Upside Down Meritocracy

There are many appalling things I have learned to tolerate over the years except one: the lack of common sense. You can correct uncivilized manners, you can control vulgar speech, you can put a stop to violence but you can never treat stupidity. Few days ago I have read in the papers something utterly outrageous. According to Gheorghe Pogea – the Romanian finance minister, “in 2015, the public sector employees’ average salary will be in excess of RON 3,400, while the private sector employees will earn 31% less, averaging around RON 2,350”. He then added that “the 25% gap between the public employees (currently earning around RON 2,200) and the private employees (currently earning around RON 1,760) will become 30% in the coming years”. Let’s all move a step back, take a deep breath and start dissecting this common sense atrocity.
It is absolutely correct that the current salary gap between the public and the private sector stands at 25%. By the same token, in 2015 the salary gap will increase to 46%. The finance minister intentionally flipped the gap sign, giving the audience the impression that the private employees will earn 31% less than the famously inefficient and counter-productive public employees. In fact, the private sector employees’ tax contributions will feed into the state budget such that, on average, a public employee will earn 46% more than a private sector employee. At the end of the day this message is aimed at window-dressing the budget deficit in the eyes of the IMF and the Romanian public.
We all remember, back in November 2008, how the President and the National Bank Governor were erroneously predicting steady positive GDP growth for 2009 and vehemently denying the necessity of an IMF loan. The reality could not be further away from their politically-driven estimates:
• Romania’s GDP went down 8.8% in 2009 so far, according to data supplied by the National Statistics Institute
• In May, the IMF agreed for a 2-year stand-by arrangement worth EUR 13 billion whereas EU signed-off for a contribution of EUR 5 billion to the bailout
The rescue package has been agreed under austere conditions in which the Romanian government would take all the necessary measures to ensure that the budget deficit for 2009 would be less than 7.3% of GDP. These measures should translate into spending cuts and reductions in public sector wages.
Under these circumstances, the Romanian finance minister is pre-occupied with doubling the current salary gap between the public and the private employees. His magic solution seems to rely solely on surreal economic growth for the next half decade. According to data presented by Mr. Pogea, “in 2010 Romania’s GDP will reach RON 525 billion, from RON 497 billion in 2009 and it will continue to grow to RON 944 billion until 2015”. These estimates could be translated in annualized GDP growth rate terms: 5.6% in 2010 and 12% thereafter until 2015.
Allow me to laugh loudly. If the local government agencies’ forecasting expertise has been totally off for years (“Three Strikes – A Strikeout), I have strong doubts about the accuracy of the aforementioned numbers. Lower than predicted budget revenues (e.g., VAT revenues) combined with higher than predicted budget spending (e.g., growing public sector wages, ever-growing under-funded state pension account) make me believe that new negotiations with IMF will take place in 2011. It is very obvious that the Romanian economy does not have enough private sector employees to financially sustain the double-burden represented by the public sector and the retired population. Consequently, the current limited and expensive access to the sovereign debt market, due to 2008 credit rating downgrade to junk level, will make the negotiations with IMF the only plausible solution. Nonetheless, another loan will never fix the core issues.
Until then, sleep tight Mr. Minister!