Romanian Economy - Structural Developments

Abstract

Romanian economy has been the champion of the European economic convergence process over the past decades. The GDP/capita at PPS as percentage of the EU average increased from around 30% in 1995 to 79.3% in 2023, a level very close to Poland (79.7%), according to Eurostat estimates. This evolution was determined by the forces of the EU integration, including the massive capital inflows (FDIs, EU funds, remittances), and the human capital outflows. However, the economic growth and development model determined by the EU integration forces seems to come to the end, as pointed out by the recent macroeconomic developments. The annual growth pace of the Romanian economy significantly decelerated in 2023 (to 2.1%) and 2024 (to 0.7% in first half of the year), while the twin deficits persist at very high levels. This paper applies standard econometric tools and uses the International Monetary Fund database in order to assess the structural developments in Romania over the past decades and to identify the main challenges for the coming decade. According to the results, the Romanian economy is facing the risk of another severe adjustment in the coming quarters, due to the unsustainable pro-cyclical income policy, the low efficiency of the investments, and the upward trend of the public debt/GDP ratio (as the financing costs are higher than the the growth pace). Furthermore, Romania is confronted with the risk of initiating a divergence process from the EU average in the future, unless structural reforms are accelerated. DOI: https://doi.org/10.53486/cike2024.06; UDC: 338.24.021.8(498):061.1EU; JEL Classification: E60, F41, O10