ACADEMY OF ECONOMIC STUDIES FACULTY OF BUSINESS ADMINISTRATION IN FOREIGN LANGUAGES (ENGLISH)

GRADUATION THESIS:
THE IMPACT OF THE CURRENT FINANCIAL CRISIS ON: IRELAND AS A DEVELOPED KNOWLEDGE BASED ECONOMY ROMANIA AS A WEAK KNOWLEDGE BASED ECONOMY
- COMPARATIVE ANALYSIS -

Scientific Coordinator, Prof. Dr. Christina Marta Suciu

Graduate, Paul Gheorghiu

Bucuresti 2009

Table of Contents

INTRODUCTION ..................................................................................................................................................2 CHAPTER I: KEY CONCEPTS..........................................................................................................................4 I.1. GENERAL MACROECONOMIC INDICATORS .................................................................................................4 I.3. THE KNOWLEDGE BASED ECONOMY - MAIN CHARACTERISTICS ...............................................................8 CHAPTER II: IRELAND CASE STUDY .........................................................................................................13 II.1. IRELAND AS A KNOWLEDGE BASED ECONOMY .......................................................................................13 II. 2. ECONOMIC DEVELOPMENTS IN IRELAND PRIOR TO THE FINANCIAL CRISIS ..........................................16 II. 3. IRELANDS CURRENT SITUATION.............................................................................................................18 II. 4. MEASURES ADOPTED TO TACKLE THE FINANCIAL CRISIS .......................................................................20 II.4 CONCLUSIONS.............................................................................................................................................20 CHAPTER III: ROMANIA CASE STUDY ......................................................................................................22 III.1. ROMANIA AS A KNOWLEDGE BASED ECONOMY ....................................................................................22 III.2. ECONOMIC DEVELOPMENTS PRIOR TO THE FINANCIAL CRISIS ..............................................................25 III.3. ROMANIAS CURRENT SITUATION ..........................................................................................................27 III.4. MEASURES ADOPTED TO TACKLE THE FINANCIAL CRISIS ......................................................................30 III.5 CONCLUSIONS ...........................................................................................................................................31 CHAPTER IV: MICROECONOMIC SITUATION. CASE STUDY: AA COMPANY .............................32 IV. 1. WHAT IS AA COMPANYS REAL SITUATION?..........................................................................................33 IV.2. PERFORMANCE: ACT DECISIVELY, BASED ON RELIABLE DATA ..............................................................35 IV. 3. MANAGE YOUR COSTS, NOT JUST LOWER THEM ....................................................................................36 IV. 4. CASH IS KING ...........................................................................................................................................37 IV. 5. THINK LONG-TERM, THE CRISIS WILL PASS ...........................................................................................39 IV. 6. PREPARE FOR POTENTIAL RISKS.............................................................................................................40 IV. 7. DONT FORGET ABOUT TAX AND LEGAL IMPLICATIONS ........................................................................41 IV. 8. COMMUNICATE .......................................................................................................................................42 IV. 9. WHERE TO FINANCE FROM? ...................................................................................................................42 IV. 10. RECOGNISE THE VALUE OF EMPLOYEES ..............................................................................................43 IV. 11. CONCLUSIONS: ......................................................................................................................................44 CONCLUSIONS ...................................................................................................................................................45 REFERENCES: ....................................................................................................................................................47 DECLARATIE PE PROPRIE RASPUNDERE.................................................................................................49 APPENDIX............................................................................................................................................................50

Introduction

I believe the purpose of the thesis is to quantify all the theoretical and practical knowledge accumulated by a student throughout his/her years of study into one piece of work which best represents his/her areas of interest. In my case, macroeconomics has been one of the courses which both inspired and gave me the confirmation that pursing my university studies in the economic filed was the right choice. Back when I was still in high school; I managed to obtain a few months free membership with Financial Times. I remember reading the macroeconomic news, statistics and analysis with the most excitement. Upon completion of the macroeconomics course in the 2nd semester of the 1st year of studies, I also acquired the theoretical background which helped me better understand the causes and effects of different kinds of macroeconomic changes. I have to admit that I still get a pleasant sensation whenever I take Mankiws macroeconomics book in my hands. Macroeconomics is a great subject because it provides us with tools by which we can judge the performance of an economy. It is generally assumed that the objective of the government in any country is to raise the material well being of the country. Now the question is how to define the material well being of the country. These questions are discussed in welfare economics which forms a part of macroeconomic theory. Macroeconomic theory is also useful to the governments for formulating appropriate policies such as monetary policy, fiscal policy, income policy. All these aspects impact our daily lives to a great extent. Without having an efficient framework which supports and promotes innovation, the society will have a difficult time progressing. The 21st century is said to be the century of the information society. The tremendous rate at which the internet and telecommunication services have developed determined are indications of the speed of advancements in todays society. People nowadays have instant access to an unlimited supply of information and they can share and exchange ideas and feelings at a glance. Since I try to keep up with the insane pace dictated by our society, I read a lot of articles on various economic themes. Reading articles also gave me the idea of tackling the issue of comparing the impact of the current financial crisis on two very different economies. The choice for Romania was 2

rather obvious, I wanted to understand more about the macroeconomic mechanisms of my own country. Ireland was also a good choice because of several reasons. Firstly, I was pretty impressed by the historic background of quick and sustainable development which characterized the Celtic Tiger in the years prior to the financial crisis, so Irelands quick fall from grace was a real surprise for me. I was very curious as to understand why Ireland, a positive example for all developing countries in Europe had such a disastrous fate during the crisis. Also, Ireland having English as its official language, made it easier for me to obtain statistical data in order to support my research. The reason why I found it relevant to insert knowledge based economy aspects into this work is because I believe that it is important to understand the changes which reshape the way we think about economy as a whole. The knowledge based economy concept is a rather new concept and its general principles are very valid and applicable to our modern economic context. The purpose of this thesis is to try and explain which were the main causes behind Romania and Irelands vulnerability in the face of the economic crisis. I attempted to find these causes by looking at both countries historic performance and by comparing their reaction to the threats posed by the crisis. I also tried to investigate why Irelands superior state as a knowledge based economy didnt help it overcome the crisis with much greater ease than Romania. The microeconomics part of this thesis, tries to identify which are the differences in terms of approach aimed at mitigating risks arisen from the economic crisis between a multinationals subsidiary in Romania and the same companys subsidiary in Ireland. The firm on which the microeconomic case study is performed is chosen from the professional services field because I personally work in a firm activating in this area and it was easier for me to obtain aggregate information and draw conclusions by having an inside view on all issues. The study also tries to identify if macroeconomic differences between the two countries also translate at the microeconomic level.

CHAPTER I: Key Concepts

In order to have a good and complete understanding of the terms used in both the macroeconomic and microeconomic case studies, an introductory overlook of the key terms and notions is needed. The chapter below forms a theoretical baseline which supports the concepts developed later. I.1. General Macroeconomic Indicators: GDP (Gross Domestic Product): The GDP represents the value of a country's overall output of goods and services (normally during one fiscal year) at their market prices, excluding net income from abroad. GDP can be estimated in three different ways which, in theory, should yield identical results. They are: Expenditure basis: how much money was spent, Output basis: how many goods and services were sold, Income basis: how much income (profit) was earned.

The GDP estimates are published quarterly, being revised constantly in order to approach greater accuracy. The most carefully watched data in each period to period change is output and consumption, in real terms (adjusted with inflation). If net income from abroad is added, then it is called gross national product (GNP). The most commonly used approach to measuring and quantifying GDP is the expenditure method: GDP = consumption + gross investment + government spending + (exports imports) The main criticisms of GDP as a realistic guide to measuring a nation's well being are that it fails to capture the period to period changes in wellbeing accurately, for example GDP increases when there are car accidents.

it includes the cost of damage caused by pollution as a positive factor in its calculations, while excluding the lost value of depleted natural resources and unpaid costs of environmental harm. Called also gross value added (GVA).

Inflation and Deflation: Inflation and Deflation, in economic terms are used to describe a decline or an increase in the value of money, in relation to the goods and services it can potentially buy. Inflation represents a sustained rise in the aggregate price levels measured by an index which reflects changes in the cost of various goods and services. Repetitive price increases decrease the purchasing power of money and other financial assets with fixed values, thus leading to serious economic distortions and uncertainty. Inflation takes place when economic pressures and anticipation of future events cause the demand for goods and services to exceed the available supply at current prices or when available output is restricted by decreasing productivity and marketplace constraints. Deflation represents a sustained decline in the aggregate prices level, by historical terms, such a phenomenon occurred during the Great Depression of the 1930s. Deflation is usually associated with a prolonged erosion of economic activity and a high unemployment rate.

Balance of payments: The balance of payments (BOP) is the statistical statement where countries record their monetary transactions with the rest of the world. Transactions are either marked as a credit or a debit. The BOP is comprised of three different categories under which the transactions are included: the current account, the capital account and the financial account. In the current account, goods, services, income and current transfers are recorded. In the capital account, physical assets such as factories or buildings are recorded. And in the financial account, assets belonging to international monetary flows of, for example, business or portfolio investments are noted.

Current account: The components of the current account are the following: goods, services, income and current transfers. Goods - These are movable and physical by nature, and in order to record a transaction under the denomination "goods", a change of ownership from/to a resident (of the local country) to/from a non-resident (in a foreign country) has to take place. Movable goods include general merchandise, goods used in order to process other goods, and non-monetary gold. Exports are marked as credit (money coming in) while imports are noted as debit (money going out). Services - Are transactions which result from intangible actions such as transportation, business services, tourism, royalties or licensing. If money is being paid for a service it is recorded just as an import (a debit), and if money is received it is recorded like an export (credit). Income - Income is money going in (credit) or out (debit) of a country from salaries, portfolio investments (in the form of dividends, for example), direct investments or any other type of investment. Together, goods, services and income provide an economy with fuel to function. This means that items under these categories are actual resources that are transferred to and from a country for economic production. Current Transfers - Current transfers are unilateral transfers with nothing received in return. These include workers' remittances, donations, aids and grants, official assistance and pensions. Due to their nature, current transfers are not considered real resources that affect economic production. Now that we have covered the four basic components, we need to look at the mathematical equation that allows us to determine whether the current account is in deficit or surplus (whether it has more credit or debit). Here are the variables that go into the calculation of the current account balance (CAB): X = Exports of goods and services M = Imports of goods and services NY = Net income abroad NCT = Net current transfers The formula is: 6

CAB=(X-M)+NY+NCT.

Budget deficit: The budget deficit means that government spending is exceeding revenues. Governments finance deficit spending by borrowing money through the issuance of bonds or more controversially by issuing money. Deficit spending is politically controversial because of the belief that government borrowing reduces the amount of money available for private investment.

I.2. General Indicators Found in the Microeconomic Section Bonds: The bond is an interest-bearing certificate sold by corporations and governments to raise money for expansion or capital. An investor who purchases a bond is essentially loaning money to the bond's issuer in return for interest. The investor can hold the bond and collect interest payments or sell the bond to a third party.

Direct costs and indirect costs: Direct costs are the costs that are traced to a specific cost objective like product/service. Indirect costs are the costs that cannot be directly traceable to a particular cost objective and incurred for multiple cost objectives.

Audit: The general definition of an audit is an evaluation of a person, organization, system, process, project or product. Audits are performed to ascertain the validity and reliability of information. The goal of an audit is to express an opinion on the person / organization/system under evaluation based on work done on a test basis.

Working capital: Working capital is a measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as: Working Capital = Current assets Current liabilities Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company is currently unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory).

Stakeholder: A stakeholder is a person, group, or organization that has direct or indirect stake in an organization because it can affect or be affected by the organization's actions, objectives, and policies.

Risk management: Risk Management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events.

I.3. The Knowledge Based Economy - main characteristics It is widely acknowledged that in the last 20 years, the share of high-technology industries in total national manufacturing production has risen considerably. This is especially true for highly developed countries. This trend is logical if you think about the fact that most developed countries have moved their medium and lower end centers of production to countries in Eastern Europe or Asia where the cost of labor is significantly lower. Hightechnology requires very well trained people and professionals, people who are traditionally paid very well. The introduction of very technological advanced production lines has also helped improve the general skill base of the labor force. A previous production worker, who has undergone training in the use of computers and robots as a production tool, can now be 8

considered a knowledge worker. Such production lines have been introduced in high developed countries in the hope of improving productivity and decreasing costs. Wealthy countries were the only ones who could afford such technology anyway. In the new economy, the knowledge component of products and services has had a dramatic increase in importance and has become the dominant component of customer value. The shift to knowledge as the primary source of value means that the new economy will be led by those who manage knowledge in an effective manner, who create find, and combine knowledge into new products and services faster than their competitors. Such trends have determined analysts to start thinking about revising classical economic theories. It is clear that investments in knowledge are yielding increasing returns. This is because they can improve the productive capacity of other factors of production, and they also speed up the development of new products and processes. Therefore investments in knowledge are the key to long-term economic development. So lets sum up which are the main interlocking driving forces that are changing the rules of business and national competitiveness. One is globalization, markets and products are more global. Products by Nike and Coca Cola are known the world over. Today, even resourcing is becoming global. Thus many companies outsource manufacturing and software development to distant locations. Another is the increasing knowledge and information which are required for a job. Efficient production relies on information and know-how; over 70 per cent of workers in developed economies are information workers; many factory workers use their heads more than their hands. And lastly, the networking and connectivity, developments such as the Internet bring the 'global village' ever nearer. The net result is that goods and services can be developed, bought, sold, and in many cases even delivered over electronic networks. Electronic commerce offers many advantages in terms of costs savings, efficiencies and market reach over traditional physical methods. You no longer have to travel long distances to meet someone and discuss important aspects concerning business, you can make all kinds of transactions using the internet and lets not forget about the fact that you can exchange knowledge and information with anyone, anywhere without encountering too many barriers. This can be seen as a response to the need of handling the know-what and know-why portions of knowledge more efficiently. However, the availability of knowledge and information over networks, has lead to its codification. This means it is acquiring more and more the characteristics of a commodity.

As I stated above, investment in knowledge can raise the returns on investment, we can use these returns to invest in even more knowledge, which leads to an accumulation of knowledge. There is thus the possibility of sustaining increases in returns on investment which can lead, to continuous rises in a country or a companys growth rate. This can prove to be one of the few ways a developed economy can still maintain a decent growth rate. The knowledge economy differs from the traditional economy in several key aspects. The economics is not of scarcity, but rather of abundance. Unlike most resources that deplete when used, information and knowledge are virtually infinite, they can be shared, and actually grow through application. The effect of location is diminished. Using appropriate technology and methods, virtual marketplaces and virtual organizations can be created that offer benefits of speed and agility, of round the clock operation and of global reach. Laws, barriers and taxes are difficult to apply on solely a national basis. Knowledge and information leak to where demand is highest and the barriers are lowest. Knowledge enhanced products or services have a lot of price advantages over comparable products with low embedded knowledge or knowledge intensity. Pricing and value depends heavily on context. Thus the same information or knowledge can have vastly different value to different people at different times. Knowledge when locked into systems or processes has higher value than when it can walk out of the door in peoples heads. Human capital is a key component of value in a knowledge-based company, yet few companies report competency levels in annual reports. In contrast, downsizing is often seen as a positive cost cutting measure. These characteristics, so different from those of the physical economy, require new thinking and approaches by policy makers, senior executives and knowledge workers alike. To do so, though, requires leadership and risk taking, against the prevailing and slow changing attitudes and practices of existing institutions and businesses. As access to information becomes more facile, the skills and competences relating to the efficient selection and use of information are becoming more crucial. Tacit knowledge is the form of skills needed to transform the codified information into something useful. Tacit knowledge or implicit knowledge, can also be seen as far less tangible than explicit knowledge and is deeply embedded into an organization's operating practices. It is often called 'organizational culture'. Tacit knowledge includes relationships, norms, values, and standard operating procedures. Because tacit knowledge is much harder to detail, copy, and distribute, it can be a sustainable source of competitive advantage. Workers will be required to have both

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formal education and the ability to acquire and apply new skills, they will increasingly be paid for their tacit knowledge skills rather than for manual work. The knowledge based economy concept places great emphasis on the diffusion and use of information and knowledge, firms search for links to promote inter-firm interactive learning, while also directing the search for complementary assets to outside partners and networks. These relationships help firms spread the costs and risks associated with innovation among a greater number of organizations. Recent trends in highly developed countries show that with the introduction of more knowledge-intensive means of production, the need for highly skilled workers has grown significantly. The fact that highly skilled workers are paid more is also a true, while this seems normal, its problematic, because a discrepancy appears between skilled and less skilled workers. Another problem occurs because unskilled workers can no longer find jobs, most of the tasks which dont require too much skill are now performed by immigrants, robots or they are outsourced. The knowledge economy is constantly evolving and should have important implications for policy makers of governments at a local, regional and national level, as well as international agencies and institutions. Traditional examples of economic success must be supplemented by new ones, for example Nova Scotia has developed Knowledge Quotients for their economy. They represent a great step forward towards understanding the implications knowledge can have on economy. However, we have to admit that measuring the contribution of knowledge has to the economy is hard, and this is because most forms of knowledge can travel freely, it is difficult to trace their use and therefore its benefits. Economic development policy should not focus on jobs created but rather on infrastructure for sustainable knowledge enhancement. This infrastructure acts as a magnet for knowledge-based companies. Countries should focus on facilitating things such as the production, transmission and transfer of knowledge with concern towards also supporting the development of regulations for information and knowledge trading at an international level, mainly investing in future knowledge-based industries rather than traditional ones For example several EU programmes now focus on market development (rather than product development) and encourage participation across national boundaries using electronic knowledge networking methods. The empirical evidence suggests that enterprises which perform R&D are more likely to survive longer and provide higher quality and better paid employment. The latest trend 11

shows that enterprises have an increased propensity to access knowledge and new ideas from around the world to grow and compete on international markets and to provide sustainable high quality employment. Investment in R&D is also at the heart of the European agenda to improve economic growth and competitiveness (the Lisbon Agenda). Following a decade of relatively stagnant growth and poor competitiveness lagging behind the US and Japan, the EU Heads of State at Lisbon in 2000 agreed a strategy to reinvigorate growth in the EU. At Barcelona in 2002 Heads of State agreed to a target for Europe for gross expenditure on R&D to reach 3% of GDP by 2010. Unfortunately, given the way things look now, this objective seems impossible. They also agreed that two-thirds of the increase in R&D should come from the enterprise sector. To conclude, knowledge economies have always been part of our lives. The difference now is that IT (Information Technology) is allowing us to accumulate and analyse this knowledge like never before .The wealth of a country relies heavily on the wealth generating capabilities of its human factors of production, enterprise and labor. These factors in turn are dependant on their knowledge to generate such wealth, hence the term knowledge-based economy is born. For an individual, assessing trends in the economy to determine valuable knowledge determines him to obtain marketable skills that allow him to generate personal wealth. Such trends by their nature do not stand still, therefore it is likely that all knowledge workers (or professionals) will have to keep an eye on their own levels of knowledge indefinitely, to ensure that they are continually improving and building upon their expertise. The detailed explanation above regarding the meaning of the term knowledge based economy combined with the notions refering to microeconomic and macroeconomic aspects are merely theoretical means for understanding the impact of the crisis on a multinational company and on the two economies under the spotlight.

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CHAPTER II: Ireland Case Study

The chapter below will present the economic situation in Ireland by analyzing the extent to which the country has made progress in becoming a knowledge based economy, the macroeconomic history of the country, the way the financial crisis affected the country and which were the measures taken by the government in tackling the effects of the financial crisis. II.1. Ireland as a Knowledge Based Economy Irelands Current R&D Performance: R&D in the business, higher education and public research institutions increased three times during the1990s. Business expenditure on R&D reached 917 million in 2001. One-third of foreign business entities in Ireland (300 enterprises) are active in R&D. These firms account for two-thirds of all business R&D. Of these, 50% spend less than 500,000 annually. Nineteen foreign business entities spend more than 5 million annually and account for two-thirds of all R&D performed by foreign business entities in Ireland (figure 1.1) One-third of local enterprises (1,000 enterprises) have some expenditure on R&D, with 85% spending less than 500,000 per year. Only twenty six of the 1,000 local enterprises have expenditure of more than 2 million annually. (figure 1.2) A more detailed view on R&D expenditure across EU states as percentage of GDP can be seen in figure 1.3. Realizing the Vision Through Policies: The governments vision represents a transformation of Irish society. Therefore it is essential that the relevant stakeholders are involved in the development and implementation of strategies for achieving this vision. To achieve the targets set out for building Irelands research and development base, the following actions are to be implemented: National Pro-Innovation Culture Develop a national pro-innovation culture supportive of invention, risk-taking and entrepreneurship 13

R&D in the Enterprise Sector Re-orient the enterprise support budget to R&D and develop a new and less bureaucratic approach to R&D support that encourages a systematic and continuous approach to R&D within enterprises; Strongly support the development of strategic research competencies (technology platforms) based on enterprise needs; Develop the seed capital markets for early stage ventures. Develop a national plan to increase the performance, productivity and efficiency of research in the higher education and the public sectors; Sustain Irelands commitment to building an international reputation for research excellence. A Highly Attractive Environment for Researchers Make Ireland a highly attractive environment for high quality researchers and research careers. Turning Knowledge into Products and Services Develop the intellectual property management and commercialisation expertise and resources necessary to ensure effective and rapid exploitation of research generated in higher education and public research sectors. Two-thirds of the current gross expenditure on R&D in Ireland is being undertaken by the enterprise sector, with two-thirds of business R&D being performed by foreign enterprises in Ireland. The higher education and public research base is performing a dual role of providing high level research across all disciplines and focused research in areas of key national interest. In addition the higher education sectors main role is that of supplying high quality graduates for both the enterprise and public sectors. The Minister for Enterprise, Trade and Employment established a High Level Steering Group in 2003 in order to determine what the policy initiatives implications were at European level for the Irish society and what actions Ireland needed to take. The Group was involved in a wide ranging consultation with all the stakeholders in the national innovation system, indepth analysis of current public and private investment in R&D and assessed the business environment for R&D in Ireland. 14

R&D in the Public Research System

Universities: An important feature of knowledge-based economies is their ability to convert knowledge from just a research base into products designated for economic and social benefit. This is dependent on collaborative research between industry and academia. Up until now, Irelands export base in high technology areas was as a result of licensed-in technologies. Into the future, real success and growth will depend on the countrys ability to transfer the knowledge generated domestically into goods and services for world markets requiring effective on-going relationships between the enterprise and academic sectors. The levels of linkages between enterprise and academia remain low, (around 19%) illustrates the percentage of companies that have active R&D collaboration with the third level sector, this being a rather sad indicator of Irelands current R&D collaboration development level. Perhaps the most important point to note in this regard is that foreign companies have a higher collaboration incidence. This is, at least partially attributable to their link with their overseas parent. We should however note in this context, that the above average incidence of joint research among foreign companies is also clearly evident with regard to links with third level education (both inside and outside Ireland). Human Resources for R&D A strong research base in any sector requires that a number of highly qualified people should be available to carry out that research. Overall, Ireland in 2007 had the equivalent of 5.1 researchers per 1,000 of total employment in the economy in 2007. The OECD average in 2007 was 6.5 researchers per 1,000, with Finland (15.8 per 1,000), Sweden (10.6 per 1000), Japan (10.5 per 1,000) and the US (8.6 per 1,000) significantly above the OECD average. These are also the only countries where researchers in the enterprise sector exceed 6 per 1,000 of total employment. Conclusion Ireland has the potential to achieve a step change in the performance of R&D over the period to 2010 and beyond. However, due to the recent impact of the financial crisis, advancements in the R&D sector are likely to stagnate or even decrease. The determinant of Irelands future economic well-being will be its success in stimulating business to do more R&D, by stimulating innovation and a entrepreneurship culture amongst researchers and fostering effective linkages between the enterprise and academic fields. 15

II. 2. Economic developments in Ireland prior to the financial crisis The roots of Irelands fall date to more than 20 years ago, when a group of economists, politicians and civil society representatives planted the philosophical seeds for the Irish economic miracle. Known widely as the Doheny & Nesbitt School of Economics, it soon became government policy that chopped taxes in half, sharply reduced import duties and embraced foreign investment; a radical transformation that gave birth to the Celtic Tiger and perhaps the most open and vibrant economy in Europe. To cynic observers, Irelands fall from grace is an overdue payback for its previous fast rise. Between 1990 and 2007 the economy grew by an annual average of 6.5%. It is easy now to consider the rise in living standards in the Celtic Tiger years as illusory, particularly as Ireland enjoyed house-price and credit booms that were big even by British standards. But to only focus on the events related to the bursting of the housing bubble would mean to miss the lasting gains that were made. Irelands expansion went through two phases. The first, which was led by exports and powered by foreign direct investment, ended roughly in 2002. Foreign companies, mainly American, provided large amounts of capital and know-how. Ireland offered in return a young, educated, English-speaking, low-cost workforce. State grants, a low corporate-tax rate and access to the EUs single market made things even sweeter. That gave way to a period of growth on weaker foundations. Low interest rates, a consequence of euro membership, led to a huge increase in property prices and spurred a building and retailing boom. The boom got an endorsement in 2004 as migrants from the EUs new member states flooded in. Continued growth gave the impression that all was well. But as we can observe now, the Celtic Tiger had already vanished. But beyond the glow that made Ireland the fourth most wealthy country in the Organization for Economic Cooperation and Development, a housing bubble had begun to form. Low interest rates, a wave of inward immigration and a bank lending spree drove housings share of the economy to 14 percent, the highest in Europe, from 5 percent, according to research done by Finfacts, a financial Web site that analyzes the Irish economy. Irelands policy makers, like their counterparts in the rest of the countries currently heavily affected by the crisis, were seduced by record tax inflows and a full-employment economy. They paid little attention to the scarce voices that warned of the crash that finally 16

came over the summer. When interest rates in Europe began to rise. Banks that had directed more than 60 percent of their loans toward property stopped lending, and asset values dropped. Irish banks, unlike those in the United States, didnt grant that many subprime loans. Rather, they lent important amounts to big property developers who themselves were encouraged to build by government-imposed tax breaks. This is because our genius freemarket entrepreneurs came up with a brilliant business model based on leverage. Basically, this meant that it was more profitable to build businesses with borrowed money than it was to do so through capital investment, all thanks to the fact that bankers had friends government friends who wrote the tax laws so that borrowings could be written off. Last month Waterford Wedgwood, a maker of luxury glassware and china, went into receivership; and Dell, a computer maker, announced it was closing its manufacturing plant in Limerick, with the loss of 1,900 jobs, and moving to Poland. One important factor was a big rise in public-sector wages after a 2002 review. State workers were discontent about the fact that they had been left behind by the private sector. The review led to an important increase in pay, a symptom also of a generally relaxed approach to public finances. Members of the Irish Government took a very relaxed approach in this situation by saying that Ireland could afford the salary increase, thus it was justified. Cuts in income tax left public finances too dependent on revenues from VAT on new homes, capital-gains tax and stamp duty. Those revenues dried up very fast once house prices and sales decreased, pushing the budget into deep deficit. The fragile economy and a continuing loss of competitiveness have made bond markets nervous about Irelands ability recover. The yield on Irelands ten-year government bonds, at 6%, is way above those of Germany, at 3.2%. Both countries borrow in euros, so the gap is a clear indicator on how creditworthy investors consider Ireland to be.

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II. 3. Irelands Current Situation The 20082009 Irish financial crisis is the official name of the economic crisis which is currently under development in Ireland. and is in part responsible for the country falling into recession for the first time since the 1980's. The made an official announcement it was in recession in September 2008, with a sharp rise in unemployment occurring in the following months. Ireland was the first country in the Eurozone to enter recession officially. Everything, it seems, has gotten worse here. The recession started early and its bite has been deeper. Housing prices have fallen by as much as 50 percent. Bank shares have gone down by more than 90 percent. The government has injected 3.5 billion ($4.5 billion) into each of the countrys two largest banks, but this has not yielded a positive impact on the markets. Shares in Allied Irish Banks and Bank of Ireland have fallen sharply. After the bursting of the property bubble, more than 7 billion may be needed to cover bad loans issued to developers. In January the government nationalised Anglo Irish Bank (considered as the builders bank), after its chairman, Sean Fitzpatrick, failed to disclose some 83m in personal loans. Even so, GDP has contracted by 8.5% in Q1 of 2009 (see figure 1.4) and the unemployment rate is set to rise to over 9% this year. And Ireland is currently looking at a projected 9% decrease in GDP over the course of the whole year. Much will depend on how the rating agencies will judge the latest efforts by the government to stabilise the public finances. After weeks of talks, it failed to win trade union support for much needed budget cuts. Yet the measures rejected by the unions were imposed, including a pension levy on public-service workers. The governments unilateral action signalled the end of twenty years of social partnership, based on a consensual approach to wage negotiations between government, employers and unions. The governments cuts are the first steps in a five-year austerity programme meant to lower a huge budget deficit. But they come at a hard time. The economy has been hit by the global credit crisis, a burst property bubble coupled with collapsing tax revenues. This years estimated budget deficit will be close to 10% of GDP (see figure 1.5), even after the latest cuts. The government hopes to restore balance by 2013, but that will necessitate spending cuts and tax increases worth 16 billion (equivalent to 8% of GDP). When the property bubble burst, it left a mark beyond the unsold houses and bad debts. The housing boom had demolished one pillar of Irelands appeal: its low costs. Inflation had 18

risen and unit labour costs (ie, pay adjusted for productivity) rose sharply relative to Irelands main trading partners. A recent study by the European Central Bank determined that Irish unit labour costs had risen by 30% between 1999 and 2007, the biggest jump in the euro area. A steady current-account surplus in the mid-1990s had turned into a big deficit a decade later, a sign that Ireland had become too expensive. The numbers of people asking for unemployment benefit in Ireland rose to 326,000 in January 2009, the highest monthly level since records began in 1967. Most of the job losses in 2008 were recorded in the construction industry. The biggest problem is that 2009 will see the job losses in construction continue and they will eventually spread to the rest of the real economy. Yet the pressing task remains to keep the budget deficit within normal boundaries. The mini-budget in April was the fourth fiscal package in a year. In February, in the teeth of union opposition, the government introduced a tax on public-sector pensions that cut net pay by an average of 7.5%. The problems will get worse in April. Income-tax rates will probably rise, some capital projects may be put on hold and more current spending will be cut. The Irish however insist on keeping their 12.5% corporate-tax rate. Still, once the economy hits bottom and the new measures take their full effect, the 2010 deficit should be less scary to general public perception and the markets. Some economists believe that an agreement that cuts public and private pay in tandem is necessary. As a euro member, Ireland cannot devalue it currency to restore competitiveness, so wages must fall. A Dublin Chamber of Commerce survey identified that nine out of ten firms were reducing or freezing salaries; almost a third of respondents were cutting executive pay by 10% or more. In America and Britain, policy is oriented towards avoiding deflation, which raises the real cost of debt. But Ireland tries to find salvation in lower wages, even though its households are also heavily indebted. Whereas many countries are planning on lifting their economies by fiscal expansion, Ireland is tightening its budget. Few other countries face such big deficits. By implementing these measures, the Irish hope for a reward in improved confidence among foreign investors and at home.

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II. 4. Measures adopted to tackle the financial crisis The Governments main economic and budgetary principles are geared at achieving further significant, sustainable growth while operating responsible fiscal policy. Government policy is concentrated on rebuilding as soon as possible, by raising Irelands productive capacity, particularly in terms of public infrastructure and ensuring high-levels of high-quality employment, and in doing so to improve quality of life and achieve a fairer society. Delivery of the medium-term economic policy and investment framework as set out in the National Development Plan 2007 2013 is the key priority for the Government to raise Irelands productivity, enhance competitiveness and secure future prosperity. The Government is committed to making significant progress in reaching its environmental targets and is implementing an extensive range of measures as set out in its new National Climate Change Strategy and initiating a carbon report with this Budget. The Governments guiding principles for fiscal policy for 2007 2012 as set out in their Programme for Government are to: Keep the Budget in broad balance and fully within the commitments under the Stability and Growth Pact. Retain flexibility to deal with any future shocks Set aside a minimum of 1% of GNP per annum to provide for the future pensions of todays workers. Implement a series of significant and sustainable increases in key public services such as pensions, health and schools. Keep the overall tax burden low and implement further changes to enhance the rewards of work while increasing the fairness of the tax system.

II.4 Conclusions Ireland clearly has a well structured knowledge based economy development strategy. This strategy, prior to the financial crisis, was one of the governments main priorities. However, due to the insufficient development of the countrys domestic R&D systems and because of the rather insufficient cooperation between universities and the business community, Ireland failed to position itself in such a way as to mitigate the negative effects of 20

the crisis by having a strong knowledge based economy. In the years prior to the financial crisis, Ireland failed to notice the fact that its growth was no longer sustainable. The real estate bubble constantly increased its proportions until, with a little help from the US subprime credit crisis, it burst sending the economy into deep recession. The current government is faced with the daunting task of reducing the budged deficit and trying to bring growth back to a shattered economy. In the next chapter, the analysis will try to unveil how the crisis affected a developing country such as Romania, which also had a real estate boom but with an economy based on weaker macroeconomic fundamentals. At first glance one would expect Romanias faith to be at least similar with the situation in Ireland, the truth is to be unveiled in the analysis below.

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CHAPTER III: Romania Case Study

Like all ex communist states, Romania only started experiencing market economy in its real sense at the beginning of the 90s. Ever since the fall of the communist regime, Romania has been in a constant transition period. Drastic need of reform is felt in pretty much every area of activity. Romania, although trying to embrace the concept of knowledge based economy, it fails to consider it as a priority. That is why most of our bright minds are seeking better working conditions abroad, being creative and transforming their knowledge into tangible results for someone else. The impact of the crisis hasnt been as disastrous as anticipated in Romania mainly because of the low levels of foreign debt, a good policy carried out in the last decade by the central bank and the attractiveness of the countrys low cost profile. The governments response to the financial crisis, although insufficient has still saved the country from total disaster. III.1. Romania as a Knowledge Based Economy Romanias Current R&D Performance: R&D expenditure in Romania has had a modest dynamic until now, being situated under 0.4% of GDP annually. It is currently at 10% of the target set out by the EU. Due to the enhanced competition brought by Romanias integration in the common market, R&D activities will provide the only solid ground on which Romanian companies will be able to resist on the market. Investment in R&D will yield technological advancements which in turn will lead to the competitive advantages Romanian companies need in order to survive on the market. The disparities between research and development equipment available in Romania and that found in more developed EU countries should be minimized as soon as possible. Renewing this equipment, especially for universities and state controlled research centers is a daunting task, especially given the fact that Romania spends only about 650mil or 0.54% of GDP on R&D (figure 3.1). According to the 2000 Lisbon Agenda, which was ratified by the parliament, Romania should aim at spending 3% of GDP on R&D activities but given the current economic crisis, this objective seems impossible even for a medium term effort. 22

The Evolution of Researchers: Because the R&D field is chronically underfinanced in Romania, the number of researchers has dropped constantly during the past years, while the average age has gone up at an alarming rate Low wages, material resources which are completely inappropriate in order to obtain performance, as well as opportunities provided by Research programmes run by other countries have gradually led to an increase in the average age of the R&D highlyqualified staff, so that approximately 60% of the total number of researchers are over 40 years old. A lot of skilled young researches opted to leave Romania and work abroad because of the better conditions offered. Currently the share of R&D personnel in the total active population is still low: 4.81 R&D personnel per 1000 employees and 3.13 researchers per 1000 employees. (figure 3.2) Romanias R&D Policies 2007-2013: According to the principles set up by the Lisbon Strategy, between 2007-2013, policies related to science and technology are considered key instruments for the future development of the EU. The essential role research and development plays in offering competitive advantages has been recognized and confirmed by the European Commission many times. In Romanias case, quickening the enhancement of economic competitiveness is a post EU integration requirement which has been set up in order to ensure that Romania will surpass the technological disparities it currently faces as compared to the rest of the EU member states. From this perspective, Romania should be directly concerned with improving the competitiveness of the innovation and R&D systems which should provide the necessary infrastructure for: The internal growth of scientific technical competency sources which can assure development of high level equipment and technical specifications, necessary for developing the advanced technology fields of the economy. Enhancing the degree of assimilation of knowledge, services and advanced technologies related to the general economic environment in order to cope with the technological advancements happening at European and international levels. The timely assimilation of such knowledge, services or technologies will ensure durable growth in terms of economic competitiveness.

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The most important R&D policy that could be found related to Romania is the National Strategic Reference Framework 2007-2013 (NSFR) NSRF is implemented through Operational Programmes under Objectives Convergence and European Territorial Cooperation. The key aims of the National Strategic Reference Framework 2007-2013 (NSRF) are to strengthen the strategic focus of Romanias Economic and Social Cohesion and Regional Policies and to make the correct and appropriate linkages to the European Commission policies, notably the Lisbon Strategy, which builds policies for economic growth and the creation of jobs. The NSRF has its genesis in the National Development Plan (NDP) which was developed as a tool to guide National, European Union (EU) and other funding sources available to Romania. It justifies and prioritizes public investments related to the European economic and social cohesion policy and defines Romanias multi-annual strategic planning and financial programming. The NSRF is also correlated with Romanias 2007-2025 Strategic Concept of Spatial Development and Reintegration in the European Spatial Structures. The NSRF demonstrates how Romania intends to build environmental sustainability and equality of opportunity to fight social exclusion into the strategies. The NSRF has six priority axis: Priority Axis 1: An innovative productive system Priority Axis 2: Research and Development for competitiveness Priority Axis 3: Information and Communication Technology for private and public sectors Priority Axis 4: Increased energy efficiency and sustainable development of the energy system Priority Axis 5: Romania as an attractive destination for tourists and businesses Priority Axis 6: Technical Assistance

R&D and the educational field: Universities are fundamental for integrating advanced research with education. They have a decisive role in the dissemination of knowledge at a social and economic level. Therefore, universities are very important in promoting a knowledge based economy. Investing resources in order to help universities pursue research ambitions can contribute to the achievement of the objective of creating a knowledge based economy in Romania. One of the policies pursued in the last few years by the Ministry of Research and Education was that of developing the R&D specific infrastructure in order to lower the disparities in 24

terms of research equipment between Romanian research centers and the rest of the EU. This objective was pursued in a few distinct stages starting from the existing human potential and the prior performance related tot eh R&D field: During period 1998-2002, a number of research grants have been given for projects related to Research centers for multiple users. These centers were located in universities and were financed by the World Bank. The result was the creation of 34 centers in 15 universities. During period 2000-2004, The National Plan for R&D and Innovation, which is the main financing instrument in the R&D field has set up a number of excellence centers promoting R&D activities in certain key fields. The excellence centers were set up based on previously successful R&D initiatives coupled with updated and modern strategic development plans. The states contribution within these excellence centers amount to 30% of total costs, the financing coming from various EU action plan programmes. Conclusion regarding Romanias R&D performance: With a delayed start, Romania is undergoing a fast restructuring period that has been accelerated by the European integration process and the impact of structural funds. In search for a frog leap, the R&D system has received a credit of a consistent public spending, which will be managed under a new strategy. This attempts to recover the currently lost connection between the business and research sectors and to regain the brains in terms of knowledge production. The non-research push for innovation is still unclear, as no fiscal or other horizontal incentive has been put in place.

III.2. Economic developments prior to the financial crisis Brief History: The Romanian economy has been transformed over the last decade, experiencing unprecedented rates of growth in productivity, employment and living standards. Like any other economy in the region, the advances in science and technology are having a significant 25

impact on virtually all aspects of Romanian society and economy as a whole and have, compared with growth in domestic services, been responsible for much of the increased prosperity of recent years. Lets begin with a short resume of the last years. After Romania managed to avoid default in 1999 with the help it got from the IMF, public debt in Romania as a percentage of GDP has been relatively low during the last years. Compared to countries from Western European government debt in Romania and budget deficits can even be considered modest. The budget deficit fluctuated around 2% of GDP after 2000 (figure 3.3), while the public debt of Romania measured as a percentage of GDP has been even shrinking, from 26% in 2000 to some 12.40% in 2006. This is mainly because the GDP has been growing at a much faster rate than public debt. Those figures were perfectly fine even with the stability and growth pact of the EU, even though, during the last years the EU urged Romania not to loosen its fiscal policy. On the other hand, the problem here (when only focusing on the good looking figures) lies in the method of measurement in combination with an additional factor, the weak tax collection in Romania. Romanias GDP (figure 3.4) experienced strong growth in recent years (up to over 8% in 2008) and grew even stronger than public debt, which in absolute terms also has been growing, though, at a slower pace. One could assume, that this way sustainability of debt could be taken as granted (as a rule of thumb), as public revenue should increase proportionally with GDP growth and money could be paid back in the future. However, this way of reasoning has not been applicable in Romania. Romanias fiscal sector had to face decreasing revenues all over the last years and an eroding tax base, even though, together with GDP growth, also employment in Romania was on the rise. The tax reforms which have been introduced so far yielded only marginal increases and could not make up for the weaknesses characterising the tax collection system and the still negative impact of high social contributions. Romanians have always been inclined towards favourising tax evasion and the propensity to activities in the shadow economy (estimated to be somewhere around 30% of GDP) might play additional roles. Hence, we can conclude, that even if other countries might have more debt, both absolute and relative to GDP, they usually have also better prospects to pay the debt back. Romania should urgently revise its fiscal code to the core, and it should introduce more severe punitive measures for those who are found guilty of tax evasion or other fiscal crimes.

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The notions mentioned above are also underpinned by the way Government spending in Romania is often allocated. Government spending lacks essential planning and in the because of this it has been largely allocated to current spending, rather than to badly needed long-term investments, like infrastructure or other, competition rising measures. Last years, for example, Romanian public sector employees, especially teachers and professors claimed a pay increase of 50% and in the end, they were granted increases of up to nearly 30% (according to the salary level). While much needed long term-investments in education (increasing quality and quantity) would have been a good decision, even at the cost of higher public debt, such populistic measures seem at the current economic stage of Romania desirable, but out of place. Another problem is the fact that public debt in Romania is mainly externally financed. The biggest share of external debt in Romania is held by the private sector, though. This is because of the surge in consumption characterizing Romania, which is often credit financed. Just like government debt, this is mainly external debt. And even though, this problem here lies mainly with the private sector it could easily have public consequences. Due to the rather unforeseen financial crisis investors trust in emerging markets in general, and in particular Romania is in decline, while exports tend likewise to decline. This is true for Romania, which is deeply involved in the strongly affected automobile industry, though Dacia has some fine sales due to its cheap vehicles. As a consequence, the anyhow deeply negative current account of Romania is set further under pressure what again detracts investors trust and makes external sources for financing, both private and public debt harder and more expensive to access.

III.3. Romanias Current Situation When talking about the public debt and external debt of Romania we have to face a two-way truth. Firstly, the public debt of Romania is rather low, by both international and European standards. The same is true, second, for external debt. On the other hand, newspapers all over the world reported that Romania was in need of a loan in order to avoid national bankruptcy and external help was needed in order to avoid default. The International 27

Monetary Fund, IMF, and the EU are the fitting institutions in this regard. The IMF lent 12.95bn euros, the European Union provided 5bn euros and the World Bank lent 1bn euros. The European Bank for Reconstruction and Development (EBRD) is to invest up to 1bn euros in Romania over two years. Romania is the third EU nation to be given IMF aid recently, after loans were given to Latvia and Hungary. The IMF measures under the plan are aimed at strengthening fiscal policy further to reduce the government's financing needs and improve long term sustainability, thus preparing Romania for eventual entry into the eurozone. In just a few months, Romania's economic fate has turned. From a country which last year registered the EU's highest growth rate, it is now losing thousands of jobs mainly in the chemical and steel sectors, and facing the collapse of a property boom. After an election year in 2008 the budget deficit reached 5 percent of the gross domestic product (GDP) at yearend. Now the country has to drastically cut spending and find solutions to limit the income drop considering the slight chance of an economic advance this year. The European Commission's prognosis pinned the budget gap at 7.5 percent of the GDP this year, without including the spending cut measures. The government has targeted a 2 percent budget deficit this year but in a scenario of a 2.5 percent economic increase. Instead of focusing on narrowing the budget deficits during the years of economic advance, the government spent massively. The budget deficit should have been widened only during a crisis when fiscal measures are required to prop up the economy. About half of the EBRD loan would be dedicated to the financial sector, with the remainder invested across the broader economy, including in the corporate, energy and energy efficiency and national and municipal infrastructure sectors. The Romanian economy shrank 6.4% in first quarter 2009 compared with the first quarter of 2008, confirming that the country had entered a recession. Romanian gross domestic product contracted 3.4 percent in the final quarter of 2008, according to the statistics institute. Recession is traditionally defined as two consecutive quarters of negative growth. The agriculture sector registered a 7.6 percent decline in activity in the first quarter and the industrial sector 1.4 percent. The Romanian government has borrowed close to 20 billion euros from international financial institutions in order to stem the effects of the global financial crisis. But few in the country seem to know precisely how the money will be used and whether it will have a more positive than constricting effect. The International Monetary Fund (IMF) announced Mar. 25 it would grant a loan of close to 13 billion euros to Romania. The country is to receive another 28

7 billion euros from other lenders, such as the European Union (EU), the World Bank (WB), and the European Bank for Reconstruction and Development (EBRD). The money is expected to come in over the next two years. Romanian authorities have negotiated to repay it by 2015, at an interest rate of 3.5 percent annually. After Hungary, Belarus, Ukraine, Latvia and Serbia, Romania becomes the sixth country in Eastern Europe to borrow money from the IMF in order to tackle the effects of a financial crisis that originated in the U.S. and Western Europe, and spread eastwards thanks to the economic liberalisation intensively promoted in the region since 1989. The global financial crisis has taken its toll on the Romanian economy, which has grown mostly on the basis of increased consumption over the past decade. The threat of redundancy looms large, in both the private and the state sectors. The housing market has slowed down, and many construction sites for apartment buildings and luxury residential complexes have been left abandoned. Romanian producers have also been hit, since the major trading partner of the country is the rest of the European Union. The banking sector, made up mostly of Western European banks, has become reluctant to give out loans. This is the main purpose for which the IMF money is to be used, according to official statements. The idea is that IMF money would allow the National Bank to soften requirements on reserves to be deposited by banks for the credits granted, in turn making them more inclined to public lending. Currently, commercial banks are required to deposit in the National Bank reserves representing 40 percent of the value of loans in foreign currency and 18 percent for loans in the national currency. Following the IMF deal, the reserve requirements would be reduced very gradually, and starting with those for foreign currency, where the market is less active. The billions borrowed by Romania are additionally supposed to help stabilise the national currency. Romania is much more integrated in the European and global economy today than ever before. A depreciation of the currencies in the countries which have still not adopted the euro (like Romania) would cause a chain reaction, negatively affecting trade between these countries. The IMF decision to provide this money for Romania takes into consideration the larger picture, rather than only Romania's specific situation, and this is how we can account for the very big amount granted.

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While the IMF deal is usually considered, both in Romania and at the EU level, a necessary boost to help the country avoid a deep recession, there is some doubt whether the loan is appropriate.

III.4. Measures adopted to tackle the financial crisis After the European Commission expressed concern regarding the need for anti-crisis measures, Prime Minister Popescu-Triceanu asked his ministers on 17 November 2008 to start thinking about measures to support the national economy and to have them ready by the following cabinet meeting; the prime minister never mentioned the word crisis. The proposed plan of measures was going to inject some 10 billion into the economy, including tax incentives, such as a 10 percentage point cut in social security contributions, tax exemptions for reinvested dividends and a 5% tax bonus for the timely payment of taxes. However, as soon as it was appointed in December 2008, the new government found that the budget deficit for the 2008 financial year was in excess of 5%, as a result of overdue payments accumulated by the previous government. Anti-crisis measures announced by government: - investments worth 10.2 billion or 20% of all budget spending and 7% of gross domestic product (GDP) for infrastructure works, and the allocation of an extra 2 billion to pay for the outstanding debts of the previous government; - tax exemptions for reinvested profits, effective from the second quarter of 2009 following a motion by the social partners; - support for small and medium-sized enterprises (SMEs) through a guarantee fund for the loans granted to SMEs and through the capitalisation of two banks following a motion by the social partners; - improved mechanisms for absorbing European funds, accelerated fund drawing procedures, the promotion of public-private partnerships and the elimination of bureaucracy following a motion by the social partners;

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- an extension of the unemployment benefit period by three months, as well as an exemption from taxes and charges for technical unemployment benefit that is, when employers temporarily suspend workers; - co-funding of 50% towards continuing vocational training for unemployed people and employees; - legislation regarding the minimum welfare pension; - consultation, after 15 April 2009, with the social partners on matters related to pay increases and the law regarding standard principles of wage formation for public servants; - a moratorium for 2009 on the salaries of high-ranking civil servants and public officers, affecting about 7,000 persons.

III.5 Conclusions It is obvious that the almost inexistent efforts undergone by the Romanian government towards making progress in the area of knowledge based economy have had little quantifiable effect in minimizing the impact of the financial crisis in Romania. The country was in a bad shape to begin with when the crisis struck. Although it had very strong growth in 2008, the budged deficit remained high and infrastructure investments failed to show results. Given this, it is rather remarkable that Romania managed to ride the storm so far without being forced to implement some radical measures such as neighboring Hungary for example. Seeing and understanding which were the main causes and effects of the financial crisis on the macroeconomic development of Romania and Ireland, only strengthened my belief that a microeconomic comparison should also be performed if we are to have a full understanding of the way the financial crisis is affecting our lives. Such a comparison is being performed in chapter IV.

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CHAPTER IV: Microeconomic situation. Case Study: AA Company

Microeconomics has always been the more tangible for public perception than macroeconomics because it influences peoples lives to a much greater extent. Developments in the microeconomics field eventually transfer to the macroeconomics field. In order to best describe the impact of the financial crisis on a microeconomic level in Ireland and Romania, I decided that the best approach would be to compare two local subsidiaries of the same company. Because of confidentiality related issues, the firm will receive a generic name AA Company but the actual figures used in the case study are closely and proportionally linked with the real situation. The case study will focus on the way the two subsidiaries are trying to improve their activity and market position during the current financial crisis. AA Company is one of the largest professional services firms in the world. It is present in over 150 countries, employing over 100,000 people and generating yearly revenues totaling 28bn. Professional services are infrequent, technical, or unique functions performed by independent contractors or consultants whose occupation is the rendering of such services. AA Company has three main service lines: Assurance (financial audit) Tax, (international tax planning and compliance with local tax laws, human resourcing consulting) Advisory - mainly consulting activities which cover Strategy, Performance Improvement, Transactions Services, Business Recovery Services, Mergers & Acquisitions and Crisis Management in a range of specialist areas such as accountancy and actuarial advisory. The company is organized as a limited liability partnership. The legal structure of a limited liability partnership is very different to that of a company, and as such the global firm 32

is in fact a collection of member firms, that are run autonomously in their respective jurisdictions. Because of the scale of services offered by AA Company, we will only be focusing our analysis on its Advisory department. About 4.9bn out of the total 20bn in revenues is generated by the companys advisory service. During uncertain and volatile times it is important to make tough decisions early. Here are 10 points that will help AA company focus on key value drivers and risks across their business. The 10 points are structured in Similarities and Differences between the practices in Ireland and Romania. The future holds success for those who best position themselves to take advantage of the eventual upturn. IV. 1. What is AA companys real situation?
Similarities:

During an economic downturn the companys situation is of a particularly volatile nature. It is critically important to work with an exact analysis of the real situation, not with best estimates. When analysing AA Companys market position, we will focus particularly on: Business partners (banks, etc.): Do they have correct information about the companys situation and plans? AA Company has always been very open and transparent in its relationship with business partners. Due to its reputation and because building a relationship based on trust is extremely important, AA Company always makes sure that it informs its business partners of all relevant aspects as soon as it is needed. This ensures that AA Company is treated in turn as a real partner and it benefits from a fair treatment at all times. Competitors: Will they change its product or services portfolio, lower prices or establish strategic partnerships? It is obvious that all companies are trying to position themselves as best as possible during these turbulent times. Companies working in the professional services field are among the fastest to adapt to new economic conditions. That is why, it is obvious that AA Companys competitors will try to focus on offering more crisis oriented products, lower their prices in order to accommodate clients needs and establish strategic partnerships which will allow them to have a competitive edge. Customers: will they prefer a cheaper version of the product, buy a smaller volume of the same product or service or will they look for brand new alternatives? It is 33

extremely difficult to maintain the same fees which were in place before the financial crisis. This is mainly because many of the companies have completely abandoned their consulting budget, by reducing it to 0; which means that only companies in great need of reform will spend money on consultancy services. Lower demands means that the suppliers, such as AA Company will have to lower their fees. It is difficult to find alternatives for good quality advisory services, however, many companies might try to call upon smaller firms to provide them with consultancy rather than large consecrated and rather expensive companies. Suppliers: Are your contractual terms favourable? Even though AA Company is entirely focused on providing services, its main assets being people, it still has some suppliers which generate an important amount of costs. The relationships with these suppliers needs to be reevaluated and contracts for rent, cleaning services etc should be revised in order to make sure that they reflect the realities found on the market. Based on quality data, AA Company will model a range of financial, operational and workforce scenarios that reflect the potential impact of the downturn on the business. AA Company is prepared to adapt them as needed based on market changes and explore their strategic options as they go. Differences: Business partners The similarities section outlined the fact that AA Company has an excellent relationship with its business partners. However, AA Company has only set up its activities in Romania in 1991, while it operates in Ireland since 1978. Because of the fact that the firm is older in Ireland, it has long lasting very strong relationships with its business partners. The Romanian subsidiary of AA Company doesnt have such long term relationships with its most important business partners which means that trust levels are not as high as they are in Ireland. Competitors: AA Company is a market leader by market share in Romania. This means, that the company has to find ways of at least keeping its good market share, and not allowing its customers to slip to competitors. AA Companys subsidiary in Ireland however is positioned on the 2nd place in terms of market share. This means that it has to be more aggressive in attracting customers from its main competitors. Customers: AA Company had a large costumer turnover in Romania lately, this means that the company didnt have time to develop strong relationships with its clients. Not 34

having strong relationships means that customers will be more likely to switch to a competitor which offers them the same quality of services at a lower price. However, the Irish branch of AA Company has a very important core of customers with whom they have collaborated in the past two decades. This core of important clients is unlikely to shift anywhere even if marginally better financial terms would be offered. Suppliers: The Romanian subsidiary of AA Company incurs its highest supplier costs with rental expenses. The renting contract has been renegotiated at the beginning of the year in the firms favor. AA Companys Ireland offices are however mainly owned by the company, this means that supplier cost indicators are significantly lower in Ireland, which means they wouldnt be able to obtain a very significant reduction in costs by renegotiating its supplier contracts.

IV.2. Performance: Act decisively, based on reliable data Similarities: Successful players demonstrate flexibility and agility. Now more than ever, AA Company needs to have access to high quality, timely management information and appropriate key performance indicators (KPIs). History shows us that businesses that succeeded during downturns were those that acted decisively, managed to mobilise their internal resources and took advantage of current uncertainties, weaknesses or the slow reactions of their competitors: During times of crisis, AA Company needs strong leaders are your key posts staffed appropriately? Because of the fact that AA Company is one of the leading professional services firms in the world, it managed to create a very strong brand name, attracting bright minds throughout the world. By using innovative human resource motivation techniques, AA Company manages to retain its top talents. Key positions are occupied by highly qualified individuals who are constantly assessed and their performance is thoroughly monitored. Is your work productivity at maximum? What are your internal reserves and how can you utilise them? The advisory department, having a project based working schedule, isnt exactly the best example for work productivity excellence. The average staff occupancy levels are at around 68%, which means that out of the total time spent at the office, only 68% is client chargeable time. However, such levels are understandable 35

and justifiable by the fact that almost all the staff working in the advisory field is comprised of experts which have very expensive hourly rates. Another point which can corroborate this is the fact that people in the advisory department have a lot of internal administrative duties to take care of that take time to complete. What are your internal options for increasing margins? AA Company has already slashed employee bonuses and is on the lookout for what the competition does in terms of salaries. The firm has also slashed employee non cash related benefits, such as fitness memberships and optional health insurance. Differences: Since Irelands macroeconomic situation has deteriorated to a much greater extent than Romanias, AA Companys local subsidiary there was forced to take more radical measures concerning their employees. They operated a 10% across the board salary reductions, which means that all employees receive10% less money than they did 1 year ago. Because of these actions, the company is at risk of losing possibly key employees disgruntled by the salary reduction. AA Companys subsidiary in Romania didnt operate any pay reductions yet, which means the company is still safe from any employee dissatisfaction caused by such a measure.

IV. 3. Manage your costs, not just lower them Similarities AA Company has focused on enhancing operational performance and on savings in targeted and justified areas instead of across the board cuts. The fastest ways identified by the firm to make savings are strict caps on new hiring and limiting expenditures, which do not directly support the business or its development and their elimination will not jeo pardise the companys main operations. Profitability analysis needs to reflect both direct and indirect costs of each service. It will help the company decide which activities may be terminated or deferred, how to set new prices and business terms. Do not try to save on profitable products and clients ensure their loyalty. It is however pointless to invest in services that produce only marginal profits. The company should analyse which services are the most profitable and it will try to invest resources into developing those fields.

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The companys cost structure will have to be evaluated, as well as the benefits arising from different types of expenditures. Savings can be achieved by improving the purchasing processes and eliminating inefficiencies. Although AA Companys biggest expenses are salary related; it can still identify a number of costs which can be lowered in order to reflect the benefits received.

Focus on your employees and support their cost consciousness. Employees need to be made aware of the fact that cost cutting is a joint effort. They need to be actively involved in the companys efforts aimed at cutting costs. Water and electricity consumption can be reduced through certain measures, paper and consumables can be used with more concern to costs, etc. The travel policy will also be modified, employees will have to get used to traveling with low cost airlines, staying in lower rated hotels in order to save the companys money.

Dont forget your working capital as its proper management can lead to big savings. This area, being of a very complex nature will be discussed in the following points.

Differences: Since Ireland has long been a market economy, peoples consciousness when it comes to cost awareness is much higher than in Romania. Irish people are accustomed to recycling, not wasting water, heat, electricity and paper while their Romanian counterparts, working with AA Company are still undergoing a learning process in many of these fields. Thus, the impact of a concentrated campaign aimed at reducing costs generated by employees would have a much more significant impact in Romania, where peoples actions could really make a difference.

IV. 4. Cash is king The majority of companies face financial issues during a downturn. In order to manage the crisis successfully, AA Company needs to minimise its debt and receivables and maximise liquidity. Cash management must be a priority, because otherwise the company wont be able to fulfil its obligations which would lead to insolvency. The company needs to protect its liquidity and insist that customers pay in a timely manner. Better tracking of collectable invoices can be done by stimulating the managers in charge of different projects to make sure their clients pay invoices on a timely basis.

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AA Company needs to re-examine its cash-flow, financing sources and expenses in order to make sure that it can survive in case the recession deepens. Also, the cash-flow reflects the companys current position and possible changes will surely be reflected in the way the firm will handle cost reductions in the future. Effective working capital management can help reduce a companys dependency on creditors and lower financial costs. AA Company will consider the following strategies: Stricter credit control and motivating customers to pay on time. For example, the company could either motivate clients positively or negatively. A positive incentive would mean a certain discount in case they pay early; a negative incentive would mean modifying the contract and introducing penalties in case of non payment. Rewarding sales representatives only upon collecting payment, not upon closing the transaction. Managers, which are the main sales representatives of a professional services firm, should only receive their bonuses after their clients have paid the amounts stipulated in the contract. This would motivate the managers to get the job done in perfect conditions in order to be able to demand quick payment from their clients. Paying invoices only on the due date, unless there is a specific incentive to pay early. This is another trick ensuring that cash stays in the company for as long as possible. Deferring payments could increase the amount of liquidity the company is holding. During periods of economic downturn, liquidity is the best indication of a firms stability and short term prospects. AA Company should re-examine its contracts with banks and other creditors in order to ensure that they are beneficial considering the current market conditions. Economic performance should be closely monitored and communication with stakeholders should be more open unexpected surprises are the worst. Differences: The Irish office of AA Company has already started implementing a new model of contracts which contain a 5% discount for clients paying their invoices within 15 days of receiving them. This discount goes together with the companys efforts to keep its existing client baseline and possibly expand its market share. The Romanian subsidiary of AA Company hasnt implemented such measures yet.

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IV. 5. Think long-term, the crisis will pass In the short-term, AA Company has managed to stabilise cash and minimise costs. In the long-term, it needs to preserve growth drivers and the ability to compete. Economic recession gives the firm the opportunity to improve long-term efficiency of the business. When eliminating non-essential costs, the firm has the opportunity to set up its cost system in a way that will be efficient in the long-term. Long-term cost reduction is based on the fastest possible returns. A larger proportion of variable and a smaller proportion of fixed costs will improve the companys resistance during an economic recession. A change of the business model, including re-evaluation of target markets, of product and services portfolio, possibilities of outsourcing or centralisation, transformation of the information systems or remuneration policy all demand a careful analysis, sufficient amount of time and stakeholder support. AA Company can also take advantage of tax optimization. AA Company has a department specially dedicated to this field of activity, it could involve it in an internal project and ensure that the amount of taxes paid are at a minimum. AA Company should have an eye for the future; think beyond the next quarter. It should not stop innovating and investing in areas that will feed future growth, even though finding resources could be difficult at times. The firm should also remember to continually work on improving its brand image. Although AA Company is very well established on the market and it has a strong presence in terms of brand image, it still has to constantly be concerned with building its brand name. Downturn periods create interesting opportunities for lucrative mergers and acquisitions with high return potential. In order to be successful, these transactions require financial backing, flexible decision-making as well as specific skills and expertise in the area of forced property sell-off. AA Company has a department specialized in offering advice to companies looking at buying other competitors. This department currently has very low activity due to the fact that the mergers and acquisitions market has collapsed. The people and expertise accumulated in this department could be used for identifying possible acquisition targets for AA Company. Differences: Even though Romania is considered as one of the most vulnerable countries in Europe when it comes to the outcomes of the current financial crisis, this means that Romania is not 39

set on coming back on track with its explosive GDP growth anytime soon; however we have to remember that Romania is still a developing country which had huge imbalances even before the debut of the crisis. Because of this, Romania will have a much more spectacular comeback than Ireland. That is why Romanian representatives of AA Company are more concerned with their post recession strategy than their Irish counterparts.

IV. 6. Prepare for potential risks Similarities: During an economic downturn, there is mounting pressure to reach business targets and generate profits. Do not overlook risk management, especially fraud prevention. Because AA Company activates in the professional services field, it is very exposed to the danger of offering consultancy services to firms which perform money laundering activities. AA Company should be very careful in selecting its clients and it should thoroughly analyse all potential engagements no matter the projected profits. Investing into proactive measures costs less than losses arising from fraud. In the case of a firm such as AA Company, the integrity of its brand name is of vital importance. In case a fraud scandal would arise because of its employees lack of caution, the damages caused would be very difficult to measure. The impact would be deep and long lasting. That is why employees should constantly be on the lookout for suspicious behaviors when dealing with their clients. Your employees must be able to resist risks such as corruption in order to reach business targets, manipulating financial results or producing false documents in order to obtain financing. During times of economic turmoil, more and more companies are tempted to use fraud and they grey economy in order to get back in shape. AA Companys employees need to maintain a strict standard of moral conduct and they shouldnt give in to unethical demands. All kinds of stimulus packages could be introduced in order to ensure that employees resists temptations. If fraud occurs, consider the impact on employee morale and your reaction to it, as well as on recovering the damages such as through anti-fraud insurance or through criminal or civil proceedings. Make sure that departing employees do not breach your trade secrets and that upon their departure you will have access to all relevant information regarding their work. 40

This is both applicable during times of economic stability. However, since during times of recession firms tend to fire more people, the risk that employees breach trade secrets because of accumulated frustration is higher than normal. That is why AA Company needs to make sure that employees are not allowed to leave with any sensitive information about the firm or its clients. Differences: AA Companys subsidiary in Romania is much more exposed to risks from potential fraud. The Romanian legislation is very complicated and inefficient. Stronger punitive measures for people committing fraud have only been introduced recently, so many companies and individual employees are tempted by the easy gains generated by fraud. That is why the Romanian representatives of AA Company are much more concerned with fraud prevention than their Irish counterparts.

IV. 7. Dont forget about tax and legal implications Similarities: Tax planning can have a substantial impact on your liquidity and profitability. All of AA Companys actions have tax implications and as such also impact profitability. Tax planning is important at all times, but even more so now, when companies look for cost savings and stress cash flow management. Savings can not only be achieved in the area of corporate income tax, but also in personal income tax, social and health insurance. A number of savings options can also be found in the area of VAT. In tax planning, it is important to focus not only on the tax obligations of individual companies within a group, but on optimising the total tax obligation of the whole group. Particular attention needs to be paid when some companies within a group are creating losses, while others show tax obligations. Differences: Both the Romanian and Irish offices of AA Company are very well prepared from a tax perspective and they administer their fiscal activities as efficiently as possible given local fiscal policy. For example, Romanian authorities delay paying their VAT reimbursements for

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as long as possible, while the Irish government is much stricter in paying its obligations towards the business environment.

IV. 8. Communicate Similarities: AA Company is evaluating the likely impact of the downturn on the companys stakeholders and is trying to understand their positions and needs. A persons perception of a situation is often more important than the situation itself, so it is crucial that you regularly and openly communicate with them. Loyalty of the firms key customers and employees can be substantially affected by the way communication is done with them. Inaccurate, incomplete or untimely information can have a major impact on their position and may jeopardize your viability. Particularly in times when finances are tight and their loyalty cannot be rewarded that way, the key to your success is good communication, quick feedback and an open approach. Differences: Romanian representatives of AA Companys local subsidiary have been very vague and secretive lately in concern with employee redundancies, salary decreases or bonus annulments. This situation has left room for speculation and employees in general are very dissatisfied about the lack of communication. However, the Irish office of AA Company has launched a clear and detailed 1 year plan which tackled exactly the issues avoided by the Romanian representatives.

IV. 9. Where to finance from? Similarities: Given the specifics of AA Company, it is clear that it rarely needs outside financing for its activities. However, during turbulent times such as the ones currently experienced, it is important to evaluate the possibility that external financing might be need in order for the business to survive. Some financing sources may prove unnecessarily expensive or may overly restrict your flexibility. AA Company should analyse available options and consider which form of financing is suitable for the company, including tax and other implications. Finance providers 42

need a reliable assessment of the firms economic situation and outlook, that is why it is important to maintain a good relation with banks and other creditors. The fastest money, is the money that you dont spend. First of all, you should always look at possible internal financing sources. Differences: The Irish subsidiary of AA Company, having larger problems with customers who didnt pay according to their contractual obligations and also filing for bankruptcy decided to cover the hole in cash-flow by negotiating a credit line with an important local bank. The credit line will probably be abandoned once the bankruptcy procedures will be over and the firm will receive its money. The Romanian office, not being currently faced with large problems concerning their receivables has not contracted any credit lines from banks.

IV. 10. Recognise the value of employees Similarities: In times of crisis, regular and clear communication with employees is key. AA Company will identify key talents and develop appropriate incentive programmes for them. Downturn periods are challenging for keeping employees motivated and keeping their productivity up. First of all, you need to identify key people that will be critical to your future success and ensure that you can retain them during the crisis period. While new hiring will be restricted, AA Company shouldnt forget that right now it may be easier and cheaper to find qualified employees which will drive future growth. Layoffs and job elimination are two but not the sole options on how to deal with the effects of an economic downturn. The firm should consider all the alternatives of employee relations as allowed by law. Also consider all the tax and legal implications of lowering staff levels. Differences: The AA Companys Irish branch has currently laid off approximately 8% of their employees. This is a pretty significant figure but it is fully justified given the current economic conditions in Ireland. Romanian layoffs have been confined to about 2%, this value representing employees who performed poorly and had no future with AA Company.

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IV. 11. Conclusions: The 10 points above synthesize the key value drivers of a business. Although in the study above, the analysis is applied to a professional services field, the structure and hypothesis which comprise it can be applied to any business out there. The general principles are the same whether youre a small enterprise or a multi billion euro company, the scale and complexity are the two variables which differ. These measures dont guarantee 100% success, but they help each company control its sources of value and expense in a more structured manner. By having grater structure and control, a business can easily implement any other measures it sees as fit for a certain situation.

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Conclusions
The work above was born out of passion for economics and curiosity for studying the mechanisms of the current financial crisis. The objectives initially set out by this thesis were the creation of an original analysis of the impact of the financial crisis on two very interesting economies; Romania and Ireland. However, during the creating of this piece of work, a lot of aspects previously unknown to me surfaced; I failed to predict the extent of useful information which eventually surfaced. This work explains how the general macroeconomic principles impact our economy, and the way changes in different macroeconomic variables influence the evolution of public wellbeing. We could also determine how the financial crisis impacts companies at a microeconomic level. Which were the anti-crisis measures imposed by subsidiaries of the same company in both Romania and Ireland and which were the expected gains from implementing those measures. After analyzing AA Companys subsidiaries in both Romania and Ireland from an action against crisis perspective, we could determine that although Romania is well behind Ireland in economic development, the main directions pursued by the companys subsidiaries in overcoming the financial crisis are basically the same. The implementation mechanisms also coincide this means that Romanias business environment is in line with the most developed countries in the world, however the macroeconomic environment in general is still lagging behind. Digging beyond the literal sense of the term knowledge based economy was also one of the objectives of this book. Careful analysis revealed which are the main characteristics of this theory, why it is so suitable for todays society and how it can generate perpetual growth. The mechanisms by which Romania and Ireland try to create an integrated knowledge based economy helped shed light on the practical way in which the theoretical concepts could be put into practice. Seeing how investments in research and development and education contributed to the improvement of both countries economic situation was also an interesting discovery. The economic background of both Romania and Ireland had to be analysed in order to understand the economys reaction in the face of the financial crisis. The current situation makes an account of the changes which impacted both countries once the recession got a strong foothold. And lastly the analysis looked at how the governments of Romania and Ireland reacted to the financial crisis and what they hope to gain from their interventions. 45

This thesis doesnt set out to explain everything and provide a response for every question. Many of the aspects characterizing the current financial crisis are still unknown and only time will shed light on all regards.

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References:
Books, articles, studies: 1. Ciobanu C, 2009, Romania: Pushed by Crisis Into Dubious Borrowing, 6 April, Romania News Watch, <http://www.romanianewswatch.com/2009/04/romania-pushed-by-crisis-intodubious.html> 2. Ciutacu C, 2009, Anti-crisis measures agreed by social partners, media release, 24 March, Romanian Academy Institute of National Economy, <http://www.eurofound.europa.eu/eiro/2009/02/articles/ro0902039i.htm> 3. Curaj A, 2006, Report on the National Science System in Romania, December, UNESCO Forum for Higher Education, Research and Knowledge, <http://portal.unesco.org/education/en/files/55143/11978897255National_Science_System_R omania_EN.pdf/National_Science_System_Romania_EN.pdf> 4. Kearns A, Ruane F, 2001, The tangible contribution of R&D spending foreign owned plants to a host region: a plant level study of the Irish manufacturing sector (1980-1996), Trinity College Dublin - Department of Economics, no. 997 5. Public Debt of Romania and the Financial Crisis, Romania Central, 2009, <http://www.romania-central.com/public-debt-of-romania-and-the-financial-crisis/> 6. Skyrme D, 1997, The Global Knowledge Economy and Its Implication for Markets, David Skyrme Associates, <http://www.skyrme.com/insights/21gke.htm> 7. The Economist Country Briefings, The Economist, 2009, <http://www.economist.com/countries> 8. Big 4 Internal Sources Online sources: 1. 20082009 Irish financial crisis, Wikipedia, 2009, <http://en.wikipedia.org/wiki/2008 2009_Irish_financial_crisis> 2. European Commission Directorate-General for Research Communication Unit, 2008, A more research-intensive and integrated European Research Area Science, Technology and Competitiveness key figures report 2008/2009, European Commission document 3. Inter Departmental Committee on Science Technology and Innovation, 2004, BUILDING IRELANDS KNOWLEDGE ECONOMY - The Irish Action Plan For Promoting Investment in R&D to 2010, governmental document, <http://www.forfas.ie> 47

4. Irish Government, 2007, Ireland Stability Programme Update, governmental document, <http://www.budget.gov.ie/2007/en/downloads/StabilityProgramme.pdf>

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Declaratie pe proprie raspundere privind autenticitatea lucrarii de licenta

Subsemnatul, Gheorghiu Paul, declar pe proprie raspundere, sub rezerva sanctiunilor penale si morale, ca la redactarea lucrarii de licenta cu titlul THE IMPACT OF THE CURRENT FINANCIAL CRISIS ON: IRELAND AS A DEVELOPED KNOWLEDGE BASED ECONOMY ROMANIA AS A WEAK KNOWLEDGE BASED ECONOMY nu am folosit decat sursele bibliografice mentionate in subsolul paginilor si in bibliografia mentionat n finalul lucrarii. Declar c nu am mai prezentat aceast lucrare in fata unei alte comisii de examen de licent.

Bucuresti, 10 Iulie 2009

Semnatura

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Appendix

Figure 1.1 Distribution of Indigenous R&D Expenditure:

Source: Finfacts
Figure 1.2 Distribution of R&D in Foreign Affiliates in Ireland:

Source: Finfacts 50

Figure 1.3 R&D Intensity (as % of GDP), 2006

R&D Intensity Source: EUROSTAT

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Figure 1.4 The evolution of GDP

Figure 1.5 The Budget Balance

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Figure 3.1 Public funding on R&D:

Source: EURSTAT
Figure 3.2 Researchers by age groups:

Source: INS

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Figure 3.3 Romania Budget Deficit (as % of GDP):

Figure 3.4 Romania GDP Growth %:

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