TheMarketForIdeas

The so-called anti-austerity backlash in Romania, led by the now defunct unnatural alliance between the National Liberal Party (PNL) and the Social Democratic Party (PSD) of eight years ago, has kept the Romanian public on the edge and can even be credited with electoral success, but its actual anti-austerity policies are quite hard to pin down. Despite a lot of angry rhetoric, until 2015 the USL (Social-Liberal Union) government’s fiscal policy basically followed, with minor tweaks, the 2010 much maligned austerity measures put in place after an external financing agreement with international financial institutions. The 2015 tax cuts were basically a Trump-style “neoliberal” supply-side fiscal stimulus that the most leftish, non-PSD aligned, commenters criticized as the climax of post-communist Social-Democratic hypocrisy, surpassing in scale even the 2005 introduction of the flat income tax. It is only in the last year or two that the PSD government has actually strayed from more or less orthodox, even if sometimes ill-timed, fiscal policies, by adopting an ill-designed bank-assets tax, as well as a turnover tax for the energy and telecommunication companies, in order to finance a growing deficit ahead of a major electoral year. Nevertheless, there is actually a heterogeneous group of both Social-Democratic as well as National-Liberal economists that claims to propose a radically different, heterodox, set of economic policies and which has gained considerable influence over policymaking. 

New Developmentalism 

While it is not easy to give a coherent account of their proposals, marketed audaciously under the label “New Developmentalism”, these involve short term as well as long term changes, significant cyclical as well as structural changes in economic policy and feature, as their common denominator, more active state involvement in the economy. So far, the proposal that has come closest to being consistently implemented is the so-called “wage-led growth” idea most famously advocated by Cristian Socol, the most high-profile public face and unofficial leader of the group. According to this idea, hammered out on a rather ad-hoc basis from Kaleckian growth models, the state should use its monopsonistic power over the labor market in order to aggressively increase public sector wages and minimum wage requirements and thus not only increase aggregate demand over the short-run, but also improve the appeal of Romania’s labor market and stop the structurally-induced, wage differential-led, labor force emigration. The proposal is obviously risky because using the public sector and minimum wage laws to push up wage rates and create demand reverses the orthodox policy recommendation in times of crises as well as in times of growth and can easily backfire, through reduced employment, reduced competitiveness, fiscal imbalances and even price inflation (as has in fact happened). In fact, the public sector wage measures already adopted by the current PSD government seem to repeat the public sector wage and employment policies of the National-Liberal government in the run up to 2008, which are often considered, at least in part, responsible for the difficult adjustment measures of 2010.

The proposal that has come closest to being consistently implemented is the so-called “wage-led growth” idea most famously advocated by Cristian Socol.

Closely related to this idea of aggressively increased public wages and minimum wage requirements is the idea, also championed by Cristian Socol, that Romania should consider deliberately breaking or asking for an exemption from the European Growth and Stability Pact, which limits budget deficits to 3% of annual GDP and the public debt ratio to 60% of the country’s GDP. Although the party Socol advises is currently highly suspect of anti-European sentiment, particularly when it comes to corruption and rule of law issues, having basically paralyzed the judiciary and blocked major corruption inquiries in the last two years, his argument for ignoring the Stability Pacts is not entirely devoid of intellectual merit. This is especially the case for those economists who, in the current rather low interest rate global environment and slowing growth, are more in favor of flexibility than of fiscal discipline. When Romania joined the Stability Pact and subsequent fiscal compact, Socol argues, its public debt was among the lowest in the EU – not only compared to old Member States such as Italy, Belgium or France, but also compared to new Member States like Hungary – while its public investment needs were and still are among the highest, therefore the rules give in his opinion an unfair advantage to the countries which have already stockpiled on debt compared to countries which have not. It remains to be seen how this critique of European deficit and public debt limits squares with the first point of his “New Developmentalism” manifesto[1], which fortunately enough emphasizes macroeconomic stability and debt sustainability especially when applied to a country which does not exactly enjoy the highest trust of international creditors. 

Other examples 

Closely related to this idea of aggressively increased public wages and minimum wage requirements is the idea, also championed by Cristian Socol, that Romania should consider deliberately breaking or asking for a derogation from the European Growth and Stability Pact, which limits budget deficits to 3% of annual GDP and the public debt ratio to 60% of the country’s GDP.

More debt-financed and active state investment in the economy is an idea also embraced by Lucian Isar – a former junior Minister for Business Environment for six months as well as husband of a former PNL Chairwoman –, who is highly critical of the National Bank of Romania’s policies during the 2008/2009 crisis response and subsequent stabilization agreement with the International Monetary Fund (IMF). He primarily advocates for the creation of a new public Development and Investment Bank, separately from the current Eximbank (a state-owned bank originally for the purpose of promoting exports), which is supposed to function alongside another controversial PSD proposal for a Romanian Sovereign Wealth Fund. This new Development and Investments Bank, as well as the new National Sovereign Wealth Fund, made up of state-owned companies and other state-owned industrial assets, are supposed to leverage off-the public budget financial resources to spur investment growth in the economy, in accordance with the guidelines of a new indicative planning board, which presumably would be set up within the premises of the Ministry of the Economy and Business Environment.

Lucian Isar primarily advocates for the creation of a new public Development and Investment Bank, separately from the current Eximbank, which is supposed to function alongside another controversial PSD proposal for a Romanian Sovereign Wealth Fund.

Daniel Dăianu – another National-Liberal-leaning economist, former Member of the European Parliament and now Board Member of the National Bank of Romania (BNR) – also advocates, along the line of the “New Developmentalism” group, for increasing the capital resources available to state-owned banks, particularly the capital of the only major state-owned bank left in Romania: CEC Bank (formerly Casa de Economii și Consemnațiuni), the country’s oldest financial institution. He blames the European Commission for having opposed such a measure during the financial turmoil of late 2008 and often deplores the dominance and accompanying high profits that foreign capital has achieved in the Romanian economy during the last two decades, and especially during the last two or three years.

It is ironic that Cristian Socol claims inspiration for his “New Developmentalism” doctrine – which mixes elements of economic policy from both communist Romania and pre-communist Romania – from a Brazillian economist, Bresser-Pereira, who actually updates a framework of economic thinking which began with Vintilă Brătianu and then spread through Mihail Manoilescu in South America and beyond.

The idea of more active state involvement in the economy, a so-called New National Industrial Policy (“Romania 2040”, with an intermediate target in 2030) based on competitive business clusters, is often coupled by its promoters and associate business interest groups with protectionist sentiments regarding the plight of Romanian capital, whose share in the economy has generally decreased since the fall of communism. State-led development, even based on more public debt or public debt guarantees, generally means in these various proposals – such as the one of Ilie Șerbănescu, most clearly, an economist who served as Minister of Reform and Privatisation in the late 1990s – more state support for Romanian capital ownership, through various state support schemes, and less openness to foreign capital ownership, an attitude which parallels one in the late 19^th century, when such a policy course was first formulated in Romania with tariffs and other intrusive regulations. In fact, it is a bit ironic that Cristian Socol claims inspiration for his “New Developmentalism” doctrine – which mixes elements of economic policy from both communist Romania (e.g. acquisition of product licenses) and pre-communist Romania (promotion of domestically owned industry) – from a Brazillian economist, Bresser-Pereira, who actually updates a framework of economic thinking which began with Vintilă Brătianu and then spread through Mihail Manoilescu in South America and beyond[2]. 

Coming soon… 

Besides state-led wage growth and state-led investment growth, more or less debt financed, there is a third big idea which is not quite part of this “New Developmentalism” group agenda, at least not to date, but is pretty close to it that one may expect a full merger sometime soon, especially given the current government’s financing difficulties and needs: more progressivity in taxation. This idea is advocated primarily by two PSD-affiliated economists, which are also Board Members of the National Bank of Romania (BNR), Florin Georgescu and Liviu Voinea. The two were from the beginning opposed to the flat income tax reform of 2004, with the latter having authored a study blaming it for ballooning Romania’s current account deficit and, by implication, laying in part the basis for the crisis of 2008/2009. At present, however, the 16% flat tax has actually been replaced by the Social Democratic Party with several tax rates on various sources of income, the lowest being the capital gains tax, and even the additional value-added tax rate has been differentiated for various categories of purchasing items.

The country, despite the often unrecognized progress over the last two decades, does face huge challenges.

Although, with Cristian Socol authoring the Economic Governing Program of PSD, the “New Developmentalism” group does seem to have gained a lasting foothold in Romania’s economic policymaking (not to mention significant media space), the extent of their influence and actual capacity to transform the country’s economic policy in the most radical way envisioned is not as easy to evaluate. On the one hand, they seem to have ridden on a wave of growing dissatisfaction, which is no longer composed only of the so-called “transition losers” and communist nostalgists (workers who have seen their communist era factories closed-down, failed entrepreneurs, public employees who have seen their social prestige dwindle or low income pensioners), but also encompasses “transition winners” hit hard by the 2008/2009 crisis (small and not so small, honest or not so honest businesspeople, the unemployed, the mortgage debtors, the public employees who have had their wages cut and young people who have hardly or never lived under communism lacking economic opportunities). On the other hand, despite PSD’s rather monolithic structure and high party discipline inherited from the Romanian Communist Party, the organization has recently gone through a petty separation, with former Prime Minister Victor Ponta – for whom Cristian Socol was officially the economic advisor – starting his own party. Although Socol still advises PSD, the current Prime Minister Viorica Dăncilă has given his former advisory job to a much less reputable character, Darius Vâlcov, who is currently appealing an eight-year sentence for money laundering. It was actually Darius Vâlcov and Finance Minister Eugen Teodorovici who abruptly announced, around Christmas, the infamous Emergency Ordinance 114 that introduced the controversial bank-assets tax, the turnover tax for energy and telecom companies as well as higher equity requirements for the private pension funds. 

Conclusion 

Nevertheless, the feeling that, despite considerable economic progress, Romania has somehow been taken advantage of by the “anarchic liberalization” that followed – too slowly in fact – the fall of communism, and especially the subsequent EU integration process, is widely shared among this cross-section of transition-era policymakers and does not seem to want to go away anytime soon. And this often misplaced feeling of outrage, lacking self-criticism, unfortunately molds perfectly to a traditional Romanian penchant for heavy-handed state intervention and unorthodox, usually counterproductive, even opportunistic, economic experiments. The country, despite the often unrecognized progress over the last two decades, does face huge challenges. Its population is aging rapidly and shrinking fast, with outflows still high even after recovery. Old-style – even if only indicative – industrial planning, very hard or almost impossible to implement when it comes to innovative new industries[3], has no chance to work without an institutional environment (political, legal and social) which makes people want to stay, work and create in Romania, or even relocate here from elsewhere. A country showcasing outrageous politicians weakening the independence of the judiciary and notorious for petty or large corruption in its public services is not likely to successfully implement a New Industrial Policy.

[1] Cristian Socol, „Un manifest pentru modernizarea României”, Ziarul Financiar, 3 iulie 2018 : https://m.zf.ro/opinii/un-manifest-pentru-modernizarea-romaniei-nouldevelopmentalism-ca-proiect-de-tara-17340810

[2] Joseph Love, Făurirea Lumii a Treia. Teoreticieni ai subdezvoltării în România și Brazilia, Univers, București, 2002, translated by Lucian Bălțătescu, Gelu Calacean, Catrinel Florea

[3] Larry Downes, Paul Nunes, Big Bang Disruption. Strategy in the Age of Devastating Innovation, Portfolio, New York, 2014