Abstract
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Romania was a special case under central planning, and the balance of payments adjustment it undertook in the 1980s offers an example of a sui generis shock therapy undertaken in a command system. Direct controls were used to cut domestic absorption to the largest possible extent. This forced adjustment can be seen as an “internalization” of external disequilibria, which created increased domestic imbalances, both open and hidden. If one conceives an optimal degree of internalization, an obvious overtaxation of domestic absorption took place during those years.
The start of transformation consisted, among other things, of the decentralization of decision making, although soft budget constraints continued to operate; a phasing out of direct control devices; an increasing fuzziness concerning property rights, with trade unions becoming key players and “managers/monitors”; and a very liberal trade and foreign exchange regime. Macroeconomic policy was unable to contain the disequilibria because of the modifying domestic institutional and economic arrangements in the country and an unfavorable international environment. This resulted in a reversal: an “externalization” of domestic imbalances, which led to a surge of imports and a dramatic reversal of the current account balance.
The stabilization and transformation policy in Romania further fuels many debatable issues, including the following: How sustainable is stabilization if financial discipline can barely be imposed, and can the latter be imposed without clearly defined property rights? What are the microfoundations of macroeconomic policy during transition? Does industrial policy have a role to play in supporting enterprise reform and stabilization? What is the role of an incomes control policy in an uncompetitive environment and how can an industrial relations policy enhance stabilization under the prevailing circumstances concerning property rights? What is the role of foreign investment in fostering industrial restructuring when domestic investment is inadequate? To what extent does hysteresis occur when resources (labor) have low mobility? And, finally, if wage dynamics will not enhance human capital accumulation, how will long-run growth potential be impaired?