CAPITAL FLOWS LIBERALI ZATION IN ROMANIA [613154]

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CAPITAL FLOWS LIBERALI ZATION IN ROMANIA

Sorina Ioana COROIU, Claudia Diana SAB ĂU POPA
UNIVERSITY OF ORADEA, FACULTY OF ECONOMICS

Abstract:
Capital flows liberalization is a highly controversial subject, but its importance is
not controversial at all. The capital flows liberalization in Romania has been made
according to the EU criterions, between 1991-2006. The liberalization decision
involves benefits and risks, also. We hope that the liberalization process will bring more benefits to the Romanian economy.

Key words: capital flows, liberalization, Romania, European Union;

JEL classification: F21, F32

The unique market is the most important realization of the European Union,
being based on the four fundamental freedoms: the free circulation of people, goods,
services and capitals. One of the pre-conditions of the unique currency´s adoption and of the entrance
in the euro zone is the liberalization of capital flows. The community acquis in the field
of free circulation of capitals bases on the provisions of the Treaty of the European
Community, as well as on a series of directives, recommendations and communications,
but it does not contain precise obligations and does not impose the procedural steps
regarding the way of phasing the liberalization of the capital fund.
The capital flows liberalization process was adopted by many countries in all the
world, the way of using it being very different. It is a vast process, of a high importance,
due to the impact it has on the general macroeconomic setting.
In the speciality literature, the notion of ˝capital flows liberalization ˝ means the
˝reduction or the abolition of the administrative restrictions and controls on the
international financial transactions ˝
1.
Influenced by the main international financial organizations (the International
Monetary Fund, the World Bank, the World Trade Organization, the US Treasury, etc.),
many emergent economies followed the tendency of capital flows liberalization and removed gradually the existent restrictions . The collapse of the communist economical
systems in the Eastern Europe boosted even more this evolution.
The ´80s and the beginning of the ´90s were years of intense economic activity
during which governments from all the world proposed the reduction of the barriers on
the international market of the capital.

1 Bakker A. F. P., “ The Liberalization of Capital Movements in Europe: the Monetary Committee and
Financial Integration, 1958-1994” , Kluwer Academic Publishers, London, 1996;

163Figure no. 1 : The speed of the capital flows liberalization

The‘ 60s

The ‘70s

The ‘80s

The ‘90s

Developed countries
(France, Germany, Italy, Austria,
Holland, Belgium, Sweden, Switzerlan)
Medium income countries
(Greece, Spain, Portugal, Turkey)

Emergent economies
(Czech Republic, Poland, Hungary,
Mexic)

Unliberalized capital account

Gradual liberalization

Fast liberalization

Source: Isărescu Mugur – Capital Flows Liberalization2;
Over the time, it has been remarked that a period during which restrictions on
the capital movements were imposed was followed by a period of removal of these
restrictions and vice-versa. Thus, the liberalism of the 19
th century was followed by the
imposition of severe restrictions on the inte rnational circulation of the capital and the
extern commerce in the interwar period. Th e post-war period includes three different
phases: a phase immediately following the end of the war, when a series of
liberalization measures of the capital moveme nts was adopted; the end of the ´60s, when
this tendency is reversed and a great number of countries impose again restrictions to the capital flows; the ´80s, when the orientations is again changed in the opposite
direction.
The cyclic modification of the capital circulation system corresponds partially to
the cyclic evolution of the world economy. Indeed, in the periods of depression, the
authorities tend to adopt restrictive measures, in order to prevent the capital exit caused
by the lower interest rates established to stimulate the internal demand.
In the context of the adherence process to the EU, the Central European
countries began the liberalization of the capita l movements in the first part of the ´90s,
ending this process after about a decade (Poland: 1991-2001; Hungary: 1991-2001;
Slovenia: 1992-2003; Czech Republic: 1994-2001; Slovakia: 1996-2004). In Romania, the capital flows liberalization began in 1991 by the adoption of a
foreign investment law, but the process was accomplished with a delay in comparison
with other Eastern and Central European countries.

2 This paper was maintained at the FINMEDIA Conference, in 15 March 2005;

164
Figure no. 2 : The chronology of the measures adopted by BNR for the promotion
of price stability and financial stability

the per-cent variation towards the same period of the previous year

Source: BNR, INS;

The reasons of the delay of the liberalizat ion process were multiple. First of all,
the gradual approach concerning the structural reforms and the macro-stabilization
program of the ´90s was reflected in the increase in inflation and interest rates, in
comparison with other neighbour countries or the member states of the EU. Secondly,
the capital account liberalization was delayed until the moment when, as a result of the
banking system restructuring, the financia l domain became strong enough to face the
capital flows with a high potential of reversibility. Thirdly, it was necessary that the
central bank reach a satisfying level to cover the imports through the national reserves,
this objective being accomplished in the first half of the 20th century.
The process of capital flows liberalization in Romania, began in 1991 by the
adoption of the Foreign Investment Law, included the following moments3:
¾ On the 25th of March 1998 , Romania accepted the obligations
stipulated in art.VIII of the FMI status: liberalization of the current
account operations ; non-introduction of other restrictions in the future;
the system of monetary exchange shall not suffer significant
modifications; creation of more favourable conditions to the relaunch of the economic reform.
¾ 1999: liberalization of the entrance of foreign capital on a medium and
on a long period.
¾ 2001-2002: capital flows liberalization with low impact on the balance
of payments (European Institut in Romania, 2005), including:
– direct investments, also in property values made by residents
from abroad;
– admission of national value titles to the cote on the external
market;

3 Dăianu Daniel (coord.), „ Deschiderea contului de capital în România: cât de mult și cât de repede? ”,
SSRN Working Paper, 2002; Inflation
rate
Fully current account liberalization
Liberalizarea deplin ă a contului curent The passing to real-positive interests

Trecerea la dobânzi real pozitive
The initialization of the bank system reshaping
Demararea programului de restructurare a sist bancar
Capital account liberalization
Liberalizarea contului de capital
The adoption of the inflation direct-aiming strategy
Adoptarea strategiei de țintire direct ă a inflației

165- mortgages from the part of th e foreigners applied to the
residents;
– movements of the personal capital;
– credits on a medium or long term for the commercial
transactions or the services offered by the residents to the non-
residents.
¾ 2003-2004 : capital flows liberalization with high influence on the real
economy, that is:
– capital transfers for the execution of insurance contracts;
– transactions in currency made by the residents;
– loans with a maturity of less of a year, offered by the foreigners
to the residents;
– financial loans and credits offered by the residents to the
foreigners;
– mortgages made by the residents to the foreigners;
– admission of the cotation of the foreign value titles on the
Romanian capital markets.
¾ 2005-2006 : capital flows liberalization with high influence on the
balance of payments, that is:
– deposit operations in the current account in national currency,
opened in the national financial institutions by the non-residents;
– operations with obligations and other instruments on the open
market;
– operations in the current account and on terms made by the
residents abroad.
¾ September 2006 : entire conversion of the national currency.
In Romania, the last rate control forms were abolished actually on the 1st of
April 2005, when almost all the capital flows were liberalized – on a long term and on a
short term.
The general principles being at the basis of the capital flows liberalization in
Romania are:
– The liberalization of the capital entrance shall take place before its exit ;
The application of this principle was due to severe necessity of external
financing of the Romanian economy during the transition. The advantages are bound
first of all to the reduction of the investment financing costs and consequently to the
attraction of foreign investors into the main domains of the Romanian economy. Thus, new technologies would enter on the market, which would determine the increase of the
capacity of production factors, mainly the wo rkforce. It should not be neglected either
the impact of the foreign investments´ entrance on the business sector, but also on the
incomings to the national budget.
– The capital flows liberalization on a medium and long term shall take
place before those on a short term ;
Usually, the capital flows on short term s may be represented by speculative
capitals, especially in the cases when they concern the access of the non-residents to the
deposit accounts, in conditions in which there exists the possibility of a profit obtained
from the difference between the practiced interest rates.
– Direct investments liberalization before those in the portfolio ;
The Romanian capital market is one in formation, thus its capability to manage
the value titles coming from the Portfolio Investment is a reduced one. Meanwhile, the important capital entrances, but especially the important retreats, could disturb the stock
exchange activity, affecting intensely the real economy.

166The taking of the liberalization decision is not easy at all, because it implies as
well advantages and risks, too.
Thus, the main advantages are the following: rational allocations of the
resources to the most productive applications; the reduction of the financial costs; the
import of technology and the afferent increase of work productivity; improvement of the
management of the companies; consolidation of the discipline in the field of
macroeconomic policies; increase of budgeta ry incomings; development of financial
system, etc.
But there are also many risks, such as: the excessive increase of the credit
volume, with the afferent inflationist dang ers and those of intens ification of unequal
balance of current payments; the exposure of the economy to sudden capital entrances and exits, as a consequence of the speculations allowed by the Portfolio Investment; the
excessive appreciation of the national currency, with the impact this has on the deficit of
the balance of current payments (but the appreciation of the currency has favourable
consequences on the real disinflation and convergence).
To avoid the risk of excessive increase of the credit volume, the Romanian
authorities took action to assure a careful orie ntation of the fiscal policy; consolidation
of the banking system and adoption of some careful standards, generalization of the use
of the international accounting standards; etc.
It´s been made an attempt to avoid the risk of economy´s exposure to the sudden
entrance and exit of the capital through a confor table level of the official rate reserves
and through a certain flexibility of the exchange rate.
The risk produced by the excessive appreciation of the national currency was
counteracted by the increased implication of the fiscal policy, incomings and structural
reforms, in order to reduce the external imbalance.
The avoid of risks was attempted also through a careful fiscal policy, interests
policy and flexible administration rate policy within the system known as the ˝managed
floating ˝
4.
It´s been also made an attempt to maintain the level of foreign direct
investments, in order to finance the current account deficit. The increase of direct
foreign investments was encouraged by the following measures: reduction of the uncertainty concerning the economic environment (stability of prices, of interests and
rates); coherence and stability in legal limits and correct application of the legislation;
assurance of a stable, predictable and unifo rm fiscal framework; public administration
reform and reduction of bureaucracy; infrastructure improvement; etc.
The theoretical considerations regarding these advantages and risks suggest that
before these restrictions applied to the cap ital movement might be eliminated, it is
necessary the accomplishment of some conditions and the respect of some principles.
Thus, an essential condition is the assurance of the macroeconomic stability,
whose fundamental elements are: the stability of prices, national budgetary equilibrium
and the equilibrium of the external balance of payments.
The liberalization of the capital movement in Romania took place according to
the criteria of adherence to the EU. Despite the vulnerability caused by the capital flows
liberalization, we hope that the advantages it conferes will be primary and the final
effect on the Romanian economy will be favourable.

REFERENCES:
Arteta, Carlos, Eichengreen, Barry si Wyplosz, Charles, “ When Does Capital
Account Liberalization Help More Than It Hurts?” , NBER Working Paper 8414, 2001;

4 Cerna Silviu, Donath Liliana (2006), „ Aderarea României la UEM și liberalizarea mi șcărilor de
capital ”; Lucrare sus ținută la Sesiunea de comunic ări științifice “Piața de capital”, Arad, 16 iunie 2006;

167Bakker A. F. P., “ The Liberalization of Capital Movements in Europe: the
Monetary Committee and Financial Integration, 1958-1994” , Kluwer Academic
Publishers, Londra, 1996;
Blair Henry Peter, “ Capital Account Liberalization: Theory, Evidence, and
Speculation” , Journal of Economic Literature, Vol. XLV, 2007;
Cerna Silviu, Donath Liliana , „ Aderarea României la UEM și liberalizarea
mișcărilor de capital ”; Lucrare sus ținută la Sesiunea de comunic ări științifice “Pia ța de
capital”, Arad, 16 iunie 2006;
Dăianu Daniel (coord.), „ Deschiderea contului de capital în România: cât de
mult și cât de repede? ”, SSRN Working Paper, 2002;
Eichengreen, Barry, “ Capital account liberalization: what do the cross country
studies tell us ? ”, World Bank Economic Review , 15, 3, 2001;
Isărescu Mugur , “Liberalizarea fluxurilor de capital” . Lucrare sus ținută în
cadrul conferin ței FINMEDIA, în 15 martie 2005;
Isărescu Mugur, “Stabilitatea pre țurilor și stabilitatea financiar ă”, Dizertație cu
ocazia decern ării titlului de “Doctor honoris causa” al Universit ății din Pite ști, 2006.