To advance, Romania needs more competitive markets and stronger human capital

Despite Romania’s great success in catching up with the European Union, progress on living standards remains fragile. The disruptions caused by the coronavirus pandemic (COVID-19) risk weakening the economy’s productive base and widening an already large divide across social groups and areas of the country.

Romania has risen to many economic challenges it has faced in the 21st century, working to increase per capita income from just 26 percent of the EU average in 2000 to close to 70 percent today. The economic gains have not reached everyone – especially those living in rural areas.

What, then, can propel Romania’s growth and drive the country forward in a way that is both expansive and inclusive? In February, right before the outbreak of COVID-19, our  Country Economic Memorandum – "Markets and People" – opined that the answer lies in stronger market competition and better human capital.

The answer remains valid today: only a more competitive economy and renewed attention to human capital can help Romania quickly rebound from the current crisis with a more solid productive base and a more inclusive society.

Competition is an essential engine of the country’s future success, and it should be nurtured even amid the current difficulties.  The past two decades have taught Romanians that openness to the world and free competition among its enterprises mean better jobs, more opportunities and higher income.

Some Romanian businesses have been successful both domestically and internationally, while others have been left behind, remaining unproductive and unable to create good jobs. In fact, between 2011 and 2017, the productivity gap between the best and the rest appears to have widened.

The best firms tend to be older, larger, and more capital intensive, and to pay higher wages. Leading firms are also able to charge higher markups on their products – which can be good if the higher price reflects higher-quality products, but less so if it reflects a lack of competition, as it is often the case in Romania.

Overall, manufacturing firms have been more successful than services firms. Romanian manufacturers have long been exposed to domestic and international rivals. This has allowed the best among them to emerge, becoming more productive and making increasingly better products.

The same cannot be said for services, where market forces are often impaired by a large state footprint and by anticompetitive regulations.

State-owned enterprises (SOEs) – owned both by the central government and by local authorities – are present in many sectors and do not abide by clear corporate governance rules. This creates opportunities for rent-seeking, as well as fiscal risks, because SOEs are often on the receiving end of state handouts, and the state remains liable for their losses.

Perhaps more importantly for Romania’s growth prospects, SOEs do not compete on equal terms with private sector firms, draining labor, capital and customers from more productive competitors and ultimately leading to worse service provision for the public.

In many sectors where SOE are not present, anticompetitive regulations also prevent the emergence of the best players and lead to higher costs and worse outcomes for citizens and businesses. This is the case for regulated professions and for road freight transport, where sector-specific rules limit market entry and operation.

Overall, since services constitute well over two-thirds of the economy and citizens and businesses use them daily, increasing competition in services would lead to better quality and lower costs, with a positive impact on everyday life and on GDP growth.

The second, and even more fundamental, engine of Romania’s future growth is its people themselves.

At the core of all policies aimed to increase Romania’s competitiveness are investments in human capital, both for young people who will be entering the labor force and for prime-age workers whose skills need to be upgraded.  Building its human capital will enable Romania to adapt the skills of its workers to the changing needs of a modern economy.

According to the World Bank’s Human Capital Index (HCI), a child born in Romania today is expected to reach just 60 percent of his or her productive potential as an adult, compared to 100 percent if that individual were to receive the full benefit of high-quality education and health.

Disparities in education outcomes remain both across and within regions of Romania. Changes are certainly taking place, but learning gaps in primary and secondary education persist. These are most clear when looking at urban and rural areas, across regions, and across social groups. In fact, the lockdown in response to COVID-19 has exposed the inequality of education opportunities between rich and poor, and between areas of the country. 

What should reform measures include to build human capital?

• A paradigm shift, made even more urgent by the current crisis, which would require continued reforms in primary and secondary schooling to ensure adequate literacy, numeracy, socioemotional skills, and other core foundational competences, like using evidence to hold the system and stakeholders accountable for achieving student learning.
• Tracking progress of program interventions through systematic measurement of impacts, designing and implementing a more flexible approach to teacher development and appraisal, and upgrading teaching as a profession – through the use of innovative teacher recruitment, motivation, and development practices that recognize teachers as valued professionals – will all contribute to this shift.
• Finally, providing schools with the ability to plan school-level improvements tailored to their needs and offering systematic support to school leaders and teachers to prepare school staff on methodologies that can engage students meaningfully – including through digital platforms –  go a long way toward improving Romania’s education system.

Preserving competition in the economy and investing in human capital are the keys to a solid economic recovery.  They can help lay the foundations for more inclusive and sustainable growth that benefits all Romanians.