"EU internal competition is growing and Romania will be more competitive if it takes this challenge together with its Central and Eastern European partners"
Roberto Musneci, Vice President of Aspen Institute Romania and partner in ‘Serban and Musneci' consultancy speaks about the economic imperatives of closer political cooperation between Romania and its Central and Eastern European neighbours. Roberto Musneci was Vice President and Area Director for Eastern Europe of GlaxoSmithKline.
Aspen: When the crisis broke out, Romania felt that it was somehow left behind and that anti-crisis measures were tailored to Western, rather than to Eastern Europe. In this context, should we cooperate closer with our immediate Eastern neighbors, with whom we share similar problems?
RM: Well, clearly when new countries enter the European Union, they do not yet have the established models of that region. And as the needs of these newcomers are very substantial, this has attracted direct investment relatively fast. Still, the level of FDI in Central and Eastern Europe as compared to that in their Western neighbors is rather reduced. We are still a poor competitor in terms of investment capital. This is why, to a large extent, Western countries which have more costly state administrations have been relatively mild in criticizing the tax competitive measures taken by Central and Eastern European countries. But this situation is about to change and I think tax competitiveness, labor market competitiveness and access to those unmatched needs will be some of the primary elements of attractiveness for investors into Central and Eastern Europe. Yet the same moment when the flow of investment capital increases, real competition begins with the West and those tax policies and labor policies will come under much tougher scrutiny from the EU, representing primarily the interests of the major states. Hence collaboration on tax policies among Eastern European states that have chosen such tax policies as one of the levers to foster growth will allow the new countries in the Union to have a more solid position in front of those pressures. Surely, cooperation among the financial institutions of the countries in South-East Europe, specifically Romania, Bulgaria, Slovakia, the Czech Republic, that have established pretty competitive and attractive tax frameworks needs to be structured into policies that put the tax element at the center.
Tax competitiveness, labor market competitiveness and access to those unmatched needs will be some of the primary elements of attractiveness for investors into Central and Eastern Europe. Yet the same moment when the flow of investment capital increases, real competition begins with the West and those tax policies and labor policies will come under much tougher scrutiny from the EU, representing primarily the interests of the major states.
Secondly, clearly the labor market will have to increase its cost, because that is the normal dynamic, it happens in every country and we cannot continue to attract investment only on the basis of cheap labor. We need to operate more on the flexibility of the labor market than on the cost, because flexibility means productivity and that will help investors gain what they inevitably lose because of the crisis. Investors tend to look at Central and Eastern Europe in a synergic way.
Aspen: One possible problem in cooperation between Romania and its neighbors is the lack of a recent history of a sustained dialogue with our EU neighbors, of common projects. Is there sufficient political ground, even, to encourage economic cooperation?
RM: It's only natural that when we first entered the EU we looked at Western models rather than Eastern models. On the other hand, if you look at several industries, such as the healthcare industry, the logic and the dynamic of the whole system have very similar characteristics, because there is a shared history of how that system developed. There is therefore a very good ground for an investor to look at Central and Eastern Europe in a rather synergic way. It is not by chance that many regional heads of multinationals have responsibilities across chunks of CE Europe. The systems are the same, the culture is somewhat similar, some of the economic metrics are the same, the size of the countries is similar if you compare it to Western states.
So yes, it makes a lot of sense for Eastern European countries to reflect together at their own specificities and take the challenges of integration into a common system. If you look at energy and transport infrastructures for instance, there are numerous common projects possible and many under way already, by virtue of their geographical characteristics, first of all.
We cannot continue to attract investment only on the basis of cheap labor. We need to operate more on the flexibility of the labor market than on the cost, because flexibility means productivity and that will help investors gain what they inevitably lose.
Aspen: Talking about geography, is now the time for Romania to further deepen its EU integration or can it afford to look also to its East?
RM: These things are not mutually exclusive. The advantage of your being in Central Eastern Europe is that you know how to look at the East better than us!
Aspen: Well, we don't appear to be so good at that...
RM: You probably need to regain the self-confidence of being in a dialogue rather than in a subordinate situation, to take this challenge when bilateral dynamics have changed. You cannot go to the negotiation table without a project.
Aspen: Do we have reasons for self-confidence? And that being said, do we have the political and economic strength to make a case and become partners in a more or less equal dialogue?
RM: You need to have a project in order to have confidence. As far as reasons are concerned, you have every reason for self-confidence. You have moved from a centrally directed society, not just economy, to a system of a free market where individual liberties are upheld - despite some shortfalls here and there - at an incredible speed after all. That should give the historical rationale for a fully certified feeling of self-confidence. But you cannot go to the negotiation table without a clear, coherent project. Romania has a key role particularly in the energy security debate. There is of course the geographical reason, the possibility to act as a tap between the flow of Eastern resources and Western demand. But apart from this, Romania can provide energy security to Western economies and find a better way to dialogue eastwards, where the EU has often failed - if you look at the policies of Italy or Germany versus those of France or the UK, there are significant differences. Look at how Italy sees the balance between Nabucco and Southstream and compare it to the vision here.
You cannot go to the negotiation table without a project.
Aspen: Who should be our immediate partners for a constructive dialogue?
RM: The Republic of Moldova is one direct responsibility you have because it is historically linked to the region and to your country. By definition this is of major importance, given also the role the Russian Federation plays there. If you talk about energy policy, look at the roots, look where Nabucco and Southstream are supposed to go through. You need to have a common approach with Bulgaria, with Turkey - I think no major decision can be made in Europe in that sense without due consideration to the Turkish position. This is where SE European countries can really make a difference. Despite the relatively small size of their economies, they have the territory where these energy supplies are supposed to flow through - which is quite an opportunity if you use it properly. The main investment opportunity to the East is the immense level of unmatched needs.
Aspen: What are the stakes for us after all? What are the opportunities to our East which we should be looking to and is there anything the Romanian government can do to support interested investors?
RM: I think opportunities are the same as those offered to Western European companies approaching Eastern markets. The main opportunity, I guess, is the immense level of unmatched needs. This is why I am chronically optimistic about Romania's perspectives in general, because crisis or no crisis, business will eventually bounce back and people's needs are still there. People still have a major need for better clothes, better roads, better medication, better consumer goods, better houses etc. This is in the nature of economic convergence. The advantage is that still in Romania and Central-Eastern Europe constructions are at a lower level than in Western European countries, in the pharmaceutical field Romania can deliver very good quality, world standard generic medication, exportable at lower costs than Western European products - and that is the case for other neighboring countries as well. There are opportunities in infrastructure too.
Aspen: Should we also seek Eastern investors for Romanian projects? The Chinese for instance are eager to build highways in Romania.
RM: I don't know how this will be viewed in the EU, but from an economic point of view, the answer is absolutely yes, you need the roads, there is no political reason to stop you from getting them in the shortest time at the lowest cost, provided the quality and security standards are met.
Since most domestic Romanian companies do not have the capabilities to even apply to those tenders because they cannot meet the standards, then if the Chinese can, so be it. And if Western companies complain about the market being somehow hijacked by the Chinese, well, that is economic competition! Anything that you can put in place to foster your growth, you have to do, despite the political problems you might face. It's a global competition.
Aspen: Are there specific obstacles you see in this cooperation, especially with our Eastern partners?
RM: One thing that is critical in the cooperation between Eastern and Western European states is immigration policies. It is normal that when you have an imbalance in the standard of living in different countries and you have the free flow of people and goods, people will flock to where there is more wealth and businesses will flock to where there is less wealth, to tap into the opportunity. The impact on communities is huge.
There is also stability in the Balkans in that sense. Everybody talks about the Caucasus when they talk about frozen conflicts; I have the feeling there are frozen conflicts much closer to home. How you unfreeze them without letting them explode is something that needs to be dealt with urgently and responsibly, because we simply cannot afford to have a situation of permanent instability resembling the one in the Middle East in the immediate proximity of a society like the Western one, where borders and the society are so open. Political stability is a prerequisite for economic relevance.
And if Western companies complain about the market being somehow hijacked by the Chinese, well, that is economic competition!
Aspen: There are obstacles in Romania's cooperation with its non-EU neighbors, such as the instability you have mentioned, and there are obstacles in its dealings with the EU - such as the growing internal competition. Is one category of obstacles easier to remove than the other?
RM: This is different from industry to industry. Having free circulation of people and capital and the opportunity to compete freely in developed markets is a major advantage. But that does not mean the EU should not be a bridge to those who are outside the EU but share its same aspirations. Look at Ukraine. It is a very large country, ethnically relatively homogeneous - there is an internal political clash spurred by Russian influence rather than a clash on ethnic grounds - and I would lend a helping hand eastwards to such a country. It is certainly a different set of challenges though. In 1989, when multinationals said "there's a whole virgin land in Central and Eastern Europe, which won't happen again in history" and they seized the opportunity, that did not mean that investment decreased in France or Italy or other established economies. I think the same works today and it's time to invest in the East while certainly not neglecting the opportunities which exist in the West. People on the ground have already resolved these philosophical issues - there are already 2,000 Romanian companies operating in Italy. But these new markets do provide their own opportunities.
Aspen: Neither Romania, nor Italy were well-prepared for the massive migration which took place from Romania to Italy. Should Romania prepare already for the time when it is in the same position as Italy is today - a guest country for Chinese or Pakistani workers for instance?
RM: Yes, of course. This is more of a cultural revolution, where people have to be prepared for their daughters to marry a foreigner, but you also have to manage the practicalities of the phenomenon. Smaller numbers of people can be easier to absorb, especially if they are from cultures similar to our own - look at the Romanian example in Italy, where the migrants tend to integrate. But when you have to deal with larger communities, of totally different cultures, who tend not to integrate - see the Chinese community in Italy, which tends to be a very closed club, then this is a bigger challenge. And you have to protect both the culture of the immigrants and the people themselves, as well as the national security.
Interview by Oana Popescu, Aspen Institute Romania Policy Program Director