Valentin Lazeya recently published a very interesting analysis that shows very clearly that NO can dramatically increase potential GDP. The analysis is available here (link). Basically, Mr. Valentin Lazea is definitely right “Caeteris paribus”, that is, as long as the environmental variables outside the equation do not change significantly.

Fortunately, any function with which we try to determine the future, apart from the known factors of the past, has a coefficient, let’s call it “ϵ”, an error factor that sums up all the unmeasured, apparently irrelevant factors in the mathematical model of the forecast. Can we even hope?

How can you increase potential GDP?

Let’s start with the definition of potential GDP:

• Potential GDP represents the estimated level of economic output that a country can achieve using all available resources to maximum capacity without creating inflationary pressure.
• Potential GDP is the estimated level of output of an economy under normal use of its resources, such as capital, labor, and available technology.

In terms of potential GDP, to simplify things as much as possible, it depends on human resources, the size and the way capital is used. This leads to four possible directions of potential GDP growth, which are internal in nature:

• Increasing the number of active human resources. In practice, this means importing labor from Ukraine, Moldova, Nepal, Bangladesh, the Philippines, Pakistan, India, or any other country that exports labor. It would be ideal to bring Romanians back from Europe, but it is quite difficult for our companies to offer competitive working conditions and salaries.
• Increasing labor productivity through management (without additional capital resources). This means managing talent, using the right people in the right place.
• Increase production by increasing sales. A stricter focus on markets so that production is competitive in terms of quality and cost. In fact, we are talking about the development of the marketing function of Romanian companies.
• Increasing the return on investment due to the introduction of highly efficient technologies.

To these four main directions, I would add two less obvious and perhaps more difficult ones:

• Restructuring of the state and transfer of some activities from the public sphere to the private sphere. The usual term used for this process is privatization, except that in this case we are referring to areas that are not traditionally private in Romania. For example, it is possible to increase the share of private education, the sphere of health insurance and non-state pension provision, the sphere of private medical services.
• Simplification and optimization of deposit commissioning processes (oil, gas, rare earths, metals, etc.). Only the extractive oil and gas industry has the potential to generate high value products with a small number of workers compared to the value produced.

Apart from my thoughts, I firmly believe that many people in Romania could add to and improve the list of solutions. But there is one resource that cannot be quantified and should be mentioned, DETERMINATION.

Can we increase potential GDP?

Potential GDP, like GDP, like any other indicator, is a statistical reflection of the economic environment. They can be seen as almost natural phenomena, as if the economy moves according to its own rules, the enormous power of the market outweighs the forces of interventionists.

This is where the great debate begins, which did not occur during the election campaign of the grace year of 2024. There should be two alternative positions: development through indefinite state intervention (right) and development through massive state intervention (left). These are two alternative viewpoints that exponents should have, pros and cons, and once chosen, administrators can implement with determination one of two directions. Basically, any direction, applied correctly and very seriously, has the potential to produce the same result.

The question is, at least this year, is economic development a real and serious campaign issue? I don’t feel like this is a real problem with the campaign at all. Some boast of economic growth, others blame high inflation. Some praise the increase in pensions, others blame it on the deficit. I don’t really see alternative economic directions, especially in their essence.

On the other hand, without debate, the decision has already been made, the direction is massive state intervention. This decision was made through the PNRR, which is an absolutely massive intervention mechanism, and about which I have reservations, starting with its design at the EU level, its reasonable design at the Romanian level, and its subsequent implementation.

For intellectual reasons, how would the Romanian economy, and the EU for that matter, have developed with a freer, less restrictive state system and with minimal or no intervention orientation? What would happen if the energy market were freed from legal barriers to market entry, from environmental restrictions, if agriculture was completely freed from subsidies and, at the same time, the equivalent of subsidies was calculated on all imported products?

Also, for intellectual reasons, what effect would a massive intervention in workforce education have with government-funded courses at all levels, for all occupations, with courses designed and evaluated by employers and only strictly certified by the government? In essence, this would mean subsidizing labor productivity. I would make the priority criteria for companies to pay income tax and dividend tax, and the eligibility criteria to pay income tax by employees.

How about combating the export of added value by multinational corporations through cumulative advantages? The more taxes a multinational company pays in Romania, the more benefits it gets, as in the example above? Probably the intra-group price adjustment alone would be enough to dramatically change the GDP value, but possibly also the volume of activities located in Romania and implicitly the number of employees located by international groups in Romania.

I put forward ideas, but there are far more people in this country with far better ideas than I do. Without real and constructive debate, ideas and people who could really bring about the fundamental changes needed when we really want to grow the economy, in any case, cannot come to the fore. – Read the entire article and comment on contributors.ro