Scenting Corruption, Investors Shun Romania

Romania is likely to find it hard to attract foreign investment unless the government takes action to tackle the high level of corruption.

International criticism of the Balkan state has grown in intensity recently. A report by the World Bank in September highlighted corruption and legal and judicial shortcomings as major obstacles hindering Romanian economic growth.

“Romania is a country with a lot of problems and in particular a high level of corruption,” Warrick Smith, the main author of the World Development Report 2005, told IWPR.

“We have repeatedly encouraged Bucharest to take drastic measures to solve this problem so the country can have a better investment climate,” he added. “The government should also reduce its intervention in the economy.”

According to the bank report, 34.9 per cent of Romanian and foreign investors view corruption as a big brake on their business and around 4.7 per cent of companies’ profits go on bribes “to get things done”. Some 255 local and international companies took part in the survey.

The World Bank is not the only body to slate Romania recently as a corrupt business environment.

Transparency International’s Corruption Perceptions Index, CPI, for 2004, released on October 20, placed Romania last out of all 29 European countries that belong to the EU or are actively applying for membership (Turkey, Croatia, Bulgaria and Romania).

Corruption is mentioned also as a major concern in the latest country report on Romania drawn up by the European Commission. Romania wants to join the EU by 2007.

Concerns over corruption in Romania were one reason Brussels has insisted on adding a “safety clause” to the accession treaty, allowing for postponement of the country’s membership by a year if it fails to fulfill its commitments.

The Romanian authorities remain optimistic.

The country’s chief EU negotiator, Vasile Puscas, told the media recently, “We are confident we will be ready for membership by 2007.”

Puscas added he was sure Romania would close the remaining chapters on justice and home affairs and competition by the end of the year, as required by the EU, in order to sign the accession treaty in the first half of 2005.

The EU negotiator admitted the EC’s concerns “makes us all uncomfortable” but said, “We are doing our best to try to approach corruption from top to bottom and the recently established National Anti-Corruption Prosecution Office understands the importance of this issue.”

Puscas admitted that unless the issue was tackled head on, Romania would have a problem attracting foreign investment.

Bucharest is not the only government facing the problem of growing investor indifference, however. Neighbouring Eastern European countries that recently joined the EU face similar problems.

Global investors expressed lower levels of interest in new EU member markets this year, compared to last year, according to the latest Foreign Direct Investment Confidence Index.

The annual survey of executives from the world’s largest companies is conducted by the American global management consulting firm A T Kearny and was published in mid-October.

Compared to last year, Poland dropped from fourth to twelfth place and Hungary from seventeenth to nineteenth in the list of most attractive global investment environments.

Among perceived threats to the competitiveness of the ten new EU members, 67 per cent of global investors mentioned poor infrastructure and 60 per cent listed corruption.

For its part, the World Bank Development Report 2005 highlighted other obstacles deterring investors in Romania.

These include uncertainty over economic policy, confusion over business regulations and a lack of confidence in the ability of the courts to deal with real estate issues.

Together, these factors had acted to “chill” investment, the bank report said.

Unlike previous years, the 2005 World Bank report included recommendations to establish a better investment climate.

The bank urged Romania to conduct a more consistent economic policy to lure investors. “Improving policy predictability may increase the likelihood of new investment by over 30 per cent,” it said.

“Governments will only overcome credibility gaps and attract foreign investors by reducing costs and corruption and by encouraging competition,” Francois Bourguignon, vice-president of the World Bank, told IWPR.

George Melloan, deputy editor of the Wall Street Journal, agrees a combination of different measures are needed to attract outside money.

“A country that wants to attract investment should make efforts to improve the climate for business, such as following reasonable taxation and regulatory policies and maintaining the soundness of the national currency, which often requires budgetary restraint,” he told IWPR.

American companies, Melloan added, make investment decisions based on certain key factors, such as production costs and access to important markets, “Romania could make itself attractive by reducing the burdens on producers and opening up to free trade and competition.”

Romania has shown few signs of following any of that advice, however, and as a consequence it has lured few American investors over the past decade.

Only 3.9 per cent of foreign firms based in the country are American, according to the Romanian Agency for Foreign Investments.

On a more optimistic note, the World Bank report noted that the growth of a free media in Romania had played an important role in the battle against corruption.

“Newspapers have often disclosed irregularities and corrupt practices, despite certain pressures that have been made on the journalists who investigated the cases,” it said.

Daniela Tuchel works for the Bucharest-based newspaper Libertatea.