The IMF and Romania: A Road Well Travelled John Horvath

Romania looks set to follow in the footsteps of Hungary and others down the path of IMF structural adjustment

The International Monetary Fund (IMF) announced at the end of March that it would grant a loan of close to $17.4 billion to Romania. The country is to receive another $9.4 billion from other lenders such as the European Union, the World Bank, and the European Bank for Reconstruction and Development (EBRD). The money is expected to come in over the next two years. Romanian authorities have negotiated to repay it all by 2015 at an interest rate of 3.5 percent annually.

After Hungary, Belarus, the Ukraine, Latvia, and Serbia, Romania has become the sixth country in Central and Eastern Europe to borrow money from the IMF in order to tackle the effects of the global financial crisis. Ironically, Bulgaria - considered just as vulnerable as Romania - has postponed signing such a deal. Although poorer than Romania, Bulgaria has run a much smaller budget deficit and its currency is kept stable by a Currency Board which was established after a major financial collapse in 1997.

As with other countries within the region which fell into the trap of asking for an IMF loan to help stem the effects of the global financial crisis, the Romanian government regards the money as nothing more than a preventive measure. Coincidentally, these were the exact same words used by the Hungarian government last year. Indeed, the Hungarian prime minister went so far as to say that they probably wouldn't even touch the money. Needless to say a few weeks later the government began drawing on the cash and recent reports now claim that Hungary will have already used up all the money by the end of this year.

As in Hungary and elsewhere that IMF money and influence has made inroads, few in Romania seem to know how the money will be used and whether it will even have a positive effect. One of the main criticisms against the IMF deal is the sparse information on the conditions Romania agreed to. As elsewhere, the Romanian authorities are reluctant to publicize in detail the IMF conditions. As one observer noted, "if we want to have national solidarity in the face of the crisis, we need transparency."

IMF policies have left shattered economies

Yet transparency is the last thing that the IMF wants when dealing with the countries of Central and Eastern Europe. This is because the IMF is renowned for having a constraining effect on the countries it deals with. It's so-called "structural adjustment programs" have been known to do more harm than good. These programs consist of a set of policies aimed at keeping developing economies subservient to leading world economies such as the US, Germany, and Japan. Hence, what is often recommended by the IMF are the slashing of government budgets, the sale of government assets to local elites and foreign corporations ("privatization"), deregulation of the economy, promoting exports and trade at the expense of local needs, removing protections for local producers growing food or manufacturing for the local market, removing labour rights protections, and more.

It goes without saying that these policies have left shattered economies around the world and consigned untold millions to poverty. Mass privatization has led to enormous concentrations of wealth and encouraged corruption while deregulation has contributed to local financial crises that are independent of, yet exacerbated by, the global credit crunch. Forced government budget ceilings and inflation targets, meanwhile, have prevented countries from expanding desperately needed investments in healthcare and education thereby leading to decreased standards of living.

IMF is asking recipient countries in Central and Eastern Europe to adopt measures that will lead their economies to contract

Although the IMF has operated these structural adjustment programs under different names in the past, there is no doubt that what is now going on is the same form of exploitation. This can be clearly seen in what the IMF is asking recipient countries in Central and Eastern Europe to do: adopt measures that will lead their economies to contract - which is exactly the opposite of the policies carried out by rich countries (and supported by the IMF, for rich countries only).

Thus, in order to receive loans from the IMF countries like Romania will have to agree to austere conditions including sharp budget cuts, increased interest rates, regressive tax increases, currency devaluation and other measures which will make these poor countries of the EU even poorer. Likewise, the IMF's concept of "capital account liberalization" (CAL) will be duly enforced. Stripping away its high-sounding, technical jargon, CAL is nothing more than corporate welfare in the form of insurance for banks and other large investors.

In many ways, the money given to Romania and other Central and Eastern European countries is merely a cover for bailing out western banks and financial corporations that attempted to make super-profits from an economic liberalization program which operated as nothing more than a fancy pyramid scheme. In essence, money was poured into these countries in order to help stimulate growth which was driven solely by increased consumption. Such a form of economic development was no doubt a risky venture, but one that carried with it colossal returns.

It goes without saying that this model has since collapsed; in Romania, as elsewhere, the country's capital-inflows-driven boom has come to an abrupt end and the real economy, in turn, has slowed down. Having come off an investment and consumption bubble, Romania's reliance on foreign capital has put the country in a very vulnerable position. The threat of redundancy looms large in both the private and the state sectors. The housing market has slowed down considerably, and many construction projects for apartment buildings and luxury residential complexes have been abandoned. Romanian producers have also been hit hard because the country's major trading partners are the rest of the EU, all of whom are also suffering from the effects of the global financial crisis.

As a result of this, non-performing loans have increased substantially and bank capital has begun to erode. Consequently the banking sector, made up mostly of Western European banks, has become reluctant to give loans. "To enable banks to lend again", this is the main purpose for which IMF money is to be used according to official statements from Bucharest. This follows a pattern already established in other countries within the region where similar loans were granted, such as in Hungary.

Accordingly, IMF money is first and foremost needed to help soften requirements on reserves to be deposited by banks for the credits granted; this would then make banks more inclined to lend again. In conjunction with this, IMF money would be used to help stabilize the national currency. There is a fear that countries such as Romania may cause a chain reaction, negatively affecting trade within the EU between those countries that use the euro and those that don't. The weakness of the Hungarian forint recently has already demonstrated how the weakness of one currency within the region could drag down the rest along with it.

While such arguments for the need to secure IMF loans to help cushion the effects of the financial crisis may sound persuasive, there are yet other, more effective ways at invigorating an economy and stabilising a currency than in the way which the IMF recommends. Among them is the use of capital controls, which could limit the ability of foreign investments to enter and flee a country easily.

As Robert Weissman, editor of the Multinational Monitor and director of Essential Action points out, "this is of central importance, because it is concern about a currency attack that is the rationale for why poor countries cannot undertake stimulative measures." He goes on to add: "Capital controls would be the obvious remedy. But since the Fund rules them out a priori, countries are helpless, and denied the right to use the same Keynesian tools available to the rich countries."

Whereas the IMF deals with Hungary and other countries of Central and Eastern Europe were done with little or no public consultation whatsoever, it appears that in Romania at least some effort was made to mitigate some of the negative effects of the loan. In particular, the Romanian Social-Democrat Party (PSD), a member of the governing coalition, demanded provisions to protect the population from any immediate social costs associated with the deal. The PSD insisted there should be no cuts in salaries and no layoffs in the public sector as had been with similar IMF loans in other countries.

"The program contains explicit provisions to increase allocations for social programs, as well as protection under the reforms for the most vulnerable pensioners and public sector employees at the lower end of the wage scale," stated an IMF press release when the deal was made. For its part the government has started negotiating with the trade unions, pensioners, and students to prevent layoffs and cuts in incomes. The government so far agreed to cut bonuses but not salaries, and to increase some scholarships by as much as 15 percent.

The global financial crisis has suddenly become a major business opportunity for the IMF

Still some are sceptical. They point out that while one of the conditions of the loan and subsequent government deals with the public sector was not to decrease the incomes of state employees, at the same time neither will these same incomes be increased so as to meet IMF conditions for constrained budgetary expenditures. Coupled with inflation which will no doubt increase as a result of the financial crisis and IMF recommendations, this wage freeze will in fact represent a net loss for workers. Such an approach has already been adopted by Hungary where a wage freeze for the next few years means that state employees will continue to experience a substantial drop in real wages.

Thus, it's highly unlikely that the IMF deal will give Romania the cushioning it needs against the global financial crisis. Political leaders themselves also seem uncertain of the consequences of the IMF deal and it's questionable whether the government will be able to pursue a coherent anti-crisis strategy as a result. This is one of the main failings of some other countries which have already received IMF funding, such as Hungary and Latvia. Despite receiving loans early on, these governments have been unable to pursue a coherent anti-crisis strategy and are thus now in a worse position than when they had first acquired the loans.

As for the IMF it doesn't seem to really matter whether a country will be able to properly manage the money it receives or not. The global financial crisis has suddenly become a major business opportunity for the IMF and other international lenders. Over the last few years many countries have risen up against the IMF to the extent that it has severely affected its business. For instance, Latin American countries joined together to launch the Bank of the South in an effort to create a viable alternative to the structural adjustment dictates of the World Bank and the IMF. Not only this, almost all middle-income countries paid back their loans to the IMF and refused to have anything to do with the institution, leaving only poor countries (mostly from Africa) under their control.

Since the IMF depended heavily on the interest payments from middle-income countries to support its budget, the loss of this revenue stream was acutely felt. In fact, last year the IMF's governing body went so far as to approve a proposal for cutting its staff by about 20 percent and selling some of its gold stock so as to create a trust fund that would fund administrative operations in the future.

Sadly, it appears that the countries of Central and Eastern Europe have now filled the gap left by middle-income countries, breathing new life into the IMF and other international lending institutions which had been reeling from the financial crisis - a crisis which they had in many ways provoked. Meanwhile, the ignominious role of the IMF as a multi-pronged corporate welfare machine for big business is once again being successfully smothered by the global media establishment. In doing so, the true nature of the credit crunch is being concealed, making progressive solutions to the global financial crisis that much more difficult to introduce. (John Horvath)