RESPONSES TO GLOBAL CRISIS Case study on Romania Sorin Ioniţă Chişinău, Jul 2010

Six dimensions of analysis 1. Structural imbalances prior to crisis 2. Severity of recession 3. Socio-political consensus 4. Quality of response to crisis (I): timing and diagnosis 5. Quality of response to crisis (II): policy package 6. Implementation capacity

1. Structural imbalances Major problem: increasing expectations in society overcoming real growth, consumer boom, pensions’ explosion Gap: EU-style aspirations / developing country resources (38% spending commitments / 29% revenues in GDP) – “premature welfare state” (J. Kornai) Crisis hit at maximum optimism: rapid catch up with “the West”

1. Structural imbalances

However, convergence achieved at a price: GDP grew, but public deficits grew even faster, esp. in pension fund (1 employee : 1.4 pensioners) Main items: public salaries, social expenditure Old weaknesses remained: investments hard to execute, so unspent money shifted in Nov to “soft items” The crisis only revealed imbalances

1. Structural imbalances

1. Structural imbalances Budget deficits (% GDP) deeper than in other countries

1. Structural imbalances Salaries, % of government revenues, 2008

2. Severity of recession GDP growth,

2. Severity of recession Due to pre-existing imbalances (simultaneous growth of GDP and deficits) little space for stimulus Rapidly rising debt (from 25% to 41% in one year and a half) just to keep previous (social) commitments Complete change of mental map: from expansion plans (central / local governments) to nominal salary and staff cuts

3. Socio-political consensus (-) Little consultation by government on policy; distrust from social partners (-) Intensely politicized mass-media, no policy debates, denial of problems (+) Moderate social partners, non-ideological unions (esp in private) (+) Moderate power of lobby groups, low extractive power – social protest by tax evasion (40%) (+) Resilience of population (compare to ‘90s)

4. Response to crisis: timing Electoral cycle (Nov 08, Jun 09, Nov 09)  delayed diagnosis of problems, slow response Little capacity to read the trends in real time: 2009 budgets (esp local) designed with expansionary plans – on both social and capital spending

5. Response to crisis: content Devaluation (approx 25% in two years) Small stimulus package: focus on EU projects, some eco-related programs, car-for-clunkers (protectionist) Continuity with pre-existing agenda (decentraliz health / education) but on a background of budget reductions  may force rationalization of sectors 2009: stopped spending increases built into the system before elections

5. Response to crisis: content Full adjustment package – just in mid-2010 Public wages: 25% cut, pension freeze Unification Laws to increase transparency and horizontal equity Borrowing, spending and staff caps for local governments (anti-decentraliz) Direct staff and capital investment cuts in central government Tax increases (VAT), close loopholes, enlarge base

6. Implementation capacity Little analytic capacity in government  difficult to target spending, prioritize Dissonance in society on priorities: keep benefits; against enlarging fiscal base Judiciary = veto power over changes; visible preference for positive rights Salary reductions  counter-selection in public institutions (self-defeating) Delegitimation of capital spending / procurement / PPPs in public discourse

Summary: dashboard in crisis 1. Structural imbalances 2. Severity of crisis 3. Social consensus 4. Response: timing 5. Response: content 6. Implementation