Romania’s economic growth needs to be fundamentally rethought

Romania’s economy is on the verge of stagnation. This situation should come as no surprise. Economic growth based on large deficits – both budgetary and external – was unsustainable and could not continue at the pace of the last decade. To resume its economic growth, Romania needs a reset. Economic excesses must be stopped with the mandatory goal of breaking out of the spiral of harmful debt, which can only ultimately lead to default or, in a slightly more optimistic scenario, to a rapid and painful IMF-style restructuring.

Unfortunately, the threat of economic stagnation and a failure to understand the need for economic reset are encouraging political and opinion leaders to talk more and more about the need for immediate economic recovery measures. The great risk of these calls is the failure to understand that, over the next 25 years, Romania will no longer be able to develop economically according to the model of the last 25 years.

Of course, economic growth will continue, but given the acceleration of development brought about by technology, a low rate of economic growth will no longer be sufficient to keep pace with the countries that will be at the forefront of the technological revolution. Please note that I did not use the term “developed countries” above. This is because, perhaps paradoxically, it is not only developed countries that are engaged in the race for technological development, but also countries with more emerging economies.

For this reason, Romania must abandon a prejudice. Investment in the technologies of the future is not the preserve of developed countries. Investments in technology are related to a country’s vision, objectives, and priorities. And choices are not easy to make, especially when there are still disadvantaged social groups in the country and public services are still underdeveloped.

But prioritization is also Europe’s dilemma, isn’t it? Former German Chancellor Angela Merkel once remarked that the EU has 7% of the world’s population, 25% of the world’s GDP, and 50% of social spending. However, demographics no longer make this sustainable. The economic area with the most generous social protection in the world is beginning to lag behind other countries with less generous systems. This latter category includes the US, but also China and India, countries where social polarization remains significant.

Commenting on a ranking of the world’s most innovative countries, The Economist notes two extremely telling developments. On the one hand, the fact that Germany has left the top 10, and on the other hand, that by being in the top 10, China far exceeds its status as an emerging country. Countries with a GDP per capita similar to China’s tend to be in the top 50-60 of the ranking of innovative countries and not in the top 10.

Among the countries that have surpassed their GDP per capita status in the ranking are India and Vietnam. Let’s not forget that, while all eyes are focused on China, India has made remarkable progress, sending spacecraft to the Moon and into Mars orbit. More recently, India has set itself the goal of catching up with the major chip manufacturers by 2032. Mexico, for its part, plans to build the most powerful computer in Latin America within two years, a project estimated to cost €280 million.
The amounts allocated by emerging countries to technological development, despite the lack of resources for quality social assistance, suggest that the choices these countries have made to finance technological leaps have not been easy, but have been considered extremely important and urgent in the long term. This is because a country’s future prosperity and, consequently, its ability to ensure the long-term well-being of its citizens, comes only from strengthening its economic competitiveness. And in the 21st century, this can only happen through massive investment in innovation and technology.
In his famous 2024 report on EU competitiveness, Mario Draghi noted that, if we exclude the IT sector, the EU’s economic growth over the last 20 years has been similar to that of the US. As an article in the Financial Times pointed out, “Draghi understood something very important: that the US economy had flourished not because America built more houses but because, unlike the UK and EU, it had a thriving technology sector. This provided a cauldron of new ideas and new technologies that drove them on — leaving us far, far behind.  A growth strategy that took this understanding on board would look very different; asking, “How can we get more growth?” is the same as asking, “How do we generate more new ideas?”

The problem is that if Europe’s economy continues to diverge from the major technological powers, on the log run, it will no longer be able to provide the social protection standards it has today. These will inevitably deteriorate in the coming years, because the European social protection system was not designed to withstand the demographic bomb brought about by the rapid aging of the population. And in Romania, even less so…

The quality of investments and the development of high-tech, high value-added sectors should lead to an important reset of Romanian economic policy. It is pointless for Romania to boast about the value of public investment at a record level in the EU of 8% of GDP. Its leverage effect, the added value it generated is totally unsatisfactory. Economist Ionut Dumitru mentions in this regard that every 1 leu invested generated less than 1 leu. So many investment projects were just for show, with no economic impact. This means wasted resources and economic backwardness compared to countries that direct their investments towards cutting-edge areas.

Many may wonder what connection the Romanian state could have with accelerating technological innovation. A very important connection, because, as we well know, many projects that have revolutionized the world, of which the internet is just one example, started as civil or military projects funded by the state.

Centers of technological excellence often require state funding, especially in countries where the private sector is not sufficiently powerful, risk-taking or ambitious. The question is: why would the Romanian state not propose such a thing? Especially in a context where the technological revolution is creating unprecedented opportunities. Ukraine is a testament to this.

A country much poorer than any EU country has been able to make the most of its high-quality human resources to compete with and even surpass the military technology of much more economically advanced countries. Today, Ukraine is an exporter of know-how to Western markets, including Romania, in terms of drone technology.

To be effective on the battlefield, you no longer need to know how to build a $100 million F-35 aircraft. Mass production of drones, which cost only a few hundred dollars each, is the key to success. And reality shows us that such a product is within the reach of much less developed countries (Iran, Turkey) than traditional aeronautical powers. What is preventing Romania from developing a solid domestic drone production, given that we export valuable aviation engineers but import drone construction technology at great expense?

A similar example is provided by Bulgaria, through its star company Endurosat, a start-up that designs, builds, and operates satellites for private companies, governments, or scientific research. Endurosat is one of the fastest-growing European company in the field of satellite production. It has offices in Bulgaria, France, Germany, and the US, serving over 350 customers worldwide. Its success story has attracted renowned institutional investors, including the famous Founders Fund, which has invested €43 million in the company.

The fact that it is not a large enough country, or with a sufficiently developed economy, can no longer be an excuse for the lack of interest in technological innovation in Romania. In a European Commission report ranking EU countries according to their capacity for innovation, Romania ranks 27th, last, with an innovation index value of only 37.7% of the EU average, while Bulgaria, immediately above it, stands at 45.8% of the average.

So the fundamental question Romania must answer is how it will ensure that it does not fall behind, resetting the engines of economic growth in a century of technological revolutions. Romania is a major importer of technology, both from the West and the East, and at the same time a major exporter of Romanian brain power and education.

This is a major anomaly that needs to be corrected quickly.

And here we must not be fooled. The fact that there is local brain-power that is used by foreign companies is still another form of export. Scaling ideas is made by foreign companies, which also own the intellectual property rights to the technological solutions.

Given that the private sector in Romania is still reluctant to stimulate research or scale up remarkable technological ideas, budgetary resources and institutional solutions must be identified to enable Romania to advance rapidly in cutting-edge technological sectors.

The military sector, which currently receives substantial European and national funding, could be a starting point. It is curious, to say the least, that we are willing to pay billions and billions of euros to import military equipment, but we do not allocate enough money to keep our aeronautics and IT experts in the country. What is preventing Romania from creating a national center for military and civil advanced technologies, bringing together the best experts in the technologies of the future? Why don’t we have a strategy to attract bright minds from the region or other emerging countries, but apparently we have one to attract large numbers of unskilled labor?

Of course, we cannot be experts in all sectors. But prioritizing 3-4 sectors would first require a vision of the technological advantages that Romania wants to build in the 21st century, possibly starting from the tradition it already has in certain areas, and the allocation of the necessary financial resources.

This brings me back to what I said on another occasion, which shocked many people. The goal of reducing budget expenditures is a great utopia. In fact, total budget expenditures must increase and, at the same time, be restructured and redistributed according to priorities. For this reason, budget revenues must be brought up to European standards, and budget inefficiency must be financially penalized so that other sectors, which are chronically short of money, can receive much more.

In the 21st century, research and technological development should be at the top of the list.

Have a nice weekend!

Translated with DeepL.com (free version)

Translated with DeepL.com (free version)