SPECULATIVE BUBBLE IN ROMANIAN POLITICS IS NEARING FINAL BURST Why Don"t We Need The IMF?

"Something" happened in Romania in 1989, which proved that the State cannot ensure the welfare of its citizens even if it has full control over the economy. Then, and now, everything that the authorities were doing was intended to promote the common good, without even the slightest intention to correctly evaluate the country"s economic potential. Governmental programmes and economic legislation (i.e. in most cases it was actually anti-economic legislation) have been blocking the country"s development for the past 20 years.

Now, the authorities believe that an agreement with the IMF can save the economy from a crisis that is not only inevitable, but also necessary for Romania. First, the discussion referred to a 6-7 billion EUR loan from the EU, under the IMF"s supervision. Since the International Monetary Fund is anyway included in the equation, why do we still need the "contribution" of our authorities? If we were to disband the Government and the Parliament, the State budget would become much more comfortable, as public expenses would be significantly reduced.

The incompetence of our politicians, so painfully reflected in frequent changes in attitude, statements and opinions just a few hours apart, has reached the peak of the last 20 years. All the transition period in Romania was nothing but the "growth" of a speculative bubble in politics, too, just like the one we have seen in real estate for the past few years. However, the IMF is not a solution for us. Why? Because the institution created in Bretton Woods over sixty years ago, alongside the World Bank, has failed to solve the problem of underdevelopment, even during economic booms. A number of economic studies on the impact of IMF assistance on development point out that, on the contrary, the effect of the financial agreements with the IMF and the World Bank on developing countries was negative.

Even if we start from the hypothesis that the 7 billion EUR from the IMF can eliminate the risk of an immediate economic collapse in Romania, the conditions imposed by the IMF will not allow for a true reorganization of the economy. The crisis will be amplified specifically by the structural deficiencies, which are not typical just of our economy. Professor Edmund Phelps, a winner of a Nobel Prize for Economy, recently told FT Deutschland that the U.S. economy was not going to recover fast because it was caught in the middle of a deep structural crisis. The same is valid for Romania, too. Any help from the IMF will be wasted in an attempt to ensure the short-term survival of the current economic structure, while the debt will remain in place.

What are the problems of the U.S. economy as Professor Phelps sees them? The decline of the capacity to innovate, too many poorly paid jobs and a financial sector incapable of financing the economic sectors which generate economic growth on long-term. From this point of view, we could say that Romania has finally caught up with the United States. Need we recall that Professor Phelps is sceptical also about the economic rescue plan promoted by President Obama?

Throughout the transition, Romania has been dependent on foreign capital inflow in order to finance the foreign deficits caused by the lack of economic reform. The Financial Times has analyzed the latest data available from the Institute for International Finance (IIF), which indicate that capital flows to emergent economies are likely to collapse in 2009. Four months ago, the IFF forecast anticipated an inflow of 562 billion USD for 2009. The current forecast is 165 billion USD, according to the Financial Times (i.e. "Capital Flows To Developing World At Risk," published 27 January 2009). This financing volume only accounts for 20% of the foreign direct investments made in emergent markets in 2007, which is quite a record.

The major contraction of the private capital flows is too great to be compensated by a loan from the IMF, while the restructuring of emergent economies is inevitable. Nevertheless, IIF Vice President Bill Rhodes believes that the IMF needs to continue to offer liquidities to emergent economies because the dire capital crisis is strongly affecting companies that need to finance their debt. Unfortunately, the IIF vice president does not seem to understand that the problem is not about liquidity, but solvency. The messages coming from central banks, who were arrogant enough to see themselves as "administrators" and "guardians" of economic growth, have been misleading companies into oversizing their production capacity in order to benefit from low financing costs. Now, corporate assets are depreciating rapidly, while debts are increasing. The market demand was also distorted by relaxed consumer lending terms. The return to the real level of the market demand is a process that has just started.

Romania does not need anti-crisis programmes because not only does Romania not have anybody to manage such programmes, but the actual solution is quite different. Luke Johnson, a Partner with Risk Capital Partners did not only refer to Britain when he described it in the Financial Times: "It is clear that as a society we must learn something painful and radical - how to live within our means - because the credit just is not there any more. The easy money is all gone, and there will be no more for a long time."