Harsh IMF approach courts disaster in Romania

February 9, 2012

By Martin Hutchinson and Christopher Swann

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

The IMF is courting disaster in Romania. The fund’s draconian conditions led Bucharest to cut public sector wages by 25 percent, far more than elsewhere. Now Romania’s prime minister Emil Boc has resigned and anti-reform forces have been emboldened. Excessive IMF rigour could do lasting harm.

The fund has been trying to soften its fearsome reputation. Managing Director Christine Lagarde has argued that the IMF should be less harsh, admitting that “consolidating too quickly can hurt the recovery and worsen job prospects.”

Sadly, in its treatment of Romania the IMF lived up to its old blood-sucking reputation. The lender’s demands included 100,000 job cuts, as well as steep cuts in salaries and a hefty rise in VAT, which hits the poor directly. Such harsh measures may prove self-defeating. By strengthening anti-market political forces, the IMF may end up pushing Romania away from the policies it encourages.

Romania does not obviously need extreme measures. While its current account deficit reached 14.5 percent of GDP in 2007 (less than Latvia, Bulgaria and Estonia), it has alleviated the problem with a 30 percent devaluation of the leu in 2007-09. Its public spending at 36 percent of GDP is not excessive.

Crude fiscal austerity fails to address Romania’s endemic corruption and other structural economic problems, which help keep the country’s GDP per person the second lowest in the EU. The IMF could help the country deal with the dreadful legacies of the odious Ceausescu regime. Instead, its harshness risks undermining Romania’s fragile democracy – street protests helped bring the government down.

The mauling of Romania heightens worries that the IMF operates with a double standard. Richer nations such as Ireland and Portugal were offered more lenient terms. The Emerald Isle was asked only to cut the pay of incoming civil servants by 10 percent and trim the government payroll by 8,000 while Portugal got away with 5 percent salary cuts and staff reductions through attrition.

When the IMF lends to richer countries, its conditions have softened. For the fund to succeed in its mission it may need to give its more impoverished clients similar treatment.


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i love the kind of left wing rhetoric that crops up at times. it’s refreshing to see that after having ruined Europe, the left just doesn’t give up.

Ok, so the fund lends money. As any lender, they wish to see the cash returned and so they impose conditions. The effects of said conditions must be easily quantifiable. Setting aside the large pre-crisis increase in both number of government employees and compensation per gvt employee that Romania suffered, one can clearly agree that it is not the domain of the IMF to oversee much less quantify the effect of anti-corruption reform or any other structural reform.

If one does take into account the greek style expansion in government employee related expenditure the gvt undertook in 2007-08 (FAZ journalist’s terminology, not mine), one can look at the subsequent reduction in per employee compensation as an after election return to so-called normality rather than as a draconian measure. A necessary measure. Perhaps the authors should widen their research to include a 10 year growth in per eployee as well as number of employee increase rather than only focusing on the post (intra??)- crisis evolution of said indicators.

I would also suggest that the authors consider the ratio of government employees to private sector ones and draw their own conclusion as to the necessity of criticized measures undertaken under the guidance and political responsibility shielding of the fund. I am certain that the authors would then come to the conclusion that the number of public sector employees is quite large (even unsustainable) in comparison with their private sector counterparts. As a side remark, I am certain the same conclusion can be drawn about the number of people relying on pensions.

To conclude, one cannot ignore the context in which such so-called draconian measures were taken. One must also look at the mandate and tools of the IMF. Structural reform is more the domain of the EU rather than the IMF.

Posted by alex_i | Report as abusive

Dear Martin & Chris, as you probably already know, the austerity measures you are talking about were taken in 2009, which is almost TWO years ago. i.e. they are past tense now. Funny thing you may call it, but in the meantime, consumption has started to show signs of stabilization and even a small recovery. So, please, next time when you write another article with such a bombastic title, please choose your words carefully. As you well know, media has a very important role in investor sentiment, especially when it comes to small EM countries. Maybe IMF has put a cap on GDP growth but the RO gov’t has a pretty strong pipeline of IPOs this year and articles like yours ain’t helping the country either!

Posted by Nuca | Report as abusive

IMF did not ask to cut the public sector wages by 25%; it asked to reduce the bloated public sector. It was Romania’s government choice to do a blanket cut instead of closing unnecessary public sector jobs.
The authors imply Boc’s government was reformist and the protester are anti-reform. Until pushed by IMF Boc’s government did absolutely no reform. The protests were triggered by “reformist” zeal of the past government who wanted to replace a working public-interest service (funded by private donations) and replace it with a private scheme where people close to the governing party would win the business.

The crude fiscal austerity is caused by the lack of reform and inability (or rather unwillingness) to identify the main causes for the budget deficit: bloated public sector, siphoning of funds from state owned companies, overpriced contracts won by party friendly companies. That and the endemic corruption is the problem and not IMF austerity.
The governments was brought down not by public protests directly; it is a last ditch attempt to salvage whatever political capital the ruling party has left.

Posted by bvrabete | Report as abusive

I wonder if the author of this article has ever been to Romania. The article seems to be written after doing some reading in the media. I doubt the IMF is bringing the country to the brink of disaster. Lets put some of the facts presented here in context: Yes, salaries in the public sector have been cut by 25%, but prior to 2008 public expenditure on personnel rose by 120%. This also coincided with a surplus of 200,000 employees in the public sector. If I am not mistaken Romania entered the crisis with 7% budget deficit. Any sane govt would have tackled the issue; VAT of 24% is high, but it solved the deficit problem.

Please explain to me, in what way is Romania’s democracy fragile? A few hundred people took to the streets to express their discontent with health sector reform (get your facts right!) and this provided the opportunity to vent frustration accumulated during the past 3 years. Yes, the PM resigned, but a new govt was installed. Elections are scheduled for autumn. How long did it take to install a government in Belgium? I hear they have a strong democracy.

Posted by atalossofideas | Report as abusive

This is not just an issue of a honest policy mistake. It is wilful predatory behaviour, meant to further the interests of global finance. What is happening in Romania and Hungary with the IMF and its suporters is naked financial agression. This has been especially evident given the obviously coordinated attack on Hungary in the past few months, which included the IMF, the ratings agencies and western media and political establishment as levers to push Hungary into begging for a loan, which in fact will destroy that country systematically, just as it did to Romania. The most recent attack on Hungary came in the form of the EU effort to banckrupt Malev, which will leave Hungary on the hook for $2 billion in penalties to be paid to the recently privatized Budapest airport. The damage to Romania’s long term health is greater than this article reports. I recomend to you read an article published a few weeks back, which was in response to a Reuters article attacking Hungary in a rather shameless way. The article’s title is “Hungary and Romania, bad slave and good slave of global finance”, and it is available on: http://zoltansustainableecon.blogspot.co m/

Posted by ZBan | Report as abusive

Four months later we can clearly see that the situation is up-side-down. Now countries like Portugal and Spain have serious financial problems, while Romania has none of this kind. Portugal expects a -3.1% decrease of the economy, while Romania expects for a positive 1.2% to 1.5% growth. That not means the crisis is over, but that does not mean, either, that IMF killed Romania. Overstating a little bit, we can say even that IMF killed Portugal when they treated it so kindly in the past :)

As a general remark: the countries with problems (Romania included, of course) are the countries which are not able to collect properly the taxes and which spend inadequately the lent money. IMF just points out to those two diseases while borrowing their money.

Posted by Kor | Report as abusive