1

2

OUTLINE

I. Desirable features of sustainable development .………...……...3

II. Growth, ageing and income distribution in Romania ………...5

III. Final remarks and policy suggestions.…………………………22

3

I. DESIRABLE FEATURES of

SUSTAINABLE DEVELOPMENT

4

Desirable features of sustainable development • The good society

– The term ‘a good society’ was coined in the 19th century and referred to kind people who cared about others, maintained their property, raised their children well and were loyal citizens. The defining characteristic of the good society is that people adhere to the Golden Rule: ‘Do unto others as you would have them do unto you’. (Shiller, 2015)

• Economic growth – smart, sustainable and inclusive growth, creating jobs and enhancing our

competitiveness (Barnier, 2014).

– green and inclusive growth are the building blocks of our sustainable and equitable economic future (Lagarde, 2012)

• Income distribution – Make sure that all share in the fruits of prosperity and that all are given the

opportunity to fulfill their potential; we should strive for economic growth, environmental protection and social progress at the same time (Lagarde, 2012)

– Profits are not the only measure of success of a manager, for success is still defined by our sense of community. (Shiller, 2015)

5

II. GROWTH, AGEING and

INCOME DISTRIBUTION in

ROMANIA

6

Data source: Romanian National Institute of Statistics, AMECO

Robust and sustainable economic recovery since 2011 on the basis of balanced macroeconomic

environment

• Pre-crisis (2004-2008): average growth per year ~ 7%

• Crisis (2009-2011): average economic contraction per year ~ 2.3%

• Post-crisis (2012-): output gap gradually closing by the end of 2016 (growth forecasts for 2015 and 2016 ~ 3%)

8,3

4,2

8,1

6,8

8,6

-7,1

-0,8 1,1 0,6

3,4 2,9

3,4

-8

-6

-4

-2

0

2

4

6

8

10

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f

%

7

Inflation is at historically low levels

7,5

5,0

4,0 3,8 3,5 3,5

3,0 3,0

0

2

4

6

8

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f

CPI averageCPI dec/decAnnual Target

Inflation rate %

Multiannual target:2.5%

Data source: Romanian National Institute of Statistics, National Bank of Romania

• Pre-crisis (2005-2008): overheated economy pushed inflation above targets, except for 2006

• Crisis (2009-2011): VAT + excises increase pushed inflation above targets; the target was met in 2011

• Post-crisis (2012-): historically low inflation, below the multiannual constant target, except for 2012

8

Substantial fiscal adjustment brought budget balance broadly in line with MTO

-1,5

-0,8

-1,6

-2,3

-4,7

-7,1

-6,2

-4,2

-2,5

-2,5

-1,9

-1,8

-1,2

-1,2

-2,2

-2,9

-5,6

-8,9

-6,6

-5,3

-2,9

-2,2

-1,5

-1,6

-1,6

-1,5

-3,9

-5,6

-10,

1 -9,7

-5,9

-3,3

-2,1

-1,5

-1,0

-1,3

-6

-4

-2

0

2

4

6

8

10

-12

-10

-8

-6

-4

-2

02004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f

budget balance (national methodology) budget balance (ESA2010)structural balance (ESA2010) output gap (rhs)fiscal impulse (rhs)

Data source: European Commission, National Institute for Prognosis, Ministry of Public Finance (Convergence Programme 2014-2017 and the National fiscal strategy for 2013-2016)

f - forecast

% of GDP Fiscal and structural budget balance

• Pre-crisis (2004-2008): pro-cyclical fiscal policy drove the structural deficit up to 10% of GDP

• Crisis (2009-2011): fiscal adjustment of around 3.6 pp in terms of budget deficit

• Post-crisis (2012-): additional fiscal consolidation in 2012 amounting 2.4 pp → exit from EDP + MTO reached in 2014

9

The current account deficit is at a very low level as a result of a large adjustment

-8,6

-10,4

-13,4

-11,5

-4,5 -4,6 -4,6 -4,5

-0,8 -0,4 -0,8

-14

-12

-10

-8

-6

-4

-2

0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f

Current Account Balance %

IFIs financing

Data source: Romanian National Institute of Statistics, National Bank of Romania

• Pre-crisis (2005-2008): high current account deficits (2 digits levels), except for 2005

• Crisis (2009-2011): fast adjustment (with substantial financing from IMF, EC and WB amounting to around 20 bln. EUR) towards the benchmark provisioned by the macroeconomic imbalances procedure (-4% of GDP)

• Post-crisis (2012-): further adjustment to an almost balanced position due to FDI results and structural reforms effects

10

Even if most of the IFIs loans have already been repaid, international reserves remain at a

comfortable level

0

10

20

30

40

dec.

. 200

5

dec.

. 200

6

dec.

. 200

7

dec.

. 200

8

dec.

. 200

9

dec.

. 201

0

dec.

. 201

1

dec.

. 201

2

dec.

. 201

3

dec.

. 201

4

bln. EUR International reserves

27

38

34 +11 bln. EUR

Data source: National Bank of Romania

• International Reserves (IR) increased from 27 bln. EUR (April 2009) to 38 bln. EUR (May 2012), following the financing arrangement with IFIs

• IFIs loan reimbursement has been proceeding smoothly → IR gradually reduced to 34 bln. EUR as of April 2015

• Less than EUR1 bln. outstanding amount to IMF

11

All nominal convergence criteria are met with a comfortable margin

Nominal Convergence Iindicators Maastricht Criteria Date RomaniaInflation rate (HICP) 4.1 2008 7.9(percent, annual average) 1.2 Feb. 2015 1.2Long-term interest rates 6.2 2008 7.7(percent per annum) 5.3 Feb. 2015 4.1Exchange rate (vs. euro) +/- 15 percent 2008 +9.7/-16(percent change) Mar. 2015 +2.1/-3.5Budget Deficit below 3 percent 2008 5.6(percent of GDP) 2014 1.8Public Debt below 60 percent 2008 13.2(percent of GDP) 2014 39.8

Data source: Eurostat

• 4 out of 5 criteria were not met in 2008; only public debt indicator was lower than the Maastricht benchmark (60% of GDP)

• All criteria are met in 2015

12

However, the real convergence is progressing slowly

• Despite the economic crisis, the GDP per capita, expressed in terms of purchasing power standard, converges to the EU average

• However, the pace of real convergence has been, on average, around +1.2 p.p. per year since 2008, which is, insufficient to catch-up with the euro zone economies in a reasonable time

~ + 1.2 p.p per year

2008 2009 2010 2011 2012 2013 2014 2008 2009 2010 2011 2012 2013 2014

UE-28 25 863 24 317 25 317 26 019 26 451 26 585 27 335 25 863 24 317 25 317 26 019 26 451 26 585 27 335

România 6 933 5 912 6 260 6 616 6 670 7 219 7 521 12 491 11 900 12 646 13 298 14 003 14 472 15 137

% în UE-28 26,8 24,3 24,7 25,4 25,2 27,2 27,5 48,3 48,9 50,0 51,1 52,9 54,4 55,4

*) paritatea puterii de cumpărare standard

Sursa: Comisia Europeană

PPS*

Indicatori de convergenţă reală

(PIB/locuitor)

EUR

GDP per capita

Data source: Eurostat

EU-28

Romania

% in EU-28

13

The catching-up process is unevenly distributed among Romania’s regions

32 34 23

31 29

72

28 38 42 44

29 37 39

117

35

51 47 51

34 45 41

131

41

59

0

20

40

60

80

100

120

140N

orth

-Wes

t

Cen

tre

Nor

th-E

ast

Sou

th-E

ast

Sou

th -

Mun

teni

a

Buc

hare

st -

Ilfov

Sou

th-W

est O

lteni

a

Wes

t

2004 2008 2013

% of EU average

Data source: Eurostat

• The Bucharest region progress has been almost double than the national average since 2008 (+2pp per year vs 1.2 pp per year), from an already high level (above EU average)

• In the same period of time, three other regions (West, Centre and South-East) have evolved in line with the national average

14

Branch structure of the economy reveals a low gross value added contribution

Top countries • Luxemburg (101.600

EUR) • Ireland (80.600 EUR) • Denmark (74.500

EUR) • Belgium (72.600

EUR) • France (66.500 EUR)

Romania (12.700 EUR) – the

second last place: • Poorly equipped

agriculture • Low manufacturing

intensity of industry • Over-tertiarization,

compared with the manufacturing industry, with a low GVA contribution per employee of the services sector

Data source: Eurostat

thousand EUR

Gross value added (GVA) per employee per economic sector (2011) in EU

15

While the GDP has recovered to the pre-crisis level, only half of the jobs lost during the

economic crisis was restored

4.398

4.739

4.102

4.423 444

579 577

0

100

200

300

400

500

600

3600

3800

4000

4200

4400

4600

4800

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Employees (lhs)

GDP at 2010 reference levels (rhs)

bln. lei ths.

Data source: Romanian National Institute of Statistics

• The GDP level in national currency has approached its 2008 level only after 6 years, in 2014

• However, only 321 ths. jobs were recovered out of 637 ths. lost during the crisis → jobless recovery

16

The share of employees’ compensation in GDP has decreased by almost 8 p.p. since the crisis outbreak,

while the situation at EU level has been stable and significantly better for employees

Data source: AMECO, author’s calculations

• The share of employees’ compensation in GDP had been gradually decreasing since 2008 in Romania 2008: ~40%

2014: ~30%

• Crisis → increase of inequality by the worsening of income distribution between employees and employers

Compensation of employees / GDP (%) Operating surplus / GDP (%)

17

Sustainability issues in the pension system, as the dependency ratio remains above 1 and the

pension-wage ratio remains at an unfavorable level

1,40

1,18

1,34

1,21

24,7

37,0 35,8

20

25

30

35

40

45

0,5

0,6

0,7

0,8

0,9

1,0

1,1

1,2

1,3

1,4

1,5

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Dependency ratio (pensioners/employees)Ratio average gross pension / average gross wage (%) - rhs

%

Data source: Romanian National Institute of Statistics, National Bank of Romania

• The number of pensioners relative to the number of employees (dependency ratio) increased due to the crisis → the purchasing power of pensioners has decreased from 37% to 36% of average wage

18

30,6 30,3

30,9 30,4

30,7 30,4 30,5

31,0

33,0

37,8

36,0

34,9

33,3 33,2

34,0

25

27

29

31

33

35

37

39

2005 2006 2007 2008 2009 2010 2011 2012 2013

European Union Romania

Data source: Eurostat

Although the Gini coefficient decreased after the crisis, it is starting to rise again from an already

higher level compared with EU • The GINI coefficient

points to an increasing income inequality in Romania in the pre-crisis period (38)

• In the crisis period the inequality converges towards the EU level

• In the post-crisis period Romania registers another inequality increasing period (to 34 from 33)

19

Households’ net wealth remains far below its 2007 level; however, the financial component is on an upward trend and exceeded the pre-crisis level

0

200

400

600

800

1.000

1.200

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Real-estate assets Net financial assetsbln.

Data source: National Bank of Romania

• In the pre-crisis period both real-estate assets and net financial assets values increased.

• The crisis period reversed this trend.

• NW2013 ~ NW2006, due to the value adjustment of real-estate assets → the net wealth of individuals returned to the 2006 level, while the public debt tripled; only a few have benefitted from the boom period

20

Youth unemployment could become a major challenge for future growth, especially if the

divergent current trend with the UE continues

18,7

15,6

23,5

21,9

20,2

18,6

24,0

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

European Union Romania%

Data source: Eurostat

• Youth unemployment has bottomed just before the crisis …

• … then followed closely the EU upward trend during the crisis (increasing to around 24%) …

• While youth unemployment in EU decreased with 1.5 p.p. during 2014, in Romania it increased with 0.5 p.p. during last year

21

The population is ageing as the share of individuals with less than 24 years old decreased

with 6 p.p in the last 10 years

Data source: Eurostat

32,9

26,9

53

56,6

14,1

16,6

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Less than 24 years From 25 to 64 years

65 years or over

%

• The young population is decreasing from almost 33% to around 27%

• The share of population aged between 25-64 increased slightly from 53% to around 57%

• The elder population is on a increasing trend from 14% to almost 17% in the last 10 years

• Nevertheless, there is still enough available workforce in some of the Romania’s regions to contain, on medium term, the impact of ageing population as the employment rate is rather low when compared with both the EU and Europe 2020 target

22

III. FINAL REMARKS and

POLICY SUGGESTIONS

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Final remarks (1)

• Inequality, distribution and growth are important topics in modern post-crisis economics and their interconnections are a favorite subject of economists and international and national institutions – Inequality through distribution is considered, from a certain

point, to affect growth negatively (Okun, 1975);

– Bernanke (2007) called for more research to understand the causes and the effects of widening inequality in the US and especially the implications on economic opportunity; a similar concern has been expressed by Yellen (2015) who recommended to explore some factors that may influence economic mobility such as access to quality education and ownership to family business as well the economy as a whole;

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Final remarks (2)

• There is strong evidence also that important inequalities may affect growth through several transmission channels:

– Disparities may deprive the poor of the ability to stay healthy and accumulate human capital (Ostry et al., 2014)

– Unfairness generates economic and political instability that reduces investment and therefore growth (Ostry et al., 2014)

– Economic contrast impedes the social consensus necessary to absorb shocks and sustain growth (Ostry et al., 2014)

– Inequalities contribute to the rise of financial fragility credit booms (Mersch, 2014) → NPLs booming stock market (Piketty and Saez, 2012)

25

Final remarks (3) • Addressing the long term consequences of the current

macroeconomic challenges requires a new policy mix; one which also tries to solve the problem of inequality; – Fiscal policy

Trickle down policy advocates that economic benefits provided to businesses and upper income levels will indirectly benefit poorer members of society when the resources inevitably "trickle down" to them → available data prove that the theory is invalid and generates increasing inequality

Reform the tax and transfer system to make it at least fair that those at the top

pay at least the same share, that we don’t have these distorting provisions which weaken the economy and create more inequality (Stiglitz, 2015)

Progressive income taxes (automatic adjustments) and estate taxes—and possibly also progressive consumption taxes—are important tools for dealing with excessive economic inequality. (Shiller, 2012)

We need also to accelerate our efforts to eradicate tax evasion and corruption, and make no delays in putting an end to tax havens, with the endorsement of G7. I welcome the recent signing of the historic new tax transparency agreement between the

European Union and Switzerland and the announcement that negotiations with other European countries are approaching the final stage.

26

Final remarks (4) – Macroprudential policy

Contain the amplitude of the financial cycle by using macroprudential instruments → prevent credit booms and assets bubbles

– Structural reforms We need to look at the basic structure of the economy and to our laws

and regulations. It is the way our economy works that creates this inequality: ineffective and ineffectively-enforced anti-trust laws and corporate governance laws that allow those at the very top to seize a larger and larger share of the corporate pie. As a result, that leaves less for investment, less for wages. (Stiglitz, 2015)

We need to provide equal access to education to bridge the inequality divide. We spend more even in the public school on the children of the rich than we do the poor. This has long-lasting effects. We are transmitting advantages and disadvantages across generations, and that is the most important factor in creating this inequality of opportunity. (Stiglitz, 2015)

– Monetary policy Monetary policy tools are not effective in dealing with issues related to

inequality Monetary policy actions seem to have negative collateral effects – both in

terms of allocation and distribution (Draghi, 2015)

27

Thank you for your attention!