Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized INTERNATIONAL DEVELOPMENT IN FOCUS Markets and People Romania Country Economic Memorandum © 2020 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202- 473- 1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 23 22 21 20 Books in this series are published to communicate the results of Bank research, analysis, and operational experience with the least possible delay. The extent of language editing varies from book tobook. This work is a product of the staff of The World Bank with external contributions. The findings, interpre- tations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Contents Acknowledgments vii Executive Summary ix Abbreviations xiii Overview 1 Drivers of growth 5 Competition: Allocating resources more efficiently 10 Human capital: Forming present and future workers 15 Notes 20 References 21 CHAPTER 1 Productivity 23 Estimating productivity 24 Leaders and laggards 27 Productivity drivers: Within-firm improvements and reallocation effects 32 A policy agenda 35 Annex 1A: Measures of productivity 37 Annex 1B: List of 2-digit sectors 38 Notes 39 References 39 CHAPTER 2 Romania’s Product Market Regulations 41 Benchmarking product market regulations 42 Regulations with economywide effects 44 Sector- specific regulations 49 Boosting growth with procompetition reforms 55 Notes 56 References 58 CHAPTER 3 State Ownership and Competitive Neutrality 59 The SOE sector in Romania 60 Romanian SOEs hold significant market positions 61 Regulations and policies protect SOEs from competition 66 Romania lacks an economic test for government intervention through SOEs 72 Reducing anticompetitive market outcomes 73 Notes 75 References 77 iii iv | MARkETS AND PEOPLE CHAPTER 4 Romania’s Human Capital Deficit 79 Measuring Romania’s human capital 81 Estimating the subnational HCI for Romania 82 Lagging the rest of the EU 83 Regional disparities are driven by education, more human capital for girls, and a wide urban-rural divide 84 Annex 4A: Human Capital Index for Romania: Data and methodology 92 Notes 95 References 96 CHAPTER 5 Closing Learning Gaps in Primary and Secondary Education 97 Learners: Performance is characterized by systemic gaps and disparities 99 Teachers: Challenges in recruitment, deployment, and motivation 101 School management: Driving toward greater professionalization 103 School inputs: Skewed funding mechanisms and allocations 104 Improving school performance in Romania: Suggested policy actions 105 Notes 11 0 References 11 0 CHAPTER 6 Romania’s Skills Challenge 113 Multiple causes for skills mismatches 114 Quantity of general education 114 Levels of skills 115 Quality of education 11 6 Skills specialization 117 Economic activity and labor demand 118 The changing nature of work 11 9 Asymmetry of information 120 Sociocultural influences 121 Responding to skills mismatches with work-based training 122 Workplace training practices: Case study evidence 123 Identifying opportunities to respond to the challenges 124 Concrete steps to overhaul Romania’s skills-development system 126 Notes 129 References 130 CHAPTER 7 Policy Recommendations 133 Market competition 133 Human capital 138 APPENDIX 145 Boxes O .1 The firm as a central actor of economic growth 7 1.1 Management capabilities and firm productivity 36 2 .1 Product market regulation methodology: Economywide score 43 2.2 Tackling entry restrictions in professional services in Romania 53 2.3 Tackling price regulation and estimating benefits to the service users 54 3.1 The Sovereign Fund for Development and Investments 68 3.2 Corporate governance of Romania’s SOEs 69 3.3 State aid in Romania 71 5.1 Conceptual framework from the World Development Report 2018 98 6 .1 Taking training to the workplace in Romania 125 Contents | v Figures O .1 Romania’s GDP growth, 1990–2018 2 O.2 Growth drivers (demand side) in Romania, 2013–17 2 O.3 Growth drivers (supply side) in Romania, 2013–17 3 O.4 Structural change in the composition of gross value added, Romania, 1995–2018 3 O.5 Changes in employment and productivity shares by industry, Romania, 2018 versus 2009 4 O.6 Industry distribution of exports, 1996–2018 4 O.7 Labor productivity in Romania relative to the EU-15, 2000–17 5 O.8 Shares of growth attributable to TFP, labor, capital, and other factors during four periods, 1990–2018 6 B O .1.1 A model economy 7 O.9 GDP per capita (2011 PPP adjusted) versus economywide PMR indicator 12 O .10 GDP per capita (2011 PPP adjusted) versus PMR subcomponents 12 1.1 Average annual growth rate of median productivity values, 2011–17 (manufacturing versus services) 26 1.2 Average annual growth rate of productivity dispersion values, 2011–17 (manufacturing versus services) 27 1.3 Average differences in firm characteristics, 2017 28 1.4 Labor productivity growth: Frontier versus laggards, 2011–17 29 1.5 TFPR productivity growth: Frontier versus laggards, 2011–17 30 1.6 Churning at the frontier 32 1.7 Average employment growth across the firm TFPR markup-adjusted distribution; all firms: Deviation from the 2011–17 average 32 1.8 Average employment growth across the firm TFPR markup-adjusted distribution: Manufacturing versus services, deviation from the 2011–17 average 33 1.9 Olley and Pakes decomposition of TFPR adjusted, 2011–17, accumulated percentage change 33 1.10 Olley and Pakes decomposition of TFPR adjusted, 2011–17, annual percent change 34 1 .11 The national productivity system 35 B 2 .1.1 Economywide PMR methodology 43 2 .1 Product market regulation in Romania and comparator countries 45 2.2 Restrictiveness of state control regulation in Romania and comparator countries 45 2.3 Romania: State control indicator composition 46 2.4 Regulatory barriers to entry and rivalry in Romania and comparator countries 47 2.5 Romania: Regulatory barriers to entry and rivalry indicator composition 47 2.6 Regulatory barriers to trade and investment in Romania and comparator countries 48 2.7 Regulations in network sectors (energy, telecom, and transport): Overall score in Romania and comparator countries 49 2.8 Restrictive regulations in network sectors 50 2.9 Are there any special regulations prohibiting or restricting sales below costs beyond a prohibition of predatory pricing? 51 2 .10 Are sales promotions restricted to appear within a particular period of the year? 52 3.1 Probability of an SOE operating in a sector or subsector 62 3.2 Factors related to market