Portugal and Romania – Observer
Half the world relates to the European Community’s predictions that by 2024 Romania will surpass Portugal in GDP per capita (in purchasing power parity); Romania, which in 2000 had the lowest GDP per capita in the EU, which at the time was – it should be noted – less than half of the Portuguese. Another half of the world, which includes much of our media, seeks to discover mitigating factors for such disparate levels of performance between the two countries. But recently Czechia, Slovenia, Lithuania, Estonia, Poland and Hungary have overtaken us; and soon they could also be overtaken by Slovakia, Latvia and Croatia. That is, there is no surprise for anyone who has been following the growth rates of the two countries. Romania with an average growth rate of 4% for the period 2000/2019 (before the Covid effect); Portugal with 0.6% growth in the same period.
Among countries that belong to the same space of economic integration, there is a tendency for the least accommodated to tend to convert with the most included countries, even more so when they benefit from generous community funds. Thus, the convergence of Romania and other European countries, although remarkable, is not surprising. That is the aim of many European policies. What is surprising, or maybe not, is that Portugal – which benefits from the same European aid – is now diverging.
The purpose of this article is to launch possible incentives for such a large disparity in performance between Portugal and Romania.
Long-term growth dynamics are associated with the capital stock, which results from investment by economic agents, and several factors that determine productivity levels, such as human capital, economic freedom, technological innovation, openness to the outside world, the quality of political and economic institutions and the weight of the State in the economy.
Starting with the analysis of the main factor, capital, we present a graph with the annual evolution of investment as a percentage of GDP.
As can be seen, from 2003/2005, Romania has higher levels of investment than Portugal; for the period under analysis, Portugal has an average ratio of 21.9% while Romania has 24.2%, that is, much higher. We are facing a relevant difference, but one that does not seem to justify such a large disparity in economic growth, so there must be other explanatory causes. The more inevitably they may be associated with human capital, that is, the levels of education of a people, all the more so since it is common to state that the exceptional economic performance of some Eastern European economies is associated with the high levels of education provided by previous communist regimes.
The above chart is however understood! Portugal systematically presents better education indices than Romania, so we will have to look for other possible causes for such a divergence in the performance of the two countries. Incidentally, it is not by chance that it is often said that Portugal saw the birth of a more prepared generation than ever.
Another possible cause may be associated with levels of economic freedom, so we will use the Heritage Foundation’s index of economic freedom in the following graph.
Here, although Romania has recently surpassed us in this indicator, it does not seem to us that this factor constitutes – by itself – a sufficient cause for such disparate performances in terms of economic growth of the two countries. We will therefore have to find other causes, which are unlikely to be access to technological innovation or markets, since both countries will benefit from the same economic space. It should also be noted, for example, that Lisbon is geographically a little closer to Brussels than Bucharest, so we must also eliminate geographical causes as explanations for these different levels of performance.
As with regard to the quality of institutions, we do not have comparative data for the two countries, it remains for us to investigate a final factor: the weight of the State in the respective economies. Below is a graph that reflects the weight of the State as a percentage of GDP in each of the countries.
As with investment, here we have a relevant difference for the entire period under review: Portugal has an average of 45.8% of public expenditure as a percentage of GDP; Romania has 36.1%, that is, a difference of almost 10%.
In short, investment levels and the weight of the State seem to be the main causes for disparities in economic growth in Portugal and Romania.
On the problem of how a State is excessively compromising economic growth, I refer the reader to two articles already published in the Observer “Why don’t we grow? The effect of excessive public spending – Observer🇧🇷 and “Portuguese economic backwardness. The effect of excessive public spending – Observer🇧🇷
In a very brief theoretical review, we can say that public spending excessively withdraws savings from households and companies with an impact on investment. A “fat” State means the production of public services with flexible productivity rates, with direct effects on the overall productivity of a country and, consequently, on its economic growth. More public spending means one of two things: either more debt (and more interest on it), or more taxes. In the long term, ever more taxes, which leads to distortions in the economy caused by high taxation. Romania has a flat rate of 10%; Portugal has marginal IRS rates that reach 53%. Romania has a corporate tax rate of 16%. Portugal has a progressive corporate tax rate that can marginally reach 31.5%! Here we have causes for our low levels of investment and, ultimately, the explanation why we do not grow and why our young people emigrate.
Portugal needs a profound reform of its State. A smaller and more efficient State, which does not compromise economic growth. A sustainable State that does not compromise its social functions in social security, health and education. Portugal needs a State that is friendly to savings and investment; of a State that provides the attraction of foreign investment; of a State that does not let the most prepared generation ever escape.
This is the only way we can stop walking “happily and happily” towards the tail of Europe.