Unleashing Romania’s potential to converge faster towards OECD standards

By Caroline Klein and Yosuke Jin, OECD Economics Department

Romania’s economic growth has been impressive over the past decades: its income per capita has reached about 60% of the OECD average, vs. only around 30% two decades ago. However, the COVID-19 crisis put a halt to progress in living standards, despite a strong rebound of activity after the lockdown in 2020. The recovery remains fraught with risks, including further restrictions in response to the sharp rise in infection cases, persistent supply chains disruptions and stronger than expected inflationary pressures.  

Romania is also facing major long-term challenges, with an ageing population, still prevalent poverty, especially in rural areas and in the Roma population, slowing productivity growth, and high air pollution. The implementation of the National Recovery and Resilience Plan is a unique opportunity to address these challenges, as the plan includes EUR 14.2 billion of grants, amounting to around 6.5% of GDP, and important structural reforms. The OECD forecasts GDP to grow at around 4.5% on average over the next two years, in part owing to this plan. But, for its benefits to spread in the longer term, the plan should be used effectively to accelerate the digital and the green transitions.  

Against this background, the 2022 OECD Economic Survey of Romania presents recommendations on reforms that would help Romania converge towards OECD standards. 

Firstly, the budget and the current account deficits have deepened to worrying levels, calling for prudent macroeconomic policies. In particular, the budget deficit reached 9% of GDP in 2020. Room to reduce public spending is limited. Essential public services, such as education and health, are underfunded, and the green transition requires considerable investments. At the same time, tax revenues are low by OECD norms, amounting to 26% of GDP against 34% on average in the OECD in 2019. To restore Romania’s fiscal space and make the tax system fairer and more efficient, the modernisation of the tax administration should accelerate, inefficient reduced tax rates and special provisions be eliminated, and less distortive taxes, such as property taxes, raised. The reform of the pension system, whose previous design undermined the sustainability of public finances, is also a central part of the consolidation strategy. It should include the harmonisation of the legal retirement ages and a revised benefit formula. 

Secondly, policies should promote equality of opportunities. Around 30% of the Romanian population is at risk of poverty or social exclusion, one of the highest rates in the EU. Poverty hit those detached from the labour market, a group in which youth, women and the Roma are overrepresented (Figure 1). Around a quarter of the working age population has below upper secondary education, too many young people leave school before getting adequate qualifications to thrive in the labour market, and participation in adult education is low. The funding system of schools should be reformed, as schools do not receive adequate resources to support vulnerable students. Strengthening training and guidance services in public employment services would also help developing upskilling options. Childcare and long-term care services need to be expanded. Women would benefit most, as, like in many OECD countries, they are the main informal caregivers. Romania lags most OECD countries in access to high-quality healthcare, especially in rural areas. Developing mobile health centres would help address shortages and increase vaccination rates from very low levels. 

Figure 1. Some groups have difficulties to join the labour market 

Labour market participation rate, %

Thirdly, improving the business environment is key to foster productivity growth. The creation of highly innovative firms is limited in Romania compared with OECD countries. In parallel, around 30% of companies were loss making in 2019, suggesting market discipline is weak. For prospective firms to enter and grow unimpeded in the market, the regulatory framework needs to be improved, as it is among the most restrictive according to the OECD Product Market Regulation Indicators (Figure 2). Administrative burden on entrepreneurship and state control must be reduced. As many firms are undercapitalised, access to finance should be enhanced significantly by developing risk capital markets. Courts are congested, with a high number of backlog cases, lengthening insolvency procedures. To facilitate the smooth exit of unprofitable firms, out-of-court mechanisms should be developed, and judicial efficiency enhanced, beginning by collecting sufficient data to accurately assess the functioning of the court system. 

Figure 2. Product market regulation needs to be improved

2018, index scale 0-6 from least to most restrictive

The quality of infrastructure remains low compared with OECD countries, undermining sustainable productivity growth and regional development. Romania should seize the unprecedented opportunity offered by EU funds to invest in road and rail. The absorption of EU funds must be accelerated by ensuring policy consistency to implement prioritised investment projects without disruption. Finally, the rule of law is fundamental for a market economy to function properly. 88% of companies consider corruption is a problem when doing business in Romania. Recent efforts by the Romanian government to fight corruption should be intensified. 

References 

OECD (2022), OECD Economic Surveys: Romania 2022, OECD Publishing, Paris, https://doi.org/10.1787/e2174606-en.