TheMarketForIdeas

Economically speaking, where did we start from within the political project shepherded by Ion Iliescu in 1990? I see that this project is called at the same time “Gorbachevite”, “neoliberal”, “shock therapist” even. Yet, rigor is needed here.

My analysis is that at the decisive moment of 1990, before the fragmentation brought about by the 1991 reforms, at an intellectual level in power circles there was actually a split between market socialism and a strange neo-developmentalism grafted on social-democratic aspirations whose undercurrents neither Iliescu nor his allies understood very well, given the data of the problem in Romania in those years and the terrible isolation experienced in the 80s. The Neoliberal Consensus from Washington, not to mention shock therapy, had no supporters in the power apparatus until 1996. What was done in this regard was fragmentary and under the coercion applied by financiers (here the IMF) to the rulers of a state without access to capital.

In the final socio-economic outcome – overall an extremely brutal one with millions of lives –, these economic paradigms mattered less than objective material and political factors, some inherited from the late stage of Ceausescu’s reign, others new. But in no case can we see in the dominant actors of this period simple projections of structural constraints. Some socialist countries gravitated towards the ideas that were the basis of European social democracies (Slovenia). Others went towards a kind of market socialism without the advantages of China (Belarus). Others gravitated towards liberalism, although some socially embedded it quite a lot, at least for a while (Visegrad) or did not bother to put in serious safety nets (the Baltics).

(Market) Socialism’s Swan Songs

During the early 1990s the most radical contestation of neoliberal economics was put together by local advocates of market socialism, a set of ideas that had been declared dead by their erstwhile proponents in Central Europe (Kornai 1993; 2008). The socialists had made their careers when Romania’s economy grew at breakneck rates and became Europe’s most industrialized. Unlike their peers in Central Europe, they had not felt the disappointments of reform socialism and understood little of Western economics (Aligica and Evans 2009). Consequently, they critiqued Ceausescu’s economic ideas and agreed that more market-based competition was needed, yet were keen to salvage the basics of the socialist economy: planning, state control over most of industry and agriculture, administered prices, etc. (N.N. Constantinescu 1990; 1991; Vacarel 1990; 1993).

The overwhelming majority of market socialists were academic economists and economic experts affiliated with the bureaucracy. All belonged to a newly-established association (The General Association of Romanian Economists or AGER)[1] whose public mission was to search for a “third way” between capitalism and state socialism (AGER 1990). Headed by one of the orthodox economists of the regime (N.N. Constantinescu), AGER had chapters throughout the country, established its own publishing house and claimed to represent the voice of 50,000 economists. The socialists published their views on economic policy in a small circulation newspaper (Economistul) and in the supplement of the most popular national daily (Adevarul) known for its criticism of the socio-economic reforms adopted with Petre Roman as Prime Minister. The AGER elite had a reliable political voice in Alexandru Barladeanu, one of the architects of Romanian economic reforms during the 1960s and, until his marginalization by Ceausescu, the country’s most respectable socialist economist.[2] Now a believer in modest “Gorbachevite” reforms and a staunch opponent of the market reforms adopted in Central Europe, he used his power position as the president of the Senate, advisor to president Ion Iliescu and informal leader of the left wing of the FSN to foist the reform plans of the Roman government (Severin 2005; Betea 2005; Abraham 2006).

In the aftermath of 1989, the socialists diagnosed the economic failures of Ceausescu’s economic model in his abandonment of the technoscientific core of socialism.[3] For them what failed in 1989 was not socialism but the pathological outgrowths of “Ceauschism”. Socialism had been bled dry by the fact that the austerity of the 1980s had cut off crucial imports of technology, thus decreasing the competitiveness of Romanian exports. The combination between increasing centralization in decision making and the unscientific investment of forced savings in energy-intensive projects had smothered the managerial capacity of firms to adjust and of the state to fund competitive sectors.

Given this diagnosis, the reform socialists thought that the only desirable alternative was the socialist market economy.[4] Rather than scrap planning altogether, they endorsed a variant of planning that factored in market signals and talked about breaking giant down state-owned firms into smaller, worker-controlled units, like in the Yugoslav model.[5] Rather than embrace macroeconomic austerity and accept concomitant rises in unemployment, they wanted to relaunch investment, keep full employment and maintain state ownership over most of the industry for the foreseeable future. Some of them had built political capital out of opposing Ceausescu’s unrealistic forced savings and his early debt repayment and saw in Romania’s lack of foreign debt leeway to obtain the external financing needed to restart of the investments that socialist market economy called for. The socialist economists also pleaded for the institutionalization of equal relations between private, public and cooperative forms of property as the best guarantee of “economic pluralism”, a concept they saw as tied to political pluralism and presented as a guarantee against a return to the oligarchic capitalism of Romania’s pre-Stalinist past.[6]

The Unemployed Keynesian Views

Another path not taken was that of Keyensianism. Its domestic advocates (Vasile Pillat, Eufrosina Ionescu) played down the crisis potential of the structure of the socialist economy or of the transition to the market economy itself. Pillat even saw a significant comparative advantage in the country’s exceptionally strong external position (Pillat 1991). Instead, they blamed price liberalization in a market with large monopolies and oligopolies as the prime cause of the serial breakdown of a large slice of the state-owned industrial sector after 1989. Rather than hope that market institutions would appear spontaneously, they argued that former socialist economies were best served by a gradualist approach executed within a neo-corporatist institutional structure and with the mixed economy as the final destination.

Ionescu used the contributions of the neo-Keynesian Joan Robinson to warn against the likelihood that such economic reforms in Romania could only lead to yet another form of the Western oligopolistic market.[7] She warned that macroeconomic stabilization and price liberalization could trigger a catastrophic recession rather than transformational one through forcibly compressing internal demand and lowering the expectations of investors. Similarly, while attacking the idea that neoliberal capitalism should be the end of the transition and framing the neoclassical tradition as an “abstract, asocial and irrelevant to address our quest for what kind of market economy we can and wish to build”, and indeed no more than an instrument of the economically powerful, Pillat pleaded for a synthesis of Keyensianism and the Romanian structuralist tradition of Manoilescu (he called it “national economy theory”).[8]

This position entailed a gradualist approach to transition based on large state investments financed by foreign debt and deployed to absorb excess labour, create market institutions and the pillars of a neo-corporatist wage bargaining.[9] Moreover, rather than treat labour as a mere production factor, Pillat argued for its incorporation in the national economic policy process. The structuralist-Keynesian synthesis he advocated also suggested that given the basic structural flaws of the Romanian economy (large monopolies and oligopolies), price liberalization was bound to trigger inflation because in such conditions the basic function of prices as rational mechanisms of allocation was inoperable and served instead a monopoly/oligopoly rent mechanism. Given the same structure, it was argued that the abandonment of any form planning was the prime generator of the disorder and uncertainty that led to inflation and loss of output. Therefore, indicative planning and a tight state control over its firms were needed at least until market institutions matured.[10]

In sum, the Romanian economic profession had enough socialist and neo-Keynesian opposition to prevent a quick neoliberal turn. Moreover, it was not surprising that the external environment notwithstanding, the reform socialists thought they had a real chance to shape the economic transition. The country’s electoral mood was on their side: the ex-communist FSN had won the May 1990 elections with a landslide, Iliescu’s “Gorbachevite” ideas were then delivering political capital. Yet these economic ideas failed to shape the policy debate despite the impressive number of economists that upheld them. The fact that all leading socialists had a hectic relationship with the FSN, failed to present detailed templates of what the Romanian version of the socialist market economy would look like and were challenged on their own turf by heterodox economists contributed to the quick marginalization of their ideas. Moreover, unlike their heterodox or neoliberal foes, they were slow to come up with research couched in econometric models at a time when quantitative research was becoming a language of power under pressure from the IFIs. As a result, by the mid 1990s, market socialist economics had written itself into irrelevance.

As for Keynesians, neither Popescu nor Pillat managed to make followers. Moreover, Popescu stopped publishing and Pillat reduced his ambitions to building a methodology for multiannual industrial policy (Pillat 1995). It was only in the late 2000s that a small and equally peripheral generation of young scholars began to publish studies inspired by Keynesian ideas (Caraiani 2007; 2008; Ciurila and Murarasu 2008). As a result, Keynesianism was never a real competitor and remained alive in economic debate only in the diluted forms encountered from the Western macroeconomics textbooks translated into Romanian after 1990. Like the socialists, the neo-Keynesians enjoyed no external support at a time when neoliberalism was at its apex in the Western economic profession. Therefore, unlike their neoliberal competitors, neither the socialists nor the neo-Keyensians could offer potential followers status incentives, subsidized access to organizational resources or previously unavailable databases, methodological metrics or output produced by recent Nobel prize winners and prestigious academic or financial organizations.

The Temporary Veto of Heterodoxy

Unlike socialism and neo-Keynesianism, the third non-neoliberal economic model (heterodoxy) “stuck.” A basic intellectual template for the policies of the Vacaroiu government (1992-1996), the heterodox agenda was tantamount to the institutionalization of a statist variety of capitalism through gradual reforms. Built off ideas derived from continental and Nordic neo-corporatism, French dirigisme and early postwar East Asian developmentalism (Dobrescu and Postolache 1990: 110-112; Zaman 1990; Cosea 1995), heterodoxy emerged as a robust alternative to the neoliberal template of transition to the market economy.

Unlike the socialists and the Keynesians, the heterodox carried domestic political clout. During the first half of 1990 ex-planners based in the National Institute of Economic Research (IER) formed a special commission tasked by the provisional government to outline a long-term economic strategy. Published in May 1990, the document (the Outline…[11]) informed the economic strategies of the Vacaroiu government.[12] The premier had been a protégé of one of the luminaries of heterodoxy (Tudorel Postolache) and one heterodox mandarin (Gheorghe Zaman) went on to serve as economic advisor to president Iliescu between 1992 and 1996 while two of the younger members of the group (Mircea Cosea, Florin Georgescu) became the ministers of Economic Reform and of Finance respectively.[13] The heterodox message was also bolstered by the most internationally famous living Romanian economist, Nicholas Georgescu-Roegen.[14]

Heterodox ideas constituted the only intellectual program that addressed the dilemma of the “conservative” wing of the communist successor party: while reform socialism risked further international isolation, the neoliberal transition strategy risked the destruction of the socialist industry, an asset the ex-communists valued as a symbol of national sovereignty.[15] Basically the political power of heterodox economic ideas could not be understood without examining their resonance with the premium that the conservative sector of the ex-communist elite put on industrialization and domestic control over the economy as quintessential markers of national sovereignty.

As a result of their nationalist understanding of the economy, for Iliescu and the left of the FSN the radical market reforms adopted by Romania’s Western neighbours were a form of external economic aggression that bred not only suspicion of Western advice, but also triggered bold foreign policy moves such as a new partnership with the Soviet Union in 1991. In a recently released transcript of a conversation that President Iliescu had with Gorbachev at the moment when the treaty was signed, the Romanian leader made it clear to his Soviet counterpart that he saw resistance to radical market reforms as a security issue:

“Iliescu: We are the object of both external and external pressures. Neither the IMF nor the World Bank want to give us loans. Why? The US gets involved […]

Gorbachev: Don’t you think the West wants to run us into the ground and then buy us for a penny?

Iliescu: Undoubtedly: They are taking advantage of our difficult situation (…) External and domestic foes go hand in hand. Given this, the treaty we conclude today is of great importance” (Oprea 2006: 230).

This Securitate-minded economic policy became institutionalized in the nebulous of intelligence apparatus of the state. In 1993, soon after the inauguration of the Vacaroiu government, a report of the Romanian Intelligence Service (SRI) alerted the Parliament to

“[t]he intentions of some foreign partners to control key positions in various economic sectors” and “the economic offensive orchestrated by foreign forces to force the shutdown of Romanian firms producing unique products and, as result, the blocking of the basic sectors of the national economy.”[16]

In addition to speaking to the political identity of the conservative sectors of the communist successor elite that took power in 1992, by wanting a statist variety of capitalism rather than a reformed socialism, the heterodox also looked less outré in the geopolitical landscape of the early 1990s. This was a period when ex-communist political forces in Eastern Europe were treated with hostility in Washington. As Thomas Carrothers report on Romania amply showed, American organizations held a dim view of the ex-communists and openly spent resources on backing the opposition (Carothers 1996). Reform socialism was also deemed unthinkable by IFIs and the European Commission (Berendt 2009). As Romania needed the funds and/or the markets controlled by these actors, heterodoxy gradually emerged as the only internationally presentable left alternative in early 1990s Romania. As former Romanian president Ion Iliescu put it:

“In the summer of 1990 it was obvious that even with a program as right wing as Roman’s we could not get the foreign funding needed to restart the economy. The situation remained virtually unchanged after the painful price liberalization measures. The West was thinking in Cold War terms and because the left won the elections, they treated us as a kind of communist regime […]. Given these external obstacles there was no way that Yugoslav socialist market economics could have helped, although many of us had preferred that model, at least in the immediate aftermath of the Revolution. In the end, we thought that with a better government than Roman’s we could convince the Westerners to support a reform program that was simultaneously inspired by the experience of developed market economies and was not the same with the calamity called shock therapy.”

The heterodox response to the economic crisis of socialism was the introduction of industrial policy as well as of indicative planning as permanent mechanisms of compromise “between plan and market” deliverable with the technical assistance supplied by the many research institutes inherited from national-Stalinism. Rather than hope that price liberalization would generate competition, they argued that the high degree of monopolization of supply would deny prices their basic function as mechanisms for the rational allocation of resources and would turn “markets” into mere excuses for rent-seeking. Consequently, they wanted gradual price liberalization, although they never considered the dual pricing strategy of the Chinese reformers.[17] On industrial restructuring, the heterodox wanted to restart public investment by further price liberalizations and an end to the global subsidization of industry. This led them to demand the adoption of a three-pronged strategy: public investments in state-owned enterprises (SOEs) assessed to have chances to stay afloat, transparent public subsidies for firms with no such prospects but which were judged essential for the economy (about half of the industry!) and liquidation for the rest.

The heterodox position on the pace of transition was ambiguous, as it rejected both existing paradigms (shock therapy and gradualism) and proposed a pace commensurate with the specific conditions of the Romanian economy (Dobrota and Postolache 1990). Yet the analysis of their specific economic ideas strongly suggests that shock therapy was not on the agenda and that they preferred a very slow gradualism.[18] In practice this meant a strong preference for the mixed economy, with a strong investor state targeting easy credit at industrial champions and state agribusiness while coordinating the expectations of individual firms and of entire economic sectors via French-style indicative planning (Dobrota and Postolache 1990; Zaman 1990).[19] Based on this normative position, they argued that the state was responsible for targeting industrial credit for investments in technology so as Romania does not slip back into a trap of labour-intensive specialization.

Macroeconomic policy was eclectic as well. The objectives of monetary and fiscal policy were to balance monetary and price stability, on one hand, and full employment on the other. Through Alexandru Albu, an academic economist who was the head of the Economic Commission in the Chamber of Deputies, the heterodox opposed a quick convertibility with the argument that one first needed a considerable increase in exports, so that the Romanian Leu would not collapse (Severin 1995: 66). The Outline also called for progressive taxation of both personal and corporate income, the nationalization of health, education and social welfare, increased spending on all these sectors and the institutionalization of a welfare system inspired by the Swedish corporatist model.

It was suggested that the National Bank of Romania (BNR) be transformed into a central bank with limited autonomy (which meant that it could be used as a development bank, if needed), but state banks were to stay public and some of them turned into development banks. Within this framework, the heterodox rejected the undiluted comparative advantage thesis and the strong liberal belief in the efficiency of the market:

“Left on their own, market devices generate the risk of excessively postponing the modernization of the national economy as well as the emergence of economic and social problems with unpredictable consequences. We therefore need to capitalize on the experience of advanced countries whose governments undertook active and flexible forms of intervention […] targeted at the technological updating and development of the national economy” (Dobrota and Postolache 1990: 43).

Foreign direct investment was encouraged, but so was the use of international credits for industrial policy. Industrial policy was developmentalist: managed demand for domestic goods, and aggressive export subsidy regime based on manipulated currency and investment in the industrial base inherited from socialism. The success stories of postwar France, South Korea, Japan and China were used to bolster this argument. Attracting FDI with free economic zones and deregulation of repatriations of capital was understood as part of this strategy, based on the same examples (Cosea 1995: 143-145).

Unlike liberals, the heterodox did not regard privatization as valuable in itself, as a form of credible commitment to the market economy. Neither did they see it as an act of economic democracy, as some saw it at the time.[20] Instead, they regarded it as a complex developmental tool. Thus, the state property deemed to serve strategic objectives (national defense, food security, the mobility of people, merchandise and information, social peace) were considered unprivatizable. The minimalistic list of unprivatizables included all state firms in gas, oil, electricity, some mining, forestry, large farms, the basic transportation and telecom infrastructure, defense manufacturing, social housing. Firms from all other sectors could be privatized, yet the heterodox insisted that large state firms could be sold only after giving workers the first option or, in subsidiary, after ensuring the availability of a foreign strategic investor.

Yet the heterodox model was more nationalist and developmentalist than it was egalitarian. The idea was that full employment was the best social policy. Consequently, proponents of heterodoxy proposed cuts in current spending in order to have funds for public investment in “strategic industries” and in firms experiencing temporary difficulties. To save employment, the privatization of small and medium state enterprises was to be pursued immediately, while large SOEs who served as large employers were to be maintained as public enterprises and benefit from targeted subsidies. Unprofitable firms were to be liquidated not through market mechanisms, but following state efforts to reorganize them in order to save those parts that could actually generate profit. Therefore, the heterodox saw the quick privatization suggested by foreign consultants as potentially catastrophic (Ionete 1993: 135). At a time when the Roman government decided to follow Janos Kornai and transfer half of the state’s assets to the population, the heterodox reduced that figure to 30 percent and successfully pushed for barring public utilities from privatization (Dijmarescu 1994: 79).[21]

Overall, the heterodox paradigm was a powerful and coherent contender for the neoliberal reform paradigm. Yet this framework had a few intellectual gaps that made it vulnerable to neoliberal attacks. First, it had nothing to say about the costs incurred by the state’s withdrawal of its supervision of the companies it owned. Concerned to show that they were serious about their turn away from the past, the heterodox insisted that the management of state-owned enterprises had decisional autonomy. This however prevented the government from tapping the profits of its own firms to fund much needed public investment or boost the shrinking health, education and welfare budgets. Second, the complacency of the heterodox about the banking sector (they thought that banking crises were not likely to plague a predominantly public banking industry) led them to ignore the importance of regulating the financial sector as whole. This allowed fraud and embezzlement that bankrupted two large private banks[22] and the poor supervision of non-performing loans in state banks.

Note: More on this topic, in Cornel Ban’s Dependență și dezvoltare. Economia politică a capitalismului românesc, Tact Publishing House, 2014 & Ruling Ideas: How Global Neoliberalism Goes Local, Oxford University Press, 2016.

[1] The Romanian original was Asociatia Generala a Economistilor din Romania.

[2] N.N. Constantinescu himself was close to the Martian-Barladeanu group and, as such, he was invited by them to address the Parliament when the government sent liberal bills. N.N. Constantinescu addressed the Parliament during debates on the company law (Severin 1995: 186). A Moscow-trained economist and former head of the Central Planning Commission, Barladeanu had been marginalized because he opposed the increasing of the rate of forced savings from 20 to 30 percent of GDP during the 1970s.

[3] The socialists were keen to critique the replacement of linear planning with the Stakhanovite elan that ended up destabilizing “production factors”.

[4] Interview with Alexandru Barladeanu, Adevarul, January 7, 1990.

[5] In the spring of 1990, the Yugoslav model of socialist market economy was presented as desirable by figures as high as Iliescu’s economic mentor (Alexandru Barladeanu) as well as by minister of the Economy and the military architect of the deposition of the Ceausescu clan (general Victor Stanculescu).

[6] Interview with Alexandru Barladeanu, Adevarul, January 7, 1990.

[7] Early postwar Europe and especially the France of les trentes glorieuses, with their extensive state intervention in the “mixed economy”, rather than contemporary Europe or “shock therapy” East European models were presented as more adequate sources of policy inspiration (Popescu 1991: 23-29).

[8] Pillat critiqued the “shock therapy” solution of forcing competition on the socialist economy through trade liberalization by giving the example of GDR, where not even West German aid could prevent the collapse of East German economy. He labeled monetarism and rational expectations as “extremist” and deplored the institutionalization of these ideas in IFIs. He systematically critiqued the assumptions of neoclassical economics from the positions of Joan Robinson, Gunnar Myrdal and E. Chamberlin and Pillat also used the work of institutionalist Romanian-American economist Nicholas Georgescu-Roegen to critique of the universalist pretensions of neoclassical economics (Pillat 1991: 9-15). Vasile Pilat used his contributions in Œconomica to critique the assumptions of “naked” neoclassical economics, an interpretation he saw as a “the economic variant of Darwinism (Pillat 1997: 19). He attributed the endurance of neoclassical economics to political factors. “Why is it that the dominant Western economic thought keeps avoiding the object of study of economics and prefers instead to remain stuck in theoretical assumptions and propositions that are wholly irrelevant to contemporary economies despite the endogenous and exogenous challenges it was exposed to? It is clear that since economic relations are basically reflective of economic interests, dominant interests shaped dominant economic ideas at a national and international scale” (Pillat 1991: 12).

[9] Pillat critiqued the decision of the government in early 1990 to cut the workweek to five days, reduce production quotas and increase wages as output and productivity was falling. Like Keynesians, he thought that wages and productivity should be correlated (Pillat 1991: 9-10).

[10] Pillat (1991: 11-13).

[11] Schita priving strategia infaptuirii economiei de piata in Romania, May 1990.

[12] The heterodox ideas were largely replicated by the government program of the Vacaroiu cabinet. See Strategia de reforma economic-sociala a programului de guvernare, February 1992, published integrally in Adevarul.

[13] Interview with Ion Iliescu; This information is confirmed by Adrian Severin (1995: 211). See also Academia Romana, “Aurel Iancu, la 80 de ani” http://www.ince.ro/iancu-eng-2.pdf.

[14] Already an emeritus professor, Georgescu-Roegen wrote to the prime-minister to argue that his economic policies should be skeptical towards capitalism, that large state enterprises should not be privatized and instead pleaded for greenfield FDI and the privatization of small and medium state firms instead. Letter to Petre Roman, April 1990 (cited in Stefoi 2002: 215).

[15] This understanding of sovereignty as linked to the economic primacy of the state had deep roots in the synthesis of nationalism and (neo-)Stalinism that characterized Romanian economic policy after 1964.

[16] SRI report, Adevarul, June 30, 1993.

[17] No heterodox economists developed a coherent dual price mechanism theory and even Iliescu seemed to have conceded that price liberalization would stabilize the market in a phone conversation with Gorbachev from 1991. See Oprea (2006, p. 230).

[18] Thus, while rejecting the solution of the return to “hypercentralized planning” and the state’s monopoly over industry as a reactionary and utopian solution, the heterodox nevertheless emphasized that the concrete aspects of the transition to the market economy should be “adjusted to the needs, possibilities, traditions and interests of the Romanian people, with the integration of those economic institutions of advanced economies that are organically appropriate to our economic conditions” (Dobrota and Postolache 1990: 39).

[19] Dobrescu and Postolache 1990 plus Gheorghe Zaman, “Planificarea indicativa si rigorile pietei”, Tribuna Economica, 14, 1990.

[20] The heterodox rejected as flawed a popular proposal advanced by Constantin Cojocaru, an exiled Romanian economist, who suggested Milton Friedman’s recipe for Eastern Europe: privatization of the entire economy through the gratuitous transfer of state assets to all citizens, as an act of economic democracy (Ionete 1993: 135). Cojocaru’s proposal was widely debated in the parliament and the media.

[21] The same interventionist penchant ruled agricultural policy. Trade policy was to balance liberalization and the interests of local producers. Since the problems of agriculture were diagnosed in the tariff liberalization unleashed by the Roman government, the government set out to build a system of price subsidies and cheap credit lines for local producers, with the central bank serving as a facilitator for the refinancing of state-owned agribusiness.

[22] Dacia Felix and Credit Bank went bankrupt in 1996.