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Managing performance – The experience of the World Bank Mauritania Country Office

Romania: Boosting Competitiveness

Why and How?

Francois Rantrua

World Bank Country Manager for

Romania and Hungary

RCC Conference, Nov 1, 2012


Contents

I. Why focusing on competitiveness is so important

and urgent?

II. What did we learn from the crisis?

III. Increasing competitiveness in Romania: key areas

of action

IV. Making it happen

1


I. Why focusing on competitiveness is so

important and urgent?

2


Good news Less good news

20%

25%

30%

35%

40%

45%

50%

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

Romania GDP vs. average EU 27 GDP Evolution of competitiveness

(labor cost/productivity)

Source: Haver Analytics: RO=Romania; SL=Slovakia;

PL=Poland; CZ=Czech Republic; HU=Hungary 3


II. What did we learn from the crisis?

4


During 2000-08 Romania made important

progress towards EU convergence…

Income per capita rose from 25% to 45% between 2000

and 2008

Poverty fell (from 17% to 2% over similar period for a

$2/day poverty line)

Restructuring of old industrial sectors in underway

Trade and FDI increased once with the EU accession

5


…But growth was unbalanced and

unsustainable

Excessive growth in domestic demand – credit and short-term flows fueled private consumption and investment in non-tradable.

Price of tradable fell relative to non-tradable

Wages during these years grew faster than labor productivity

Leading to:

Unsustainable macroeconomic imbalances – current account, trade deficit, fiscal deficit

Competitiveness was eroded by wage increases above productivity gains

Source: OECD, taken from Dimitru (2012) 6


The crisis hit Romania so hard because of

unsustainable growth model…

Pro-cyclical fiscal policy (fueling

rather than preventing

overheating)

Insufficient structural reforms in key

areas:

Not enough competition and

private sector development

Public sector efficiency (revenue

collection, capital spending)

Energy and Transport obstruct

growth

Insufficient job creation

Informality

Declining population and

ageing labor force

Productivity level (1000 Euro/employee) in

2010

Source: World Bank staff elaboration based on Eurostat

7


III. Increasing competitiveness in

Romania: key areas of action

8


Beyond macroeconomic stability, we need to

focus on the pillars of growth In

clus

ion

Sus

tain

ability

0. Safeguarding Macroeconomic

Stability

1. Enhancing competition

and the regulatory environment

2.1. Modernizing

the public sector

2.2.

Improving the performance

of SOEs

3. Improving energy/

transport infrastructure

4. Transforming

the rural economies

5. Improving labor market functioning and skills

9


Competition… There is significant room for

improvements in business environment

Context

In the 2013 Doing Business survey ranks Romania 72nd out of 185 countries

Efforts to date

Functioning Competition Council

Some steps to simplify tax compliance (electronic filling)

Ease the process of opening a company and get credit

Reform Agenda

Market deregulation and remove key constraints

Reduced state participation in economic activities

Enhanced competition in all markets

1.Competition

DB

2013

Starting a

Business

Construction Permits

Registering Property

Getting Credit

Protecting Investors

Paying Taxes

Trading Across

Borders

Enforcing Contracts

Closing a Business

United Kingdom 7 19 20 73 1 10 16 14 21 8 Germany 20 106 14 81 23 100 72 13 5 19 Estonia 21 47 35 14 40 70 50 7 31 72 Latvia 25 59 113 31 4 70 52 16 24 33

Lithuania 27 107 48 5 53 70 60 24 14 40 France 34 27 52 146 53 82 53 27 8 43 Spain 44 136 38 57 53 100 34 39 64 20 Slovak

Republic 46 83 46 8 23 117 100 98 69 38 Hungary 54 52 55 43 53 128 118 73 16 70 Poland 55 124 161 62 4 49 114 50 56 37 Czech

Republic 65 140 74 27 53 100 120 68 79 34 Bulgaria 66 57 123 68 40 49 91 93 86 93

Romania 72 68 129 72 12 49 136 72 60 102 Italy 73 84 103 39 104 49 131 55 160 31

Greece 78 146 31 150 83 117 56 62 87 50 Ordered by the overall DB 2013 ranking; in blue, the oldest EU Member States

10


The productivity dividends of increasing

competition is particularly high for some sectors

0 10 20 30 40 50

Air transport

Manufacture of pulp, paper and paper products

Manufacture of food products and beverages

Hotels and restaurants

Recycling

Other mining and quarrying

Manufacture of other transport equipment

Manufacture of wood and wood products

Manufacture of other non-metallic mineral products

Fishing

Manufacture of basic metals

Mining of coal and lignite; extraction of peat

Percent

12 Source: World Bank staff working paper: COMPETITION AND PRODUCTIVITY GROWTH: An Empirical Assessment for Romania Using Sector-Level Data.

Prepared by Donato De Rosa, Mariana Iootty and Ana Florina all ECSPF, The World Bank.

Estimated increase in average annual productivity growth by sector in Romania given a 10%

increase in competitive pressure over the 2003-2008 period

Legend:

Service sectors

Agri-business

Heavy manufacturing /industry

11


Public sector…Many gradual reforms to

modernize the public sector with good results

Context

Still does not compare well against MICs (on

broad indicators of government effectiveness,

regulatory quality, corruption and rule of law)

Sustained high growth needs an increasingly

capable, credible and committed government”

(from Growth Commission Report, 2008)

Efforts to date

Functional Reviews

Fiscal budgetary strategy

Reform Agenda

Policy management and coordination

Public expenditure management

Revenue management

Human resources management and administrative

capacity

Government effectiveness lags far behind other EU

countries (percentile rank, best rank is 100)

Source: The Worldwide Governance Indicators, 2011 Update.

0

20

40

60

80

100 Accountability

Political Stability

Government Effectiveness

Regulatory Quality

Rule of Law

Control of Corruption

Bulgaria Poland Romania

12

2.1.

Public sector


Public sector…Efficient and competitive SOEs that

contribute to overall investments, revenues, exports,

and growth

Context

About 700 SOEs managed by different agencies and ministries

They have dominant position in many sectors, such as energy (53% of the activity), transport and storage (34%) and mining and quarrying (27%)

Account for about 10% of GDP in revenue and 15% of government employment

Financial performance is very weak (arrears of over 3% of GDP)

Distribution of SOE by sector

0 50 100

Energy and gas

Transport and storag

Mining and quarrying

Defense

Water supply, sewerage and waste …

Agriculture, forestry and fishing

Postal and courier activities

Other services

Audit, research and consulting

Chemical industry

Construction

SOE actitivity (in % of total SOE economic activity)

SOE actitivity (in % of total economic activity)

Efforts to date

Initial steps in corporatization of most SOEs, including IPOs

Hard budget constraints

Reform Agenda

Continued hard budget constraints

Improved sector policies (e.g., energy)

Strong implementation of corporatization/privatization agenda

13

2.2.

SOEs


Energy sector… should be an important

engine of growth in Romania

Context

A good start to realize this potential occurred before 2007 with the initial privatization and liberalization efforts

The sector responded by reducing energy intensity and consumption during the1990s (when economy was restructuring)

But currently the power and gas sectors are only half liberalized and greater transparency/efficiency in SOEs is needed; private investment flows halted

Efforts to date

A new Energy and ANRE Laws were adopted

Roadmaps for electricity and gas prices approved

Restructuring of SOEs in the sector initiated

Reform Agenda

Promote private investment (e.g. to modernize power plants)

Swift implementation of corporate governance agenda (professional management, good governance practices)

Continue liberalization of power and gas tariffs and markets

Improve safety nets to protect poorest households

Continue to exploit the potential for attracting investments into renewable energy

14

3. Energy policies


Transport… A well functioning transport system is

needed to realize Romania’s growth potential

Context

Significant SOE present (23) in the transport sector

The four largest SOEs are among the top 10 Romanian

arrears generators (e.g., road system development and

O&M, railway infrastructure, rail passenger service, and

rail freight operations).

Efforts to date

Process of appointing management, boards of SOEs

Reform Agenda

Improving efficiency of SOEs is the key reform agenda

(central to improving the transport system and the overall

sector performance)

Once addressed, the medium-term reform agenda can

move into more sophisticated issues (e.g., multimode issues,

PPPs, attracting FDI into logistics, port performance)

160

140

120

100

80

60

40

20

0

3. Transport

policies and infrastructure

15

Quality of Overall Infrastructure (rank out of

142 countries)

Source: World Economic Forum (2011)


Rural economies…Properly exploited labor can be

employed more productively, on and off farm

Context

Romania is one of the best endowed European countries (about 40 percent of the country is arable)

But average crop yields in Romania are very low (half of EU27); and yields for dairy and meat are falling

Efforts to date

Clear progress toward accessing CAP funds; yet the absorption rate needs to be improved

Smaller and middle farms have been releasing land to the benefit of larger units

Reform Agenda

An integrated Agricultural and Rural Development Strategy is needed, including:

Accelerate land tenure legislation

Rural infrastructure

Wholesale markets and networks

Agricultural research and development

4. Rural economies

16


Labor market…Quality of education should be a

priority in Romania

Context

Romania faces two major labor market

challenges: Raising the employment rate and

upgrading the skills of its workforce.

Efforts to date

New Labor Code

Ongoing work on Social Code

Reform Agenda

Continue to focus on improving skills and

enhancing the flexibility of the labor market:

Education and in-house training by employers

Tighten oversight of universities and schools

to improve quality

Expand access for poorer students,

especially from rural areas and for Roma

Need strong public/private partnerships (and

smart incentives)

5. Labor market

17

Source: Enterprise Surveys (http://www.enterprisesurveys.org/) and World

Bank staff calculations.

http://www.enterprisesurveys.org/

http://www.enterprisesurveys.org/



18



1. Need for understanding the urgency to act

2. Strong political commitment, including cross-party line, and

coordination of the reforms

3. Developing a vision and a strategy in line with the pillars

of the next EC- WB- IMF programming period

4. Communicating the vision and empowering employees to

generate strong public and private ownership of the

reforms

5. Generating short-terms wins

19


Thank you!

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