3.6 Sytlized Facts

Beginning with the year 2000 Romania definitely joined the club of catching-up economies among the CEECs. Only between 2000 and 2005 the Romanian per capita GDP grew more than twofold and is expected to reach 41.5 % of the EU-27 average as measured in PPS by 2008. The nineties in turn were mainly spent with the hard development of working political and market economy institutions, which had been virtually absent before.

As a consequence of untypical dire initial conditions, relatively timid reform attempts and lacking experience with reforms all through the nineties, Romania experienced two major recessions and devastating hyperinflation. More decisive reforms and privatizations in the end-nineties laid the foundations for a more sustainable recovery. Overall, some 2.5 millions of jobs got lost in this period, mainly in the formerly oversized industrial sector. However, official unemployment in Romania was buffered by a massive expansion of unproductive self-employment in the agricultural sector (to this extent an unique issue among the CEECs), heavily decreased activity rates and (short-) term-migration (a common issue among the CEECs). The erosion of the tax base, a large amount of subsidies and arrears in the nineties lead to large fiscal and quasi-fiscal deficits.

Overall, little budgetary space is left, whereas Romania is actually a less-indebted country by both, regional and world standards. Nonetheless, SGP criteria have to be met while at the same time EU-membership still requires immense adjustment costs. Most debt, both government and private debt, is foreign owned and reflected by large current account deficits. The recovery after 2000 was mainly driven by Romanian exports and internal demand, thus seems sustainable. Especially the export sector could surprise with an unexpected good performance. Then again, Romanian imports grew much faster than exports did and the resulting trade deficits contributed further to the accelerating current account deficits. The latter is mainly financed – but only partly covered – by mobile resources such as worker’s remittances and FDI.

Up to 2.5 million Romanians are estimated to work abroad, mainly in Spain and Italy. Noteworthy FDI-flows to Romania remained absent during the nineties but increased after the second round of privatizations after 1997 and accelerated considerable since the first years before EU-Accession. Currently, Romania belongs to the most attractive FDI-destinations among the CEECs. Furthermore, FDI-activity was often underestimated when it was judged after the size of monetary flows, only. A closer look revealed an extraordinary FDI-activity of small but productive firms, which contributed significantly to the surprising export performance.

Assessed against our stylized facts from chapter 2.5 most dynamics observed in other CEECs work in Romania also, though the convergence path was embarked later on, only. FDI-activities helped to shift production towards more skill-intensive sectors but it is still unclear if Romania will join the smaller club of CEECs which attract more technology-intensive than labor-intensive FDI-flows. Currently, a large part of exports from Romania still belong to less skill-intensive sectors. Together with an increased productivity of labor real wages increased considerable but are still much below European-average. Hence, labor markets recover at a much slower pace than GDP evolution would suggest. High unemployment rates were avoided by massive self-employment in agriculture and low activity rates which are, again, rather typical for the CEECs. Obviously, a large part of the labor force still prefers the shadow and home economy, long- or short-term working abroad.

Macroeconomic imbalances remain a risk like in most other CEECs and budgetary space is narrow. Romania will probably – as the other CEECs – have problems to absorb structural funds, which require also a co- and pre-financing. A closer look on the regional patterns of the Romanian economy reveals sharp regional disparities, which are likewise typical for many CEECs and shall be captured in some stylized facts concerning the Romanian economy.

Stylized Facts about the Economy of Romania

First, GDP per capita in Romania differs heavily among regions (NUTS II). The extent of regional disparities in Romania becomes even much more pronounced once the typical NUTS-II perspective is abandoned in favor of a NUTS-III (county-) perspective. It should be mentioned here that Romania’s counties still are not too small units but on average maybe just five times smaller than the entire Belgian territory and host on average over 500,000 inhabitants (INS 2008).

Second, while the national economy follows the typical convergence pattern, i.e. clearly exhibits higher growth rates than more advanced economies, such a catch-up remains absent among the development regions of Romania. Less developed regions grow more or less at the same pace as better developed regions do and have to struggle with high unemployment whereas the better developed regions even struggle with FDI-hampering shortages on their labor markets.

Third, the regional disparities in Romania seem to be more or less inherited as their persistence and constant extent among the available regional data suggests. The current pattern resembles broadly the traditional pattern all through the 20th century and even before. From a more technical point of view the rather stable ranking order of counties makes it nearly indifferent for which year GDP per capita data is deployed for cross-county comparisons. This is in particular true for the years after 2000 when most subsidies and other distortions had been removed.

Forth, oddly enough, FDI-activities in Romania strictly prefer the already better developed counties despite their higher propensity to shortages on the labor market, higher salaries and associated phenomena such as extensive job-hopping. Judged by qualitative data, the lion’s share of FDI-activities seems to focus on counties which already exhibit a developed economic environment, a qualified labor force and better infrastructure.

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

Fifth, as a consequence, some counties benefit to a much lesser extent from the SEM than others do. Low export and import levels reflect their weak connections to the Single Market.  As FDI in Romania – up to now – preferred rather to be born with a golden spoon in the mouth it can hardly be expected that these counties attract more FDI unless they are modernized.

On the one hand, regional disparities are nothing out of the ordinary, not even in the EU-15. Nonetheless, regional disparities within the CEECs and in Romania are on the very high side. Rather than taking this phenomenon for granted chapter 4 will try to investigate some of their driving forces and to determine their role in the process of real convergence.