Poverty Profile Romania embarked on an historic transformation from a socialist system to a market economy in 1990, after a decade of harsh economic conditions and social distress. In the early years of the transition, the country realized a sharp economic contraction as it initiated economic and structural changes necessary for achieving sustainable growth and coped with the dislocation inherent in the break up of a centrally planned system. Not surprisingly, household welfare mirrored the decline in economic activity. Poverty increased over the transition, with the main reason being the sharp decline in economic output. The distribution of income worsened, but contributed less to the increase in poverty.
A precise definition of poverty is useful for the analytical purposes of this report. To this end, with the recognition that any poverty threshold is to an extent arbitrary, the report finds that about 21.5 percent of the population lives below a poverty line of 35,593 lei per person per month (April 1994 prices), or approximately US$3.30 per day.1 This level is approximately 50 percent of the mean per capita expenditure of the population.
Nearly half of the poor live with wage earners and the unemployed, while the rest reside in farm and pensioner households. The highest incidence of poverty, however, is among households headed by the unemployed (46 percent) and by farmers (40 percent). The poverty rate for pensioners (19 percent) and salaried workers (17 percent) households is far less. More specifically, the poor in Romania can be divided into two groups. The transient poor and the longer term poor.:
Transient poverty is concentrated among salaried workers and the unemployed. As noted above, nearly half of the poor live in households headed by salaried workers and the unemployed, with the majority (70 percent) living in working poor households. Urban women with one or two young children, and individuals with little labor market experience and secondary school education, are having the most difficult time getting employed.
Farmers and pensioners represent a longer term aspect of poverty. Most of these poor individuals (70 percent) live in households with pensioners and the remainder live in farm households. Although elderly rural women with low pensions are the poorest of all pensioners, they encompass only 19 percent of the poor.2 This pocket of rural poverty in the north of the country has remained intact over the transition.
Common Characteristics of the Poor — Despite the variations in the occupational and regional composition of poverty, poor individuals, and poorer regions and judets have many of the same characteristics (Chapter III). Poor households have fewer wage earning members (a lower activity rate), and relatively more non-working age members than nonpoor households. Although the poor spend about 80 percent of their total expenditures on food, they consume fewer calories (only 1,504 calories per day compared to 2,472 for the average population). They also own fewer durables and smaller plots of land.
Romania has among the lowest health indicators in Eastern Europe and the poor have the lowest health status in the country. Children in poorer rural areas also have a lower nutritional status.3 Low levels of education are prevalent among the poor. Children of poor households and those with less educated parents have lower enrollment rates at each level of education, particularly in rural areas.
Incentive and Regulatory Framework The government has pursued step wise deregulations of foreign and domestic prices. Though the domestic and foreign price liberalization program began in 1990, consumer prices have been "fully" deregulated (only in 1994) and the exchange rate has recently been liberalized. These ad hoc and step wise measures have fueled inflation rates that have been amongst the highest in Eastern Europe, reaching 300 percent per annum in 1993 before declining to 62 percent per annum in December 1994. Individuals faced an uncertain economic future and realized further declines in wages and fixed benefits.
The government adopted a strong stabilization program in 1993. The elimination of consumer subsidies allowed the budget, which showed a marked deficit (7.5 percent of GDP) in 1992, to realize a small surplus (0.1 percent of GDP) in 1993. In late 1993, the government supplemented its tight fiscal policy with a strict monetary policy and a liberalization of the exchange rate regime. These policies almost had immediate results. By December 1994, inflation fell to 62 percent, output grew by 4 percent, and exports increased by 24 percent in dollar terms. These favorable developments were sustained only partially through 1995. Inflation fell to 30 percent at year's end and growth rose to nearly 7 percent in 1995. However, these positive developments were overshadowed by an increase in the fiscal deficit to almost 3 percent of GDP by the end of 1995.
Despite the gradual progress of reform, the government has been active in providing a solid framework for the development of a market economy. The enactment of a Constitution guaranteeing property rights followed by establishing the legal framework for a market economy; the establishment of a two-tier banking system and development of indirect instruments of monetary control; the reform of the tax system including the introduction of the VAT; the development of a framework for privatization and corporatization of over 6000 enterprises, are some of the key achievements of the country to date
Public Programs and Public Expenditures4 The main purpose of government spending on cash transfers (child allowances and discretionary social assistance) and in-kind transfers, is to improve equity and reduce poverty. The unemployment benefit scheme is an insurance program that protects individuals against a short-term loss of income. Public spending on education and health is guided by both efficiency and equity concerns.
Total government spending on the three main cash transfer programs — pensions, child allowances and discretionary social assistance — declined from nearly 10 percent of GDP in 1990 to 8 percent of GDP in 1994. Most importantly, child allowances, the largest government cash transfer program (94 percent of all cash transfers, excluding pensions) decreased from nearly three percent of GDP in 1989 to less than one percent of GDP in 1994.
The decline occurred mainly because the government did not fully protect benefits against changes in the price level. Thus, the reduced protection to the poor as a result of a decline in food subsidies was exacerbated by reduced spending on cash assistance programs. On the positive side, in 1991 the government instituted an unemployment insurance program to protect workers laid-off or fired as a result of plant closings. In 1994, the program covered 500,000 unemployed and paid out benefits amounting to nearly 1 percent of GDP. Public spending on health and education (about three percent of GDP for each) has remained fairly constant over the transition, but is biased towards non-poor programs, the richest 20 percent of the population, and urban areas. It is also the lowest in the region. The government has recently increased spending on education to approximately 4 percent of GDP.
Poverty Strategy These findings indicate a considerable scope for reducing poverty in Romania by promoting economic growth and by targeting cash transfers and public investments more effectively and efficiently to the poorest households.
Promote economic growth: Sustained growth (along the levels of 4 percent and 7 percent, in 1994 and 1995, respectively) will be critical to poverty alleviation for wage workers and the unemployed. The basic strategy involves sound monetary and fiscal policies, a reduced role for government in financial and product markets, a market based price regime, and a more conducive environment for private sector growth.
In rural and agricultural areas where we find the highest incidence of poverty, agricultural sector reforms (encompassing land market development and increased private sector involvement in input supply, distribution and marketing), should help raise the agricultural growth rate, increase average incomes and reduce rural poverty.
Protect the poor through efficient and effective public transfers: The government initiated a new means-tested program in 1995 as a response to the low level of protection offered by previous transfer programs and their inefficiency in targeting the poorest groups. The new social assistance law has consolidated and phased out many discretionary social assistance benefits, linked the remainder of these benefits to income, simplified the claims procedure, and strengthened the delivery system. These measures can be more effective in reducing poverty through the following proposals:
- Monitor the efficiency and effectiveness of the newly instituted means-tested social assistance scheme. This new scheme guarantees a minimum income of 70 percent of the poverty line in the report or 45,000 lei per person (for a single person household) in 1996. Thus, if all individuals eligible for this program are correctly identified and all claim the benefit, the incidence of poverty would be significantly reduced.
- Improve the targeting efficiency of Child Allowances and Discretionary Social Assistance. The stipulation that all school age children be enrolled in school to collect benefits should be reconsidered (at least for secondary school education) given the low rates of enrollment of poor children. Changes in the delivery system of discretionary social assistance programs should continue to be monitored to ensure that new mechanisms for delivery of benefits and processing claims has increased the targeting efficiency of these transfers. Pockets of poverty amongst pensioners should be addressed through the means-tested social assistance system.
Invest in human capital: Investments in education and health will alleviate poverty and help reduce inter-regional disparities in income. The education sector has reduced the emphasis on vocational and technical education, and private educational institutions have been promoted. Curriculum changes are being made to ensure that graduates from the public education system are suited for a market economy. Health outcomes of the poor, in general, and the rural poor in particular, could be improved by a reallocation of spending from tertiary care (hospitals) towards improvements in the quality of primary health care, mainly in poorer and less well served rural regions, and towards investment in sanitation and water supply facilities.
Promote labor market policies that are pro-poor and conducive to economic growth: In the first few years of the transition steps have been taken to make labor markets more flexible and responsive to economic conditions. Restrictions on labor mobility have been eliminated and wages have been allowed to adjust to economic conditions. The government should consider additional measures to increase the flexibility of labor markets:
- Keep minimum wages low. Minimum wages provide protection to already employed workers and are likely to discriminate in favor of higher skilled workers. As a result, they may well create unemployment for younger and/or less skilled workers. Since unemployment is likely to increase over the transition, minimum wages should not be institutionalized in the private sector as they may discourage employment. In the public sector, minimum wages should be kept as low as possible.
- Phase out the Wage Subsidy Program. The wage subsidy program could be turned into a marginal employment subsidy program, targeting the long-term unemployed and secondary school leavers.
- Training programs should be responsive to labor market conditions. The government is currently promoting these programs, which would best serve unemployed workers by allowing them to acquire the necessary skills to re-enter the labor force.
Develop a more progressive tax system: A progressive tax structure should accompany the transfer and investment system. The tax structure in Romania appears very progressive, but the government could still raise revenues without worsening the distribution of income by taxing rent, petrol, tobacco, and public transport.
Statistical System The government has so far used the Family Budget Survey data for social policy, which is not a nationally representative data set. The government should therefore use the newly initiated and nationally representative Integrated Household Survey (see Annex 1), to derive minimum benefits, identify the poor and evaluate the incidence of public spending. The Statistical Office is committed to continuing the new household survey and has replicated it in 1995 and 1996. However, the ability of the household survey to measure agricultural and other self-employment income and to capture the incidence of public spending on education could be further improved. In addition, the survey could include a community price questionnaire to alleviate problems in constructing price indices.
Notes:
1. The line is based on a daily per capita intake of 2425 calories, considered the minimum daily nutritional requirement for Romanian individuals. For consistency, the consumption level of the second decile is chosen for tracing the evolution of poverty over the transition (Chapter II).
2. This is in comparison to 17 percent poor among individuals in wage earner households, 46 percent poor among unemployed headed household population, and 40 percent poor among individuals in households headed by farmers.
3. Ministry of Health, National Nutritional Survey, 1993.
4. Child allowances, health, and education, are universal benefits and as such are not targeted to the poor. Also, unemployment benefits are geared towards the short-term unemployed and are not designed to protect against long-term poverty. |
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