Austerity and Regime Collapse in 1980s Romania (part two)

From Cornel Ban (excerpts for forthcoming article in East European Politics and Societies)

‘With central bank reserves at a paltry 400 million, a dramatic policy shift was needed to deal with the debt crisis of the Romanian state in 1981. At this point what tipped the balanced against the regime was that creditors convinced the IMF that Romania needed a second chance. According to James Boughton, the IMF’s official historian

Although the staff met on various occasions with major bank creditors in the fall of 1981 to explain the extent of the measures the authorities were taking to strengthen their finances, they gradually came to accept the banks’ doubts about Romania’s comittment to reform. The Fund refused to waive the terms of the stand-by and it allowed no drawings during the first year of the program other than the one made at the time of the initial approval (Boughton 1981).

After two years of struggling to meet its international financial obligations, the Romanian government sent a letter to its main creditors and informed them that it could no longer afford to carry on servicing the principal of its external debt to commercial banks. In January 1982 Romania began negotiating with a consortium of nine creditor banks, with IMF staff as observers. As the banks did not offer a rescheduling agreement in time to resume the stand-by agreement, the IMF staff decided to signal their support for the regime and offered a token drawing of 10 million, an extraordinary measure. This move by the IMF soothed creditors, who eventually agreed to rescheduling in December 1982.

The economic meltdown faced by the Ceausescu regime was so dramatic that the expenses of the national airline (TAROM) and the state’s embassies were paid in cash. Instead of the preferential treatment he expected from the West because of his “maverick” foreign policy, Ceausescu helplessly observed a souring Western mood and the roughness of the IMF terms imposed on Poland, where loans with attached conditionalities severely constrained the policy choices of the government (Eichengreen 1992). With Poland’s fate in full view, Ceausescu could see that the writing was on the wall for the main pillars of his regime’s ideas about development (that is, industrial development and “hard” policy sovereignty). Indeed, Poland offered a nightmare scenario for national-Stalinists: halved investment rates, central planners confined to setting macroeconomic targets, real autonomy for enterprises and risk of liquidation for the unprofitable ones, less discretionary credit and tax policy, depreciated currency, and increases in administered prices (Marer et al 1988).

To meet the debt repayment schedule, Ceausescu demanded a radical revision of the five-year plan that would make the early payment of foreign debt the chief priority of economic policy. No new debt was to be contracted from private lenders or other states. Even the contracting of loans from the Bretton Woods institutions was banned in 1988. As investment in industrial expansion was set to continue, all imports had to be cut drastically and the value of exports had to go up. While income levels were not affected negatively, all strategies meant to amass the dollars necessary for this task were on the table, including the engineering of a massive drop in domestic supply of staples and industrial consumer goods. Overall, between 1981 and 1989 the supply of food staples was nearly halved. The production of consumer goods was also nearly halved during the same period and, to make matters worse, its share in exports was increased (Ionete 1994: 86-87). In marked contrast was similarly indebted Poland, where the government cut consumption by barely ten percent in 1981, only to restore it to its previous levels two years later (Marer et al 1988: 8). Also, while in Romania non-socialist convertible currency imports fell by 43 percent between 1980 and 1983, they decreased only by 5 percent in GDP.

To save dollars, barter deals paid for commodity imports. For example, the export of engineering industry outputs to Iran, Iraq and socialist states was bartered for imports of oil and other commodities that otherwise would have had to be paid in scarce foreign currency. Unfortunately for the Romanian side, as a result of trade deals struck in the late 1970s, Romanian exports were sold at fixed prices that did not account for the increase in the price of energy inputs after the 1979 oil crisis. During the late 1980s, the Brasov Tractor Works (Uzina Tractorul Brasov), one of the industrial champions of Ceausescu’s Romania, was selling tractors to Iran for just under 4000 dollars apiece in order to pay for imported Iranian oil.

Soon the push to pay off debt reached Stakhanovite levels: in 1988 and 1989 Ceausescu decided to pay a billion dollars of debt by selling 80 percent of the country’s gold reserves. As a result of these drastic measures, between 1982 and 1987 Romania boasted the fastest reduction of debt to GDP ratio in the world. Likewise, a current account deficit of 2 billion dollars in 1982 turned into a surplus of 9 billion by 1989. In a determined show of fiscal virtue, the government budget closed with surpluses.

Ironically, in terms of its external accounts and fiscal policy numbers, Romania was a top performer. In 1987, the Bank for International Settlements (BIS) appoached the regime’s central bank governor to convey the message that Romania’s sovereign bondholders found the early debt repayment program to be sufficiently credible. Consequently, the BIS strongly recommended that the rest of the sovereign debt should be paid at the deadlines agreed in the 1982 debt rescheduling agreement. Ceausescu vehemently rejected the recommendation and stayed the course, ending with the message that the regime was pulling the plug on Western finance for good. In the same year, the regime stopped communicating basic data to the Bretton Woods institutions.

The squeezing of domestic consumption through the planned reduction of demand contributed to sharp drops in GDP: from 6 percent in 1983 to -0.5 in 1985 and -5.8 percent in 1989. Indeed, the depth of austerity and the pace of the improvement in trade deficit was far in excess of what markets expected and constituted a “sui generis shock therapy” (Daianu 1999:9) whose effects were magnified by the initiation of new and expensive infrastructure and industrial projects. As the next sections show, the result of the regime’s belt-tightening was oppositional mass mobilization.

Austerity Jams the Economic Engine

Scholars have discussed at length the soft budget constraints and supply shortages that plagued centrally-planned economies (Kornai 1980; 1992; Myant 1989). These mechanisms were probably at work in Romania as well. But Romania was unique in that one of the most damaging aspects of the policy turn after the debt crisis was the cutting of imports of Western technology paired with the unrealistically short deadlines for substituting them with local technology and, where possible, by extending the lifeline of existing technology.

Forced technological substitution contributed to the reduction of the current account deficit and of the level of debt. But as underfunded research institutes could neither replicate nor reinvent imported technologies overnight, the cuts in imports of technology also weighed down the capacity of the industry to maintain its levels of competitiveness. As formerly imported parts and materials were replaced with local substitutes of poor quality, many factories could not liquidate their stocks because of quality issues and had to be “bailed out” by the state (Murgescu 2010: 373). This was particularly the case in high-tech sectors, where the extension of obsolescence deadlines had dramatic effects on quality and the capacity to cope with technological innovation. Moreover, just as it was becoming clear that external competitiveness was increasingly dependent on the integration of information technology, five year plans did not allocate adequate funding to these emerging industries.

The forced import substitution was carried out using a self-destructively autarkic perspective on innovation that stressed a combination of Stakhanovite norms, nationalist posturing, and industrial espionage. In defiance of the intrinsically transnational nature of technological innovation flows, during the 1980s subscriptions to scientific journals and all funds for study abroad opportunities were cut (Grigorescu 1993: 102-135). Average spending on research remained at 24 percent of the West European average and spending on education was also curtailed (Ionete 1993: 69-72; Constantinescu 2000: 335). In a local adaptation of Maoist “anti-intellectualism”, university students and professional researchers were forced to spend several weeks every year harvesting crops rather than carrying on with their research. Moreover, Ceausescu signalled his skepticism at the added value of information and communication technologies. Such policies demoralized the white collar class of engineers, researchers, and other technical experts tasked with keeping Romanian industry competitive through innovation. As a former senior researcher at Cluj’s Physics Institute remembers,

They simply did not get it that research projects for complex parts take years and participation in foreign networks of researchers. We made important breakthroughs in mass spectrometry instruments during the 1970s because of such networks and access to foreign scientific networks. But after 1982 they cut almost all of them and we spent a decade without subscriptions to foreign research journals. When you make it a point out of saving on electricity, heating and journals in one of the country’s elite institutes, as they did at the time, you know that the game of applied physics is basically over.

When combined with the scrapping of individual incentives in the evaluation of worker productivity, this planned de-coupling from the international flow of technological innovations contributed to the beginning of economic decline through losses in productivity. Export performance was affected immediately, as Romanian exports became less likely than before to find a market in the developed capitalist core. Between 1981 and 1989 the losses of state-owned firms increased by 450 percent and profits fell by over 150 percent (Ionete 1993: 104-105; 199). As remembered by Nicolae Vacaroiu, former economist of the State Planning Commission and future premier,

What Ceausescu did after 1982-83 was almost like a form of euthanasia of our industrial competitiveness. He wanted an autarkic research and development system which was sheer fantasy. And he wanted it overnight and on the cheap. The institutes could reverse engineer some Western imports but not others and before you knew it our industry was flooded with poor quality replacements of sophisticated devices (subansamble) that drove down the quality of our exports. And since he [Ceausescu] wanted to pay off foreign debt at all costs, the fall in quality was offset by price markdowns on our industrial exports. It was a self-defeating spiral whose origins were in the extreme austerity Ceausescu decided at the beginning of the 1980s. In the end, this showed up in negative growth figures…

In this dire context the regime remained committed to the industrialization project, even as industry already had the highest share of the economy in Europe. As a consequence, although the pace of annual industrial growth decreased from 3.3 percent during the 1970s to 2.6 during the 1980s, the industry’s share of the national economy continued to increase during the 1980s, (Cojanu 1997: 89). A former regime insider explains,

From an ideological standpoint Ceausescu was very simplistic. For him industrialization and his own freedom to decide what to do about it were paramount. In turn, industry was the guarantee of national independence. Citizens’ material needs, he assumed, were something you could dispense with for the sake of the glorious future. Some specialists [in economics] tried to tell him during the 1980s that things are a little more complicated but he would not hear any of it and tell them that the alternative would be Poland’s gradual loss of sovereignty at the hands of international agencies.

Faced with the Poland scenario, the regime stuck to its guns. Industry remained the main beneficiary of dwindling budget resources and the investment rate remained Eastern Europe’s highest. Enrollement rules in the education system strengthend even further the tendency to channel the overwhelming majority of students into vocational high school and university training programs that served the needs of the industry (Constantinescu 2000: 336-338). Industrialization for industrialization’s sake, even in the face of social catastrophe and technological obsolescence in an increasingly competitive world economy, turned out to be the terminal pathologies of Romania’s brand of national-Stalinist developmentalism. Some investments were productive, such as the nation wide electrification of the country’s extensive rail network or the massive overhaul and expansion of the Black Sea port of Costanta. Others, however, such as the costly building of a canal meant to shorten routes from the Danube to the Black Sea or the push to construct gigantic public buildings in Bucharest, were spectacular manifestations of waste that contrasted sharply with the wartime food and heat rations ordinary citizens had to live with.

In the spring of 1989 the regime announced that the foreign debt was paid in full. Moreover, the regime also boasted a budget surplus of 8.2 percent and exports worth 10 billion US dollars, barely 3 billion less than the much bigger Polish economy. But while the more liberalized socialist economies of Central Europe and USSR were merely stagnating in 1989, in Romania things looked much worse even from the standpoint of the cherished GDP indicators, with a spectacular drop of 5.8 percent of GDP confirming the failure of austerity and forced import substitution (Amsden et al, 1994; 32-33).

Austerity Wrecks Guaranteed Basic Needs

Austerity has a corrosive effect on regime legitimacy, especially when the distribution of wealth is perceived as unfair. Despite the fact that Romania’s income distribution was egalitarian, it became clear that the allocation of the state’s fiscal resources for industrial investment and debt repayment came at the cost of meeting the basic needs of citizens. Because this disregard for needs immediately followed a policy era of accumulation and social welfare, one could say the shift amounted to the Stalinist version of social injustice.

The obstinate comittment to industrial investment in conditions of extreme financial scarcity did not only come at the expense of a decline in technological competitiveness. Political regimes can maintain their legitimacy in conditions of technological and economic stagnation as long as they deliver on the socio-economic agenda that bolsters their legitimacy. This was even more the case in an authoritarian system like Ceausescu’s Romania, where, as we have seen, the majority of the population saw unprecedented levels of improvement in quality of life and social mobility during the first three postwar decades. Indeed, like other Stalinist regimes, Ceausescu’s governed not only through political prisons and intelligence services but also by promising and generally providing guaranteed employment, decent pay and working conditions, affordable housing and leisure, and universal access to education and healthcare. Yet it was precisely the remunerative sources of the regime’s legitimacy that suffered the most from the austerity policies of the 1980s. Unlike Hungary or Czecholsovakia, Romania did not use individual material incentives as intensively in order to secure compliance (Verdery 1991: 85-86). As revealed in testimonials on subjective perceptions of austerity during the 1980s, a dramatic reduction of consumer demand during that decade abruptly terminated the status quo in the relationship between the regime and its subordinates (Nicolau 2003; Latea 2000; neculau 2004).

To get the dollars needed to pay off foreign debt, Ceausescu decided to crack down on both private and public consumption, thus reversing two decades of progress in living standards. The provision of adequate food, housing and health was no longer taken for granted. Schools and the extensive apartment complexes that housed the newly urbanized population saw regular electricity and heating cuts during subzero temperatures because an expanding industry struggling to meet the export targets of the regime needed more electricity (Constantinescu 2000: 144-145). Industry earned precious hard-currency, so consumers had to endure daily blackouts, even though the country produced more electricity than Spain and Italy. Spending on healthcare, the hallmark of the regime’s social progress, was also cut—so much so that by the late 1980s doctors had to offer care without the most basic supplies. Spending cuts and the effective banning of medical imports during the late 1980s led to severe shortages in medical supplies. Even essential items like insulin, cotton pads and single use syringes were hard to come by. Some of the weakest members of society (childless retirees, orphans and abandoned children) were cared for in abysmal conditions. In suggestive contrast, the building of a single new coal power plant (Centrala Termoelectrica Anina) cost nearly three times more than the yearly investment in health and social assistance during the 1980s (Ionete 1993: 43).

The strong export orientation also meant reduced supplies of clothing, footwear, and gasoline. Eerily empty shelves, long queues for everyday items lasting hours on end, and the growth of the informal economy became the new realities of consumer life in urban areas during the 1980s. In a parallel to consumer behavior in capitalist recessions, savings deposits in 1980s Romania went up in real value per annum, even as households experienced unprecedented consumption cuts (C.N.S. 1991).

In what seemed like an uncanny repeat of the early industrialization period of the 1950s, as the government budget was accumulating surpluses, the bout of fiscal virtue saw private consumption as a share of national income drop by 2 percent (World Bank 1991; IMF 1992). And even according to government statistics, food became more expensive, with the share for this item in household budgets going up from 46 percent in 1980 to 51 percent in 1989. Moreover, as food exports increased and food rations were introduced, the per capita calorie intake fell from 3,200 to 2,900 over the same period. In this way, drastic cuts in consumption and social services undermined the very claims of socio-economic progress that the regime’s legitimacy hinged on. The belt-tightening continued even after April 1989, a date celebrated by the regime as it marked the full repayment of Romania’s foreign debt.

Austerity also made the regime increasingly derelict in keeping its promise to deliver decent working conditions. Increased work intensity, night shifts, working Sundays, and higher quotas at no extra pay became the rule in the expanding export sector as management was ordered to meet increasingly ambitious export schedules. The engine of social mobility began to sputter, as the new generations of working age peasants trained to staff the industrial infrastructure had to obtain special permits to live in the cities where they worked. Accordingly, they were forced into long commutes at a time when spending on transportation had been drastically reduced (Murgescu 2010: 380-385).

Mass mobilization and regime change

In 1987, a wildcat strike in the heavily industrialized city of Brasov demonstrated the importance of wage cuts and consumption deprivation as sources of mobilization. Crucially, scholarly accounts and memoirs of this event are in agreement that workers’ demands for restoring the pre-austerity socio-economic status quo soon morphed into demands for regime change, storming of government buildings, and the destruction of RCP symbols. The strike led to a wave of arrests, prosecutions, and long prison terms for the workers involved. In the aftermath of the strike, some in the inner circle of the regime tried to temper austerity but were demoted by Ceausescu. When Florea Dumitrescu, the central bank governor and Ceausescu loyalist suggested that the payment of the foreign debt ahead of schedule irritated foreign creditors, he was marginalized and eventually sacked.

When the socialist social pact was challenged in Brasov, Romania’s own “magnetic mountain,” one would have expected the regime to reverse its consumption suppression strategy. This did not happen, however. Moreover, the minutes of an RCP executive committee meeting from May 5, 1989 certify that Ceausescu remained keen to divert resources away from basic consumption and towards exports (Betea, 2011: 396-397). When trade minister Stefan Andrei asked Ceausescu to at least provide better heating in the huge housing complexes the regime had built, he learned that Ceausescu’s new strategy was to use the 2 billion dollars accumulated in 1989 and the 5 billion in debt owed to Romania to build enough hard currency reserves to turn Romania into a creditor country. A former Romanian diplomat who specialized in Middle East affairs claims that in 1989 Ceausescu’s thinking went as far as planning the establishment of a development bank together with Iran. It became clear that once Romania was cut off from the international bond markets, Ceausescu hoped to turn Romania into a leader of newly industrializing countries, apparently with no consideration for the political costs involved.

Moreover, just as austerity was traumatizing the urban industrial working class the regime had created, the public budget was funding infrastructure and industrial investment in North and Sub-Saharan Africa, Cuba, the Middle East and the USSR. While before 1989 this policy was presented as a calculated attempt to get the dollars needed to pay off the debt and, through barter, the commodity imports demanded by the industry, it was hard to understand why the debt payment terms of these countries extended well into the 1990s given that Ceausescu’s plans to enter the mining business in these countries saw few concrete steps. It also seemed profoundly unfair that as living standards continued to drop in 1989, the regime sat on nearly 9 billion dollars lent or invested in developing countries and the USSR.

This extravagance in Romania’s external accounts was paid not only through extensive mass mobilization. Indeed, Brasov’s rebelling workers were the unheeded canaries in the mine to the anti-regime mass mobilization that brought down the government in December 1989. Unlike negotiated transitions in Spain and elsewhere in Central Europe, the Romanian authoritarian regime died in a violent face off with a protest movement whose backbone was precisely the social class the regime had built and then betrayed: the industrial wage-earners. Contrary to skeptics’ assumptions, it quickly became clear that the high levels of police repression, constant surveillance, and the absence of a robust network of anti-government activists did not prove to be insurmountable obstacles against Europe’s last popular revolutionary movement to end a particularly repressive regime and the grip of a well-entrenched “uncivil society.”

Beginning in Timisoara, a multiethnic city in the southwest, the movement spread throughout most large cities in the country. The regime’s attempts to put down the movement failed despite the deployment of the entire repressive toolbox of the police state, from the “milder” arrests, city blockades and curfews to fire-at-will orders given to armored army regiments. On December 22, 1989, Ceausescu’s flight by helicopter, his abandonment by the repressive apparatus, and his execution a few days later ended Romania’s national-Stalinism. All of this, however, was not before hundreds more had died in various forms of urban warfare, the images of which were grotesquely dramatized in Western media and converted into an imagery of postcommunism as a realm of violence riveted by the devastating effects of “communist” rule (Petrovski and Tichindeleanu 2009).