Central Banking and Economic Policy in Romania (1)

14 Jun

Vlad Nanca, Dacia – 30 Years (…), 2003

From monobank to central bank

Before 1989 the BNR was little more than a socialist commercial bank (monobank). Most of its activities consisted of managing state subsidies to the industry and all foreign operations were carried out through a separate state bank (Banca Romana de Comert Exterior). The BNR had lost its statute as a central bank in 1952, following a dramatic political purge during which the regime arrested its leadership on sabotage charges, fired its Western-trained economists and hired a new generation of economists with fresh Soviet degrees. In theory, the BNR was completely subordinated to the State Planning Committee and the Ministry of Finance. Yet de facto during the 1980s the BNR governing board remained completely subordinated to the whims of Ceausescu personally.

This situation changed radically after the end of the Ceausescu regime. With IMF and World Bank expertise, in September 1990 the BNR received a new statute (Legea no. 34/1991) which stipulated that financial flows between the government and state firms be henceforth carried out by commercial banks and that the main function of the BNR would be price stability, with the former objective playing a central role in the first press interview of the new governor, Mugur Isarescu. The new statute gave the bank a considerable degree of autonomy relative to the executive and, most importantly, almost complete control over its budget.

During the heterodox governments of the early 1990s both of these prerogatives were violated by cabinets. For example, in 1991, BNR was forced by to run real interest rates below inflation in order to feed cheap credit to unprofitable state companies. The IMF defended the BNR in 1993 against government pressures to subsidize loss making state firms, forcing them to borrow money at market interest rates. But eventually the government managed to force the central bank to demand the lowest interest rates on the market for strategic sectors (as opposed to firms) such as agriculture, energy, exports. All in all, the heterodox treated the central bank almost like a development bank.

On the road to central bank independence

As its epistemic superiority consolidated, the institutional vulnerability of the central bank was drastically reduced in 1998, with the adoption of a new statute (Legea no. 10/1998) that restricted government borrowing from the BNR by setting a market interest rate on central bank advances to the public budget and by capping the maximum amount of government deficit to be covered with central bank credit. The test of the political prowess of the BNR was came between 1998 and 2004 when the cabinet refrained from demanding central bank credit. Moreover, during this period the influence of central bank economists in the executive grew. The BNR chief economists Daniel Daianu became minister of finance in 1998 and governor Isarescu became premier in 1999 and presidential candidate for the hapless Convention in 2000. The reforms also turned this institution in one of the few clear winners of the 1997 “transformational recession,” with BNR reserves soaring from 600 million in 1996 to 2.6 billion in 1997 (Daianu 1999: 15). BNR’s increasing resources enabled it to attract the best graduates of DOFIN, Romania’s only graduate economics school endowed with some international reputation, while the Finance ministry was left with the second tier.

The 2003 reforms made under the EU integration calendar gave the central bank freedom from instruction from the cabinet, sole competence on determining the exchange rate regime, prohibited all direct credit to the public budget and gave the BNR complete control over its expenses and revenues. In ECB fashion, the BNR board was freed from the obligation to publish the minutes of its meetings. The BNR’s only political obligation was to submit an annual report to the Parliament.

BNR as epistemic power
Yet the BNR shaped economic policy in more subtle ways. Immediately after 1989, its greater control over its earnings enabled an entrepreneurial new governor (Mugur Isarescu) to endow the bank with a team of young macroeconomists selected from the elite niche of the department of mathematical economics. When drastic budget cuts and bad management deprived economics departments of economic journals and books, the BNR made access to the latest literature one of its priorities. By 1991 BNR sponsored scholarships abroad for its staff and funded the institutes who could assess the costs of industrial reconversion. The top economists in BNR and the governor himself were also star professors at ASE, the leading economics department. This was the result of the fact that the BNR’s generous budget allowed for the payment of competitive salaries for the elite of ASE economists. Moreover, by the late 1990s the BNR informally patronized its own private think-tank (CEROPE) staffed by economists that either worked for the BNR or had co-authored research projects with BNR economists in the past. CEROPE soon emerged as the leading and highly elitist voice of orthodoxy and served as a laboratory for preparing the macroeconomic dossier of Romania’s EU integration during the early 2000s.

(to be continued)


3 Responses to “Central Banking and Economic Policy in Romania (1)”

  1. punk June 14, 2012 at 19:54 #

    So we should conclude that the main driver of 10000:1 hiperinflation in the Roman-Văcăroiu-Stolojan era was not the printing press employed directly? Rather, the government forced the central bank to loan it large amounts of money, comparable to the monetary base, and dumped it in the economy. By the time the loans came to maturity, even loans larger were made since the inflation induced by the earlier loans inflated prices and GDP. Thus the monetary base increased exponentially until 1998 when the borrowing stopped. (the legal reference seems wrong http://www.jurisprudenta.com/lege/lege-10-1998-6qs7z/ )
    How are these historic loans reflected in BNR’s balance sheet ? I assume paying them off is impossible and would create severe deflation.

  2. Development Studies at Brown June 14, 2012 at 20:41 #

    I am not sure that’s how one typically defines hyperinflation.
    Other than that, any sources for the claims you make would be helpful.

    • punk June 14, 2012 at 22:31 #

      I’m not claiming, I’m asking. Such a massive devaluation is surely the effect of a rapidly increasing money supply – that’s a given. So I’m wondering about the exact causes for this explosion of the money supply.

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