A report on Economic Openness in Romania, published by the Legatum Institute and showcased at a panel event at the British Romanian Chamber of Commerce, highlights that strengthening governance remains the country’s biggest opportunity for enhancing future prosperity.
The report reveals that Romania ranks 47th in the world for economic openness overall. It has the same rank for governance, reflecting its progress in adopting EU roles and standards in the run up to its EU accession. The country ranks 41st for executive constraints, with clear separation of powers between the executive, judiciary and legislature, and 37th for political accountability. However, recent actions such as increasing use of ‘emergency ordinance’ and changes to the justice laws that risk undermining the independence of the judiciary are causing concern, and the country performs poorly on a number of other key governance measures.
Romania is ranked 130th globally on transparency of government policy and 103rd on the extent to which public money is diverted for private gain. Corruption is a key challenge in the country, deterring potential international investors and eroding confidence among citizens, several million of whom have emigrated abroad, creating a skills-gap that is holding back business growth. The report shows that trust in institutions and leaders, as well as civic engagement, remains lower in Romania than neighbouring countries, and this enables corruption and collusion between businesses and the state.
Dr Stephen Brien, Director of Policy at the Legatum Institute and author of the report, commented: “This report provides a timely opportunity to assess the economic and institutional challenges and opportunities that face Romania ahead of the presidential elections in November. While it highlights many reasons to be optimistic, it also demonstrates the significant challenge of endemic and long-standing corruption facing the country.”
“Good governance stands at the heart of an open and strong economy, and is fundamental to sustainable economic growth. It requires the effective rule of law, which itself is dependent upon trust in a robust set of effective and accountable state institutions. Real progress will require a cultural transformation in Romania – away from corruption and towards a greater adherence to the rule of law. Addressing this issue head-on would lead to significant economic and social gains and help secure the country’s future prosperity.”
The report also shows that to achieve increased prosperity, an open economy requires not only strong governance but effective market access and infrastructure, a healthy investment environment, and strong enterprise conditions.
Romania ranks 52nd globally for market access and infrastructure, with strengths in low average tariffs as well as the relative speed and low cost of complying with border regulations. These strengths reflect the benefits of the country’s access to the single market through its EU membership and the concentration of its trade within the EU. While Romania’s communications infrastructure is relatively poor compared to other Central and Eastern European countries, it can build on the strength of its ultra-fast broadband, which is the second most available in the EU. In addition, Romania could improve its prosperity by strengthening its transport infrastructure, which is undeveloped and in need of upgrading, as well as ensuring businesses have affordable access to electricity.
The report shows that Romania’s best performance is in investment environment, for which it ranks 35th in the world. The country is reducing hurdles for foreign investment and improving the process for registering property. Romania also performs very well in terms of contract enforcement, above countries such as Germany and Austria. However, access to finance is relatively constrained, especially for small and medium sized firms, and limited financing options means there is an over-reliance on bank debt.
Romania ranks 70th globally for enterprise conditions due to its high burdens of regulation and extensive bureaucratic process. There are signs of structural challenges in the country’s labour market, with high inactivity rates and skills shortages due to significant past net migration, and markets are often dominated by a small number of businesses. However, confidence among Romanians that they could set up a business, significant tax incentives, and access to ultra-fast broadband mean entrepreneurialism could thrive in the future and drive long-term growth.
Dr Brien remarked: “Prosperity is much more than material wealth, it also encompasses welfare, security, freedom and opportunity. However, without an open, competitive economy, it is very challenging to create lasting social and economic wellbeing.
“Romania enjoys the advantages of a strategic geographical position between Western Europe and Asia, access to the single market, and ample natural resources. But an attitudinal shift is required for the country to transition fully from state-led to market-based growth. Our research shows that there is significant opportunity and, with the right policies in place, Romania’s future path to prosperity looks bright.”
Chairman of the British Romanian Chamber of Commerce Neil McGregor said: “The BRCC was delighted to host the Legatum Institute and hear their insightful analysis on the opportunities and challenges present in the Romanian economy. We believe that the Romanian economy, whilst challenged in many areas, continues to offer significant opportunities for business and investment alike, a view that was a constant thread throughout the discussions. The event had an interactive exchange of views, something that BRCC members appreciate and benefit from. It was valuable to see both the challenges and opportunities that Romania is facing ahead of the presidential elections in November, and we are delighted to have contributed to sharing these views.”