of Steam?

Forbes Romania magazine dedicated a special edition to the touching stories of over 30 Romanian businessmen about their “First Million”, which they obtained primarily due to their “unquestioned intuition and flair”, their “determination to reinvest”, their “courage, curiosity and modesty”, their “confidence”, “medium term market analysis”, as well as to their “fairness”, to the “quality of the products and services delivered”, etc. How did Romanian capitalists emerge and where are they now?

The first steps towards capitalism were shy and confused. While teams of wise men were being hurriedly formed to tell the political leaders what needed to be done to transform the economy (*1), many populist measures were being taken under the pressure of the population and of the daily needs. During those times, few people wondered why communism fell and the majority wanted to know if there were still going to be shortages, queues, etc. Romanian capitalists emerged and developed in four waves.

The Romanian market economy began in 1990-1991 with the liberalization of the import of consumer goods for the population (poultry from the U.S., color TV sets, etc.) and the import of raw materials for industrial consumption. The salaries were paid in full for the first time in many years (without deductions for “failure to achieve the plan”) and the employees’ contributions to the social capital of state enterprises were released. The net effect was to raise the purchasing power of the general population. For fear of inflation, the state “invested” approximately 2 billion USD (the surplus of the balance of payments during Communism) in expensive luxury items, “to absorb the excess cash on the market” according to the official intentions (?!). In fact, the authorities didn’t know how to protect the economy against shocks and wasted the surplus of the balance of payments on imports of expensive commodities and ordinary products, instead of acquiring equipment and technologies to increase productivity.

That was when the first business opportunities appeared and were capitalized by Romanians. The first to pursue the new opportunities were those who made money during Communism (state officials with high salaries, employees of foreign companies residing in Romania or local brokers of goods that were sold on the black market), those who had access to local resources (party activists, civil servants or Secret Service officers) and those who had international connections (people working in foreign trade, famous sportsmen, Romanians residing abroad). The source of their gains was a straight up markup (although margin from trading was limited for a while to 30%) and the exchange rate. The prices of the import goods were high because people would have paid anything for goods they hadn’t had access to until then because they felt this was raising their social status.

The second wave came when the apartments leased from the state were transferred in the private ownership of the urban population and half a hectare of land was distributed to each rural family. Thus started the long and expensive process of restitution of private property confiscated by the Communist state, a process that extended over 20 years (and is still in progress…). The state restituted agricultural property (first 10 and then 50 hectares), forests, real estate and industrial property. The restitution of such property infused new resources into the economy and generated significant income for another category of Romanian capitalists, who developed and capitalized on it especially by selling it to foreign investors. This kind of property was perhaps the most important source of income for many Romanian heirs residing in the country or abroad and formed the object of many real estate transactions, especially after Romania’s accession to the European Union.

The redistribution of the state’s production assets represented a significant source of privatization and the third wave of capitalists. During the first years, entire teams of professionals simply left the old communist factories, the research institutes, or the trade enterprises and developed on their own similar business in IT, industrial manufacturing, constructions, services, etc., that did not require much capital investment. In the official privatization policy, the state offered coupons in the state industrial enterprises for all Romanians (a kind of shareholders who could live off dividends), which were soon sold to middlemen or investors and used by the acquirers to consolidate ownership. Several small and medium sized enterprises were sold on credit to the employees and the management (the MEBO method). The ownership over such companies ended up concentrated in the hands of smaller groups or was acquired by multinational companies.

In the last decade, foreign direct investments contributed not only to restructuring and developing the Romanian economy, but also to the formation and development of the local class of businessmen and women, representing the fourth wave of capitalists. Multinational corporations that invested in Romania required services (distribution, logistics, legal and accounting services, consumables, spare parts, etc.) which they acquired from local suppliers, thereby helping them grow. The multinationals strongly promoted capitalism and entrepreneurship by the opportunities they created, by their own organization systems, and by training people. Many former employees of foreign companies started their own businesses, thus becoming Romanian capitalists.

In all these waves, Romanian entrepreneurs used opportunities, market demand, low (or sometimes free?!) prices on tenders for state assets. As mentioned by Forbes, they used courage, audacity, flair, curiosity, confidence, but thorough analysis… not so much. And they make little or no mention at all of the family inheritance. With the exception of the few people who had good salaries when the Revolution broke out, the Romanians’ money came from the restitution of property or acquisition of state assets at prices much below their real value. There was also the money made during the first wave of the trade businesses, but this money was quickly used to purchase new tangible assets. In those days, the more tangible assets you owned, the richer you were considered.

Romanian businessmen did not take the time to capitalize their companies. They had no long and medium term development plans. Romanian capitalism was an opportunistic one, failing to build long-lasting businesses and the financial crisis drastically reduced foreign investment forcing the state to adopt an austerity fiscal policy. This significantly reduced the orders from the State to the private sector and exposed the fragility of Romanian capitalism.

There aren’t any statistical data for a detailed analysis of the Romanian capitalists’ activity. We know, however, that the indebtedness degree of the Romanian corporate sector is 207%. Most of the debt is short term. If we separate the multinationals and the state companies, which are adequately capitalized and less exposed, we can see that the Romanian private companies are even deeper buried in debts, probably 3 or 4 times the value of their social capital. It seems that “new money” in Romania is made from businesses built mostly on debt. In order to operate soundly, such companies need to be capitalized. Without a vision, a strategy, a well-made plan and their own resources, these businesses will not be able to increase yields from bank loans or European Funds.

Romanian capitalists have no tradition, no history, and no connection with their pre-war predecessors, who emerged over 150 years ago (*2). The former Romanian industrialists who were restituted their properties – Malaxa, Aushnitt, Mociornita – did not return to production (with only one exception that I am aware of, Azur Timisoara). National capital was never subject to specific policies in the period following the Revolution, as was the case of foreign direct investments.

How, then, could Romanian capitalists compete with their European counterparts, who have been accumulating capital, know-how and technologies for hundreds of years? Can they reinvent themselves after experiencing the crisis in the past five years? Will Romanian capitalists keep seeing the market economy as a source of quick wins? They could benefit from further education and a better understanding the mechanisms of the market economy with focus on organization and long term planning. They need operational markets and institutions, new policies and a new approach.

Lately, a new wave of entrepreneurs is emerging. They are modern, more educated, more analytical, more transparent, more innovative and more efficient. They know how to operate in the digital economy era. They navigate the Internet easily and move freely around the world. They adopted services or industries that require less capital and are no longer tempted to accumulate (expensive) tangible assets like the 90s generation. They are building a modern economy in Romania, but are limited by the activity of most politicians who don’t understand that if they support this category with a clear, stable and transparent legislation, both sides win.

Further Reading

(*1) “Strategy to Establish the Market Economy in Romania”, May 1990

(*2) “Burghezia romana. Originea si rolul ei istoric” [Romanian Bourgeoisie. Its Origins and Role in History ] by Stefan Zeletin, Bucharest 1925, Humanitas Publishing House, 1992

(*3) “Noul capitalism romanesc” [New Romanian Capitalism] by Vladimir Pasti, Polirom Publishing House, 2006

Remembering the failures of the command economy

My recent article about Iași brought up the topic of “the extraordinary heritage” we had before the Revolution and how “many enterprises were viable” back in the day. The image of the socialist industrial platforms is still in our minds even decades later, in a blend of childhood nostalgia, for a time when all of our parents went to a factory, and regret that now the industry doesn’t provide enough jobs (as in Germany) and there are fewer manufacturing plants.

Both may be true, but let’s not forget that the causes for the collapse of communism in Romania were primarily of economic nature: the long years of shortages of all sorts; the hunger and the absence of food on the market, the endless queues; the lack of heating in the winter and the proration of basic products; the desperate struggle to survive and provide a future for one’s children. All this is nothing but evidence of a systematic incapacity to provide a decent life to the members of the “socialist and multilaterally developed society” and to meet the basic needs of the population. How could this have happened if Romania was an industrialized country with viable enterprises?

The Romanian socialist industry was all about the pride of the communist regime. It was built primarily to prove that it can exist and not to meet the needs of the internal or external markets. No doubt, it could have generated economic development and social welfare, but it started out on the wrong foot and it emerged in a twisted and artificial economic and political framework. In the 80’s Romania experienced, too early and too hard, the severe distortions of a command economy, highly accentuated by the self-sufficient and nationalist policy promoted by the communist leaders. But the socialist industry failed to offer its citizens a better life.

The major distortions that led to the collapse of communism are related to the ineffective allocation of resources, the abusive interference of politics in the economic decision-making process, the system of controlled unitary prices, the employment on a permanent basis of the entire labor force, even beyond the objective needs, and the absence of any relation whatsoever between remuneration and individual performance.

Allocation of resources through a central command (the State Plan)

Communism eliminated private property, abolished owners and prevented individual operators from making economic decisions; and the markets, as mechanisms of sending signals to the economic decision-makers (demand-supply), disappeared. In communism the State was the sole owner, as opposed to a multitude of owners in a market economy. There were far more chances for a single owner to make bad decisions, than when you combine decision from a diversity of owners. The socialist industry is developed according to the unitary state plan, which in most cases is grounded on unrealistic data, information and desires. The state plan was based on political, megalomaniacal, or fame-driven objectives. Romania was aiming to become the third largest producer of machine tools in Europe, building heavy machinery industrial facilities in all large cities, opening a large ferrous steel plant (in Calarasi) although it lacked both the necessary resources and the markets. The plants and factories were kept operational only to report an industrial yield and to artificially ensure jobs, not because they were profitable.

Abusive interference of the Communist Party in economic decision-making

The reasons behind the industrial investments were often the result of political bargaining, established based on the influence of certain local communist leaders, rather than on market economy arguments or on the possibility to support production with local, efficient and quality factors, able to generate a long term marketable production. Each communist leader succeeded, using personal influence, to place various industrial facilities in several regions, which then consumed important resources of the state plan. They built steam power plants in areas without coal resources (Suceava, Mintia), ferrous metallurgy plants in localities with little labor force, without iron ores or without access to transport routes (Calarasi or Targoviste), chemical plants or refineries in areas without oil resources or supply infrastructure (Pitesti, Turnu Magurele), railway car factories in areas with no industrial tradition (Caracal, Turnu Severin), aluminum at Slatina and alumina at Tulcea, etc. Towards the end of communism in Romania, the political leaders had taken full control over the economic management, aiming at maintaining active industrial “fortresses” that were so fragile that they collapsed immediately after the Revolution. Professional managers were a rare thing in the 80’s…

A system of unitary prices administered and controlled by the State

The rigidity of the unique prices, established centrally, made it impossible to adapt to the market conditions; especially in the case of exports. The prices in the economy were initially established according to wishes, not based on real costs and productivity. In time, the income and the costs were completely separated and parallel management and administration systems were created based on artificial data, as a result of chain reporting that no longer reflected the reality. In the period preceding the Revolution, the prices no longer reflected the real costs and the raw material used, nor the quality of the products and services obtained. The industrial products exported or the raw materials imported were internalized at local prices based on different and arbitrary exchange rates, which suggested massive subsidies. Therefore, the economy lost all real competitiveness as the prices were unrealistic and the subsequent liberalization of prices related to the market creation process took a long time; and it still does in some cases.

Employment on a permanent basis for the entire labor force

It’s counterintuitive why the employment of the entire labor force, which even today is a priority objective of public policies, was a negative aspect in communism. In capitalism, rational and efficient investments create jobs and the employment is flexible, consistent with the production needs. In communism, the industrial objectives were created in order to employ non-industrial labor force. It was the production needs that were adapted to the labor force and not the other way around. Over 30,000 workers in and around Galati were employed at the ferrous metallurgy plant. Today, less than 5,000 people work there and the production and the export are higher. The national production system had a primarily social nature. The economy progressively became a social assistance mechanism, failing to take into consideration the production needs, the individual skills or productivity increase. In a market economy, people always have the opportunity to change their workplace, there are new projects, new challenges.

Lack of any relation between compensation and individual performance

Gradually, the connection between the compensation for the work performed and individual performance disappeared. The salary and incentives were the same for similar or comparable positions regardless of results, efforts, skills, talent or dedication. Due to the expectation created by job security, the quantity and quality of the labor or the increase of productivity became less important. The more productive workers were not motivated to produce more, many innovative ideas were not put into practice and promoted, the income was capped regardless of how much initiative you showed. Research became an administrative activity, and incentives were granted on disciplinary or political bases. Labor productivity decreased along with the quality of the products and services.

These are the main structural problems which led to the scarcity of products and services and to the failure of the communist production system. The transition to the market economy proved to be a long and difficult process. The industrial heritage was problematic and impossible to continue on the same structure. The industry had to be rebuilt and the industrial enterprises reformed. Many of such industrial enterprises were fully modernized under Romanian shareholding (Compa – Sibiu, Elba – Timișoara, Farmec – Cluj, RAAL and Rombat – Bistrița etc.), but the main drivers of change in the Romanian industry were foreign investors (Dacia – Renault, Sidex – Arcelor, Petrom – OMV). Romania now exports more than twice as much (almost EUR 50 billion) as in the best years of the socialist industry. The country definitely has a more advanced and more efficient industry. But obviously not enough.

The industrial platform of Iași attracted less foreign investors, due to both the profile of an outdated industry and the geographic position. Nevertheless, new businesses still emerged and more than 20 years after the change of the economic system in Romania industrial investors established production centers in Iași for the local market, the eastern market and for export (Delphi Packard, perhaps the largest exporter of high-end technology). More and more Romanian technicians and workers, many of them returning from abroad, find a job at the industrial enterprises in Iași.

Golf vacations in the Balkans

While Mamaia is launching its new anthem Viva Mamaia, urging tourists to joyful party hardy, our neighbors to the south of the Danube are hosting the international golf tournament Volvo World Matchplay Championship near Balchik, at Thracian Cliffs, an event that prompts elegance, harmony and competition. The two neighboring countries couldn’t possibly have a more different approach to developing their seaside tourism.

It’s my feeling that Mamaia targets mainly young adults (25 and under?) who are eager to party and like loud music, who go to nightclubs, lay on the beach sun tanning and, for those who can afford, maybe even practice some water sports. In that sense it reminds me of Bodrum. Tourists are mostly here during the summer season and particularly on weekends thanks to the new highway from Bucharest. Based on services being advertised the typical tourists might also include young couples with small children (I’ve seen an advertisement for baby daycare services).

I’m not familiar in detail with the tourism market, but it seems to me that the tourists the Romanian seaside doesn’t cater to are precisely those people who can afford to spend more money on their vacation. Let’s say people over the age of 35-40, whose children are already grown up or have their own families and who usually vacation separately. These tourists are interested in different kinds of services (they don’t spend that much time sun tanning). I’m not referring particularly to those who go to the seaside for mud therapies at Techirghiol or for Ana Aslan treatments. But I am not excluding them either.

I believe that modern tourism offers must include golf. All great vacation destinations have golf courses. Golf is an Anglo-Saxon sport (invented in Scotland several hundred years ago!), considered a purely capitalist sport (in Romania it was banned by the communists), but unjustly considered a sport for the elites. In the past few decades, it spread throughout Europe as a sport for the masses. It has clear rules, it stimulates fair-play and rewards results for any level of training and game mastering.

In countries such as Germany or Austria, over one million and, respectively, one hundred thousand people (many couples) play golf. The Czech Republic has almost 100 golf courses (almost all built in the past 20 years). Not to mention the U.S., where over 25 million people play golf. The numbers, even if approximate, show that this sport is populist if anything, not exclusive. In Scotland, half of the population plays golf. Golf also became an Olympic sport for the amateurs, in addition to the large, money-making competitions for professional players.

Golf is not a sport for senior citizens who, once retired, have nothing better to do so they take up golf. It’s a sport that can be practiced at any age, between 10 and 90. By young, strong, healthy people as well as by older people, even with health problems. Our modern lifestyle requires exercise. Golf is not only a perfect excuse to exercise (a golf course has a 5,000 – 6,000m track), but it’s also an application of focus, skill and talent. It is a sport for men and women, for grandparents and children. Three generations within a family can be at the same time on the golf course. Anyone can learn how to play. I haven’t met anyone who, after the first golf lessons, didn’t become a passionate player.

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Golf is associated with a certain lifestyle and particularly, with a certain type of vacation. I, for one, discovered golf 13 years ago. Since then, I have been planning my vacations to include a golf course. I found that all of the touristic locations I used to go to also have golf courses, which I hadn’t noticed until then. I started arranging more active vacations by including (besides trips and water sports) playing golf. My family, colleagues and friends caught “the bug” as well. I met many people who are playing, from a variety of backgrounds and professions: a farmer from Bavaria, a bus driver from Scotland, a former officer from Norway, as well as industrialists, bankers, high officials, etc.

I think 20 years ago, golf didn’t even exist in the Balkans. I’ve seen an older course in Athens and in Eastern Europe probably the oldest one is the Royal Club (known today as the Diplomatic Club) of (pre-war) Bucharest. Now I only see newly built, modern courses, nicely adorned with trees, lakes and sand. True works of art! A course has a surface area of 80-100ha, it’s equipped with irrigation and draining systems, and it’s permanently taken care of. An investment of perhaps €3-5 million.

If you live in Bucharest, you can think of golf options in the Balkans as three concentric circles of courses. Locally, Greece and Bulgaria, then Turkey and Cyprus, each more spectacular than the other, completing the vacation offers. Antalya has the most golf courses (over 15 – Cornelia, Gloria, National, Carya, Montgomery, Sueno, Sultan, Pasha, etc.) which, during the holiday season are filled with tourists from Germany, Austria, the Northern countries, but also from Italy, France, Russia and… Romania. Cyprus has 4 golf courses (I think the most impressive one is Aphrodite Hills), then Crete, Rhodes, Peloponnese and Halkidhiki in Greece.

But the most pleasant surprise is Bulgaria, having no less than 5 new, modern, spectacular courses, in the Balchik – Kavarna area (3) and Sofia area (2). The most remarkable is, to me, Thracian Cliffs, which integrates perfectly with Light House and BlackSeaRama. These courses are frequented particularly by Romanians or expats working in Romania. But there are also Germans, Austrians, Irishmen and Englishmen. These are also the closest full-scale golf courses to Bucharest. You can get there in a 3-4 hour drive on A2 highway. For some, Santa Sofia and Pravet (50 km from Sofia) are even closer.

In Romania there isn’t a complete, full-scale golf course, equipped with all of the necessary facilities so we can’t organize an international competition, similar to the one taking place now in Bulgaria (Volvo). But there are many initiatives, a lot of enthusiasm and several quite nice locations. The nicest one is probably Pianu de Jos in Alba having a complete course (18 holes), but with so improvements still to be completed. Then we have 9-hole courses in Breaza (Lac De Verde) and Cluj (training facilities Sun Garden Resort and Transylvania Golf) and a bold attempt in Recas (Timis county). Last but not not least we have the old royal golf course at the Diplomatic Club in Bucharest, paired down to… 6 holes, now also accessible to non-diplomats. In the vicinity of Bucharest, there are only training facilities in Zurbaua and Snagov. Almost every year we hear about a new project and we can only hope that someone will eventually build a full-scale course. A hotel-owner friend of mine invited me to a meeting with 6 mayors at Eforie Nord, in an attempt to pull together 70-80ha of land for a golf course.

But at least Romanians are doing well with a few golf clubs, a Golf Federation, and the Association for Romanian Golf Players of around 3-400 players. As for the golf infrastructure, we’ll just have to be patient. Until then, watch out! – tourism in the Balkans has adapted quickly to modern demands. Exercise and a healthy lifestyle, even on vacation!

Bucharest Academy of Economic Studies at its 100th anniversary

The Academy of Economic Studies (ASE) recently organized a series of events to mark a beautiful anniversary: 100 years from its establishment. In attendance were distinguished guests, from the Head of State to alumni, academics, professors, ministers, businessmen, and bankers. All in all representatives of generations of graduates and professors gathered together to show everyone that the ASE means something. Missing were students currently in attendance(!), perhaps a decision of the organizers in the tradition of U.S. universities who seem to disproportionately court alumni? (based on my son’s experience after attending Duke University)

The atmosphere was full of festive wishes (at anniversaries we only recount the happy stories!), recollections, touching stories, congratulations and diplomas, all nostalgic for „the good time we had back in the day”. Economistul (a local weekly) dedicated a special issue to commemorate the events and distributed some well edited leaflets. Kudos to them!

I was invited to one of the sessions, organized by the School of International Relations (formerly known as School of Foreign Trade), which I graduated and where I lectured for some time.  I was even invited to say a few words for the occasion, but in the end it didn’t pan out (local customs for event logistics don’t prioritize punctuality). But at least I listened to a few speeches, including some from representatives of foreign universities/colleges which did prove interesting. In lieu of giving that speech I’m sharing here what I would have said.

I was quite close to the university after graduation. I was a part time assistant professor, wrote several chapters of the Applied Foreign Trade course, and was a PhD candidate which I completed after the Revolution. Starting with 1994 I was a professor and I taught “International Financing” for a decade. I have the satisfaction that by introducing this course, the School of International Relations embraced a new specialty important for foreign trade: financial services. The curriculum fares well compared to the more specialized classes offered by the School of Finance. Over the years I lugged many suitcases of books bought in London, New York, or Paris for students. I used modern teaching methods in a time when professors still used to read the lectures sitting behind their desks. I worked with students at seminars and coordinated the preparation of many graduation thesis. I tried to do things differently, in a more diverse and modern way. My assistant (now a professor) even created our first website for the class.

While I was a top civil servant (1991- 1996) I tried to involve the ASE in the research programs financed by the European Union (I coordinated the first of the PHARE programs), to bring to the School of International Relations outside support (British Council, PHARE) to adjust the curriculum to modern requirements. I also invited visiting lecturers from European universities to share their experience about teaching methods, working with students, contents of the lectures, organization of the university departments, etc.

Many things have changed since then. The Academy is more open, more modern, better equipped. The library is grand, when you walk inside, you feel as you were in a cathedral, where you shouldn’t even whisper, but which invites to studying. State of the art digital equipment facilitates access to any source for research. The libraries are still enticing, despite living in the era of tablets and distance learning. The teaching probably changed a lot as well. Today, my modest projectors (first overhead with transparencies, later with a computer) would be outdated and the photocopied books I carried to classes and seminars would seem ludicrous.

I would have used all these resources to mark the great anniversary with debates and an analysis of the 100 years of history. How it initially started as the Academy of High Commercial and Industrial Studies, how it was “swallowed” and transformed and what it is now, anchored in a modern world. I would like us to talk about the moments of reference and inspiration, about great professors and their contribution to the making of the country’s destiny, but also about the deviations, the mistakes, and the failures. I wish that students and teachers, graduates and sympathizers, participated in a fair evaluation of the achievements of the economic education within the ASE and  create the institution’s profile for the future. What is the place and role of the ASE in today’s society? Is it an institution of the professors or of the students? Is it a partner in the social dialogue? Is it an institution that supports public policies?

After more than 20 years, Romania is still struggling to determine its economic and social development model. We lack understanding of the past, the needs of the present, and the directions of the future. We also lack the basics. One example is the school or university textbook; society is wasting precious time arguing about that content of textbook rather that demanding that our educational institutions rise to the occasion. Public debate should focus on the political viability of one development model or another, not on teaching what we are missing in school. I would like the ASE to fill in this void, to make sure that the students are left with sound and applicable specialized knowledge (the DOFIN – Doctoral School of Finance and Banking program is a good example) and to participate, as an institution, in shaping Romania’s development directions. The Academy could and should elaborate its own strategic view on Romania’s development, one that is credible, modern, well documented, sound, and last but not least, academic, significant.

Major topics of today’s life are not addressed scientifically: the financial crisis and the economic recession, the role of the financial institutions, Romania’s competitiveness, sustainable development, the convergence of the EU economies, adoption of the Euro, the future of the European institutions, etc. These topics should be approached not solely through the opinions of several well-known professors (including some with significant political positions), but in debates within the university departments and within scientific sessions. Doing that would affirm the university’s position much like Chicago University is known for its position on macroeconomics.

I wish that the ASE had its own notable periodical (a kind of local Harvard Business Review) where students, professors, alumni and sympathizers alike, could publish and debate research papers. We could discuss ideas, opinions, arguments, theories. More than a learning institutions, the ASE could be a school of economists (like the National Bank of Romania School), that leads the direction and view of Romanian economic research and doctrines (like the Romanian Academy does for the national language and other cultural heritage). ASE could be the pillar of the education-research-production cluster lying at the base of modern development (Porter’s diamond) in the strongest area of the country (Bucharest).

I wish that the ASE tried to become one of the most desirable universities of Economics. Romanians going to study abroad aim for the world’s top 100 universities. Why couldn’t the ASE be among the first 100 universities in the world? These are only a few of the ideas I would have shared with my colleagues and with the students at the 100th Anniversary. Other than that, we are all proud to have graduated from the ASE. Back then, we did not have much of a choice.

 

The Mount Washington Resort at Bretton Woods, New Hampshire, USA, site of the 1944 conference that set a new financial order.

For Some the Crisis is worse than for others

The financial crisis that started in 2008 has thrown Europe into the most severe post-war economic recession and emphasized the fundamental weaknesses of national economies, some countries undergoing significant “corrections”. The first wave of corrections (2008 – 2010) generated a decrease in the national productivity (GDP) of up to 10% in the Baltic Countries, Romania, Hungary, Ukraine, etc. The second wave (2010 – 2013) triggered an explosion of public debt in Portugal, Italy, Greece, Spain (the PIGS group), as well as the crisis of the oversized banking systems with foreign deposits and loans in Cyprus, following Iceland and Ireland.

Before the crisis, the countries were evaluated at the standard level of performance of the economic block they are part of (in the case of those mentioned above, the EU). Their identification with the economic block could reduce/conceal individual vulnerabilities. Under the weight of the crisis, the financial markets began to differentiate the countries’ individual performance in the form of a wide range of financing costs between 1% and 10% (even more between Greece and Germany). Therefore, in terms of financing costs, there appeared new regrouping criteria classifying countries into “Northern/Southern countries” or “peripheral countries” (see PIGS above). What differentiates these countries?

Historically, the European countries have developed based on economic traditions, social and cultural values and on their own institutions, which vary from one country to another, but fall within relatively similar economic policies, generated by the main development theories, from Adam Smith (1776) to Keynes and the Bretton Woods institutions (1944). The assessment of the national economies is made today under the “Washington Consensus” (the IMF philosophy), focused on macroeconomic stability (internal and external balance), liberalization of the markets and privatization.

The main components of the macroeconomic stability are the balance between public income and expenses (the budget deficit recommended in the EU is of up to 3%) and the balance of the external sector, between the input and output of goods and services (the conventionally recommended current account deficit of 3-5%), which reflect the functionality of the economy. Maintaining such balances in the long run, together with acceptable levels of price increases (2-3% inflation) and employment rates (5-6% unemployment), will provide the economy with a sustainable, long-lasting growth basis.

Some countries are in deeper trouble than others not for failure to make diligent efforts or for lack of creativity, but because they did not follow the financial discipline promoted by the “Washington Consensus” providing sustainability to economies. By a serious deviation from the standard policies, a series of economies became unsustainable, with major deficits and public debts of more than 200% of GDP (Greece, Italy), with external imbalances and exaggerated monetary economies (Cyprus, for example, has financial assets 8 times higher than its real economy), with public expenditures (social welfare programs) much exceeding their possibilities. The “South” or the “periphery” may work as hard as the “North” or the “Center”, but according to the financial markets, their work is less efficient (and apparently they need a decade to correct the imbalances).

Before the crisis, the public budgets of several countries reached deficits of 8% – 12% (Ireland, Romania, Italy, Spain, etc.), and the current account deficits amounted to 15% – 20% (Romania, Hungary, the Baltic Countries). And the effects became visible as soon as the crisis commenced: productivity went down and the unemployment rate went up. Restoring such imbalances to acceptable levels after being hit by a worldwide financial crisis requires “austerity measures”. As we are well aware, public debate with regard to whether or not such measures should be applied is very controversial and it triggered political crises (in Greece, Italy) bringing some countries to a stalemate.

Some feel that the level of the deficits and of public debt has nothing to do with being poor or rich. For example, Romania has constantly had relatively low deficits and public debts, but not for being a rich country. There are rich countries that have huge public debts and high budget deficits (see France and Germany a few years back and USA today). I think that not many countries can afford to ignore the Washington Consensus and if they do, they do it at their own expense. If you have a strong economy, with national production and a high taxable amount, then you have sufficient budget income to cover public expenditure, including social welfare programs. If your economy is less developed and/or weaker, then your income is less than your public expenses and therefore you register high budget deficits, which you have to cover from public debt (limited, within the EU, to 60% of GDP).

In other words, if you don’t need the help of the IMF, you can do whatever you want. If you do need help, you apply the lesson learnt in school. If you are a country that needs to attract foreign investments and foreign capital, the balance of external payments translates into an export competitive and attractive economy. A high deficit of the balance of payments requires the assistance of the IMF and “orthodox” correction and restructuring economic policies in order to restore the sustainability. The aim is to increase the competitiveness of the real economy.

Sustainable development, based on fiscal balances and financial stability, seemed to be a natural component of western economies. There were corrections now end then, depending on the economic cycles and, rarely, some developed countries even benefitted from IMF assistance programs for major restructuring operations (in England, it was performed by Margaret Thatcher with a courage and determination hardly seen in the political environment). But in general, the western world has been quite relaxed thinking that the lesson only had to be taught to the developing, emerging countries. Romania had to learn this lesson in the transition period from a centralized economy to a market economy. Today, having a functional market economy, all it has to do is apply the lesson.

It seems however that it is now time for the entire Europe to (re)learn the Washington consensus. I am optimistic that this will occur and that the European Union will be more resilient before a financial crisis.

The end of tax havens in the EU?

The lesson that the European Union is teaching Cyprus through the financial assistance program (bail-out), combined with its own efforts (bail-in) and the restructuring of the deposits exceeding €100,000 kept in the Cypriot banks (most of them made by foreign citizens) is a strong blow to tax heavens. However, this position is not unprecedented.

There have been previous warnings made by prominent right wing (Angela Merkel) as well as left wing (Francois Holland) politicians. It seems that the European governments (and not only the European ones, if we consider the pressure made by USA on the Swiss banks) acquiesce to interpret the “fiscal optimization” offered by tax heavens as nothing less than tax evasion. Considering all states are feeling pressure on the income from taxes and given the decline of production and the decrease of the taxable amount, financial engineering can no longer be tolerated and the battle seems to be one of life and death.

High officials within the EU and the Member States (like Germany) declared that the restructuring package agreed upon with Cyprus is unique and special. This is to reassure the markets that similar measures will not be taken in other countries as well. More specifically, that the private sector will not be required to bear part of the restructuring cost (bail-in), which is a rather uncommon measure for public programs meant to avoid systemic risks (too big to fail). As I see it, the uniqueness derives from the particular status of “tax heaven” of the Cypriot market (the bank assets are almost eight times higher than the real economy). The message quickly got through: Luxemburg (a financial market of comparable size, but deemed more stable) announced that it will waive bank secrecy, which would end its status as tax heaven.

What do the Cypriots say? From heartfelt slogans (such as “Cyprus is not for sale!”) to demanding withdrawal from the EU (the Orthodox Bishop of Cyprus), they sense, almost in unison, the end of an era, of a comfortable system that provided a good life, exploiting the country’s geographical location, maybe even its history, but definitely of a system artificially “accommodating” the financial interests of tycoons.

I was surprised by the position of a (former) high dignitary of the Greek orthodox (and Mediterranean!) world, but still an international personality of the social democratic universe: Andreas Papandreou, a guest at the Congress of the Social Democratic Party (PSD) held in Bucharest. Papandreou, who was a PASOK leader in Greece and Prime Minister when people started to become aware of the financial disaster taking over Greece and the first austerity measures, gave a speech that could be regarded as a lesson of social economy for any government. Transparency, competitiveness, equality, social inclusion, infrastructure and education, strengthening democracy, fighting nationalism, investment and development, jobs, and not austerity. But also fiscal discipline.

PSD Congres

Andreas Papandreou, who is the Interim President of the International Social Movement, advocates not only for the change in balance of power in favor of the left wing, but also for the actual eradication of tax heavens. He estimates that “30% of the wealth of the world’s richest people is hidden (unaccountable)” and therefore, not taxed. What do his Cypriot neighbors and allies say upon hearing this from a true, internationally renowned Greek? I think it’s easier to teach lessons than to make things happen when you have the power. I remember Papandreou as a democrat, demanding a referendum for the approval of the austerity measures in Greece (sic!), but he did not do much to correct the Greek taxation system.

P.S. PSD’s program presented at the Congress (“A Strong and Fair Romania” structured into 9 priority items) contained a single mention on taxation (under item 1, “We are overcoming the crisis”): “War against tax evasion, for the financial consolidation of the state and of the public services”. They could have taken more from Papandreou’s speech!

Iasi contributing to Romania’s 21st century

Iași praises its heroes and lives from its past”, said, recently, a local high official. “Iași needs to live in the present and build its future, a future of economic development, of attracting investors, technological parks and jobs, a future of well-being for its citizens.” Is Iași archaic and gloomy, as it seemed to be in the ’90s, drifting in the twists and turns of capitalist economy? Today, it is certainly NOT!

I hadn’t been to Iași since 2010. I was very surprised a few days ago, when I visited the city. Of course I know a lot from books, from previous visits, from stories told by colleagues (renowned people working in the IT business), friends and family (my son worked at Microsoft in Seattle with a lot of young people from Iași, people their teachers should be proud of). The city is a cultural, religious, educational, and even… political center. Many of the ministers (secretaries of state for my U.S. readers) within the recent governments came from Iași. I read the works of writers from Iași (Dan Lungu) and I think we all are generally captivated, countrywide, by young talents in the media.

But is Iași, an economic center? Many decried the famous “industrial platform” of the city when a National Liberal Party minister, elected in Iași, launched the “reindustrialization of Romania” perhaps impressed by the fate of the socialist industry. Was it a real sustainable industry, or just a “job factory”, significantly subsidized by the State? A lengthier debate perhaps for some other time…

It seems to me that Iași’s industry is resurrecting in modern, not in traditional terms, in terms of quality, not quantity. In terms of efficiency and productivity not only with regard to jobs. State of the art technologies dominate Iași’s industry and they are champions in regards to exports (I think the export rate is higher than in the times of the “industrial platform”). American and European companies established their regional business hubs in Iași, and even invested in alternate railroad tracks to match Russia’s and Ukraine’s. Several Romanian entrepreneurs, some young, some older, had significant achievements in various sectors of the economy (health, food industry, etc.).

And industry is not the only growing sector. Services are developing as well. The city’s infrastructure is largely renewed and modernized. New access ways and improved traffic flow. Better utilities (Iași has one of the most powerful water supply companies). New entertainment centers, hotels, and restaurants maintaining traditional local cuisine (tochitură [stew], sarmale [stuffed cabbage], papanași [cheese doughnuts], plăcintă poale’n brâu [sweet cheese pie] and many more.

The much-awaited airport, modernized and extended, seems to be on its way. The peopl of Iași and of (upper) Moldova have relatives in Europe, whom they want to visit more often. The first flight to Rome was sold out long before the departure and for the flight to London there were no more tickets! Direct link to Europe: done!

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The city is livelier, more colorful, and more beautiful. The people are more relaxed, more modern, and more proud of their city. The new pedestrian route brings out better the historical and religious monuments (including the Cathedral), the administrative buildings (the City Hall is seated in Palace Roznovanu) and the modern “monuments”.

“We see accomplishments we are not used to”, says a colleague from Iași. “The Palace of Culture was 95% consolidated and renovated, the way it has not been in decades, the Moldova Philharmonic is half rebuilt, the National Theater was fully renovated (a work of art!), after 20 years, Trei Ierarhi Church is finally rid of the scaffolds and it looks impressive, the National Opera started to give open air concerts, there are new theater plays, the theaters are packed with spectators, the archaic promenades are coming into shape and give out a note of eccentricity, in tone with the city itself …”

I was impressed by the architectural and commercial blend of the esplanade of the Palace of Culture – Palas Mall, the summer theater, the promenades and playgrounds, the commercial centers, the office buildings, the restaurants and even the streets are in perfect harmony. It is a refreshing view of two wonderful worlds melding together – one old, glamorous, and the other new, modern and functional. Iași passed the modernity test. You don’t know whether you’re in Iași or in Lyon (the comparison is mine, though to some it may seem exaggerated).

Perhaps even more importantly, in Iași there is a new state of mind, more optimistic, of “yes, we can”, the state of mind of accomplishers and winners. A strong and dynamic local administration, highly cultivated and educated persons, ingenious and courageous entrepreneurs, engineers, technicians and workers who are more confident in their place of origin, modern and emancipated students. I feel that I am part of this state of mind and I am happy to have lived this experience. I recommend it!

 

Romania is antifragile compared to Cyprus and Greece

Romania went through 20 years of reforms, some incomplete, some improvised, but the progress is visible and so are its effects. Romanian authorities were assisted in the transition to a market economy by IMF (the IMF agreements covered 15 of the 23 years of capitalism), the World Bank and the European Union, cumulating perhaps the most advanced expertise in the field.

The period preceding Romania’s accession to the European Union was a genuine program of structural adjustment and reforms. On the one hand the privatization of the gas and electricity distribution, the breakup of the oil and landline phone service monopolies, with the liberalization of the prices and of foreign trade on the other hand transformed the Romanian economy, within a relatively short period of time, from a centralized, command economy, into a functional market economy, mostly private and completely open. Foreign direct investments stimulated Romania’s economy (52% of the private sector output), particularly in telecommunications, automobiles, manufacturing, dairy and non-alcoholic beverages industry, but also in the financial, retail, etc. industries, which all together generate most of Romania’s exports, of over €50 bln.

Romania’s economy has all it takes to enter a sustainable growth stage if the economic and social reforms, structural adjustment and public administration reform are continued. Many steps have already been made and there is little left to do, but what remains is essential. We have a relatively complex (multi-sectorial) economy, although small (€131 bln. GDP), mainly based on industrial production, agriculture, and services. The economic operators in Romania are competitive, both locally and internationally, and they achieved such competitiveness through their own forces, proven in real markets and not by subsidies, monopoly or other advantages. This makes Romanian production sustainable and business environment more productive.

The Romanian banking system is… localized, but operated mostly by experienced banks, competitive in other markets, which offer modern services. The banks receive domestic, and not foreign, deposits and savings or they finance their local assets from foreign savings, but on their own. The home countries of the banks operating in Romania proved that they have the economic strength to protect or save their banks in crisis situations and thus protect Romanian depositors. Bank assets in Romania represent only 62% of the GDP, the public debt 35% (3rd quarter of 2012), and the external debt 74% of GDP. Romania’s rating on the financial markets is “investment grade” and it obtains financing at costs much below those of Greece or Cyprus (as compared to their current default/bankruptcy statuses) or even of developed countries such as Italy and Spain. Romania managed to adjust the financial unbalances through its own forces, with the support of IMF and the EU, before the onset of the crisis in Greece and Cyprus.

The economies of Greece and Cyprus are rather mono-sectorial (primarily based on tourism, shipping and… financial services) and more closed than open. The collapsing banking sector is built with national capital(!), with other sectors still state-owned (we haven’t seen any privatizations in the past 10-20 years), less competitive (dominated by public or private monopolies), little, or not at all, transparent, less reformed and even unbalanced.

Cyprus has a gross domestic product of €18 bln. obtained from two types of services (tax heaven and tourism) which are not sustainable. At the same time, it has deposits (foreign, obviously) of €127 bln., representing over 700% of the GDP, that is to say, a monetary economy with no connection whatsoever to the real economy. The deposits are volatile because they are only registered in Cyprus, but used somewhere else. Therefore, it is not only an unsustainable economy, but also an unconventional one, too atypical to be comprehended by the Western-European policies as well, which criticize (at least on occasions and in action) the tax heavens associated with tax evasion.

It is no wander that the European “rescuers” are not supportive of this type of economy, on the contrary. “Normalizing” the Cypriot economy, so as to generate sustainable income, which is indispensable to fiscal balance and financial stability, is an impossible task. Lacking economic solutions, the donors requested the Cypriot Government, in exchange for the rescue assistance, to take decisive actions to “restructure” the gigantic financial institutions and to “clean up the economy” (bail-in). We are not talking here of a banking crisis, but of the failure of a pyramidal and opportunist economic system collapsing at the first gush of wind.

Besides the closed and monopolist economy, Greece stands out by an almost complete absence of industrial production and an excessive public debt(over 150% of the GDP, 3rd quarter of 2012), which in fact subsidizes an unsustainable country level. The capacity of this type of states to solve their own problems and to save their own financial institutions has proved insufficient, precisely because their economic system generates little output, consumes a lot and is unsustainable.

Romania promotes itself internationally to attract foreign investors because it has relatively cheap and qualified labor force, particularly in the industrial production sector. Romanians are educated, bright and hard-working. This is perhaps the main leverage of Romania: its citizens work! When you have a population that works, learns (English at the same time as Romanian!), sacrifices itself (the way they managed to avoid disaster in 2010 – 2011), knows its limits, hunts for better jobs in Europe (including Cyprus and Greece), you have a natural advantage. Cypriot housewives keep in their homes 2-3 women (possibly Romanians) doing chores for them. They pay these women and still have some money left. Where from? Romanians work a lot (maybe even competently) and live modest lives. It’s true, they could live better if the administration was able to turn the resources it has into welfare for its citizens.

Social welfare in Romania is much below the country’s possibilities, as opposed to the social welfare in Cyprus and Greece, where it is well over the countries’ possibilities. It’s true that Romania still has unfinished reforms, that maybe it doesn’t know how to manage its resources properly, or maybe it has lower productivity than ideal, but these things are on track to be can be changed for the better. They aren’t fundamental problems that have to be rebuilt from scratch or started all over, as in the other two countries. We don’t have to redesign our economic model, we only have to supplement it, to operate it at the same speed with the rest of the industrialized countries. Unfortunately, Cyprus and Greece, Our orthodox sisters, have to redesign their welfare model, and they won’t be able to do it on their own.

Romania is more open and cooperative with its international partners which is good because it has much to learn and to transfer from the more advanced economies and democracies. The miracle of Westernizing Romania in the nineteenth century can surely be replicated by the rapid modernization of the country in the twenty-first century. And Romania can do it! I doubt that our Balkan neighbors still can. They are too proud of their old civilization!

P.S. The concept of anti-fragility comes from Nassim Taleb. He advocates what he calls a “black swan robust” society, meaning a society that can withstand difficult-to-predict events. He proposes “antifragility” in systems, that is, an ability to benefit and grow from random events, errors, and volatility.