Bogdan Ion, Country Managing Partner, EY Romania & Moldova & COO EY South-East & Central Europe and Central Asia, opened Business Review’s Foreign Investors Summit 2021 with a powerful keynote speech on Romania’s competitiveness in the medium and long-term. You can read the entire intervention below and also download the insightful presentation here, as well as rewatching Bogdan Ion’s speech in the embedded YouTube player inside the article.
„I will try to organize some of the opportunities and the challenges of improving Romania’s competitiveness. I believe this is a topic on everyone’s mind, be they local entrepreneurs, foreign investors, or state representatives. At the same time, I think we should not ignore reality. We face the critical issue of high mortality rates due to COVID, we continue to experience a political crisis, coupled with record-high energy prices. However, even though it may not be easy now, we should also consider a longer-term view.
Coming back to our topic of competitiveness, the main questions are: How do we see ourselves competing as a country, and what are the key drivers for growth? Do we look forward to a growth model primarily based on manufacturing, or rather services?
Romania seems to be expanding in both, like Poland, and this is a really favorable development. Another good development is the high share of ICT in value-added, and we are ranking well here.
The growth of exports in Romania, and other CEE countries, has for many years exceeded the growth recorded in Western European economies. Here again, Romania is scoring well.
However, in our view, Romania’s competitive approach has been mainly based on cheap labor and technology adoption, supported by foreign direct investments. In the context of economic convergence and increasing labor costs, these growth drivers are slowly exhausting. Therefore, Romania needs to compete increasingly on quality and less on low costs. It’s crucial to raise labor productivity. This, among other factors, requires improvement in the areas of education and healthcare, as we all know. And we also know that more foreign direct investments could still be attracted if institutional framework and infrastructure will improve.
Addressing these four areas where we significantly underperform, would most likely lead to better technological absorption, and also generate domestic investment and innovation, where we also score very low. Indeed, according to the European Innovation Index, Romania is the least innovative EU country. We are lagging well behind the EU average in the vast majority of indicators, other than Internet access, venture capital, medium and high tech exports, and sales of innovative products.
Demography is also a huge challenge in the long term. According to Eurostat, we might record a 37% drop in active population by 2060. We are placed towards the extreme end of this spectrum.
This will most likely translate into a shrinking domestic market and possibly an existential crisis for our economy. The ratio of people aged between 20 and 64 to people older than 65 is projected to fall to 1.6 in Romania in 2060, down from 3.2 in 2020, and this trend will be faster than the EU average.
So if we are to address all these challenges, including the existential crisis of the domestic market in the years ahead, this would mean to start now strategically transition towards a knowledge economy. When we say knowledge economy, we might think of Silicon Valley and high-tech startups, but this is just a partial image. Knowledge economy would imply innovation, either by the adoption of available technologies or by local innovation, which will manifest and spread across sectors, from agri-business to heavy industry.
While we encourage intellectual property creation and retention in Romania, focusing on the knowledge economy transition would help to achieve higher productivity, keeping in and attracting highly skilled labor in Romania.
Having said all of that, let’s take a step back for a moment. In our history, the key topics for our development were modernization and westernization, at least since the 1848 revolution. For many years now, we have discussed about convergence and reforms to catch up with the West. Now, in our Recovery and Resilience Facility Plan, we find the word modernization more than 150 times. We have almost always been in catch-up mode, in a mindset of modernization through replication, but not bringing in innovation and fresh perspectives.
Hopefully, reforms such as the state digitalization and the pension system reform, plus the funds available under this recovery and resilience facility will represent an important boost in the transition to a knowledge economy. And in addressing structural challenges, in the pandemic context, and given the sustainability imperative, we need maybe more than ever public policies to guide the transition to a knowledge economy and move away from low labor cost-led growth. In other words, we need public policies to help Romania shape its own and unique knowledge economy architecture.
Concluding, we are at an important crossroads as an economy and country. Even if as individuals we could feel like surrendering at times, as businesses and business people, we can never give up. It is our responsibility and duty to increase the pressure for accelerating change and bring long-term value to the Romanian society.
I hope the discussions during the Foreign Investors Summit will help move forward the topic of Romania’s long-term competitiveness and growth.
Finally, I want to thank Business Review for challenging us to explore answers on this topic, particularly now.”
Bogdan Ion, Country Managing Partner, EY Romania & Moldova & COO EY South-East & Central Europe and Central Asia