## 1. Romania and the External Balance Assessment

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---

### Introduction
- Romania’s current account reached a deficit of -7.0 percent of GDP in 2021 and is "set to remain similarly elevated in 2022."
- The deficit has been largely financed via FDI and capital transfers from the EU.
- The IMF’s standard External Balance Assessment (EBA) model (first inclusion of Romania) estimates the 2021 current account was about 5 percent of GDP weaker than the level implied by macroeconomic fundamentals and desirable policies.
- IMF staff find standard EBA models do not fully capture fiscal policy as a driver; part of the widening current account is explained by higher household income share, large EU capital transfers, stable long-term financing, and COVID-19–related temporary factors.

### Drivers of the Current Account Imbalance
- Fiscal dynamics and household income distribution:
  - Structural fiscal and current account balances have steadily deteriorated in tandem since 2014, consistent with "twin deficits" literature.
  - Government savings fell by 7 percent of GDP over 2015–2021; government investment fell by 1.6 percent of GDP over the same period.
  - The decline in the government savings-investment balance was 5.4 percent of GDP over 2015–2021, compared with an overall decline in the current account balance of 6.3 percent of GDP.
- Household income share:
  - Net household income: peaked at almost 73 percent of GDP in the mid-2000s, fell to about 63 percent of GDP by 2014, then increased to become the largest in the region, edging out Poland in 2019.
  - Rising household share contributed to lower national savings given households’ higher marginal propensity to consume.
- Real exchange rate and competitiveness:
  - GDP-deflator–based real exchange rate shows a cumulative 15 percent appreciation since 2010, suggesting erosion in external competitiveness.
  - Unit labor costs surged after 2015 following earlier declines.

### Trade Composition and External Flows
- Current account composition:
  - Decline in the merchandise trade balance since 2014 driven mostly by increased imports and a fall in exports as a share of GDP.
  - About half of the change in the merchandise trade balance since 2014 driven by net imports of consumption goods excluding autos and gas; most of the rest by increased imports of intermediate goods (industrial inputs and parts).
  - Imports of capital equipment remained virtually unchanged as a share of GDP over the past decade and well below the peaks seen in the 2000s.
- Category and regional trade shifts:
  - Largest change in consumption categories: semi-durables and clothing (2 billion euro decline in trade balance over 2015–2021 due to a doubling of imports and fall in exports).
  - Romania became a strong net importer of food and beverages despite having the largest agricultural sector as a share of GDP in the EU.
  - Romanian merchandise exports fell by about 4 percentage points of GDP over 2014–2021, mostly on exports outside the EU.
  - Imports from outside the EU rose by about 2 percentage points of GDP (mostly intermediate goods); imports from the EU were broadly steady.

### Fiscal–External Interactions and the Twin Deficit Pattern
- Empirical linkage:
  - Cyclically-adjusted fiscal deficit and external imbalance moved from near balance in 2014–2015 to deficits of 6.4 percent of GDP (structural fiscal) and 7 percent of GDP (current account) in 2021.
  - National Bank of Romania counterfactual: fiscal expansion (including lowering social security contributions and VAT reductions) led to a 3.9 percent of GDP decline in the trade balance.
- Model limitations and residual:
  - Standard EBA fiscal pass-through coefficient may understate the fiscal impact for Romania; an alternative specification implies a larger fiscal effect on the current account.
  - The portion of the current account deficit unexplained by the standard model (the residual) could reflect higher household income share, large EU capital transfers and stable long-term financing, and temporary COVID-19 effects.

### External Balance Sheet and Risk Assessment
- External liabilities and financing:
  - External liabilities concentrated in direct and other investment, reducing rollover risk.
  - International investment position improved since the start of the current-account widening cycle due to strong growth over the past decade.
  - External debt securities (mostly sovereign debt) have doubled as a share of GDP to almost 20 percent.
  - FDI dropped precipitously during the COVID-19 pandemic; a large share of foreign investment is structured as intra-company debt that could be withdrawn in a global shock.

### Policy Recommendations and Conclusions (from chapter)
- Primary policy priority: fiscal consolidation designed to maximize its impact on the current account.
- Specific fiscal measures recommended:
  - Contain growth in the public sector wage bill.
  - Moderate pension increases.
  - Undertake tax reform (noting past measures: flat income tax lowered from 16 percent to 10 percent in 2018; VAT reduction in 2015 referenced).
  - Maintain fiscal space for investments to boost potential growth and international competitiveness.
- Complementary measures:
  - Structural reforms to improve competitiveness and export performance.
  - Greater exchange rate flexibility to assist external adjustment.
- Rationale:
  - Reducing demand for imported consumer goods via fiscal consolidation (and targeted reforms) addresses the largest components of the merchandise trade deterioration and the twin-deficit dynamics identified.

### EBA Model Findings, Decomposition, and Alternative Specification
- EBA results and gaps (Romania 2021):
  - Actual Current Account: -7.0 (percent of GDP)
  - Cyclically-Adjusted: -6.7
  - EBA Norm1/: -1.9
  - Total Gap (3 - 2): -4.8
  - o/w Policy Gaps: 0.2
  - Unexplained Residual (4 - 5): -5.0
  - Standard Error of the Norm: 0.7
  - 1/ Includes Multilateral Consistency and Cyclical Adjustments.
- Fitted current account components (reported):
  - Fitted CA: -2.5
    - NFA -1.6
    - Policy Factors 0.6
    - Demographics -0.5
    - Constant -0.5
    - Cyclical Factors -0.4
    - Institutional Quality 0.3
    - Expected GDP Growth -0.3
    - Others -0.1
  - Contribution of policies at desirable levels: 0.4
  - EBA Norm (Fitted - ∆ actual and desirable policies): -2.7
  - Multilateral Consistency (MC) Adjustment: -2.4
  - MC Cyclically Adjusted Norm: -1.9
- Interpretation:
  - Actual 2021 current account: -7 percent of GDP, or -6.7 percent of GDP after cyclical adjustments.
  - Gap between actual cyclically-adjusted current account and MC cyclically-adjusted norm (-1.9) is -4.8 percent of GDP.
  - Calculated policy gap for Romania in 2021 is 0.2 percent of GDP (slightly positive), reflecting that the rest of the world was even farther from desirable fiscal policies than Romania in 2021.
  - Specific fiscal figures cited:
    - Romania’s cyclically-adjusted fiscal deficit: 6.7 percent of GDP.
    - Romania’s desirable medium-balance (per baseline EBA): 3 percent of GDP.
    - Global sample cyclically-adjusted fiscal deficit: 5.7 percent of GDP.
    - Global sample desirable medium-balance: 1.6 percent of GDP.
- Model misspecification concerns and alternative:
  - EBA uses a coefficient of 0.31 for changes in the fiscal deficit (1 percent of GDP larger fiscal deficit → current account reduced by 0.31 percent of GDP).
  - For Romania, reasons to expect higher pass-through: high openness, lack of capital account restrictions, EU membership sustaining inflows, fiscal shifts from corporates to households with low saving propensity.
  - Alternative specification:
    - Assumes fiscal deficit coefficient of 0.66.
    - Sets "desirable" fiscal balance at world sample level of 1.6 percent of GDP (instead of 3 percent).
    - Under this alternative, most current account widening since 2015 is explained by increased fiscal deficits; in 2021 about half the current account gap remains unexplained (possibly due to COVID-19 factors and supply chain disruptions).
- Current account financing and model limits:
  - Financial and capital accounts dominated by long-term investment, concentrated in the automotive sector.
  - Capital transfers are large; Recovery and Resilience Facility financing stands to raise transfers to Romania to about 2 percent of GDP annually into the medium term.
  - Such unique financing sources may not be fully accounted for in the model.

### Structural Reforms, Regional Development, and Convergence (selected sections)
- Structural reform priorities:
  - Strengthen public investment management to absorb more EU funding and use both EU and domestic investment funds more efficiently.
  - Raise quantity and quality of infrastructure to boost growth potential.
  - Increase productivity via digitalization; strengthening anti-corruption framework; improving health and education systems; reforming SOEs.
  - Ensure further wage growth does not erode international competitiveness.
  - Complement reforms with greater exchange rate flexibility over the medium term.
- National convergence and demographics:
  - Per capita GDP: 16 percent of the EU14 in 2006; grew at an average annual rate of 3.6 percent, reaching 32 percent of the EU14 average by 2019.
  - Working-age population decline: fell by 12 percent over 2006–2019.
  - Gini coefficient: 2000: 29; 2019: 35.
  - Redistributive impact: reduces the Gini coefficient from 52 before taxes and transfers to 35 after taxes and transfers (2019); in 2019 pensions provided 86 percent of the reduction in the Gini coefficient from before taxes and transfers, compared to 74 percent in 2007.
- Regional disparities and growth drivers:
  - Convergence uneven: Greater Bucharest concentrated growth; poorest region had per-capita GDP of 47 percent of Romania’s average in 2018.
  - Investment, human capital, and institutions critical for regional growth.
  - Infrastructure: 677 km of new highways added in recent years, mainly in Western and Central regions and between Bucharest and the Black Sea.
- Migration and demography:
  - Population shrinking and aging due to fertility below replacement level, rising life expectancy, and continued net emigration.
  - Emigration of working-age population raises dependency ratios and can lower productivity; remittances can reduce poverty and boost investment.
- Cluj-Napoca case study (high-level summary):
  - Cluj-Napoca: about 425,000 inhabitants; ~100,000 students; Cluj County fastest-growing since 2007; Cluj is Romania’s foremost IT hub with over 800 IT companies and 16,000 software engineers, supplying 78 percent of Romania’s IT exports.
  - Success factors: strong higher education and research base, local public infrastructure and innovation parks, partnerships across city-university-private sectors, governance promoting innovation, international connectivity, and cultural attractiveness.
- Policy implications:
  - Combine macroeconomic levers (greater exchange rate flexibility) with structural reforms to raise labor productivity.
  - Improve public investment management to better absorb EU and domestic funds.
  - Target policies to support ICT and S&T sector development; improve health and education; strengthen anti-corruption and SOE reform; address regional connectivity and infrastructure gaps; incorporate demographic and migration dynamics into regional strategies.

*Prepared by Lawrence Norton and Wei Zhao; IMF staff calculations; August 31, 2022.*

### 1. Romania and the External Balance Assessment_________________________________________ 10

### 1. Romania and the External Balance Assessment

### Introduction
- Romania’s current account has steadily deteriorated over the past decade, reaching a deficit of -7.0 percent of GDP in 2021 and "set to remain similarly elevated in 2022."
- The deficit has been largely financed via FDI and capital transfers from the EU.
- The IMF’s standard External Balance Assessment (EBA) model (first inclusion of Romania) estimates the 2021 current account was about 5 percent of GDP weaker than the level implied by macroeconomic fundamentals and desirable policies.
- IMF staff find standard EBA models do not fully capture fiscal policy as a driver and that part of the widening current account is explained by higher household income share, large EU capital transfers, stable long-term financing, and COVID-19–related temporary factors.

### Drivers of the Current Account Imbalance
- Fiscal dynamics and household income distribution:
  - The structural fiscal and current account balances have steadily deteriorated in tandem since 2014, consistent with the "twin deficits" literature.
  - Government savings fell by 7 percent of GDP over 2015–2021; government investment also fell by 1.6 percent of GDP over the same period.
  - The decline in the government savings-investment balance was 5.4 percent of GDP over 2015–2021, compared with an overall decline in the current account balance of 6.3 percent of GDP.
- Household income share:
  - Net household income peaked at almost 73 percent of GDP in the mid-2000s, fell to about 63 percent of GDP by 2014, and then increased to become the largest in the region, edging out Poland in 2019.
  - A rising household share of national income contributed to lower national savings given households’ higher marginal propensity to consume.
- Real exchange rate and competitiveness:
  - Cost-based measures point to real exchange rate appreciation; the GDP-deflator–based real exchange rate shows a cumulative 15 percent appreciation since 2010, suggesting erosion in external competitiveness.
  - Unit labor costs surged after 2015 following earlier declines.

### Trade Composition and External Flows
- Current account composition:
  - The decline in the merchandise trade balance since 2014 has been driven mostly by increased imports and a fall in exports as a share of GDP.
  - About half of the change in the merchandise trade balance since 2014 has been driven by net imports of consumption goods excluding autos and gas; most of the rest by increased imports of intermediate goods (industrial inputs and parts).
  - Imports of capital equipment remained virtually unchanged as a share of GDP over the past decade and well below the peaks seen in the 2000s.
- Category and regional trade shifts:
  - Largest change in consumption categories: semi-durables (including most household items) and clothing (2 billion euro decline in trade balance over 2015–2021 due to a doubling of imports and fall in exports).
  - Romania became a strong net importer of food and beverages despite having the largest agricultural sector as a share of GDP in the EU.
  - Romanian merchandise exports fell by about 4 percentage points of GDP over 2014–2021, mostly on exports outside the EU.
  - Imports from outside the EU rose by about 2 percentage points of GDP (mostly intermediate goods); imports from the EU were broadly steady.

### Fiscal–External Interactions and the Twin Deficit Pattern
- Empirical linkage:
  - Romania shows a close relationship between the cyclically-adjusted fiscal deficit and the external imbalance: both moved from near balance in 2014–2015 to deficits of 6.4 percent of GDP (structural fiscal) and 7 percent of GDP (current account) in 2021.
  - National Bank of Romania counterfactual analysis assessed fiscal expansion (including lowering social security contributions and VAT reductions) led to a 3.9 percent of GDP decline in the trade balance.
- Model limitations and residual:
  - The standard EBA specification uses a fiscal pass-through coefficient (cited literature range and EBA coefficient) that may understate the fiscal impact for Romania; the paper proposes an alternative specification implying a larger fiscal effect on the current account.
  - The portion of the current account deficit unexplained by the standard model (the residual) could reflect: higher household income share, large EU capital transfers and stable long-term financing, and temporary COVID-19 effects.

### External Balance Sheet and Risk Assessment
- External liabilities and financing:
  - External liabilities are concentrated in direct and other investment, reducing rollover risk.
  - International investment position improved since the start of the current-account widening cycle due to strong growth over the past decade.
  - External debt securities (mostly sovereign debt) have doubled as a share of GDP to almost 20 percent, remaining a relatively small but growing share of external liabilities.
  - FDI dropped precipitously during the COVID-19 pandemic; a large share of foreign investment is structured as intra-company debt that could be withdrawn in a global shock.

### Policy Recommendations and Conclusions
- Primary policy priority: fiscal consolidation designed to maximize its impact on the current account.
  - Specific fiscal measures recommended:
    - Contain growth in the public sector wage bill.
    - Moderate pension increases.
    - Undertake tax reform (noting past measures: flat income tax lowered from 16 percent to 10 percent in 2018; VAT reduction in 2015 referenced).
  - Maintain fiscal space for investments to boost potential growth and international competitiveness.
- Complementary measures:
  - Structural reforms to improve competitiveness and export performance.
  - Greater exchange rate flexibility to assist external adjustment.
- Rationale:
  - Reducing demand for imported consumer goods via fiscal consolidation (and targeted reforms) addresses the largest components of the merchandise trade deterioration and the twin-deficit dynamics identified.

*Prepared by Lawrence Norton and Wei Zhao; IMF staff calculations; August 31, 2022.*

### 15.      Current account models have generally found a significant negative gap between

### 15.      Current account models have generally found a significant negative gap between

### EBA model findings and observed current account
- The latest External Balance Assessment (EBA) model, applied to Romania for the first time in 2022, finds a cyclically-adjusted current account norm of about -2 percent of GDP for Romania in 2021.
- The previous EBA Lite model found a norm of -1.5 percent of GDP for 2020.
- A similar methodology used by the European Commission assesses the current account norm to be close to balance.
- Romania’s actual 2021 current account deficit was -7 percent of GDP, or -6.7 percent of GDP after cyclical adjustments.
- The gap between the actual cyclically-adjusted current account and the multilaterally consistent, cyclically-adjusted current account norm of -1.9 percent of GDP is thus -4.8 percent of GDP.
- EBA “fit” indicates most of the increased external deficit is unexplained by the model for recent years; the gap widened over 2020–2021, likely reflecting difficulty modeling series of shocks since the COVID-19 pandemic began.

### EBA model structure and key inputs (Box 1)
- Sample and estimation:
  - Sample of 52 countries using annual data for the 1986–2019 period.
  - In 2022 Romania and two other countries were added, based on data through 2021.
  - Estimated using pooled Generalized Least Squares (GLS) with a panel-wide AR(1) correction.
  - Country fixed effects and lagged current account are not included.
- Determinants grouped as:
  - Cyclical factors (including output gaps and commodity terms of trade).
  - Macroeconomic fundamentals (including net foreign assets, output per worker, expected GDP growth).
  - Structural fundamentals (including demographics, institutional quality, exhaustible resources).
  - Policy variables (fiscal policy, health spending, foreign exchange intervention, financial excesses).
- Key model logic:
  - Regressors expressed as deviations from the GDP-weighted global average to ensure multilateral consistency and allow decomposition of domestic vs foreign components.
  - The exchange rate is not an explanatory variable and is assumed to adjust endogenously.

### Decomposition and specific numeric contributions (Romania 2021)
- Fitted current account components (as reported):
  - Fitted CA: -2.5
    - NFA -1.6
    - Policy Factors 0.6
    - Demographics -0.5
    - Constant -0.5
    - Cyclical Factors -0.4
    - Institutional Quality 0.3
    - Expected GDP Growth -0.3
    - Others -0.1
- Contribution of policies at desirable levels: 0.4
- EBA Norm (Fitted - ∆ actual and desirable policies): -2.7
- Multilateral Consistency (MC) Adjustment: -2.4
- MC Cyclically Adjusted Norm: -1.9
- EBA Analysis summary table (percent of GDP):
  1. Actual Current Account -7.0
  2. Cyclically-Adjusted -6.7
  3. EBA Norm1/ -1.9
  4. Total Gap (3 - 2) -4.8
  5. o/w Policy Gaps 0.2
  6. Unexplained Residual (4 - 5) -5.0
  7. Standard Error of the Norm 0.7
  - 1/ Includes Multilateral Consistency and Cyclical Adjustments.

### Interpretation of policy gaps and residuals
- The calculated policy gap for Romania in 2021 is slightly positive (0.2 percent of GDP), implying that if Romania and the rest of the world pursued desirable medium-term policies, Romania would have a 0.2 percent of GDP weaker current account than actually observed in 2021.
- This positive policy gap is driven partly by the fact that the rest of the world was even farther away from desirable fiscal policies than Romania in 2021.
- Specific fiscal figures cited:
  - Romania’s cyclically-adjusted fiscal deficit: 6.7 percent of GDP.
  - Romania’s desirable medium-balance (per baseline EBA): 3 percent of GDP.
  - Global sample cyclically-adjusted fiscal deficit: 5.7 percent of GDP.
  - Global sample desirable medium-balance: 1.6 percent of GDP.
- The policy gap decomposition shows fiscal balance and low health spending as contributors that, in Romania’s case, are net positives to the fitted current account because the rest of the world’s deviations were larger.

### Possible model misspecification and alternative specification
- The EBA model uses a coefficient of 0.31 for changes in the fiscal deficit: a 1 percent of GDP larger fiscal deficit reduces the current account by 0.31 percent of GDP.
- Reasons this may be too low for Romania:
  - High openness and lack of capital account restrictions can raise the fiscal-to-current-account pass-through.
  - EU membership may have reduced dependence of private investment on domestic financial intermediation and sustained inflows despite public financing needs.
  - Romania’s fiscal expansion shifted income from corporates to households with a low propensity to save, amplifying current account impact.
- Alternative specification presented:
  - Assumes fiscal deficit coefficient of 0.66.
  - Sets “desirable” fiscal balance at the world sample level of 1.6 percent of GDP (instead of 3 percent of GDP).
  - Under this alternative, most current account widening since 2015 is explained by increased fiscal deficits, except in 2021 when about half the current account gap remains unexplained (possibly due to COVID-19 factors and supply chain disruptions).

### Current account financing and model limits
- Financing composition may affect the current account gap size:
  - Financial and capital accounts are dominated by long-term investment, concentrated in the automotive sector.
  - Capital transfers are large; European financing under the Recovery and Resilience Facility stands to raise transfers to Romania to about 2 percent of GDP annually into the medium term.
  - Such unique financing sources may not be fully accounted for in the model.

### Conclusions and policy recommendations
- Core findings:
  - Romania’s current account is substantially weaker than explained by fundamentals and desirable policies.
  - Several current account models find Romania’s external position to be weaker than structural and macroeconomic factors would suggest under desirable policies.
  - Romania’s consistently large current account deficits set it apart from most CEE peer countries.
- Policy priority:
  - Fiscal consolidation is the main priority and should be designed to maximize its impact on the current account.
- Recommended fiscal measures to maximize pass-through to the current account:
  - Contain the public sector wage bill.
  - Moderate pension increases.
  - Broaden the tax base.
  - Maintain fiscal space for investments to boost potential growth and international competitiveness.
- Complementary macro adjustment:
  - A real exchange rate depreciation would help switch domestic demand from imports toward nontradables and switch supply towards exports, aiding internal equilibrium.
- Under an alternative (higher fiscal pass-through) specification, desirable fiscal policies could eliminate about half of Romania’s external imbalance in 2021; the other half may stem from temporary COVID-19 related factors, supply chain disruptions, and EU transfers.

*Source: IMF staff calculations and Box 1, "Romania and the External Balance Assessment," from the supplied content.*

### 24.      These efforts should be complemented by structural reforms to raise labor

### 24.      These efforts should be complemented by structural reforms to raise labor

### Structural reforms, productivity, and exchange rate policy
- Strengthen public investment management to absorb more EU funding and use both EU and domestic investment funds more efficiently.
- Raise the quantity and quality of infrastructure to boost Romania’s growth potential.
- Increase productivity via:
  - digitalization;
  - strengthening the anti-corruption framework;
  - improving the health and education systems;
  - reforming SOEs.
- Ensure that further wage growth does not erode Romania’s international competitiveness.
- Complement reforms with greater exchange rate flexibility over the medium term.

### National convergence with Western Europe (background)
- Romania’s per capita GDP:
  - was only 16 percent of the EU14 in 2006 (in euro terms);
  - grew at an average annual rate of 3.6 percent, reaching 32 percent of the EU14 average by 2019.
- Working-age population decline:
  - fell by 12 percent over the same period (2006–2019).
- Poverty and inequality:
  - absolute poverty has declined significantly since EU accession;
  - relative poverty and the Gini coefficient have also been reduced, though Romania’s relative poverty remains the second highest in the EU.
- Gini coefficient:
  - 2000: 29;
  - 2019: 35.
- Redistributive impact of taxes and transfers:
  - reduces the Gini coefficient from 52 before taxes and transfers to 35 after taxes and transfers (2019);
  - in 2019 pensions provided 86 percent of the reduction in the Gini coefficient from before taxes and transfers, compared to 74 percent in 2007.
- Policy changes affecting inequality:
  - introduction of a flat income tax in 2005 reduced redistributive impact of taxation;
  - a reduction of the flat income tax rate in 2018 combined with successive increases of pensions influenced redistribution patterns.

### Regional disparities and convergence within Romania
- Regional pattern:
  - Romania has the second lowest GDP per capita in the EU despite significant national convergence.
  - Convergence has been uneven: growth concentrated in the capital region (Greater Bucharest comprises Bucharest and Ilfov).
- Trends in regional GDP per capita:
  - Prior to 2013, GDP per capita in all but one NUTS3-level regions grew more slowly than in Bucharest.
  - During 2013–18, most regions grew faster than Bucharest despite continued population declines in many regions.
- Persistent disparities (2018):
  - The poorest region had a per-capita GDP of only 47 percent of Romania’s average (only 2 percent higher than in 2006).
  - Bucharest improved from 231 to 262 percent of the Romanian average over the same period.
- Poverty convergence:
  - Severe material deprivation rate fell most in regions where it was highest in 2007 (absolute poverty convergence).
  - Relative poverty did not systematically change in relation to the initial rate.

### Factors affecting regional growth
- Core growth drivers emphasized: investment, human capital (health and education), and institutions.
- Investment:
  - Investment is critical for regional growth performance.
  - Cross-regional correlation between investment levels and growth strengthened in 2013–18.
  - Investment of EU cohesion funds does not show a clear immediate impact on growth, possibly because some investments are social or environmental with longer-term benefits.
- Specific investments with additional impact:
  - Investment in ICT, though small overall, may boost growth.
  - Strong correlation between employment in science and technology (S&T) sectors and growth.
- Migration:
  - Emigrants tend to be working age; their departure raises dependency ratios and reduces per-capita output.
  - If emigrants are more skilled than the average population, productivity may be lowered.
  - Remittances can reduce poverty and inequality and may boost investment; returning migrants could raise productivity.

### Spatial variables influencing regional growth
- Proximity to markets:
  - In 2020, 57 percent of Romanian goods exports went to Western European markets and a further 14 percent to the Central European Visegrad countries.
  - For regions other than Greater Bucharest, effective distance (driving time to Budapest) appears related to growth performance.
- Infrastructure:
  - Density of the intra-regional rail network (kilometers of rail lines per 1,000 square kilometers of area) correlates with faster growth.
  - Romania added 677 km of new highways in recent years, more than tripling the length of the network, mainly in the Western and Central regions, and between Bucharest and the Black Sea.

### Demography and migration (Box 1 key points)
- Romania’s population dynamics:
  - Population is shrinking and aging overall due to fertility below replacement level, rising life expectancy, and continued net emigration.
  - Prior to EU accession population in all regions declined; in recent years some regions—mainly metropolitan areas including Greater Bucharest—have experienced population increases through internal migration.
- Linkages between migration and economic outcomes:
  - Relative poverty is related to subsequent net outward migration.
  - Higher outward migration is correlated with a lower working-age population.
  - Higher gross value added per capita is associated with a smaller decline in the working-age population.
- Possible feedback loop:
  - Limited economic prospects → outward migration → reduced working-age population → lower economic potential and per-capita growth.

### Cluj-Napoca case study (Box 2 summary)
- City profile:
  - Cluj-Napoca: largest city in the Nord-Vest region, about 425,000 inhabitants (17 percent of the region’s total inhabitants, and 59 percent of the county’s), including 100,000 students.
  - Economy: Cluj County has grown faster than any other in Romania since 2007; Cluj is Romania’s foremost IT hub with over 800 IT companies and 16,000 software engineers, supplying 78 percent of Romania’s IT exports.
- Contributing factors to Cluj-Napoca’s success:
  - Education: long tradition, first university founded in 1581; 11 universities and colleges; about 1,000 IT students graduate every year; 200 research units and laboratories in ICT and high-tech manufacturing.
  - Investment: local authorities provided public infrastructure and developed technology and innovation parks using own resources and EU funds; promotion of ICT and manufacturing and medical technology.
  - Partnerships: active start-up scene through city, university, and private enterprise partnerships.
  - Governance and innovation: administration promoting innovative governance and citizen participation; runner-up for European Capital of Innovation Award 2020.
  - Connectivity: international airport; well-connected to Central Europe and Bucharest by road and rail (some highway links incomplete).
  - Culture and quality of life: multicultural, multilingual community; vibrant cultural scene and festivals attracting immigrants.

### Conclusions and policy implications (drawn from presented analysis)
- Combine macroeconomic levers (greater exchange rate flexibility) with structural reforms to raise labor productivity.
- Prioritize improvements in public investment management to better absorb and utilize EU and domestic funds for infrastructure and productive investment.
- Target policies to:
  - support ICT and S&T sector development;
  - improve health and education outcomes;
  - strengthen anti-corruption measures and SOE reform;
  - address regional connectivity and infrastructure gaps;
  - consider demographic and migration dynamics as part of regional development strategies.
- Recognize successful regional models (e.g., Cluj-Napoca) where coordinated investment in education, connectivity, governance, and innovation produced self-reinforcing growth.

*Italic: IMF — ROMANIA (selected sections from the PDF chapter).*

### 16.      Romania has made great  strides in converging  toward more advanced  EU member

### 16.      Romania has made great  strides in converging  toward more advanced  EU member states, but progress has been uneven.

### Convergence progress
- Per capita GDP in Greater Bucharest approaches that of advanced EU countries.
- Many regions, especially rural areas, have been unable to catch up and in many instances have fallen further behind Bucharest.
- Only in recent years has growth in the majority of regions begun to outpace that of Bucharest, but the process of intra-Romanian convergence remains slow.
- Regional catch-up is strongest in secondary cities and bypasses many rural areas (Surd et al, 2011).

### Obstacles to regional growth (many also act at the national level)
- Policy instability.
- Administrative shortcomings including corruption.
- Inadequate infrastructure.
- Low or mismatched education levels.
- A welfare and tax system and labor market that discourage labor force participation, especially of women.
- Unproductive state-owned enterprises (De Rosa and Kim, 2018; Belinga et al, 2020, IMF 2017).
- Improving education across the country, especially in poorer regions, would provide a more productive labor force and encourage investment outside Bucharest and other cities (IMF 2016c).

### Transfers and investment allocation
- Equalization transfers are formula-based and inversely proportional to income.
- Some investment allocations (including through the National Program for Local Development—PNDL) are discretionary and subject to political influence.
- Greater transparency in investment allocations—combined with administrative support for less developed regions—would likely increase the efficiency of investment.

### Public administration, infrastructure, and EU funds
- National-level policies more directly linked to regional development include public administration and provision of infrastructure (IMF 2016d).
- Strengthening public administration, especially at the local level, would support sub-national authorities to promote investment and respond to idiosyncratic regional needs (Ibinceanu et al, 2021).
- Further steps toward decentralization could create administrative units at the NUTS2 level, as an administrative layer between the central government and county-level administration.
- Improving the ability of regional and local authorities to access EU funds, perhaps with central-government support, could unlock significant resources—and help raise Romania’s absorption of EU funds.
- Regarding infrastructure, national-level transport axes (such as highways or improved international railway links) are important, but it is critical to ensure that more remote local areas are plugged into those networks to reduce effective distances, enlarge markets, and improve productivity.
- A corresponding law in 2013 proved controversial and was eventually declared unconstitutional (Sandu 2022).

*Source: Romania country report chapter excerpt*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1rouea2022004.pdf_