Economics and Business October 2005

Economics and Business
Time for real economic and political reform

by Dan Visoiu
October 2005

The Romania of 2005 is still the economic and political laggard of the former communist (European) bloc. After 15 years, it is an economy that resembles more a Latin American banana republic than a future EU member state, and a political system where politicians have ill regard for the interests of citizens. This is the truth, not a subjective and unjustified opinion. And the sooner this is officially recognised and accepted, the greater the chances that Romania will finally begin to enact the necessary reforms which would significantly bridge the gap with its future EU neighbours.

But at the moment, it is quite clear that decision makers simply have not come up with any short, medium or long-term economic policies and plans. Romanian decision makers, at least post-1989, have never prepared nor implemented an overall economic policy that would address the country's economic transition and redress the resulting problems. Everything has been done by the “seat-of-the-pants”, that is after the initial “we’re not going to sell our country” period, the early 1990s.

These two major economic philosophies have resulted in Romania not approaching anything like its economic potential, as evidenced by the two or so million Romanians who are working abroad (with most of them working illegally). Politically, at present parliamentarians simply are not accountable to the Romanian electorate because they are not directly elected (rather, they are appointed based on party lists). Consequently, we cannot speak of Romania being a real democracy, since the will and interests of the electorate are not directly represented.

Romania and Romanians have to ask themselves one very important question. Where does the country and its population want to go? This may sound simple but the answer could determine Romania’s course for the next two to three generations.

The overwhelming majority of Romanians would like to live in a country with a solid economy, a country in which the average person has a decent standard of living and is not forced to leave for work (as is the current situation with over two million work-eligible Romanians). Consequently, there is only one way that Romania would be able to achieve this – by attracting foreign direct investment (FDI) at a rate of a minimum of 5-7 billion euros annually, for the next five to ten years. And what does Romania specifically need to do in order to attract these funds? Well, it is not as difficult as it may seem. Here are the key reforms and projects that need implementing:

(1) FISCAL REFORM: the flat tax was the first major step, but now the state must implement a coherent fiscal system which encourages economic growth and expansion (the current system simply attempts to patch up and plug chronically recurring financial holes);

(2) LABOUR: let’s be realistic, Romania – at least for the next 10 to 15 years – will be attractive to manufacturers – and not service providers – due to its relatively cheap labour. Two things have therefore to happen. The social contributions have to be lowered from the current 49.5 per cent to no more than 25 per cent (a drastic change, but this is what real reform is all about); secondly, a flexible labour code – at least one as flexible as Hungary’s – needs to be adopted since at present it is difficult to fire an employee even if the employee was caught stealing! It is better to have the majority of work-eligible people subject to a flexible labour code instead of a huge percentage (those currently working abroad illegally) having no rights at all;

(3) INFRASTRUCTURE: freeways, freeways, freeways! This haggling about which freeway to build first is nonsense. By setting up a freeway company (which would own the land on which the freeways would be built as well as the concession/use rights) which would in turn issue long-term bonds, the state would be able to raise at least 10 billion euros without any detriment to the actual budget, so it is not difficult to finance such ‘grand’ projects.
Romania’s party-list system is not democratic, for a number of reasons. Firstly, this system does not allow the electorate to hold politicians directly accountable, since voters cast their votes for parties and not particular persons. Consequently there is never any direct interaction between a politician and his would-be constituents. As a result, a politician never acts in the best interests of those he represents; and in any event, if a particular politician is not performing up to the expectations of constituents, voters still cannot get rid of him during the next elections (since, again, voters may only vote for parties and not specific candidates.)

Worse, parliamentarians are able to switch parties after their appointment, meaning that, for example, if a certain party received 100 seats in the Chamber of Deputies (on the basis of votes obtained from the electorate), then during any certain term this particular party may in fact hold less than these 100 seats if any appointed person decides to switch parties. In essence, Romania has an absurd system whereby a parliamentarian could hold a seat on behalf of a party which was not even initially chosen by voters! This means that a Romanians vote is in fact meaningless, since the possibility exists that such a voter may have chosen a particular party who is no longer represented (due to the appointed parliamentarian switching parties and continuing to keep his seat).

Romania needs to implement the direct vote (at least for 75 per cent of all eligible Chamber of Deputies and Senate seats), so that voters may directly elect their representatives and thereby finally make politicians accountable to their electorate. Also, since Romania is and will be a transitioning country for years to come, term limits need to be implemented in order to ensure that every decade or so a sizable new political class with new ideas and experience will come to power. Constant fresh political blood is the key to Romania’s political future. This would undoubtedly do away with career politicians who are menaces to countries and societies the world over.

Dan Visoiu is a BAC Investment Bank managing partner and a founder of Romania Think Tank (RTT)