Sustainable economic development is based on a stable, functional, financial and banking system. Economy is financed, on the one hand, by the fiscal system (through taxes it collects and redistributes afterwards towards investments aimed at development) and, on the other hand, by the financial and banking system, which credits economy by specific means. A country’s development depends on the level of public revenue and the way this revenue is redistributed to various sectors of social life. For instance, in Romania, labour is taxed higher than capital. There are considerable differences in this respect in comparison to Europe’s developed countries, but also to neighbouring countries. For instance, in Germany capital retains approximately 40% of the newly created value, and labour, 60%; in the case of Romania, the situation is reversed. This directly impacts the revenue that the state can redistribute (to finance public investment, infrastructure, education, health, etc.). [Read more]
The state of public finances and the level of accumulated capital directly influence a country’s development potential. These aspects will be approached in detail by means of a series of specific indicators. Capital is the key resource in any economic system, the link between the factors that are relevant in the production process (labour, raw materials, technology, innovation, management, etc.). Thus, capital accumulation from various resources and its investment in efficient projects are prerequisites for supporting development processes. Romania has a less developed financial and banking system in comparison to Western countries, or other states in the region (Poland, for instance). Capital accumulation has increased constantly in Romania in the last decades, in parallel with the capitalization of the banking system. However, the involvement of the financial and banking system in economic life is well under the EU average (domestic credit is five times lower than the EU average).
>The field includes two subfields: finances and financial capital; the former refers to the state of public finances, the latter, to the process of capital accumulation and to the financial and banking system.
Finances
Financial capital
This subfield describes public finances (public budget) by means of indicators that look into public revenues, public deficit, public expenditures and public debt. The state is a fundamental actor in any modern economy, the provider of vital public goods such as: defence, public order, education, health and social services. The way the state allocates its resources, together with the efficiency of these resources’ use by authorities significantly influence development processes. Thus, the structure of public expenditures shows the state’s priorities. When the budget is low, expenditures cannot be high, irrespective of the field’s importance. Consequently, the issue is how to increase the budget, by increasing economic activity and efficiency and diversifying the sources that feed the budget. [Read more]
At the same time, the indicator Public revenues (% of GDP) shows that Romania has low revenue collection, compared to EU average. Romania occupies the last position in the EU regarding VAT collection, the collection deficit being 39.6% in 2015 – the highest in the region (PwC, 2016). Profit tax is marginal (approximately 6% of total fiscal revenue, on the decrease), just as property tax (approximately 2% of total fiscal revenue, on the decrease), as shown in data on budget execution in 2016-2017 (Ministry of Finances, 2018). When a state collects insufficiently and spends more than the economy’s potential, mostly for stimulating consumption, public deficit is inevitable. These aspects are highlighted by indicators that show the dimension of public deficit (the imbalance between revenues and expenditures) and the evolution of public debt in the long term. In Romania, deficit in the last 20 years has been over 70 billion euro, while public debt has been over 65 billion euro (at 39% of GDP). In the last 7 years only, the deficit has added a 31 billion euro public debt (enough for approximately 3.000 kms of highway!).
A nation can only develop if it is capable of attracting and accumulating capital. Capital is one of a nation’s most important riches and, in modern economies, it is the driver of development. This subfield refers to the sources and nature of capital accumulated in society and the ways it is managed by the financial and banking system. The main indicators used in this subfield are: gross capital formation (level of investments in productive activities), gross savings (as a source of capital accumulation), volume of domestic credit, volume of foreign investment, bank capital to assets ratio. [Read more]
The gross capital formation in Romania is an indicator that has had an insignificant increase in the last 25 years (GDP’s dependence on investments is almost unchanged). The capitalization rate is relatively low in the Romanian economy, and this fact explains the strong link between the dynamics of exports (on the increase from 16.7% of GDP in 1990 to 42.2% in 2013) and the dynamics of imports (on the increase from 26% of GDP in 1990 to 42.7% in 2013). This situation sheds light on the constant and consistent trade deficit, especially during economic growth. Romania’s export orientation is limited by the fact that investment is directed especially towards sub-assembly manufacturing, which requires more imports. At the same time, imports of resources and goods are necessary, because of increased consumption. The cumulated result of these processes cancels a great part of the added value of exports.
Even though in Romania savings have increased constantly (especially after the crisis), the population’s low income does not allow consistent accumulation of capital. Deposits have a very low value in Romania (the value of 40% of deposits is under 5 euro), and the high-value deposits are concentrated in the hands of very few depositors (5% of depositors have 75% of deposits!). In this context, the total stock of foreign investments in Romania is slightly above 70 billion euro, while the overall foreign debt is over 92 billion euro. In 2016, Romania added just 5.6 billion euro to foreign capital stock, but most investments can be found in raw materials processing sectors (petrol, food, energy, etc.).
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