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The Effects of the Economic Crisis on Structural Convergence in Romania

Sercin Ali1, Oana Maria Lungu2

The Academy of Economic Studies, Bucharest

Abstract
The global economic crisis strongly affected all of the world countries. Within the
European Union, the developed countries economies are expected to remain on the first line
of economic growth, while the other economies are left behind by the unbalances created for
each field of activity before the economic breakdown. Any type of temptation of ignoring the
basic economic rules will be penalized sooner or later by more or less difficult breakdowns,
meant to cure an imperfect national economy.
Connecting the Romanian economy to the international economic trends led to a
better catching-up process, with a clear evolution revealed by the growths during years
2000-2008. While there are a lot of structural unbalances, in the same time Romania tries to
remain open to the external market. That is why the unfavourable situations will strongly
affect it. Thus, analysing the internal labour market evolution will lead to some very
consistent conclusions. Firstly, an increasing rate of unemployment, even though the
specialists considered it to be around the average rate. Secondly, there has been created a
major pressure over the social budget, due to the high volume of social payments for the
unemployed persons and other social transfers. As a conclusions, there has to be made some
an effort regarding financial policies in order to reconsider the budget and not deepen the
debt.
Key-words: economic crisis, real economic growth, convergence, innovation

During the periods of economic crisis, both population and institutions want to be able
to quantify their standards of living, as a result of the subsequent recession.
Who is going to bear the burden and what are the most effective solutions for
reducing the breakdowns?
It is of a major importance to understand the processes that took place before the
economic crisis how sustainable was the economic growth and even more, how did the
unbalanced economic growth contributed to the deepening of the breakdown.
In other words, the last years changes of the world economy were very various and
presented an important subject for research due to the complexity of the economic growth,
both theoretically and practically speaking.
In the economic literature, the economic growth theories are divided in classical,
neoclassical and modern theories.
The technical progress led to a change of paradigm between the classical and modern
3
theory. The technical progress and furthermore the informational progress, mark a path from
the classical pessimism to the modern optimism. If the classical theory pleads for the rational
use of resources due to their limited character, the modern theories innovate the fact that our
main concern is to develop unlimited resources, based mostly on the human capital (the
1
Sercin Ali, PhD Candidate, Academy of Economic Studies, ali_sercin@yahoo.com
2
Oana Maria Lungu, PhD Candidate, Academy of Economic Studies, oanal20@yahoo.com
3
Socol, C., Socol, A. (2006) The European Model: Economic Growth, Convergence and Cohesion article
published in the Theoretical and Applied Economics Journal, no. 8/2006 (503), ISSN 1841-8678, pg. 61-66
know-how potential, the capacity of work innovation). Thus, as long as we use the
informational progress (the innovation), we create the basis for a sustainable growth. It is the
main condition for the economic, social and cultural development of a nation.4
From the economic perspective, it also means long-term convergence of countries
around the world regarding their per capita incomes.
The per capita income is a factor that divides the economy as follows:
underdeveloped (a high level of poverty), in transition, modern.
Regarding the matter of poverty, the main focus is on the available financial
resources, better said the lack of those resources, in order to satisfy the population needs,
meaning the population average standard of living. The level of poverty for each country is
given by the variety of factors of the labour market.
Employment and compensation policy measures could mitigate the effects of low
employment rates.
The dimensions of the labour market and the risk of poverty are positively correlated.
Romania is facing a low performance of the work factors, especially of the capital.5
In order to bring arguments to the mentioned theory, we used as basic information the
data regarding the changes of the economic structure of the main three fields of activity for a
certain group of countries with different development stages. We considered the changes
occurred in one decade period (2002-2011). The structural changes of the economic growth
process are based on empirical findings. Following the literature, it is shown that the main
idea regarding the long-term development of countries economy is related to the growth of
the services field of activity (the third field), linked to the GDP and the total workforce,
which marks the transition from the underdeveloped to the modern economy.
There are several cases where the gap regarding the economic development is
evaluated by the contribution of the third field of activity within the GDP.
The table below describes the GDP and the workforce structure for 27 European
Union countries divided in three main fields of activity: the primary agriculture, the
secondary industry and the third services, for year 2007, considered to be the reference
year of recession.

Table 1. PC Income, Workforce and Rate within GDP in 2007

National PC Income Workforce (%) Rate within GDP (%)


Agriculture Industry Services Agriculture Industry Services
Economy Ths. Euro
Bulgaria 3,8 7,5 35,5 57,0 6 32 62
Romania 5,8 29,5 31,5 39,0 7 41 52
Latvia 9,3 9,6 28,4 62,0 3 22 75
Lithuania 8,5 10,2 30,6 59,2 5 33 62
Poland 8,2 14,7 30,7 54,2 4 31 65
Slovakia 10,2 4,2 39,4 56,4 3 36 61
Estonia 11,6 4,4 35,2 60,4 3 30 67
Hungary 10,1 4,7 32,6 62,7 4 30 66
4
Pohoata, P. (2008), Strategies and Policies for Sustainable Development, pg.6
5
Solow growth model shows how saving rate, population growth and technological progress affects production
and growth process for a specific period, temporarily. It is used most often in the analysis of growth. The
economy model is considered as stationary, savings turning into investments are contributing to the raising of
living standards. Unfortunately, in the case of Romania, the development level is beneath the capital level that
the model is considering as average. Thus, to ensure growth conditions is necessary to increase the savings rate.
The main priority is to stimulate competitiveness of all sectors of activity through production technologies and
through continuous training of human capital.
Czech Rep. 12,3 3,5 40,2 56,3 3 39 58
Malta 13,3 3,0 22,0 75,0 3 22 75
Portugal 15,4 11,3 30,5 58,2 3 24 73
Slovenia 17,1 10,2 34,2 55,6 2 34 64
Greece 20,2 11,2 22,4 66,4 4 23 73
Cyprus 20,3 7,4 38,2 54,4 3 19 78
Spain 23,5 4,3 29,3 66,4 3 30 67
Italy 26,0 3,8 30,1 66,1 2 27 71
Germany 29,5 2,2 29,8 68,0 1 30 69
France 29,7 3,4 23,3 73,3 2 31 77
Belgium 31,5 1,8 24,4 73,8 1 24 75
Austria 32,6 5,7 27,3 67,0 2 31 67
England 33,5 1,3 22,3 76,4 1 23 76
Finland 34,0 4,4 25,5 70,1 3 32 65
Holland 34,7 3,1 19,1 77,8 2 24 74
Sweden 36,2 2,2 21,6 76,2 2 29 69
Denmark 41,6 2,9 23,3 73,8 1 26 73
Ireland 43,6 5,3 27,4 67,3 2 35 63
Luxembourg 78,1 1,5 21,3 77,2 1 13 86
Source: EUROSTAT, 2012, data processing

As it can be observed, Romania occupied the last place regarding the services rate
within the total occupied population (with a low percentage of 39%, compared to Poland with
54% and with almost 39% less than Holland, the country with the highest percentage within
the total workforce).
Nevertheless, the agriculture gives a first place for Romania, regarding the rate of the
agriculture field within the total workforce (29,5 %). This is how we can explain the gap
related to the other European Union countries.
We can also observe a negative correlation between the two variables: the primary
and secondary field of economy (agriculture and industry) within the population workforce
and the per capita GDP.
In 2010, the Romanian economy encountered the second year of economic
contraction while the other European Union countries felt an increase of the per capita GDP.
The same year, the average growth rate for the real GDP within the European Union was
1.8%. The most consistent growths were in Sweden and Poland with 5.5% and 4%, the
lowest being in Romania with -1.3% and Greece with -4.5%.
The international markets had reacted and penalized the Euro states, imposing
drastically measures of rehabilitation.6
The unbalanced economic policies before the economic crisis in Romania have
deepened its effects. Thus, those gaps needed a lot of measures to be taken within a European
context.
The transformations within the labour market occurred as a result of economic
uncertainty and drastic recovery policies. That is why the occupation rate fell in 2009 (table
1).

6
BNR (2010), Annual Report - Overview of the main economic and financial evolutions in 2010
Table 2. Employment rate, age group 15-64
2001 2002 2003 2004 2005 2006 2007 2008 2009
EU-27 62.6 62.4 62.6 63.0 63.5 64.5 65.4 65.9 64.6
Euro area
62.1 62.3 62.6 63.1 63.7 64.6 65.6 66.0 64.7
(EA-16)
Belgium 59.9 59.9 59.6 60.3 61.1 61.0 62.0 62.4 61.6
Bulgaria 49.7 50.6 52.5 54.2 55.8 58.6 61.7 64.0 62.6
Czech
65.0 65.4 64.7 64.2 64.8 65.3 66.1 66.6 65.4
Republic
Denmark 76.2 75.9 75.1 75.7 75.9 77.4 77.1 78.1 75.7
Germany 65.8 65.4 65.0 65.0 66.0 67.5 69.4 70.7 70.9
Estonia 61.0 62.0 62.9 63.0 64.4 68.1 69.4 69.8 63.5
Ireland 65.8 65.5 65.5 66.3 67.6 68.7 69.2 67.6 61.8
Greece 56.3 57.5 58.7 59.4 60.1 61.0 61.4 61.9 61.2
Spain 57.8 58.5 59.8 61.1 63.3 64.8 65.6 64.3 59.8
France 62.8 63.0 64.0 63.8 63.7 63.7 64.3 64.9 64.2
Italy 54.8 55.5 56.1 57.6 57.6 58.4 58.7 58.7 57.5
Cyprus 67.8 68.6 69.2 68.9 68.5 69.6 71.0 70.9 69.9
Latvia 58.6 60.4 61.8 62.3 63.3 66.3 68.3 68.6 60.9
Lithuania 57.5 59.9 61.1 61.2 62.6 63.6 64.9 64.3 60.1
Luxembourg 63.1 63.4 62.2 62.5 63.6 63.6 64.2 63.4 65.2
Hungary 56.2 56.2 57.0 56.8 56.9 57.3 57.3 56.7 55.4
Malta 54.3 54.4 54.2 54.0 53.9 53.6 54.6 55.3 54.9
Netherlands 74.1 74.4 73.6 73.1 73.2 74.3 76.0 77.2 77.0
Austria 68.5 68.7 68.9 67.8 68.6 70.2 71.4 72.1 71.6
Poland 53.4 51.5 51.2 51.7 52.8 54.5 57.0 59.2 59.3
Portugal 69.0 68.8 68.1 67.8 67.5 67.9 67.8 68.2 66.3
Romania 62.4 57.6 57.6 57.7 57.6 58.8 58.8 59.0 58.6
Slovenia 63.8 63.4 62.6 65.3 66.0 66.6 67.8 68.6 67.5
Slovakia 56.8 56.8 57.7 57.0 57.7 59.4 60.7 62.3 60.2
Finland 68.1 68.1 67.7 67.6 68.4 69.3 70.3 71.1 68.7
Sweden 74.0 73.6 72.9 72.1 72.5 73.1 74.2 74.3 72.2
United
71.4 71.4 71.5 71.7 71.7 71.6 71.5 71.5 69.9
Kingdom
7
Source: EUROSTAT, 2012
The reorganization among the secondary field of activity led to an orientation of
employees to the primary field. Thus, it is observed a low rate of work productivity at
national level in 2010 although the occupation rate decreased in 2009.

Conclusions
The main structural issue of the Romanian economy, before and during the economic
crisis is the low level of population occupation, with 6% below the European average rate and
over 15% below the strategic European target. It is to be presumed that the level of
occupation will have been increased, even during the economic breakdown, if the main
policy for cost reduction would not have been the employers disposals.
A budgetary medium and long term balance may be reached if over 4 million active
employers will manage to fit in the labour market. As revealed in our past researches, mostly
the women, the older persons and the young people are the most affected by entering the
7
Labour Market Data, http://epp.eurostat.ec.europa.eu/portal/page/portal/product_details/publication?
p_product_code=CH_05_2011_XLS
labour market and there is a need for sustainable social policies for these categories of
persons.
There is a gap for increasing the rate of population occupation, the so called
unemployment trap rate which evaluates the financial consequences when transferring
people from unemployment to the labour market with an income that represents 67% of the
average gross income provided in the industry, constructions and services fields of activity.
The rate measures the amount of payments for social contributions and the cutting
down of unemployment social costs due to employment. The indicator represents the share of
the difference between the gross earnings and net income growth in gross earnings.
The unemployment trap it is to be considered of 70% of the supplementary income
that an unemployed person would receive if being employed. This income will go for social
taxes and will have a negative effect regarding the giving up of social benefits. Thus, there is
no real encouragement for entering the labour market.
In other words, in order to have a sustainable development and to balance the budget,
Romania needs a large number of employees to work within the formal economy and to pay
social taxes. Unfortunately, the actual trend is opposite.
The most approachable alternative to the standard population occupation, especially
during the economic breakdowns, when the labour market asks for more flexibility is hiring
personnel within the services field of activity.
The lack of financial resources has a temporarily character while the lack of qualified
personnel has a long term character. On the other side, it is encountered a lack of human
resources generally speaking, as the occupation rate fell down even in a decade period of
economic boom.
The people that remained employed had a stronger negotiation power regarding their
salaries, which were most of the times more over the productivity rate and that also led to
some major economic disturbances.

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5. Pohoata, P. (2008), Strategies and Policies for Sustainable Development, pg.6
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and Cohesion article published in the Theoretical and Applied Economics Journal,
no. 8/2006 (503), ISSN 1841-8678, pg. 61-66
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http://epp.eurostat.ec.europa.eu/portal/page/portal/product_details/publication?
p_product_code=CH_05_2011_XLS