Romania's Missed Opportunity

03/29/2015 08:33 am ET | Updated May 29, 2015

Bucharest was once known as the Paris of the East. In the 1930s, it was a vibrant city of cafes, artists and poets. The playwright Eugene Ionescu, the historian of religion Mircea Eliade, and the essayist Emil Cioran all became friends at this time at the University of Bucharest. Romania was also enjoying a brief economic boom, and many of Bucharest's most beautiful houses were built during this period leading up to World War II.

Some of those houses are still standing, including the family home of economist Dragos Negrescu. That's where I met him in 1990 when we talked about the future prospects of Romania.

Negrescu chose to study economics because, back in the 1980s, it offered a better shot of getting a job in a city. Otherwise, as a historian for instance, he would have forced to take a position in the countryside. During the waning years of centralized planning, he worked for a short time at a steelworks in Targoviste and then in a ministry in Bucharest. Since 1989, he has had a series of jobs in and out of government. Currently he works for the European Union in Brussels, and that's where I caught up with him in August 2013.

Negrescu argues that Romania missed an opportunity in 1990 to embark on the same kind of "shock therapy" economic reforms that Poland began. "Prior to October 1990," he told me:

There was no movement toward economic reform. And the government built up a debt to the miners. I don't remember the exact figures, but there were about 100,000 workers in a sector that required no more than 20,000, and they not only kept the miners in place for a decade but increased their salaries.

Another brilliant idea was dropping the retirement age for scores of workers because of difficult working conditions. And allowing people to retire wholesale. So basically for the first year the government radically increased all sources of macroeconomic imbalances.

In 1993, Negrescu worked for the government of Nicolae Vacaroiu for eight months, but it was not a satisfying experience.

"I worked for the Council for Coordination, Strategy, and Economic Reform, which was headed up by Misu Negritoiu," he told me.

We were writing the strategy of reform, because Vacaroiu had promised a full-fledged program when he got his investiture vote. But our strategy was never implemented. I used to describe the council this way: We were all typing in front of an unplugged keyboard.

We were talking to people in the ministries who didn't give a shit what we said. They had their own ways of doing things.

Could Romania have caught up with the rest of the region if it hadn't delayed implementing economic reforms? "It definitely would have lost fewer years than otherwise," Negrescu responded.

When things began to work economically in Romania, when the economy was booming, in 2003-4, then the world crisis happened a few years afterwards. This is very similar to what happened to Romania in the inter-war period, with exactly a 70-year difference in time. Between 1934 and 1938, Romania's economic boom came to a stop because of the world war.

The accession process to the European Union provided Romania with the necessary impetus to push through economic reform. I asked Negrescu if Brussels, too, missed an opportunity to use the leverage of accession to demand further reforms.

"There wasn't much left to reform," he replied.

It is just regular decisions of economic policy. If you look at the fundamentals, Romania compares advantageously to many countries. Look at the fiscal consolidation. You now have a budget deficit after seven months this year that's less than one percent of GDP.

Even with the slippage that takes place every December, it will be at most around three percent. Romania's public debt has been increasing at a fast pace in recent years, but it's still only 40 percent of GDP. Compare that to Belgium or France, where it's hovering around 100 percent.

In other words, Romania has become, basically, a normal country. "One can talk a lot about the infrastructure, which is still missing a few parts," Negrescu concluded.

It still takes decades to build a highway. You can pay billions and still get nothing. But we see lots of new buildings. The airport is now looking like a regular airport. Of course the railway network is in shambles, but it's in shambles because there's no demand. Romania is a normal country, that's the point. From the standpoint of economic policy, there might be mistakes, but they're not radically bigger than in other countries.

The Interview

What do you think were the economic options were for Romania at that time? Could the government, any government, have done a better job with the economic reform?

Definitely. Especially at the very beginning, Romania had some assets, which the government threw out the window in a single month. I'm not talking about no longer having foreign debt, because that was stupid to begin with. As a parenthesis, every now and then, here in Brussels, I come across locals who try to explain to me how clever Ceausescu was in paying off all of Romania's debt, and I try to make them understand with a simple example. You borrow money to build a house, you build it, and then you start paying back the loans without maintaining the house any longer, and you let it decay -- that's exactly what Ceausescu did.

Recently I was talking to my Greek son-in-law who said, "At least Romania had no foreign debt." Yes, but who made this debt in the first place? Ceausescu! Prior to the late 1960s, no socialist country could have borrowed from abroad. Ceausescu built up a small debt by the Eastern European standards of the time, which he used to build factories. Then he started paying back by restricting imports so that those factories either didn't have raw materials or spare parts or could not modernize their product. The Dacia [Romanian-built car] was the same in 1989 as it was in 1970! How idiotic could you be? And Ceausescu is given as an example of a great economist? Okay, closed parenthesis.

But there was a foreign reserve of about $2 billion, which would be the equivalent of about $5 billion now. What did the government do? They started importing oranges!

They wanted to satisfy consumer demands.

Then they didn't liberalize prices for 10 months, while at the same time immediately going to a five-day week. Petre Roman said that there were such pent-up expectations that he couldn't have opposed it. Yes, he couldn't have opposed it -- because he wanted to be in power. And actually what he did was bribery, not giving in to legitimate demands.

What other major mistakes were made?

It all boils down to the fact that prior to October 1990, there was no movement toward economic reform. And the government built up a debt to the miners. I don't remember the exact figures, but there were about 100,000 workers in a sector that required no more than 20,000, and they not only kept the miners in place for a decade but increased their salaries. Another brilliant idea was dropping the retirement age for scores of workers because of difficult working conditions. And allowing people to retire wholesale. So basically for the first year the government radically increased all sources of macroeconomic imbalances.

Who was making these decisions? Were there economists providing recommendations?

There might have been economists as well. There used to be two categories of economists: real economists and the "geniuses" that Ceausescu was using, for whom the only the thing that mattered was production, with a capital "P."

So they didn't have any real economists giving them advice.

Right. On the other hand, I don't think they would have used their advice anyway. There were political demands, then political debts. Also because of doing all that crap in the first months like coming down hard on the opposition and creating a shitty reputation, Romania had no access to external funding any longer. The government could have done it in an intelligent way. They could have used foreign funding as a way of rounding the angles of liberalization.

Later on, of course, it was more difficult and more costly to make the simple -- simple in the sense that they weren't rocket science -- reforms that Balcerowicz did in Poland on the spot. Even now 23 years later, I still favor "shock therapy," in spite of what happened from 2008 onwards. Those reforms just put the economy on the path to the market, and afterwards we can talk about how much market and how much intervention and so on. But 23 years ago, we did not have a sophisticated financial system that could "give birth to monsters," as people say.

If somehow a Balcerowicz-style plan had been instituted in Romania 23 years ago, do you think Romania would have been at the level of Slovakia or the Czech Republic today?

Possibly. It definitely would have lost fewer years than otherwise. When things began to work economically in Romania, when the economy was booming, in 2003-4, then the world crisis happened a few years afterwards. This is very similar to what happened to Romania in the inter-war period, with exactly a 70-year difference in time. Between 1934 and 1938, Romania's economic boom came to a stop because of the world war.

That wasn't a particularly good time in the world economy.

The crisis was mostly over. But the starting point for Romania was lower than for other countries. In the richer quarters in Bucharest today -- Kiseleff, Aviatorilor, Cotroceni, in Dacia where the World Bank is located -- all those beautiful villas were built during those four years. My house was built in 1936.

When Bucharest was called the Paris of the East. In October 1990 economic reform started in some fashion. Why did it happen then?

To read the rest of the interview, click here.