Debt Repayment and Ceausescu
This post was written by Philip Lane
Arthur Beesley has an interesting article in today’s Irish Times which reports on the views of Nouriel Roubini and Ken Rogoff in relation to Ireland’s debt situation. One element in the article is a passing reference by Rogoff to Romania’s determination to pay off its external debt under the Ceausescu regime.
Readers may interested in more details on this case.
Carmen Reinhart and Ken Rogoff write in their acclaimed book This Time is Different (pages 51-52):
In most instances, with enough pain and suffering, a determined debtor country can usually repay foreign creditors. The question most leaders face is where to draw the line. The decision is not always a completely rational one. Romanian dictator Nikolai Ceausescu single-mindedly insisted on repaying, in the span of a few years, the debt of $9 billion owed by his poor nation to foreign banks during the 1980s debt crisis. Romanians were forced to live through cold winters with little or no heat, and factories were forced to cut back because of limited electricity.
Few other modern leaders would have agreed with Ceausescu’s priorities. The Romanian dictator’s actions are especially puzzling given that the country could presumably have renegotiated its debt burden, as most other developing countries eventually succeeded in doing during the crisis of the 1980s.
This summary is taken from the Wikipedia entry on Nicolae Ceausescu:
Ceauşescu’s political independence from the Soviet Union and his protest against the invasion of Czechoslovakia in 1968 drew the interest of Western powers, who briefly believed he was an anti-Soviet maverick and hoped to create a schism in the Warsaw Pact by funding him. Ceauşescu did not realise that the funding was not always favorable. Ceauşescu was able to borrow heavily (more than $13 billion) from the West to finance economic development programs, but these loans ultimately devastated the country’s finances. In an attempt to correct this, Ceauşescu decided to repay Romania’s foreign debts. He organised a referendum and managed to change the constitution, adding a clause that barred Romania from taking foreign loans in the future. The referendum yielded a nearly unanimous “yes” vote. In the 1980s, Ceauşescu ordered the export of much of the country’s agricultural and industrial production in order to repay its debts. The resulting domestic shortages made the everyday life of Romanians a fight for survival as food rationing was introduced and heating, gas and electricity black-outs became the rule. During the 1980s, there was a steady decrease in the living standard, especially the availability and quality of food and general goods in stores. The official explanation was that the country was paying its debts and people accepted the suffering, believing it to be for a short time only and for the ultimate good.
The debt was fully paid in summer 1989, shortly before Ceauşescu was overthrown, but heavy exports continued until the revolution in December.
Although data are patchy for 1980s Romania, an indirect piece of relevant data is that the Romanian current account turned around from a deficit of 5.3 percent of GDP in 1980 to a surplus of 6.5 percent of GDP in 1988.
Exam Question: Discuss the similarities and differences between the Romanian case and the current Irish situation.