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;
24
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!
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