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Inflation Was A Good Economics Teacher To Romanians; Unfortunately – The Only One

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01 Mar 2010 - 00:00
Since the economic crisis struck Romania in the fall of 2008 one witnesses the recurrent critical points. From one month to the next, one sees old wounds being sealed up while new ones open. So the crisis goes on, while perpetuating serious imbalances of the economy. This the reason why Romania's economy continued to shrink massively in the 2009 Q4, why crediting is not yet off the ground, why the unemployment continues to grow and why government spending is way over government revenues.

But is it all to blame on the crisis? Not at all. One cannot ignore the fact that Romania's economy was severely unbalanced, with the demand grossly exceeding the domestic supply, even before the world economy got its first jitters in 2007. Other local imbalances included the difference between imports and exports, between production costs and sales costs, etc. The advance of the global economic crisis made imperative to adjust the imbalances, bringing down the current account deficit, freezing salaries or even cutting them down, etc.
All hopes now circle around one single question: when will the economy pick up again?

A follow up question is warranted here: is the Romanian society ready for it?
And I mean by "society" the central and local public authorities, industrial companies, research institutes, education institutes, mass-media and the civil society.
While I mean by "being ready" the general level of education, the life experiences, the debates we all took part in - or not - and the lessons we were able to learn from them so as to understand what is going on in the world, what are the true problems of the economy and how should they be mended.

The bottom line is that we all were exposed, for the past 20 years, to what ravages inflation brings about, more so than to what changes might do economic reform, political liberalization, cultural, social or moral reforms - which were all too slow to come about or failed all together.

Therefore, inflation was the one phenomenon pervading our lives, harassing us for the past 20 years, and finally teaching us all important lessons.
Lesson no. 1 is that one fights inflation with a generous supply of goods and services. We seem to have learned the theory, but to be unable to provide the actual supply.
And, as the domestic demand was higher than the domestic supply the solution adopted was to rely on imports. Unfortunately, too many imports.

The expectations of the population, fed by aggressive advertisement, went higher and higher. And there were plenty of money around to feed up that need for consumption, coming from bank credits, salaries growing at higher rate than the productivity and the remittences of relatives working abroad.
Therefore, a bulged up demand left further and further behind the domestic supply of goods and services. This is the crux of all our current problems: Romania's economy was unable to keep up with the surging demand.

And this is not due to lack of ideas or intelligence, but to the fact that inflation - as the sole real-life economic teacher we were exposed to, had no way of teaching us that the supply is supported by R&D and investments.
Therefore, speeding up the rhythm of investments would help set up new businesses, and that will work for us in two ways, as both new jobs will result, and added value produced by the Romanian economy.

Translated by AAP
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