Merry Xmas and A Happy New Year

Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.



Credit crunch, did someone use the expression credit crunch?

Romania Trade Deficit October 2007

Romania's trade deficit has steadily deepened during the first ten months of this year, and has already reached over 17.2 billion euro, an increase of over 6 billion euro when compared with the same period of 2006, according to data this week from the National Statistics Institute. The overall trade deficit for the whole of 2006 amounted to "just" some 14.8 billion euro.




Over the same period, the total value of exports grew by 13.2%, rising to 24.2 billion euro, while imports advanced 27.2% to 41.4 billion euro.
In October this year, exports exceeded 2.7 billion euro, a 17.2% increase as compared to the similar month last year. On the other side, imports reached in October the total value of 4.9 billion euro.

Labour Shortage in Romania?

Well according to Labor Minister Paul Pacuraru, quoted in the newspaper Ziarul Financiar, Romania needs at least another 300,000 workers to meet current needs and will need more than 1 million within a decade.

The labor shortage, Pacuraru said, is caused partly by a migrating workforce and partly by a declining population, and is most acute in construction, and the textile, automobile and food processing industries.

Maybe he has been reading this blog (and here, and here).

Actually, according to the UK Daily Telegraph finance minister, Varujan Vosganian, aims even higher, saying Romania lacks half a million workers."We need more engineers, mechanics and bricklayers," he is quoted as saying "We have a labour deficit of 500,000 employees."


And he wasn't talking about the elites - doctors and IT programmers gone to make their fortune elsewhere, though that would be damaging enough. Romania needs its skilled labourers to return - the people who are going to build up the infrastructure that the country so severely lacks. But when we look at the wage differentials, this idea of a mass return would seem to be a forelorn hope to me, in Latvia, in Poland, in Ukraine or in Romania.

So the simple issue is, what is now the normal capacity neutral growth rate for Romania at this point (remember this will get less as the population continues to decline)? That is, what is the annual growth rate which Romania is capable of without seeting off the sort of inflation we are seeing at the moment? Noone really knows, but it is obviously well below the rate Romania is currently growing at.

Second question: when and how will the adjustment come?

Romania Inflation November 2007

Well here it is, I wouldn't say it was exactly good news, but a drop in inflation to an annual 6.67% from an annual 6.84% isn't bad news at any rate, unless you thought inflation was going to suddenly go away it isn't.



On one level you might have thought that the rot had been stopped, but it's not that simple. The month on month rate is 0,93, which is down from last months 0,97. But if we look at the components, then food rose 1,17% month on month, while services rose 1,21 month on month. In October food was up 1.3% over September, while services where only up 0,98. So food seems to be slowing, but price increases in services are accelerating (pass through) and this is not good news.

The Leu Turns Down Again

Romania's leu fell the most in almost two weeks against the euro today, apparently on investor concern inflation is making exports uncompetitive and the current account deficit unsustainable growth. The leu dropped today for a second day after INSEE (the Bucharest-based statistics office) said producer-price inflation accelerated in October by the most in six months. The cost of goods produced in Romanian factories and mines rose at an annual 8.2 percent rate in October, compared with 7 percent in September, according to the INSSE data. Month on month producer prices rose by 1.6 percent, up from 1.2 percent in September.




The rate of Romania's economy expansion slowed 5.7 percent in the third quarter, the second slowest pace since the end of 2005, while inflation picked up to 6.8 percent in October, the strongest rate since April 2006. The leu fell by as much as 0.9 percent today, which was the most since Nov. 22, to 3.5353 per euro at 2:30 p.m. in Bucharest, down from 3.5026 late yesterday.

Romania Q3 2007 GDP Growth

Romania's economic expansion accelerated slightly again in the third quarter as a lending boom and rising wages spurred consumption, offsetting damage to agriculture from a drought. Gross domestic product grew an annual 5.7 percent, up from 5.6 percent in the first quarter, according to data released today by INSSE (the National Statistics Institute).



For a detailed examination and explanation of why such continuing rapid growth may be problematic see this post earlier in the week.

Romanian Demography At A Glance

"...the fetus is the socialist property of the whole society. Giving birth is a patriotic duty, determining the fate of our whole country. Those who refuse to give birth are deserters."

Nicolae Ceausescu addressing a Communist Party congress in 1986




Well for those of our readers who thought I had said all that could be said about Romanian demography in this monster post here, I have a rather nasty surprise: there is more. Scratching my head about the spike I found in the Romanian natality and mortality data I started scratching around a little more, and what follows is what I came up with.

And before I go any further, here's one for your bookmarks, since browsing around for information on Romananian remittances I came across the very intersting "Romanian Migration to Spain - Motivation, Networks and Strategies" by Ana Bleahu, from which I have drawn the above reasonably graphic chart. Bleahu's article is a working paper (careful PDF) from the Institute for Quality of Life at the Romanian Academy, Bucharest. Despite some evident shortcomings, the document is a mine of information, and very readable for the insight the interviews it is based on offer as to the actual motivations of the out-migrants.

As the above diagram makes clear, Romanians are leaving, and in large numbers. The charts I present in this post here - based on data from Italy's ISTAT and Spain's INE - indicated that at this point there are at least a million Romanians (out of a total population of around 20 million) living and working in Spain and Italy alone. Whether this migration is temporary or permanent remains to be seen, and the answer depends in large part, I would suggest, on what happens next in Romania.


Too Much Money Chasing Too Few People?

Now one of the big arguments Claus and I are pushing at the moment - on this blog and elsewhere - is that the sudden acceleration in inflation which we are now witnessing across a whole swathe of emerging economies in Eastern and Central Europe is not simply accidental, or coincidental. Nor is it a simple by-product of collective poor institutional quality, bad government and/or endemic corruption. There are larger, and in historical terms grander, "big picture" processes at work here.

One of these processes is intimately related to the very specific and unusual demographic profile which most of Eastern Europe has inherited from its recent past. So one of my central arguments is that what we have here is a kind of mis-match. A mis-match between a basically third world. "developing-country" type, income level (for this reason they tend to be called "emerging economies") and a very-first-world-type age structure - in the sense that many of these societies have had below replacement fertility for several decades now, and that the key 25 to 49 age group is now peaking nearly everywhere as a proportion of the total population.

But even their demography is pretty unique, since you could say that many Eastern European societies have a mature society population age structure, but with the top of the pyramid effectively lopped off. Lopped-off in the sense that life expectancy - and especially male life expectancy - is normally considerably lower than it is in Western Europe, or other developed economies like Japan. The implications of this are - at this point in time - far from clear, what we have effectively is a research "work in process" in hand here, since we will only know what the implications are as and when we get to see them. In this sense Eastern Europe has become a living laboratory.

But one thing is becoming increasingly clear, and that is that this underlying life expectancy reality is making the raising of participation rates among the over 60 population - which is basically the Lisbon Process "remedy" for addressing the problem of declining working age populations and rising elderly dependency ratios - a far more difficult result to envisage. Rather than increased participation rates, what we are getting as the labour market tightens is accelerating inflation, and this would now seem to constitute some sort of empirical fact.

My argument then (roughly summarised) is that the current epidemic of dramatic "overheating" which is extending itself across the map (and to non-EU destinations like Russia or Ukraine as well) is a by-product of this very special and almost unique combination of demography and poverty (I say almost since you can find this sort of mix elsewhere, for example in the Southern Indian state of Kerala).

Combined and carefully shaken these two ingredients have produced the rather unstable cocktail mixture of a substantial out migration of workers in search of a better standard of life (the poverty effect) together with a shortage of young new labour market entrants (the demographic/low fertility) effect. The twin pincer consequence we have here seems to be a very combustible mixture as we are seeing.

As I say, part of all this is driven by a very structurally distorted underlying demography. As they say demography casts a long shadow, and just how long is very well illustrated by the long run impact of Ceausescu's crazed version of pro-natalism introduced in the late 1960s. The consequences of this policy are very much with us today in the form of Romania's very unusual age structure pyramid (see below). In the pretty unique world of Eastern European demography, Romania stands out as being even more unique.


Demography at a Glance

So, and without more ado, let's now take a rather closer look at this Romanian demography, and to get the ball nicely rolling why don't we start by taking a quick glance at Romanian fertility.





Despite the fact that we have a gap in the data during the late 1980s a number of things stand out clearly enough in the above chart. The first of these is that fertility in Romania was already making the transition to below replacement level by the early 1960s, and in fact dropped below replacement level in 1962. The second is that fertility suddenly shot up in 1967. This was the year the infamous Ceausescu pro-natality campaign was introduced (and you can read more about all this in this post here, but since all of this is such an important aspect of Romanian history, and since the historical memory of Romanian society seems to have a major lacuna here, I am taking the liberty of reproducing a short extract from this book (Ronald D. Bachman, ed. Romania: A Country Study. Washington: GPO for the Library of Congress, 1989. More References at the foot of the article) which gives some essential background.

With a political system in place that made long-range planning the cornerstone of economic growth, demographic trends took on particular significance. As development proceeded, so did disturbing demographic consequences. It soon became apparent that the country was approaching zero population growth, which carried alarming implications for future labor supplies for further industrialization. The government responded in 1966 with a decree that prohibited abortion on demand and introduced other pronatalist policies to increase birthrates. The decree stipulated that abortion would be allowed only when pregnancy endangered the life of a woman or was the result of rape or incest, or if the child was likely to have a congenital disease or deformity. Also an abortion could be performed if the woman was over forty-five years of age or had given birth to at least four children who remained under her care. Any abortion performed for any other reason became a criminal offense, and the penal code was revised to provide penalties for those who sought or performed illegal abortions.

Because contraceptives were not manufactured in Romania, and all legal importation of them had stopped, the sudden unavailability of abortion made birth control extremely difficult. Sex had traditionally been a taboo subject, and sex education, even in the 1980s, was practically nonexistent. Consequently the pronatalist policies had an immediate impact, with the number of live births rising from 273,687 in 1966 to 527,764 in 1967--an increase of 92.8 percent. Legal abortions fell just as dramatically with only 52,000 performed in 1967 as compared to more than 1 million in 1965. This success was due in part to the presence of police in hospitals to ensure that no illegal abortions would be performed. But the policy's initial success was marred by rising maternal and infant mortality rates closely associated with the restrictions on abortion.

The above described episode has had a clear, evident and lasting impact on the age structure of the Romanian population, and we can readily see this if we take a look at a breakdown of the 2006 population by age, since we can see an evident spike in the 37-39 age range.



Now if we come to think about the actual drivers of fertility, it would be really interesting to know why Romanian fertility was hitting such low levels during the early 1960s. As far as the drivers of low fertility go in the short term, the key indicator is normally the rate of birth postponement. Birth postponement is a process which normally revolves around the rising age at giving first birth of those women who decide to have children. It is thus a timing decision, and normally reflects growing investment of young women in their own education or career oportunities. In the Romanian case we do not have specific data for this age, but (again thanks to Eurostat) we do have data for mean age on childbirth, and since most Romanian mothers now have only one child this is not a bad indicator, since the number will be lower, but not that much lower (possibly between 1 and 2 years).



As we can see, the median age at childbirth has been rising slowly but steadily from the mid 1990s, and this process is, in part, behind the very low fertility readings which have been registered in Romania in recent years. But if we think about the current level which is still under 27 (and this is an average for ALL births and not just first births, so the first birth median age might be what, 25.5?) then this still significantly below the Western European norm, which is around the 30 mark. So more years of very low fertility are to be anticipated as postponement continues, and if Romania hits a major economic crisis in the meantime (which is, I am afraid, a very distinct possibility) then we may get stuck in exactly the kind of low fertility trap which the Austrian demographer Wolfgang Lutz has so ably identified.

What we don't know at this point though (since I have been unable to find any data on this interesting topic) is what the first birth age of women was in Romania in the late 1950s/early 1960s. Given the relative poverty and economic backwardness of the country at the time a modern postponement process would seem to be an unlikely candidate for the very low fertility which was being registered, and pressure to work combined with a very "free and easy" abortion system would seem to be a more promising candidate explanation.

However moving on now to the natural evolution of the Romanian population, I think it is worth taking a look at the live births' chart:




Apart from the obvious spike in births in the late 60s which we have already spoken about, it is also worth thinking about the sharp drop in the number of births which took place around the end of the 1980s. To put this in some perspective we might point out that in 1988 some 380,000 children were born, while in 1991 this number was down to 275,000. This is a drop of over 100,000 children a year in just 3 years (and of course the annual rate has subsequently only dropped further). So in 2009 there will be 100,000 young people of 18 years of age LESS than might otherwise have been the case, and the Romanian labour market is BOUND to notice this sharp adjustment, out-migration or no out-migration.

Also, if we come to look at the balance of births and deaths, we will again observe some strange details in the data, including the abrupt rise in the number of registered deaths after 1967, but also the fact that the natural rate of population increase, that is births minus deaths (ignoring migration effects) turned negative in 1991.




So if we look at the theoretical population position we will see this negative growth confirmed:





Turning to life expectancy at birth, we will see, despite a decline in the early 1990s (which may have been associated with high infant mortality) the headline number is now rising, but it is still low in comparison with Western Europe, and this is going to have important economic implications, not least because it places severe limitations on one of the favourite economic recipes for getting out of the kind of problems Romania is getting into, namely raising participation rates in the over 55 age group. Looking at all this data it may well be that the health of the older Romanian population is just not up to taking this kind of strain. I suspect we are going to hear a lot more of this kind of issue in the East European context in the months and years to come.



Finally, to complete our demographic round up, we could look at the median age of the Romanian population. This age is - at a current level of 36.9 - very young by modern standards, but it is hard to know what interpretation to put on this, since Romania is hardly a "young" population in the sense that Iceland or Ireland are, since the whole structural configuration of the demographic panorama is so uniquely skewed and distorted, and in part the comparatively young median age is a reflection of the comparatively low level of life expectancy.



Now what stands out here is just how comparatively young Romanian society is at this point. This could become clearer if we put Romanian median age up against Slovenian median age, since Slovenia is effectively the youngest member of the EU10 (although still significantly younger than the older West European societies like Germany or Italy).



Really at this point I am neither sure how to interpret this, nor of the significance of this difference in ages between these two societies. Normally this more youthful effect would be associated with a much later decline in fertility to below replacement (say Ireland or Iceland), but this is not the Romanian case and it undoubtedly has something to do with the specific weight of the ceaucescu cohorts within the population, but quite what this will mean I am not really sure at this point. I don't imagine anyone is, since we have never really been here before.



Again, this key age group exhibits strange behaviour in the Romanian case, since (despite the inevitable gaps in the data) we can see that this group is already dropping as a share of the population in the 1970s (which is most unusual) and then of course (after the "birth spurt") it starts to climb again, and now it seems to have peaked again. But it seems to have peaked at a very low share - 37 (while 38/39 would be more normal) and at a very low median age (36, while 40 would be much more usual, again, if only we knew how to interpret all this). And then you have the million or so people who are there (in the official numbers), but aren't (insofar as they are out of the country). How will they affect things? I wish I knew the answer to all of this, but one thing is sure, we will find out soon enough, although unfortunately by that time it may well be too late to do anything constructive.


Population Pyramids

Finally lets have a look at some population pyramids, which, in the Romanian case aren't any more re-assuring. I have chosen here to make a comparison with Ireland, since Ireland has had a more or less normal (if somewhat delayed) demographic transition, and has been fully able to leverage this to get the full blast of her "demographic dividend". If we look at the pyramids for the early 1990s we can see that this is when Romania in principle was best positioned to get the rapid catch up growth, and this is, of course, when Ireland was doing exactly that.





If we look at the transitions through the pyramids, we can see that Ireland's path is a lot more stable than Romania's, and especially when we bear in mind that Ireland has, since the end of the 1990s been a strong net receiver of inward migration, while Romania's has been exactly the opposite case.







But really the most striking contrast is in the 2020 pyramids, since we can see that while Ireland's population is ageing, and the elderly dependency rate is rising, this is happening much more slowly than it is in Romania, and the whole pyramid is a lot more stable and sustainable, the bottom section is a lot thinker if you will. As I say, I wish I new exactly how to interpret all this, but one thing is for sure, the difference between Ireland and Romania's demographic evolution is not in Romania's favour.


By Way of Conclusion


Well returning to our point of departure and the crazed policies of Nicolae Ceausescu, perhaps it isn't necessary to say this at this point (after all the posting it shouldn't be!), but those of us on this blog who are advocating pro-natalist policies to help offset the more dramatic effects of population ageing, normally think in terms of an approach which is more along the lines of the Swedish or French ones, and we would obviously wish to completely dissociate ourselves from the type of coercive pro-natalism which was advocated and implemented by the likes of Ceausescu and his ilk. What we are arguing for is a collective effort on the part of the whole of society (organized inevitably via the state) to transfer resources to those women who would like to have children (Adam Smiths "hidden hand" seems to have gone "missing" at just this point, in the sense that societies and economies do not seem able to guarantee their own reproduction, which is at the end of the day a necessary prerequisite for economic growth as we now know it, so this is precisely the kind of case the old founder of libertarian economics would have had in mind as a justification for state intervention). What is being advocated by modern pro natalists then is a policy to support choice, one based on the secure knowledge that our collective interest as societies lies in the direction of doing this, and of reproducing our populations (even if in decline) across a stable trajectory. Our future lies in this direction since otherwise.... well, unfortunately we are more than likely just about to find out what the otherwise alternative is in the present Romanian case.


Unfortunately, however, maybe at the end of the day Ceausescu was right about one thing, maybe the rate of childbirth does determine the whole future of a society, and for many decades to come. His authoritarian attempt at social engineering however has very definitely become part of the problem legacy, and not part of the solution.



Bibliography and Appendix

Extract from Estimating the Consequences of Unintended Fertility for Child Health and Education in Romania: An Analysis Using Twins Data, by Peter J Glick, Alessandra Marini and David E Sahn.



Among the hardships faced by Romania’s population under Ceausescu was an almost uniquely harsh population policy. When Ceausescu came to power in 1965, Romania’s birth rate (15.6 per 1,000 population) was 44% lower than in 1950, in large part due to an exceptionally liberal abortion policy (Baban and David, 1996). With the aim of reversing this downward trend in fertility, the government in October 1966 made family planning and abortion illegal with only rare exceptions.

As a consequence of this law as well as restrictions on access to modern contraception and a range of other pronatalist policies (including divorce restrictions as well as financial incentives to bear children), the birth rate tripled from 13 to 40 per 1,000 in less than one year (Streatfield, 2001). Additional and even harsher measures were enacted in 1985, including among other practices compulsory regular pregnancy tests of women in their twenties (David, 1990). Public health consequences of these policies were severe, including extremely high rates of maternal mortality as women resorted to unsafe illegal abortions (Baban and David, 1996) and the placement of large numbers of unwanted children in overcrowded orphanages.

With the 1989 revolution, policy reversed again: the pronatalist policies were revoked and abortion and contraception were legalized. The rate of legal abortion quickly reached the highest level in the world, with about 200 abortions per 100,000 women aged 15-44 in 1990 (Serbanescu et al, 1995). Access to modern contraceptives improved but they remained generally unavailable (RAPHHM 1999; Baban 1999) and contraceptives knowledge was poor, in large part due to misinformation spread by the Ceausescu regime. There were modest declines in infant mortality and larger reductions in maternal mortality (Serbanescu et al., 1995; Mureşan and Rotariu, 2000) but these ratios were still the highest in Europe a half decade after the revolution.


Baban, A. (1999). ‘Romania’, Chapter 10, in David, H.P. (ed), From Abortion to Contraception, Greenwood Press, Westport, Connecticut.

Baban, A. and David, H. (1996). ‘The Impact of Body Politics on Women’s Body, Women and Men in East-European Transition Project’, Lectures held at the summer University in Cluj, Romania, July, 1996.

Mureşan, C. and Rotariu, T. (2000). ‘Recent Demographic Development in Romania’, in Kucera T., Kucerová O. V., Opara, O.B. and Schaich, E. (eds), New Demographic Faces of Europe, Springer-Verlag, Heidelberg, , pp.267-285.



Serbanescu, F., Morris, L., Stupp, P., and Stanescu, A. (1995). ‘The Impact of Recent Policy Changes on Fertility, Abortion, and Contraceptive Use in Romania’, Studies in Family Planning, Vol. 26, pp.76-87

Romanian Association of Public Health and Health Management (RAPHHM) (1999). Reproductive Health Survey, Romania, 1999: Final Report, Romanian Association of Public Health and Health Management, Bucharest

Trebici Vladimir (1991) – Genocid si demografie (Genocide and Demography) – Editura Humanitas, Bucuresti



According to Manuela Lataianu in "The 1966 Law Concerning Prohibition of Abortion in Romania and its Consequences. The Fate of One Generation":

All women were forced to go for a gynaecological control every month, this monthly health control representing the requirement for receiving medical care8. The pregnancies detected were monitored until term. In this way, the possibilities to provoke an empirical abortion were almost totally annihilated. The law was extremely severe, numerous gynaecologists as well as women who resorted to this method paying with years of prison their trial to avoid it. At the same time the law punished the sale of modern contraceptive means which, as a result, disappeared from the specialised shops. All persons over 25 years old who did not have children (excepting those who had valid medical infertility problems) were punished for celibate, paying 30 per cent tax on income.

The generations 1967 and 1968 are the largest in Romanian history, the children born during this period being informally called “ceausei” (Ceausescu’s babies).

Consequences of the Decree no. 770/1966 concerning prohibition of abortion


However, on long run the consequences of applying this law were not at all favourable to Romania. Firstly, the rate of maternal mortality – and especially that of maternal mortality caused by abortion – reached in Romania the highest position in Europe. As it could be noticed into the table 2, in 1980 in Czechoslovakia this index was 9.2. This value is the lowest in comparison with Romania, were this index reached the level of 132.1. After almost 10 years, in 1989 it can be noticed that generally, the woman’s situation – at least from this point of view – knew a substantial improvement in this part of Europe, excepting Romania, which registered a substantial increasing of it (169.4), maintaining the top position.

Another consequence of this law was a high increasing of the infant mortality rate. Between 1967–1989 there were born almost 10 millions children. 340,000 of them died before reaching the age of 1 year. Demographers estimate that 20 per cent of children born in this period were under-weight or with congenital malformations, this fact affecting negatively the biological quality of population.

Romanian Migration to Spain

Here's one for your bookmarks. Browsing for information on remittances into Romania I came across "Romanian Migration to Spain - Motivation, Networks and Strategies" by Ana Bleahu, which is a working paper (careful PDF) from the Institute for Quality of Life at the Romanian Academy, Bucharest. The document is a mine of information, and very readable for the insight it offers on the actual motivations of the migrants.

The paper also includes this very revealing chart, which just about says it all I think.



Perhaps it is worth recalling at this point Spain and Italy have been the principal destinations for Romanian migrants, and that the number of Romanians in Spain has increased in the following fashion:



(more explanation of this in this post) while the number of Romanians in Italy has increased as follows:



And while I'm up here posting, here's a reminder of the volume of remittances these Romanians are sending home (as measured by the World Bank, who openly recognise that this is minimum data, since accurate information here is virtually impossible to come by).



I think the conclusion we can draw here is that - even while accepting that the number of Romanians working in Spain and Italy increased significantly in 2005 and 2006, the very steep increase in the chart is more a by-product of the fact that the post 2004 data while still inadequate is nonetheless a big improvement on what was available earlier. Another way of looking at this is to take the current transfers item in the monthly balance of payments data published by the National Bank of Romania.



While this data has little validity in absolute terms - since it includes other kinds of transfer - in relative terms it can give us a much better appreciation of how the remittances situation has evolved over the years than the World Bank data can. It will also give us some sort of proxy indicator to track as we move forward. Be all this as it may, the world bank estimate the 2006 volume to have been some 4.1% of GDP, and that is very large, and with significant macroeconomic consequences as we are currently seeing. I think what no-one had thought about before was the way in which these remittances could be treated as an income stream and used to finance mortgage borrowing to fuel construction, with all the distortionary consequences we are now observing.

Alarm Bells Ringing in Romania?

According to the Financial Times, in this article, it was just 5 years ago that Raiffeisen International, the Austrian-based bank with the greatest involvement in Eastern Europe, bought Casa Agricola, a struggling state-owned Romanian bank, for $45m and invested about $250m in its modernisation. Today, analysts estimate the bank could be sold for $2.5bn (€1.68bn, £1.22bn). The rise in value is attributed to Raiffeisen’s success in overhauling Casa Agricola as well as to Romania’s soaring economic growth, rapid credit expansion and spiralling asset appreciation. Many business people in Bucharest see the case of Casa Agricola as exemplary, and argue that similar success stories are developing across the board.

Not everyone, however, sees things like this. The International Monetary Fund, for example, (and of course yours truly the blogger here) takes a rather different point of view. Concerned about the continuing impact of the global credit market turmoil, the IMF has been consistently warning (and here) about the dangers of economic overheating in Romania, citing in particular the yawning current-account deficit and the financing problem that this could pose should there be a sudden and sharp reversal in investor risk appetite.




In addition inflation, which had been falling steadily in recent years, jumped to 6.8 per cent October after climbing steadily from a low around 4 per cent in the January-July period.



Rising world energy and food prices, compounded by a drought inside Romania itself, are playing their part. But so is rapidly rising local pay (fuelled in part by labour shortages which are caused by massive outmigration - the consequences of which the Romanian authorities are effectively in denial about - and years and years of below replacement fertility). Wages seem set to rise this year by about 25 per cent in money terms (or about 20 per cent in real terms) year on year.






Far from running a fiscal surplus to try and cool the economy - as advised by the IMF to drain excess liquidity from the system - government spending is being increased, with a 43 per cent increase in pensions currently being implemented, and a further 30 per cent rise having already been approved for early 2009.

A steady and increasing flow of remittances from Romanians working abroad is also helping to fuel a credit surge, particularly in home loans. In fact the IMF is not the only entity drawing attention to this situation. The National Bank of Romania published data earlier this week - in its Monetary indicators October 2007 press release - which shows that private debt in Romania increased an annual 51.4 percent in October as individuals and companies took out more loans in foreign currencies. Debt rose to 133.3 billion lei ($55 billion) as of Oct. 31.




According to the Bank:

In October, non-government credit went up 3.3 percent (2.3 percent in real terms) from September 2007 to RON 133,319.6 million. RON-denominated loans picked up 3.3 percent (2.3 percent in real terms), while foreign currency-denominated loans increased by 4.0 percent when expressed in EUR and by 3.3 percent when expressed in RON. At end-October 2007, non-government credit advanced year on year by 51.4 percent (41.7 percent in real terms) on the back of the 40.5 percent growth in RON-denominated loans (31.5 percent in real terms) and the 63.3 percent rise in foreign currency-denominated loans expressed in RON (when expressed in EUR, forex loans expanded by 72.4 percent).

The IMF has warned that borrowers might be assuming too much risk, especially as an increasing share of the loans are either in foreign currency, mainly euros, or indexed to foreign currency.



And of course all this increase in credit is financing soaring increases in imports, boosting this year’s likely current account deficit to 14-15 per cent of GDP – a level the IMF considers dangerous. Last year the €10bn deficit was largely financed by privatisation-boosted FDI of €9bn. But this year’s forecast FDI of €7bn will fall far short of the likely €17bn deficit – leaving banks to finance the gap with credit, much of it short-term.




The IMF take the view that this is unsustainable, particularly with global conditions worsening. But Bucharest-based bankers argue much of the credit is quasi-investment as it is provided in-house by multinational banks to their Romanian subsidiaries.


Of course one of the areas where all this extra economic heating is most directly noticed is in construction, and Romania recorded in August (the latest month for which comparative data are available from Eurostat) the highest annual pace of construction growth (37.5%) of any country in the European Union. According to data supplied to Eurostat, Romania is way out in front here, followed by Great Britain with a 7.7% year on year rate and Slovenia with a 4.6% one. Even the Baltic countries have no dropped out of this particular race.






Meanwhile the Romanian leu continues its downward course, falling again early in the week for the third straight week against the euro as investors became increasingly concerned about the widening current-account deficit and accelerating inflation. The leu has been the world's worst-performer against the euro in recent weeks, falling the most since August 2005, as investors trended away from higher-yielding emerging-market assets amid a sell-off in Romanian stocks.





As can be seen above, in the few days the fall seems to have been brought to at least a temporary halt after central bank Governor Mugur Isarescu said sharp swings in the exchange rate can harm the country's economy and indicated the possibity of a further tightening of monetary policy to address the inflation problem.

The National Bank of Romania raised its key interest rate to 7.5 percent from 7 percent at the end of October following the rise in the inflation rate to a one-year high of 6% in September and 6.8% in October. But Isarescu has also warned about the sharp rise in indebtedness and the limits to conventional monetary policy in the current environment.

"In the last four or five months, credit in foreign currencies exploded...When we raise rates, foreign currency loans rise because they look cheaper. We have reached a limit of monetary policy.''
Romanian Central bank Governor Mugur Isarescu

Now although Romania nominally has a relatively high unemployment rate - some 7% using ILO methodology - it is impossible to know just how realistic this figure is, since we do not really know how many Romanians are actually in the country and ready and available for work, or indeed the quality of the unemployed labour force that actually are. One measure of the situation though can be found in the recent statement by economy and finance minister Varujan Vosganian that Romania has a current labor shortage of about 500,000 workers, especially in construction, heavy industry and car manufacturing.

"We need more engineers, mechanics and bricklayers........We have a labor deficit of about 500,000 employees," he admitted at the opening of a conference on professional and technical education recently.


One of the really difficult problems which comes into operation in a situation like that which Romania is currently experiencing, and where a strong level of euro indexing of prices and a significant number of households and companies are paying loans which are in or indexed-to euros (or other foreign currencies), is that exchange rate and monetary policy become effectively impotent (this is what Mugur Isarescu means when he talks about the limits of monetary policy) to correct growing competitiveness problems - since given the indebtedness it is just not practical to encourage any substantial downward correction the exchange rate, while increasing the interest rate only puts upward pressure on the currency and attracts additional funds in search of yield, and these only serve to make the excess demand problem even worse. Thus the only real arm left in the government policy arsenal is the fiscal policy one, whereby the government attempts, by running a fiscal surplus, to "drain domestic demand" from the system, and thus work to effect some form of price deflation (for a fuller discussion of this complex topic in the Latvian context see this post). And this, of course, is exactly the policy that the IMF economists tirelessly advocate that the Romanian government practices, but unfortunately the message seems to be falling on deaf ears.

Now, evidently, running a deficit stimulates demand, which increases economic growth, and this extra growth does, of course, bring in increased revenue which can help pay for extra spending, but if the economy is already running up against its capacity limits then this extra growth is rather artificial, and such attempts at growth really only has one result, that of pushing up wages and prices, and thus increasing inflation, and given the difficulties associated with implementing a strong downward correction in the currency this inflation means only one thing, a loss of export competitiveness, and this, of course, is what we are seeing happening in the Romanian case.

And on top of this we have the issue of remittances coming back home, stimulating even more demand, demand which would lead to the employment of those workers who have migrated, only they are now no longer there. Undoubtedly this flow of remittances (around 4.3% of GDP in 2006 according to the World Bank) carries some of the responsibility for the escalating home demand, and rush to borrow, since you don't have to be an economic wizard to see that the money can be initially used to accumulate the deposit to purchase a new family home, and then subsequently as a stream of income to help make the mortgage repayments.

So more than having the alarm bells ringing, the writing is now on the wall I would say. Even Central bank Governor Mugur Isarescu warned on Nov. 1 he was concerned that foreign-currency lending ``exploded'' in recent months, increasing the risk associated with any depreciation of the local currency, and the national currency the leu was the world's worst-performer against the euro last week, falling the most since August 2005, as investors shunned higher yielding emerging-market assets amid a sell-off in Romanian stocks. So take note of the old adage, caveat emptor.

Romania Trade Balance September 2007

Romania's trade deficit widened in September as steadily rising inflation and the elimination of many EU trade barriers have reduced export competitiveness and boosted imports. The deficit widened to 1.69 billion euros ($2.49 billion) from 1.175 billion euros in September of last year, according to preliminary data from INSSE (the National Statistics Institute) last week. The deficit was however lower than the revised gap of 1.797 billion euros in August.


The trade deficit is the major factor widening Romania's current-account gap, and concern about the widening CA deficit lead Standard & Poor's to recently lower its outlook on Romania's sovereign credit rating for a second time since April.

Imports in September rose an annual 22.5 percent to 4.14 billion euros, while exports increased 11.1 percent to 2.45 billion euros. Imports from other EU countries rose 24 percent as exports to the bloc increased 9.5 percent.




In the first nine months of the year, the trade deficit widened to 15.07 billion euros from 9.55 billion euros in the same period of last year. Imports increased 27 percent and exports rose 11.7 percent.

Romanian Inflation October 2007

Romania's inflation rate rose again in October, this time to a 16- month high of 6.8%.





In fact inflation accelerated upwards this month from the 6 level registered in September. Food costs, which have been rising in Romania as in many others countries played a big part in this months acceleration - rising 9,52% year on year - and a government decision to increase natural gas prices by 3.7 percent in October obviously didn't help. At the same time the leu, whose steady rise in the earlier part of the year helped slow inflation is now declining, and has in fact declined 6% against the euro in the past three months, pushing up in the process import prices, and the leu cost of all those products and services which are priced in euros.

The ex-food price index rose at a yearly rate of 4.7%, up from a 4.1% rise in September. The EU harmonised price index rose by only 4.6%, and has been much tamer in recent months than the home grown Romanian one, but this in many ways only reflects the different composition of the typical consumption basket in Romania, which is very different from that in many of the wealthier European societies, since food is a much more important part of the household budget in Romania.



Now the most logical conclusion to draw from this state of affairs would be that the National Bank of Romania is surely about to raise interest rates, since they specifically cited higher-than-expected inflation as the grounds for their Oct. 31 to raise the key interest rate to 7.5% from 7% and normally in the present climate any likelihood of an interest rate rise in the offing should send a currency upwards, so what is surprising to note is that on the back of the announcement the leu fell sharply today. In fact the currency has been falling since the end of October, but it was definitely given another firm shove downwards by today's news.

Romania Retail Sales September 2007

Romanian retail sales surged in September as higher wages, a boom in consumer credit and an expanding retail network encouraged Romanians to shop more.



Sales increased an annual 32.5 percent, slightly below the 33.7 percent growth registered in August, INSSE (the National Statistics Institute) reported this week. Month on month, sales fell 7.2 percent from August, a traditional peak shopping period.



Sales of food, drinks and tobacco surged an annual 64 percent while sales of non-food products increased 5.1 percent from September of last year. Sales in the services industry rose an annual 5.7 percent.

Consumption has risen sharply since Romania joined the European Union on Jan. 1 driven by inward remittances flows, booming credit and steadily rising wages. Average net wages rose an annual 21 percent in September.

Private debt by individuals in Romania rose an annual 53 percent in September, much of it from consumer loans, as higher wages increased borrowing power.

Romanian new-car sales will be 18 percent higher this year than in 2006, according to Ziarul Financiar.

Rising wages and expanding credit will also help to boost car sales, which will total about 350,000 vehicles this year.


``It's hard to find any good stories about Romania these days,'' Lars Christensen, senior emerging-market strategist at Danske Bank A/S in Copenhagen, is reported as saying. The leu's ``overvaluation is quite significant when compared with other central European countries'' and ``interest rates are quite low,'' he said.

Romania's central bank raised its benchmark interest rate 50 basis points on Oct. 31, matching Hungary in having the highest rates in the EU at 7.5 percent.

Romania Industrial Output September 2007

The rate of growth of Romanian industrial output slowed for a second month in September following a drought which lowered electricity production at hydroelectric dams.



Industrial production grew an annual rate of 3.2 which compares with growth of 4.5%in August, according to data released by the National Statistics Institute today. Month on month, output rose 4.2% from August as workers returned from traditional August holidays.



Electricity production fell an annual 0.7 percent, after growing 2.3 percent in August, the institute said. Growth of output in manufacturing industries slowed to 3.7 percent from 4.6 percent.

Industrial sales growth accelerated to an annual 6.9 percent in September from 3.7 percent in August as sales of manufactured goods grew an annual 8.2 percent, from 4.1 percent the previous month, the institute said in a separate release. Industrial sales rose a monthly 6.7 percent.

If we look at the index chart we can see that the rate of growth in industrial output has definitely fallen back from the highpoint achieved in May. At the same time the economy has been accelerating, consumers have been borrowing like never before, domestic costs have been rising as the economy pushes up against structural and infrastructural limits, and a growing volume of imports has, of course, come flowing in. All in all, not good news.

Romanian Producer Prices September 2007

Romanian producer-price growth accelerated on an annual basis in September from the previous month, led by increased costs of mined materials, electricity and manufactured goods.



The cost of goods produced in factories and mines rose an annual 7 percent in September, compared with 5.6 percent in August, the Bucharest-based National Statistics Institute reported this week. Producer prices rose 1.2 percent on the month, the same pace as in August.



The leu weakened 2.3 percent against the euro and 2.2 percent against the dollar in September, making imports such as equipment and raw materials more expensive for Romanian companies.

The cost of manufactured goods increased an annual 6 percent in September from 4.4 percent in August, the institute said. Prices of electricity and sewerage services increased 7.8 percent from 7.7 percent the month before. Mined goods rose an annual 16 percent in September from 14 percent in August.

Consumer-price growth in September accelerated to an annual 6 percent, from 5 percent in August, as a drought boosted food prices and a weaker local currency made imports more expensive, the institute said on Oct. 10.