Launch of the “Economic Survey of Romania”

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Speech by Prime Minister Nicolae-Ionel Ciucă at the launch of the 2022 edition of OECD's Economic Survey of Romania

Dear OECD Secretary-General, Mathias Cormann,

Ministers,

Ladies and gentlemen,

Allow me to begin by welcoming the presence here of Mr Mathias Cormann, OECD Secretary-General, two days after the OECD Council's vote of January 25-26, that decided to open accession discussions with Romania.

Also, I would like to thank you, Mr Secretary -General for all your efforts to unblock the expansion of the organization. We are aware of your essential role in the decision of the OECD Council and we thank you on behalf of Romania and of myself, personally. I also thank you for your letter in this respect and the attached OECD Council Resolution on opening accession discussions.

Romania called the Inter-ministerial Committee for OECD Accession, which approved at its meeting on January 26 Romania's adhering to the organization's principles, values and standards, as reinforced and developed in the two recently adopted OECD documents at the OECD Ministerial Council meeting (Paris, October 2021) - " OECD VISION STATEMENT" and "2021 MINISTERIAL COUNCIL STATEMENT".

At this time, Romania is already adhering to 6 of the 8 essential standards for accession:

● Declaration on Investment;

● Principles of Corporate Governance;

● Principles for Internet Policies Making;

● Recommendation on Good Statistical Practice;

● BEPS Inclusive Framework - base erosion and profit shifting;

● Global Forum on Transparency and Exchange of Information;

In the coming months, Romania will start activities related to the accession to the OECD Codes of Liberalization. Moreover, Romania has already expressed its intention to join the OECD Anti-Bribery Convention. All these commitments are being translated into relevant reforms for the modernization of our country's economy.

The current "Economic Survey for Romania" is among the projects Romania is already developing together with the OECD, which shows our country's firm commitment in terms of joining the organization.

The survey represents a multidimensional X-ray picture of Romania's social and economic realities, providing decision-makers with a set of extremely useful recommendations for those measures aimed at generating development and well-being on an intelligent, sustainable and inclusive basis.

The first part is dedicated to key political prospects and includes a presentation of the macroeconomic situation and medium-term developments, with a special focus on the pandemic and its implications for the economy.

The survey includes several references to Romania's National Recovery and Resilience Plan(PNRR) approved by the European Commission in September, specifying that it properly focuses on areas where urgent investment is needed.

The reforms and investments included in the plan will contribute to the development and modernization of the Romanian economy in areas such as public finance sustainability, consolidation of public administration and resilience of the health system, ensuring social and territorial cohesion, public administration digitalization and many others. A series of recommendations in the survey find their response in the measures envisaged by the Romanian state in the National Recovery and Resilience Plan.

The thematic chapter on business environment analysis also includes sections on the need to adapt financing access to the needs of companies, the state-owned enterprises' governance or the need to improve judicial efficiency and insolvency arrangements in order to boost business dynamism. Transport infrastructure and the green transition are key areas, their importance being reflected in the PNRR, through the largest financial allocation. The survey underscores the need to reduce transport infrastructure gaps in order to increase productivity and reduce regional disparities.

In the present survey, analyses were carried out on the lack of proper correlation between the needs of the labor market and skills, aspects related to informal work, prevention of school dropout, improvement of the quality of education and of vocational training, promotion of digital skills in primary education. The Romanian authorities are aware of the need to improve labour market conditions. Further efforts are needed to increase the participation of young people, to protect vulnerable groups, especially in marginalized communities, to support training programs.

In the current pandemic context, the Romanian Government has adopted a series of innovative measures, in line with the evolution of the situation at the national level and the needs of the labour market, in order to maintain jobs in the affected economic sectors and prevent the rise in unemployment.

Regarding the pension system, Romania is undergoing a full reform process, with the legislation under evaluation and legislative measures to be adopted to ensure the sustainability and predictability of the public pension system in the medium and long run, to correct the dysfunctions and inequalities between different categories of beneficiaries, to strengthen the principles of contributiveness, social solidarity and equality.

The survey considers that improving access to education and training is one of the most important areas that can contribute to economic recovery and raising the living standards. We appreciate the recommendation to speed up measures to support students who are at risk of dropping out of school and to reduce educational gaps, especially in disadvantaged areas

This survey is a useful instrument, which brings a high added value to political decision-makers, emphasizing in a balanced way the efforts made so far by our country, but at the same time offering useful recommendations in the fields of special importance for Romania.

Among the main conclusions of the OECD Economic Survey on the Romanian economy, the following should be noted:

• Economic growth is robust, but the risks are still high;
• Macroeconomic policies have supported the economy, and monetary policies must remain vigilant and respond to inflationary pressures. In terms of fiscal policy, it needs to adapt to economic developments in a rapid and targeted manner;
• Romania must capitalize on the opportunity provided by the European funds, especially on the Next Generation component;
• The public pension system needs to be reformed to ensure public finance sustainability;
• Reforms can improve efficiency and fairness in the tax system;
• Improving access to better education and high -performance health care system is the key to the progress in living standards. Economic policies must aim to reduce high rates of inactivity and the informal economy. European funds must be used to respond to social and environmental challenges, including reducing pollution;
• There are high regional disparities in living standards and economic opportunities,
• Like in OECD countries, labour market integration of people with low levels of education (especially young people, women and the Roma population) is difficult. In order to improve performance in the labour market, it is necessary for all citizens to acquire adequate skills;
• Productivity increase was significant in 2010 but it slowed down. Business-friendly reforms, an efficient allocation of resources and the reduction of infrastructure disparities are key to productivity gains;
• Improving the regulatory and competitive framework can boost productivity growth;
• Although access to finance has improved, SMEs need increased support for access to financial and banking instruments;
• Increase in the predictability of regulations to support the business environment in terms of the investment process;
• Continuing the fight against corruption will lead to increased confidence in state institutions.

We have assimilated all these elements and we are preparing to absorb them in the current public policies in Romania in the next period.

Thank you!

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Speech by the OECD Secretary-General Mathias Cormann at the launch of the 2022 edition of OECD's Economic Survey of Romania

Thank you very much, Mr. Prime Minister.

Ministers,

Colleagues,

It is a real privilege to be here with you, just a few days after OECD Council has decided to open accession discussions with Romania. I have appreciated Romania's longstanding commitment to a strong and engaged relationship between Romania and the OECD, indeed your long-standing commitment to becoming a member of the OECD. You have done amazingly well over the last few decades in growing the economy, lifting living standards for your people, lifting incomes, and indeed thriving the future of Romania through the European Union, NATO, and other partnerships and engagements. You are very much in the context, of the system of values and principles promoting individual liberty, democracy, human rights, rule of law, macro-economic principles. And I think it has worked exceptionally well for Romania so far, but as you know, there are still some opportunities for improvement, there are still some areas that require further work and I would like to think, and I have noted that you also believe that working together, we can help work the next leap forward.

Today, I think it is a step in the journey as I have the opportunity to present to you, the economy survey of Romania for 2021.

This is the first OECD Economic Survey of Romania since 2002. This really demonstrates the impressive progress that has been achieved by Romania since then.

In the last two decades, there has been a rapid catch-up with OECD economies, despite the Global Financial Crisis of 2007-2008 and the COVID-19 pandemic.

By 2019, just prior to the pandemic, per capita GDP had reached USD 27,000 - or 63% -- of the OECD average, up massively from around just 30% of the OECD average in the early 2000s.

Like most countries around the world, you can see the pandemic hit Romania hard in terms of the economic impact.

In 2020, its GDP fell by 3.7%, less than the OECD average of 4.7% across the OECD.

Romania also managed to deal comprehensively with the consequences of COVID-19. You responded with a range of social and economic measures that amounted to 3.6% of GDP in 2020 and 1.4% in 2021. As a result, Romania's GDP surpassed its pre-crisis level in the second quarter of 2021.

Today, the unemployment rate is also nearly back down to its pre-crisis rate.

Economic activity has rebounded since last year, and the recovery is continuing.

We project that, after 6.3% GDP growth in 2021, Romania's economy will grow by 4.5% in both 2022 and 2023.

Romania will be one of the recipients of the European Union's Recovery and Resilience Facility, one of the main recipients, I should say, with EUR 14.2 billion in grants representing 6.5% of GDP which is really massive. One of the key challenges here is to make sure that these funds are invested wisely and you are able to actually absorb them through the economy in an effective and wise way.

Effective implementation of the EU-funded Recovery and Resilience Plan, and the associated structural reforms, including to support the green and digital transitions, will help sustain Romania's recovery and will also help to really continue on the path of lifting living standards.

However, downside risks remain. In Romania and around the world, the biggest risk to a sustained economic recovery continues to be future waves of infection and in this context, the number one economic priority policy is lifting the vaccination rate, to get as many people as possible vaccinated, boosted.

Romania sadly has one of the lowest vaccination rates in the European Union, with only around 41% of the population fully vaccinated.

As the Omicron variant spreads, efforts to accelerate vaccination, especially in rural areas, must remain the immediate top policy priority. We understand the challenges, we understand the impact of misinformation that is being spread by anti-vaccinists.

The efforts of enhancing trust in vaccinations by providing reliable information, engaging with underserved communities, and tackling misinformation are crucial.

We also suggest that Romania might want to consider extending the COVID-19 vaccine certificate to access a broader range of activities and perhaps, for some professions.

Another downside risk is inflation. Inflation in Romania reached 8.2% in December last year, exceeding the upper 3.5% limit of the central bank's target of 2.5% +/- 1%, mainly driven by global increases in energy and food prices.

As you know, since October 2021, the National Bank of Romania has increased policy rates by 75 basis points to 2.0% in January. This is, we believe, appropriate, no doubt, it will require continuous monitoring and measures.

Romania also faces important long-term challenges, such as large and widening regional disparities in living standards and economic opportunities.

Bucharest and many secondary cities have become hubs of prosperity and innovation, but social pressures remain quite significant in marginalised communities and in rural areas.

These pressures have also been compounded by the effects of the pandemic. And some of these segments of the population also are the least likely to have higher vaccination rates.

Another challenge is the relative slowdown in productivity from a very low base. Productivity growth has slowed, and productivity is already, if you look at the OECD average, there are opportunities to do better.

Productivity gains are particularly important to pursue economic convergence and to continue to lift living standards particularly in the context of ageing population.

The pandemic has also worsened macro-economic imbalances, with a deterioration of the fiscal position and the current account. The budget deficit increased to around 9% of GDP in 2020. For obvious reasons, we understand why, and to a large degree, that was unavoidable.

The current account deficit reached 5% of GDP in 2020 and deteriorated further to nearly 7% of GDP in the third quarter of 2021. In terms of productivity, certain it makes it easy to do business easing some regulatory requirements and burdens

Let me now turn to the Survey's findings and some policy measures that we are suggesting.

First, we need an agile fiscal policy to foster macroeconomic stability.

A credible fiscal consolidation strategy should be implemented once the recovery is firmly underway.

Reforming the pension system is relatively urgent, as ageing-related costs will put the public debt-to-GDP ratio on a rising trend. You can see the red line there which essentially is a trajectory without any policy adjustments, then, you can see the continuous green line which is with policy adjustment.

Growing pension costs would limit resources available for education, healthcare, social assistance, and infrastructure - all important for sustaining future growth.

We welcome the inclusion of the reform of the pension system in the Recovery and Resilience Plan and encourage Romania to strengthen incentives to expand working lives and policies to improve the employability of old-age workers.

Accelerating the on-going modernisation of the tax system and administration is also crucial to improving tax collection. As you can see tax revenues in Romania are relatively low, not necessarily just an issue of tax policy setting, it is to a large degree, as we see it, also a matter of effective administration of existing tax policies. This is an opportunity to invest in your future growth and success and to invest in some of your social programs that you need.

Reforms to remove inefficient tax expenditures, such as exemptions from energy-related taxes, and to increase less distortive taxes, such as taxes on immovable property, could boost sustainable growth.

Second, policies will need to address labour market challenges. While the labour market has remained resilient during the COVID-19 pandemic, the working-age population is decreasing rapidly, due to ageing and emigration.

Skill shortages have hampered growth in the past and will likely continue to do so in the future. You really have to look at ways to boost workforce participation to make sure that your workforce has the skills to meet the needs of your economy.

The integration in the formal labour market of people with low educational attainment levels, especially among young people, women and Roma populations, is a challenge. As you can see, participation is quite low for some groups if you compare it with the OECD average.

This is partially explained by the persistent inequality in education. Prime Minister has referenced to some of the Government's efforts and we encourage you to continue.

Romania is among the countries, where socioeconomic background has the largest impact on reading performance.

Too many young people in Romania leave school before getting the skills needed to thrive in the labour market.

School closures due to COVID-19 have further deepened learning gaps and accentuated inequality in access to education. Children from disadvantaged backgrounds are more acutely impacted.

Accelerating support to vulnerable students is urgent. Measures planned under the "Educated Romania" project and the National Recovery and Resilience Plan are steps in the right direction. We will encourage you to think about ways to do better.

Much needed financial and human resources should be allocated to schools in disadvantaged areas, to remedial courses to support students in need, and to on-going initiatives to prevent school drop-outs.

Similarly, too few adults have access to training, including among the unemployed. If you look at Romania in red, compared to the OECD average, and then, compared to the best performances, you can see there are a lot of opportunities there, to do better.

Public employment services need to be reinforced to better adapt to the changing needs of the labour market, provide individualised support, and expand training programmes.

More importantly, providing affordable and good-quality childcare and long-term care will help boost labour market participation further, especially for women.

Third, strengthening the business environment, making it easier to do business in Romania, you will have to achieve stronger productivity growth, this is the special focus of this year's Survey - this is also a very important area to focus for Romania.

Raising productivity is key to continue economic convergence and to continue to improve Romania's path to align with the highest standards of the OECD and it is also an important path to improve Romania's competitiveness.

According to the OECD Product Market Regulation Indicators, Romania has more restrictive regulations than the OECD average, particularly for licensing and permits.

With the support of the OECD and the European Union, Romania is currently simplifying the business licences for manufacturing activities.

This is a welcome step.

It will be important to continue on this path by simplifying and digitalising procedures, including for the services sector.

Inefficiencies in the insolvency regime and court congestion are also hindering the reallocation of economic resources towards more productive sectors and firms. To get maximum benefits of a market-based economy, you really need to facilitate the efficient reallocation of capital from unsuccessful firms to the firms with the best chance to be viable, successful and growing in the future and if that reallocation is blocked through an inefficient judicial system, you are left short in terms of what you are achieving.

Introducing out-of-court proceedings, for example, would facilitate the exit of non-viable firms and the reorganisation of viable firms, while strengthening market discipline.

The rule of law is fundamental for a market economy to function properly. The administration needs to be as efficient as possible.

Recent efforts to fight corruption are welcome and should be extended and intensified as trust in institutions and integrity remain a major issue. I commend the comments Prime Minster made in relation to that issue and the intention to join the Anti-bribery Convention.

Further infrastructure investments, particularly in the transport and the energy sectors, are also important to raise Romania's economic potential. Again, you can see how you compare to the OECD, but also to peers in your immediate neighbourhood.

Last but not least, Romania needs to continue improving its environmental outcomes. Romania has done very, very well. Romania has made impressive progress in recent times. But you can see you are tracking under lower levels of emissions than the EU's equivalent, in terms of per capita emissions, the emissions intensity of your economy is lower than that of the EU, but in terms of reaching the net zero emissions objective by 2050, you can see the trajectory that is still lying ahead.

Greenhouse gas emissions have more than halved since the early 1990s, for obvious reasons, you have significantly modernized your manufacturing operations, and it had a massive impact, but it is more work to be done.

Reducing air pollution is important too. It is a major environmental and health hazard in Romania, associated with a high number of premature deaths.

Policy action should combine green investments, which account for 41% of the Recovery and Resilience Plan, with incentives to reduce environmental damages, and if needed, accompanied by compensation measures for low-income households.

Prime Minister Ciucă,

Colleagues,

I hope you find our findings and recommendations useful and help you to chart the future path of reforms. OECD looks forward to continuing to engage with you, we appreciate the fact that there is broad political support from across the political spectrum for Romania's engagements with the OECD, and we will do everything we can to engage positively and constructively with you and help you be the best you can be. Thank you.