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4.1.3 Wolrd Bank Advice



The World Bank Group supported Romania during the nineties and after 2000 with various programs. Key areas as perceived by the World Bank will now be outlined based on three more recent reports for the macroeconomic level and completed by the latest business environment ranking for the microeconomic plan.

The assessment of challenges for the economy of Romania conducted by the IBRD (2006) underpins the importance of further improvements of governance and institutional capacities. Especially administrative barriers to business activities should be overcome (cf. ibid: 2). The efforts undertaken so far to combat corruption in Romania seem to be successful and should be continued (cf. ibid: 7).[1] Macroeconomic imbalances remain a matter of concern. The growth of private credits keeps setting the current account under pressure (cf. ibid: 3), which’s deficit is on the one hand not so high by regional standards but to a large part financed by mobile resources rather than FDI (World Bank 2004 a: 9).[2]

Arrears declined substantially but are not eliminated (cf. IBRD: 2) what underscores the importance of hard budget constraints (World Bank 2004 a: 66ff.). A unique phenomenon even among the Central and Eastern European Countries was that also “profitable private companies” (cf. ibid: 68) were allowed to create arrears. The labor market in Romania suffers from a skills-mismatch, urging for further reforms in the education system while the flexibility of the labor market should be increased and taxation on labor reduced (cf. ibid: 110ff. and IBDR 2006: 2).

Reforming the low performing (but potentially competitive, cf. ibid: 14) agricultural sector requires special care due to its high contribution to employment (cf. ibid: 8) but is needed to shift resources to more productive sectors (cf. World Bank 2004 a: 17). The dimension of the reformation needs in agriculture is vividly illustrated by some figures. In 2000 about 4.8 million persons were involved in the Romanian agricultural sector and represented some 72 % of the entire EU-15 labor-force in agriculture while productivity was by no means comparable. Whereas an EU-15 worker in agriculture contributed an output of some 21,000 Euro the respective value in Romania amounted to a mere 1,500 Euro. This was not just a matter of pricing and shares. Taking milk as example, every cow in the EU-15 yielded some 5,800 liters per annum, while the respective value in Romania was 3,000 liters (cf. ibid: 82ff.).

As the end of the still unfinished privatization process is foreseeable FDI-inflows to Romania might slow down (cf. IBRD 2006: 4) and anyhow FDI remained below potential (cf. World Bank 2004 a: 10). Hence, budget execution should be prudent and further revenues mobilized since adjustment costs for environmental upgrading and infrastructure will be substantial. Just the upgrading costs for environmental measures will amount to some 30 billion of Euros during 2005 – 2015 (IBDR 2006: 17) of which only 7 billion are covered by EU-funds (World Bank 2004 a: 185). A large part will have to be paid by local authorities and the private sector. Making budgetary space for the co- and pre-financing of EU-funds will be a main challenge (cf. IBRD 2006: 5), while the social security system remains a long-term risk (cf. 16).

The IBRD assessment appreciated the recognized “linkage between infrastructure and human capital development and growth” (ibid: 10) by the Government program and supported the strategy to focus on modernization of infrastructure, agricultural improvements and to enhance human capital (cf. ibid: 10). Road transport costs are estimated to be 30 % – 60 % higher than they should be (cf. ibid: 15). World Bank 2004 a (108ff.) urges to reduce rural poverty by public investment in physical infrastructure and reducing the isolation of remote villages, education and a better environment for land transactions.

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

The business environment of Romania as being monitored by the Doing Business Project of the World Bank Group (2008) was ranked 48th out of 178 countries which represents an intermediate rank when compared to other Central and Eastern European Countries (better than e.g. Poland, Slovenia or Czechia but behind Bulgaria, Hungary or the front-runners Estonia and Latvia, which gained the places 17 and 22). The low ranked areas were the categories employing workers (145th), registering property (123th) and paying taxes (134th), followed by dealing with licenses (90th) and closing a business (81th). Good ranked areas were starting a business (26th), getting credit (13th), protecting investors (33th), trading across borders (38th) and enforcing contracts (37th). The bad rankings resulted from the difficulties concerning employment and hour rigidities, while registering property takes a long time (150 days) and the process of closing a business suffers from shortages in the justice system. The high taxation of labor and the social contributions result in a total tax rate of 46.9 % on profits whereas the profit tax itself is low (10.9 %). Overall taxation seems complicated, consisting out of 96 different payments.

Footnotes

[1] Surveyed enterprises reported a substantial decrease in the frequency and amount of bribes during the period from 2001 to 2005 (cf. IBRD 2006: 7).  For more details cf. chapter 4.1.4 and the paragraph about the “BEEPS”.

[2] The dynamics seem to have changed somewhat now but the problem remains the same. While Romania currently performs well with regard to FDI the extent of the current account deficit increased sharply, so that even FDI and increasing mobile resources (workers’ remittances) are not sufficient in size to cover the deficit.