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1 Introduction


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

Romania joined the European Union in 2007. The main interest of this paper is to investigate Romania’s progress and prospects in the context of Eastern EU-enlargement (EEUE). In particular, the paper wants to contribute to the question how to achieve real convergence.

European Integration and the Single Market

European integration started to play a prominent role in political thoughts and concepts after the experiences of WW I and WW II. In short, European integration aims at a po­litical and an economical goal at the same time. First, integration is believed to reduce the probability of war and violent struggles at least among the Member States (henceforth MS). This notion is sometimes referred to as “peace-argument” (cf. Mussker 2004). Second, inte­gration is expected to augment welfare for all MS; an idea often denoted as “common-market-argument” (cf. ibid). On a political level the peace-argument often has been considered – and still is – the principal one. Nonetheless, even this political goal shall be achieved rather by measures of economic than of straight political integration (cf. Pelkmans 2001: 3). It can be argued that the European Union at its current state is more an economic alliance than a politi­cal one. However, the common market is its most important instrument. While the EU presents itself as being based on three pillars, the common market is actually the most developed one. Hence, the Single Market can be seen rather to be the core (ibid: 25) of the EU instead of only one of three well equilibrated pillars. Accordingly, this paper will focus on the economic dimensions of integration.
Brasche (2003) specifies that the EU claims to increase welfare for all of its members through economic integration and its respective market mechanisms. The underlying assumption is that merging markets will result in a convergence of the participating economies (ibid: 45; 218). The most prominent effects of regional integration are optimization of factor allocation, gains from trade by reducing its costs, economies of scale and an enhanced competition; which likewise shall result in reduced costs and prices (cf. Smeets 1996; Breuss 2002).

Eastern EU Enlargement – EEUE

Up to now, the history of the Single Market has been a story of success. Though it has not lived up to its full potential yet (cf. EC 2007 e) nor is it likely that the ambitious goal of the Lisbon-Agenda (of turning the EU into the best performing market of the world) will be met until 2010. However, despite these opportunities for further improvements integration from initially six MS to now 27 MS created several advantages and proofed to be a rather harmonic process. At least this is true until the 4th round of enlargement to 15 MS in 1995. It has been argued that the success and relative ease of integration was due to the high degree of similar­ity among the merging economies. Especially from this point of view the 5th round of en­largement from 2004–2007 has been considered the most ambitious one. Beside Cyprus and Malta ten Cen­tral and Eastern European Countries (CEECs) joined the EU, thereby ending the division of Europe that arose with the Iron Curtain. Up to now, it has been the biggest en­largement with regard to both the number of countries and the population joining the EU. Furthermore, the economic differences between the Old Member States (OMS) and the New Member States (NMS) never have been that sharp before. Not only that the CEEC-10 turned only recently from central-planned economies into market economies. Their economic per­formance was – and still is – well below the EU-15 level. Accordingly, i.e. because the differ­ences between the markets to be merged have been so large, fears have been widespread that the costs and un­wanted effects of integration could outweigh its benefits for the OMS. Some­times, especially in mass media, even a convergence to a lower level than the former EU-15 level has been feared.
In order to assure that a candidate is ready to join the Union the EU established the so called Accession criteria (also known as Copenhagen criteria) which have to be fulfilled before. These criteria shall guarantee a minimum of similarity between the markets to be merged (cf. Brasche 2003: 158). Thus, making the desired convergence process possible and resulting in a catch-up of the less developed economies towards the level of the most devel­oped ones. For the next step of integration, the adoption of the Euro, the Convergence criteria (or Maastricht criteria) have to be met.[1]

Romania and the EU

Especially with regard to the accession of Romania and Bulgaria concerns have been serious among the EU-15 population. Though both countries are often mentioned at the same time there exist important differences between their political and economical structure and devel­opment. Thus, this paper will not follow the trend to handle these countries as homogenous and will con­centrate on Romania only, without any further references to Bulgaria.

Growth and development is not a natural law or process (cf. Brasche 2003: 161) experienced by every economy at some point of history but dependent on a variety of factors. Many of them can be influenced by political processes and reforms. Among these are social and po­litical stability, human capital, macroeconomic stability and especially a business environ­ment in which market forces can unfold freely. If such a business environment does not exist political efforts can help to create it. The Romanian case demonstrates this in some regards. Unlike most CEECs it took some more time for the Romanian economy to recover from the recession of the transition period. After the mid-nineties even a second phase of negative growth had to be recorded. Only a series of reforms, heavily altering the macroeconomic and microeconomic plan of the business environment, ended this crisis of transition. Romania was brought back to its road of convergence and catching-up after 2000.

In the past years Romania’s economy experienced high growth rates and a dynamic economic development. But despite all progress the Romanian GDP per capita is still much below even the EU-27 average. Catching-up will remain the principle goal to be achieved for the next years. Correspondingly, the EU keeps urging Ro­mania for further improvements of its busi­ness environment, mainly through better institu­tions and a continuous fight against corruption.

Then again, a closer look reveals that several regions of Romania perform much better than suggested by aggregate reports and figures. A main interest of this paper is to investigate some determinants of these regional disparities and their role with regard to catching-up. As the typical approach to regional develop­ment via NUTS-II units turns out to be less precise in the Romanian case – with regard to both the illustration of the extend of regional disparities in Romania and the clear examina­tion of its determinants – it will be replaced with a more suitable NUTS-III approach. Using quan­titative analysis, three main differences in the business environment, namely the quality of pub­lic administration, infrastructure and availability of qualified labor, will be tracked and examined concerning their relation to economic performance. This for an entirely new index for infrastructure will be developed as the indicators often deployed do not necessarily reflect business considera­tions, at least on the local level. The results suggest that in the Romanian case infrastructure, international accessibility and availability of qualified labor are key determinants for ex­plaining differences in economic performance within the country. Institutions themselves as tracked by the limited available data seem to matter to a much lesser degree. The results are further backed by several surveys among investors from and in Romania, which point out that the quality of public administration is sometimes indeed a concern but much better than often expected. Assessed against the importance of in­frastructural improvements in Romania, quality of public administration is to a smaller extent an obstacle to business activities or investment decisions within Romania.
The other main interest of this paper is to provide some advice of how to back the Romanian way to convergence via improvements in the political accessible part of the business envi­ron­ment. Hence, the investigations and findings of this paper will be embedded into a general macroeconomic sketch of Romania’s economy and development after the Revolution in 1989. The findings will be legated to suggestions from the European Union, international financial institutions and the strategy envisaged by Romanian policy makers.

Analysis of the Romanian Economy

The remainder of the paper is organized as follows. The first part (chapter 2) reviews the theory and practice of regional inte­gration, growth and convergence with particular regard to the special conditions of EEUE. Chapter 2.1 will deal with the general trade approach to regional integration. But as EEUE is not only about additional trade between similar developed economies but about the integration of a poor region (CEECs) into a rich region (EU-15) chapter 2.2 will sketch the neoclassical theory of growth, convergence and catching-up; often denoted as devel­opment approach to regional integration. After having sketched the theoretical framework of integra­tion, chapter 2.3 introduces the Single European Market and some evidence on its functioning so far. Afterwards, chapter 2.4 will focus on the special conditions and expectations for EEUE, which will be contrasted with some first evidence from the 2004 enlargement. Overall, this first part of the paper is meant as a short outline of the theoretical foundations of Euro­pean integration and EEUE, only. An extensive or even complete overview on the literature and evidence is by no means envisaged, nor provided. The chapter closes with the conclusion (chapter 2.5) of some stylized facts for EEUE against which the Romanian economy will be assessed in the subsequent parts of this paper.

The second part (chapter 3) will present Romania from an economical point of view. Chapter 3.1 sketches the initial conditions for the Romanian transition process. Chapter 3.2 traces Romania’s macroeconomic development since the Rev­olution and is followed by a closer insight into the regional patterns of the Romanian econ­omy (chapter 3.3). Chapter 3.4 and chapter 3.5 provide further details on the labor market, respectively FDI-performance. The main observations of chapter 3 are finally summa­rized in subchapter 3.6.

Chapter 4 contributes to the question how to facilitate convergence. Chapter 4.1 discusses how the EU, international observers, the business world and the Romanian Government sources envisage to achieve real convergence, respectively how to better the business envi­ronment. Afterwards, two major – not necessarily competing – arguments will be tested. The first links economic performance to the quality of the Romanian institutions, the other to the state of the infrastructure and human capital. Given the considerable regional disparities both hy­potheses will be tested via linear regression on a NUTS-III level. The results will be discussed in chapter 4.3 and policy implications outlined. Finally, chapter 5 reviews the proceeding of the paper and its findings.

Footnotes

[1] The Convergence criteria, laid down in Maastricht, aim at a nominal convergence of monetary and fiscal indicators and have been subject to harsh critics and debates (cf. e.g. Breuss 2006: 406ff.). Despite the fact, that some reasonable arguments for the Convergence criteria exist (ibid.), which on the other hand are not necessarily true for the CEECs (cf. e.g. Hallett & Lewis 2004) this paper focus on real convergence, anyhow. Real convergence refers to the convergence of the standards of living and productivity.