r/globalistshills Feb 01 '21

Why Nations Don't Fail: Building Institutions in Romania

In the last episode of the Wealth of Nations podcast, I discussed Ukraine's spectacular economic implosion in the aftermath of independence, democracy and market reforms. However, Ukraine's experience was far from universal. Nations such as Poland, Estonia, the Czech Republic and Slovenia successfully adapted to the political and economic transformations of the 1990s, and are now rapidly converging with western European standards of living. The nations that adapted most successfully to changing conditions benefitted from close geographic proximity to Europe, strong historic and cultural ties with developed markets, a previous history of industrialization and development, and leadership committed to fundamental reforms.

In today's podcast episode, I want to instead focus on Romania, a nation that like Ukraine, did not benefit from these initial advantages. Romania in both 1914 and 1989 was substantially poorer than Ukraine, does not have a border with a developed market, and had political leadership in the 1990s that was deeply ambivalent to reform. Understanding why Romania adopted more successfully to radical change than Ukraine is crucial to understanding under what circumstances massive political and economic reforms will result in human flourishing.

Romania and Ukraine's Different Experiences of CommunismImportant differences in the economic trajectories of Romania and Ukraine emerged early on in the days of communism. While Ukraine was incorporated into the USSR in 1919, Romania became a Communist state under soviet tutelage that imitated Stalinism from 1947 onwards. However, after Nikita Kruschev condemned Stalinist excesses in 1954, Romania's political leadership stayed loyal to Stalinist precepts. Ironically, this created a wedge between Romania and the USSR and from the 1950s onwards, Romania turned to the west as partners in trade and investment. By 1981, Romania had an external debt of $10.1 billion and had to make external payments of $3 billion a year.

The government of Romania was too proud to default on its debt, or turn to the IMF for support and instead created the fiscal space to repay this debt with harsh austerity. The Romanian dictator, Nicolae Ceaușescu, imposed some of the harshest austerity in the world. Daily blackouts became the norm even though Romania produced more electricity per capita than Spain or Italy. The government forced students to labor in the fields during "vacation" , but exported all the produce so that food calories consumption fell by 10%. Funding for education and health collapsed, and it was during this period that Romania's infamous orphanages came into existence.

By 1989, Romania successfully paid off the debt it owed to western creditors. Romania had ironically also undergone much of austerity and disconnection from Communist markets that Ukraine faced in the 1990s before communism fell. Moreover, the austerity destroyed the legitimacy of Ceaușescu's government. Protests against the expulsion of a priest in the town of Timosoara exploded into a nationwide insurrection. The government of Ceaușescu initially responded with brutal repression, with over a thousand people likely losing their lives. However, communist party elites were just as angry at the government as ordinary people, and the armed forces rapidly abandoned Ceaușescu. A coup by senior leaders overthrew the government, and Nicolae Ceaușescu and his wife were executed. The Communist party maintained its institutional integrity through all of this upheaval, and formed the Front for National Salvation (FSN) to guide Romania through the fall of Communism. Unlike in Ukraine, the Communist party partially recast itself as the Social Democratic FSN, and given the massive organizational advantages was able to dominate early years of transition.

The Political Economy of ReformThe new FSN initially followed the same path of reform as other post-Communist nations. The Romanian government engaged in mass voucher privatization, just as in Ukraine. Just as in Ukraine, these enterprises largely ended up in the hands of former managers more interested in extracting subsidies from the state, rather than in making ailing SOEs profitable. Moreover, Romania suffered a milder version of the collapse Romania saw, as the planned economy collapsed beforethe rules and institutions of a succesful market economy could be adopted. Between 1989 and 1992, GDP PPP per capita fell by 19%, causing widespread unhappiness. The FSN (which later became the PSD) government got cold feet about reform, and drastically slowed the liberalization process.

Unlike in Ukraine, the former Communists in Romania maintained organizational (if not ideological) coherence, and was wary of privatizing too fast. They did not want to create a class of oligarchs capable of financing opposition movements. While the new elite was extremely corrupt, rents were broadly distributed through society. No class of oligarchs comparable to Ukraine emerged in Romania, and only one billionaire in Romania has business roots during the period of transition. By 1996, center left administration was discredited. Unlike in Ukraine, those people representing the interests of the rising private sector needed to organize on an ideological basis beyond personal wealth accumulation. In 1996, Emil Constantinescu became the President of Romania on a platform of economic reform.

While the new government of Romania accelerated the privatization process, it also made deep institutional reforms to make it possible for capitalism to thrive. In order to gain EU membership, Romania made substantive reforms to the judiciary , strengthened anti-corruption bodies. Comprehensive efforts were made to simplify taxation, remove harmful regulations, and modernize business law. Moreover, bilateral investment treaties allowed foreign investors to demand arbitration by a neutral party if investors felt Romanian courts could not be neutral.

Although, to a certain extent, these changes had a greater effect on appearances than reality, real improvements in governance were made. By 2007, Romania was ranked 69 on the Corruption Perceptions Index, while Ukraine was ranked at 118. While Ukraine's oligarchs blocked efforts to improve the rule of law, the smaller businesses and foreign companies that dominated the Romanian business had a clear stake in good institutions. The reforms implemented by the center-right government after 1996 did not yield immediate results, and the center-left returned to power. However, as growth accelerated from 2000 onwards, reforms were maintained and strengthened, with Romania gaining EU membership in 2007.

https://wealthofnationspodcast.com/
https://media.blubrry.com/wealthofnationspodcast/s/content.blubrry.com/wealthofnationspodcast/Romania-Succesful_Transition.mp3

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