GRADUALISM VS. "SHOCK THERAPY" IN ROMANIA

by Thomas Denslow

The gradualist approach to economic reform has dominated the field in Romania but has thus far failed to score. The "Shock Therapists have yet to take the field. Instead, the governments policies have only served to worsen the situation for Romania's people. Unlike Poland and the Czech Republic, who pursued more rapid transition programs, Romania has nothing to show for its decline in GDP and the standard of living. This need not have been the case. In the early years of reform the Romanian government proposed an ambitious plan that would have put the country on the "fast track" and set the stage for a healthy economic future.

In May of 1990 the newly elected leaders in Romania formed a committee to formulate a strategy of transition to a market economy. It is the reform plan of this committee and the initial efforts to implement it that Demitri Demekas and Mohsin Khan discuss in their OCCASIONAL PAPER for the International Monetary Fund.(1) The authors endorse the Romanian plan of transformation. Indeed they emphasize the need for "speedy" and thorough transition, because the situation in Romania after forty years of Ceacescu was extremely grim. Furthermore, in order to obtain maximum effectiveness the sequencing of the implementation of the particulars should be simultaneous.

Demekas and Khan begin by arguing for restructuring the legal system. This includes new provisions for bankruptcy, the private ownership of property, investing, trade, and other measures needed for the smooth functioning of a market economy. Next, the authors emphasize the need for the liberalization of prices and privatization. Also they argue for the establishment of a private financial sector to facilitate the efficient allocation of credit and allowing interest rates to seek a market equilibrium. This provision would protect savings from erosion caused by inflation and encourage people to invest. Finally, the article argues for strict monetary and fiscal policy, which would help control inflation and avoid the burdens of a large government debt.

Although it was the original intention of the government to pursue these objectives, political pressures caused the government to slow the sequencing of reform.(2) The initial results of reform were promising according to Demekas and Khan. And it was a mistake to deviate from the original plan. Decline is inevitable in transformation because the centrally planned economic system and the market economy are fundamentally different. It is for that very reason that gradualism has been a failure in Romania. "A man does not put old wine into new bottles or new wine into old bottles lest the bottle break and the man should loose all his wine," Jesus once said. Although His message was of a spiritual nature, the adage applies to economics as well. If reform is to be effective it must be swift and complete, because the two diverse systems cannot exist simultaneously.

Romania has regressed to gradualism, and its policies have failed. Mugar Isurescu, a Romanian member of the Board of Governors of the World Bank, recently reported that in 1994 Romania will register a small yet encouraging growth rate of 1%. Also he reports that inflation is being checked as the rate falls below 100% to 70%. But these numbers are misleading. This years growth is do solely to the fact that Romanian farmers had a bumper crop. Production, however, is still declining.(3) Compared with other nations in Eastern Europe whose most difficult phases of transformation are complete, Romania is a failure, and the worst is yet to come.

In Poland where the "Big Bang" began in 1990, economic decline and hardship has been enormous. In 1990, when the reforms began, inflation rose almost 600%, and GDP shrank by 8%. By last year, however, Poland's economy registered gains of 3.8%. The Czech Republic, also in the "shock therapy" club, showed signs of significant growth as well. Romania, on the other hand, has reported no signs of recovery, with GDP output falling cumulatively more than 35% since 1990 and inflation averaging over 150% over the last five years.(4) And reforms have hardly begun! Severe decline is a given as an economy becomes reequilibriated by the market. When Romania decides to allow this process to happen it should be prepared for the "shock" that it had hoped to avoid by pursuing its gradualist approach. And at that time it must also watch as the economies of the "Big Bang" school grow and prosper.(5)

(1) Demekas,D and Khan,S.1991."The Romanian Economic Reform Program" OCCASIONAL PAPER.International Monetary Fund.Washington,D.C.

(2) Lingle,C and Wickman,K.1993."Give the Bangs Time to Work in Eastern Europ. "INTERNATIONAL HERALD TRIBUNE.Oct.25,1993.Opinion

(3) Guttsman,J.1994."Central Bank Says Romania Heads for Modest Growth." THE REUTER EUROPEAN BUSINESS REPORT.Sept.30,1994.Madrid

(4) Havlik,P.1993."Transition Countries:The Economic Situation in Early 1994 and Outlook Until 1995."THE ECONOMIST.Nov.6,1993.p92

(5) "I'll find this one later"

 

 

 

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