Paul Bmn,
Advisor to the Prime Minister, Romania
Introduction
In the context of the transition t o a real market economy, money is gradually acquiring the leading part in managing and influencing economic activity. Its functions must be reconsidered both theoretically, penetrating the core of all economic concepts, and in practice, monetary instruments being used, t o the full, by macro- and microeconomic policy.
Currency's Functioil of Conveying Informatioil
In an economy, currency--or, generally speaking, money-is fulfilling a complex function of communication between people, as econonlic agents, conveying information on the value and utility of various goods and services. On the c:her hand, the matcrial part of money-the so- called monetary standard-helps t o express the significance of value under the form of prices, and, on the other hand, money as a social token, preserves and conveys information in time and space, on the created and distributed economic value.
During all the phases of the commuilication process through money (or currencies), objective and subjective distortions may appear, altering the quality of economic information, of the monetary mechanism and money itself.
This possibility arises from the specific traits of every phase of the monetary communication process:
(1) Reflection of value
(2) Incorporating the meaning of economic value into money as a symbol
(3) Interpreting (or translating) the respective meaning (sense) by those utilizing money ( 4 ) Regulation of the communication process by credit or by changing the monetary standard.
Any period of social and economic transition, especially in Romania today, is very rich in influences affecting the quality of the monetary communication process.
Changes in the Way of Interpreting the Role of Money
In East European countries, there is a clear necessity to accept the changing character of both economic value and of currency. This new vision of money, rather hard t o achieve for those accustomed t o fixed prices and a rigid monetary standard, is also leading to a change in economic behavior, implying quick decisions and risk sharing.
At the same time, it is necessary t o understalld and evaluate the role of money not only on the economic basis of its purchasing power, but also by taking into account multiple influences exerted by social, political, or even military factors.
' f i e penetration sf non-economic influence5 illto the core of money is possible or even prob- xble .,~.specinlly in periods of c cir,j,;, revolutionary transition or social unrest.
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Situation of Currency in RomaniaThe E)ec~mber Revolution in i 983 found the Romanian economy in a state full of contradictions.
The tespzcted positive effects of the clearing out of Romania's foreign debt were annihilated by the ewtrernely grave state of ihe economy (obsolete products, technology and information) and of t h ~ entire social system (rigid ~tructures, various and deep disequilibrium).
Frorn a monetary point of view, money supply was relatively constant; people's savings were a a t h w high representing about 10% of the social product.
Im the first eight months of 1990, economic, social and political events had both a n extensive and profound impact on currency circulation:
o T'he decrease of production and its quality, with ever increasing prices a t the same time.
r Many strikes and other forms of social struggle with a view t o obtain increases of wages and Alaries
s wage and salary increases accepted by Government and enterprise management in contra- diiction with the results of prnduction.
tin this situation, for examplv in July 1990, industrial production was only about 85% of its levd recorded a year ago while the money supply was forced t o increase because of a 4 billion lei dale in wages and salaries over the 1989 level.
Cmnsequently, the present econo~nic reform faces a currency worn-out by various types of inflatiion (first of all demand-pull and cost-push inflation). Money supply increased by about 15% axompared t o the end of 1989, while production decreased substantially. As a result, pressure on priites has been quite powerful.
Premequisites of Implementing Monetary Reform
The &rst componeilt of the monetary reform that has already been accomplished consisted in reorganizing the banking system. Since September 5, 1989, our National Bank has detached itsdf7:from crediting activity, becoming a bank of issue (similar t o Western Central Banks).
I%e credit and discount operations have been taken over by a new bank, called the Romanian Commercial Bank. All the o t h e ~ banks become commercial banks and private or cooperative ones.
8. second prerequisite consisk In making healthier money circulation by increasing and di- versi&ying the supply of goods and services (from houses and buildings t o shares and bonds, plant ~ n d equipment).
&X the same time, the money supply will be under more rigorous control by trying t o achieve a closer correlation between the e v ~ l u t i o n of wages and salaries and the fulfillment of production
norm:^ and quotas (taken into account by future regulation of wages and salaries).
A third condition of monetary stability is the reform of prices by which new real dimensions of t h ~ monetary standard should Re identified according t o the laws of market economy. The prices will be gradually liberalized, in several stages and on different categories of products. In this respect the reform project is taking into consideration three main types of prices:
(1) Free prices for the goods supplied by a t least three manufacturers.
(2) Ctgntrolled prices by Government for the goods manufactured in the branches of national ecxorromy wit11 manopolistic or oligopolistic structure.
(3) Srdbsidized prices-by Govenlment-for the goods which meet the basic needs of the popu- Fa$tion.
Tihe above mentioned compo~lents of ~nonetary reform will be accompanied by the gradual imprcn~~rement of the leu/dallar exchange rate, based on several devaluations.
The Scenario of Transition t o Convertibility
In the reform scenario, taken into account by the Government, convertibility of our national currency (leu) is t o be carried out in several stages as follows:
Changing the present 21 lei/$ rate in order t o bring the official exchange rate as close as possible t o the level of the free market rate.
Strengthening the purchasing power and the exchange rate of the national currency by increasing production and limiting money supply.
Liberalization of payments in lei and foreign exchange for non-residents (foreign tourists and investors), probably beginning in the first half of 1991.
Setting up the legal framework for Romanian citizens t o take abroad larger sums of lei.
Passing from limited t o general convertibility by liberalizing payments in lei and foreign ex- change according t o international practice (analogous t o neighboring countries which already have convertible currencies, such as Yugoslavia), stage envisaged for 1992.
The fulfillment of this schedule will depend both on the evolution of our country's economic recovery and on the way in which Romania will benefit from monetary and financial assistance from the interna.tiona1 and regional specialized institutions.
At the same time, the nlonlellt and the quality of reaching the target of convertibility depend on the way in which monetary and "real" factors interact.
Thus, the international experience gained by many countries, with different economic po- tentials, structures and development levels, proves the existence of complex, sometimes even contradictory, correlations between the exchange rate of convertible currencies and the evolu- tion of balance of payments.
One may consider the following model reflecting the interdependence between convertibility of a certain currency and the situation of the balance of payments:
(1) The effective transition to convertibility is generally favored by the state of equilibrium in the balance of payments.
(2) In its turn, the devaluation (or depreciation) of the national currency coiltributes t o obtaining a surplus in the payment balance which will provide foreign exchange reserves.
(3) This effect will last only if an increase in 1a.bor productivity and in the quality of the exported goods and services is achieved.
(4) If the expected action of the economic fundalnental factors is missing or delayed, convertibil- ity will lose its beneficial implications and will tend t o bring about inflation and a decrease in foreign exchange reserves.
Conclusion
The measures envisaged in our Government's Program are favorable t o the recovery of the Romanian currency and t o the transition to convertibility. In the view of the Council for Reform, convertibility is both a means of stimulating economic agents t o adapt themselves t o the market economy's requirements and, in the longer run, a consequence of some favorable economic and monetary conditions.