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October 14, 2017

At a sleek new office in the heart of Bucharest, Fitbit co-founder and chief executive James Park explains why the smartwear giant is rapidly expanding its operations in Romania – and following the lead of a host of multinationals. “The tech talent here is amazing. Romania and other countries in central and eastern Europe have great existing talent, and also great universities,” he says.

The US company, which bought Romanian smartwatch brand Vector Watches for a reported $15m (£11.4m) late last year, and has tripled its staff in Romania since, has just opened its largest research and development centre outside the US, in the Romanian capital. It’s not alone: in recent years, major global companies such as Siemens, Ford and Bosch have set up or expanded operations in Romania, boosting an economy that’s already growing at speed.

While many see Romania as a country of migrants flocking abroad to find work, back home the economy is booming. The services sector is expanding at pace, along with exports and manufacturing. Meanwhile, private consumption – from clothes to furniture and cars – hit a nine-year high in 2016, and increased a further 8% in the first half of this year.

The economy grew 5.7% year-on-year in the second quarter of 2017, the fastest rate in the EU, where the average growth rate was 2.4%. This was on the back of a GDP rise of 4.8% in 2016 and 3.9% in 2015; during the same period the UK economy grew by a more placid 1.8% and 2.2%. According to the International Monetary Fund, Romania’s economy is expected to grow by 5.5% for the whole of 2017.

The tech sector, in particular, is expanding fast, built on a communist-era legacy of excellence in science, mathematics and technical education, as well as Romania’s strong language skills, which have long made it a hub for IT outsourcing. While the Romanian language’s Latin roots have helped explained the country’s linguistic skills, some suggest it was a decision to subtitle rather than dub foreign programming on television that boosted foreign language exposure and proficiency.

According to industry insiders, the tech sector – which employs about 150,000 people – is expected to double its share of GDP to 12% by 2025, aided by one of the fastest broadband internet speeds in the world (behind only Singapore, Hong Kong, South Korea and Iceland).

Elsewhere, Ford has announced plans to hire almost 1,000 workers for its plant in Craiova, 180km west of the capital, adding to its current workforce of 2,715. The automotive giant has invested more than €1.2bn (£1.1bn) in its Romanian manufacturing operations since 2008. Renault-owned Dacia, a former communist state-owned giant, remains the country’s largest company based on revenue, with a turnover of £4.1bn in 2016.

Joining the EU in 2007 clearly had an impact, while more recent government measures have also boosted the economy.

“The government in 2015 decided to cut taxation for consumption,” says Ionut Dumitru, chief economist at Raiffeisen Bank Romania and chairman of Romania’s fiscal council. “They cut VAT from 24% to 20%, and now 19%, and extended the reduced VAT rate for food and some other items. This was a very strong stimulus for consumption.

“The government has also doubled the minimum wage in four years. And it’s not only the minimum wage that has increased a lot, but also public sector wages.”

In the second quarter of 2017 hourly labour costs in Romania grew 18.6% year-on-year, the highest increase in the EU, where the average rise was just 2.2%. Even so, wages in Romania remain far below the EU average, which makes it an enticing option for outsourcing; the minimum monthly wage in Romania is currently around £283, with only Bulgaria lower within the EU.

However, lower wages have stopped many Romanians returning home, leaving companies short of workers – in 2016, the unemployment rate dropped to an historic low of 5.9% compared with an EU average of 8.6%, amid predictions it will drop to 5.4% this year.

Uncertainty over Brexit is having an impact, with companies looking at alternatives within the EU in case the UK pursues an exit that restricts trade.

“We’re getting inquiries from UK companies on a weekly basis since the referendum,” says Shajjad Rizvi, the director of the British Romanian Chamber of Commerce in the northern city of Cluj, one of the largest tech centres in central and eastern Europe.

“We are seeing global companies hedging their bets, in case tariffs are not favourable or something else, and Romania is one of the choices they are looking at,” he adds. “Software companies, a lot are doubling or tripling their workforces in Romania, and a lot of those jobs are coming from the UK. Whole departments: marketing, PR, HR; they are being closed down in the UK and moved out here.”

Brexit could help Romania with its workforce issue, though much will depend on wages. “Wages have to increase for people to come back, but if they do factories will likely move elsewhere,” says Rizvi, pointing to opportunities in nearby Poland and Slovakia.

Other challenges are more ingrained. Romania has long been considered one of the most corrupt nations in the EU. Despite progress, there are still major concerns. In February, the country experienced the largest protests in decades after the government pushed through legislation that would have effectively decriminalised low-level corruption. The government backed down, but has yet to regain public trust.

Looking forward, questions remain over the sustainability of Romania’s recent growth. Foreign direct investment is showing signs of slowing, with foreign companies investing €2.36 billion in Romania in the first seven months of 2017, down 17.2% year on year, according to Romania’s National Bank (BNR), though this was coming off an eight-year high in 2016.

There is also concern about the rising deficit. In 2016 the government deficit – the gap between state income and spending – rose to 3% of GDP, up from 0.8% in 2015, due to increased spending and tax cuts. “The main concern for the economy is the fiscal situation,” says Raiffeisen’s Dumitru. “The deficit is under pressure.”

Even so, Romania’s economy looks set to continue to expand in the near future. “It’s hard to sustain more than 5% growth,” says Dumitru. “Most analysts are predicting closer to 4% for next year. But even 4% will probably be one of the highest growth rates in Europe, so it’s not bad at all.”

www.theguardian.com/world/2017/oct/14/romania-economy-booming