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Would it have been possible for Romania to avoid recession in 2009?

Part of Romanian media and local economists currently participate in an open debate regarding similarities and differences between Romanian and Polish economies. Namely, they are trying to find the fundamentals behind the Polish "miracle" - in a very difficult year when almost all countries are severely affected by the economic crisis, Poland is likely to have a small positive economic growth.

So what are the main reasons behind this remarkable evolution of Poland's economy? First of all I would mention the level of the current account deficit (the difference between savings and investments) before and after the crisis. In 2007, Romania's current account deficit ballooned to 13.5% of GDP while Poland had an external imbalance of only 4.2% of GDP. Now Romania is in a process of strong adjustment of the current account deficit which is expected to halve to around 5 of GDP in 2009. This adjustment of the external imbalance is reflected by the severe economic contraction from 2009 and it is clear that under no circumstances Romania could have survived with a double-digit current account deficit in the long run. Hefty foreign capital inflows supported foreign exchange lending in Romania during the last years but the economy was not fully prepared to cope with this new situation - the domestic supply of goods and services was thin and many people and companies turned towards foreign goods, wages were growing significantly faster than labour productivity undermining the external competitiveness of Romanian industry, public sector was expanding too fast as compared to Romania's resources.

On top of that, the structure of the Romanian economy was different from that of the Euro Zone countries - a large share of the agriculture in gross value added with frequent and rather unpredictable variations from one year to another due to strong dependence upon weather conditions and a lower share of services. The second wave of the international financial and economic crisis triggered by Lehman bankruptcy in September 2008 caught Romania and Poland in different stages of economic development. Romanian industry still had a long way to go in order to completely meet markets' demand, the need for foreign direct investments in manufacturing was important, state budget was pressured by high and rigid wages and pensions expenses which left the government with little space of maneuver in supporting the economy through public investments. Foreign direct investments have been traditionally low in Romania before NATO and EU accession, explaining at least partially the weak structure of exports (low value added products in previous years) and the scarce supply of domestic goods on consumer markets. FDIs stock per capita was EUR 450 in Romania in 2003, nearly three times lower than in Poland. By the end of 2008 Romania had managed to gain some of the lost ground - FDIs per capita were EUR 2,400, only 25% below those in Poland. And since these foreign investments need some time to produce visible results, it's natural to see a lower development level of the Romanian economy, and a rather poor capacity to withstand a strong economic crisis. Procyclical fiscal and income policies followed in Romania during all these years prevented state budget from accumulating significant resources in good times.

When bad times arrived, Romania had a limited capacity of investing in infrastructure projects in order to support the local construction, industrial and services sectors. During all those years most of us thought that good times would last forever in Romania but that was definitely not the case. This should open the door for more coherent fiscal and income policies in the future, especially now when the agreement with the IMF and the European Commission can be regarded as an opportunity for a structural reform of the public sector. Economic growth should rely more on exports and less on consumption, internal savings should rise for a lower dependence upon external financing while salaries should increase strictly in line with labour productivity. If all these happen, Romania will be able to avoid the next recession.

by Lucian Anghel

Sursa: http://www.nineoclock.ro

Tags: romania investments foreign economy poland romanian economic would euro

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