Valentin Lazea, the chief economist of the National Bank of Romania (BNR), stated that Romania's economic growth potential is currently between 3.5% and 4%, considering the country's current development level. The notion that Romania can achieve higher growth rates is a myth that needs to be dispelled. Lazea expressed this view during the "Romania's Path to Excellence through OECD Membership" conference organized by the Association of Financial-Banking Analysts in Romania (AAFBR).
Economic Growth Potential
Lazea explained that a high-income country like Romania, as classified by the OECD, cannot sustain growth rates of 5-7% anymore. Such growth was possible between 2001 and 2010 when Romania's development level allowed for increases of 5-6%. From 2010 to 2020, growth potential was 4.5-5%. Now, it is 3.5-4%, and the expectation of growing at 7% is unrealistic.
Constraints on Growth
When asked why Romania cannot grow by 5-6%, Lazea pointed out the three components of potential GDP: capital, labor force, and productivity. He emphasized significant issues with the labor force, including demographics, education, labor force participation, and migration. The labor force is very limited, which restricts growth despite available capital and increased activity. Romanian employers today face the problem of having to pay more than the productivity of their workers justifies. The belief that Romania can grow at any rate is a fallacy.
Romania's OECD Comparison
Inflation: If Romania were to join the OECD today, it would have the fourth highest inflation rate, with higher rates only in Turkey (68%), Colombia (7.4%), and Iceland (6.8%).
Budget Deficit: The Economist forecasts that only the US will have a budget deficit over 6% this year. Romania would share the lowest spot in the OECD with the US, having a deficit of 6.1%. Other countries like Turkey (4.6%), Colombia (5.1%), and Mexico (4.7%) have lower deficits.
Current Account Deficit: Romania would rank last with a deficit of 6.5%. Turkey has a 3% deficit, Colombia 3.1%, while Poland, Hungary, and the Czech Republic have surpluses.
Economic Growth: Romania performs well in terms of economic growth, with a rate of 2.5%, surpassed only by Turkey with 4%.
Myths Affecting Romania's Economy
Lazea identified three prevalent myths that have negatively impacted Romania's macroeconomic status:
Myth 1: Economic Growth Must Be as High as Possible: Many believe growth should exceed potential, even if it leads to higher inflation. This perspective is mathematically impossible and ignores the fact that as a country's GDP per capita grows, it approaches the production possibility frontier, limiting growth potential.
Myth 2: Budget Deficit Doesn't Matter Due to European Funds: European funds are recorded both in budgetary expenses and revenues. Without these funds, budget revenues are 27% of GDP and expenses are 33%, resulting in a 6% deficit. Including European funds, revenues are 33% of GDP, expenses are 39%, but the deficit remains 6%.
Myth 3: Growth Model Based on Consumption Rather Than Exports: In Romania, 80% of GDP is consumption. A more balanced approach would reduce consumption to 75% and increase exports, which would improve the net export deficit.
Conclusion
Romania's economic challenges are multifaceted, including labor force limitations and misconceptions about sustainable growth rates. Addressing these myths and focusing on balanced economic policies will be crucial for Romania's future development.
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