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.