Understanding Romania’s Emigration And Its Opportunity Cost Of € 715 Billion

After dropping a comment on a LinkedIn article related to the record number of Romanians running for office in local elections in Denmark, I was invited by?Stefana Todica of StirileProTv to contribute with a point of view on this phenomenon, which is becoming more and more important.

I call this phenomenon "Bianca Andreescu - Emma R?ducanu". And I define it as follows: more and more Romanians, and moreover young people, are successful in their countries of adoption, whether they are in the first generation that emigrated there, or born there.

I was asked why have Romanians left their country and why, more recently, other Romanians say they want to leave.

What is already obvious, the political turmoil in Romania, a country virtually ungoverned for months, is still a determining factor.

But political instability is not the only factor.?

There is no single factor and every family or fellow citizen who emigrate have their own reasons. If we were to combine all the determining factors into one “super-factor”, this would be: quality of life.

It might sound generic or too vague, and that's why the European Commission has defined this indicator as a sum of 10 sub-indicators, simply "Quality of Life".

The UN also measures quality of life through its own indicator: the Human Development Index.

I. How does Romania score on quality of life, according to the methodology of the European Commission

In order to be able to evaluate Romania in the European context, in terms of its quality of life level, it is necessary to briefly go through the 10 sub-indicators:

1. Material living conditions (economic-financial aspects of life: disposable income, risk of poverty, quality of housing etc.). Unfortunately, after the last measurement on this indicator (2019) Romania ranked lowest in the European Union;
2. Employment, ie. ease of finding a job, productivity at work; here, too Romania ranks last, at EU level;
3. Quality and safety of the health system; although the average life expectancy at birth in Romania is not so far from the European average, our country loses over the quality and accessibility of public medical services, most likely a main factor that pushes Romanians to emigrate;

Source: Eurostat

4. Education. This is another component where Romania is not too far from last place in Europe (non-EU states included!); the image below ranks European states according to the percentage of population aged 25-64 with a higher education degree;

Source: Eurostat

5. Leisure. Romania stands somewhere in the middle of the ranking, especially when it comes to the level of satisfaction brought by recreational activities;?

6. Quality of social interactions. On this sub-indicator, what struck me was a component called: "Percentage of the population who have no one to turn to for non-material help"; unfortunately, although pretty sociable, when it comes to landing a hand to one another, statistically, Romanias don't have much of a helping spirit; the image below depicts this fact;?

Source: Eurostat

7. Economic security and physical safety. Economic security is also a bit problematic in Romania; for example, when it comes to the percentage of population that would have difficulties in case of an unforeseen negative situation, in 2018, Romania was among the last couple of countries in Europe, with approx. 46%. Moreover and worrisome, this percentage is actually higher than in the past (E.g. 42% in 2008 - in the midst of the financial crisis!);

8. Governance and basic rights; this component encompasses: trust in the authorities, election turnout, the level of accountability among public authorities and servants, respect for human rights etc. Paradoxically, this is one of the few sub-indicators where Romania is not in a tight spot, but rather somewhere in the middle;

9. Preservation of natural environment and quality of life parameters (E.g. pollution); the aggressive deforestation, floods and a high degree of pollution across big cities play a crucial role on Romania’s poor performance over this component; and when it comes to the pollution of big cities, mainly the quantity of toxic particles that?the inhabitants?are being exposed to, Romania has one of the most exposed populations in Europe;

Source: Eurostat

10. The general perception on the quality of life, as the last sub-indicator, where Romania ranks relatively in the middle;

II. Where does Romania stand in UN’s Human Development Index ranking???

To properly understand the HDI methodology, this is how UN defines it: "The Human Development Index (HDI) is a summary measure of average achievement in key dimensions of human development: a long and healthy life, being knowledgeable and have a decent standard of living. The HDI is the geometric mean of normalised indices for each of the three dimensions. The health dimension is assessed by life expectancy at birth, the education dimension is measured by mean of years of schooling for adults aged 25 years and more and expected years of schooling for children of school entering age. The standard of living dimension is measured by gross national income per capita.?

Also in the definition of HDI: "it can also be used to assess the quality of political decisions", especially in the situation where two countries with the same level of GNI?per capita may have different standards of quality of life.

N.B. I remember that, recently, there was this idea that was circulating about Romania’s GDP per capita being on the verge of overtaking the one in Hungary and that, sooner or later will reach?Poland’s. Well, maybe Romania scores well on GDP / capita, but not on the actual indicator aimed at?measuring the quality of life with higher depth - that is the HDI.

Romania, in terms of HDI, ranks 49th in the world, just in the vicinity of Montenegro and Palau, and below Poland and Hungary.

Source: UN data presented by Wikipedia

III. What does Romania lose with each family that chooses to emigrate?

Before tackling the classic, well-known consequences of migration, the first point that comes to mind is innovation. With every cohort of Romanians choosing to leave, Romania also loses well-trained, intelligent and creative people, people who, instead of creating added value in their home country, do it abroad.

There are many examples of Romanians who have become masters of their game, be it in business, such as Daniel Dines with UiPath, in sports - Bianca Andreescu, or in politics, for example, Roxana M?r?cineanu, Minister of Sports in France.

Then there is the economic cost that is huge. Romania’s official number of emigrants within European borders rises to 3.2 million.

At a simple and estimated calculation, considering that 86% work (adults aged 19-64), the nominal economic cost of Romania is:

?3.2 million x 86% x € 1,160 month x 12 months = ~ € 38 billion / per year.

This is the nominal economic value, potentially produced by the departed Romanians, if they had stayed in the country and worked on an average gross salary of approx. € 1,160 / month.

Out of this amount, the labor taxes, of 47.25%, would amount approx. € 18 billion a year. To these, several other billion euros coming from VAT charged on consumption would add up.

So, the Romanian state budget misses its share of the opportunity cost.

N.B. The 47.25% includes the social security tax (CAS) 25%, health tax (CASS) 10%, labor insurance tax 2.25% and income tax 10%. For the simplicity of the calculation, any tax waivers or deductions have not been considered.

The figures of 3.2 million Romanian emigrants, 86% of those able to work (age 19 - 64 years), and the average salary of € 1,160 / month are official data from Eurostat, INS, respectively CNP.

And, since the average age of the Romanian emigrant is, according to the OECD, approx. 39 years, this means that, based on simple calculation, Romania has an opportunity cost of not just one year’s revenues, but of an average period of 26 years, raising the economic loss at a staggering € 715 billion. 26 years is the average period until the 3.2 million Romanians retire (65 minus 39).

The amount of € 715 billion represents the sum of potential annual income, taking into account the forecasted average gross salary (by CNP until 2025, subsequently increased by 3% p.a.), income denominated in euro (based on the CNP estimated exchange rate until 2025 and considering an annual depreciation of the leu of 1% afterwards), of all those who currently work abroad and until they will retire, ie for an average of 26 years.

The calculation method is the present value of the annual amounts (NPV), at a discount rate of 6% (yield of long-term government securities).

As a pale consolation, Romania receives around € 6.5 billion a year in remittances, the official figure for 2020, according to the World Bank. There is still a long way to go to the € 38 billion that are lost.

Another major cost is the socio-demographic one. With every family of young people leaving Romania, the ratio between pensioners and those who work (and from whose taxes pensions are paid), gets worse.

I will cover this aspect in a future article dedicated to pensions.

Last but not least, another important cost is the emotional stress of divided families, of children growing up away from their parents and of an increasingly eroded cohesion of the Romanian nation, in general.

IV. In the end, after having listed some of the causes, some of the implications and costs for Romania, it would be worth coming up with some possible solutions for Romania, should it decide?to reverse this trend, hence to convince the Romanians abroad to return to their homeland.

I do not consider myself to hold the absolute truth and as such I limit my list to a few ideas, perhaps obvious and superfluous, but otherwise arising from all the reasons pushing Romanians to emigrate, described above.

First of all, I believe that a government that genuinely wants to address the situation should really develop effective channels of communication with the diaspora, asking them what would it take for them to return, and also pass such requests into actual government reforms.

Also, Romania should not miss the objectives it committed to in its NRRP, it should fundamentally refurbish its public health system - which has shown its limits again in this pandemic; education also needs to be reformed and modernised, adapted to a context where digital skills and innovation should be the norm; and not to forget all those promised kilometers of highway and the rehabilitation of the railway infrastructure.

The Romanian State, through its authorities, must also restore the trust of its citizens in its institutions that have direct contact with them: police, gendarmerie and all other categories of civil servants.

Because, in order to address all the causes of the massive migration of its population, Romania must restore the relationship of trust with its citizens and respect the social contract with them.