The Impact of the IMF on Romanian Economy

I. Introduction

The IMF is one of the most important international organizations for Romania. It is also one of the most embattled international organizations worldwide. Its critics blame it for the plight of collapsing economies like Argentina’s. Its defenders claim that such tragedies usually occur because countries listened to IMF recommendations too little, or too late. It should be in the interest of debtor nations like Romania as well as of the international community as a whole (consisting as it does of prospective debtor nations and quota contributors) to know more about the effects of IMF loan conditions, guidelines, and advice on domestic economies and social systems. Various studies, mostly concerning specific countries, very few taking a comparative perspective, have appeared in the attempt to elucidate the impact of the IMF’s activity worldwide. None to date have examined the impact of the IMF on economic and social policy in Romania in particular. This research project seeks to fill this gap, and to develop conclusions which might also be relevant for other “problem countries” in post-communist transition.

In order to understand the nature of the impact cooperation with the IMF can have on a debtor country, it is important to understand that the influence of the IMF is not necessarily proportional to the money owed to it. The sums involved can be rather small, as they are in the case of Romania. However, success in negotiations with the IMF, the approval of loans, and good performance in reviews have a crucial signaling function, which affects the country’s credit ratings and thus its ability to borrow on international financial markets, the perception of its progress towards EU accession, as well as its judgment by other potential supporting organizations, such as, notably, the World Bank.

The main research question tackled in this project is: How has cooperation with the IMF affected Romanian economic and social policy since 1989? This is admittedly a very difficult question to answer. The sheer number of actors at different levels of governance which impinge upon the evolution of policy within any transnationalizing state, along with the lack of transparency of much of their activity, make it quite impossible to sort out their various influences with any certainty. It is impossible to accurately measure the amount of impact these various actors have on the shape of domestic policy, nor is it possible to ascertain the precise nature of their impact. The best we can do is to ascertain its direction and estimate its weight by employing a two-fold strategy: First, we can try to trace their influence within the domestic policy making system as carefully as possible, to shed light on the actual mechanisms and dynamics of norm transfusion through the system via the particular actor of interest. Second, we can, based on knowledge of the evolution of domestic policymaking and policy in the country under study over a reasonably long time period, attempt a comparison of the observed behavior of domestic policymakers with the counterfactual scenario in which no such “outside” actor has been active.

II. What is IMF?

The IMF has become an almost universal financial institution, with its membership rising from 44 states in 1946 to 187 at present. However, the members of the IMF do not have an equal voice. Each member contributes a quota subscription, as a sort of credit union deposit to the IMF. Upon joining the Fund, a country pays 25 percent of its quota in the form of international currencies or SDRs and the remaining 75 percent in its own currency. The quota is the basis for determining voting power: each member has 250 basic votes plus one additional vote for each SDR 100,000 of quota. The initial quotas of the original members were determined at the Bretton Woods Conference in 1944. The allocations were based mainly on economic size, as measured by national income and external trade volume. Quotas of new members have been determined by similar principles.

The major shareholders have strong influences on the IMF’s decisions. Many important decisions require special voting majorities of 85 percent. Hence, the United States alone and a group of three Western European countries have veto power. Although the managing director has traditionally been a European, the United States has exerted the strongest voice at the IMF and has sometimes openly wielded this power to influence decisions.

The basic conception of the IMF’s role, as envisioned at Bretton Woods in 1944, was to promote exchange stability and provide short-term finance to deal with temporary current-account deficits in advanced countries. Thus, with the breakdown of the “par adjustable peg system” in 1973, the IMF lost its major role as the “guarantor of fixed exchange rates” among advanced countries. Nevertheless, the IMF did not disappear, and its role expanded instead into many new areas. The IMF has now evolved into the “crisis manager” and “development financier” for developing countries.

The primary role of the IMF is to provide credits to member countries in balance-of-payments difficulties. Part of the credit is provided in relation to a country’s quota. The first tranche, 25% of the quota, is available automatically, without entailing any discussion of policy. The use of IMF resources beyond the first tranche almost always requires an arrangement between the IMF and the member country. Under an IMF arrangement, the amount of resources committed is released in quarterly installments, subject to the observance of policy benchmarks and performance criteria. This process is often called conditionality.

Stand-by Arrangements (SBA) and the Extended Fund Facility (EFF) are the main IMF programs designed to provide short-term balance-of-payments assistance to member countries. The typical Stand-By Arrangement covers a period of 1 to 2 years, with repayments scheduled between 3 1/4 and 5 years from the date of the borrowing. The Extended Fund Facility program, introduced in 1974, was intended to provide somewhat longer-term financing in larger amounts. The EFF arrangement typically lasts up to 3 years, with repayments scheduled over a period of 4 1/2 to 10 years.