Romania’s path to prosperity

Editor's note:

 The author visited Bucharest on November 1-2 for a celebration of the 25th anniversary of the World Bank’s opening of its country office in Romania in 1991, shortly after the fall of communism. This blog is adapted from his keynote speech delivered during the event, attended by Romania’s president and prime minister, as well as other national and international dignitaries.

Romania in many ways is representative—and points the way—for the middle-income countries trying to climb the ladder to high income prosperity. I last visited the country 15 years ago, while I served as vice president of the World Bank for Europe and Central Asia. Much has changed in Romania since then. In many ways, the country’s path has been remarkable, as evidenced by just a few examples of the strides made over the past 25 years:

  • In the early 1990s, electricity blackouts happened several times each day; heating and hot water was available only a few hours. Now, Romania is one of Southeast Europe’s biggest energy exporters. It has also the largest wind energy farm in Europe.
  • Back then, factories were closing and parents were worried that their children would not have jobs or opportunities—now Romania’s young talent is attracting some of the biggest players in the information technology sector.
  • Communication with the rest of the world had been deliberately limited: Romania had only one television channel in 1992. Now Romania has one of the fastest and cheapest internet connections in the world.
  • During the last 25 years, millions of Romanians have escaped poverty. Life expectancy in the country grew by more than 10 years; child mortality fell by two-thirds.
  • Since 2000, Romania’s economy has grown at more than 7 percent a year (in purchasing power terms)—faster than any other EU member state.
  • The 2008 global financial crisis shook the country, but in its wake, the Romanian government acted decisively, implementing one of the largest post-crisis fiscal consolidation efforts in the European Union. Today, Romania is in a better macroeconomic position than many other EU member states, with a public debt-to-GDP ratio of only about 40 percent in 2015, a small current account deficit, and the highest GDP growth of all EU member states estimated for 2016.

A key to progress has been a strong national commitment to join the EU. With the support of the international community, the country implemented the reforms required for accession and it became an EU member state in 2007. The World Bank actively assisted Romania in this process.

So, should Romania rest on its laurels? Hardly so, if it wants to avoid getting stuck in what is now widely known as the “middle income trap,” i.e., the fate of many middle income countries, which found that after years of sustained growth their convergence towards high income status was thwarted by insufficient productivity growth.

Looking ahead, say, 25 years from now, what could be an ambitious, but realistic vision for Romania? By 2040, Romanians could aspire to have achieved high income country status; minimal poverty and opportunity for all its citizens; health indicators at least as good those for Western Europe; a transport infrastructure that would allow easy access throughout the country and with the rest of Europe; schooling of high quality; and an efficient, fair, and transparent government.

Despite the impressive progress Romania has made over the last 25 years of transition, the country remains far from that vision:

  • Per capita income in 2015 was 57 percent of the EU average.
  • The incidence of poverty in Romania remains the highest in the EU.
  • Though Bucharest is thriving, other parts of the country have been left behind, as many rural areas are without internet and some villages even remain without electricity, clean water, and proper sanitation.
  • Romania has fared well below the Organization for Economic Cooperation and Development average on the PISA score of educational achievement.
  • On many other world-wide comparative country performance indexes Romania consistently ranks only between 50th and 60th, or even less favorably, whether it is on the United Nations Development Program’s Human Development Index, the Economist Intelligence Unit’s “Where to be born” Index, the World Economic Forum’s Global Competitiveness Index, or the World Bank’s Worldwide Governance Indicators.

How could Romania achieve such an ambitious vision and thus avoid getting stuck in the middle income trap?

First, Romania needs to bridge the gaps to other EU members in key sectors, such as education, health, and infrastructure.

  • Romania’s education system will have to deliver the skills the private sector needs. The quality of education will have to be improved, especially from currently low levels in rural and marginalized communities.
  • Health outcomes will have to be raised to close the gaps with the EU in life expectancy, infant mortality, and the incidence of many communicable and chronic diseases. This will require health system reforms and a reversal of the recent drop in health spending.
  • The wide transport infrastructure gap relative to the rest of the EU must be tackled so as to improve connectivity within the country and with the rest of Europe.

Second, Romania should develop a better, fairer, and more predictable public sector that helps the private sector to thrive. This would mean a focus on three priorities:

  • Maintaining a prudent fiscal policy: Rather than the pro-cyclical fiscal policy it often pursued in the past, Romania would consistently pursue a fiscal policy in support of economic stability and sustainable growth. Improved revenue collection, greater efficiency of public spending and sound policy decisions would underpin this effort and assure a high quality of public services.
  • Strengthening public administration: Romania would improve coordination among its currently fragmented public administration and thus enhance the efficiency of policy formulation and implementation. It would significantly strengthen and depoliticize its civil service.
  • Combating corruption: The National Anti-Corruption Directorate has already pursued corrupt officials with considerable vigor. Still, the perception of widespread corruption in the public sector persists. Steps are needed to ensure that the institutions fighting corruption are protected and given adequate budgets, while also pushing ahead with the stolen asset recovery program.

Third, Romanians will need to close the divide that has opened up across their society. A common vision made it possible for Romania to join the EU and become a NATO member. With the support of all political parties, civil society, the private sector, academia, unions, and the general public, Romania took the hard decisions and made the right choices. Today, Romanians again need to come together and forge a long-term vision that transcends any one single party or politician. With the right policies and investments and a laser-like focus on Romania’s most important asset, its people, Romania can avoid the middle income trap and enjoy high income prosperity in the decades to come.