Neo-dependent development and its limits: the case of Romania

31 Oct

During the 2000s foreign direct investment in the “real” economy, albeit much less spectacular than in East-Central Europe, was just noticeable enough for people to have at least the impression that the long coveted catch-up with the “West” was within reach or that deindustrialization could be reversed by West European market forces. After all, as some reputable international consulting groups discovered, socialism may have been a failure, but at least it left behind impressive numbers of people who sold their solid engineering training for very low wages.

The results were impressive and began to unmoor Romania from the cold war propaganda image of a place covered in the soot of obsolete industries. The 300 dollars a month army of engineers left behind by Romanian socialism made possible a boom of Western investment in manufacturing, from cars to airplane parts. International brands like Renault, Ford, Nokia and Mittal opened up some of their largest plants in Romania. The high-end line of H&M, Benetton and other clothiers was for years made by the same Romanian textile factories that had produced for Western markets during state socialism. A wide array of Western firms that are pivotal suppliers for the global car industry opened up large operations in Romania, making car parts a Romanian niche. When Renault announced that it would open a large research and development facility close to Bucharest and began a hiring spree in the engineering departments of Romanian campuses, many felt that the developmental shift from assembling Western products to designing and manufacturing them locally was within reach. The years of fitful economics and hopeless misery seemed over.

There was some truth to this picture. FDI worked in at least one respect: exports. By the end of the 2000s Dutch, Austrian, German, French and Italian firms (in this order) accounted for about two thirds of Romania’s exports during the decade. Contrary to conventional wisdom that paints Romania as a low-end industrial hub, manufacturing attracted most FDI (44 percent), followed by the financial sector, retail and real estate. Unsurprisingly, the socialist planner and the foreign investor had the same preferences: heavy industry. The bulk of FDI was invested in energy, chemicals, means of transportation, mining and steels. Electronics and equipment, two up and coming export sectors, accounted for 2 percent of FDI, outdone by IT with 5.5 percent. Textiles and footwear, the erstwhile export niche of the Romanian economy, received only 1.4 percent of FDI.

The result of all this was the slowdown of the deindustrialization process and even the beginning of a movement up the technological ladder in the export sector. In 2010 Romania’s main export markets were demanding (German, Italy, France) and its main exports were middle rather than low-level products. It’s cars, car parts and electronic components, not textiles and footwear, as it was the case in the 2000s. Moreover, in the midst of the crisis, a wide survey on hundreds of investors found that IT, telecom, energy and pharmaceuticals were expected to be the substantial contributors to future growth and that Romania was perceived in investor circles as a country whose emerging competitiveness clusters signaled a high likelihood of more high-tech development.

By 2010 Romania lagged behind Visegrad countries in terms of the sophistication of its exports but it did not leg behind very far. It ranked 27th in 128 economies in this regard. Granted, only Slovenia and the Czech Republic are in the top ten of the most sophisticated exporters. Also, Hungary and Slovakia are in the same league with capitalist countries with old industrial traditions such as Italy, the US or France. But Romania ranks in the same league with Poland and Spain and does not lag far behind the Netherlands. In contrast, the Baltic states and Bulgaria have export profiles that put them in the company of commodity exporters (Brazil, Canada), traditional low end manufacturing economies (Portugal) or war-ravaged economies (Lebanon, Serbia, Bosnia).

But is this improvement of the country’s export profile a solid piece of evidence for the case of socially disembedded neoliberalism? The facts casts considerable doubts on this. Let’s just mention two of them (more in the next postI:

First, although Romania was a champion in attracting FDI during the 2000s, it nevertheless failed to attract enough manufacturing investment to reverse the deindustrialization process. Every year between 2001 and 2008 the share of industry in GDP shrunk by nearly 1 percent a year and industrial employment continued to decline. The shrinkage of industry did not reflect a rise in the service sector, whose growth was sluggish, but a construction boom, which increased by 70 percent and mopped up most of the employment growth.

Second, it soon became clear that there was little technological trickle down from FDI flows. As in the case of the Visegrad countries, this investment was focused on the use of local labor and government incentives, leaving R&D operations elsewhere. For all its virtues, FDI did not help reduce the low innovation capacity of Romanian economy. While average R & D spending per GDP reaches 2 percent in the EU (with highs of 4 percent in Sweden an Finland), in Romania it is merely 0.47 %, a level similar to that of Bulgaria and Slovakia. Indeed, one can say that in Romania state and capital alike are locked in a low innovation vicious circle. While more than half of R&D in the EU is made by private firms, in Romania this percentage is barely 23 percent, with most R&D originating in the public sector. Romanian research personal declined precipitously after 1990 and continues to do so even today. Although the volume of academic research is significant (35th in the world), it has a weak links with industrial applications and its impact factor is the lowest among EU member states (and on a par with Venezuela and Kenya). There are a few highlights in the area of innovation clusters emerging in the auto and IT sector, both of which benefited from extensive state subsidies and tax cuts. Overall, however, Romania’s potential to improve its innovation file remains limited.

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