III Mapping the Transition: Design of the Reform Program
- Mohsin Khan, and Dimitri Demekas
- Published Date:
- June 1991
Against a background of economic, institutional, and social crisis in Romania, a coherent reform strategy gradually emerged. This section examines the overall design of the reform program, and, in particular, how the reform strategy evolved.
Conditions at the Beginning of 1990
The provisional Government that came to power in the last days of 1989 after the violent overthrow of Ceauşescu faced an economic and institutional crisis.9 On the one hand, years of economic mismanagement and the country’s self-imposed isolation in the latter part of the 1980s had undermined its productive capacity and led to an erosion of the standard of living. On the other hand, Romania’s institutional framework was probably one of the most antiquated in Eastern Europe, and its administrative and managerial apparatus had no experience with even limited economic reform. At the same time, because emigration was tightly controlled throughout the 1970s and 1980s, Romania—unlike other Eastern European countries—did not have a large expatriate community that could act as a channel for foreign expertise and advice.
The provisional Government was also faced with social turmoil following the December events that led to the overthrow of Ceauşescu. The turmoil was manifested, particularly, in worker absenteeism and lack of discipline and a breakdown of law and order, which aggravated the disorganization of the economy.10 Moreover, in many enterprises, workers decided to eject their managers, whom they associated with the old regime, and to hold new elections to replace them. These elections were often disorganized and had to be repeated until, in early February, the provisional Government decided to end this practice.11 These events further disrupted the already problematic supply network of state enterprises.
The economic and institutional crisis combined with the sociopolitical circumstances prevailing in the country at the beginning of the transition period had three major implications for the Romanian reform process. First, the resulting economic collapse required an immediate policy response from the authorities with no time for a “pre-reform” period—in the sense used by Calvo and Frenkel (1991) and as experienced in other Eastern European countries—during which the elements and priorities of the reform program are negotiated, the population is informed and educated, and a broad consensus on the strategy is reached before any structural measures are actually introduced. Instead, the authorities introduced several measures to unblock the productive structures before they had formulated a coherent reform program. As a result, many of these measures had to be subsequently modified or replaced, making the reform effort—at least in its early stages—a process of trial and error. Second, the release of the population’s pent-up desire for consumer goods and the dramatic decline in living standards in the 1980s influenced considerably the early decisions of the provisional Government. One result was to make the adequate provision of basic consumer goods—especially food, heating, and electricity—a necessary condition for the population’s consent to policy changes and the improvement in living standards an immediate policy objective. Another result was to focus the Government’s attention from the outset on the importance of an adequate social safety net to shield the most vulnerable groups from the burden of the transition to a market economy over the medium term. Third, the collapse in output combined with the policy of boosting real incomes to improve living conditions caused a rapid deterioration of the macroeconomic situation in 1990 and forced the authorities to change somewhat the priorities of their reform program in midstream.
Developments in 1990
The disorganization of the economic management system and the obsolete capital equipment and production techniques inherited from the previous regime, together with further supply disruptions and the diversion of energy from industry to the population in early 1990, caused output to collapse. Production in state industry in January and February 1990 was 22 percent and 20 percent, respectively, below its level in the corresponding months of 1989, and averaged almost 20 percent less for the year as a whole. In 1990, GDP is estimated to have fallen by almost 8 percent in real terms on top of a 5.8 percent decline in 1989 (Chart 1).
In the face of these developments, the authorities introduced, very early in 1990, a number of supply-side measures aimed at containing the downward trend in economic activity. However, many of these structural measures were introduced in haste before a coherent reform program had been devised. The most important of these measures were (1) the complete liberalization of peasant markets in January in order to increase the supply of food; (2) the abolition of the State Planning Committee in January, and its replacement by the Ministry of the National Economy, with mainly coordinating functions; (3) the abolition of certain provisions of the turnover tax that were particularly burdensome on enterprises;12 (4) the introduction in February of Decree-Law 42,13 which allowed agricultural cooperatives to distribute land to their members and to other peasants for “long-term use,” and Decree-Law 54, which allowed small-scale private enterprises with up to twenty employees; (5) the introduction in March of Decree-Law 96, which liberalized the regime governing foreign direct investment in Romania; and (6) the abolition of the state monopoly on foreign trade and the partial liberalization of foreign exchange regulations. These early structural measures—although they were pointed in the right direction—turned out to be inadequate and incomplete, and, with the exception of the liberalization of peasant markets and the modification of the turnover tax, had to be supplemented or replaced by improved versions later, when a more coherent reform strategy emerged. The Ministry of the National Economy was closed within a few months of its establishment, and its functions were partially assumed by a new National Commission on Prognosis; Decree-Law 54 had to be complemented by additional legislation and regulations, including a privatization law, in order to perform its function as the major vehicle for reforming the ownership structure of the economy; and Decree-Laws 42 and 96 had to be replaced by a Comprehensive Land Reform Law and a New Foreign Investment Law, respectively, in 1991.
To satisfy the population’s demand for basic consumer goods, notably energy and food, as well as to improve living conditions, the authorities decided to divert energy resources from industry to the population, adding to the supply disruptions in state industry. In addition, they pursued expansionary fiscal and monetary policies through most of 1990. These policies, combined with the output collapse, aggravated the domestic imbalances and caused a sharp deterioration in the balance of payments. The deterioration was further exacerbated by the reversal of the previous regime’s policy of import compression; the introduction in January 1990 of a ban on food exports to improve the availability of food domestically; and the deterioration of the external environment in the second part of 1990 owing to the Middle East crisis.14
On the fiscal side, revenues declined owing to the simplification of the turnover tax in January 1990 and to the replacement of the system of remittances from profits—the other major cause of the excessive tax burden on enterprises in the 1980s—by a profit tax later in the year. Expenditures also declined somewhat, owing largely to the sharp reduction in investment outlays, which reflected the cancellation of several of Ceauşescu’s showcase projects. Current expenditures, however, increased dramatically, mainly because outlays for subsidies, pensions, and transfers doubled. These increases were, to some degree, inevitable: under the previous regime, some benefits to which civil servants were entitled had simply not been paid,15 and promotions had been unlawfully delayed. The bulk, however, was due to increases in employee benefits, subsidies to producers of consumer goods—notably food—and transfers for social assistance. The provisional Government considered these increases to be necessary to ensure social peace by improving living standards, especially those of the most disadvantaged groups. As a result of these fiscal measures, the general government accounts registered a surplus of less than 2 percent of GDP, down from over 8 percent in 1989. In addition, accumulated unserviceable bank debts of state enterprises and cooperatives were written off against government bank deposits resulting from fiscal surpluses of the past, all but eliminating these deposits by the end of 1990.16
Monetary policy was also expansionary, as banks were initially instructed to extend credit to enterprises to meet higher labor costs. Even later in 1990, when commercial banks had become nominally independent, the financial system was not yet market-oriented, and bank supervision was imperfeet. Consequently, broad money increased by over 22 percent in 1990. Moreover, wage increases granted during the early months of the year (before the Government and trade unions agreed upon a wage moratorium in July), as well as higher benefit payments, contributed to an increase of about 3 percent in the average real wage in the economy in 1990. This monetary expansion took place while output was collapsing and before prices had been fully liberalized. As a result, it added to the stock of forced savings, or monetary overhang, created by the planning system, thus exacerbating inflationary pressures in the economy. Although it is extremely difficult to estimate even roughly the monetary overhang resulting from the fundamental changes in the demand for money taking place in a situation of systemic upheaval and great uncertainty like the one that occurred in Romania in 1990, the pattern of income velocity of money can be indicative. Income velocity of broad money at the end of 1990 in Romania was about half its level during the late 1970s and early 1980s, suggesting that perhaps up to 50 percent of the money stock was involuntarily held.
On the external side, in another attempt to improve the domestic supply of food and energy (the latter, unlike in most other Eastern European countries, was imported mostly from the Middle East),17 the provisional Government decided to discontinue the previous regime’s policy of import compression and to ban food exports. These measures, the rapidly growing domestic imbalances, and the Middle East crisis in the second half of the year were reflected in a swing of the convertible currency current account balance from a surplus of $2.9 billion in 1989 to an estimated deficit of $1.7 billion in 1990. This took place despite two devaluations of the leu, in February and November 1990, which together moved the official exchange rate from lei 14 to lei 35 per U.S. dollar. Because external financing—other than trade financing—was not available, mainly as a result of Romania’s self-imposed alienation from the international financial markets in the late 1980s, the convertible currency current account deficit in 1990 was financed almost entirely from the country’s foreign exchange reserves, which were all but exhausted by the end of the year. The trade balance in transferable rubles with the countries of the CMEA also deteriorated, from a deficit of TR 0.5 billion in 1989 to a deficit of almost TR 1.7 billion in 1990.
This sharp deterioration in Romania’s macro-economic situation during 1990, besides being a concern in itself, forced the authorities to reconsider their reform priorities. First, during the year, they placed increased emphasis on macroeconomic stability. The early reform statements had simply noted the danger of inflation and the need for a stable macroeconomic environment during the transition. Gradually, however, macroeconomic stabilization became a central part of the Government’s program and a prerequisite for further reform, thus leading to negotiations with the IMF for a 12-month stand-by arrangement, which became operative in April 1991. Second, the Government rethought certain elements of the reform program directly related to the macroeconomic situation, notably price reform. While the approach to price reform was initially timid, it soon became evident that the budgetary implications of such an approach would be incompatible with the tight fiscal policy necessitated by the worsening macroeconomic situation and would delay all other aspects of reform; price reform was therefore accelerated.
The need for immediate structural measures to contain the collapse in output, the lack of a consensus-building pre-reform period, the trial and error approach to reform, the partial reordering of priorities, and the change of pace of reform in midstream made the Romanian reform effort appear somewhat haphazard from the outside. However, the authorities never wavered as to the ultimate objective of their reform program; rather, these features reflected the conditions in which the program was launched and the absence of any received wisdom on how best to proceed with such a reform.
Evolution of the Reform Strategy
Although Romania clearly stated the ultimate objectives of its reform program at the outset, the strategy underlying the program evolved gradually during 1990-91, influenced by the country’s economic and institutional conditions. This gradual evolution was punctuated by three specific events, which can be considered as landmarks in the development of the Romanian reform program: the publication in May 1990 of the provisional Government’s “Outline of Strategy for Transition to a Market Economy in Romania”; the Prime Minister’s report to Parliament on October 18, 1990, on the status of the implementation of economic reform; and the Prime Minister’s report to Parliament on February 26, 1991, on the progress of the reform and the Government’s program for 1991. These events, aside from specific measures introduced during this period, also reflect the major turning points in the evolution of the authorities’ reform strategy.
In February 1990, the provisional Government established a twenty-member Commission to prepare a proposal for a program of transition to a market economy.18 This Commission produced a preliminary draft report on March 1 (Government Commission (1990a)), outlining the program and specifying areas for further study, and submitted its final draft to the provisional Government in April (Government Commission (1990b and 1990c)). Although the Commission consisted mostly of administration officials, in all about 1,200 Romanian academics, enterprise managers, trade unionists, scientists, and civil servants contributed to the report. The provisional Government discussed and endorsed the Commission’s proposals on April 19, and published the final version of the report in early May.19
This report was unique in Eastern Europe in being an official public statement of a govern-ment’s reform plans. Moreover, despite the remarkably short time in which it was produced and the relative isolation of the country, it was entirely “homemade.” The objective of the economic reform process, as well as its urgency, was clearly stated in the earliest draft of the Commission’s report:
The transition to a market economy is desired not only by the Government; there is now a national consensus on that point. All those who understand the complexity of the question agree that the transition must be prepared economically, financially, organizationally, and also in the area of legislation. But the various measures cannot be delayed because they aim at medium- or long-term purposes, for delaying them would render the tasks of the future Government much more difficult, and it is also known that any delay would increase the social costs of transition immeasurably. (Government Commission (1990a), pp. 3-4).
Even in the early drafts, the Commission’s report was notable for its sense of perspective and its comprehensive approach to the issue at hand. Perhaps more important, the transition to a modern market economy was placed in the context of a wholesale transformation of the country toward political pluralism and multiparty democracy (Government Commission (1990a), pp. 6-8). At the same time, transition was envisaged as a process that would embrace all facets of economic activity. Indeed, the report encompassed all aspects of economic reform: decentralization and reduction of the role of the state; ownership reform, including land reform; price liberalization; financial sector reform; currency convertibility; liberalization of trade and capital flows; macroeconomic management, including tax reform; institutional and legal reform; accountability of state enterprises during the transition, including increasing managerial responsibility and enforcing bankruptcy regulations; changes in the statistical system; and social and environmental dimensions.
The report presented the transition to a modern market economy in two stages: first, reform of the existing economic and institutional structures to those of a market economy; and, second, modernization of the economy. These two stages overlapped, but their time horizons differed, with the former being a prerequisite for the success of the latter. Economic reform was envisaged as a short-term task, to be completed in at most two to three years, while modernization was to be a longer-term process, at the conclusion of which—near the end of the century—standards of living in Romania would be comparable to those of Western European countries. Aside from this initial reference to long-run goals, the report focused almost entirely on the short-term economic reform tasks ahead.
As regards the pace of reform, the Commission’s report, noting the controversy between shock treatment and gradualism, opted for a “gradual reform introduced at a rapid pace, [starting with] an accelerated introduction of the legal and economic mechanisms strictly necessary for the functioning of a market economy.”20 This choice of terms reflected the Government’s concern with the social aspects of transition and the need to maintain popular consensus on its objectives. The report stated that “the period of transition should be reduced to the possible minimum” (Government Commission (1990a), p. 10) but emphasized that “transition … is to be accomplished in terms acceptable to the people, along with absorption of crises and without affecting adversely the standard of living (Government Commission (1990b), p. 3).
The report included a discussion of the objectives and content of structural measures in specific areas, as well as a tentative timetable for their implementation during 1990-92 (Government Commission (1990c)). In terms of sequencing, the report gave priority to ownership reform, reduction of the state’s role in resource allocation, and social protection. The liberalization of prices, trade, and capital flows, although already under way in the first months of 1990, was envisaged as a more gradual process, to be completed by the end of the two-to three-year reform period. The financial sector was to be reformed in order to help improve the allocation of resources, starting with the breakup of the monobank system. Interest rates were to be increased but would remain controlled until the end of the reform period, when the basis of a capital market would have been created, making enterprises less dependent on banks for financing. During the period, careful fiscal and monetary policies were called for to ensure price stability and, together with appropriate exchange rate action, balance of payments equilibrium.
The emphasis on social protection was one of the most prominent characteristics of the Commission’s report. Its objective was to ensure that living standards for the entire population be protected during the transition and, indeed, that they start improving immediately. Therefore, although it directed special measures at disadvantaged groups (for example, mothers with many children, orphans, and the disabled), it did not focus on any particular section of the population but included measures affecting all citizens. These measures included reductions in the work week, additional holidays, housing subsidies for young couples, improved social insurance, scholarships for students, professional training, and a minimum wage law.
The Commission’s report reflected the authorities’ thinking and priorities in the early months of 1990 in the context of the economic and social conditions prevailing at the time. It stated clearly that the ultimate objective of the reform process was the transition to a market economy. It stressed the need for a comprehensive approach, with action to be taken simultaneously in all areas, and offered specific policy proposals in each area that would build on the measures already taken. It recognized the importance of maintaining a social consensus on the reform objectives during the transition and of protecting the most vulnerable groups. Remarkably, the Commission drew up this blueprint for reform virtually without foreign assistance, in about three months, following a violent change of regime in a country with no previous experience of reform. In retrospect, however, the report failed to see that many of the structural measures introduced by the provisional Government were insufficient. The report also underestimated the degree of price distortion and the disequilibrium between aggregate demand and supply inherent in the existing monetary overhang and its inflationary potential. Partly in consequence, the proposed price reform was timid, especially given the ambitious target of developing private economic activity, including privatization of state enterprises and foreign direct investment; the report failed to recognize not only that these targets would not be achieved before price distortions were removed, but also that the macroeconomic disequilibrium would only grow as a result of increases in wages, benefits, and transfers. In this connection, the social protection scheme advocated by the report, although arguably necessary in the sociopolitical conditions prevailing in Romania at the time, ran counter to the stabilization policies required under the circumstances. Finally, although the report discussed privatization at some length, it did not focus on making state enterprises autonomous and accountable before they were privatized.
The publication of the final version of the Commission’s report marked the culmination of the provisional Government’s reform effort. In the elections that followed on May 20, the National Salvation Front (NSF)—which had run the provisional Government—won a large majority in both houses of Parliament. The Government that was formed under Prime Minister Petre Roman in late June retained many members of the provisional Government’s economic policymaking team. The new Government was to serve until a draft new constitution was adopted by Parliament, at which point—originally scheduled for the end of 1991 or early 1992—new elections would be held.
The new Government endorsed the general strategy outlined in the Commission’s report and started to implement it. From the beginning, the Government understood the importance of building the appropriate legal framework for a market economy, especially in view of Romania’s recent emergence from an excessively centralized central planning system. To this end, the Government appointed a Minister of State (of Deputy Prime Minister rank) on Relations with Parliament who would be solely responsible for elaborating and coordinating a detailed legislative plan. In addition, a Council for Reform was appointed,21 consisting, inter alia, of legal specialists and economists to assist the Government in drafting, interpreting, and implementing laws. Foreign assistance was received from various institutions in this regard. The Government’s legislative plan for the period through June 1992 appeared in August 1990 (Council for Reform (1990)), and, during the ensuing months, the legislative effort assumed impressive proportions.22
One of the most important laws for the reform program was prepared very quickly and was passed by Parliament in August 1990. Law 15 on the Restructuring of State Economic Units—essentially a privatization law—also included other critical provisions on trade and exchange policy, the breakup of monopolies, the abolition of the centrale, and foreign capital inflows. The law brought the issue of ownership reform to the forefront, and clearly signaled the Government’s intentions vis-à-vis the state enterprises. Apart from its many positive points, this major piece of legislation shared to some extent the defects of some of the provisional Government’s earlier acts. Because it had been hastily prepared, and many provisions were unclear or difficult to implement, it subsequently had to be clarified by, and supplemented with, an additional privatization law and a land reform law.
During the spring and summer of 1990, the size of the output collapse became increasingly evident, as did the growing domestic imbalances and the mounting pressures on the balance of payments. These events influenced the Government’s unfolding reform program in three major ways. First, the Government was forced to focus more on the macroeconomic situation and to accelerate the pace of the reform strategy outlined in the Commission’s report and endorsed by the provisional Government. As an early step toward reducing the inflationary pressures in the economy—which had not yet been reflected in prices, most of which were still controlled—the Government called in late June for a moratorium on basic wage increases throughout the economy. Second, the Government became increasingly aware of the critical role of price liberalization in the success of virtually every other reform initiative, and accordingly reordered its priorities and modified the sequencing of structural measures. It also realized that price liberalization would inevitably cause a jump in the price level, because of the existence of a monetary overhang. Finally, the Government recognized the need for consistency between its social and macroeconomic policies and started rethinking its social objectives.
The Government’s awareness of and concern with these issues were evident in the Prime Minister’s report to Parliament on October 18, 1990, on the status of implementation of economic reform (Rompres (1990)). Noting in his report the decline in output and investment, as well as the increase in money incomes and the attendant inflationary pressures, the Prime Minister stated that “the acceleration of the reform is an absolute necessity. The crisis in the economy calls for exceptional, emergency measures” (Rompres (1990), p. 33). At his request, Parliament granted the Government exceptional powers in the area of economic reform, including the power to introduce new measures, accelerate reforms, and negotiate foreign credits pending parliamentary approval, provided that these measures were consistent with the Government’s existing reform program. The Government used these powers to liberalize trade policy later in the year, and to begin negotiations with commercial banks and multilateral organizations with a view to mobilizing external financing.
The Prime Minister’s report to Parliament reflected a substantially more realistic approach to reform than the approach adopted in the Commission’s report. Price liberalization was given a central role, the pace of reform was accelerated, and social policy became better targeted. In addition, the Government recognized the urgency of the macroeconomic situation. Despite this progress, however, the Government’s macroeconomic policy and reform strategy remained disparate: there was no attempt to integrate them in a coherent program. Further, the Government seemed unaware of the weaknesses of important pieces of legislation that had been quickly prepared and enacted; nor did it yet fully realize that changes in the legal framework, although necessary, were not sufficient to instill market discipline into existing state enterprises.
The 1990-91 winter months saw three major developments in the authorities’ reform strategy. First, as the Government’s persistent legislative effort gained momentum, the authorities realized the defects of earlier structural reform laws and amended or complemented them with improved versions. Second, the Government built around its 1991 budget a coherent program for the year, integrating its macroeconomic and structural reform policies. The 1991 program not only emphasized macroeconomic stabilization but also included consistent structural reform policies, such as further price and trade liberalization and a realistic and well-targeted social safety net. Third, the Government undertook a major price reform on November 1 that liberalized about 50 percent of prices in the economy and—while maintaining controls—raised others substantially, notably those of many basic consumer goods.
In the legislative area, the Government’s efforts assumed impressive proportions. In the eight months to February 1991 that the Government had been in office, some 90 laws were drafted and submitted to Parliament, of which 46 were promulgated. Many of them pertained to the functioning of the economic system and covered a large number of subjects, including labor legislation, tax reform, civil service employment and salaries, reorganization of state enterprises, banking reform, international treaties—such as joining the International Finance Corporation—and the 1991 budget. These laws were, by and large, carefully prepared, often with foreign technical assistance. In addition, new privatization and foreign investment laws, as well as a land reform law that complemented inadequate existing legislation, were submitted to Parliament in the first half of 1991.
The Government’s integrated reform and adjustment program for 1991 was presented by the Prime Minister to Parliament on February 26, 1991, on the occasion of the debate on the 1991 budget. The Prime Minister’s report (Rompres (1991)) started with a critical assessment of the experience of the first 12 months and then discussed in detail the 1991 program—the Program for Reform, Adjustment, and Stabilization.
The report acknowledged that the provisional Government had made mistakes during the first year of transition, notably in drawing up early reform plans that were too optimistic and in not taking sufficient steps at the outset to inform the population of the objectives and costs of transition. According to the report, the optimism of the early reform plans reflected the provisional Government’s failure to recognize the magnitude of economic imbalances, as well as its inability to fully resist populist pressures on the eve of the May 20 elections. Moreover, the Government had assumed that changes in the institutional framework alone would be enough to set the economy on the right track. In the words of the report,
The economic reform was primarily achieved on an institutional plane, while managerial structures both at the macro level and in the area of palpable processes of economic activity were not changed radically. The shortage of managers, the insufficient communication with those who could become true managers, and the incompetence of some managers within the governmental apparatus who would not let go of their managerial chairs slowed down or blocked the course of reform. (Rompres (1991), p. 14).
The core of the Government’s Program for Reform, Adjustment, and Stabilization for 1991 was a macroeconomic stabilization package, supported by the IMF, that reflected the primary importance accorded to stabilization and served as a test of credibility for the Government’s intentions at home and abroad. At the same time, the structural reform policies put forth were consistent with, and complementary to, the stabilization program, notably in the areas of price reform, trade and exchange system reform, financial discipline for enterprises, and the social safety net.
The Government implemented the second round of price reform on April 1, 1991, when it liberalized the prices of basic consumer goods and services. The official exchange rate of the leu was devalued from lei 35 to lei 60 per U.S. dollar, and the prices of imported intermediate goods were adjusted accordingly.
An open trading system was created in early 1991 through the abolition of all quantitative import restrictions and the rationalization of the existing tariff system. Its goal was to minimize price distortions and contribute to opening the Romanian economy to the rest of the world—from the beginning, one of the major objectives of reform. At the same time, with a view to moving toward currency convertibility, an interbank foreign exchange market started daily auctions on February 18, 1991. These measures were not only important steps in the transition to a market economy but, by reducing structural distortions and opening up markets, would also directly promote the aims of macroeconomic stabilization.
The Prime Minister’s report focused on the financial discipline and restructuring of enterprises. Realizing that the promulgation of a privatization law could not, by itself, reduce losses or force state enterprises to operate efficiently, especially given the time needed for effective transfer of control to the private sector through privatization, the Government decided to follow a twofold enterprise restructuring strategy in the short term. First, old enterprise debts, caused by the distortions and excessive tax burden of the central planning regime, were to be written off so that both enterprises and the banking system could start with a clean slate. Second, the Government planned to impose financial discipline on enterprises with the means it had at its disposal: taxes and subsidies, bank credit, and bankruptcies. In the longer term, as privatization progressed, financial discipline would be reinforced by the exercise of private ownership rights.
The operation to write off old unserviceable enterprise bank debts began in early 1990, when these were written off against government deposits accumulated in the banking system as a result of past fiscal surpluses. In 1990, a total of lei 265 billion (about one third of 1990 GDP) in unserviceable enterprise debts was written off this way, exhausting the stock of government deposits, and a further lei 125 billion (equivalent to about 15 percent of 1990 GDP) was refinanced by the National Bank of Romania. The authorities decided in 1991 to replace the outstanding stock of NBR refinancing with nonnegotiable government instruments, thus eliminating these bad assets once and for all from the books of the entire banking system.
To avoid the re-emergence of losses and bad debts once the existing ones had been eliminated and prices had been largely liberalized, the Government made financial discipline of enterprises an essential ingredient of its reform program, to be enforced through a combination of measures: the restructuring of the tax system in early 1991 to guarantee enterprises adequate retained earnings to finance investment; strict bank supervision to prevent credit being extended to unprofitable activities; and enforcement of existing bankruptcy procedures while a new bankruptcy law was being prepared. However, the Government promised temporary budgetary support to enterprises undertaking sound restructuring programs.
Finally, the Government’s 1991 budget incorporated a social safety net that was substantially different from the one envisaged in the early reform documents. It was not only better targeted at the most vulnerable groups rather than the entire population but was also consistent with the tight fiscal policy required under the 1991 stabilization program. In addition, the Government acknowledged that even for those groups, adjustment would have costs: the social protection given to the least well-off segments of the population would “fall short of [the Government’s] desire” (Rompres (1991), p. 55).
In summary, although the objectives and ingredients remained unchanged, the strategy of the Romanian reform program evolved and changed during the first year. Both the experience of introducing structural measures and the developments in the Romanian economy influenced the pace and sequencing of reform envisaged by the authorities: it quickly became clear that an accelerated pace would shorten the period of uncertainty and enhance the credibility of the reform program. As for sequencing, price liberalization and enterprise financial discipline came to be regarded as preconditions for, rather than simply components of, a successful transition. This evolution, although it occasionally caused the Romanian reform program to appear erratic and lacking clear direction, was to a great extent a natural consequence of the initial conditions in which the reform effort was launched, the state of the Romanian economy at that time, and, perhaps most important, the fact that policymakers were themselves learning about transition as it was occurring.
For a detailed discussion of the Romanian revolution of December 1989, see Behr (1991) and Codrescu (1991).
In early January, the Deputy Minister of the Interior of the provisional Government, General J. Moldoveanu, reported a “renewed outbreak of offenses accompanied by violence in the past few days,” including pilferage of the emergency aid received from abroad (Romania—News of the Day, No. 8/1990, January 11, 1990).
Romania—News of the Day, No. 35/1990, February 12, 1990.
These provisions, introduced in 1988 to boost tax revenues, had come to be known as the “Ceausescu tax” (see Section IV for more details).
Legislative acts passed under the provisional Government were called decree-laws, as there was no elected Parliament to promulgate them. After the May 1990 elections, legislative acts of the new Parliament were called laws.
This crisis caused a jump in the cost of imported energy, a virtual cessation of exports to the region, and a freezing of Romanian assets, particularly in Iraq, which currently owes Romania about $1.7 billion.
This practice was also enforced in the state enterprise sector. Although eligibility for some bonuses (for example, for work in hazardous or toxic conditions) had been established by law, the total number of recipients of these bonuses was arbitrarily limited in each enterprise to contain labor costs, regardless of the actual number of eligible workers.
For more details on this operation, see below and in Section IV.
For political reasons, Romania’s access to oil from the U.S.S.R. through the CMEA payments arrangements was very limited.
Government Commission for the Elaboration of a Program of Transition to a Market Economy in Romania, henceforth referred to as Government Commission or simply Commission.
Schita privind Strategia Înfăptuirii Economiei de Piata in Romania, May 1990. Also appeared in Council for Reform (1990). Unless otherwise stated, all references are to the translated versions of the Commission’s reports.
Schita privind Strategia Înfăptuirii Economiei de Piata in Romania, p. 11.
Council for Reform, Public Relations, and Information, henceforth referred to simply as Council for Reform.
Information on laws presented herein comes mainly from translated versions of the laws as published in the Monitorul Oficial al Romaniei (the official gazette). Several important laws have also appeared in Council for Reform (1991) and Ministry of Trade and Tourism (1991).