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Economic and Policy Making Challenges during the European economic crisis Hungarian Presidency of the Central European

Economic and Policy Making Challenges during the European economic crisis Hungarian Presidency of the Central European Initiative Budapest meeting - May 24 th , 2013 Razvan Orasanu , Research Director Former Privatization Minister and Romanian PM Advisor *

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Economic and Policy Making Challenges during the European economic crisis Hungarian Presidency of the Central European

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  1. Economic and Policy Making Challenges during the European economic crisis • Hungarian Presidency of the Central European Initiative • Budapestmeeting - May 24th, 2013 • Razvan Orasanu, ResearchDirector • Former PrivatizationMinister and Romanian PM Advisor * • * Acknowledgement to Fiscal Council PresidentIonut Dumitru

  2. High growth… Economic growth (% yoy, annual average, 2001-2008) Source: EUROSTAT

  3. …but unsustainable demand

  4. The economic crisis – big picture Source: EUROSTAT

  5. Crisis impact – lower budget revenues

  6. Clientelistic spending

  7. Banking – where it all started… External debt by institutional sector (% of GDP) Source: NBR

  8. Capital flows Contributions to potential GDP growth in Romania (%) • the high potential GDP growth in the pre-crisis period was driven mainly by large capital inflows. • The contribution of capital and TFP is expected to be much lower after the crisis; • The contribution of labour should increase. Source: European Commission

  9. Growth Fuelled by FDI Source: NBR

  10. Foreign Capital stops, IMF / EU step in CA deficit and development of capital inflows External funding gap • Jan-Jun 2012 • Funding gap= CA deficit+net private capital inflows • Source: NBR

  11. Crisis impact on demographics • An increase in employment rate is highly needed also to offset partially the negative impact of demographics. Support ratio (Number of contributors/pensioners, %) Source: European Commission, 2012 Ageing report

  12. Current account –problem for Romania Note: data cumulated over the last four quarters Source: EUROSTAT

  13. Response 1 : Lower foreign inflows Source: EUROSTAT

  14. Response 2 – Non performing loans NPL ratio (%) FCY loans in total loans (%) • NBR introduced in 2003-2008 tight administrative and prudential regulations to curb lending growth (especially in FCY for unhedged borrowers), but the impact was short-lived – loans started to be originated directly from abroad or exported abroad. Source: IMF

  15. Response 3 – Higher Savings Rate Saving rate (% of GDP) Source: EUROSTAT

  16. Response 4 - salary rises, then cuts Development of public sector wages and social benefits Source: Ministry of Finance, European Commission

  17. Response 5 – Exports diversified Exports of goods by destinations - change between 2000 and 2011 (in pp of GDP) • Increased focus on extra-EU exports Source: EUROSTAT

  18. Solution 1 : Better use of EU funds

  19. Solution 2 : Reduce shadow economy Share of shadow economy in GDP in EU-27 countries Source: Schneider, F. (2012), "Size and development of the Shadow Economy from 2003 to 2012: some new facts”

  20. Solution 3 :Tax administration reform • Legal tax wedge on labour is high in Romania, but implicit taxation is relatively low. Legal tax wedge vs implicit taxation on labour (SSC and personal income tax) Source: EUROSTAT

  21. Solution 4 – Wage control essential Unit labour costs growth (%, annual average) • ensure wage growth never exceed productivity growth –increase labour market flexibility Source: EUROSTAT

  22. Solution 5 : Exporting away trouble Export to GDP ratio (%) Source: EUROSTAT

  23. Solution 6 – Gvt Asset Management Structure set up in 1949 • Landlord for all buildings • Purchasing agent for gvt • Asset Management • One potential pitfall

  24. Solution 7 – Productivity Growth Employment rate (20-64 years) Labour productivity growth and productivity level • Romania has one of the lowest employment rates in EU; • Increase effective retirement age; education reform and lifelong learning; stimulate re-skilling and job search; re-attract Romanians working abroad. • Increase efficiency of public administration (including through introduction of e-government). Source: EUROSTAT

  25. Solution 8 – Pensions crisis on agenda • Awareness building exercise Romanian Academic Society • Forcing the issue on the agenda of 2014 • Moving out of pay-as-you go • 20 year top-up financing ring-fenced every year

  26. Solution 9 – Coherent privatization • Inventory/ valuation of property • Yearly privatization calendar • Roadshow for all companies • Predictability in selling • MAV vs CFR Marfa

  27. Solution 10 – Innovation in gvt design • Central Policy Units essential for institutions • Flow of documents improved • Delivery targets and service level agreements • Performance budgeting (and project budgeting) • Independent anti-corruption departments • Revisions to the legislation (600-2.600 Off.M) • BEST – Evidence based policy making

  28. Thank you ! RazvanOrasanu Romanian Academic Society 004(0)740303073 orasanu@hotmail.com orasanu@sar.org.ro

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