Eastern Europe and Romania—The Path to Prosperity by Christine Lagarde in Bucharest
IMF News, July 16, 2013
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- Authors: Christine Lagarde Managing Director
- Published: July 16, 2013
The Global Context
- Overall global growth:
- "the global economy should expand by around 3.1 percent this year, the same as in 2012."
- "euro area—where growth still in negative territory to the tune of 0.6 percent"
- "emerging markets and developing economies ... with 5 percent growth this year."
- Risks and watch points:
- Ongoing fallout and "too many speed bumps in the road to strong and sustained global growth."
- Europe could worsen before improving; U.S. debt ceiling uncertainty.
- Risk that the slowdown in emerging markets could persist due to domestic tighter credit, structural constraints, weaker global demand, and financial stability concerns.
- Market turbulence and the unwinding of unconventional monetary policy require careful phasing and clear communication.
- Focus areas going forward: people, policies, and partnerships.
Lessons from Your Neighborhood
- Past transformation and growth:
- "Between 1995 and 2007, Eastern Europe grew faster than all other emerging market regions, with the exception only of China and India."
- "Average incomes have tripled in the past two decades, from about US$3,000 in 1993 to more than US$10,000 today."
- Crisis-era vulnerabilities:
- Capital and credit inflows fueled excess demand; fiscal policies exacerbated imbalances.
- "current account deficits reach double-digits in many countries; for some going as high as 25 percent of GDP."
- The 2008 crisis produced double-digit declines in many countries.
- Recovery status:
- "Now, five years after the start of the crisis, the worst has passed. Most of the countries in your neighborhood have returned to growth, along with Romania."
- "This year, we expect only two countries—Croatia and Slovenia—to remain in recession, compared to eight last year."
- Key lessons and policy imperatives:
- Integration remains the right path despite risks; risks "can be managed."
- Three key actions to harness integration for lasting growth:
- Ensure macroeconomic stability: many countries took steps to rein in public deficits.
- Example: "last year Latvia had a budget surplus compared to a deficit of nearly 8 percent of GDP in 2009."
- "about half the countries in the region still have deficits over 3 percent of GDP and public debt has been rising."
- Share the burden of adjustment fairly and support growth:
- Use easy monetary policy as cushion while anchoring inflation expectations.
- Strengthen social safety nets to protect the most vulnerable during budget cuts.
- Lift potential growth through structural reforms:
- "Potential growth across the region has slowed substantially since the crisis, from over 5 percent in 2007 to less than 2½ percent in 2012."
- Address country-specific roadblocks: dysfunctional labor markets, poor infrastructure, unfinished transitions.
The Path Forward for Romania
- Romania’s strategic position and potential:
- EU market and FDI links:
- "the European Union is an enormous market—the destination for about 70 percent of Romania’s exports and the source of more than three-quarters of foreign direct investment."
- Income and labor indicators:
- "income per capita around one quarter of the EU average"
- "Labor market participation is among the lowest in the EU at 64 percent, and lower still for women."
- Natural advantages: "potentially abundant supply of natural energy," "strategic location on the Black Sea," and "an energetic and largely untapped workforce."
- Stabilization achievements:
- Romania "reduced its fiscal deficit by more than 6 percent of GDP" in the space of three years.
- Romania "has exited the EU’s Excessive Deficit Procedure this year."
- The Vienna Initiative exemplified successful public-private coordination to stabilize the banking system.
- IMF provided financial and technical support and seeks continued partnership.
- Structural priorities to translate stabilization into sustained and inclusive growth:
- Continue structural transformation to "thrive, not just to survive."
- Maintain and expand reforms that boost competitiveness and employment while strengthening social protections.
- Specific reform areas:
- Liberalizing energy prices gradually while better targeting social assistance to protect the vulnerable (Romania cited as having "the hallmarks of a model approach").
- Improve the quality of energy and transportation infrastructure by enhancing the viability of state-owned entities and creating an environment that attracts private-sector investment to raise efficiency.
- Improve Romania’s ability to effectively use EU funds for efficient public investment.
- Emphasis on persistence: "policy actions take time to create change and generate growth."
A Final Thought
- Romania’s future is a shared future within the European family and the global community.
- Cultural note and motto: "Unde-s doi, puterea creşte" — translated as "where there are two, the strength rises" or "we are stronger together."
- Closing sentiment: "Romania is both undeniably unique, yet also profoundly European. As part of the European family, as part of the global community, Romania can go from strength to strength."
Source: Christine Lagarde, "Eastern Europe and Romania—The Path to Prosperity," Bucharest, July 16, 2013.