Romania is increasingly specializing in the extremes of the demand range. High-quality products for the foreign markets or parts incorporated at low prices in quality products marketed as final products in other countries. Along with products at a modest level of quality and moderate price for the domestic solvent market.
In other words, we exploit small gaps identified among the already established offers and export the salary differential existing between the West and the domestic market.
Unfortunately, we can only handle the situation in which technology enables us to exploit the skills of the labour force at a still fairly low cost or in which we manufacture products with low added value and/or reduced production expenses.
All in all, production in Romania is not focused on developing the local middle class. From this perspective, domestic products are usually surpassed by those made at the regional level in our former country colleagues from the Eastern bloc, Poland, Hungary, the Czech Republic and Slovakia. They propose a better adapted assortment to the Romanian consumers with increasing incomes.
Domestic companies are mainly oriented toward the demand coming from consumers with relatively low incomes. Or, their base will inevitably narrow over time, while the middle-income customer base will expand and tastes will diversify. Unfortunately, low-cost mass production involves limitations of the assortment and a lower quality.
Of course, the local business environment tries to adapt to the new challenges. But it is forced to do so under some unfavourable conditions compared to the countries mentioned. Both in terms of financing the production, at higher interest rates and under more restrictive conditions and in terms of logistical reasons (see the poor infrastructure) or management difficulties (from the experience of the senior management to the corruption from the public sector).
The end data published by the National Institute of Statistics (INS) for the first eleven months of 2016 show that Romania has a problem of competitiveness with consequences causing the foreign trade imbalance. Paradoxically, the disadvantage does not occur in relation to the largest four economic powers of the EU (where, ironically, the trade balance is positive!) but to the four countries directly competing with us, colleagues from the former economic Eastern bloc, only them generating half of the trade deficit.
Simplified, we are slightly within the positive range in relation to the first four largest EU economic powers.
What we gain in relation to the UK and France we lose in relation to the main trading partner, Germany, and we have a slight surplus with Italy. In relation to Spain, we are also not doing badly, as the 1% deficit of the total is negligible in the size of the trade.
Foreign trade situation in relation to Romania’s main trade partners after eleven months of 2016
Therefore, our position would be remarkable if we would consider the development gap compared to the West, but we have problems in the trade with smaller countries like the Netherlands, Austria or Belgium, where the level of import coverage by exports is relatively low and leads us to a cumulative deficit equal to one quarter of the total.
The coverage level is even lower in relation to Poland, Hungary, Slovakia and the Czech Republic, representing about a half of the trade deficit. Moreover, in absolute terms, Poland and Hungary rank the second and third among the largest sources of trade deficit for Romania and, if combined, easily exceed the world champion China.
This country already approaches the 30% trade deficit threshold, in the absence of any Romanian goods marketable on the Asian market. Only behind it, the old EU members such as Germany, the Netherlands and Austria have rates higher than ten percent, placed before a country that provides energy resources such as Russia.
Top countries by trade deficit in relation to Romania
While we can understand how former socialist countries from the Central Europe are more competitive than Romania, perhaps due to the more suitable products for the Romanian consumers benefiting from the income growth, it remains less clear why we can sell enough to balance the trade with the major EU economic powers, but fail in relation to the second-class developed countries.
Basically, as we get closer to the 60% of GDP/capita level compared to the EU average, which in theory is the minimum level accepted to join the Eurozone, data prove the inadequacy of the domestic production in relation to the additional demand coming from the increased income. In weighing the opportunity of whether to produce new assortments we should consider not only the current situation but also the income trend, especially in the current circumstances given by the increasing incomes.
This is where appears the trap of priority redistribution to elderly people or state employees spread over the country territory, who remain to a major extent in the relatively low-income category. Categories who consume less new products and are less attentive to the quality/price ratio from the Western perspective.
Altogether, Romanian producers are facing a strategic decision:
1.Specializing, as a matter of principle, without much trouble with the market research on the quality range ends, at higher prices for very high quality (high margin from customers with more substantial amounts of money) and low prices for a minimum quality (for slightly smaller profit, but growing volumes) or
2. Really competing at the regional level to take over significant shares of the domestic market growth which seem to be granted through the supermarkets preponderantly supplied from other countries in our region (which for the Romanian manufacturers would be equivalent to testing and implementing an optimal combination, mobile under the revenue growth and sustainable over time).
Things are complicated by the fact that, in many cases, decisions are taken by multinational companies active in several countries from the region. They optimize their financial and material flows independently of the borders. Therefore, any potential development strategies can only lead them indirectly towards the direction desired by the Romanian state.
In contrast, by adjusting and calibrating the income and social protection policy, it could be activated the demand channel which the offer of various products can match. From this perspective, especially in the early sophistication area, Romania has a default dimension (through the volume of potential customers) not only below Poland but also below smaller countries like Hungary, the Czech Republic and Slovakia.
Of course, there is no question of balancing targeted trade exchanges. We can opt for compensating the surpluses from certain relations by some deficits from other relations but within a reasonable limit. For instance, it is not normal for the deficit in relation to Hungary to be almost one and a half times the deficit with the European locomotive, Germany. Or for Poland to deliver to us twice as much as we export to this country and for us to pay for what we get from the Czech Republic with what we obtain from France. The technological gap simply does not justify these differences.
The height of evolution over time, in terms of competitiveness, is the gradual loss of the surpluses systematically recorded with Turkey and Bulgaria until a few years ago. And the reverse of the situation to the point where Turkey has come to threaten Russia’s position, with exports to Romania that already surpassed last year Austria and got closer to the Netherlands.
To move the emphasis from the external to the domestic offer in the case of income increases, we should be certain that the increase in these incomes will benefit primarily the domestic production. That is just not to blow out the macroeconomic balance achieved over time, with great difficulty. But in terms of free movement of goods in the EU (as well as the progress of globalization in the non-EU relations), the relationship between the advance of the purchasing power and the development of an appropriate production is a two-way relationship and should be managed carefully.
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