Which Way Goes Romanian Capitalism? Making a Case for Reforms, Inclusive Institutions and a Better Functioning European Union

INTERNATIONAL POLICY ANALYSIS Which Way Goes Romanian Capitalism? Making a Case for Reforms, Inclusive Institutions and a Better Functioning European Union Daniel DaianU and BOGdan MURGescU June 2013 n This paper examines the Romanian economy and its version of capitalism from a long-term perspective and in a broad context. It focuses on economic prospects in the face of a legacy of backwardness and the endurance of domestic weaknesses, in the context of the Great Recession and the eurozone crisis. n Romania has a pressing need to mobilise its internal resources and absorb EU funds on a much greater scale so that it can enhance economic growth and mitigate exter- nal shocks. To this end, Romania needs to undertake thorough reforms in the public sector, combat rent-seeking and waste, foster domestic savings. The functioning of institutions and of taxation should convey a sense of fairness to citizens. n Romania needs to rethink its growth model. Romania must improve its education system by increasing the level of resources assigned to education and creating coher- ent policies to strengthen institutional capacities and to improve quality standards. n The Romanian economy would benefit significantly from EU policies that are more responsive to the economic and social fractures revealed by the current crisis. n Not least, financial markets have to be tamed in Europe and elsewhere if they are to serve economies. Daniel DaianU and BOGdan MURGescU | WHicH Way Goes Romanian Capitalism? Content Introduction: Romania in a crisis-ridden environment ........................ 2 1. Where does Romania come from? ........................................ 2 Pre-communist Romania ..................................................2 Communist Romania .....................................................3 2. Post-communist transition in Romania ..................................... 5 Industrial downsizing and two big recessions in the 1990s .........................5 A decade of growth, albeit with a fragile growth model: 2000-2008 .................6 The eruption of the financial crisis in Europe and a growth model called into question ....7 3. Romanian capitalism in its post-communist phase ........................... 8 Initial conditions .........................................................9 Structural and institutional change ..........................................10 Romanian capitalism judged within a European framework ........................11 4. Romania, the EU and catching up ........................................ 13 The EU as »attractor« ....................................................13 Mobilizing domestic resources .............................................15 The need to rethink the growth model .......................................17 End remarks: Seeking a cure in an uncertain Europe ......................... 19 References 1 Daniel DaianU and BOGdan MURGescU | WHicH Way Goes Romanian Capitalism? Introduction: tries are excelling in combining flexible markets with Romania in a crisis-ridden environment a high volume of public goods. There are also significant economic performance differences among NMSs. How many people, in the wake of the fall of the Berlin Nevertheless, the general feeling in the EU is of disaf- Wall, would have been able to imagine the hard times fection and concern for the future. Although Romania that Europe is facing today? The essay, »The End of has substantial economic potential and some catching History«1, expressed a Zeitgeist that many people be- up did take place there, the country has been caught lieved would be permanent. It is only fair to point out in the aforementioned vortex and remains one of the that not a few post-communist countries have since poorest countries in the EU. It has major institutional crossed key thresholds, allowing them to join the EU and structural weaknesses that have made its post- and NATO. But capitalism has its ups and downs, and communist transition difficult and that raise significant the current down is a very steep one. Some causes in- questions about what lies ahead – not least in view of a clude, inter alia, »irrational exuberance«2, which pops up very complicated international environment. This paper cyclically in market economies; a financial system gone explores post-communist Romania and its market-based astray following waves of deregulation; and a simplistic economy from a long-term perspective and in a broad philosophy on the functioning of markets, also known context. It focuses on economic development prospects as »market fundamentalism«. To compound the pic- in the face of a legacy of backwardness and enduring ture, the EU has been in relative global decline for years domestic weaknesses in the context of the Great Reces- now. The Third Way3 approach once aimed at making sion4 and the eurozone crisis. Western economies more flexible in order to gain com- petitiveness. But, although it decried the fickleness and destabilising features of financial markets, it did not 1. Where does Romania come from? comprehend the perils of an oversized financial sector in mature economies, the consequences of a derailed History leaves its marks on a country’s present and fu- financial system, or the loss of a moral compass. And, to ture. Sometimes, what social scientists call »path-depen- make matters worse, the eurozone is in profound trou- dency«, is quite strong. Romania’s status in the EU as a ble because of a flawed design and inadequate policy ar- less-developed economy is rooted in its pre-communist rangements. This manifold crisis has hit the new member and communist history.5 Its quest to catch up with the states (NMSs) hard because not a few of these countries West has been a secular aspiration that links the past also have to cope with the less beneficial effects of a with the present. growth model that relied on massive capital imports and underestimated tradable sectors. This model is rooted in the logic of the single market (e.g. the opening of the Pre-communist Romania6 capital account) and contrasts with the evolution seen in emerging Asian economies after the crisis of 1997-1998. Modern-day Romania emerged as a nation-state in the 19th century as part of the peripheral incorporation There is talk of sluggish economic growth, and even of south-eastern Europe into the Western-dominated stagnation, in Europe for years to come. Such circum- world economy7. After World War I, it also encompassed stances call for a re-examination of the prospects of other territories, such as Bessarabia, Bukovina and Tran- catching up. It is true that there are major differences sylvania, which were inhabited mostly by Romanians. among EU economies. Germany is a powerhouse of Both before 1914 and during the interwar period, Roma- world trade and industry and the Scandinavian coun- 4. Many people refer to the current financial and economic crisis as the Great Recession to distinguish it from the Great Depression of 1929- 1. Fukuyama (1990) 1933. One salient difference is the smaller decline in output and employ- 2. An expression coined by Alan Greenspan, the former head of the ment during the current downturn, although what has been happening Federal Reserve System, and the title of one of Shiller’s books, which tries in Spain, Greece, and Ireland would invalidate this distinction. to explain the volatility of financial markets (2000). 5. See also Daianu (1992) 3. Tony Blair, Gerhard Schroder and Bill Clinton are among the top politi- 6. This part is based mainly on Roberts (1951) and Murgescu (2010). cians and heads of government who promoted this vision in the 1990s. An eminence grise behind this train of thought was Anthony Giddens 7. Chirot (1976). For the theoretical framework, see also Wallerstein (1998). (1974-2011) 2 Daniel DaianU and BOGdan MURGescU | WHicH Way Goes Romanian Capitalism? nia was a predominantly rural society, with more than while severely cutting the wages of state employees to three-quarters of its population living in the countryside balance the budget. These policies failed, and eventually and working in agriculture. The state was weak and Romania had to change its economic policy again, in- largely preyed on by predatory interest groups. Public troducing strict state controls over the foreign exchange goods were scarce and unevenly distributed. Most of the and relying more on internal demand than on exports. rural population lived in poverty and had very limited access to the benefits of modernisation (literacy, health This new economic context and policy shift favoured in- care, technological progress, etc). The impact of the re- dustry. Industrial output increased and substituted for forms made after World War I – enfranchisement for all a significant part of consumer goods imports. Yet, the adult males, land reform, recognition of minorities rights high income inequality and the peasants’ poverty made thanks to the ratification of the Minorities Treaty of the domestic market too limited to allow a major break- 1919 – was limited by the agrarian depression and by the through in industrial production. In addition, various in- Bucharest-based elite, who were backed by King Ferdi- dustries needed to import their capital goods and some nand I (1914-1927) and the military and who wanted to raw materials, limiting Romania’s degree of self-reliance. ensure that the political system of »Greater Romania«8 At the same time, the political and economic expansion continued to corrupt practices of the »Old Kingdom«. of Nazi Germany, which

Load more