Dangerous Doping

Romania’s economic growth accelerated in the first quarter of 2016 more than estimated. The GDP (Gross domestic product) rose by a preliminary 4.3% according to the National Statistics Institute. This makes Romania the second fastest-growing economy in the EU only behind Ireland. I’m quite sure you’ve read or heard about this ‘success‘ in local media.

There is only one big problem: Romania’s economic growth is almost purely based on ‘doping’.

In sports, the key to success is – aside a certain talent – the daily training of your skills, your body and your mind. But although doping is forbidden, you still have a chance, and if your attempt to cheat remains undetected you don’t have to face the negative consequences. That’s why it’s tried by so many athletes.

In economics, the key to success is a culture of education, investments and entrepreneurship. Although doping is allowed, it’s not very smart, yet dangerous to try it, because other than in sports, you will surely face the negative consequences.

Nonetheless, Romania is just about to build up its economic success on ‘doping’ again.

The political doping of tax cuts,  wage increases and other ‘legislative election-year’-measures buoyed consumers, resulting in retail sales growth of up to 20(!) %, while the real important data for success were moving in a complete other direction.

Between January and March 2016, the current account deficit jumped to 1,5 billion EUR. This means that Romania’s imports of goods and services are outpacing its exports by half a billion EUR on average each month. Foreign Direct Investment (FDI) reached only 775 million EUR, down almost 13% compared to the first quarter of 2015. Aside, investments in R&D are by far the lowest in the EU – still, wages are on the rise.

You might ask, what’s wrong with wage increases – especially higher minimum salaries – to boost spending and thereby help the local economy. Well, in order to achieve a sustainable growth, salaries must be linked to labor productivity – and labor productivity only. In Romania, the higher level of minimum wage that passes on to overall wages and labor costs is outstripping any productivity growth which only deteriorate the country’s competitiveness. Aside the terrible infrastructure, a weakening competitiveness is one of the main reasons, why FDI is shrinking.

If you like to dig deeper into the matter of wages, you’ll find the IMF report on Romania (May 2016) here.

A final figure: the growth of Romania’s ‘doped’ economy based on several economically unsustained populist measures – consumption instead of productivity and investments in research, education & healthcare – might result in a temporary rise of a little over 4% in GDP – from the current 160 billion EUR to about 167 billion EUR. On a GDP per capita-level, 7 billion is 350 EUR a year or less than 30 EUR a month.

That’s a very small potential reward considering the potential risk Romania is facing. From my perspective, I sense a looming crisis a la ‘2008’ all over again.

——–

A high growth based mainly on consumption is unsustainable, short-lived and dangerous. The key to long-term economic success and better paid jobs is labor productivity, investing and innovation!