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Earlier this year, overjoyed officials in Bucharest had some long awaited piece of good news to deliver: the Council of the OECD finally decided to open accession talks with Romania. The 38 countries in the organization account for 18% of the world’s population, but for almost two thirds of the global GDP.

The announcement at the end of January did of course not come out of thin air. It was the result of solid long-term efforts, often hidden from the public eye, not out of secrecy, but because they did not seem very newsworthy. Romania did not twiddle thumbs while waiting for an approach by the Paris elite club of developed nations but joined as many of OECD bodies and legal instruments as possible. The OECD itself acknowledges that Romania is an associate and/or member in more OECD bodies and projects than any other partner country of the organization and that there is a growing alignment with OECD values. Romania adheres to major OECD standards such as the Declaration on International Investment and Multinational Enterprises.

Another thing considered by the OECD is the evolution of the last decades. Romania’s economy and society underwent a slew of dramatic changes in preparation of the EU accession and after that. 15 years after the accession to the EU, their effect is easily observed – a GDP similar or even higher than that of some OECD countries in Europe, like Hungary, Greece, Portugal, or the Czech Republic. The rise of the GDP to the level of 63% of OECD average from about 30% over the last 20 years has been one argument for the OECD to look at Romania as a prospective member, the organization admitted.

But Romanian decision makers should not rest on laurels and must look to the future, not the past.

When OECD Secretary General Mathias Cormann visited Romania in January, meeting with President Klaus Iohannis, Prime minister Nicolae Ciucă and members of his cabinet, he had to say not just nice words about the successful mastering of the COVID-crisis by the government of Romania, but also listed a sobering inventory of things to be done in order to not squander this success, but to build on it and secure long-term development.

The OECD Survey on Romania*, presented by Cormann highlights key areas where Romania still shows differences from what happens in the OECD.

One area of concern is the pension system. The OECD warns that without a reform, rising aging costs could push public debt above 100% of GDP by 2040, should increases in these costs not be offset by consolidation measures. The OECD furthermore suggests that strengthening incentives to prolong working lives can be a sustainable and cost-effective way to improve pensioners’ living standards without increasing the tax burden. But especially this part is hurtful in a country where – unless they work for some state or public services – men retire at 65, with a life expectancy of about 70 years. The National Recovery and Resilience Plan pushes Romania to engage in a pension insurance reform – and the mere fact that reform is a condition for the EU to disburse money makes for a compelling motivation. However, resistance is expected to be met from politicians – the Social Democrats, the junior partner in the governing coalition often call for a renegotiation of the resilience package in regard to a limitation of pension spending.

The OECD survey on Romania also paints a stark picture of the taxation system, noticing that ”despite some progress over the past few years, tax efficiency is much lower in Romania than in OECD countries.” The VAT gap as the difference between actual and potential VAT is the highest in the EU, mainly due to low compliance rather than to tax exemptions or reduced rates, even if this component has increased over the past decades, the OECD mentions.

Although the government initiated a range of measures, including streamlining tax declarations and payments and restructuring the tax administration to allocate resources where they are most needed, and a new comprehensive strategy for the modernization of the tax administration is in place – partly financed by the Recovery and Resilience Facility – an extensive reform of the tax administration will nevertheless require stronger political commitment than in the past. In this context the OECD recalls a World Bank Revenue Administration Modernization Project that had been initiated in 2013 but was canceled in 2019 due to the absence of progress in implementation.

In its analysis, the OECD addresses another sensitive issue as well: equally, low trust in institutions negatively affects tax compliance, and in Romania, a number of complex factors, including low enforcement capability, widespread tax evasion, tax breaks for large firms, and low spending on public services results in a tax system seen as unfair, which is reducing the willingness to pay taxes, the OECD quotes a number of authors. The use of emergency ordinances with minimal consultation has damaged public confidence in policymaking. Reducing the frequency of fiscal policy changes and avoiding the allocation of tax exemptions and tax amnesties without proper justification could help restore trust, the study continues.

Bringing forward the argument that broadening the tax base is crucial for raising revenue, the Paris based organization calls for a comprehensive reform of the taxation system. It points to the fact that according to the IMF, special tax regimes or tax exemptions have been increasingly used, with the introduction of 26 exemptions, incentives, and special rates between 2013 and 2018 only. They include specific tax regimes, notably for microenterprises and specific sectors (e.g., construction, IT), and exemptions from energy-related taxes. Scaling back such tax expenditures would broaden the tax base and simplify the tax system. A thorough evaluation of their distributional and efficiency effects needs to be carried out as they are not transparent and were subject to reduced scrutiny in the past.

In addition, the OECD suggests that although taxes on immovable property have been found to have the lowest negative impact on growth, they account for a low and decreasing share of total taxation in Romania (2.4% in 2019, around 3 percentage points less than the EU average).

Also of some interest from the perspective of the OECD is the still high involvement of the state in the economy. The survey explains that the prevalence of state-owned enterprises (SOEs) continues to be important in the Romanian economy. At the end of 2018, there were 225 central-government-owned SOEs and a total of 1,231 local-government-owned SOEs in Romania, the majority operating in the energy and transport sector. In terms of the employment share and equity valuation, Romania’s state-owned sector is higher than in some of its OECD peer countries, most notably the Baltic countries, but lower than in Poland and Slovenia for instance.

Addressing the underperformance of SOEs requires a strong corporate governance framework – and well-designed governance structures are also needed to address the frequent challenge of undue politically motivated interference in SOEs’ activities. The ownership structure of these companies is not an ideal setup for avoiding political interference in the day-to-day management nor to avoid conflicts of interest between the state’s roles as enterprise owner and regulator. The OECD joins the European Commission in noting that frequent replacements of management and board members due to changes in ministries, as well as opaque selection procedures for managers and board members, continue to hamper efficient organizational functioning. The recommendation from the OECD is clear: Romania needs to enforce internationally accepted good practices to depoliticize and professionalize the management of the SOEs. And it should improve transparency, accountability, and performance. Changing the governance model towards a more centralized (or at least centrally coordinated) ownership model could help to improve corporate governance; as this has been practiced in the last 10-15 years in a number of Western European countries and emerging economies, such an approach would create a framework allowing to monitor and evaluate SOE performance more easily since it would bring stronger accountability with one body evaluating the performance of SOEs, as opposed to being spread over several different ministries, the organization’s experts suggest.

Many recommendations and calls for change are also part of the Recovery and Resilience Plan, but if the message from Brussels was not clear enough, Romania now has its homework described by the OECD as well. It is therefore a good thing that Romania already participates in the Global Forum on Transparency and Exchange of Information for Tax Purposes and is an associate in the G20/OECD Project on BEPS conducted by the Committee on Fiscal Affairs. On the other hand, OECD guidelines on the governance of state-owned enterprises also provide an international benchmark of best practices.

Should they ever muster the courage to tackle the problems indicated by the OECD, officials in Bucharest would have enough expertise to access.

But of course, not meddling in the economy and taxing properties probably goes against the grain of Romanian policy practices.

Alex Gröblacher

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