22 May 98
Economics and Romania: The Dismal Science Meets La La Land
I have always wondered if Economics is referred to as the "dismal
science" because it uses numbers (and big ones, at that), because
people only pay attention to it when there are serious problems, or because
observers suspect that economists are the contemporary equivalent of the
high priests of classical mythology who offered advice on major matters
of state by studying the carcasses of dead birds.
Admittedly studying dead birds have been replaced by an examination of
the national income accounts and other obscure databases that mean as
much to ordinary people as avian entrails. And while this represents a
signal victory for the anti-vivisectionist movement, it is not clear that
anyone else is any better off.
Let us begin our gloomy journey.
The outlines of the calendar 1998 budget are known: income is estimated
at 75.1 trillion lei, expense 88.1 trillion lei resulting in a deficit
of 13.0 trillion lei or 17.4% of income and planned to be 3.6% of Gross
Domestic Product (GDP) compared with 3.7% for 1997. Economic growth is
estimated at zero percent compared with a negative 6.6% for last year.
In terms of the impact on the economy, the Prime Minister has vowed to
slash inflation from 151.4 percent in 1997 to 45 percent in 1998. In an
earlier email I confused the modest change in the exchange rate (perhaps
11% annually) with inflation. The inflation figures above are far more
accurate. In this environment it is not surprising that 91-day T-bill
How does this country get to a more "normal" economic environment?
Answer: With great difficulty and a lot of pain. The government is still
saddled with a lot of state enterprises which are extremely unprofitable.
"Economic reform" means close these losers. The World Bank says
delays in implementing reforms are "causing Romanian industry to
become ever more obsolete."
But closing state enterprises has potential political consequences because
of the resulting unemployment. The more subtle approach of cutting back
on subsidies has other consequences when the state owned companies stop
paying their bills to utilities and local governments.
This causes the utilities to run deficits, the electric utility RENEL
being an example. A newspaper reported: "Renel is the largest debtor
to the state budget owing 1.9 trillion lei [about $US 230 million], plus
postponement taxes of 1.9 trillion lei." In addition, "The utility
[RENEL] also owes 5 trillion lei to coal, energy and materials suppliers.
Management blames restructuring delays and non-payment by customers, especially
But political pressures to keep the government from cracking down on RENEL
are coming from the coal mining labor unions. RENEL says domestic coal
is too costly. "A recent government order forcing the company to
use expensive domestic fuel to fire its power plants." How expensive?
$53 versus $24 per ton. So RENEL is damned if it does and damned if it
Of course the small consumers are unhappy. They call RENEL "the colossus
that has been covering expenses only by raising electricity prices."
So should RENEL cut off electricity to state owned enterprises? This would
cause the enterprises to lay off employees who would cause "social
Decisions are needed. The year is five months over and the budget is not
yet passed. On June 1 the first 100,000 lei bank note goes into circulation.
The newspapers make a point of saying that just having large bank notes
does not cause inflation. Not many people are talking about what does.
No wonder that economics is called the dismal science.
23 May 98
Economics: The Dismality Continues
The May 25, 1998 issue of the International Herald Tribune carried an
article titled, "Hungary Struggles in Transition." It discussed
the likelihood that the government in power might loose an election because
of perceived problems in the country. "The politicians better pay
attention to what's happening to everyday life." one citizen was
This was the third free election since the fall of communism, the paper
noted and "Hungary may be over the toughest days of market reform,
but voters appeared poised to register healthy complaints about the downside
of economic transition. . . . Concerns about crime, corruption, and the
struggle to make ends meet top voters' interests, polls show," yet
interestingly, "No one expect wide swings in policy" from the
The paper noted that "Hungary, in fact, has fared well among Eastern
Europe's new democracies, attracting more than $16 billion in foreign
direct investment and last year registering 4 percent growth in its gross
That is Hungary. In Romania, as I described in my last email, economic
restructuring isn't as far advanced. The decisions here are harder, cut
closer to the bone and affect more people. The economy is weaker, more
inflation prone, and there is much less foreign investment. One can understand
why the government fears "social unrest."
Finance and Symbolism
When you enter the Ministry of Finance, the first thing you see across
the expansive lobby is the white marble staircase that, in a grand manner,
sweeps up for ten steps to a broad landing and then turning to the left
and right and curves upward to the second floor which is at double height.
Not to make too much of what some might see as merely a work of art but
on the landing is a wooden statue of Icarus.
Icarus, you will recall, is the gent credited by Greek myth with the first
human-powered flight. He created wings by inserting bird feathers into
wax on his arms. He flew and became so impressed with his achievement
that he flew very high and approached too near the sun which melted the
wax and he plummeted to his death.
The eight foot carving of Icarus is smack in the middle of the landing,
the cynosure of all entering eyes. But this is not Icarus soaring on new-found
wings; it is of Icarus plunging to his death from daring to fly to high.
I wondered if this is an appropriate symbol for a country trying to find
its way out of a financial morass. Perhaps it should be transferred to
the Ministry of Aviation?
Inflation: The Official Figures
I finally got my hands on the government data for inflation. The image
it produces is more like Icarus than I had previous thought. Look at the
following "CPI" data and notice how they increase.
On a practical basis these data mean that something you could buy for
100 lei in December 1990 cost 31,000 lei in December 1997. If you cannot
understand what this would be like in real life, don't be surprised for
I cannot understand or explain it. Even the Romanians I talk to cannot
understand it; they just experienced it. Economic shell shock might be
the right term.
Since the only time people discuss economics is when the statistics are
bad (read disastrous? catastrophic?), it is no wonder that economics is
called the dismal science.
24 May 98
Letters to the Editor
My discussion of social problems in Romania produced several comments
from readers. One of the most eloquent was from Tia Kandall who lives
in a suburb of Chicago. She writes:
"I just finished reading your Bucharest Bugle Issue 48. It is pretty
sad over here as well. But the abandoned kids over here have money, at
least here in La Grange they do. When I first got my divorce in 1989 my
children were all in high school. After my ex left, the house was opened
up to the kid's friends coming in. I always would rather have the kids
here than god knows where, doing god knows what. Joe, you couldn't believe
the parents, affluent people, who would walk in on a Thursday or Friday
night and throw $50 or $100 at their kids and walk out for 3-4 days. A
lot of those kids wound up at my house. These people should never have
"At one point I had three young people living here for more than
a month. If I had told them to go, they would have gone home to empty
homes, where a group would congregate and then trouble would come right
behind. I didn't do that because I could afford it, I was only making
$17,000 before taxes at that time. I did it because my own children would
have fallen to the temptation of all that an unmonitored empty house offered.
I felt it was too much for them to handle with the divorce and all.
"What an eye opener that was. I had no idea we had at least 200 kids
living in the forest preserves at any one time because their parents kicked
them out at 14 and 15. Where the hell did these fools think these kids
were going to go or how were they going to feed themselves?
"We had one young lady who came around that was dragged out of bed
at 5:00 a.m. and thrown out on the street. She lived in the forest preserve
for 2 years before her mother would allow her back in. She was 16 when
she was thrown out because she lost her part time job. Naturally this
young lady sold herself to eat, and had two abortions before she was 20.
The school tried to go after the parents but the parents insisted that
she ran away. She came into our lives after all this was over but she
was one of the angriest young women I've ever met. It just went on and
"Then the adults in this country have the nerve to wonder what is
happening to our young people. We've taught our children to kill what
gets in the way, or divorce it. We've never taught them how to work through
a problem relationship, or how to strengthen a relationship after difficulty.
No wonder they carrying guns to school. I often wonder where it is all
going to end, then catch a headline and know.
"I often wonder whatever happened to just loving your children no
matter what and working through difficulty. One of mine is gay, and told
me last year. She's still the same person she was the day before, but
at least now it's in the open and she can be comfortable, as if I didn't
know before her announcement. Another one came home pregnant, so I'm bringing
more in instead of sending them out. But I guess my point is, I don't
understand how a parent can abandon their kids. Oh well. Enough sadness.
I hope this generation rejects most of what my generation tried to teach