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The Pandemic and the Standard of Living

The Pandemic and the Standard of Living

A recent report was issued by the Research Institute for Quality of Life of the Romanian Academy, titled The pandemic and the standard of living. Social policies. Its authors were Daniel Arpinte, Sorin Cace, Simona Mihaiu, Iulian Stanescu, Simona Maria Stanescu and Sebastian Toc.

The main objectives of the report were to identify the social outcomes of the coronavirus (Covid-19) pandemic and to provide public policy recommendations.

Romania faces two crises at the same time: first, the health crisis, deals with the evolution of the pandemic and its duration remains unpredictable. The second crisis deals with the economy. Unlike the health crisis, which produces immediate outcomes, the economic crisis has social outcomes that have just begun to be felt and that will be visible in the near and medium term.

The report looks into two kinds of issues: (1) socio-economic issues caused by the coronavirus pandemic and (2) structural issues of Romanian society. During the economic growth period of the last decade, the latter were largely overlooked. Under the shock of the pandemic, we expect the structural issues to (re)emerge and become more pressing.

In order to figure out what could lie ahead in this very dynamic period, the report features an overview of Romania’s past crises and their lessons. One of the lessons: returning to the purchasing power of salaries and pensions prior to the crises takes at least half of a decade, even though other indicators return to pre-crisis levels. Therefore, a purely GDP/capita and productivity oriented reading of past crises does not reveal the whole truth with regard to the impact on society, whose members feel the effects for much longer. We conclude that the most difficult period for the standard of living will be after the health crisis passes or subsides. Romania’s difficult fiscal position at the start of 2020 further narrows the policy options.

Population income was analyzed by its two components: primary and redistribution income. The issues covered include: the outcome of Romania’s economic model on primary income; income distribution, especially salaries; income inequality, risk of poverty; the social strata that experienced income decline during the pandemic and lockdown period.

The report looked into the two components of the social protection system in Romania: social insurance and social work, the main sources of redistribution income. The main issues facing both are reviewed and policy recommendations put forward.

Social insurance (old age & disability, healthcare, unemployment) covers roughly 75% of the social protection spending in Romania. The report’s main recommendations include:

= Increase of unemployment benefit to RON 1,000 per month (EUR 208), up from less than EUR 100 at the moment, time limited for the next 3-6 months; this would return the unemployment benefit to 75% of the minim net salary; the policy would be reviewed after 3-6 months based on the pandemic dynamic;

= The (re)introduction of the unemployment insurance contribution by both employees and employers;

= Universal access to the public healthcare system, which is nearly universal at the moment;

= The (re)introduction of the healthcare insurance contribution for pensioners with monthly income above RON 3,200 (EUR 666), the average net salary.

The social work section also looks into the new vulnerable groups during the pandemic. The main policy recommendations for social work:

= Increase of the minimum income guarantee to RON 1,000 (EUR 208) per month per household/person, time limited for the next 3 months; this amount is about 75% of the minimum net salary;

= Emergency aid benefits administered by local government to be boosted by central government funds for the next 3 months;

= Review and revise the social work law to strengthen social protection in the difficult years ahead; the current law was passed during the austerity policies from 2010-2012 and is no longer fit for purpose;

= Restart from scratch in the drafting of the social policy documents for the EU multiannual financial framework 2021-2027 (MFF).

The stimulus for the economy and the financing of social protection entails dealing with the public deficit (public sector borrowing requirement). The main policy recommendations include:

= External loans and financing:

- Intense political initiatives at EU level for economic support of Central and Eastern Member States that are not part of the Eurozone, such as Romania (unused EU funds, reallocation of funds from ongoing programmes, European Central Bank purchase of gilts issued by EU, non-eurozone member states);

- Immediate talks with the IMF for a stand-by loan: the government has to try to get the best terms from the IMF (i.e. break with austerity policies from past IMF loans);

- Talks for loans from the EIB, the EBRD, the World Bank group, and other such multilateral development banks to finance major infrastructure investment projects to restart the economy.

= A solidarity tax for a limited time period of up to a year;

= Pension and public salary policies:

- Postponement or cancellation of the 2019 pension law; increase of pensions only to keep up with inflation instead of the circa 40% increase mandated by the current law for this year;

- Public sector wage law: increase of wages in the public sector only to keep up with inflation;

- The return of local government employees in the national public sector salary system.

The last chapter deals with social behavior concerning the lockdown period, social control and other specific issues. Recommendations feature ways to foster physical and social distancing, the prison system, and maintaining the public’s support for the lockdown period by better updating the government communications strategy and providing an exit strategy.

 

Photo credit: People vector created by pikisuperstar

 
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OEconomica No. 1, 2016