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|  Romania
the awakening giant of Europe |
 Looking for lost prosperity - 1997 : A mixed performance - Rebuilding the Country -
Major Infrastructure Projects March On - The Tough Game - No Pain, No Gain -
The Young Wolves of the Private Sector - What's Next? 
| Interview with
Mr. Daniel Daianu
Minister of finance of Romania
10th of January. |
Question: Mr. Daianu, you are a new minister, we would like to know what really has been done in your sector since the Ciorbea Government took office?
Answer: As you probably know, the Ciorbea Government initiated a new program of reforms and, certainly, one can judge it in a traditional way - by looking at the various measures in various territories: the real economy, the area of finance, opening the economy in general, trying to attract foreign investors, etc. I think that what is essential for understanding [these reforms] is the thrust and the philosophy of the reforms.
Among other things, that means that time is a very precious resource and the marginal cost of inaction is increasing in a country like Romania; and that reforms should be seen against the background of what is going on in the world - globalization, information technologies, structural problems in the West as well, and, recently, the financial crisis in Southeast Asia. One has to be very determined, one has to move swiftly although pains can be tremendous. This is not easy, because there are tradeoffs and there is no free launch within the economy, especially within an economy that has to deal with the legacy of a very, very poor resource allocation. When we talk about the need for structural reforms, we mean, on one side, institutional reforms, building up the set of institutions that define a market-based system and a democratic society, a state of law. On the other side that points the finger at the legacy of resource misallocation. The latest is extremely burdensome for a country like Romania, that practiced late Stalinism until the very end of the regime and had a protracted way of initiating reforms, with stop-and-go policies, inconsistencies, not a proper understanding of tradeoffs and dilemmas. Problems have accumulated and are showing now their teeth in the area of finance and banking system.
Aside from the legacy of resource misallocation, the government had to face problems, which usually are not encountered, by countries that embark on a process of macro-economic stabilization. From the very beginning there was a need to address and redress the functioning of the forex market. There was a big overshooting in the depreciation of the Leu and that partially explains why in a year of resumption of macro-economic stabilization, because of the magnitude of corrective inflation, the December on December inflation is some 150 %, more than during the previous year, when thing were out of control. The overshooting, freeing the price of energy, monopolistic structures in the economy, [structures] that extract monopoly rents, explain corrective inflation.
Q: And how large are the chances to curb down inflation?
A: If you look at the average monthly rate in the last quarter of
1997, that was less than half the monthly rate at the end of 1996. That is an indication that, in spite of an annual rate of 150 %, inflation was brought down substantially by the end of the year. We did not achieve the target - a monthly rate below 2 % - that we are trying to attain by May-June this year.
Secondly, the forex market has been functioning properly, with Romania getting substantial capital inflows. This explains why the National Bank of Romania was able to accumulate foreign exchange reserves and to raise them from about 600 million $ to about 2.6-2.7 billion $ within one year. This was a major achievement; of course, if you compare Romania to other countries, that have reserves in the range of tens or even hundreds of billions.
We have not moved as quickly in other fields - such as speed of structural reforms - but there are reasons why that has not happened. It is much easier to restructure a booming economy, where there is a balance between exit and entry, where job construction is as intense as job destruction implied by restructuring, downsizing, slicing off the fat of the companies. The real economy has been more squeezed in 1997 than we programmed. This diminution explains why restructuring was less rapid than we expected.
There are other reasons as well - higher inflation led to a diminution of sales and that does not help the companies, the cash flow changes, the prospect changes. What is rot in the banking system started to become more visible. In the last portion of the year the Central Bank and the Ministry of Finances had to provide financial assistance to two major state-owned banks, which was the result of the lack of restructuring of the economy. The restructuring of the banking system is a top urgency for the Romanian Government - and I am talking on my behalf, but this is also what the Governor of the Central Bank and the Prime Minister would tell you as well. It is the very state of affairs that demand to act resolutely. Theory and practice indicated clearly that. Macro-economic stabilization cannot be durable unless one is very much concerned about what is going on in the banking system, because stabilization can be derailed by the improper functioning of bans. Thirdly, there is an increasing sensitivity of our international interlocutors within the international financial community, the IMF, the World Bank, etc., about the state of banking system worldwide.
We target an inflation rate of 45% wich is much inferior to what we have programmed - 90 percent - in 1997. The corrective inflation, to a large extent, belongs to the past. I fully subscribe to those who argue that, in our circumstances a budget deficit bigger than 4 % is very likely to be inflationary. For example even if one has a lot of external financing available, the domestic counterpart of that external financing needs to be sterilized so that liquidity be kept under control.
If that is the case - and [in Romania] that is the case - you would still have high interest rates, and inflationary expectations would be maintained (even reinforced) by the lack of sufficient restructuring. And that is bad for the service of the public debt, bad for macro-economic stabilization because interest rates would continue to be high. We are working on a budget deficit and aiming at 3.6% [of the GDP]. The consolidated budget deficit of last year was about 4 percent. I think that a target of
2.5 percent is not realistic after the squeeze of last year. We are trying to put more emphasis on indirect taxes and reduce direct taxes. Simultaneously we are trying to alleviate the pains for the private sector, for the entrepreneurs who want to reinvest profits; real credit to the non-governmental sector should not be reduced, as it happened in 1997.
It is extremely tricky, because we have several objectives and not enough instruments. However, I am hopeful that I can come up with a number below 4 percent for the consolidated budget deficit. If we take into account that only for servicing the public debt we need this year about 5 %, that means we have to run a primary surplus - and this is not easy in an economy that comes after a year of decline of over 6 percent. Out of those 5 percent, almost 1,5 percent is the burden for assisting the two big state-owned banks, Bancorex and Banca Agricola. I hope that BancPost and the Romanian Development Bank were be privatized during this year and I am also pushing for the privatization of Banca Agricola. I hope we will see big names putting a foothold in Romania - - Deutsche Bank signaled its intention of being in Romania this year, ABN Amro Bank wants to be more active, Citibank gave me a very strong signal that it wants to get involved into the privatization of Romanian banks. Things are moving in the right direction.
Q: You are very pessimistic for 1998.
A: I am not very pessimistic, I am realistic.
Q: You are working with the National Bank of Romania, with the Ministry of Privatization and with the Ministry of Reform. What is the level of collaboration with those three entities?
A: I mentioned that there are two dimensions to this. One involves the very institutional framework. We are keen in
improving the dissemination of information, the dialogue helping the decision making process. I decided together with the governor to have a special committee formulating a monetary policy in conjunction with what the Finances Ministry does in the realm of financing the budget deficit. The low level o f monetarization of the Romanian economy and the need for the state to issue bonds mean that if there is no good coordination of policy liquidity. Also, informally, we have a kind of mini-cabinet, economic cabinet. We usually meet on Saturdays - me, Serbanescu, Ionescu, the deputies - and we try to think, to find solutions. Now we are working on an economic program - and that program is not constructed now because the IMF is supposed to come to Bucharest, but because the country needs and economic program. The country needs an economic program and that should be preferably a domestic product.
| The other dimension is much softer and relates to intellectual empathy. I came from the central bank; the Minister of Reform is an old friend of mine, we are members of the Romanian Economics Society, and the Minister of Privatization is also a friend of us. I am not suggesting that there is a coterie in the Government; I am emphasizing that there is an intellectual bias that, I think, is good for reforms. The country needs ministers who can see eye to eye in fundamental things and this is pretty important when you have to deal with a huge bureaucracy, with red tape, with the inability of other people to understand properly the policies, when you have to short circuit bureaucracy.
Intellectual empathy is important when inertia is big, resistance is enormous because of vested interests that are liable to loose a lot. In an economy where you have a lot of inefficiency, companies that extract big rents, there are people, coalitions of interest which, under normal circumstances (of level playing field and competition) would be losers. Those people articulate stances, they can use the Parliament, the political parties, they can even use the coalition government!
Q: Economists complain about the fact that little has been done regarding the structural reforms, especially within the industry. What should be the best industrial policy for Romania in this moment? Who should design such a policy?
A: Aside from using the cliché "let the market forces do it", every realistic person understands that governments do play a role, whether the role is active or is passive, in the sense of helping inefficient state-own companies to restructure. Unless you do have proper information, let market forces do it, try to privatize as quickly as possible and let the owners decide - that is my experience, that is the best way and that should be the working assumption.
However, if we also accept that that may not be possible - to privatize very quickly all the companies the state still has in its own hands - it does not make sense not to do anything. For example, we have the "regii autonome", big industrial companies. If you know that they are highly unprofitable, that wages are not related to performance, that costs are not controlled and if you think the state as an owner than I would say that this sui generis capitalist is pretty irresponsible if he doesn't take a look at costs, at wages that are not related to performance. This is why I believe we have to deal with the big, value subtracting companies. If we know which those companies are we should close them immediately. For those which are highly inefficient, but which are not value subtracting, we should have very determined measures to control costs and phase them out. That means regulation, but in a proper sense, because the way they operate now is a kind of deregulation that harms the good sectors of the economy and harms the citizens at large, because they extract rents and frequently cover their losses by mark ups; they rise prices because they do not face competition.
In the Ministry of Finances we decided to have a task force dealing with structural reforms in the industry. We should signal to everybody, to the various ministries, that we are adamant about the need to accompany fiscal reform, measures in the realm of monetary and exchange rate policies with determined action in restructuring companies. If we do not do it, tensions will mount in the system and we will not have a durable macro-economic stabilization.
Q: The new emergency ordinance on encouraging direct investments put the local and foreign investors on the same foot. What action would your ministry take to encourage foreign investment in Romania?
A: One has to accept that solid companies are not necessarily attracted by tax exemptions. They need a clear and stable legal framework, they are attracted by fundamentals. I am not naïve I do not want to extol the virtues of Romania that can not be extolled. Everybody knows that there is still much red tape which can be discouraging; people may waste a lot of time because of the way the information flows, because of the intricate institutional network that does not help a company to reach a deal quickly.
Sometimes, in big deals you need an intervention of the Prime Minister. A lot depends on the relationship between the Ministry of Privatization and the State Ownership Found. If a critical mass of foreign direct investments starts to define the interaction between the Romanian economy and the outside economy - because the level of foreign direct investment is still low -much would change. It is hard for any system to change itself. It is like when a big conglomerate needs to change; it needs pressure from above, from the management team, but also pressure from outside, and a good
"virus" introduced into the body, to provide for new, better blood.
If you look at which American companies came to Romania - I'm not saying that there are not major European companies, but they tend not to have the global reach American companies have - most of them target the domestic market, they are more in consumer goods, like Coca Cola and Procter & Gamble. You don't find big names that target other markets, in export-oriented segments of the Romanian industries. And they should be, because Romania has a very large industrial base. There is obsolete technology, but there is also skilled labor. In a world of global procurement, where global companies source according to a different logic than they used to, I think that overall Romania deserves more.
Q: What particular sectors or companies do you think are most attractive for foreign investors?
A: I mentioned the very broad industrial base. One cannot talk only about furniture and textiles - that's ridiculous. How many countries in the world have the ability for example to build helicopters? This is something that cannot be achieved overnight. There is skilled labor force that can manufacture cars, ships, and helicopters. We are very inefficient and we have to discard a lot, but the capabilities are actual. What we need is a transfer of new technology, injection of capital - because we are an undercapitalized economy - and a good policy. If we achieve macro-economic stabilization, bring inflation down, have a proper legal framework, maintain social peace, have a clever policy, investments should flow.
Q: Before being appointed as the new Minister of Finances, you stated that you want fast reforms in Romania. Now that you are minister, will you do that?
A: The headlines are not enough, the devil is in the fine prints. You may wish a lot of speed of reforms and fail miserably and be out of power in a couple of months. That is not enough and that is why we are working at an economic program. Daianu is not alone; he may be very lonely when he has to present the budget, I can tell you that, but in terms of the economic program, we are a team. For various reasons the governments was not able to achieve last year all it had as purpose, but we hope to do better this year, because otherwise it is not only the end of the government at stake.
Q: As a final issue, keeping in mind that we are reaching 2.5 million readers, what would be your message to them?
A: Some years ago I had a talk with an American diplomat and I explained him why I believe that American companies should come to Romania. America enjoys a lot of sympathy in Romania and that was proved by the post-Madrid moment. Polls indicated that that decision did not change the perception and that shows that there is something in our psycho in terms of sympathy and affection that cannot be moved away by political decisions, by geo-political interests that are not necessarily favorable for Romania at one point in time.
Romania is, to a large extent, like an "underrated stock". It pays to be here and it pays to buy when it's attractive. Later on it maybe much more difficult. The Asians now are in big trouble; but fundamentally they remain very competitive, they will rebound. They are learning now a very hard lesson that will pay back one day. They will be more competitive, they will be more aggressive in investing and selling; this is why American companies should come now. If you look at which companies do use commercials and advertise in Bucharest, you would be stunned: the Japanese and the Koreans. Because American companies take it for granted.
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© World INvestment NEws, 1998.
This is the electronic edition of the special country report on Romania
published in FORBES
Magazine's enriched with complementary information,
such as full interviews, detailed company files and more.
June 1 st 1998 issue
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