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Romania can overtake Poland in terms of GDP per capita at purchasing power parity by the middle of this decade, but with a number of conditions, according to an analysis by Andrei Rădulescu, Director of Macroeconomic Analysis at Banca Transilvania.
The key conditions to reach this goal are the acceleration of reforms, the digitalization of the public sector, and a greater focus on investment in research and development, says the BT analysis.
Poland and Romania have faced similar economic and historical challenges over the past century, and developments in the two countries are often compared by experts.
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Poland and Romania are currently the top two economies in Central and Eastern Europe, with nominal GDP levels in the 2020 pandemic year of €500 billion and €200 billion respectively.
If we take into account International Monetary Fund (IMF) data, in the period 1980-1990 the level of development in Romania was higher than in Poland.
The situation has changed since then, particularly as a result of divergences in the implementation of reforms, with the development gap between Poland and Romania reaching record levels in the late 1990s and early 2000s.
However, Banca Transilvania points out that the development gap between Poland and Romania adjusted significantly in the post-crisis economic cycle: thus, in 2019 (the last year of that cycle) GDP/capita at purchasing power parity as a percentage of the EU average stood at 75.7% in Poland and 72% in Romania.
“This strong convergence of the level of development in Romania towards the level in Poland over the last decade was driven by structural factors. We underline the fact that in both economies we have witnessed a significant improvement in the structure of the contribution of factors of production to the annual dynamics of potential GDP in the framework of the post-crisis economic cycle, highlighting the dynamics of the multifactor productivity component. The significant increase in the contribution of multifactor productivity to the annual rate of potential GDP was mainly driven by developments in the private sector, geared towards efficiency and the incorporation of technological progress, including the Digital Revolution roadmap. We stress that the private sector in these economies is now competitive, both in Europe and globally,” the BT analysis says.
At the same time, the analysis shows that never in the past has the contribution of the capital factor and the contribution of multifactor productivity to the annual rate of potential GDP been as balanced as it is today, both in Poland and Romania.
Econometric analysis expresses that Romania has achieved a strong convergence towards the Polish level in terms of the annual rate of potential GDP from 2010 to 2019. This convergence was mainly driven by developments in the labour factor size and multifactor productivity.
According to the analysis, the annual rate of potential GDP in Romania exceeded the level in Poland in 2020, driven by the dynamics of the capital factor.
For the period 2021-2023, Banca Transilvania expects Romania’s convergence towards the Polish level to intensify, through a stronger evolution of the potential growth rate, mainly supported by the contribution of the capital and labour components.
It should be recalled that Romania overtook Slovakia in terms of GDP per capita in 2020 and, according to estimates by Marcel Ionescu-Heroiu, senior urban development expert at the World Bank, Romania “probably” overtook Hungary in 2021 in terms of GDP per capita.