Romania | Implications of tackling corruption on the election and the economy

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Romania | Implications of tackling corruption on the election and the economy

Poised to become one of Central and Eastern Europe’s largest growing economies; Romanians are heading to the ballot box this week to vote in a new government.

Over the past year, Romania has emerged as an attractive investment destination. It looks set to become one of the fastest growing economies in the EU this year, outperforming its peers in Central and Eastern Europe (CEE). These achievements are remarkable as Romania experienced much domestic political uncertainty and was governed by a technocratic caretaker cabinet for a year. Good news for investors: the upcoming general elections on 11 December are far less contentious or controversial than polls and referendums were in most other Western countries this year.

Last November, mass protests following a deadly nightclub fire in Bucharest blamed on corrupt officials forced the prime minister, Victor Ponta and his Social Democrat (PSD) cabinet to resign. In July 2015, Ponta himself had been indicted by Romania’s independent anti-corruption prosecutor, the National Anticorruption Directorate, on charges of tax evasion, money laundering and conflict of interest, which he denied. Ponta was one of over 1,000 officials prosecuted last year, as part of a sustained anti-corruption campaign targeting high-level politicians as well as businessmen.

The National Anticorruption Directorate, better known by its Romanian initials as DNA, is primarily credited for the country’s success in fighting corruption by domestic and international media. Polls in 2015 showed that public trust in the DNA scored much higher than that in parliament. The institution’s head, Laura Codruta Kovesi, was also widely praised in the international press and described by The Economist as ‘dauntless’ (4 June 2016). In the same article, the paper suggested that the exposure of high-level corruption is, counter-intuitively, good for economic development in the longer term: ‘if a country like Romania is embroiled in scandals, voters and investors should applaud, not despair’.

The most recent edition of an annual survey of business leaders by the World Economic Forum (WEF) indeed shows that investors ‘applaud’ Romania’s efforts (WEF Global Competitiveness Index, 2016-2017 edition). Compared to its neighbours, executives polled by WEF rated corruption as a much less problematic issue in Romania than in other countries. In Bulgaria and Hungary, both EU members, corruption has been mentioned as the first and second most problematic factor for doing business. In Moldova and Ukraine, it topped the concerns of businessmen. Only in Serbia was it ranked fifth, on par with Romania. None of these countries have institutions comparable to DNA in remit and power. Last year, Romania also outperformed all of its neighbours, and the EU average, in terms of economic growth according to statistics from Eurostat and the World Bank. The IMF also forecasts that Romania will be the fastest growing economy in the EU in 2016 and 2017.

However, the voters’ applause is not as unequivocal as that of investors, especially in the upcoming elections. A large majority of Romanians are set to vote for a party they protested against just a year ago. The most recent polls show that support for the PSD is over 40%, followed by the conservative National Liberals (PNL) with around 25%. A political newcomer, the Save Romania Union (USR) has over 10% support, with some polls predicting as high as 19%. USR grew out of a non-governmental organisation focusing on urban planning issues in Bucharest and attempts to pursue issue-based rather than ideological politics, and is aiming to reform the country’s political establishment. USR is unlikely to join either of the two established parties in a coalition, although they do support Dacian Ciolos, the leader of the technocratic cabinet of the past year who is now an official candidate of the PNL for the post of prime minister. Smaller parties will probably struggle to pass the 5% electoral threshold.

The polls show that Romanians appear to be favouring well-known politicians despite their corrupt past. But the public’s commitment to the independence of the DNA and the judiciary, as well as the persisting liberal consensus of the Romanian political elite are good signs for foreign investors. Perhaps surprisingly, Romania appears to be immune to the populist anti-globalisation rhetoric sweeping through large parts of the West in the past year. A recent review by Risk Advisory’s Security Intelligence & Analysis Service (Brief | Europe | Destabilising influence of populist authoritarian parties, 30 November 2016) showed that support for populist parties in Romania is the second lowest in the EU (after Belgium). In CEE, Romania is a clear outlier in this respect, especially compared to Poland and Hungary where far-right groups also have a palpable influence on governments.

There does not seem to be any risk of a major economic policy shift after the 11 December election, especially towards populist or nationalist policies as elsewhere in CEE. The main question is whether the PSD, if it manages to win a majority or form a coalition, will try to replace Laura Codruta Kovesi as the head of DNA. Many of its members, including their last prime minister, suffered from her investigative zeal. The PSD’s main rival, the PNL, whose former president has also been investigated by the DNA, may also seek her replacement. However, the major parties have little incentive to curb the DNA’s powers as an independent institution. That would be a setback for investors: exposing corruption brings much needed transparency that in the end helps honest businesses attract capital.

Featured Image: Romania Nightclub Fire Protest/ 4 November 2015/ Vadim Ghirda/ AP/ Press Association Images

Author: Andras Szirko, Senior Associate, Business Intelligence Europe
Published: 6th December 2016
Categories: Company News