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August 12, 2022

Erste Group and Legatum Institute: A View on Prosperity in Romania

30 years from the fall of communism, economic growth in Central and Eastern Europe (CEE) has not yet translated into fully realizing people’s hopes and expectations;

Overall CEE convergence towards the Western European average is at 87% in terms of prosperity, while pure income convergence is only at 47%;

Romania’s strength for growing prosperity lies in its educational system, ranked 39th worldwide. Policy action from the government and collaboration with the private sector will help reduce the skills gap and increase competitiveness.

Erste Group and Legatum Institute have published the third edition of their annual CEE prosperity report. Romania ranks 45th on an overall worldwide index score ranging from 1st to 149th. Prosperity increased slightly in Romania over the past years and the country climbed three positions, from 48th place in 2016. If the CEE region were to be ranked as a single country, it would be the 38th most prosperous in the world. The best ranking in the region belongs to Austria which is the 15th worldwide, while Serbia is ranked 56th, the lowest prosperity indicator in the CEE.

The Legatum Prosperity Index goes beyond macroeconomic indicators to measure prosperity holistically, as a function of both material wealth and social well-being. It measures the prosperity-related performance of nations across nine areas: Economic Quality, Business Environment, Governance, Personal Freedom, Social Capital, Safety and Security, Education, Health, and the Natural Environment. This year’s CEE Prosperity Report focuses on living conditions, health and education.

“The next 50 years will bring profound changes at all levels of society – which will require a new level of cooperation, coordination and solidarity,” explains Andreas Treichl, CEO of Erste Group. “It’s now been 200 years since our bank was founded on the principle of disseminating and securing prosperity. Over the years it’s become clear that this has implications for our clients’ day-to-day reality – so it’s vital to understand and measure prosperity not just at a macro, but also at a micro level. Thus, we ensure that we can support people, communities and businesses in living a financially healthy life.”

Education, technology and infrastructure, with the focus on education. This is what the majority of Romanians said they want in order to have a prosperous life. Romania needs huge investments in order to advance on the economic value chain and to be able to sustain the internal challenges: demography and emigration, geographic disparities and quality of life. As the level of investments is not reaching the level the country needs, we are focusing on financial education in order to give the people the power to believe in their own strength and abilities to change the economy and their lifestyle,” adds Sergiu Manea, CEO of BCR (photo).


Rising wages do not always translate into rising prosperity


The Index demonstrates the remarkable rise in prosperity across CEE in the past three decades and the convergence in living standards with Western Europe. However, just as salaries and wages have risen, so too have people’s expectations and the cost of living, meaning that rises in incomes have not always matched with rises in people’s satisfaction with living standards. This can be clearly seen among young people who, unlike their parents, are not looking back at how life has improved since the end of communism and are instead looking globally and, in particular to their Western European peers, to make their comparisons.

People’s high hopes of a better life after 1989 were not confirmed and disappointment contributed to increased migration in the region. To cope with an unstable social and economic environment, individuals chose to move elsewhere. 18 million migrants have left the region since the collapse of communism, and close to 20% of Romania’s working population has emigrated since 2004. Both skilled and unskilled people have left looking for employment, although those with higher education levels have migrated more frequently and stayed abroad for longer.

The rise in the cost of living has put pressure on prosperity. In Romania, the prices of goods and services rose by 257% between 2000 and 2017, compared to 98% in Hungary and 87% in Latvia, and the EU average of 36%. However, wage average increases in Romania, Croatia, Czechia, Estonia and Slovakia have still not exceeded €3 per hour, compared to €10 in France. High costs of living and low wages mean that having a job is not always a guarantee of good living standards. For this reason, in Romania, one in five (18.9%) people employed are judged to be in relative low-income poverty, the highest in EU.


Improving human and social capital is key for the convergence with the West


Romania’s strength for growing prosperity lies in its educational system, ranked 39th worldwide. More generally, a high level of education – especially in technical subjects – has been a distinctive strength of the CEE region as a whole. Both the numbers of students and graduates are on the rise. The demand for tertiary education has been increasing exponentially since the fall of communism, with some CEE countries registering a 168% increase in enrolment rates. However, when measured as a share of GDP, government funding for higher education in CEE hovers at only 30-40% of the level typical for Western Europe.

With increased rates of start-ups in the digital economy and rates of employment in high-tech sectors now higher than the EU average, there is real potential for the knowledge economy to be the next growth engine for the CEE countries, Romania included. However, this will put further pressure on the existing skills gap as demand for skilled graduates increases. For this reason, governments need to have a long-term strategy and collaborate with the private sector.

Human capital in IT&C is a driving force for digital and digital-enabled innovations and may be considered as crucial for the competitiveness of modern-day economies. About 210,000 Romanians are currently working in the IT&C sector, accounting for 2.5% of the total employment in the country. The sector’s contribution to Romania’s GDP increased significantly over the past years and is currently standing at 5.9%.

Ranking 83rd , the still weak social capital is the most challenging aspect of prosperity in Romania. Low social capital has a disproportionately large effect on CEE’s overall prosperity delivery, as it is vital to achieving a complete democratic and market transition. The bonds and trust between citizens, as well as between citizens and institutions, are substantially weaker in CEE than elsewhere in the world. Trust is crucial for a market-based division of labour and for a lending market that is efficient and fair. In addition, countries with high initial levels of social capital experienced less severe economic downturns between 2007 and 2016.

Improving social capital will play a decisive role in continuing the transition and convergence of incomes in Romania, a country where more than a quarter of the population live below the poverty line, compared to 17.1% in the CEE region and 5.1% in Western Europe. Moreover, a solid social capital allows for the formation of powerful and efficient public institutions that stimulate the development of the private sector and the creation of wealth.


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