Romania's economy has grown spectacularly in the last decade, reaching the 26th place out of 145 countries

Romania, together with Vietnam and India, forms the group of states that have impressed, globally, in the last decade with their economic performances. They have risen spectacularly in the global ranking of economic complexity and have also recorded increases in GDP of over 80%.

Romania's economy has grown spectacularly in the last decade. Archive photo

The conclusion results from the analysis of the Economic Complexity Index developed by Harvard University and gives us an important lesson, underlines Daniel Anghel, Country Managing Partner PwC Romania, specifying that this strong growth depends on economic complexity, that is, on a diversified economy in high-value areas.

The analysis points out that the much-needed economic recovery that is being discussed these days can be achieved starting from these conclusions. “The economic recovery plans implemented by Romania in recent years were often general and without taking into account the major transformations the world is going through, brought in particular by technologies. For example, this year's edition of the PwC CEO Survey shows that most business leaders question whether they can keep up with this advance to remain relevant in the future. Governments should ask themselves the same question“, emphasizes Anghel.

What does a complex economy mean?

Harvard's Index of Economic Complexity measures the sophistication of economies based on the structure of exports. The more sophisticated product categories that few countries produce, the more complex a country's economy is. For example, at the top are industrial equipment for metal processing, electrical transformers or precision electronic components.

High complexity means higher added value and higher wages. According to the latest INS data, average net earnings in industries such as computer, automotive or pharmaceutical manufacturing are 25-35% higher than the industry average.

Thus, in order to increase the economy and the general level of economic well-being, the development of complex industries must be stimulated, the analysis also shows. Statistics show a strong correlation between increasing complexity and the rate of economic growth. Overall, 50 countries that have increased their economic complexity in the last ten years have experienced an average economic growth of 50%. At the opposite pole, 50 countries that reduced their complexity had an average growth of just 29%, below the global average of 37%. Among the latter are developed economies such as Germany, France and Japan, but also economies dependent on natural resources such as Norway, Brazil and Russia. France dropped seven places in the complexity ranking and recorded economic growth of just 10%. Germany lost two positions, with GDP growth of 20%.

Romania climbed nine positions. What's next

In the case of Romania, the correlation between the increase in complexity and the increase in GDP is strong. Ranked 26th out of 145 countries analyzed, it has climbed nine positions over the past decade. In parallel, GDP increased by 83% between 2013 and 2023.

“This development was due to European funds and significant foreign investment. The balance of foreign direct investment increased by 95%, from 60 billion euros in 2013 to 118 billion in 2023. In the manufacturing industry, the largest increases in investment were recorded in complex sectors: the production of means of transport (+135%) and the manufacture of computers and electronic products (+164%)“, points out the analyst.

But the projections are that Romania's economy will grow by about 1-2% per year in the coming years. Exports have grown more slowly than the economy, and dependence on partners and declining markets is a worrying sign. More than a quarter of our exports go to Germany and France, and links with German automotive value chains are strong.

The map to diversification

For Romania, the Harvard analysis indicates ample opportunities. Unlike Germany, which needs technological leaps to find new areas of growth, Romania can advance by incremental steps, capitalizing on already existing capabilities.

The analysis identifies areas with potential, essential for the energy transition and smart grids, such as electrical equipment and industrial machinery, electrical panels, motors and electrical generators. Other promising segments are the railway sector, that of agricultural machinery.

These sectors can sustain growth over the next 5-10 years. But for the 2035-2040 horizon, the seeds for even more complex industries like integrated electronic circuits must be planted now, as everything from artificial intelligence to electric cars relies on these components.

In the next 15 years, Romania will not become a state-of-the-art chip manufacturer like Taiwan, but it can aim to become a relevant player in the European ecosystem, focusing on chip design and R&D or attracting investments in packaging, assembly and testing, segments in which significant European funds are available.

Three levers for increasing complexity

Diversification cannot be done without a mix of existing capabilities and public policies, and the increase in economic complexity rests on three pillars, Anghel claims.

According to him, the first is attracting foreign investments that bring know-how, not just jobs. Romania has already experienced the effect of knowledge transfer through factories and research centers opened by foreign companies. This must be continued, providing not only incentives but also a stable and predictable economic and fiscal environment.

The second pillar is the acquisition of know-how through investments of Romanian companies abroad. In this regard, Romania is far behind other European countries and even its neighbors. Supporting national economic champions in making strategic international purchases should become a priority.

The third is cultivating the entrepreneurial and startup ecosystem that can generate the endogenous innovation we need in the long term.

All this must be accompanied by investment in education and training aligned with the needs of the growing sectors.

“Romania is at an inflection point. The evolution of the last decade shows that it can climb the scale of economic complexity, but future challenges, from the reconfiguration of the automotive industry to the energy transition and the advance of artificial intelligence, will test the ability to adapt. Romania now has the capabilities, opportunities and the right timethe question is whether he will have the vision and discipline to act in the right direction“, emphasizes the PwC analyst.