Balcerowicz: Forget About Euro, IMF Or VAT. Entrepreneurs Are The Only Solution For Growth

05.25.2015 By Sorin Pâslaru

Leszek Balcerowicz, 68, the author of the shock therapy in Poland in the 90s, says that the only solution for the development of Romania is to encourage entrepreneurship, especially for small enterprises, that would create new jobs.

Euro adoption, EU funds, the International Monetary Fund or fiscal incentives such as the lower value-added tax or social security cut are less important for the Romanian economy than creating a favorable environment for entrepreneurs, says Leszek Balcerowicz, former Polish finance minister (September 1989-December 1991 and 1997-2000) and central bank governor (2001 and 2007).

“Business conditions are crucial. As soon as you manage to improve them, you’ll witness an accelerating economic growth.

Euro is not a substitute for reforms. Euro won’t solve your problems, as they are structural problems. Take a look at Greece and you’ll see what it means to enter euro zone unreformed,“ Balcerowicz told Ziarul Financiar in an interview at the end of last week.

Balce­rowicz added that EU funds are also important, but they won’t replace structural reforms either.

“Romania has made important progress for fiscal consolidation over the past year, it managed to lower the budget deficit below 2% of GDP, better than Poland. This achievement should be strenghtened, not weakened, despite incoming elections next year, because fiscal discipline is one of the fundamentals for a long-term economic­ growth,“ Balcerowicz says.

Professor Balcerowicz stated Romania should assess the obstacles for private investments and for creating new jobs and identify methods to remove such obstacles by massive deregulations if necessary, but also by evaluating public institutions. “You should check up whether these state institutions produce unnecessary procedures which hinder the business development. One of the best indicators of the economic environment is the growth rate of new and small enterprises. Large companies can cope with an unfriendly business environment, but small companies can’t; that’s why the rate of growth of small companies needs to be monitored. Business conditions for small enterprises are crucial.“

Balcerowicz has frequently offered the example of Bulgaria and the Baltic states for financial discipline and for a better coordination of macroeconomic policies. Nevertheless, 25 years after the fall of communism, the average wage in Bulgaria still stands at 250 euros, compared to 2,000 euros in Greece, although many goods and services have similar prices.

In fact, all Romanians who crossed the Bulgarian-Greek border to spend their holidays in Greece can easily notice the huge difference of economic development. At the same time, tens of thousands of Bulgarians are working in Greece and not the other way around. Who still believes in these words – “structural reforms“ after 25 years, after one generation?

“So what?,“ Balcerowitz replies intransigently. “I don’t understand the question. You should take a look at conditions for business, identify the barriers and improve them. Don’t speak like a populist by pretending you care about people. You care about the people if you improve the prospects."

"There’s a lot to do. Improve the business environment by strenghtening the macroeconomic conditions.“

But there is still a huge development gap between Greece and Bulgaria.

“Let’s not make confusions between growth level and growth rate. Bulgaria is suffering after the years of communism. In 1990, the starting point for Bulgaria was way below that in Greece. Poland is much poorer still than Germany and this is why it takes more reforms to catch up. The only valid conclusion is that a country which is poorer due to the past needs to move faster, and it can move faster only by implementing correct reforms and maintaining stable macroeconomic conditions.“

What’s the use for Bulgaria if its public debt is at 20% of the GDP but it ranks last in Europe by development? “One of the lessons of the recent crisis is that a country which accumulates debts has a boom, when everybody is happy, but then the boom ends, there's a bust when everybody is unhappy, that’s the lesson learnt.“

Balcerowicz, currently the head of the International Comparative Studies Department at the Warsaw School of Economics, is counting, like he did 25 years ago, on deregulation and economic liberalization which trigger development and narrower gaps.

Meanwhile, since the collapse of Lehman Brothers in September 2008, the USA and western European countries have been spending thousands of billions of dollars to rescue private banks or even car manufacturers, with public funds.

What kind of capitalism is that which goes bankrupt unless it is financed from public funds? What should be the conclusions for a country like Romania, which has no truck or tractor manufacturing plant left because they were also black holes, just like Lehman Brothers or AIG? Romania closed down Tractorul or Camioane Brasov plants, while the USA rescued General Motors with public funds, France rescued Peugeot, Austria injected tens of billions of euros to support Raiffeisen, Erste, while the Netherlands took the same steps to rescue ABN Amro or ING.

Balcerowicz is getting irritated. “It is a terribly wrong conclusion for poor countries to learn bad lessons from rich countries. It is very dangerous. France is having big problems now.  The US have suffered a «boom and bust», now the country is growing, but slowly. The right conclusion is not to emulate bad policies of rich countries that create more and more debts, but their good policies, namely the conditions they create for business. This is the right direction that you should follow: the growth rate of the number of new enterprises.“

Why Romania, starting from the same level of GDP per capita like Poland in 1990, is currently half the level of Poland (7,000 euros GDP per capita in Romania compared to 14,000 euros in Poland)? Moreover, Romania had no foreign debt in 1990, while Poland had 40 billion dollars in debts, namely 60% of the GDP at that time. “You wasted a lot of time and only made few reforms. Your country was like Slovakia, for example, where Meciar regime allowed another type of capitalism than the competitive one, namely crony capitalism,“ Balcerowicz said.

Today, after 25 years, over 3 million Romanians left the country, and certain towns in the eastern regions lost 20-30% of the population as many factories were closed down without setting up new ones or creating other well-paid jobs. What’s to be done?

“Do you want to return to socialism?“ Balcerowicz is getting irritated again by the question. “You simply have to create a favorable environment for entrepreneurs and you will also have new jobs,“ said Balcerowicz who seems to have found the solution for development and has the same answer for almost every question.

But Romania currently has 4-5 million employees, at a population of 20 million inhabitants, while the Czech Republic and Hungary have the same number of employees at a population of 10 million inhabitants.

“What? This is impossible!“ Balcerowicz says. “Yes, it’s true,“ Poland’s commercial attaché, who has been attending the talks, is confirming.

“OK. Do you want to complain or solve the problem? Do you expect me to offer you a miraculous solution or repeat what I’ve previously told you? Keep a macroeconomic balance, improve conditions for business and you will have new jobs, too. There is no other way.“

Balcerowicz, who came to Romania at the invitation of Banking Employers Association, an alternative to the Romanian Banking Association, established by Raiffeisen and other foreign capital banks, says that it is normal for the balance of loans granted to the economy to stay the same at 50 billion euros since December 2008.

Between 2004 and 2008, the balance of loans rose from 10 to 50 billion euros. “This is a typical situation after a boom. There isn’t necessarily a link between lending growth and economic growth. Lending will grow if the economy grows and if we have lending demand. Improve the business conditions and you will have lending demand.“

What should we do in terms of education to boost economic growth? “A good coordination between the needs of the labor market and the education process. In Poland, we have decided to focus more on engineering technology training as it is in high demand.“

Balcerowicz says that Romania has made progress in fiscal consolidation and that it should continue this way to avoid a slowdown in economic growth in the future.

"It’s good you managed to improve macroeconomic conditions, that you have a low debt-to-GDP ratio, but we are talking about structural conditions – the conditions for business. Euro is not a substitute for reforms."

Should Romania cut the VAT or the social security tax?

“You should keep an eye on the budget deficit if you want to cut the VAT. I would rather suggest you to lower the tax burden on labor, which is the most detrimental to economic growth,“ Balcerowicz says.

What should Romania do to boost the weight in the GDP of the revenue to the consolidated budget, which currently stands at 32%, compared to the EU average of over 40%?

“It is enough for the country’s GDP per capita. (…) You should only implement correct policies to stimulate entrepreneurship. If you want to speed up the economic growth, you should bring radical improvements to the business environment and you’ll get that. Keep an eye on politicians and don’t let them maintain their influence on state-owned companies and block the development of new businesses.“

Balcerowicz added that Romania should not learn the bad lessons from rich countries as regards the monetary policy either.

IMF – it’s better to have an agreement than not to have one, but it’s not essential, Balcerowicz says. ”I don’t agree with IMF that the local monetary policy should continue to be lax, as the monetary policy interest rate (1.75% currently - e.n.) is already very low.“ 

What are your solutions for Greece?

“The biggest risk is whether the European Union will continue to accept the financing of bad policies in Greece. Unless the Greeks make reforms, they should be taken out of the euro zone.“

How did you manage to study for an MBA in the USA in 1974? “Lots of people studied in the USA at that time.  Poland was not Romania. It was a US scholarship,“ Balcerowicz concluded.  Balcerowicz graduated in 1970 from the Warsaw School of Economics, and in 1974, he received an MBA from St. John’s University in New York.