Annual Policy and Forecast Report 2018: 12 years in the EU. Evolution or involution?

In 2018, Romania’s GDP per capita will exceed 10,000 USD for the first time ever, marking Romania’s emergence as a medium-income economy. If we look at the raw data in terms of real income, Romanians now have twice the disposable income they had in 2000, when their country was invited to join the European Union (EU). Despite this change in income, and despite all the broader social, institutional and economic changes EU membership has brought, Romania failed to overcome its striking development gaps, and prosperity is still far away. One explanation for this can probably be found in the fact that a number of reforms implemented before accession have either been abandoned, poorly implemented or ignored. Also, a considerable part of Romania’s workforce has emigrated, and, similarly to Bulgaria, Romania did not switch to the Euro, was not welcomed into Schengen, and has thus remained a second-tier country within the EU.

One of the most obvious signs of Romania’s status is the continuation of the Mechanism for Cooperation and Verification (CVM), the Commission’s safeguard measure which aims to impose various benchmarks on Romania and Bulgaria due to the fact that the rule of law in those countries was weaker than in other, formerly communist, candidate countries, such as Hungary or Poland. Even though the Mechanism was supposed to last for just three years, it is in full force in 2018 and, with every passing year, controversies pile up. It is indeed difficult to give a clear verdict: by 2018, Romania imprisoned 18 ministers, one former Prime Minister and sent to court one sitting Prime Minister. Comparatively, Bulgaria did almost nothing of the sort. Moreover, a decade later, the World Governance Indicators for corruption perception and rule of law are not only very close to the values registered in 2007, but they are also close between the two countries. Ironically, despite this, Bulgaria does a better job of absorbing EU funds and developing its infrastructure. All things considered, Romania is seen as a success story, while Bulgaria is not. Romania is often served as a positive example for other countries, especially by the International Monetary Fund (IMF) and various American governmental organizations.

Taking all things into account, in this report we aim to answer the following questions:

Did Romania’s quality of governance improve after its adherence to the EU?
Even more so, can Romania’s experience provide useful lessons for other countries that wish to follow its path?

We will mostly focus on the substantial success of good governance policies and their attempt to improve the rule of law rather than looking at the CVM as a successful conditioning instrument. Because Romania is seen, through the eyes of the CVM, as a success story as far as European institutions go, and Bulgaria is as a failure and despite the fact that the CVM itself is identical for both countries, it is quite clear that the discrepancies between the two countries can be explained by factors that are mostly or completely unrelated to the CVM.

1.
In the first section of the report, the RAS experts panel expands on its assessment that the Romanian economy will continue to grow at a faster pace than the EU average, and aside from a 5,3% GDP growth forecast, the BET stock market index will see similar growth with a 27,8% estimate, the same can be said for the real estate market, with a 6% rise. Similar optimism can be seen for both the unemployment rate, where the current 5% rate is expected to drop to 4,7%, as well as the inflation rate (3,3% compared to the 3,7% calculated by the National Prognosis Commission). However, the exchange rate will continue to weaken for the year 2018, following an already established pattern, with the current account deficit expected to grow by 5,4% of GDP.

For 2018, the most important recommendations coming from the experts are:

1. The main priority: computerization of public administration and interconnection of databases;
2. Economic decentralization in order to empower and disconnect local authorities from the discretionary allocation of funds from Bucharest;
3. Replacing the bureaucratic lump with efficient IT solutions for both the taxpayer and tax authorities;
4. Avoiding the global income tax and progressive tax, as they are complicated to administer, neither the authorities, nor taxpayers are prepared for such a change;
5. Unblocking public investment and moderating wage and pension increases.

2.

The second section of the report focuses on the persistence of the poor governance phenomenon despite Romania’s 12 years in the EU. In spite of efforts to strengthen integrity, the Romanian state has failed to substantially reform in such manner as to allow for an increase in the administrative capacity needed for a better public services delivery and for the sustainability of economic growth. In addition, Romania is still affected by collective action problems caused by the lack of trust and cooperation between individual citizens and their different groups.

Romania, perhaps more than any other country since Italy’s Mani Pulite investigations, has implemented a repressive campaign in a systemic corruption environment. However, if judicial activism is politicized and used strategically in political debates by political parties, political leaders and the press, thus exacerbating polarization, the consequence is the decline in electoral accountability for corrupt politicians rather than vice versa. Romania seems comparable to Italy, which failed to implement the structural reforms necessary for progress, the result being political destabilization without great progress in the overall quality of governance.

The fragile progress made by the Romanian judiciary is mostly owed to courts and the National Anticorruption Directorate’s (DNA) public image gains, but real reforms to strengthen the system did not take place. Romania is at the top of the EU and EU-11 rankings in terms of access to justice and its integrity, while official data on the efficiency and resources of the judiciary indicates deep institutional dysfunctions and challenges. In other words, successes are in fact a timely but ad hoc use of the existing legal and institutional framework and do not reflect profound structural or systemic changes.

The issue of politicizing public administration is dealt with in depth and the analysis reveals that the level of political patronage in Romania is the second highest in new European democracies, after Greece. Politicization is the main problem for the Romanian public office. Politicization of the central apparatus is often motivated by the capture of resources which are concentrated at the central level rather than at the local level. However, in Romania there is an almost equal degree of politicization at the level of Government and that of local public administrations. Taking into account the size of the civil servants’ body in Romania, the politicization of these functions can be a very important lever for consolidating party organizations (by rewarding loyal allies with important positions) and for corruption and siphoning public resources (by controlling key institutions and departments).

Another key area is the correct implementation of corporate governance legislation and even the attack on it by Parliament in 2017. In Romania, public enterprises account for about 6% of GDP, employ about 4% of the workforce, but 20% of all outstanding payments from the Romanian economy are due to them. According to the latest data, the 187 public companies under the central government record an operating profit of 6.6 bn. RON, and an operating loss of 1.3 bn.  RON, with an improvement in the results from 2012 to date, a result that can be undoubtedly attributed to improved corporate governance. At the same time, receivables of over 10 bn. RON are recorded, along with total debts of 21 bn. RON, including an increase in 2016 of outstanding payments. Moreover, these state companies receive annual subsidies of about 6 bn. RON, a figure almost as high as their operating profit.

The main area where poor governance is evident is the European funds sector. Given the great development gap between Romania and the EU average, the executive could have taken full advantage of the funds, but poor governance has led to wasteful use and missed opportunities. An estimate of earnings (reimbursements) and losses (decommitments, budget receivables) shows that Romania lost 1.6 bn. Euro definitively via decommitments. It is exactly those programs that should have addressed some of society’s main problems – infrastructure and human resources – registered not only low absorption rates, but also the highest decommitments (OP Transport and OP Environment together lost almost 1 bn. euro), and the largest claims following the implementation of the projects. In other words, OP Transport and OP Human Resources were among the worst implemented cohesion programs in the previous programming period. As far as the amount of financial corrections is concerned, it amounts to almost 1 bn. Euro. Again, we see that the most problematic programs are those on infrastructure: OP Transport (almost 500 mil. Euro), OP Regional (almost 300 mil. Euro) and OP Environment (almost 100 mil. Euro).

3.

The third section provides a framework for addressing the intensely polarizing question: to what extent do the three “justice laws” affect the independence of the judiciary.

Judicial independence is often invoked in political debates, most recently on amendments to the three justice laws: 303, 304, 317/2004. Although codes have been upgraded and justice is the focus of the CVM, we always hear that the judiciary’s independence is in serious danger and must be defended or safeguarded. The head of state is often urged to hold a referendum on “justice”.

Recommenations

The central recommendation of this report – and its warning – is that in the absence of an emphasis on the prevention of corruption instead of its repression, the anti-corruption campaign in Romania will fail. The DNA’s actions, after having had undue interactions with the intelligence services, are orchestrated not only politically, but also by the media by exaggerating them because of various interests. These were insufficient anyway, given the extent of the problem. The rules of the game can be changed only through bipartisan agreed policies where the elimination of corruption is a secondary but indispensable objective, for example by placing more emphasis on increasing the quality of public services, the efficiency of public procurement or the predictability of long-term investments.

The full executive summary in English is available here.

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