CVM + IMF = 4% = Wishful thinking


In a post on his official blog (http://blogs.fco.gov.uk/martinharris/2013/02/01/cvm-imf-4/), His Excellency Martin Harris, the British Ambassador in Romania, does two big mistakes.

The first one is about forming his beliefs according to what might be pleasing to imagine instead of appealing to evidence, rationality and reality. This is the definition of wishful thinking. As the definition continues, when people or governments act by wishful thinking, they go through successive stages. The first one is ‘‘the dream stage’’. After the dream disappears, it is replace by the different reality, which changes the overall sentiment from ‘‘dreaming’’ to ‘‘frustration’’. Once the frustration tries to beat reality (and it never succeds), the frustration turns into ‘‘nightmare stage’’, where everything falls apart.

This is the way I read Mr. Harris message: ‘‘CVM + IMF’ = 4%’’. First of all because it is out of reality. The proven reality shows the following systems of equations:

2009: MCV + IMF = – 7,1%

2010: MCV + IMF = -2%

2011: MCV + IMF = 0% (after the Official Statistics crooked the data)

2012: MCV + IMF = 0%

2013 (Martin Harris): MCV + IMF = 4%

This system of equations shows clearly what the reality is like: in the last 4 years there was not such thing as a 4% growth in the GDP of Romania. On the contrary, the average growth shows a different direction: -2,27 each year. This is lightyears apart from what the Ambassador predicts (a positive growth of 4%).

This does’t mean that the Ambassador cannot be right. He is just ignoring reality. And, by being a wishful thinker, he forgot/omitted to include into the system of equations the own wishful thinking of the Romanian authorities (Basescu, Boc, Isarescu, Ungureanu, Ponta). They acted like Romani was condemned for growth and they ignored the naked reality. Aiming for a 3% growth in 2009, the Romanian authorities (including IMF and CVM) got just a -7% percent growth. And that was mainly because they all ignored the reality (including the IMF). What was the result? In the fall of 2009, they promised not to raise any taxes or cut salaries or pensions (wishful thinking). The result? In the spring of 2010, they wrote the definition of ‘’ad-hoc fiscal policy’’ by raising the VAT from Friday to next Monday from 19% to 24%. That was not enough: they cut the public wages by 25% and they sent the Romanian economy in a kind of depression (the raise of taxes and the cut of salaries was ‘de facto’ a proof for a state default). They said that by cutting the purchasing power in such a draconian way, they will get the country out of recession. They were damn wrong. 2010 was another year of recession and the ‘‘raise’’ of the GDP in 2011 was possible only by crooking the figures. It was not a better result in 2012, when the GDP was stagnant while the inflation was rampant. And there where just 2 reasons for the longest recession in the whole European Union (Romania): wishful thinking and the lack of capacity of the Romanian governments to drive an economy.

Again, 2013 doesn’t look different: Romania was aiming a 1,8% growth 3 weeks ago. One week after, the economic growth prospects went down to 1.6%. That was just an intermediary station for another lowering (the third in 3 weeks) to 1.5%. Again, wishful thinking: by ad-hoc increasing the taxes, this Government does the same mistakes as its predecessors: they infuse uncertainty in the economy and further depress the consumption. This is another recipe for depressing the economy. We still have MCV and we still have IMF. How comes that for the 5th year in a row, the MCV + IMF goes negative?

One thing is for sure: Mr. Harris’s equation omits the harm that the domestic policy might bring. Of course, as an excellent Ambassador, Mr. Harris gives his own view on what might ‘‘unleash’’ the growth potential of Romania:

‘’The IMF also pointed to the need for more progress in reforming state-owned enterprises. These are present in some of the most promising areas of the economy like energy and chemicals, but they are a drag on economic growth when they should be a driver. Putting them under private management, and bringing in new investment from the City of London through public offerings on the stock exchange should be a priority for the first half of this year.’’

Of course Mr. Harris is lobbying the door opening for the capital inflows in Romania, which will be very beneficial for Romania. It is his job to do so and there is not a better solution for increasing a company efficiency than privatization. But in his lobbying effort (which is to be praised), he shouldn’t omit some facts and he should pay attention not to distort the reality (as a consequence of the wishful thinking):

The second mistake 

The IMF’s mission recorded important progress on fiscal consolidation in Romania in 2012 bringing down public debt and managing the budget deficit. Romania now has figures on public debt that would be the envy of many other EU Member States. This is particularly impressive in what was an election year.’’, says the Ambassador.

 

Of course, what the Ambassador states it is rather untrue. In 2012, Romania didn’t bring down the public debt. On the contrary: the public debt went from 35% of GDP in 2011 to 38,1% of GDP in 2012 and it is further suppose to goes up to 38,7% (of a wished bigger GDP) în 2013. This has nothing to do with ‘‘bring down the public debt’’.

And due to the fact that His Excellency loves Math and Equation, I have a definition for Mr. Harris, that has nothing to do with wishful thinking:

The public debt = The sum of all past deficits. So, a new deficit means an addition to the public debt. So, an increase. Q.E.D.

About the envy of many other EU Member States, I cannot stop from laughing 🙂 Primo: who might be envy on a state that tripled its public debt in just 4 years? Is Mr. Ambassador able to show a similar example in EU? Secundo: what did Romania do with this tripling of the public debt? Zero growth? An average negative growth of -2.27%? I cannot see any single reason for being envy on this.

Not to forget that Romania had some 20%+ inflation from 2009 till 2012. That meant eroding the purchasing power of our own citizens. Who would be envy on this? Just one category: the politicians. The wishful thinkers.

P.S. Privatization is the best solution for an improved efficiency. But by privatizing, we will act ourselves as a landlord who consumes more than what we produce, and to cover the excess, we sell more and more from our property. The result? In the end ZERO property, a big debt but a big opportunity to work for the newly landlord that we create. And it is also important what we buy we the money that we get from selling our assets.

P.S. 2: As a very good politician, Mr. Harris has an ‘‘exit strategy’’ from his wishful thinking. He says: ‘‘MCV + IMF can make all the difference to Romania’s future economic growth. In a couple of years’ time Romania could be growing at 4% a year and catching up with the rest of Europe. Or not. These programmes can release Romania’s economic potential, attract investors from the UK and elsewhere and reverse the decline in Romania’s competitiveness’’.

‘’Or not’’. This is the exit strategy of Mr. Harris (in other words, if you do not like my principles, I have others). Than another economic mistake: ‘’ these programs can reverse the decline in Romania’s competitiveness’’. Sorry your Excellency, but Romania does not see a decline in competitiveness. On the contrary: by keeping the salaries on a miserable level and by ‘‘stealing’’ purchasing power through inflation or cutting wages, Romania became more competitive (2012 meant the most successful year in terms of exports). But the value added was miserable: we knew to increase our competitiveness by mixing two factors: internal and external devaluation. That was great for our partners (the importers who bought cheaper products), but bad for the internal economy. All the other economy in the EU choose just one from the two choices: even depreciating their currency, either by modest cutting the salaries. That was not room for both. Just in Romania. Some British journalist called this ‘‘unthinkable’’ or ‘‘draconian’’. They were right either way.

Anunțuri


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4 răspunsuri

  1. Foarte tare! Felicitari pentru articol!

  2. The IMF’s mission recorded important progress on fiscal consolidation in Romania in 2012 bringing down public debt

    Baiatul asta a incurcat datele sau a baut sapun lichid.

    Nu-l cunosc… si e posibil sa aiba a’q de comunitar, dar se imbina perfect minciunile jegos de crancene cu prostia pupinbasista.

    MCV = controlul securitatii asupra statului 🙂
    IMF = controlul agenturilor asupra securitatii 🙂

    … simple as that… Mr. Harris

  3. Daca Isarescu a estimat o inflatie de 5-6% pentru prima jumatate a acestui an, cu siguranta ca vom avea o crestere generala de preturi de cel putin 15-25% la populatie. Adica, cu tot cu cresterile de impozite, un atac la buzunar de cel putin 40%, ceea ce inseamana un adevarat dezastru in conditiile in care se traieste, DEJA, foarte prost in Romania de pe timpul lui Boc.

  4. Dear Radu,
    I appreciate your analysis. Let me say that I too am against wishful thinking. My concern is that there has been too much wishful thinking, by economists, politicians, diplomats and businessmen, about long-term growth rates in Central and Eastern Europe. There is an assumption that simply because they have joined the EU these countries are on a path to ‘catch up’ with the EU average. And that the current economic crisis is only a temporary interruption in that process. I don’t think we can take that for granted.

    Until recently the IMF forecast annual growth for Romania of 4% through to 2018. It revised that down to 3.5% and then to 2.9%, in part because of the ‘output gap’ – the reduction in Romania’s production capacity caused by the crisis – but also the fact that the drivers of economic growth that were anticipated in 2011 (such as EU funds) have not materialised. Romania needs to get those drivers back. My point is that pursuing the structural reforms in the IMF programme and the judicial reforms in the CVM will help do just that, both directly in their impact on key economic sectors and the business environment, and indirectly in generating the confidence that will attract investors back to the market. (‘Romania: selected issues paper’ http://www.imf.org/external/pubs/ft/scr/2012/cr12291.pdf)

    Economics is about emotions as well as science, about perceptions as well as reality. A perception that the business climate has been transformed, that public finances are well managed (and here it was the reduction in the budget deficit I was referring to) and that Romania is a country that is really moving forward, whose growth has momentum, is what is needed. Success breeds success. 4% growth may not be achievable this year, but ‘in a few years time’ why not?

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