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Following the intellectual lead of A.D. Xenopol, the Romanian state devised mercantilist strategies that were meant to provide the resources needed to enable domestic industries to “leapfrog” the technological barrier between them and the countries of the developed capitalist core: cheap industrial credit, higher import duties on industrial imports, preferential freight rates, taxes that encouraged the accumulation of capital in large firms (Montias, 1979; Janos 1979: 94-100; Lampe et al 1982).
This approach culminated with the adoption of legislation in 1924 that discouraged foreign investment and introduced new protectionist measures. While the Romanian government fostered the labor demand of the urban economy with an effective educational system (at least in the cities), until World War I it actively worked to depress the wage level through labor codes that outlawed agricultural strikes and made rural-urban labor migration difficult (Turnock, 2007: 1-31).
This neo-mercantile capitalist system dependent on West European investment, consumption and ideas made considerable progress towards socio-economic modernization. Some of the juridical bases of capitalist modernization (a sophisticated legislation and court system) were in place. After advancing at a snail’s pace, urbanization grew at a somewhat faster pace between 1930 and 1941 while educational progress gathered momentum. After 1918, an expanding and relatively competitive industrial base “inherited” from Austria-Hungary in southeastern Transylvania and the Banat could arguably have constituted a launching pad for large-scale industrialization in the future. Most significantly, industrial production increased by 80 percent between 1925 and 1938 (Turnock, 1970: 547). The oil industry in Southern Romania and the gas industry in Transylvania expanded at an impressive pace, with both Romanian and foreign engineering competing for new projects. The increased output of these industries in turn fostered the quick development of the chemical industry.
By the end of the 1930s, high tariffs, bold state investment and planning schemes laid the basis for a modern steel industry. The development of high value added sectors such as aircraft and electrical equipment in these regions and in Bucharest itself was particularly encouraging and proved to be the basis for the subsequent communist industrial take-off (Turnock, 2007: 17-31).
Yet when the first “globalization” came to an end on the eve of World War One, Romania was still heavily agricultural, industrialization was slow by regional standards, and the country lagged further and further behind in the race to catch up with the economies of the capitalist core. The situation did not change dramatically during the twenty years of peace that came after November 11, 1918. Despite its abundant natural resources, a large internal market, relative proximity to Western markets and a bureaucracy committed to state-led development, the performance of the Romanian economy between 1860 and 1938 was poor. During this period, a gap grew not only between Romania and France, but between Romania and other European countries that had a similar GDP in 1860 (Sweden, Hungary) (Bairoch 1976, 289; Murgescu 2010).
As a result of this slow industrialization, less than 3 percent of the labor force was made up of industrial workers in 1913. Also, despite massive employment in the bureaucracy, only 25 percent of the labor force was employed outside agriculture in 1938. Although industrial growth was average by regional standards, capital consolidation was very low: after decades of mercantilist policies, the capital stock of industrial firms with more than 25 workers totaled barely 1.5 percent of the total capital stock (Roberts). The domestic share of total capital holdings in industry increased from nearly rock bottom in the 1879s to about 60 percent in 1938. However, even though the transmission belt between Romanian industrialists, bankers and the state functioned flawlessly throughout the liberal era, and despite the state’s increasing assertiveness to limit the participation of foreign capital, Romania remained dependent upon West European investments to sustain its economy (Hitchins 1992: 1071).
The performance of Romania’s dependent capitalism looks mediocre in other respects as well. For a state with one of the highest percentages of bureaucrats per employed population in Europe, tax receipts were negligible and the state’s financing of expenditures with foreign debt made debt servicing one of the biggest budget items until 1938. Caught in this debt trap, the state had meager investment resources left and gave its public servants wages whose low levels generated incentives for extra-legal collection of revenues, most frequently from Jewish entrepreneurs.
Although the Romanian land reform of 1921 was the biggest land redistribution in Europe (outside the Soviet Union), it reduced already low productivity in agriculture and it did not ameliorate the social underdevelopment problems of the Romanian village. While a public pension system for waged employees was in place, the picture looked dire with regard to the social development indicators of the peasantry and urban poor.
Despite significant investments in education (16 percent of public revenue between 1918 and 1938), almost half of the population was illiterate in 1938 and only Albania and Serbia hosted fewer doctors per capita (1.1. doctors per 10,000, which was less than in India at that time). See Janos, 99. Between 1871 and 1935 the infant mortality rate remained the highest in Europe: 19.2 deaths per hundred (or 120,000 per year during the interwar years), largely the result of poor nutrition and farm work during pregnancy. The death rate in the population as a whole was also the highest in Europe (a disturbing 21/1000 as late as 1935). Well into the boom years of the 1930s, the rural population remained dramatically disease-ridden, deprived of basic healthcare and constrained to live in precarious hygiene conditions (Hitchins: 337).
Finally, it is far from clear that despite some progress, the educational system was structured to address an industrial take-off. The result was that, by the 1940s, Romania’s living standard, literacy and access to medical services were on a level with other peripheral European countries (Yusoglavia, Turkey, Portugal) and behind both its immediate Western neighbors (Hungary, Poland) and non-European peripheral countries (Chile, Mexico) (Jackson and Lampe 1982; Ben-Ner and Montias 1991).
An excellent study on voxeu refutes the fashionably conservative argument of Acemoglu and Robinson that social democratic capitalism is bad for innovation.
“Do the ‘cuddly’ Nordic countries free ride on the ‘cut-throat’ incentives for innovation in US-style economies? Don’t PCs, the internet, Google, Windows, iPhones and the Big Mac speak for themselves? Despite a higher overall tax burden and more generous safety nets, the Nordics have generated at least as much – if not more – innovation than the US. So far, ‘cut-throat’ capitalism has not been the only road to an innovative economy.”
You can find overwhelming evidence here
And why are the Nordics doing so good, rather than be stuck in some Soviet-style sclerosis, as the neoliberals have been predicting for several decades.
“One explanation for Nordic good performance might be that they are better in mobilising human resources. While hours per capita are higher in the US, a larger share of the working age population is employed in the Nordics owing to more inclusive educational, social and employment policies.This may imply that talents are harvested better for gainful economic activity. A second explanation could be the rather determined public policies to promote innovation.A third explanation might be that the economic incentives for innovation in the Nordics, while weaker than in the US, are not miserable after all, at least not across the board. For instance, all Nordic countries have introduced dual income taxation, according to which capital incomes are taxed at a flat rate. This helps in motivating entrepreneurs, despite quite progressive taxes on earned income.”
“A well-designed safety net may also work to promote risk-taking. In particular, unemployment insurance may help risk-taking entrepreneurs by making it is easier for them to hire workers.”
The sooner we have the numbers on these explanations the better for the argument that innovation and a cuddlier economy can actually work together.
“A few weeks ago the (Latvian) government re-paid the IMF loan it took in 2009 — around three years ahead of schedule.
While the IMF has officially “welcomed” the move, there has also been criticism by the Fund about the harshness of Latvia’s austerity, which it says will deepen already-high inequality:)
The skepticism comes from the head economist Olivier Blanchard. So what did the study find? That “in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis. A natural interpretation is that fiscal multipliers were substantially higher than implicitly assumed by forecasters.”
Interesting to see how the IMF lives with the contradiction of stressing austerity just as its research finds it counterproductive.
The full study is here