Lidia Moise: Romania’s Gross Domestic Product (GDP) has grown at a tremendous pace, but there is no growth model based on foreign investment

An interview with a Romanian economic journalist on various aspects of the Romanian economic development model: attracting foreign investment, the restart of permanent taxes, the contradiction between foreign and domestic capital, the importance of the National Recovery and Sustainability Plan, the development of the Bucharest Stock Exchange and regional economic cooperation with Central European countries.

The interview was conducted on 30 March 2023. 

Mrs Moise, according to the latest Eurostat statistics, Romania’s GDP per capita is slightly higher than Croatia’s and close to that of Hungary, Portugal and Spain. What are the explanations for this sudden increase in Romanian GDP and to what extent is this increase felt by the whole population? Romania is one of the countries with the lowest budget revenues as a percentage of GDP in the European Union, and there are inequalities between the different regions of the country...

Yes, a very interesting question, and now I think that one of the explanations for this increase in Romania’s GDP is European funding. Since joining the European Union – a fact of 16 years – Romania has absorbed EUR 80 billion and contributed EUR 26 billion to the European budget. This means an additional EUR 53 billion, which is money that has come into Romania, and this is visible in Romania’s GDP.

For example, in 2000, Romania’s GDP was around USD 37 billion (EUR 40 billion). Now Romania’s GDP is definitely much higher, EUR 286 billion, and this jump has been made possible by European money, by the changes that have been made in the way the economy has been regulated – some areas have been deregulated, others have been regulated.  A market has opened up for Romanian products and we must not forget the extremely important impact of foreign direct investment, because, due to the very high inflation that Romania experienced in the post-Communist period, credit, especially for small and medium-sized enterprises, was almost prohibited and therefore they could not develop to support the economy. Because we know very well that the importance of small and medium-sized enterprises in all European economies, and in the world, is very great. Foreign direct investment has also stimulated the development of the Romanian economy by focusing on those areas that had both a domestic and an external market.

Last but not least, it should be noted that the purchasing power of Romanians has increased. Once again, I would like to remind you of how low wages were in Romania in the 2000s before accession to the European Union. It is hard to believe, but in 2000, when we were millionaires in lei, before denomination, the average salary was, if I remember correctly, approximately 2 130 000 lei. That was the equivalent of EUR 130 at that time. Well, last year, the average net salary, that is to say, the salary that a working Romanian receives in hand, was EUR 880, almost 4 400 lei.

This steady increase in wages has also stimulated investment in Romania. There is a lot of investment. Unfortunately, this increase in purchasing power has not been accompanied by an increase in the production of consumer goods that the population accepts and consumes. We are thus witnessing an economic problem in Romania, namely a large current account deficit caused by imports, which are always much larger than exports. Mainly imports of consumer goods. So this gain may also affect the overall vulnerability of the Romanian economy.

Romania may somehow be able to at least partially balance this current account deficit through more foreign investment. By the end of 2022 Romania has attracted €110 billion of foreign investment, mostly from Western Europe. How has Romania managed to attract so much foreign investment and what are the advantages and disadvantages of its foreign-led development model?

I would not say that Romania’s development model is based on foreign investment, because I do not think we have had a development model. If we had a development model, it should have been based on investment in infrastructure and energy. It is well known that Romania has enormous energy potential, which was discovered at the end of the 19th century, when Romania was producing oil, and which has been rather neglected. At present, there is not enough significant investment in the energy sector.  

With regard to foreign investment of EUR 110 billion, we had a discussion earlier – that is, if you like, the perspective of the National Bank of Romania. The statistics of the National Bank of Romania add not only foreign direct investment, that in the capital of companies, but also intra-group loans, the money that foreign companies already existing in Romania borrow from the parent company. Of course, these loans also have an impact on investment, they have an impact on the sustainability of the companies concerned. For example, they may go through a difficult period, especially at the beginning of the investment, when they do not have enough profit, when they cannot cover their running costs, and then these loans are useful. It is just that this money has to be paid back. If we look mathematically, in absolute terms, we will see that, at the end of 2022, the capital invested strictly by foreigners in their companies in Romania will amount to EUR 52 billion, i.e. somewhere around half of what the National Bank announces.

These are quite sustainable and interesting investments. However, if we compare ourselves with other Central and Eastern European countries, with Hungary, with Poland, Romanian investments are not enough. We have not been able to attract much foreign investment, which the Romanian economy deserves, because there is competition here too. Therefore, I would say that, for our countries, foreign direct investment has a number of advantages, especially those made by large companies that have had the power to build something, to take over industries or industrial objectives, to maintain and develop them. First of all, I give you the example of the car industry, which is quite developed in Romania and which is controlled, if you like, by foreign companies that have invested in Romania. This industry accounts for around 40-45% of Romania’s exports. So it helps us enormously, because if we did not have exports, imports would simply swallow up Romania’s current account, and in that context we would have great problems maintaining a stable currency. Next, foreign direct investment, especially large foreign direct investment, has ensured an increase in wages, investors have managed to increase the level of pay of employees, they have paid the taxes on time to the state budget, so there is no delay in the transmission of the obligations to the state budget by foreign companies, especially large ones. I am not talking here about small companies, I am talking about the important companies that produce a lot, that count, that have invested a lot, unlike some Romanian companies, even large ones, which have had problems over time and have had large outstanding debts to state companies. 

I will give you just one example. The Petromidia refinery, when it was privatised, had debts to the state budget of USD 600 million. Petromidia, run by investors, no longer produces these debts. So I think this is a problem that needs to be looked at with clarity. The one on foreign investment. And they need to be accepted and, if you will, supported, because they do no harm. The problem that all countries have is to balance their regulations well so that they benefit from these investments, as France benefits, as Britain benefits or Germany benefits.

Since 2015, Romanian governments have regularly reset various taxes, introduced reduced VAT rates for food, almost zero tax for micro-enterprises, exempted certain IT categories from paying taxes. What are the results of these active tax policies? To what extent are they useful and empowering for the ordinary person?

The situation is really quite interesting. All these tax breaks came in the run-up to an election, so they had a lot of electoral momentum, or politicians wanted to secure electoral momentum. With the exception of the tax breaks that people in the IT sector get, which are older, they are a few years old. They were introduced at a time when Romania did not have a flat rate, but a progressive tax, and the 40% rate applied over a fairly low level of wage income. And then, among the IT-technology sector in Romania – we, like Bulgaria, have a very good school of mathematics and informatics – there was a trend of a massive outflow of young people from Romania who specialised in the technology industry. And out of a desire to keep them here, we ended up with this situation where they were exempted from income tax in order to create an advantage for them to stay at home. That advantage has certainly worked to some extent. But probably the reason they stayed at home is that the big technology companies came to Romania and set up centres here, not this tax advantage, which has now become a bit of a problem, because now the employees in the IT sector are the best paid. They are even better paid than those in the financial sector, who have traditionally been the champions of high salaries in Romania. And the question is being asked in society whether this is fair, especially now that people are feeling the effects of the fact that interest rates on bank loans have risen, that energy has become very expensive. And in these circumstances, the idea that the best-paid group of professionals in Romania is exempt from taxes seems challenging to people, to ordinary employees, whether they are in the field of information technology, doctors, engineers or plumbers. So this is an issue that is hotly debated in the Romanian public.

But also for electoral reasons, the issue of tax breaks does not stop at IT. Employees in the construction industry were also exempted not only from income tax but also from social security contributions. Here again, there is a problem, because this is not fair to other employees in Romania. But, I repeat, these were issues that were introduced with a great electoral flavour, so to speak.

Essentially, Romania collects very little, very little money from taxes. Romania’s budget has very little revenue compared to gross domestic product. Some say that this is due to the flat tax rate, others point to the tax advantages granted to certain professional castes, which distort revenues. So somehow it is not fair, says economic logic, not to tax the income of that area, that professional area, which has the highest income. That is really abnormal and I think, and this is a personal opinion, I think it puts a lot of pressure on the flat rate, on keeping the flat rate, because the point at which you could really change the situation and revisit this whole tax policy in terms of wages would be when you abandon the flat rate.

But this flat rate is also responsible for the increase in income and the increase in gross domestic product. It has provided stability. However, it has not been possible to observe fiscal stability overall in taxation in Romania. For example, tax incentives were introduced for investment in green energy. At some point these were withdrawn and there were a number of other tax changes. Viewed from afar, Romanian taxation seemed unpredictable. So it was an image problem for the Romanian economy that signalled unpredictability.

Years ago, domestic capital in Romania complained that state aid was flowing to foreign capital and that foreign capital in Romania was stronger than domestic capital. How is this equilibrium changing with the Ciuca government, which brings together the so-called old parties that are closer to national capital?

Of course, state aid is more easily absorbed by powerful companies. I am referring here to car manufacturers, which, for example, in 2020 during the pandemic were able to obtain state aid more easily. But they will pay this money back. But one Romanian company, BlueAir, a Romanian aviation company, also received state aid. And this company, which received substantial state aid, failed to repay the money, went bankrupt, and it seems that at the time it received this money, it was quite famous – the bank that eventually gave it this loan with a heavy heart had serious reservations about BlueAir’s ability to recover. So this is where things get really complicated. I can’t say why they give it to somebody and don’t give it to the Romanians. Look, I gave it to the Romanians and that money is gone. The money can be used by other companies to keep the jobs. So, in essence, when a state gives aid, it is certainly doing so for the company in question, but above all for the people who are employed by that company and for the importance that that company has for the country’s economy. So, as I said, when you direct State aid to the automotive industry, when you know how important the automotive industry is to the Romanian economy, you do it because, in the end, I repeat, you will get your money back. So there is a whole discussion here.

But during the government led by Prime Minister Ciuca, during his government and even before that, we saw that they started to create projects and programmes for small and medium-sized enterprises, so they started, if you like, to open up to small and medium-sized enterprises in this sector. On the other hand, the very important state aid that Romania has received is for agriculture. So it cannot be said that only foreign companies have received it, Romanian farmers have also received it. This was the area that received State aid, and we must not forget that State aid is subject to monitoring by the European Commission. So there must be some rules here. There is a whole bureaucracy, is there not, specifically a European bureaucracy for granting State aid.

How is Romania benefiting from the National Recovery and Sustainability Plan? To what extent is EU money fuelling the big road and infrastructure construction at the moment? To what extent are these security considerations linked to the war in Ukraine?

European money is used for infrastructure and for roads, but if you look more carefully at the composition of the National Recovery and Sustainability Plan, there is money for green energy, a lot of money for digitalisation, for digital transformation, and I think Romania, as well as Bulgaria, if you look a little bit here, we are a little bit worse in all the analyses, in competitiveness. So we also need to focus on these areas. Of course, we need infrastructure, because we have not been able to put it in place, but maybe we should hurry up and use money for development, for modernisation of our economies as well, in my opinion. Because we are not doing well enough in terms of innovation, and innovation can only be done with serious investment in companies in Romania and Bulgaria. I am referring here to companies in the health sector that are active in the field of medicines and information technology in general.

Good. Some time ago, the Bucharest Stock Exchange was able to increase its category by attracting more international capital and has now reached a capitalisation of more than EUR 40 billion. How does the development of the stock exchange fit in with the Romanian state’s efforts to develop the Romanian economy and capitalism?

I believe that the best indicator of the efforts that the Romanian State is making to develop the capital market (and I say this with irony) is the listing on the stock exchange of Hidroelectrica, the company that operates the country’s hydroelectric power plants – a listing that has been delayed for years. If Hidroelectrica is listed on the stock exchange, it will succeed in stimulating stock market activity in Romania. Unfortunately, this listing was postponed and, in general, the stock exchange was restored too late in Romania.

Let us take Poland, with which we certainly compare ourselves. Poland is one of the Central and Eastern European countries that left communism at the same time, in the same bloc as us, with Bulgaria, with Hungary, managed to become a developed country and because it restored the stock exchange, the capital market, in 1991. And the chosen headquarters was in the former headquarters of the Central Committee. And that was an extraordinary signal. Why was that important? Because it was listing its major companies on the stock exchange. So it was no longer a question of the state supporting them. It wasn’t. Money came in, investment funds started to appear. Initially, it was not the Poles who invested the most money there, but investment funds, foreign funds. Money came in, they changed the government, they opened up the markets, they imposed regulations, new ways of working and as such they consolidated Polish companies and the Polish economy in such a way that Polish companies invested abroad. Apart from Petrom, we do not have a company that is allegedly investing abroad. The state has not paid enough attention to the stock exchange, I am sorry to say, but it has not made any efforts to develop the capital market.

Let us finish with Poland again. On his recent visit, Polish Prime Minister Morawiecki hosted a business forum together with Romanian President Klaus Iohannis. It was reported that trade between the two countries is EUR 11 billion by 2022. To what extent is the time now ripe for greater business and trade integration in the CEE region?

It is difficult to say whether we will improve our trade relations. This total trade of almost EUR 11 billion unfortunately favours Poland, as we have only exported about EUR 3.5 billion and imported EUR 7.5 billion. So Romania has much, much work to do to balance this. Romania, for example, has no investment in Poland. Poland is the 19th largest investor, but there are more than 1 500 companies operating here in Romania and they have invested around EUR 330 million. So from that point of view, Poland is one step ahead. If they are talking about economic cooperation, they are probably talking about strengthening their business in the region.

But I think the idea here is to create a triangle, as Prime Minister Morawiecki said. He was talking about a triangle of cooperation with the Ukrainians for post-war economic cooperation with Ukraine. It remains to be seen here how this cooperation can be achieved, but I think that at the moment, in fact, Poland is in a much better position. I think that the Poles, as well as the Hungarians, as well as the Czechs, are in great competition to relocate industry from Asia – not only from China, but from Asia in general, because all the problems that there have been with transport flows, the blocking of transport flows in recent years, have led to the conclusion that it is better to make investments, to have industry here in Europe, nearby. And Poland, the Czech Republic and Hungary are very interested. So it is definitely time for partnerships, but let us learn from them, let us see what they are doing and let us, and the Bulgarians, enter this race to attract European investment to our countries.

Photo: Bucharest is a very dynamic city, thanks to the large concentration of foreign and national capital (source: Pixabay, CC0)

Subscribe to the channel of the blog “The Bridge of Friendship” in YouTube, where a number of video and audio interviews are published! The blog can also be followed in Facebook and Twitter. Its Telegram channel is here. And here is its Substack account.

About Author