CAUSES AND CONSEQUENCES OF CURRENT ECONOMIC CRISIS

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1 Knowledge horizons Volume 4, no. 1 2/2012 CAUSES AND CONSEQUENCES OF CURRENT ECONOMIC CRISIS Senior Lecturer PhD. Cristina Teodora Balaceanu Lecturer Cosmin Stoica Dimitrie Cantemir Christian University Abstract: The recent market instability was caused by many factors, chief among them a dramatic change in the ability to create new lines of credit, which dried up the flow of money and slowed new economic growth and the buying and selling of assets. This hurt individuals, businesses, and financial institutions hard, and many financial institutions were left holding mortgage backed assets that had dropped precipitously in value and weren t bringing in the amount of money needed to pay for the loans. This dried up their reserve cash and restricted their credit and ability to make new loans. The current financial crisis, which began in the U.S., then spread to Europe, has now become global. Even emerging markets and less developed countries that managed their economy well, resisted the bad lending practices, held high levels of foreign exchange reserves, did not purchase toxic mortgages, and did not allow their banks to engage in excessive risk taking through derivatives are likely to become embroiled and to suffer as a result. Key words: economic crisis, economic policy, economic behavior JEL Classification: A 10 The international financial crisis has led to significant changes of behavior economic phenomena and processes, obvious macroeconomic and regional imbalances as well as to the identification of new facets of basic economical research in terms of development and implementation of certain aggregated indicators meant to predict the role of future development of the economy and to reduce the scale of crisis negative effects. Crisis occurred against the background of the monetary system failures transmitted through monetary policy and its instruments. What caused the current economic crisis is the result of the enhancement measures in the global economy based on a fiscal monetary policy mix to support an artificial demand for money independent structural policies, that widening imbalances between nominal and real convergence. Economic crisis in Romania The economic crisis in Romania is caused by multiple internal and external factors. With increasing global economic crisis, the Romanian economy has been affected by real and monetary flow channel with the outside: the contraction of demand in European economies led to a drastic reduction in business subcontractors and Romanian exporters (many of traders doing business in the regime subcontracting or Knowledge horizons Volume 4, no. 1 2/

2 outsourcing), which affected the level of production, income and profits and jobs. Another consequence of global economic crisis on the Romanian economy concerns speculative attacks on currency by the euro monetary lane and attempts to stabilize the exchange rate of the NBR through nominal instruments that have a negative impact on manufacturers, exporters in this case, with favorable consequences favorable effects on the population (most of population is indebted with European currency loans and keeping the artificially low rate of currency confers borrowers a lower pressure of the debt in terms of coverage of the revenue productivity. The NBR measures aimed at controlling inflation, the Governor Mugur Isărescu showing that the main risk factors on inflation forecast are the conduct of fiscal policy and public sector revenues as well as the economic structural rigidities which means internal events (Isarescu, 2010, pp.25). What I want to explain is that the crisis in Romania is rooted in economic policy mistakes that have marked the whole period of transition, the lack of continuity of the reform and vision of the political class in terms of concrete reform measures that ought to be implemented and correlated with long-term development strategy. The approach of the crisis in Romania is not done in accordance with an economic recovery plan, acting sporadically and with discrimination in some areas and on relatively short periods, such as: the stimulation of job creation in micro enterprises, of SMEs activities, the car industry (the establishment of an annual pollution fee, depending on the degree of pollution of the vehicle, offering an initial grant of 800 euro per recycled car, postponement of VAT by six months) petrochemical and mining, conversions of debt into shares, state aids to unprofitable areas, contributions to the budget reductions, offsetting reduction in re-exports from EU countries Romanian exports on the markets affected by the financial crisis in emerging markets (the export activities could be stimulated by the opening of five centers in promoting public-private partnership in Moscow, Beijing, Chisinau, Cairo and New Delhi). Another series of steps to exit from the crisis concerned the launch of the programs to facilitate constructions, such as The First House Project, agriculture- The Farmer project, car industry Jalopy Programme without an immediate and beneficial effect on the economy. The success of these programs is the sequence of monetary, fiscal and budgetary measures promoted by publicprivate partnership, taking into account the ability of the debtor's debt related to purchasing power. At least at the first sight, there are a few measures regarding the causes of crises in Romania the sudden break of crediting, the low level of liquidities and the lack of external commands. The programme of economic recovery in Romania should focus on the following types of economic measures (Bălaceanu, 2010, pp. 31): 1. Budget expenses decrease The measures to reduce budget expenditures set up by government had not the effect of reducing the budget deficit, on the contrary, they have amplified it. It requires that measures to reduce public spending should be done while creating the prerequisites for private sector development: on the one hand to absorb the redundant public sector staff and secondly to increase the tax base (by increasing the number of firms and economic activities in the real economy) as a source of revenue available to the public investment budget for development use. The measures taken by government as a result of the fourth part according to the Agreement with IMF, decreasing the budgetary staff s salaries by 25% and pensions by 15%, followed some fable trials of diminishing public expenses achieved at this moment, which made the budgetary deficit overpass the target aimed by Romania in accordance with IMF Agreement of 5, 9% in 2010, and the rhythm of economic increase be negative for the second year. (1) These tough measures are the consequences of an obvious social instability which led to the lack of jobs, increase of energy and fuel price and a lower cost of living. The differentiated salary decrease may be a solution to reduce the material and psychological impact of the crisis for those persons with low and very low incomes. To reduce budgetary expenditure, the Government has worked with the abolition of government agencies, a position that has not had the desired effect, and the entire process has been accused of lack of logic. There were abolished agencies financed from European funds or that financed themselves without the effects of spending to be visible. Regarding the budget staff 64 Knowledge horizons Volume 4, no. 1 2/2012

3 redundancies, the government has acted very hesitantly. Official pronouncements have created more confusion and decisions were delayed. Against this background hesitant advantage of creating pressure unions protest, many of them settled in court, which created the prerequisites installed a state of unrest and social tension, resistance from anti-crisis measures that affect society in salary bill. In the absence of measures to reduce social costs incurred by the Government, redundancies seem unavoidable. Besides the internal crisis management, the Government is facing external pressures in the implementation of measures to facilitate the change over to the euro timetable or assuming specific conditions required to implement Europe Strategy Thus, to enter the euro zone, Romania needs to achieve nominal convergence indicators that require measures to lower the budget deficit to 3% of GDP, which means, by default, the device tough budgetary measures such as freezing wages. Moreover, the changeover to the euro also requires real convergence measures involving among others, growth of per capita income, increase of purchasing power, coverage of wages in labor productivity, increase of capacity to support economic development. What surprises is the fact that to achieve real convergence necessary to the changeover to euro area, Romania needs investments, especially public investments, measures to support private initiative and business through fiscal and monetary instruments, which implicitly are related to the adjustment of the budget deficit through increased public expenditures. Thus it becomes somehow uncertain that the government may adjust economy to fit in certain budgetary and fiscal targets, and render it more flexible for the needs of growth and development without using budgetary anchors. The European strategy for 2020 aims to increase the employability of people aged 20 to 64 years to a rate of 75%. In this regard, the private sector will be motivated and supported to absorb labor force: either the market will be recovered, which implies growth of demand, and by default, the job offer, or there will be taken measures regarding job- reorientation to new economic innovating activities that benefit from etatist support to develop, such as the development of unconventional energy productions, production of ecological goods or that type of goods and services that are popular on foreign markets. The fact is that in Romania in the a number of active population in budgetary sector is very high, the organizational structure of autonomous and public institutions is crammed which draws inefficiency in public expenditures in an economy that cannot provide for consumption through domestic production. ITo identify the optimal number of jobs necessary to public system it is necessary to identify some formula inventory necessary to identify the need for personnel by activities and economic activities the yield of which being assessed on the basis of actual benefit to society. Thus, the state will be driven by corporate principles and the adjustment of costs will be made according to the state economy and the premises of its growth and development. The threat cornering our country as a result of the widening the budget deficit and external debt is loss of sovereignty over the state budget management, by default on the formation and allocation of public revenues in economy. 2. fiscal and monetary measures for encouraging and supporting the business field Overcoming the crisis effects and restoring economic growth are concrete measures to support its business, able to create jobs and to adjust domestic supply demand of economic goods. These measures regard direct grants to producers, support for the economic sectors to ensure production needs, economic development of zones and regions and decrease of the tax burden. Grants- is a controversial measure. Mostly taking this action is discretionary, favoring political clients or certain economic areas. The system of grants should be directed to priority areas with potential economic development, namely those endowed with natural resources, labor absorption capacity of economic assets, the grant thus facilitating the development of economic activities. Among the economic sectors that are favored by the system of grants, there are agriculture, handicraft industry, constructions, and facilities of health resorts, rural tourism, and the development of energy sector using renewable energy resources. Fiscal tax decrease- meant to attract investors and to facilitate competitiveness on markets by reorienting capital to those areas where the yield Knowledge horizons Volume 4, no. 1 2/

4 should be as higher as possible. The fiscal pressure is a premise of development of underground economy and corruption encouragement. Also, under economic conditions of legality, the trader will act to increase the selling price of the product. In any case, increasing taxes in the economy will not act to increase budget revenues, with revenue channels through which to escape from taxation trap. Both state and citizen will be injured due to taxable mass loss and the increased market price of products or loss of employment. Differentiated VAT practice- to orientate the productive activity in economy that should attract additional investments and implicitly jobs or to support the initiative of the local producers that favour and develop an area Interest rate decrease- to support credits which should stir initiative in private and business field. As it is known, the crisis was generated by reducing the interest rate through monetary policy in particular the U.S. economy which encouraged excessive consumption at the expense of savings. In Romania, the lenient conditions on the financial market and economic growth perspectives attract a huge flow of capital, especially speculative capital on short-term These capital inflows were used by the banking system to expand credit to support unsustainable consumption and investment. Once triggered the international crisis, the Romanian economic sectors based on foreign capital were among the first affected, the crisis has occurred suddenly, when interest rates no longer reflect the cheap money policy with direct impact on private sector jobs. The solution for this desperate situation consisted of measures particularly severe adjustment of costs in the private sector, emphasis on policies to boost productivity, increased competitiveness both in price (cost reductions both materials and labor but increasing use of intensive technologies and the production factors) and quality to attract new market segments, particularly on foreign markets. What I tried to emphasize is that this crisis (lack of liquidity and limited access to credit) has regenerated mainly the private sector creating the prerequisites for certain development strategies based on the intense use of production factors and compliance with the needs of a certain creditworthy customer class. Also, another advantage of the crisis can be identified in stimulating savings and eradication of wasteful tendencies manifested by a number of economic agents in a position to absorb the market. It would have been ideal for most Romanian companies to show that attitude to the crisis. It is precisely the spending large budgets proliferation of both companies and individuals or the state during the economic boom period, that have emphasized the dramatic fall of the Romanian economy with fewer opportunities for recovery in a short period of time without international support. IMF together with the European Union in Romania have injected liquidity to gradually restore growth and reduce the budget deficit, on the one hand, and the current account deficit on the other hand. The result is far from being a revival of economy, but deeper disparities when state expenditures also affected the private sector. The necessary measures aim at promoting policies to support private sector to generate revenues meant to support an adjusted public sector. It also intends to stimulate differently the economic sectors according to the expected competitiveness by promoting technical progress and scientific research, with positive impact on occupancy rates and long-term average. These sectors should benefit from interest rate reduction or the possibility of scheduling investment credits. 3. promotion of measures packages supporting the private-public partnerships in the field of education and public health In Romania, public health and education systems are close to collapse. It is difficult to attract funds from the state budget under the circumstance of negative economic growth for the second consecutive year and a budget deficit to reach 7% of GDP in In these conditions, it is necessary to reinforce measures to attract private sources of financing for the two sectors to become compatible and competitive with similar systems in the European Union. Education- requires a reorientation of the educational policies to render more flexible syllabus and adjust them to current and future of the European and world economy. Educational services should be approached considering both the flexibility and the efficiency of market structure. Investment in education is recovered while the productivity proved by labor force 66 Knowledge horizons Volume 4, no. 1 2/2012

5 dragged into the economic process. Romania should develop the education system together with economic growth and development to provide jobs and increase the attractiveness of the Romanian economy for the younger generation whose education should meet higher qualitative requirements. Another measure to improve education is implementing life long learning active educational policies in order to increase productivity and interest of the work force according to development requests of the employer and the market. Health- needs financial, logistic and human capital support. The fact that an important percent of the revenues of an economic manufacturer or consumer went in financing the Romanian health system, was not sufficient for the increase of the system s competitiveness and the efficient administration of the funds allocated to its functioning due to various causes such as: deficient administration of public funds, obstruction of the financing channels between the state budget and the insurance and health units, insufficient funds compared to the high number of health institutions managed by the public system. The solution would be decentralization of the health system and keeping the right number of health units that would minister the real needs of the population; the privatization of a number as highest as possible of the health units in order to attract financing sources that would increase the quality of the medical services and financing of medical services for that part of the population having financial difficulties or a low income; the awareness of the population toward the need to use health insurance policies as a result of the decrease of funds allocated to completely cover the medical services; in crisis or not in crisis, the Romanian economy can no longer completely finance the public services because of the decrease of the active working population; therefore, the health system competition between the public and private institutions must be supported. The current problems of the educational and health systems in Romania have deep causes: the proliferation and externalization of losses, maintaining a diverse and overloaded organizational structure, with services unadjusted to the present development requirements and therefore, unwieldy, inflexible on the market. The state will have to partially give up on managing these entities in order to promote public private partnerships for an increased capacity in financing and management, attracting investments that would develop them into more reliable and competitive systems. 4. attracting investments and facilitating public-private partnerships Developing public private partnerships implies that the state offers techical support (location and units) and the companies ensure the capital and the work force. In these conditions, there will be made infrastructure works, utilities, medical and educational services the high costs of which cannot be covered only from the budget; the success of such a partnership is represented by the power of negotiation and agreement in advantageous terms, having as the consumer as a final winner. The idea of launching public private partnerships is not new. Even since 2002, the government has launched an ordinance (16/2002) which regulated this type of business, however its stipulations were extremely restrictive, limiting the partnerships to constructions field, and the selection procedures were not transparent. For that matter, the ordonance was revoked in 2006, after numerous failures and from that moment on there has been a legislative gap. The Government (3) wishes the modification of the Concession Law in order to make the public private partnerships more attractive for the business environment and admits that, the present implementation frame is insufficient for motivating and attracting significant investments through public private partnerships type of projects. The need to implement public-private partnerships is a consequence of lack of funding in the public sector and reduced capacity to manage public resources to enhance the competitiveness of public services. It is also important to develop the public sector and the possibility of acquiring private sector managerial experience necessary for efficient and consistent management of public resources. Developing public-private partnership involves firstly the amendment to the legislation by which the resources and interests of both parties should be considered and transparency in decisionmaking process for managing capital should increase. Knowledge horizons Volume 4, no. 1 2/

6 5. legislative modifications meant to render labour market more flexible It is necessary to liberalize the labor market, to render supply and demand more flexible as a result of an efficient allocation of labour resources and increase of staff's remunerations according to the productivity. The quite high pressure of public employees (4) and pensioners (5) makes the employees s yield decrease, unlike employees in the budgetary sector, mostly with political support and union, who are paid in accordance with the labor productivity and turnover. Low remuneration is a consequence of low productivity unlike the EU countries, the low labor productivity of employees has made multiple causes including: low competitiveness of economic assets made, particularly in foreign markets, low capital endowment of labor, low share of domestic consumer goods in a basket, making the volume to be low revenue producers. A solution to this effect would be more competitive by investing in quality and research as well as in professionalism of labour force. Due to the economic crisis, the industrial sector in Romania recorded a certain growth, particularly through external orders especially in the automotive sector, facilitated by Jalopy Programme in Germany. Moreover, last year production increased faster than wages, so in these sectors, Romanian companies became more competitive. Currently, industrial production growth is based solely on labor productivity growth, but productivity gains of 20-30% are impossible to be maintained on long-term. It is obvious that once economic growth and programs austerity agreements are resumed in western countries, the orders of Romanian products will continue only as long as they are competitive. Romania's economy is in a state of collapse due to economic policy mistakes of the past 20 years. The solution for this situation involves first that each individual should have a rational behavior, public or private entity and understanding that once it is a component of an integrated system, either the EU or the global economy, things will move in the right direction only if we understand that work and honesty, respect for the laws and their adaptation to current realities of the real economy will become steps that any government or citizen will follow. An important element of reform is labour flexibility and besides it, the change of labor law giving employers the opportunity to adjust the number of employees according to the needs and actual conditions of the economy, to impose quality standards for their labor force and thereby raise the level of skilled labor force. It is necessary for the educational policies to adjust themselves to the specific of the labor market and business environment for better mobility and labor flex security. Any curriculum in school and university must include elements of entrepreneurship to give prospective employee skills and training practice meant to ensure both efficiency and complementarity with all fields of economy. 6. reorientation of the State role in Romanian economy The State should give confidence in the quality acts and deeds done, to guide the economy through coherent economic policies and development programs to provide continuity initiated at the national level. In Romania there is no multi- annual, strategy for managing the economy, multi-transparent, transparent and compatible with EU requirements in development that the government and political parties should implement and that should give confidence to citizens and institutions in the act of governing. Besides it, the act of government is totalitarian, unilateral and discretionary, it does not take into account the interests of citizens, the democratic values are understood and enforced erratically, and individuals have no common social values because they do not believe in the idea of community, national interest, achievement of ideals and welfare through joint activities, group, and society. Currently, it requires a redefinition of the role in the economy following the proliferation of the economic and world financial crisis, import of economic instability and accelerated fundamental economic disparities: the widening budget deficits and current account deficit, exacerbated unemployment rate and diminished purchasing power by powerfully contracting the demand. In this case, the State becomes an active and competitive economic stakeholder, through pulses of economic, fiscal and monetary policy encouraging businesses agents to invest in the economy to create jobs. There is no rule that automatically creates jobs, which is guided by state economic leverage job creation by subsidies, tax reductions for capital investment, tax 68 Knowledge horizons Volume 4, no. 1 2/2012

7 reductions or VAT exemptions for certain commodities to encourage moderate consumption and support offer. It is the State that must support large infrastructure works by allocating public revenues for investment or to support and facilitate publicprivate partnerships. For a redefinition of the role in the economy is sufficient to identify what we expect from the state: concrete measures to reduce political clientele in the act of decision in the economic system; accelerate the development programs with European support; it aims at setting up a buffer fund to absorb European funds used for financing European projects, initiation and promotion campaigns to inform citizens through municipalities and territorial agencies need to attract European funds, particularly in rural development to increase standards of living areas and adapt to current standards of civilization; support the rule of law, rules and procedures to ensure surveillance and control social-economic activities, adjustment of the current standards of living to the current standards of civilization; identify opportunities for regional economic development and orient traders through trade policies to export competitive economic goods; reclaiming those businesses uncompetitive traders through clear and consistent application of laws in liquidation and bankruptcy, including the system of penalties in economy; identify the optimal level of taxation in the state to raise revenue from the underground economy, including recourse to incentives for traders through tax amnesty; asking advice from the Advisory Board of experts from various economic, technical, social fields to expertise actions by central and local government, and thereby increase the transparency, consistency and efficiency of economic decisions; filtering of views trainers and decisionmakers in the political environment by an advisory council composed of technocrats to check the power and effects of short, medium and long term economic policy provisions; protection and conservation of work resources by investing in educational training programs tailored to develop entrepreneurial skills of the company, motivating increased education and training by awarding scholarships (replacing camps summer camps for students with creative ones where students develop skills and practical competences of diagnostic analysis in business); introduction of development models for citizens through personal example and best practice, human behavior and professional rational conduct evolved through civil society and media; It seems that the crisis generates a need for switching of government optics, economic policies and political class s expectations. At the same time, each individual need to change his mentality and attitude towards democracy and its crystallization by making proof of rational behavior regarding consumption versus income, savings to protect pensions, professional trainings and lifelong learning seminars to increase labour productivity as premises of wage growth. Crisis could mean moving to a complete economic and social maturation stage. On the other hand, crisis could also mean understanding that unless we produce to meet a proportion as high as possible of consumption, the debt for import pensions and salaries in the budgetary system will cost us whole generations of sacrifice, competent and competitive labor migration, wasteful use of natural resources still publicly owned and not least the failure of the control right over the budgetary resources. Bibliography: Cristina Bălăceanu, Sequential approach of the Romanian economy before and after accession, Universitara Publishing House, Bucureşti, 2010 Mugur Isărescu, Inflation Raport, august 2010, Cosmin Stoica, Management of European funding programs, Pro Universitaria Publishing House, Bucureşti, 2010 Knowledge horizons Volume 4, no. 1 2/