Two months ago, a news item generated “sensational” headlines in the business media – Romania surpassed Poland in GDP per capita at PPS (purchasing power standard). Indeed, updated data shows that Romania recorded a GDP per capita at PPS (purchasing power standard) of 77.9% of the EU27 average, while Poland reached 77.3%.
The „sensational” aspect of these figures is that, for the first time in the last 35 years (and probably in all of modern history or since statistical data exists), Romania has a higher GDP per capita than Poland. But that doesn’t necessarily mean that it’s good news. It could even be very bad news – writes Ionuț Dumitru, chief economist of Raiffeisen Bank, in an analysis published in issue 75 of the magazine CRONICILE Curs De Guvernare, available exclusively in print.
The first „sensational” news is the increase in GDP/capita at purchasing power parity at a pace that places it second in the EU, after Ireland, Romania not having, however, an economic accumulation behind it like the particularly special case of Ireland.
The second spectacular news heavily used from a political standpoint by the authorities is the truly sensational increase of consumption in Romania – in which we have surpassed all our neighbors, including Poland.
Why this good news is, in fact, a big bad one – is shown in the text below presenting fragments of the analysis made by Ionuț Dumitru.
(the editorial staff)
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The first „sensational” aspect: the meteoric rise of GDP/capita, at purchasing power standard (PPS) over Poland
However, after 2000, there were 13 states at the level of EU27 member countries that had increases in GDP per capita compared to the EU27 average during the period 2000-2023, Romania being the European country that recorded a spectacular increase of 51.5 percentage points in GDP per capita compared to the EU average at PPS, ranking second in terms of the size of the GDP per capita gain relative to the EU average, after Ireland.
A more accelerated real convergence was generally recorded in Central and Eastern European (CEE) countries between 2000 and 2023, although the economic gap with developed countries in the European Union is still quite broad:
for example, Romania, the Baltic States, Bulgaria, Poland and Croatia stood out with significant increases in GDP per capita at PPS (of at least 25 pp of GDP at PPS compared to the EU27 average), but they still did not reach the levels of developed countries in Western Europe. Romania, with an increase of +51.5 pp, is still below the EU27 average, while countries such as Ireland or the Netherlands remained well above this average. This gap shows that, although the pace of convergence has been fast in many CEE countries, the gaps in economic development compared to Western Europe are still significant. It is worth noting however that Romania has made a relatively spectacular leap (only Malta has had such a leap in the ranking), from 27th place in the European GDP per capita ranking in 2000 to 20th place in 2023, economic convergence being very rapid during this period.
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The second „sensational” news: the uncontrollable growth of consumption, surpassing Poland
If we look at the main component of GDP, that is household consumption, it has made an even more spectacular leap in Romania in per capita at PPS terms, with Romania ranking 17th in the EU27 in 2023, at 92.3% of the EU27 average (so quite close to the EU27 average).
Besides, the gap between GDP per capita and household consumption per capita has increased over time in Romania (being greater as a result of fiscal and budgetary policies aimed at increasing population income and stimulating consumption), the gap between them being much smaller in 2000 than in 2023.
Poland also recorded a large increase in GDP per capita compared to the EU27 average between 2000 and 2023, but maintained its 21st position at European level, while in terms of population consumption per capita it lost one position, going from 19th to 20th place.
Still, during the same period, Hungary fell from 19th to 22nd place in GDP per capita, while in population consumption per capita it fell from 21st place in 2000 to 27th place (last place in the EU27) in 2023.
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Bad news: the sensationally high cost of good news
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There are at least two factors that have significantly and positively marked Romania’s evolution in the last 25 years at all levels of society – joining NATO (in 2004) and the European Union (in 2007). Macroeconomic policies (especially fiscal-budgetary policy) have a very important role, their pro-cyclical or anti-cyclical character giving sustainability to the process of economic growth and real convergence of the economy. Furthermore, the health of public finances and the maintenance of macroeconomic balances are preconditions for sustainable economic growth.
Returning to the Romania – Poland comparison, as we mentioned at the beginning, in 2023 Romania had a GDP per capita at PPS slightly higher than Poland’s for the first time in the period following 1990 (and probably in all of modern history since statistical data is available).
If we follow the period after 1990, in the first part of the transition, until 2000, the relative distance between Romania and Poland in terms of GDP per capita at PPS increased in favor of Poland up to 22 pp of the average GDP per capita of the EU27 in 2000. During that period, Romania had „stop and go” policies with a lack of consistency and continuity in the implementation of economic reforms, while Poland had an initial economic transition much faster and more efficient than Romania.
During 2001-2008, the gap between Romania and Poland decreased to a minimum of about 5 pp of the average GDP per capita of the EU27 in 2008. The period 2001-2008 was marked by major transformations for Romania, catalyzed by accession to NATO and the European Union, reflected in very rapid economic growth (fueled by large capital inflows and a pro-cyclical expansionist fiscal policy) and the implementation of important economic reforms.
The very fast convergence in the period 2001-2008 in Romania (average annual increases of 3.1 pp GDP per capita at PPS compared to the EU27 average in Romania vs. about 1 pp per year in Poland) was fueled primarily by massive foreign capital inflows, but these were also amplified by an expansionist, strongly pro-cyclical fiscal policy, the budget deficit reaching a level of 5.4% of GDP in 2008, a year in which economic growth was very high, 9.3% (the second highest economic growth rate in the period after 1990).
But the budget imbalance fueled the current account imbalance, with the current account deficit reaching a peak of 13.6% of GDP in 2007 (more than double that of Poland, which stood at 6.6% of GDP).
After 2008, the gap between Romania and Poland widened again to a maximum of about 14 pp of the average GDP per capita of the EU27 in 2015. During this period, Romania was forced to make an absolutely necessary fiscal-budgetary adjustment, which maintained its pro-cyclical nature against the backdrop of the global financial crisis (deepening the economic recession), which caused budget deficits to be smaller in Romania vs. Poland, and economic convergence towards the EU averages to slow down, Romania losing ground in relative terms compared to Poland.
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This very rapid convergence of Romania in terms of GDP per capita after 2016 and the closing of the gap with Poland were primarily fueled by a much more expansionary fiscal policy in Romania (average structural budget deficits more than double in Romania), which also led to a new imbalance in the balance of payments in Romania, with the current account deficit reaching a maximum of over 9% of GDP in 2022.
Despite this, the average economic growth of the period 2016-2023 in Romania was similar to that of Poland, which means that the closing of the gap with Poland in terms of GDP per capita at PPS was also generated by other factors (probably also by the overvaluation of the RON exchange rate, which has a perceived positive, but unsustainable, effect on wealth).
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However, these periods have led to the imbalance of Romanian economy and to indebtedness increase (especially to the very rapid increase in public debt). The correction of macroeconomic imbalances that inevitably follows these periods slows down the convergence process and may even reverse it.
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*The full analysis can be read in issue 75 of the magazine CRONICILE Curs DE Guvernare available exclusively in print.
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