Report: Romania performs impressively economically, but convergence gaps remain and infrastructure does not reflect EU membership. Romania has made impressive progress in economic performance, but it still faces a large convergence gap with EU living standards and large regional and social disparities. To solve these problems, Romania must take advantage of its private sector, according to a new IFC report
The private sector remains the engine of economic development and can help create new jobs of better quality, as well as boost connectivity, productivity and competitiveness, according to the report Diagnosticul private sector in Romania (CPSD), conducted by the International Finance Corporation (IFC), the investment arm of the World Bank. According to the paper, Romania has made impressive progress in terms of economic performance over the past 20 years, as EU integration has helped accelerate the convergence of incomes toward the bloc average.

Purchasing power
Between 2000 and 2022, Romanian per capita income according to purchasing power parity (PPP, expressed in US dollars as of 2017) increased from 26.4% to 76.7% of the EU average. Real GDP per capita in PPP more than doubled (from $12,177 to $32,738), and the economy grew at an average annual rate of 3.5% – almost three times the EU average. Moreover, Romania’s economic growth has shown considerable resilience in the face of the pandemic, the Russian invasion of Ukraine and related economic shocks, notes IFC.

Horizontal constraints
The IFC report highlights five horizontal constraints that currently impede Romania’s development and which, if addressed, could create a more dynamic and agile private sector and boost growth: skills shortages and mismatches, governance and institutional deficiencies in the business environment, barriers to competition , limited innovation due to chronic underinvestment, and infrastructure and connectivity problems.

The transition to sustainable, well-governed and inclusive economic growth is still underway in Romania, but the private sector is facing turbulence Although economic growth in Romania is high on average, it has been highly volatile. It was primarily driven by consumption and was accompanied by major environmental impacts – such as high levels of air pollution in urban areas. According to the report, productivity gains – as a result of reforms spurred by EU accession in 2007 – have been eroded by gaps in governance and institutional quality, unfavorable demographics and acute skills shortages affecting the quantity and quality of the workforce.

“The structural transformation is still ongoing: agriculture still accounts for a large share of employment, while the relative contribution of services to GDP and employment is the lowest in the EU.

Infrastructure underdeveloped
Despite the availability of substantial EU funds, infrastructure remains underdeveloped relative to the country’s income level, limiting private investment and productivity in several key sectors,” says the IFC, which argues that unsustainable wage dynamics and an aging and declining labor force further jeopardize employment. Productivity. In addition, Romania’s huge underground economy, estimated at 21% of GDP, creates additional challenges. INS revises first 9-month GDP upward Informal workers are an important part of the labor market, especially for low-skilled positions.

Private investment
 Private investment has been relatively high, but a shallow financial sector limits the availability of long-term financing, the paper cited. The combination of a rapidly growing economy, one of the highest emigration rates in the EU and a lagging education system has made skills shortages the main obstacle to private sector development, says IFC. “Romania has the lowest score in the EU in terms of the Human Capital Index (HCI): 0.58, meaning that the future productivity of children born in Romania today will be only 58% of what it could be if they benefited from education. Romania has the lowest participation in lifelong learning in the EU due to cultural and systemic barriers, while the country’s workforce has lower levels of digital skills and soft skills compared to EU standards,” the report said.

Business Environment
 The lack of predictability of the business environment and governance shortcomings pose significant challenges to private sector development in Romania Inefficient tax administration, perceived corruption and political instability are major constraints to the business environment, notes IFC. “Although Romania has made progress in improving the business environment, many tasks (e.g., obtaining construction permits and connecting to the electricity grid, resolving insolvency cases, protecting minority investors and enforcing contracts) remain difficult for businesses. Romania also stands out for its restrictive regulations on professional services and transportation services (including airlines). Moreover, in 2018 Romanian companies reported that about 18% of senior management’s time was spent dealing with tax regulations (more than in 2009), compared with the average of 13.5% in comparable countries.”

State control and uneven playing field
High state control over the economy, an uneven playing field between state-owned and private firms, and barriers to market entry hamper competition in Romania The 2018 OECD Product Market Regulation Index (PMR) – which reflects state control, barriers to market entry, and barriers to trade and investment – shows that state control over the economy is higher in Romania than in most OECD countries.
Entry barriers that can be removed to boost competition and GDP growth include: Cumbersome administrative procedures; unnecessary entry requirements for road freight and professional services and minimum and maximum fees for legal services, as well as recommended fee guidelines for engineering and architectural services.

Budget deficit vs. state aid
Good news on the government budget deficit In addition, state-owned enterprises enjoy significant regulatory privileges, including exemptions from legal requirements on corporate governance, the absence of rules requiring the separation of commercial and non-commercial functions, and the absence of requirements that the enterprises’ investments provide a positive return. Enforcement of existing rules suffers from fragmented responsibilities for the supervision of SOEs, inconsistent reporting, unclear conditions for compensation of public service obligations and low transparency regarding state aid allocation.

Innovation capacity
 The innovation capacity of the Romanian economy is limited, mainly due to chronic under-investment, a lack of skills and governance deficiencies Romania ranks last on the EU’s innovation scoreboard, indicating a reduced ability of Romanian companies to advance up the value chain. Romanian companies score lower than those in the EU in terms of product and process innovation, marketing and organizational innovation, research and development expenditures, patent applications and ICT training. Romania has by far the lowest share of innovative companies in the EU: in 2019, only 10% of Romanian companies introduced a new or significantly improved product or service in the last 12 months, less than countries in the region such as Bulgaria, Hungary or Poland. Moreover, there is no single agency responsible for the overall management and coordination of innovation policy.

Infrastructure
Romania’s infrastructure reflects neither the status of EU membership nor the country’s generally high level of development Infrastructure measurement parameters in Romania lag behind those of the rest of the EU, with the country occupying last place in the ranking of infrastructure quality almost every year since 2007. According to the Global Competitiveness 2019-(At the time of writing, the World Forum is taking place in Davos and an updated update can be expected) report, Romania performed particularly poorly on road quality, ranking 119th out of 141 countries – the lowest position in the EU and, despite being a high-income country, well below some upper-middle-income countries. The large role of SOEs in the country’s infrastructure sector (especially in transportation and energy) leads to insufficient investment and/or exclusion of the private sector. Public investment averaged 4.2% of GDP between 2000 and 2020, above the EU-27 average of 3.2% of GDP, but was highly volatile. The government’s use of investment cuts as a tool to meet budget deficit targets has been a major driver of volatility. Insufficient coverage of transport infrastructure networks hinders competitiveness and job creation.
On the other hand, digital infrastructure is reasonably well developed, although there are significant regional differences. “Romania’s private sector holds the key to accelerating growth, greening the economy and creating better jobs. But the public sector must continue to invest in retraining the workforce, improving institutional foundations and creating better infrastructure,” said Anna Akhalkatsi, World Bank country manager. for Romania and Hungary.

A convergence can be described as a new collaborative model of research, combining social, technical and medical knowledge and methods. Indeed, convergence is seen in scientific literature worldwide as the best way to solve complex contemporary problems in the areas of health care, energy, food, climate or water. TU Delft, Erasmus University Rotterdam and Erasmus MC are embarking on a Convergence Alliance to achieve a better understanding and approach to the challenges faced in the Rotterdam delta and in urban deltas worldwide.
In a derivative sense, the 0nderdernemersplatform Dutch Romanian Network can also be referred to as a convergence where sharing experiences and knowledge can lead to a better approach to the challenges faced by an entrepreneur.