Abstract
This Selected Issues paper and Statistical Appendix provides an estimate of the long-term path of Romania’s real exchange rate. The paper describes the recent history of the real exchange rate and its main determinants. A model is developed of a time-varying long-term exchange rate path, mainly driven by the terms of trade and net foreign direct investment. This long-term path is then used to assess the developments in Romania’s actual exchange rate. The paper also examines Romania’s growth potential in the medium term.
II. Romania’s Growth Potential in the Medium Term1
1. This chapter discusses real output growth in Romania over the past decade and provides a rough estimate of the future growth potential.
A. Historical Record
2. During the past decade, Romania’s overall growth performance was disappointing; output was highly volatile and its growth was on average very low. (Figure 1). Having reached its trough in 1992, GDP growth steadily increased and averaged 5 percent during the period 1994-1996. Most of these gains were lost in the 1997-1999 crisis, when GDP dropped by about 12 percent. In 2000, Romania returned to modest positive growth and in 2001 saw a surge in its growth rate to 5.3 percent, supported by a strong recovery in the agricultural sector. However, overall growth during this period averaged only 1.2 percent annually.
The Evolution of the Gross Domestic Product, Employment, Capital and Total Factor Productivity in Romania: 1992-20013.
Citation: IMF Staff Country Reports 2003, 012; 10.5089/9781451832785.002.A002
The Evolution of the Gross Domestic Product, Employment, Capital and Total Factor Productivity in Romania: 1992-20013.
Citation: IMF Staff Country Reports 2003, 012; 10.5089/9781451832785.002.A002
The Evolution of the Gross Domestic Product, Employment, Capital and Total Factor Productivity in Romania: 1992-20013.
Citation: IMF Staff Country Reports 2003, 012; 10.5089/9781451832785.002.A002
3. The explanation of the low growth rate requires a closer look at total employment and capital developments (Figure 1). In the 1990s, the labor force and total employment persistently declined. Total employment shrank by about 2 million people or 17.3 percent2. Assuming a standard Cobb-Douglas production function and a labor share of 0.6, the contribution of the employment decline to annual GDP growth was -1.3 percentage points. Capital stock data is not available for Romania, but estimates suggest that it slightly increased by about 10 percent over the 1992-2001 period (see appendix for the procedure used to estimate the capital stock). Assuming a capital share of 0.4, this implies a modest 0.4 percentage point contribution to annual output growth. Growth accounting therefore suggests that total factor productivity (TFP) growth, measured as the Solow residual, provided the major contribution to GDP growth, estimated at 2.0 percent annually. We would hypothesize that the more efficient utilization of labor and capital was among the major determinants of TFP growth, with the privatization and restructuring improving the utilization and allocation of factor inputs, reducing hidden unemployment and raising labor productivity. Table 1 summarizes these findings and provides results for alternative assumptions on labor and capital shares, in line with the estimates in Chapter III of this paper on Labor Market Issues.
Sources of Growth, 1992-2001
(In percent per annum)
Sources of Growth, 1992-2001
(In percent per annum)
| Contribution of | |||
|---|---|---|---|
| GDP Growth | Capital | Employment | Total Factor |
| Accumulation | Growth | Productivity Growth | |
| Capital share = 0.33 and Labor share = 0.67 | |||
| 1.19 | 0,36 | -1.39 | 2.26 |
| Capital share = 0.4 and Labor share = 0.6 | |||
| 1.19 | 0.43 | -1.26 | 2.04 |
| Capital share = 0.5 and Labor share = 0.5 | |||
| 1.19 | 0.54 | -1.05 | 1.72 |
Sources of Growth, 1992-2001
(In percent per annum)
| Contribution of | |||
|---|---|---|---|
| GDP Growth | Capital | Employment | Total Factor |
| Accumulation | Growth | Productivity Growth | |
| Capital share = 0.33 and Labor share = 0.67 | |||
| 1.19 | 0,36 | -1.39 | 2.26 |
| Capital share = 0.4 and Labor share = 0.6 | |||
| 1.19 | 0.43 | -1.26 | 2.04 |
| Capital share = 0.5 and Labor share = 0.5 | |||
| 1.19 | 0.54 | -1.05 | 1.72 |
B. Growth Outlook for 2002-05
4. Despite the disappointing history, we would consider that 5 percent annual output growth over the medium term is feasible under certain policies. The authorities’ Pre-accession Economic Program projects a similar GDP growth of 5.1 percent on average in 2002-2005.
5. Given Romania’s prolonged capital scarcity, capital accumulation could become the major driving force of growth. During the past decade, the investment to GDP ratio hovered around 20 percent. With a large number of companies becoming obsolete, the depreciation rate was high, which did not allow for a sustained increase in the capital stock. Given the still low current level of the capital stock, a modest increase in the investment rate by 1.3 percentage points of GDP could push up real capital’s contribution to output growth to about 2 to 3 percentage points (see Table 2 and the Appendix). The recent expansion in private investment activities, spurred by private investment in export-oriented industries, bodes well for an increase in the investment rate, which following the 1997 crisis still lags behind other transition countries (Figure 2). Restructuring in the industrial sector and public investments in infrastructure in preparation for EU accession should further consolidate investment growth and narrow the gap between Romania’s investment rate and that of other more advanced transition countries.
Projected Sources of Growth, 2002-05
(In percent per annum).
Projected Sources of Growth, 2002-05
(In percent per annum).
| Contribution of | |||
|---|---|---|---|
| GDP Growth | Capital | Employment | Total Factor |
| Accumulation | Growth | Productivity Growth | |
| Capital share = 0.33 and Labor share = 0.67 | |||
| 5.00 | 2.03 | 0.00 | 2.97 |
| Capital share = 0.4 and Labor share = 0.6 | |||
| 5.00 | 2.46 | 0.00 | 2.54 |
| Capital share = 0.5 and Labor share = 0.5 | |||
| 5.00 | 3.08 | 0.00 | 1.92 |
Projected Sources of Growth, 2002-05
(In percent per annum).
| Contribution of | |||
|---|---|---|---|
| GDP Growth | Capital | Employment | Total Factor |
| Accumulation | Growth | Productivity Growth | |
| Capital share = 0.33 and Labor share = 0.67 | |||
| 5.00 | 2.03 | 0.00 | 2.97 |
| Capital share = 0.4 and Labor share = 0.6 | |||
| 5.00 | 2.46 | 0.00 | 2.54 |
| Capital share = 0.5 and Labor share = 0.5 | |||
| 5.00 | 3.08 | 0.00 | 1.92 |
The Fixed Capital Formation Rate in Romania and Other Advanced Transition Countries, 1992-2001
Citation: IMF Staff Country Reports 2003, 012; 10.5089/9781451832785.002.A002
1/ Unweighted average of the Czech, Hungarian, Polish, Slovak and Slovenian and Slovenian investment rates (gross fixed investment).The Fixed Capital Formation Rate in Romania and Other Advanced Transition Countries, 1992-2001
Citation: IMF Staff Country Reports 2003, 012; 10.5089/9781451832785.002.A002
1/ Unweighted average of the Czech, Hungarian, Polish, Slovak and Slovenian and Slovenian investment rates (gross fixed investment).The Fixed Capital Formation Rate in Romania and Other Advanced Transition Countries, 1992-2001
Citation: IMF Staff Country Reports 2003, 012; 10.5089/9781451832785.002.A002
1/ Unweighted average of the Czech, Hungarian, Polish, Slovak and Slovenian and Slovenian investment rates (gross fixed investment).6. We do not expect the decline in the labor force to continue. If political stability and sound economic policies prevail in the medium term, labor migration, which has caused a severe brain drain in the past, should cease. Though continued restructuring could result in further layoffs, new industries and the service sector should be able to absorb these workers. Therefore, the unemployment rate is expected to stay around its current level of about 9-10 percent.
7. Finally, further institutional improvements, more efficient management structures and accelerated human capital accumulation should sustain productivity gains. To arrive at 5 percent real growth, annual TFP growth would have to be at about 2-3 percent, about 0.5-0.7 percentage points higher than in the recent years.
APPENDIX
Estimation of the Capital Stock, 1992–2001
We estimate the change in the capital stock based on the following equation:
where I denotes gross investment, K the capital stock, Y the gross domestic product and δ the depreciation rate. The investment rates are known and the initial capital-output ratio is estimated based on the ratio of Romanian to German per capita GDP (at PPP) in 1992 which was 26.7 percent. We further assume that the difference in per capita GDP is not exclusively due to different real capital endowments but that half of it can be explained by other factors such as human capital, institutions etc. Based on a Cobb-Douglas production function and a capital share of one third we get:
that is, in 1992 the German real capital-output ratio is estimated to be 3.5 times the size of Romania’s. With a German ratio of 4.6 in 1992 we arrive at a capital-output ratio of about 1.3 for Romania.
For the depreciation rate, we assume a declining path which is supposed to capture the fact that, especially in the beginning of transition, a lot of capital equipment became obsolete. Depreciation starts at 20 percent and continuously declines to 10 percent in 2002.
Estimation of Capital’s Contribution to GDP Growth in the Medium Term
Given that Romania’s real capital-output ratio is estimated to have remained roughly constant over the past years at about 1.3 and assuming a constant depreciation rate of 10 percent and an average investment rate (gross fixed investment) of 21 percent, we get an estimate of 6.2 percent capital growth. Assuming capital shares of 0.33, 0.4 and 0.5 would yield a capital contribution of 2.03, 2.46 and 3.08, respectively.
Prepared by Thomas Harjes.
The labor force fell by 1.5 million people or 13.3 percent, moderating the effects on the unemployment rate, which increased from 3.5 percent in 1992 to 8.6 percent in 2001.
The GDP and capital estimates are in constant 1998 prices, The trend is derived by applying a Hodrick-Prescott (HP) filter. It should be noted that the HP-filter tends to perform poorly at endpoints. In addition, the fact that Romania experienced a serious balance of payments crisis during 1997-1999 seriously hampers an economic interpretation of the HP-trend, such as potential output.
