Romania's Export-Driven Debt Strategy as a Warning

Trump's policy of reducing the national debt through an export-driven economy has parallels to 1980s Romania—and it doesn't end well.

President Nicolae Ceaușescu was elected to lead the Socialist Republic of Romania in 1965, and became a totalitarian dictator in 1967. Among other seemingly anti-Soviet policies, his decision not to invade Czechoslovakia in 1968 made him popular in the West. Because of this, they generously lent money to Romania for the purpose of industrialization in the 1970s.

However, due to internal corruption and the energy crisis of the late 1970s, Romania was unable to pay its debts. Like many other developing countries, it requested a line of credit from the IMF to pay off its debts.

Unusually, however, Romania refused to negotiate with its creditors to restructure their debt and have them take a haircut, as those other developing countries did. They resolved to pay off their national debt on schedule and as soon as possible.

For this purpose, Romania cut imports significantly and expanded exports. This austerity policy led to significant reductions in standards of living, with food and energy shortages throughout the 1980s.

The export-driven economy further exacerbated this. Take the example of a shoe factory, since Romania is known for producing the best shoes in the world. All the most high quality leather would be reserved for shoes that were designated for exports. Shoes that were sold in Romania itself only used the leather that wasn't fit for export. The economic crisis led to further corruption, so people would steal the best domestic leather off the lines, leading to even worse quality for Romanian shoes on the market.

In the end, Romania eliminated its national debt in 1989. But that same year, the political unrest caused by the impending fall of the Soviet Union led to revolution in Romania. The Romanian Revolution was the only one in the Eastern Bloc to turn violent, ending in the conviction and execution of Ceaușescu and his wife.

The conclusion seems to be that the sharp drop in standard of living due to austerity was what led to the more severe consequences for the leader who put them into place.

What do you think? Is Romania’s example instructive for the US?

(Special thanks to Dr. Ionut Florescu for the detail on austerity in 1980s Romania)