First of all, I would like to thank His Excellency, Mr. Martin Harris – the British Ambassador to Romania for being so kind to read my blog and to provide feed-back to an article I wrote here: https://soviani.com/2013/02/04/cvm-imf-4-wishful-thinking/. The article was about some thoughts that Mr. Ambassador put into write on his official blog.
Here is Mr. Harris view about the premises for Romania’s economic growth in the future, following my article that underlined that it is not enough to be inside an IMF agreement and controlled by the MCV mechanism in order to reach a 4% yearly economic growth:
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? ”
I perfectly agree that economics is about emotions as well as science. We’ve learnt this better than anybody – during the boom years when we disregarded the possibility of a simple balance of payments crisis (that was exactly what happened in Romania) being overwhelmed by some irrational exuberance (or, as Mr Harris describes it – ”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.”.
On the other side, during the economic downturn, the government was treating as ”uncertainties” the certainty that the recession will come. In my opinion, there is the same attitude right now from the Romanian government- that the European recession will make a U-turn as soon as will reach Romania’s borders. And in order to feed these attitude, they are using all the arguments that other will offer, some times detouring the sense. For example, Mr. Harris was referring that the dynamic of the public debt increase will be diminished by lower deficits (as he admits in the comment). On the other hand, Romania’s prime-minister didn’t have any auto censorship when he said twice that ”by decreasing the budgetary deficit, he will lower the public debt burden for the future generation – that is simple not true as long as any additional Euro as a deficit means a greater public debt).
And one more thing: as Mr. Harris said, the current economic crisis is not just an interruption in the process of ”catching-up” the average EU economies. Because, as the data from 2012 will show, Romania turned into reverse: from being the second poorest member of the EU (in terms of GDP/capita), 2012 will show that we switched places with Bulgaria. The stagnant economy in 2012 will show that Bulgarian GDP/capita is now higher than Romanian GDP/capita. Since the crisis begun, Romania showed a divergence towards the EU economy, not a catching up.