Hardened Budget Constraints in Romania: An Approach by CGE Modeling

Abstract

This study estimates the effects of hardened budget constraints on the Romanian economy and tests a market price-based policy by removing state subsidies. As most subsidies are granted to and through the energy sector, the analysis focuses on energy issues. A general equilibrium approach is used for the empirical application. The results fit the theory and show that removing subsidies contributes to eliminating distortions: energy intensity declines, the Gini coefficient drops and general welfare improves. The main effects of applying a cost recovery policy are the improvement of agents' self-financing capacity and of their investment structure. Surprisingly, production cost falls in all sectors, since cross-subsidies are removed.

Islamic Republic of Iran: Selected Issues Paper

“…Sandu-Loisel (2007) contrast the long-term positive effects of abruptly cutting off subsidies to the less successful outcome of the gradual price and subsidy reform adopted by Romania during the 1990s in order to avoid a social crisis.…”

Islamic Republic of Iran: Selected Issues Paper

“…Sandu-Loisel (2007) contrast the long-term positive effects of abruptly cutting off subsidies to the less successful outcome of the gradual price and subsidy reform adopted by Romania during the 1990s in order to avoid a social crisis.…”