This article was published online by the Magyar Nemzet on 12 October 2021.
In 1990, Romania began their market transition; at the time, they had the lowest level of development in the region. Romanian development was at 34.3 percent of the EU average while Poland reached 39.6 percent, Hungary 56.9 percent, and the Czechs 81.4 percent. The first statistics from Slovakia appeared in 1992, with their rate at 43.2 percent; however, in 1990 their numbers were probably higher given the negative economic effects of the transformation – thereby also exceeding the Romanian levels.
Today though, Romania has managed to achieve the highest development rates from 1990 to 2020 at 37 percent, which is even slightly higher than the Polish 36.5 percent. They managed more than twice the Hungarian rate (17.5 percent) and nearly three times the Czech rate (12.7 percent). By 2020, the Romanian economy compared to the EU average of development was at 71.3 percent, close to the Slovakian levels (71.6 percent) and historically nearing Hungarian levels (74.4 percent). With this under their belt, Romania achieved the fastest development rates of the region. Among the former communist countries, only Estonia and Lithuania were faster.
For both historical and geographic reasons, it is worthwhile to pose the question: what is the rapid Romanian economic development based on?
Let’s analyze some factors:
Romanian development – starting at the same level as the Baltic states – in the south mirrored northern progress, albeit with smaller growth surges but greater imbalances.
The Romanian model was capable of the growth dynamics found in the Baltic countries, but this came at a price: high financial imbalances. Romania’s budget deficits, rising gross debt ratios, current account imbalances, inflation and financial vulnerability were higher in recent years than in the Baltic and surrounding region. The fast-growing model is not associated with sustainable balance; thus Romania’s development is not yet sustainable.
In comparison to Hungary, the Romanian development surge was largely due to the deteriorating Hungarian economy after 2002.
In the three years following 1990, Romania had greater market transition losses than we did. Following that, from 1996 to 2003, Hungarian economic development was faster than Romanian. The next turn however came in 2002-2003 when Romania’s pace of development – with the exception of the 2008/2009 crisis years – surpassed Hungary and is still ahead. The Hungarian–Slovakian comparison yields similar results: the Slovakians passed us in 2004, then their model began to stall in 2015, and in 2018 we passed them once more. After the 2008/2009 crisis, Poland overtook us as well as a result of their excellent crisis management and our poor response.
The Romanian advantage was partly due to a series of Hungarian errors after 2002. The consequences of the flawed Hungarian governmental policy between 2002 and 2010 spurred the Romanian advantage over us for the following ten years, until now.
The Romanian development advantage is also due to the strengths of the Romanian model.
Between 2009 and 2019, the Romanian economy caught up to the EU average by 17.1 percent while the Hungarian economy by 7.8 percent. One reason for the doubled relative Romanian rate is the “shadow” of the previous, flawed Hungarian policy, but another reason is Romania’s stronger performance in certain areas. This was apparent in 2020 for example as the Romanian economic downturn (3.9 percent) was smaller than the Hungarian (4.7 percent); second to Poland (2.5 percent), Romania had the best numbers in the region. Another significant figure played a large role in this performance: while Hungarian investment performance fell by 6.9 percent, the Romanian rate increased by 6.8 percent.
The Romanian growth model shares multiple similarities with the Baltic model: fast digital transition, growth based on the service sector, high investment dynamics, therefore yielding more significant capital deepening and consequentially, productivity improvements. Two equally strong contributors to the 35.2 percent Romanian GDP growth were capital expansion and total factor productivity gains – with employment growth though barely contributing. In comparison, employment growth played a significantly larger role in the 31.3 percent increase of the Hungarian model as opposed to the other two aforementioned factors. Hungarian growth was mainly based on a labor-intensive growth model while Romanian (and Polish) growth was mainly based on a capital-intensive growth model between 2010-2019.
Over the past ten years, the Romanian investment rate (24.5 percent) has been, on average, higher than the Hungarian (21.7 percent). The difference stems from household investments – constituting 5.9 percent in Romania and 3.5 percent in Hungary – which is mainly due to the greater numbers of housing construction in Romania.
In 2015, Romanian labor productivity “shot ahead”, surpassing Hungary and Slovakia by 2019, while quickly nearing Polish and Czech levels. Productivity growth is highest in the agricultural and service sectors, meanwhile it is rather weak in industry, and falling in the construction sector. The main source of productivity growth in Romania over the last ten years comes from the services sector as its share of the GDP increased by 10 percent, reaching the Hungarian level (67 percent). Thus, the overall growth is partly due to structural change in their sectors.
The Romanian digital transformation – and with it the share of the IT industry in the economy – developed much faster than in Hungary. Within ten years, Romania placed fifth best and Hungary second worst among EU countries in terms of the growing economic weight of the IT sector. The Romanian ICT sector is already above the EU average (127 percent) while ours is far behind (less than 60 percent). The proportion of graduates in the field of ICT in the Romanian higher education system is almost twice the EU average and is by far the highest in the region.
The main disadvantages of the Romanian model include their high financial imbalance heavily based on consumption expansion and their low employment levels.
Regarding GDP consumption, the primary source of Romanian growth is increased household consumption; however, the savings rate and net worth of families is low. Between 2010 and 2019, the net real wages increased by 80 percent, which is twice the Hungarian rate, while remittances from those working abroad (2.9 percent) are also higher than the Hungarian figure as a share of GDP (2.6 percent). As a result, the consumption rate (63 percent) is almost a third higher than in Hungary (49 percent).
The pre-pandemic current account deficit of around 4 percent of GDP constitutes the highest budget deficit in the region and the reliance on external financing all indicates that although Romania’s growth model is successful, it cannot yet be considered sustainable.
Romania’s success stems from the strengths of a northern (Scandinavian and Baltic) model while the risks come from the weaknesses of a southern (southern wing of the eurozone) economy.
The lesson for Hungary from this is crystal clear: we should strengthen areas where the Romanian model excels, but we must not let go of the advantages of our balanced growth.
“The injustices you suffer are worth nothing if you are not constantly aware of them” – Confucius
President of the Hungarian National Bank