Is democracy at risk in Romania? A fresh theory suggests fiscal policy plays key role in ruining Romania’s democracy

Romania’s democracy has weakened during the last couple of years, according to Varieties of Democracy’s latest report, and one of the main reasons could be the use of pro-cyclical fiscal policies by the government, a new theory suggests.

The Varieties of Democracy (V-Dem) Annual Democracy Report 2018 shows that Romania’s democracy severely degraded during the last two years.

“Brazil, Croatia, Poland, and Romania are now at middling levels on the Liberal Democracy Index (LDI) after also suffering from significant declines over the last two years. In Poland, swift and far-reaching constitutional changes have reduced checks and balances, affecting in particular the judiciary. Similarly, the Romanian government has limited the rule of law and individual liberties – allegedly in order to curb corruption,” the report says.

In fact, Romania is not even considered a real liberal democracy, but a mere electoral democracy – just the same as African countries like Liberia, Sierra Leone or Senegal.

Varieties of Democracy classifies the countries in four different categories: liberal democracy, electoral democracy, electoral autocracy and closed autocracy.

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In 2017, only 39 countries in the world were liberal democracies, compared with 43 countries in 2007. During the last decades, seven liberal democracies lost their status to become electoral democracies (Hungary, Lithuania, Israel, Mauritius, Poland, Slovakia and South Africa) and only three electoral democracies or autocracies – Barbados, Albania and Tunisia – became liberal democracies.

Worse, democracy is fading in the world, as many electoral democracies have become electoral autocracies (like Turkey, Ukraine or Iraq), and some electoral autocracies (like Syria, Yemen or Uzbekistan) have transformed into closed autocracies during the past ten years.

Varieties of Democracy uses eleven criteria to classify countries, and Romania has recorded improvements only in terms of clean elections between2007 and 2017, a severe decline in terms of deliberative component and a moderate decline in terms of freedom of expression and alternative sources of information, judicial constraints on the government, legislative constraints on the government and equality of citizens.

“Iran, Romania, Sri Lanka, and Turkey have also experienced severe declines in healthcare equality. (…) educational equality declined significantly in four of the post-communist countries over the last ten years: Armenia, Bulgaria, Romania and Ukraine,” the report said.

As a consequence, Romania ranks on the 69^th place in the world of democracies, being considered less democratic than Burkina Faso (65) or Liberia (67).

Fiscal policy’s key role

Some experts have tried to explain during the past couple of years why democracy is fading in the world, and one recent theory has linked the weakening of democracy in Romania to the current fiscal policy.

Lucian Croitoru, senior advisor to the governor of the National Bank of Romania (BNR), said in its article “With a Permanently Pro-Cyclical Fiscal Policy, We Could Lose Democracy and Monetary Policy”, published by Transylvanian Review of Administrative Sciences, that Romania, a young democracy with weak institutions, have one particularity: “one and the same party governs in virtually all upswings of the business cycle and promotes each time pro-cyclical fiscal policies.”

Due to this particularity, three serious negative effects emerge. The first effect is the loss of fiscal policy – fiscal policy remains pro-cyclical during the downturn as well, deepening the recession and extending the period in which output stays below potential.

“The second effect is the loss of democracy; unable to use fiscal policy to help exit the recession and speed up economic growth, the parties governing during downturns compounded by the pro-cyclicality of fiscal policies are perceived by the public as impotent and are penalized accordingly through a lower share of parliamentary seats, until the party that governs exclusively during business cycle upturns finds itself without a real opposition,” Lucian Croitoru wrote.

The third effect is the loss of conventional monetary policy, manifesting if interest rates and inflation are low when recession sets in.

According to the economist, in Romania we can identify a party that has so far governed almost exclusively during upturns of the business cycle and promoted pro-cyclical fiscal policies each time.

“Capitalizing on the harmful effects can be an end only in a democracy with weak institutions. My explanation, which I call the ‘fiscal cynicism’ explanation, is that – in such a democracy – there may emerge a logic of alternance in power whereby the costs of a pro-cyclical fiscal policy will be borne by the current opposition (future ruling party), which will weaken and reduce it in favor of the current ruling party (future opposition),” Croitoru points out.

The economist considers that evidence seems to support the idea that the pro-cyclical fiscal policy pursued in all expansionary periods in Romania inflicted maximum damage on the parties that managed the effects during periods of recession and exit from recession.

Saving democracy

“Each recession occurring after 1990 that had been preceded by an expansionary fiscal policy ousted from the political stage either the party perceived as leading a governing coalition during the recession or the party that formed the government during the downturn,” he said.

“That is what happened to the Christian Democrat National Peasants’ Party (PNȚCD) after the 1997-1999 slump, and to the Democrat-Liberal Party (PDL) after the 2009-2010 recession. (…) In Romania, the pro-cyclicality of fiscal policy emerges from the very start of governances in business cycle upturns and becomes more visible during the closing years of the respective tenures, as stated by our fiscal cynicism theory,” Lucian Croitoru added.

According to the economist, the ruling coalition in Romania is pursuing a strongly pro-cyclical policy.

“Based on previous experience, it results that the party coming to power or leading a governing coalition after the 2020 parliamentary elections, or even sooner, if a crisis breaks out, will have difficult problems to solve if the economy enters a recession,” Croitoru estimates.

“The respective administration will not only be unable to use the fiscal policy to take the economy out of recession and speed up the return of output to potential, but it will delay these processes because it will be coerced to cut budget spending and raise taxes. Such measures might trigger voters’ ultimate aversion, similarly to what happened after the parliamentary elections of 1996 and 2008,” he concludes.

But the economist offers a solution for saving the democracy in Romania.

“The only real strategy that remains for avoiding the possible serious consequences of a pro-cyclical fiscal policy – erosion of democracy, loss of fiscal policy in recessionary periods and, therefore, possibly the loss of the interest rate as a monetary policy tool – is to strengthen institutions, whose improved quality should stand as a guarantee that good fiscal rules are applied, preventing the emergence of pro-cyclical fiscal policies,” Croitoru indicates.

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