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5 Conclusions

Romania joined the European project in 2007. European integration (cf. chapter 2) is believed to augment welfare for all participants by removing barriers to trade (cf. chapter 2.1) and to lead to a convergence of economic performance and living standards. In particular, less developed economies shall catch-up and reach the level of the better developed economies (cf. chapter 2.2). Up to now, the SEM has been a story of success (cf. chapter 2.3) what seems likewise to be true for EEUE (cf. chapter 2.4).

Romania’s Economy

Just like most of the formerly acceded CEECs Romania (cf. chapter 3) seems to be on a good convergence path and could even positively surprise in some regards, though it joined the club of converging economies with some delays due to worse initial conditions (cf. chapter 3.1) and timid reform attempts during the nineties of which many were overcome after 2000 (chapter 3.2). A regional perspective (cf. chapter 3.3) even shows that some regions of Romania perform much better than suggested by aggregate reports and figures while others lag, maybe more than expected. Catch-up dynamics among Romania’s regions seem to be absent, i.e. regional disparities persist. Regional disparities in Romania are best obvious on county level (NUTS-III) whereas the usual deployed Development Region approach (NUTS-II) still hides a great deal of disparities within the entailed NUTS-II units. GDP per capita levels differ considerable among regions and so do total economic activity and attractivity to FDI. Against the theoretical expectation that FDI would prefer poorer regions with higher unemployment (cf. chapter 3.4) FDI crowded (cf. chapter 3.5) throughout in the better developed regions, despite higher salaries and an accelerating trend to cleared labor markets.

Assessment of the Romanian Economy

Nevertheless, Romania still is the second poorest economy in the European Union concerning GDP per capita and catching-up remains the principle goal to be fostered (cf. chapter 4). Common advice (cf. chapter 4.1) mainly suggests improvements of the macroeconomic climate and the business environment, with a focus on institutional improvements. The importance of such measures can be taken for granted. The business press and surveys among enterprises urge furthermore for infrastructural improvements and the enhancement of qualified labor what is consistent with the agenda of Romanian policy makers. As the macroeconomic environment and the general institutional design are uniformly distributed all over the country chapter 4.2 deployed regional disparities as proxies for different incentive structures in the local business environment. Using linear regression three variables were chosen as predictors for regional disparities, namely FDI activities, per capita GDP and total economic activity. The first predictor, institutional quality, was – in a sharp contrast to expectations to be derived from the institutional approach – not capable to contribute to the explanation of regional disparities in Romania.

Infrastructure as a Key Challange

On the contrary, the paper found very strong evidence that infrastructural endowment and human capital explain the largest part of all variance at a high significance level for all three outcome variables, what is in line with literature for this region in general and other countries. In contrast to a part of the literature so far, transportation and traffic related variables were found to be much more important and significant than telecommunication variables. Whereas European advisors seem to focus either on macroeconomic and fiscal issues, i.e. nominal convergence or institutional improvements the results (cf. chapter 4.3) rather support complaints in the business press, common knowledge of Romanian citizens, Romanian economists such as Daniel Dăianu or the Central Banker Mugur Isărescu (cf. e.g. Dăianu 2006, Moise 2008), Romanian Policy makers (cf. Guvernul României 2005) and (not only foreign) investors as, for instance, the CEO of Pirelli Tyres Romania Enrico Malerba (cf. Business Standard 2008 b). In particular, Malerba criticized a lack of political visions in this regard and warned that Romania might lose attractivity in the coming years, if infrastructural shortages and the situation on the labor market do not improve. With regard to labor, he suggested to persuade the people not to leave the country rather than to focus on retracting emigrants, which might have stabilized meanwhile, anyhow.

The Economy of Romania in a Nutshell

The main conclusions which might be drawn from the preceding assessment are the following. While the big picture suggests an impressionable economical progresses and real convergence dynamics, convergence among the Romanian regions remains absent. Especially the considerable increased FDI-inflows still concentrate on few economic centers, which have been traditionally better developed. Overall, the most successful counties feature a greater stock of infrastructure and qualified labor, which seem to stimulate overall economic activity and FDI and hence, are rewarded with a higher per capita GDP. Counties, which possess a greater stock of infrastructure – but less qualified labor – are usually better off than their less well endowed neighbors but worse off than counties which feature both factors and are not affected by infrastructural shortages of their neighbors. An additional endowment of all counties with infrastructure and an augmentation of human capital can be expected to stop this trend. Focusing on less well endowed counties only does not seem promising as also the better endowed counties still have a strong need for improvements after over 40 years of communistic ignorance and non-maintenance (cf. 3.1.2 chapter for details).

Recoomandations for Economic Policy in Romania

The current stock of infrastructure and the planned projects to be built in the next years are a necessary step in the right direction but do not seem to be sufficient to set an end to the current trends. Especially many counties in the north and the south remain only weak connected to Pan-European transportation (heavy traffic) networks, whereas high quality roads (highways) for some counties are not even considered, yet. The east remains likewise weak endowed with high quality infrastructure and will grant motorway access towards the west of Romania and occidental markets only via detours through the Capital unless the only recently planned Autostrada Est-Vest will be finished. While the currently planned routes might be based on current feasibility considerations or the reasonable assumption that not all counties can turn into economic centers their precarious endowment with infrastructure still causes negative externalities for some better endowed counties. In particular, the better endowed counties in the east and some in the south seem to suffer from shortages of their neighbor counties, which still have to be traversed when it comes to logistics. Furthermore, labor and product markets remain fragmented and interior migration flows distorted, hence, e.g. education might be less equally (easy) accessible. Competitiveness of the (potentially) agricultural sector cannot be expected as long as rural areas are just insufficient connected to domestic urban and European markets.

That is to say, in more theoretical terms, that not all Romanian counties are equally well connected to the Single Market – not even to domestic markets – in a very literal sense. Hence, despite the formal act of joining the Union some barriers to trade and business persist and may set upper boundaries for the extent and pace of real convergence, in a manner which might be comparable to Liebig’s law of the minimum. The availability of qualified labor is a further factor which must not be underestimated for the competitiveness of the Romanian economy and again might set an upper bound to convergence potential in an increasing skill- and knowledge based European and World economy. This insufficient connection to the SEM is not only reflected by a much lower FDI activity in infrastructural bad endowed counties but also in a reduced total economic activity and lower import and export levels, which in turn reflect also the lower standards of living in the respective counties.

The results have unfortunately some important fiscal implications and do not even promise quick returns. Both, infrastructural upgrades and the enhancements of human capital will require sizable investments for many years to come while even the – nonetheless impressive – current agenda is sufficient in size to set the budget under pressure, especially when it comes to the fulfillment of the Maastricht criteria. The returns of such investments, though high and especially in the Romanian case promising, will probably appear with delays, only. Nevertheless, Romania still is a less-indebted country when compared to other NMS and in particular when compared to the heavily indebted OMS for which the SGP was actually designed for. Therefore, an temporarily increased budget deficit should not be too worrying, neither concerning the SGP, nor regarding the envisaged adoption of the Euro in 2014, if additional Government spending will be allocated to long-term investments such as infrastructure, education and R&D. This is in particular true if the favorable growth prospects for Romania and the additional growth prospects from such investments are taken into account and assessed against the lost growth prospects of not intensifying infrastructural investments. Even well developed economies – like the German or American – were demonstrated to suffer if investments in infrastructure were not sufficient in size. On the other hand, the EC is certainly right when it urges for more fiscal discipline and more predictable budgetary policies.

Another important finding of the paper was the confirmation of the predominant importance of SMEs and domestic economic activity for the Romanian economy. For these kinds of enterprises the still high taxes on labor might be a serious constraint. Hence, a further reduction of labor costs could further facilitate (formal) economic activity.

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

Furthermore, the Romanian business environment and economic development is much better than commonly known. Hence, Romania is strongly advised to do more efforts on communicating its efforts and progresses to a larger public rather than leaving the field to mass media which often seem to be more thrilled by the state of some rural islands in the country instead of the more pleasant developments in many other parts of Romania. Such a more visible image campaign could further facilitate the current boom in e.g. the automobile and IT industry, which were just lately explicitly mentioned as a vision for Romania by Prime Minister Călin Popescu-Tariceanu. A decisive proceeding with regard to clarify corruption suspicions, especially on the high level (such as in the recent case of Adrian Năstase) would further contribute to strengthen Romania’s image inside the borders and abroad.

On the other hand, this assertion is by no means a blueprint. There is still much room left with regard to institutional improvements, which are – of course – at least as much required as infrastructural upgrades (which are likewise a matter of governance). Whereas some Mediterranean GDP per capita levels might be a good first target value, the Mediterranean style of public administration and Mezzogiorno definitely are not.