09-12-2023
4 minutes

Romania Catches Up with Poland

Frequently in various comparisons, we juxtapose Poland with Western European countries, aiming to affirm the success our nation has achieved over the past three decades. From this viewpoint, the success is undeniable, as in terms of per capita income (GDP) – considering purchasing power parity – we have surpassed Greece and Portugal. We are nearing Spain, and Italy is within our sight. However, it is crucial to acknowledge that such comparisons might conceal deeper implications, such as the fact that the aforementioned Western countries have undergone (or in some cases, like Italy, are still undergoing) significant structural challenges/crises, making their pursuit partly a reflection of their weaknesses.

Simultaneously, it is important to remember that within our region, there are countries where the aforementioned indicator is higher than in Poland. This is not a small group, as based on 2022 data, it includes: Slovenia (116% of Poland’s GDP per capita), Czech Republic (114%), Lithuania (113%), and Estonia (110%).

In the context of international comparisons, it is also worthwhile to look behind us. Unfortunately, we do this far less often, which is regrettable because such comparisons can yield interesting surprises. Observing the developments happening behind us, it’s vital to recognize that every country experiences its better and worse periods. Global shocks, such as the COVID pandemic, impact different countries in varied ways, disrupting developmental processes. However, taking all these factors into account, among European countries, three distinct groups can be identified. The first, and decidedly the broadest, includes countries that Poland “keeps at a distance,” meaning the difference in income levels between Poland and these countries remains relatively stable. This extensive group comprises: Latvia (93% of Poland’s level in 2022), Croatia (92%), Bulgaria (74%), and outside the European Union: Montenegro (63%), Serbia (55%), North Macedonia (53%), Bosnia and Herzegovina (45%), and Albania (43%).

The second group includes Hungary and Slovakia – countries that, not so long ago, boasted a higher average income level than Poland, but today find themselves trailing, with the gap widening. This is particularly evident in the case of Slovakia; before the global financial crisis, its GDP per capita was at 129% of that in Poland, dropping to just 86% in 2022. In Hungary, over the same period, the indicator fell from 113% to 98%.

The final group encompasses a single country: Romania. This nation has significantly narrowed its income gap relative to Poland in recent years; where 10 years ago the average income in Romania was at 85% of Poland’s, by 2022 it had reached 97%. There is a widespread expectation in Romania that the country will overtake Poland in terms of average income, if not this year, then certainly within the next two years.

How likely is this scenario? Arguments can be found for both sides. On the one hand, Romania’s economic development occurs amidst strong macroeconomic imbalances, with high current account and fiscal deficits. Typically, such a mix necessitates a correction sooner or later (some form of ‘tightening the belt’), negatively impacting growth. On the other hand, potential growth (i.e., linked to the availability and efficiency of resources) is estimated to be much higher in Romania (around 4-4.5%) than in Poland (about 3%). Additionally, the structure of growth in Romania is a positive factor – in recent years, GDP increases have been distributed across several sectors (noticeable expansion in the ICT sector, expansion of the industrial processing, development of trade, and real estate services market). This situation differs from the previous period of strong Romanian economic expansion at the beginning of the century. At that time, GDP per capita in Romania also significantly closed the gap with Poland (even reaching 92% of our level in 2008), but then the relationship fell. The Romanian economy went through a deep recession when it became apparent that much of the growth was a derivative of a bubble in construction and real estate.

In conclusion, Romania’s recent closure of the GDP per capita gap with Poland has partly occurred at the expense of growing macroeconomic imbalances. This means that even if Romania reaches our level, it is unlikely to be sustainable in the short term, at least over the next few years. The situation looks different in the longer term. In this case, the prospects for Romania are much better than for Poland, due to its higher potential growth rate. To increase its developmental potential, Poland would need a series of reforms leading to: an increase in the rate of private investments, improvement in the quality of labor force, and a rise in productivity (a derivative of better institutional solutions and various types of innovation). It would be beneficial for Poland if the new government incorporated these reforms into its agenda.

 

Published: Parkiet, 21.11.2023

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