Romania’s recovery must embrace the full potential of its regions

Oradea, Romania

Romania can trigger a virtuous circle by reducing the inequalities of its regional industrial development.

Beyond the obvious negative effects, the Covid-19 pandemic has emphasised several opportunities for Romania, not only to rebuild the economy but to act in order to make the most of our national production potential and existing capacity towards a sustainable recovery.

It would therefore be beneficial for the future development of industry to pursue the opportunities provided by renewable energy, stimulating innovation and a green industrial future, modelled by a qualified labour force.

We must take advantage of the possibility to develop a new industrial policy based on the understanding of modern technology, sustainability and social cohesion, as solutions to climate change, the economic crisis, and the post-pandemic recovery.

A national strategy focused on industrial policy must build upon the identification of specific local resources (material, but also human) and the governmental tools that would revitalise internal production capacities.

The government may guide industrial policy towards the industries identified as strategic and generating competitive advantages, with the purpose to boost investments in sustainable industrialisation.

At the regional level, more cities may become hubs of economic growth, increasing the number of development poles already in place, reducing the economic and social disparities between different areas, and diminishing the concentration of added value creation solely around consecrated economic centres.

Individual sectors will continue to represent an essential direction for the enforcement of the industrial strategy, but, at the same time, each region should be distinctively encouraged to identify its specific comparative advantages and subsequently be supported to create value and develop them.

The state (through the central administration) is in a convenient position (having a general, ensemble view and the capacity to act) to make an important difference in the valorisation of national development potential by redirecting resources to sustain new activities at the regional level, rather than trying to revitalise declining sectors. This is more likely to sustain long term growth.

For instance, although there could be a justification for sustaining the growth of specific activities in the processing industry, the sector in its entirety has dropped as far as long term occupation is concerned. At the same time, the demand for skills has modified at pace with the economic changes.

Industrial policy must increase social cohesion

From this perspective, industrial policy must not only be multisectoral and calibrated, but should answer the need for equilibrium in regional development, reducing existent disparities and increasing social cohesion.

Bidirectional communication must be attained both from the government to the local administration and regional business sector, emphasising the priorities and opportunities of the global environment (evolutions of the external trade, access to European and international financing, strategic investors’ interest, etc.), as well as the other way around, starting from the identification of local investment opportunities, local comparative advantages and efficient and competitive ways to encourage business environment solutions.

In this context, besides existing state or European and international financing programmes, I believe it would be a good opportunity to allocate funds (perhaps from public-private partnerships) to cover investment necessities at the national level. This may focus for instance on financing manufacturing businesses as well as on the development of (new) regional industrial poles.

During the last trimesters, Romania has seen an economic performance above expectations, considerably higher compared to its regional peers. This is the direct consequence of the surprising resilience of the industrial sector, as well as the strength of the constructions sector.

Support measures for the population and businesses also made an important contribution, while Covid-19 restrictions gradually eased as allowed by the evolution of the pandemic.

Uncertainty remains

Over the next few months, it is expected that the economic recovery will maintain a positive and alert pace, but given the decrease in people’s interest for vaccination, uncertainty remains high.

Should a new pandemic wave (with a probably reduced intensity) hit in the autumn (due to the cold weather) with herd immunity not reached by then, we might witness increased health risks for the population. Therefore, the elimination of all restrictions might be delayed, especially in certain fields of activity that are more exposed, and that may reduce the pace of the economic recovery.

That is why, despite the short term positive evolutions in the management of the pandemic and the economy, we should not stop nor reduce efforts for long term development. Addressing structural vulnerabilities is of utmost importance, because if not dealt with, their negative effects on the economic growth would become visible as soon as the turbulence of the pandemic intensity would settle.

Modern economies are very sensitive to consumer and investor sentiment and these variables have become increasingly volatile as an effect of technological advancement and the high influence of the information flow on immediate consumption, savings, and investment behaviour.

The economic optimism we witness is mostly influenced by present accelerated growth induced by the post-pandemic recovery phase. However, this optimism may diminish and affect consumption as the main component of economic growth.

An unequal recovery

An important challenge we are facing at the moment is that the economic recovery is unequal not only as far as sectors are concerned but also at the regional level, reflecting preexisting disparities. We risk pre-crisis development lags accentuating if actual measures targeting these vulnerabilities are not implemented.

Public investment projects might contribute to the economic development of areas that lag behind because there is potential to increase added value if we make the most of local particularities.

Entrepreneurs will definitely be interested to start and develop new businesses in these areas that would reduce the gaps if there is an opportunity-generating impulse: for instance, the development of infrastructure in these areas.

I am not referring only to transport and communication but also to public health, access to education and lifelong learning, as well as electricity, water, plumbing, and other public utilities, where the state is involved, directly or indirectly.

Numerous studies show that the multiplying effect of public investment is particularly high during recessions or at the beginning of the recovery phase. At the same time, studies show a positive effect on new job creation as well. Therefore, the investments not only improve living conditions but also generate an economic impulse that will most definitely determine the private sector to follow. This has been the case on several occasions, most recently the decisive contribution of the private sector to economic resilience and the recovery that has exceeded expectations.

The fiscal measures implemented during the Covid-19 crisis are necessary and adequate but economists recognise that generally, loose fiscal policies favour consumption, at the expense of future capacities. It is therefore important that the state financial effort be channelled as much as possible toward investments and less toward immediate consumption, which in the case of Romania is often met with imported goods.

Support for agrifood and green finance

Two important directions emphasised by the activity of the Romanian National Committee for Macroprudential Oversight (NCMO) should be followed by all institutions with a role in the economic development of the country and in improving existing vulnerabilities. These include supporting the agrifood sector and green financing.

In both cases, conclusions and recommendations were agreed upon by all participants in the analysis groups including, as appropriate, representatives of the presidency, government, the national bank, the Financial Supervisory Authority, governmental authorities, credit and non-bank financial institutions, the main associations in the respective sectors, and European and international institutions.

From the perspective of the development of agriculture and food industry, I highlight only two recommendations of the NCMO, which may be implemented through legislative amendments: the revision of the certificates of deposit mechanism through close dialogue with credit institutions and related associations; and the amendment of legislation regarding the certification and promotion of agri-food products through cooperation with related associations and appropriate budgeting of these programmes.

Regarding the need to support green financing, the recent report of the NCMO reveals that the climate change agenda has high stakes for the Romanian economy and financial system, from the perspective of opportunities as well as costs, should the green transition be delayed.

It would be inappropriate for political decision-makers to hope that the situation changes for the better by itself or exclusively by the actions of the market and private initiative. This is why we must act decisively to reduce climate risks and ensure a fast but smooth transition to a sustainable economy.

Moreover, a study published in May by the International Monetary Fund showed that “green” public investments have a higher economic impact, including on the labour market.

National effort

Financing projects with low environmental impact that facilitate the transition to a low carbon emission economy is an important catalyst and the analysis groups of the NCMO have identified agreed upon 16 areas of action that target three domains: (i) the sustainable increase of access to financing for projects related to climate change agenda, (ii) supporting the structural change of the economy toward a higher added value economy and (iii) improving transparency, reporting and availability of information related to climate change, as well as raising awareness regarding the impact of climate change on the society and the financial system.

It is the time of a national effort that should take the centre stage of public concerns, in order to develop Romania through an adequate industrial policy, starting from the following requirements: using solutions involving modern technology as a driving force and the innovative ideas generated by the intellectual capital within the society; identifying the industrial sectors with rapid growth and development potential (for instance, agriculture and food industry, IT industry, pharmaceutical industry, manufacturing of goods for new ecological technologies use, etc.); setting industrial development objectives at both sectoral and local administrative levels, using dedicated financing; identifying partners within the private sector; and, setting clear, simple, and precise rules for the interaction between the state and private companies.

The crisis we hope to leave behind has shown once more that many evolutions within the economy and society are interconnected and mutually conditioned.

Similarly, the development opportunities brought by the end of the pandemic are interrelated and connected to the existing vulnerabilities they should address. Romania’s industrial strategy cannot be but closely related to the acute priorities – reducing the vulnerabilities of the external commercial balance with agrifood products, the need to transition to a sustainable, environmentally friendly economy, the necessity to reduce regional development disparities to increase social cohesion.

They are all interrelated and in fact, this is one of the great opportunities of the moment, that is, to trigger a virtuous circle based on these interdependencies that still act against us.

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