Macroeconomic Policy in a Transitional Environment: Romania, 1989-1994

Article excerpt

When I finished reading the novel 1984, by George Orwell, I asked myself if there existed anything worse, more deprived, more inhuman than a fixed life set definitively in misery and terror? I believe that even then I had the answer in mind, though I formulated it explicitly later when I began to write this book. Yes, it exists: A change which changes nothing.

- George Paun, author of 1994: Schirabarea Care Nu Schimba Nimic (A Change Which Changes Nothing).

There has been increasing interest in comparing the difficulties of implementing macroeconomic stabilization programs in Latin America to those of Central and Eastern Europe [Ramirez 1993; Edwards 1992]. As in Latin America, stabilization efforts in Eastern and Central Europe face daunting obstacles: hyperinflation punctuated by chronic trade deficits, sharp currency devaluations, the depletion of hard currency reserves, and steep drops in GDP. The combination of "depressionary hyperinflation" and severe external disequilibrium casts an immediate pallor on efforts at macroeconomic stabilization in Central and Eastern Europe. Yet there is growing evidence that the problem may in fact be more fundamental in nature than most macroeconomists have considered.

A growing number of economists now realize that the overall institutional environment greatly restricts the options available to policymakers in both Latin American and former socialist countries. Of particular relevance to policymakers are the performance and structure of the banking system, the behavior and level of development of capital markets, the existence or nonexistence of a self-regulating market system in the goods market, the extent to which an economy is integrated into international markets, and the ability of financial institutions to channel capital to productive investments [Schlack 1993; Edwards 1992; Stiglitz 1992].

If there are no institutional mechanisms for channeling capital into productive enterprises, then lowering or raising interest rates is unlikely to affect either real or nominal output or the inflation rate. Similarly, if central bank control of the commercial banking system is absent and if consumers have no confidence in the commercial banking system, then efforts to target growth in the money stock, however it is measured, are predestined to fail. Removal of price controls does not automatically lead to increased supplies of goods if the industrial sector is incapable of, or unwilling to, increase production in response to price increases. If recovery of industrial production faces structural obstacles to recovery, then restrictive aggregate demand policies are likely to be undermined by enterprise demands for credit and state subsidies. Furthermore, when confronted with the prospect of widespread bankruptcy in the industrial sector, governments seldom, if ever, heed the call for discipline. Indeed, according to some economists, the failure to adhere to rigid monetary discipline in the face of severe structural imbalances may in fact be a good thing [Ramirez 1993].

A further point that has not received appreciable attention from economists is the extent to which the political environment can promote or inhibit meaningful economic reforms. When polities lack a democratic political culture, even the formal observance of democratic rules can obscure rampant corruption and the influence of extremists and chauvinist political groupings. Pervasive corruption and lack of trust by the public in the fairness of the rules surrounding privatization efforts undermine public confidence in reform efforts. In both Latin America and in former socialist countries, the legacy of authoritarian rule casts a pallor over the political landscape.

These problems are probably more severe in the former socialist countries of Central and Eastern Europe than in Latin America. Decades of development efforts, integration into world economic structures, and a history of experience in dealing with western commercial banks and international lending institutions have given Latin American countries a degree of institutional experience in policy implementation. …