Picking up strength

Confident and ambitious Romania may be, but the country must improve productivity, argues Vasile Iuga, country managing partner, PricewaterhouseCoopers

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     “Remember when we graduated high school?” says Vasile Iuga, country managing partner, PricewaterhouseCoopers. “We were 18. We were optimistic, ambitious, energetic and confident – sometimes overconfident - and we thought we knew everything. Then we began to find out there was learning beyond 18. Romania will turn 18 in a few months. This is where we are.”
     Although upbeat about the progress of his country, Iuga is aware that sometimes the brash approach of its people underestimates the challenges ahead.
     “After the accession, we have to keep our feet on the pedals, focus on the road head and not start partying at the back of the car,” he says. “However, I am convinced that Romania, despite the small current problems, will be an asset to the EU.”
     But the country still has to face up to poor productivity. “The Romanian economy is not very competitive compared to other emerging markets,” says Iuga.
     The main sector holding back Romania is agriculture. The country has the capacity to feed over 75 million people, but is a net importer of food and, in general terms, food is more expensive in Romania than west Europe.

Who is Vasile Iuga? A graduate in Aeronautics from the Politehnica University, Bucharest and a Fellow of the British Association of Chartered Certified Accountants, Iuga trained at both the Harvard Business School and London Business School. He joined PricewaterhouseCoopers when it entered Romania in 1991 and became a partner in 1997. In 2004 was appointed Territorial Senior Partner in Romania and is now responsible for financial services in central and east Europe. Iuga is also vice-president of the American Chamber of Commerce Board in Romania. Business activity PricewaterhouseCoopers has a market share of around 13 to 15 per cent in the local consulting market in Romania. The US-based group provides industry-focused assurance, tax and advisory services and, in Romania, registered a turnover of 40.5 million USD (around 30 million Euro) during the financial year ending 30 June 2007, 20 per cent up on the previous year. Locally the company has offices in Bucharest, Cluj-Napoca, Timisoara, Constanta and Chisinau and over 650 employees.

     Part of the problem dates back to 1991, when the Government broke apart the cooperative farms and gave peasants small plots of land, sometimes only one hectare in size. This fragmentation was unproductive and inefficient. Understanding the ownership of the land is also a bureaucratic headache for Brussels and Bucharest.
     “Increasing the consolidation of land is critical,” says Iuga. “We cannot invest in a country with seven million land plots. We need to use the land, raise animals, process meat and other alimentary products in one place - a captive growing, production, processing and consumption market - so that food becomes cheaper in Romania. We need to satisfy internal demand and create export opportunities.”
     Agriculture’s despair is also widening the rural and urban divide. “Large cities are becoming increasingly cosmopolitan, vibrant and booming, while the countryside is inhabited, generally speaking, by elderly people,” he says.
     To remedy this, Iuga favours better infrastructure linking the poor countryside and the richer cities – the method Portugal and Spain employed to try and ameliorate their backward regions.
     “Growth is limited to large urban agglomerations – Constanta, Bucharest, Timisoara, Cluj-Napoca,” he says. “Opportunities do not flow from the countryside. Infrastructure is like a blood system, enriching the body and keeping it alive. The road network needs to act in the same way.”
     Romania’s trade and current account deficits are swelling to unsustainable proportions. For the first nine months of 2007, the current account gap increased by over 75 per cent to 12 billion Euro. “These deficits could result in an increased volatility in the exchange rate of national currency, which is something investors don’t like and don’t want,” says Iuga.
     To remedy this Romania needs to attract more investment from abroad, while promoting growth at home. “Around 70 per cent of Romanian exports are represented by goods coming from FDI,” says Iuga. “Therefore foreign investment is a key factor in helping eliminate the trade deficit.”
     Iuga also believes the economy needs to manufacture higher added-value products to stimulate domestic growth and exports, such as car manufacturers Renault and Ford, vehicle part factories, IT and pharmaceuticals.
     But the sector once responsible for a third of Romania’s exports, textiles, is now facing tough choices. “The lohn-based economy is suffering because of the expectation of higher salaries,” says Iuga. “These companies will keep moving businesses further east. Romania should focus on high margin products [in this sector]. In Mauritius, the big names from France were producing clothes. When the salaries went up and production moved to Madagascar and Mozambique, Mauritius focused on designer and high margin wear. Romania has started this with lingerie brands such as ID Sarrieri.”
     In PwC’s core field of taxation, Iuga sees a global trend towards taxes on consumption rather than income. “The importance of direct taxes for business is reducing,” he says. “VAT over Europe is a good system in place, it’s easy to work and ensures a level playing field. All businesses have to comply and it is simple and clear. I see a growth in the weight of indirect taxes in a number of EU countries - while direct taxes such as corporate and income tax are reduced in importance and rate.”
     Introduced in Romania at the beginning of 2005, the flat tax of 16 per cent on incomes, dividends, profits was a hit among politicians and business, although the leading opposition, the Social Democratic Party, wants to revoke the change.
     “The flat rate has created a competitive advantage for Romania,” says Iuga. “But Romania has many other taxes and is not a low tax country compared to its neighbours.”
     Further changes Iuga recommends include improving the systems of tax collection and capping social and health contributions that employers have to pay on top of the 16 per cent tax itself. “People prefer to pay the flat rate,” he says, “and together with the capping of contributions, it helps to keep the middle class in the country and we need these people for our country to grow.” (MB)