Publisher: IFC – World Bank Report (www.ifc.org)

Romania’s private sector development faces challenges in the workforce’s education and national infrastructure, limiting industrial growth and hindering innovation. Sustainable economic growth is possible if Romania focuses on workforce education and training and welcomes private investment in industry to improve competition. IFC’s report provides an overview of Romania’s current economic performance, significant constraints, and possible opportunities to improve economic conditions.

Original Executive Summary

Country Context

Romania has made impressive strides in economic performance over the past two decades, as EU integration helped accelerate income convergence towards the bloc’s average. Between 2000 and 2022i, Romania’s income per capita in PPP (2017 international US$) rose from 26.4 percent to 76.7 percent of the EU average, real GDP per capita in PPP more than doubled (from US$12,177 to US$32,738). GDP grew at an average annual rate of 3.5 percent (nearly triple the EU average). Moreover, Romania’s economic growth has shown substantial resilience in the face of the pandemic, Russia’s invasion of Ukraine, and the associated economic shocks.

The shift towards sustainable, well-governed, and inclusive economic growth remains in progress, with headwinds for the private sector. Although high on average, Romania’s economic growth has been very volatile, mainly driven by consumption, and associated with significant environmental externalities—such as high levels of air pollution in urban areas. The productivity dividends from the reforms spurred by EU accession in 2007 have dwindled due to gaps in governance and quality of institutions, unfavorable demographics, and acute skills shortages that affect the quantity and quality of labor. Structural transformation remains ongoing: agriculture still accounts for a large share of employment, while the relative contribution of services to GDP and employment is the lowest in the EU. Despite the availability of sizable EU funds, infrastructure remains underdeveloped relative to the country’s income level, constraining private investment and productivity in several key sectors. Unsustainable wage dynamics and an aging and shrinking labor force further compromise productivity. The country’s vast shadow economy, estimated at 21 percent of GDP, generates additional challenges. Informal workers are a major labor market component, especially in low-skilled roles. Private investment has been relatively high, but a shallow financial sector limits the availability of long-term finance.

Substantial internal inequalities exacerbate the country’s challenges and highlight the urgency of expanding access to economic opportunities and better jobs. Although robust economic growth has translated into poverty reduction, Romania still has the highest poverty rate in the EU. Approximately 45 percent of the population lives in rural areas, where the poverty rate is six times as high as in metropolitan areas. Disparities between leading and lagging regions and between urban and rural zones are large and often widening. The Systematic Country Diagnostics (SCD) 2018 summarized the overarching narrative of the country’s socio-economic development as “A Tale of Two Romanias”: one urban, dynamic, and integrated with the EU; the other rural, poor, and isolated.1 The population in the bottom 40 percent of the income distribution has limited access to productive employment and struggles to reap the benefits of economic growth. Nearly half of those in the bottom 40 percent do not work, while 28 percent engage in subsistence agriculture. Social disparities are widening, with vulnerable groups such as the Roma facing deprivation on multiple fronts and often living in precarious conditions. Additionally, the gender gap in labor force participation is the largest in the EU, and female entrepreneurship is undercapitalized in Romania, with disparities in self-employment rates across genders and with only 17.2 percent of companies having a female top manager – see Romania Gender Assessment (forthcoming) for more details.

Two recent shocks and impending transitions highlight existing gaps and opportunities for a more inclusive, resilient, and sustainable private sector−led growth model. The COVID-19 pandemic and Russia’s invasion of Ukraine have tested Romania’s economic resilience and left considerable scars, particularly on the country’s human capital. The green and digital transitions can bring significant opportunities to Romania, but it needs a supportive institutional environment and a workforce ready for future changes.

The focus of the report

The first part of this Country Private Sector Diagnostic (CPSD) provides an overview of Romania’s economic performance and five key cross-cutting constraints to private sector development in the country. First, the inadequate education of the workforce has shot up the list of constraints in the business environment, as reported by firms. Second, the business environment tends to be unpredictable—a consequence of institutional shortcomings, including deficiencies in governance. Third, impediments to competition, associated with a relatively high degree of state control of the economy and barriers to entry (especially in services), distort market outcomes and hamper the efficient allocation of resources. Fourth, Romania’s economy has little innovative capacity, mainly due to chronic underinvestment and shortages of skills. Fifth, essential infrastructure (e.g., energy and transport) suffers significant shortcomings. Other cross-cutting issues (for example, challenges in the education system) are analyzed in depth in the Romania 2023 SCD Update2, while the Romania Country Climate and Development Report (CCDR) provides an in-depth overview of climate objectives and the potential implications for the economy and people.

The second—and core—part of the CPSD explores how Romania can harness private investment in three critical enabling sectors to reignite sustainable economic growth and social inclusion. To identify short- to medium-term opportunities for private sector growth and enhanced service provision across the country, the CPSD focuses on crucial sectors featuring gaps that affect the whole economy. These are the energy sector, with a focus on renewables; the transport sector; the financial sector, with an analysis focusing on inclusion through digitalization on the one hand; and the sector’s readiness for the green transition. Notably, surveys of Romanian firms identify shortcomings in the transport and financial sectors among the top constraints in the business environment, and a wealth of analytical work shows that private sector-led solutions can address many such gaps. Renewable energy and energy efficiency are strategic areas in the European Green Deal, offering technological solutions that are increasingly cost-effective and need to be deployed at scale. At the same time, Russia’s invasion of Ukraine has brought to the fore a renewed emphasis on energy security. The financial sector has a crucial role to play not only in enabling green growth by mobilizing and allocating private capital but also in expanding access to finance for individuals and micro, small, and medium enterprises (MSMEs), thus helping bridge regional divides and fostering social inclusion.

In addition, three “tradeable opportunity highlights”—focusing on industry, services, and agriculture—outline how improvements in the critical enabling sectors could expand opportunities for trade across the economy. Specifically, Opportunity Highlight 1 explores how Romania’s private sector may find a role in new, green value chains (e.g., supplying inputs or components for electric vehicles and wind or solar power generators), building on the green transition and recent global trends toward reshoring and nearshoring. Opportunity Highlight 2 examines how Romania can boost the performance of the services sector—which lags the EU average on many dimensions—to maximize benefits for the broader economy. Relevant steps include improving digital skills, boosting enrolment in tertiary education, and enhancing management practices at the firm level. Finally, Opportunity Highlight 3 recognizes that while agriculture remains an essential sector of the Romanian economy and a large employer, its productivity is significantly lower than the EU average, and the gap is not showing signs of closing. Addressing key constraints—such as underinvestment in mechanization due to limited access to finance, a shortage of specialized skills, impediments to technology adoption, lack of economies of scale, and infrastructural and geographical barriers that hinder access to markets—can boost agricultural productivity and value addition.

To download the report, please access: https://www.ifc.org/en/insights-reports/2023/romania-country-private-sector-diagnostic