Procyclicity and the lack of a solid economic foundation – causes for the brownian economy’s appearance in romania


For almost three decades, Romania has a democratic system correlated with the market economy. Too little, if we consider the developed democratic countries, but enough to be able to lay the foundations of a functional and efficient economic system. There are relevant examples in the Czech Republic, Slovakia or Poland, countries that have suffered from the communist regime, but managed to find ways to eliminate the shortcomings created and to get closer to the Western performances. However, the feeling is that in 2018, 29 years after the embrace of the market economy and 11 years after Romania’s accession to the European Union, the Romanian economy failed to identify any solid pillar on which it can be built sustainably.
We are oscillating between negative and positive records (from +8,5% GDP growth in 2008 to -7,1% in 2009 and again to +7% in 2017, according to NIS) with a fastness that is not encountered to none of the other Member States of the EU, while other indicator (inflation, interest rate, exchange rate) follow unreasonable trends. The result of these imbalances is the emergence of a chaotic economy, without direction, and with unpredictable developments. This is the so called brownian economy. In this context, the economy’s state, considering the results, is widely discussed in both the public space and the specialized environments, but we couldn’t identify any debates that would address the idea of creating a solid foundation on which development engines of Romanian economy can be built or simulated.
What is missing from the Romanian economy? Fundamentally, adhering to some basic principles, which most of the countries looking for sustainable developmen seem to understand. In order to discuss what these are and how Romania positioned itself in the past, we need to consider two types of contemporary social: economic and political.
The point where a country is in a particular economic cycle must always be an important matter taken into account by decision makers. This position often indicates the type of policy needed in order to maintain the medium and long-term ballance. The mechanism is simple; if we observe continuous and same sense variations of key indicators, then the economy is set on an ascending or descending slope. Depending on the established assumptions, economic policies will seek to ensure balance and bring the indicators to their potential level.
This is why we have been able to see actions such as interest rate hikes in Poland in 2007-2008, years with economic growth, followed by a steep fall of the same indicator in the immediate period, at a time characterized by economic downturns in most European countries. What was the effect of this type of approach? Poland was the only country within the European Union that did not experience a GDP fall in those years of crisis.
Romania did exactly the opposite, maintaining a real interest rates below 0% in 2007-2008 and facing an explosion of this indicator to over 12% in 2009. These examples can be used to perfectly describe two patterns of strategies in economic policies: counter-cyclical, meant to absorb shocks and help the economy tend towards its potential, and pro-cyclical, with the effect of overheating the economy, deepening economic crises and inefficient usage of budget revenues.
Prociclicity is one of the causes for the lack of constancy in the Romanian economy’s performances. The lack of policy adaptation to the economic situation is the continuous destruction of any potential solid basis. It is easy to understand why an inconsistent economy, with overheats in growth periods and collapses to minimum record levels in times of recession, will always be avoided by investors. At the same time, procyclicality makes it almost impossible for domestic capital to be developed by increasing Romanian companies’ performances, especially if we consider that any business needs a minimum of stability and predictability in the adopted fiscal-budgetary and monetary policies.
Moreover, it is also important to note the impact of political cycles on economic issues. It is well known that an election year involves an instant increase in budget spending in areas that do not effectively add value. This is why, most of the times, electoral years and post-election periods have been characterized by procyclical policies, with overheating effects in periods of economic growth and deepening of crises during periods of recession. We can remember the significant tax cut in 2005, following the presidential election, after no less than 5 years of record economic growth with values between 5% and 8%, and the courageous monetary policy in 2008, an important electoral year. Last but not least, the harmful effects of procyclicality have been exacerbated by the decision-makers denial of an obvious economic crisis by the end of 2009, when presidential elections were held again.
Lucian Croitoru, RNB Governor’s Monetary Policy Adviser, proves in an analysis from October 2017 that the tendancy of Romanian decision-makers to adopt procyclical policies is extremely dangerous for the economic stability. Consequently, we can identify two possible explanations for this behavior: „Governments either use harmful effects to achieve a political purpose, or think they can avoid harmful effects” (L. Croitoru, 2017). In addition to this, we proposea third possible explanation, which also takes into account the behavior of parties in specific period of the political cycle: in view of the short-term popularity growth among voters, the decision maker does not care about the harmful effects of procyclicality and, most of the time, he does not want to accept that they will appear at some point. This possibility is more dangerous than either of the above. The lack of interest and the refusal to accept economic realities (such as the emergence of certain negative effects due to procyclicality) seem to be increasingly common in the political environment, increasing instability and eliminating any possibility of implementing early measures for creating premises of a sustainable long-term economy.
Unforunately, the temptation of populism in notable points of political cycles seems unmanageable in the current political context, while the necessary discussions regarding the possibility of creating a long-term strategy for the implementation of economic policies with respect for the principles of anticyclicality are delayed. The solution is in the hands of decision makers, but the first step should be to open up the dialogue on this issue. Do we need such a strategy? Can the embrace of anticyclical measures be the solution for a healthy development of the Romanian economy? Can we reach the needed maturity level in order to renounce populism in favor of sustainability? These are only a few questions that can be addressed in an active dialogue involving all society.
Even if the most important theories of anticyclicality do not treat the economic process exhaustively, it is imperative, after three decades, for Romania to realize that it needs a solid economic foundation in order to develop sustainability. Only then, it can put some order in its brownian economy, and it may approach, at a faster pace, the performances of developed countries.