A tale of two economies

I’ve never known much about Romania.  There was Olivia Manning’s Balkan TrilogyRichard Wurmbrand was one of the Christian heroes of my youth, and there were the bleak last years of Ceaucescu culminating in a firing squad on Christmas Day 1989.  But that was about it. I had occasionally used it as an example of a rare country that had managed less growth in per capita income than New Zealand over the 20th century.   The rule of law, private property, strong institutions and freedom have quite a lot to be said for them.

And then the other day, an eastern European immigrant to New Zealand was commenting here.  I was curious why an east European had chosen New Zealand, as several of the eastern European economies seemed to have pretty good prospects, perhaps even better than those of New Zealand.  I had in mind especially the Czech Republic, Slovenia and Slovakia (each now with GDP per hour worked very similar to that in New Zealand).  In our subsequent exchange, it turned out that he was Romanian.

And that prompted me to go and check out some data on Romania.  It was a pretty sobering story, for a New Zealander.

Romania had its ups and downs in the 20th century.   Just prior to World War One (when we were one of handful of richest countries in the world) Romania was doing well.   GDP per capita is estimated to have been 75 per cent of that of, say, Norway.   They did really badly for the following 30 years, and then –  on these measures –  quite well economically for the first few communist decades (large scale industrialisation etc).  As with many of the eastern bloc countries, things worsened again for them in the 1980s. Older readers may remember accounts of the “austerity policy” in which everything –  particularly citizen living standards –  was subordinated to repaying the government’s foreign debt.

Things actually got quite a lot worse for Romania (at least in bottom line economic numbers, even if they were free), as for many of the former eastern bloc countries, in the years immediately after end of communist rule (so many distortions to unwind, so many governance problems etc).  In Romania’s case things finally bottomed out –  at least relative to New Zealand – in 2000.

Absolute levels comparisons between Romania and New Zealand are a bit fraught.  Romania isn’t in the OECD, and while they are in the EU we aren’t.  Here are ratios of Romania’s GDP per capita, in purchasing power parity terms, relative to New Zealand since 1990 from (a) the IMF World Economic Outlook database, and (b) the Conference Board Total Economy database.

Romania 2

Those of you who want to be relatively more upbeat on the New Zealand story might choose to emphasise the Conference Board number, and to note that – even after ending decades of communism – on that measure Romania now isn’t much higher relative to New Zealand than it was in 1990.  Personally from all the accounts I’ve seen, I’m more than a little sceptical that Romania’s real living standards in 1990 were in fact half those of New Zealand.   Things are better measured now.

But here is the Conference Board’s real GDP per hour worked series (Romania relative to New Zealand).  The Romanian data only go back to 1995, and these days Romanian statistics are part of Eurostat (ie they won’t be perfect, but I’m not sure there is more reason to doubt statistics for them than for us).

romania 3

In absolute terms it isn’t such a stunning achievement –  since New Zealand productivity growth has lagged that of most other advanced countries over this period –  but………..one of the once-richest countries of the world is on course for having Romania, almost a byword in instability, repression etc for so many decades, catch us up.  It would take a while if current trends continue.  But not that long.  Simply extrapolating the relative performance of just the last decade (and they had a very nasty recession in 2008/09 during that time) about another 20 years.

So how we do maintain a big lead in GDP per capita?  Simply by having more people work more hours.  Here is hours worked per capita (ie per man, woman, and child of all ages).

romania 4

The next time you hear Steven Joyce, or some other minister or business cheerleader, boast that we have more people working than most countries, do try to remember that labour is a cost (to individuals, who would often do other stuff instead if they could) and that the Stakhanovite cult –  extolling the virtues of tireless labour –  was a feature of the communist system, not ours.

Of course, if people do want to work and can’t, then there is a problem.  We measure that through the unemployment statistics.  Romania’s unemployment rate is a bit higher than New Zealand, but at 5.5 per cent the difference is pretty small.  We still do a lot things better than Romania:  we score top of the Transparency International rankings, while Romania is 57th.  We top the World Bank’s ease of doing business index, and they are 36th (not bad at all given where they came from, but a long way off us).   But look at the bottom line growth and productivity performances.

Of course, sometimes what you find in countries with a run of impressive-looking fast growth is that:

  • it is built on big government deficits, or
  • big ill-founded private credit booms, reflected in
  • big current account deficits, and
  • appreciating real exchange rates, with an economy increasingly skewed towards construction and domestic demand.

Our government finances are in better shape than theirs.  The Romanian government (on IMF numbers) has a deficit of about 2 per cent of GDP, while we have a small surplus.  Gross government debt in New Zealand is about 30 per cent of GDP, and in Romania it is about 40 per cent.  But even that is pretty low by advanced country standards.   And for my friends who like to emphasise size of government, (still on IMF numbers) both revenue and expenditure as a share of GDP are a bit smaller in Romania than in New Zealand.

Romanian private credit was very rapid, and looked rather risky, in the years leading up to 2008.  But not now.  There is a chart at the link, and overall domestic credit growth has been running at under 5 per cent per annum for the last few years.

Reflecting the pre-crisis boom in private credit, the Romanian current account deficit widened sharply.    But these days, deficits in Romania are similar to the modest ones we currently have in New Zealand.

romania 5

Romanian investment has fallen back from what they experienced in the credit boom period.  Then again, it is still higher, as a share of GDP, than that in New Zealand.

romania 6

In fact, they had exactly the sort of worrying real exchange rate appreciation one might have expected in the credit-boom years.

romania 7

But after that credit boom ended, the real exchange rate fell back.

Perhaps consistent with that, firms based in Romania seem to have been doing rather well in international markets.  Exports look as though they were squeezed out during the credit boom, but the subsequent recovery and trend growth is pretty impressive.  For a country with a population of about 20 million people, it is a reasonably high foreign trade share (this is exports, but imports are equally important).  Australia, for example, is around 20 per cent of GDP.

romania 8(You will recall that New Zealand has been going backwards on this metric.)

And there was one other interesting comparison.

romania 9

Since 1990, Romania’s population has fallen by 16 per cent, and ours has risen by 40 per cent.   There are several differences.  As I showed a few weeks ago, New Zealand’s total fertility rate over recent decades has been averaging below replacement.  Romania’s has been materially lower still, currently around 1.4.   And both countries have had material outflows of their own citizens: we had a net outflow of New Zealand citizens of around half a million people since 1990.    Romania has also had big outflows but (as far as I can tell) smaller cumulatively than those from New Zealand (there is a reference here to about 2.3 million Romanians living abroad long-term).

But, of course, the other difference is non-citizen immigration.  We’ve for a long time aimed to grant residence approvals equal to around 1 per cent of the population each year.  Since 1990, those policies have given us a net inflow of around one million non-citizens.

The OECD’s International Migration Outlook recorded in 2015 that

Romania sets annual quotas for work authorisations to be issued, although historically demand has been lower than the quotas.  For both 2014 and 2015, the quotas were set at 5500, including 900 intra-corporate transfers and 900 highly-skilled migrants.

In a country of 20 million people.   Not necessarily a policy I’d recommend, but……

Subdued population growth (well, falling population actually) doesn’t seem to have been inconsistent with a pretty impressive period of productivity growth, export growth, strong investment etc etc, all in a country still with its share of governance and regulatory problems.  And that investment isn’t largely having to keep up with a rapidly rising population, it is presumably responding the incentives and opportunities firms are finding).  Perhaps the Romanians, in aggregate and in some sense, wish their population wasn’t falling –  there is still anguishing about the outflow of skilled people – but probably their best hope of reversing that (perhaps slim given the low birth rate) is to keep right on with what they’ve been doing for the last 10 years.  In time, perhaps many of the diaspora might even return –  as they started to in Ireland after they finally got their act together.

30 years ago, Bob Jones toured the country lamenting that the New Zealand economy had come to resemble a Polish shipyard, a byword for inefficiency and industrial disruption.  I do hope in 30 years time there aren’t reforming Romanian politicians campaigning, warning their fellow citizens to avoid the decline and fall of New Zealand.  Yes, for now they are still poorer and, on average, less productive than we are. But those gaps have started closing fast, and the foundations of the growth don’t look that bad at all.

UPDATE: I forgot to mention Romania’s 16 per cent company tax rate.  Not sure (whether as Baptist or economist) I quite approve of the separate regime for nightclubs and gambling operations.

(On another topic, I discovered that my name was being bandied around in Parliament’s question time the other day   –  question 2 here. Winston Peters was quoting me, and Steven Joyce was batting him away.  All good fun no doubt.     But I did notice this comment from the Minister “I appreciate that the member has been talking to Mr Reddell a bit”.  In fact, I have never met Mr Peters, I have never talked to him, never emailed him or had any contact with him whatsoever.  If he or his office appear to read my stuff at times well, of course, I welcome that, as I welcome any readers.   Specific policy proposals, that might actually make a difference, would be even more welcome.)

 

 

 

18 thoughts on “A tale of two economies

  1. I read the transcript of Question Time. It seems to me that Winston Peters was getting under Joyce’s skin when he replied: “I appreciate the member’s elevation of Mr Reddell to something like economist sainthood status this week, but there are other economists, he may be surprised to learn. There are a range of them, from a range of organisations. Can I suggest he read a little more widely.” This was John Key’s typical response to anyone asking him difficult questions but it looked like a lamer and lamer approach for Key as time went on. The same will happen to Joyce, given he doesn’t answer questions directly but “bats them away”. It’s telling that he has no real counter to questions about per capita income and the like.

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  2. I’ve been following this blog for a couple of months and I have deduced that you are very unlikely to be voting for Winston Peters.
    The http://www.ifitweremyhome.com/compare/NZ/RO link that someone kindly recommended has convinced me not to sell up and move to Romania this year. But the trends are as you describe are interesting and your discussion persuasive.
    It would be interested to know more about the Romania emigres: we met Romanian gypsies while queuing to ascend the Eiffel tower – they certainly have the creativity and determination and even the fluency in multiple languages that fans of immigration as an economic cure recommend. However the only Romanian I’ve met in NZ (while she took a blood sample) was not enthusiastic about them. Isn’t a problem with emigration that you usually lose the young and talented?
    It must be difficult governing a country that has a shrinking population (I’m the son of a British Railways family so I have a lifetime of being an onlooker at managing decline). I wonder how Auckland council would manage a shrinking Auckland – they would need an anti-ATEED to drive tourists away.

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    • I wouldn’t be moving either (apart from anything else a long track record of peace, freedom and democracy count for quite a bit). But I did your comparison on Slovenia (GDP per hour now slightly ahead of NZ)

      http://www.ifitweremyhome.com/compare/NZ/SI

      and they now do better than us on a majority of that particular set of rankings.

      Re population, with our birth rate any population decline would be at a pretty modest pace. And recall that countries with flat or falling populations need many fewer builders and related trades, road-builders etc. Economies rebalance, and (for exampe) different technologies get adopted.

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      • If at the next election Winston Peters holds a significant balance of power (he’s not getting my vote but if he can manage to avoid the words ‘Chinese’ and ‘Asian’ then he might win more seats than expected) and he insists on Andrew Little keeping his word about a drastic reduction in immigration and they set a quota/cap that is the same as the average OECD country which at a guess would be 10,000 (or less judging by Romania) then population may stop about a year later. Then if NZ’s usual rate of emigration restarted (surely a possibility) we would have a fairly rapidly declining population within maybe five years later. It could snowball with builders and related trades moving to Australia.
        It would produce a whole new set of problems for our government – they could take trips to Romania instead of Switzerland and Israel to learn how to handle it. And since I’m dreaming I could produce a list of unwanted ugly high rise buildings to be flattened. With a declining population property prices would slump back reality and that would allow young people to be housed and start families when young and thus resolve the population issues in the old fashioned way.
        Is there any literature on declining population? The limit of my knowledge is after the black death in Europe killed one in three it was much harder to maintain serfdom.

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      • Lets assume we grant 12500 residence permits a year (split the difference in my 10000 to 15000 pa target). Even some of them don’t stay, so perhaps the long-term contribution is 11000 pa. If the outflows to Australia go back to normal levels, of say 27000 pa, that would be (roughly) an annual PLT net outflow of 16000. We had 59400 live births last year and 31200 deaths. That balance will be shifting (death numbers increasing), but it is hard to see us averaging something less than a 10000 per annum loss of population for a quite a while yet. That is 0.2 per cent per annum, which I don’t think would create undue difficulties.

        I have a reasonable pile of articles and books on declining population. the first systematic book is one by a UK academic written in the late 30s, at a time when there was a pretty serious advanced world concern that falling populations would be upon us before too long. Both Britain and NZ had official inquiries on population straight after the War, motivated in large part by that concern. Then, of course, birth rates rose sharply.

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      • I’m persuaded – numbers have that effect on me. Well it was a dream.

        Even with a dramatic rush to Australia I expect the movement from the rural to the city will continue.

        Comparison with other countries immigration rates have to allow for one unique NZ trait – the ‘OE’ [that term has to be translated/expanded in the UK]. Is it surprising that there are so many Kiwis marrying foreigners. Add to that recent Kiwis choosing partners from their country of origin (as per a step-daughter) and according to one academic also the recent influx of Indian pseudo-students who have a strong preference for an arranged marriage.

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      • But do bear in mind that, net, NZers have been moving out of Auckland for the last 20 years or so. That could change with a big change in immigration policy, but any net influx from “country” to “city” is prob more visible in places like Tauranga or Hamilton.

        Yes, the foreign spouses numbers are included in my 10000 to 15000. But those numbers would probably drop away quite a lot if the number of residence approvals was cut, because a remarkable number in recent years do seem to have been Indian (presumably marrying mostly other relatively recent Indian arrivals).

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  3. Can’t see how Romania can hope to compete with NZ when they have 900 skilled migrants per year for their 20,000 population when we have over a 100 times more per capita. Maybe the phrase ‘highly skilled’ in Romania means more than ‘skilled’ does in NZ?

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  4. Interesting …

    I was operating in the Global Financial sphere with international clients, providing a specialty service no-one else in the world provides. About 6 years ago, out of the blue, I was approached by a graduate from Toronto University who wished to come down to Melbourne and study with me for 6 weeks. He did so. In the time he was with me he advised that while he was born in Toronto, his family were Romanian from Romania and they were in the process of departing Toronto and Canada and returning to Romania including himself

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  5. “Since 1991, a total of ten programs have been approved with Romania and, at the time of the 2013 SBA request, Romania was the fourth largest Fund borrower”. Maybe those IMF structural reforms do help in the long run? Agree, rule of law, private property (with fair and efficient land markets) and strong institutions can become undervalued so in many ways, I hope Romania do catch up in the years to come….

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    • Do note that the last two programmes, 2011 and 2013, have not involved Romania drawing down any further borrowings. They are, in effect, using the Fund as some combination of adviser/monitor/ prod, and reassurer to international markets and investors.

      I hope Romania gets rich. But if they catch up with us, I hope it is only when we’ve sharply improved our own performance.

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  6. Haha Michael, I wouldn’t have imagined that my chat with you would prompt you for an article. I haven’t read it yet but I’ll do it soon. After I cook the dinner for my daughter (who’s born Kiwi haha). I’ll get back to you soon 🙂

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  7. So I shared this on Google+, and the Romanian who follows economics (and is early 30s I guess) says:

    In the early 90’s Romania was basically starving. The collapse of Communism was on par with the economic declines following the loss of the Second World War. Romania’s GDP was mostly flat for a decade after the Revolution. But that doesn’t show the true horror of those days , life expectancy fell by 2 and a half years by switching from Communism to Free Market Capitalism. Unemployment skyrocketed , so did inflation so purchasing power went down the hill. Every social ill imaginable came to the foreground : drug use , crime , a rise in suicide rates , a rise in divorce rates, you name it. It was only in the early 2000’s that all the reforms started to bear fruit. After that it was sort of OK.
    But the 90s decade was the decade that my generation (born in the 80s) lost at this game of life. 10 years down the drain. Those born in the 90s had an infinite better shot of making something of themselves in this life , ya know , because small kids don’t quite understand poverty and deprivation. As long as they are loved , they can live in a garbage bin. But I remember going to school with torn shoes and second hand pants and kids laughing at me. And everybody in my family was a doctor and played the piano , so it wasn’t like I was some street rat coming from a dysfunctional family. Well , it is like it is 🙂

    You can my post with his comment at https://plus.google.com/+PeterKellyofNZ/posts/3wB9ukuEpYf

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  8. Is this something to do with building institutions that are trusted by all. And however fast the institutions take to build the trust takes years. I’m thinking of PNG: a wonderful country held back by institutions that are not trusted – if not corruption then bureaucratic inertia and arbitrary decision making. If Romania has turned thing round then so can everyone else such as Pakistan and Zimbabwe.

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  9. Hello Michael,

    I have read the article. Going through it I remembered about myself talking about New Zealand when I was in the process of immigration: you cannot know the real situation from a country until you have been there.

    There are some things that I’ll point out in the comparison Romania vs New Zealand and, of course, are related to your article:

    1. Pro Romania. The GDP per capita. I’m not quite sure if it matters but from what I have seen in general in New Zealand there are too many workers/employees than needed. I consider it to be a bad news considering that New Zealand is a country with a population of only 4.5 million people and quite isolated. What I am trying to say is that the unemployment could be higher. Though… if per capita means divided to all the people in the country then I reckon that there should be more room for work to come. I’ll give you a simple example: My father paid us a visit this summer and he went to a restaurant where he could see that there were 6 waiters with only 4 customers inside. He said he would never have seen that in Europe (obviously Romania as well). 1 waiter would have been enough.

    2. Pro New Zealand. Inequality doesn’t come up in the numbers. 40% of Romanians live in poverty. Romania ranks the second in EU in terms of inequality when we speak about employees (so attention: not businessmen or investors). The best paid employees get at least 7 times more than the worst paid employees. And this is only the stats. Unofficially (as remember, I lived there) the ratio is 10 times.
    New Zealand is not there yet but, oh my, it is catching up fast.

    To be continued in my next comment

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  10. 3. Pro New Zealand. Romania’s population is aging fast. The standard of living has increased as a direct consequence of foreign investment. What were they looking for? They were looking for qualified IT specialists being able to speak a good English. Bingo, that was it, Romania was perfect. But what else did they want too? Cheap labour force. Oracle, Ericsson, Microsoft, Dell, ING Bank, HP, Electronic Arts just to name a few have invested a lot in Romania. But the question is: with an ageing population and, thus, wages continuously going up for how long are they going to stay there? My bet – not too much. This is where New Zealand could benefit – attracting foreign investors creating business and of course jobs. There are so many opportunities in New Zealand and I am sure I don’t have to name them here: data centers in IT, hotels in the Tourism Industry, infrastructure, etc.

    To be clear, I am talking about serious regulated investments not real estate speculation.

    4. Pro New Zealand: Quite related to 3. With a 3rd world war just around the corner the forecast looks better for New Zealand than Romania. Look who is our neighbour to the East. I said I would leave New Zealand but I am not sure I would go back to Romania at this stage.

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    • Thanks for those comments Daniel. On your final two, yes much-increased foreign direct investment here would be highly desirable, but isn’t that likely. Our high company tax rate is a big obstacle, but so too is our location – there are reasonably well-governed places that are closer to markets, suppliers, parents, knowledge clusters etc. But the tax rate is in our own hands.

      In a sense, it is the flipside of your final point, which I well recognise. In a sense a downside of being rather nearer the centre of the world, is being rather nearer to be bad stuff the world throws up at times. Romania has had at least its share of the bad stuff in recent centuries.

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