postreview_kbe comparative analysis_pg - draft5

8/6/2019 PostReview_KBE Comparative Analysis_PG - Draft5

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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, Graduate,

Prof. Dr. Christina Marta Suciu Paul Gheorghiu

Bucuresti 2009


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Table of Contents

INTRODUCTION ..................................................................................................................................................2

CHAPTER I: KEY CONCEPTS..........................................................................................................................4

I.1. GENERAL MACROECONOMIC INDICATORS .................................................................................................4I.3. THE KNOWLEDGE BASED ECONOMY - MAIN CHARACTERISTICS ...............................................................8

CHAPTER II: IRELAND CASE STUDY .........................................................................................................13

II.1. IRELAND AS A KNOWLEDGE BASED ECONOMY .......................................................................................13II. 2. ECONOMIC DEVELOPMENTS IN IRELAND PRIOR TO THE FINANCIAL CRISIS ..........................................16II. 3. IRELANDS CURRENT SITUATION.............................................................................................................18II. 4. MEASURES ADOPTED TO TACKLE THE FINANCIAL CRISIS.......................................................................20II.4 CONCLUSIONS.............................................................................................................................................20

CHAPTER III: ROMANIA CASE STUDY......................................................................................................22

III.1. ROMANIA AS A KNOWLEDGE BASED ECONOMY ....................................................................................22III.2. ECONOMIC DEVELOPMENTS PRIOR TO THE FINANCIAL CRISIS..............................................................25III.3. ROMANIAS CURRENT SITUATION ..........................................................................................................27III.4. MEASURES ADOPTED TO TACKLE THE FINANCIAL CRISIS ......................................................................30III.5 CONCLUSIONS ...........................................................................................................................................31

CHAPTER IV: MICROECONOMIC SITUATION. CASE STUDY: AA COMPANY.............................32

IV. 1. WHAT IS AA COMPANYS REAL SITUATION?..........................................................................................33IV.2. PERFORMANCE: ACT DECISIVELY, BASED ON RELIABLE DATA..............................................................35IV. 3. MANAGE YOUR COSTS, NOT JUST LOWER THEM ....................................................................................36IV. 4. CASH IS KING ...........................................................................................................................................37

IV. 5. THINK LONG-TERM, THE CRISIS WILL PASS ...........................................................................................39IV. 6. PREPARE FOR POTENTIAL RISKS.............................................................................................................40IV. 7. DONT FORGET ABOUT TAX AND LEGAL IMPLICATIONS ........................................................................41IV. 8. COMMUNICATE .......................................................................................................................................42IV. 9. WHERE TO FINANCE FROM? ...................................................................................................................42IV. 10. RECOGNISE THE VALUE OF EMPLOYEES ..............................................................................................43IV. 11. CONCLUSIONS: ......................................................................................................................................44

CONCLUSIONS...................................................................................................................................................45

REFERENCES:....................................................................................................................................................47

DECLARATIE PE PROPRIE RASPUNDERE.................................................................................................49

APPENDIX............................................................................................................................................................50


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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 helpedme 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


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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, apositive 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.


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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.


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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 exceedthe 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.


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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 localcountry) 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:


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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.


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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. High-

technology 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


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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.


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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 knowledgeeconomy 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 andnetworks. 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


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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 EUHeads 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


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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 (technologyplatforms) based on enterprise needs;

Develop the seed capital markets for early stage ventures.

R&D in the Public Research System

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 SteeringGroup 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, in-

depth analysis of current public and private investment in R&D and assessed the business

environment for R&D in Ireland.


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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. Intothe 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.


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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


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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 wereencouraged to build by government-imposed tax breaks. This is because our genius free-

market 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 theEurozone 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


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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 newNational 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


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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 shatteredeconomy.

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.


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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 byother countries have gradually led to an increase in the average age of the R&D highly-

qualified 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 andRegional 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


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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 inuniversities 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 connectionbetween 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


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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 ofGDP 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


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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 atstrengthening 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


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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 sixthcountry 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


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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 are10 points that will helpAA 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 analysingAA 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 offeringmore 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


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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 findalternatives 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 thatAA Company

has anexcellent 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 ofAA 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


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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 ofAA 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 thatAA 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


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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 alreadyslashed 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 cost

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