Romania

Romania started transition at a disadvantage, with significantly worse initial conditions than those prevailing in the leading reform countries, which suggests that its policymakers have also had less room for manoeuvre. Nonetheless, the result is that they have not yet found a clear way forward to a well-functioning market economy. Some analysts relate disequilibria, including inflation, primarily to the breakdown of the political process and rent-seeking activities by old elites. While this is plausible, the approach adopted in this paper emphasizes the magnitude of the required resource reallocation and friction, sometimes so large that they undermine attempts to achieve lasting stabilization. It is arguable that the success of leading transition economies is due mainly to policy that can deal with the magnitude of required resource reallocation (strain) and friction, without being 'captured' by vested interests. Together with strain, institutional fragility helps explain stop-go policies, as well as many setbacks and inconsistencies in the transition process. Fuzziness and lack of transparency characterize public finance. Banks, for example, are frequently the vehicle for granting subsidies. Primitive banking systems, which are 'captives' of entrenched structures, are likely to perpetuate much of the old pattern of resource allocation or misallocation and engage in significant quasi-fiscal operations, with the latter evidenced by high inflation rates or bank failures. Romania's experience is a highly relevant example of how strain and institutional fragility condition macro-economic stabilization.