Triggering a virtuous circle by reducing the inequalities of the regional industrial development. The case of Romania

Opinion by Deputy Governor of the National Bank of Romania (BNR), Leonardo Badea

“Beyond the obvious negative effects, the Covid-19 pandemic emphasized several opportunities for Romania, not only to rebuild the economy, but to act in order to valorise our national production potential and the existent capacity toward sustainable recovery. It would therefore be beneficial that the future development of the industry follows the opportunities provided by the renewable energies, stimulating innovation and a green industrial future, modelled by a qualified labour force.

We must take advantage of the possibility to develop a new industrial policy based on the understanding of modern technology, sustainability, and social cohesion, as solutions to the climate change, the economic crisis, and post pandemic recovery.

A national strategy focused on the industrial policy must build upon the identification of specific local resources (material, but also human) and the governmental tools that would revitalize the internal production capacities. The government may guide the industrial policy toward the industries identified as strategic and generating competitive advantages, with the purpose to boost investments toward a sustainable industrialization. At regional level, more cities may become hubs of economic growth, increasing the number of development poles already in place, reducing the economic and social disparities between different areas, and diminishing the concentration of added value creation solely around consecrated economic centers.       

The sectors will continue to represent an essential direction for the enforcement of the industrial strategy, but, at the same time, each region should be distinctively encouraged to identify its specific comparative advantages and subsequently be supported to valorise and develop them.

The state (through the central administration) is in a convenient position (having a general, ensemble view and the capacity to act) to make an important difference in the valorisation of the national development potential by redirecting resources to sustain new activities at regional level, rather than trying to revitalize declining sectors. This is more likely to sustain long term growth. For instance, although there could be a justification for sustaining the growth of specific activities in the processing industry, the sector in its entirety has dropped as far as long-term occupation is concerned. At the same time, the demand of skills has modified at pace with the economic changes.        

From this perspective, the industrial policy must not only be multisectoral calibrated, but should answer the need for equilibrium in regional development, reducing the existent disparities and increasing social cohesion. 

A bidirectional communication must be attained both from the government to the local administration and regional business sector, emphasizing the priorities and opportunities of the global environment (evolutions of the external trade, access to European and international financing, strategic investors’ interest, etc.), as well as the other way around, starting from the identification of local investment opportunities, local comparative advantages and efficient and competitive ways to encourage business environment solutions.    

In this context, beside the existent state or European and international institutions financing programs, I believe it would be a good opportunity to allocate funds (perhaps from public-private partnerships) to cover the investment necessities at national level. This may focus for instance on financing manufacturing businesses as well as on the development of (new) regional industrial poles.

During the last trimesters, Romania has attained economic performances above expectations, considerably higher compared to its regional peers. This is the direct consequence of the surprising resilience of the industrial sector, as well as the strength of the constructions sector (owing to the specific conditions ensuring the compliance with the distancing requirements). The public support measures for population and businesses had an important contribution as well, while the restrictions gradually eased as allowed by the evolution of the pandemic. 

During the next few months it is expected that the economic recovery maintains a positive and alert pace but given the decrease in the people’s interest for vaccination, the uncertainty remains high. 

Should a new pandemic wave (with a probably reduced intensity) hit in the autumn (due to the cold weather) and the level of herd immunity not be reached by then, we might witness increased health risks for the population. Therefore, the elimination of all restrictions might be delayed, especially in certain fields of activity that are more exposed, and that may reduce the pace of the economic recovery.       

That is why, despite the short-term positive evolutions in the management of the pandemic and the economy, we should not stop nor reduce the efforts for long term development. Addressing the structural vulnerabilities is of utmost importance, because if not dealt with, their negative effects on the economic growth would become visible as soon as the turbulence of the pandemic intensity would settle.   

Modern economies are very sensitive to consumers’ and investors’ sentiment and these variables have become increasingly volatile as an effect of the technological advancement and the high influence of the information flow on the immediate consumption, savings, and investment behaviour. The economic optimism we witness is mostly influenced by the present accelerated growth induced by the post-pandemic recovery phase. However, this optimism may diminish and affect consumption as the main component of economic growth. 

An important challenge we are facing at the moment is that the economic recovery is unequal not only as far as the activity sectors are concerned but also at regional level reflecting pre-existing disparities. We risk that the pre-crisis development lags accentuate if actual measures targeting these vulnerabilities are not implemented. 

Public investment projects might contribute to the economic development of areas that lag behind because there is potential to increase the added value if the local specificity is superiorly valorised.     

The entrepreneurs will most definitely be interested to start and develop new businesses in these areas that would reduce the gaps if there is an opportunity generating impulse, as it could be for instance, the development of the infrastructure in these areas. In am not referring only to transports and communication but also to public health, access to education and lifelong learning, as well as electricity, water, pluming, and other public utilities, where the state is involved, directly or indirectly. Numerous studies show that the multiplying effect of public investment is particularly high during recessions or at the beginning of the recovery phase. At the same time, studies show a positive effect on new jobs creation as well. Therefore, the investments not only improve the living conditions, but also generate an economic impulse that will most definitely determine the private sector to follow up. This has been the case on several occasions, most recently proved by the decisive contribution of the private sector to the economic resilience and recovery that exceeded expectations. 

The fiscal measures implemented during the COVID-19 crisis are a necessary and adequate support but the economists recognize that generally, loose fiscal policies favour consumption, at the expense of future capacities. It is therefore important that the state financial effort be as much as possible channelled toward investments and less toward immediate consumption, which in the case of Romania is often met with imported goods (as an effect of the structural vulnerabilities already mentioned and with negative implications for the external position).

Two important directions emphasized by the activity of the Romanian National Committee for Macroprudential Oversight should be followed by all institutions with a role in the economic development of the country and improving the existing vulnerabilities. These include supporting the agrifoodsector (http://www.cnsmro.ro/en/publicatii/studii-si-analize/grupul-de-lucru-cnsm-privind-diminuarea-vulnerabilitatilor-provenind-din-cresterea-deficitului-balantei-comerciale-cu-produse-agroalimentare/) and green financing (http://www.cnsmro.ro/en/publicatii/studii-si-analize/grupul-de-lucru-cnsm-pentru-sprijinirea-finantarii-verzi/). In both cases, the conclusions and recommendations were agreed upon by all the participants in the analysis groups including, as appropriate, representatives of the Presidency, the Government, the National Bank, the Financial Supervisory Authority, governmental authorities, credit and non-bank financial institutions, the main associations in the respective sectors, European/international institutions, etc. 

From the perspective of the development of agriculture and food industry, I highlight only two recommendations of the National Committee for Macroprudential Oversight, which may be implemented through legislative amendments:

•​the revision of the certificates of deposit mechanism through close dialogue with the credit institutions and related associations.

•​the amendment of the legislation regarding the certification and promotion of agri-food products through cooperation with the related associations and appropriate budgeting of these programs.

Regarding the need to support green financing, the recent report of the National Committee for Macroprudential Oversight reveals that the climate change agenda has high stakes for the Romanian economy and financial system, from the perspective of opportunities as well as costs, should the green transition be delayed. 

It would be inappropriate for the political decision factors to only hope that the situation changes for the better by itself or exclusively by the actions of the market and the private initiative. This is why we must act decisively to reduce climatic risks and ensure a fast but smooth transition to a sustainable economy. 

Moreover, a study published in May by the IMF showed that “green” public investments have a higher economic impact, including on the labor market(https://www.imf.org/en/Publications/WP/Issues/2021/05/06/The-Direct-Employment-Impact-of-Public-Investment-50251). 

Financing projects with low environmental impact that facilitate the transition to a low carbon emission economy is an important catalyst and the analysis groups of the National Committee for Macroprudential Oversight have identified agreed upon 16 areas of action that target three domains: (i) the sustainable increase of access to financing for projects related to climate change agenda, (ii) supporting the structural change of the economy toward a higher added value economy and (iii) improving transparency, reporting and availability of information related to climate change, as well as raising awareness regarding the impact of climate change on the society and the financial system.

It is the time of a national effort that should take the center stage of public concerns, in order to develop Romania through an adequate industrial policy, starting from the following requirements:

1. Using the solutions involving modern technology as a driving force and the innovative ideas generated by the intellectual capital within the society;

2. Identifying the industrial sectors with a rapid growth and development potential (for instance, agriculture and food industry, IT industry, pharmaceutical industry, manufacturing of goods for new ecological technologies use, etc.); 

3. Setting industrial development objectives at both sectoral and local administrative levels, using dedicated financing;

4. Identifying partners within the private sector; 

5. Setting clear, simple, and precise rules for the interaction between the state and private companies.

The crisis we hope to leave behind has shown once more that many evolutions within the economy and society are interconnected and mutually conditioned. Similarly, the development opportunities brought by the end of the pandemic are interrelated and connected to the existing vulnerabilities they should address. Romania’s industrial strategy cannot be but closely related to the acute priorities – reducing the vulnerabilities of the external commercial balance with agri-food products, the need to transition to a sustainable, environmentally friendly economy, the necessity to reduce regional development disparities to increase social cohesion. They are all interrelated and in fact this is one of the great opportunities of the moment, that is, to trigger a virtuous circle based on these interdependencies that still act against us”.