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4.3 Results of Analysis

Just as expected linear – both simple and multiple – regression models showed a significant and strong positive relation between infrastructural endowment, the size of the qualified labor market and regional GDP per capita in Romania. The same is true, if the outcome variable GDP per capita is replaced by FDI or total economic activity. On the contrary, the tests for the impact of institutional quality on regional economic performance in Romania did not yield any result with the available data.[1] The plots did not suggest another kind of trend and the monitored Romanian institutions performed mostly well, anyhow. Infrastructural well endowed Romanian counties could obviously outweigh institutional deficits with other location factors. This result does not suggest by any means that institutions and governance do not matter in Romania. Both, infrastructure and education are public goods and are mainly provided (or not provided) by the government. The patterns of regional disparities in Romania seem to be inherited and it will require some political efforts to set an end to this trend.

Economic Patterns in Romania

The economic best performing Romanian counties with regard to GDP per capita exhibit also a better developed infrastructure and international accessibility, a greater number of students and a greater economic activity in terms of firms founded between 1991 and 2007. While there is a robust linear relationship between infrastructure, human capital and the total number of firms, foreign firms in Romania seem to react even more sensitive to infrastructure, best to be captured as a cubic function while the relationship to human capital can be expressed well by a linear function. There exists likewise a positive cubic relationship between the number of domestic Romanian firms and the number of foreign firms in Romania what might be another indicator for a more pretentious behavior of foreign firms and what leaves the impression that cross-border-orientated economic activities in general react more sensitive to development in terms of international infrastructure and the economic development of their location. Infrastructural better endowed counties in Romania, which are mainly surrounded by less well endowed Romanian counties, seem to suffer from the shortages of their neighbors. On the one hand, they attract more FDI, unfold a greater economic activity and are rewarded with a higher per capita GDP as their less lucky neighbors but on the other hand their economic performance does usually not reach the levels of likewise well endowed counties at a better location.

The relationship between FDI and human capital is positive in Romania but less strong than for human capital and GDP or overall economic activity. This might indicate that yet not all FDI-activities depend so much on highly qualified labor and further room for enhancements of skill-intensive FDI-activities might be assumed. In turn, FDI favors counties with an already developed economic profile as the number of foreign firms increases heavily with the overall number of firms. To name the best performing regions, judged by GDP per capita performance and the number of foreign firms per capita attracted it turns out that these regions are essentially the traditionally better developed regions.

Front-runners in Romania, after the Capital and its surrounding county Ilfov, are with regard to foreign firms mainly the Transylvanian counties and the Banatean-Transylvanian border belt. The east and the south feature hardly any counties which managed to attract a comparable number of foreign firms. The best performing counties there – though below the average – are the already “familiar faces” such as Iași in the east of Prahova in the south. A noteworthy exception is the infrastructural well endowed and important seaport Constanța at the Black Sea with a likewise well economic performance. With regard to GDP per capita the pattern is rather the same. Above average are again the Capital and Ilfov, Transylvania and the Banat while the south and east contribute mainly to the bottom of the economic hierarchy.

Persistence of these economic Patterns in Romania

Taking the historical persistence of these patterns in Romania into account it becomes clear that infrastructure and education are not only exogenous and entirely independent variables but also reflect a traditional development pattern. Transylvania has been better developed from ancient times on and enjoyed higher political attention during the 20th century. Likewise, during the Ceaușescu era economic development plans focused on the Capital, Transylvania and few economic centers in the south or east of the country. The higher development of these lucky counties in terms of human capital,[2] cross–border connections and economic activity lead to a stronger consideration in intra- and international interconnection plans and thus, facilitated the building of a better infrastructure. A mechanism that seems to continue judged on the course of the new planned highways and the allocation of funds, respectively the setting of priorities.[3] The new planned highways in Romania consider primarily the already well endowed counties in the west and the center. Few eastern counties are considered and remain connected to the west only via a detour through the Capital. Some northern counties and southern counties are not considered at all, a fact also captured by the composite index for infrastructure and international accessibility.

This means a perpetuating virtuous circle for the better developed regions of Romania and a vicious circle for the lower developed Romanian regions. A higher endowment with human capital and infrastructure stimulates economic activities. Stronger economic performance in turn facilitates further improvements in infrastructure and the accumulation of human capital, which both become also more affordable in economic performance. Poor counties in turn seem sometimes to come only second, especially when it comes to expensive large-scale infrastructure projects and hence, tend to remain periphery.

Having the still urgent catch-up needs even of the better developed Romanian counties in mind, it becomes clear that it would not be a solution to stop this trend by cutting expenditures for the better developed counties. Even these have a strong need for further investments. Additionally, it cannot be expected that an abundant endowment with physical infrastructure and higher education institutions will turn all currently low performing counties into economic centers. But an equally distributed accessibility and improved interconnection of all counties will probably set an end to the fragmentation of labor markets – as e.g. pending becomes more practicable – and trade flows – via cheaper and improved logistics – and finally an easier accessibility of education. Furthermore, despite the focus on major roads in this paper, the importance of the local road network must not be neglected (as also recognized in Guvernul României 2005: 316). A certain part of the traffic on national roads (such as carriages) could be avoided if the local road network would be repaired and extended (cf. SAR 2007: 2; 4).[4]

Unfortunately, these results have some important fiscal implications for Romania. First, the current and planned stock of physical infrastructure still seems to be insufficient to connect all counties equally to the SEM and into worldwide business structures, though they are of course fitting with regards to immediate needs (cf. World Bank 2004 b: 11). The current projects already lead to budgetary shortages (cf. Ministerul Transporturilor 2007) but additional projects should nonetheless be considered to make all counties equally accessible. The returns of such investments are according to literature (cf. chapter 4.1.5) are high, even for well developed countries what seems to be in particular true for catching-up economies like the Central and Eastern European Countries. The costs of underinvestment in infrastructure and human capital are on the other hand even higher. Romanian policy makers are therefore advised to stick to their current agendas and even encouraged to extent them if possible.


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

[1] One might argue that the impact of institutional quality could have been well assessed in a cross-country setting using e.g. the governance indicators by Kaufmann et. al. 2007. This is just what I did. But after I examined the data, building averages of the percentile ranks (95 % confidence level) for 1996 – 2006 and performing a multiple regression with all six indicators for FDI per capita averages for the same period and the 10 CEECs, the results were far from being significant, while individual variable effects were more than modest. It might be that results improve if a lower significance level is accepted but on the other hand a rationale for such a proceeding is missing, yet. As this “result” is rather in line with the findings of Garibaldi et. al. 2002 I refrained of including this exercise into the paper.

[2] The restrictions to rural migration, i.e. the closure of bigger cities, during the Ceaușescu era (cf. chapter 3.1.2) probably hampered urban agglomeration and maybe the rise of new economic centers. The land reform and shift to self-employment in agriculture during the nineties (cf. chapter probably had a similar effect. Hence, the regions which already featured bigger cities and a higher degree of urbanization had – and continue to have – an advantage with regard to the accumulation of human capital.

[3] For instance, the urban motorways granted to Nokia had as a consequence the postponement of reparation works on 11 other national roads, mainly in infrastructural less well endowed counties (cf. Cireașa 2008).

[4] While this paper completely accepts SAR’s (2007) assessment of the importance of local infrastructure in Romania, the notion that highways and the like are somewhat overestimated is not supported by our results. The local road network as outlined by SAR is badly needed for competitive local economic activities and a well interconnection of labor markets, while the international infrastructure network is indispensible for sound business activities and the integration of local activities into the national economy.