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4 Achiving Convergence

The assessment of the economy of Romania so far yielded an ambiguous picture. Overall, Romania enjoyed a sustainable seeming recovery and high, export driven growth rates which are likely to continue for the next years. On the other hand, economic disparities between Romania and the EU – even to some other CEECs – are still obvious. Furthermore, the extent of the persistent regional disparities in Romania and the concentration of extensive economic activities on few counties suggest that not all counties can reap the profits of the Single Market to the same extent. The less developed counties grow also but do not catch-up and tend to be avoided by foreign investments. Most of them exhibit likewise few domestic activities. Thus, the expectation that increasing their competitiveness might play a major role in accelerating the process of real convergence seems reasonable.

This chapter seeks to contribute to the question how real convergence can be fostered by increasing the competitiveness of the economy of Romania by facing the challenges of regional disparities in Romania. In order to guard against misunderstandings it has to be stressed that this paper does not want to discuss whether and how to reduce regional disparities in Romania or to equalize economic performance among regions. The principal aim is not homogeneity. The paper rather tries to discuss how eventually overall economic performance can be improved by mobilizing further resources in all regions. This for regional disparities in Romania are deployed as proxies for a different endowment of competitiveness factors and for identifying these critical factors for success. It remains to be hoped that an additional endowment with these factors can activate currently unused resources in the low performing regions and thus increase the convergence potential of Romania’s economy.[1] Or to put the underlying assumption in other words: since macroeconomic variables are constant, regional disparities might be an indicator for different microeconomic incentive structures on the local level.

Convergence certainly cannot be taken for granted” (Vass: 2005: 5) and thus requires also governmental efforts. But the overwhelming amount of policy areas to be reformed and adjusted would make it impossible to deal with all of them in this paper. Thus, the following analysis will focus on only three of them; namely institutions, infrastructure and education. The topics were not chosen arbitrary and ad hoc but take current issues into account.

First, Romanian policy makers themselves do not tire to consider infrastructure and education as the main levers for real convergence and even trace back the regional disparities to the regional differing endowment with infrastructure. Second, a large part of the business press and many business surveys seem to support their view as they likewise identify infrastructure as a major problem. Education is understandably commonly believed to play a crucial role in shifting production toward more skill-intensive sectors and to assure long-term competitiveness. Third, though they perfectly agree with the Romanian assessment Western observers seem to emphasize the role of institutions and governance.[2] Modern economics likewise identified institutions as important elements of the business environment, which robustly were proven capable to explain a part of the unexpected behavior of capital flows after their liberalization. All three, not necessarily competing suggestions are accounted for by assessing them in quantitative linear regression models.

The paper of course recognizes the importance of macroeconomic stability and good economic policies. Nonetheless, they will not be subject to further investigation as from now. This is because the impact of both can be expected to be uniformly distributed all over the country and hence, might play a secondary role in stimulating the catch-up of lagging regions.[3] In turn, the patterns of the real sectors are not uniformly distributed in Romania, as outlined in chapter 3.3 what might be due to locally different factors.

The idea of the following chapter is simple. After having sketched the main areas of interest (chapter 4.1) by various observers and scientific literature so far, chapter 4.2 turns to test the impact of the three chosen factors. First, the impact of institutional quality on the local level will be assessed with regard to the regional differing FDI-performance, overall economic activity and GDP per capita. Afterwards chapter 4.2.3 addresses the impact of infrastructure and education, respectively the availability of qualified labor, on per capita GDP, overall economic activity and again FDI. These examinations will use multiple linear regression analysis. Chapter 4.3 concludes the main findings from our proceeding and discusses their implicit policy implications relegating them to the general macroeconomic context before chapter 5 summarizes the main observations and findings of the paper as a big picture.

Academic Research paper and Study of the Economy of Romania and Romanian Business


[1] If such a measure turns out to work fine the result could of course be (a higher degree of) homogeneity. But that does not need to be true in every case as also better endowed counties could (and should) augment their stock of these factors.

[2] That is not to say that Romanian policy makers do not recognize the importance of institutions and their improvements. Indeed, there are several reform attempts envisaged or under way. However, there sometimes seem to be slight differences when it comes to the setting of priorities.

[3] Furthermore, valuable advice for fiscal and monetary policy is already given by several institutions, such as by the EC via the convergence programs, by the IMF and the World Bank via occasional but strong assessments.