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ROMANIA’S PATH TO PROSPERITY
Systematic Country DiagnosticOnline Consultations
October 18 – November 30, 2017
OUTLINE OF PRESENTATION
1
1. Purpose and Process of the Systematic Country Diagnostic (SCD)
2. Romania Country Context
3. Recent Poverty and Shared Prosperity Patterns
4. What Should Romania Do to Boost Its Long-Term Growth Potential?
5. How Can the Benefits of Growth Be Spread More Equitably Across Society and Regions?
6. How Can Growth Be Made Environmentally Sustainable?
7. How Can Institutions be Strengthened to Achieve Sustainable and Equitable Growth?
PURPOSE AND PROCESS OF THE SCD
2
The purpose of the SCD is to identify a set of priorities through which a country may most
effectively and sustainably reduce poverty and increase shared prosperity;
SCD will help the World Bank Group define its strategy for Romania for the period 2018-
23 as part of a new Country Partnership Framework;
SCD takes stock of key development challenges in Romania and progress attained;
SCD identifies and, where possible, fills in the existing knowledge gaps;
SCD process includes intensive consultations with key stakeholders across private sector,
civil society, academia, local and national public authorities and other sectors.
SOCIAL AND REGIONAL
DISPARITIES
LARGE INFRASTRUCTURE
GAP
HIGH LEVEL OF POVERTY
INCOMPLETE INSTITUTIONAL CONVERGENCE
HOW CAN ROMANIA REACH THE TWIN
GOALS OF REDUCING POVERTY
AND ENHANCING SHARED
PROSPERITY?
Boosting the Economy’s Growth
Potential
Making Growth More Inclusive
Greening Growth
LOGICAL FRAMEWORK
Strengthening Institutions
DEMOGRAPHIC CHALLENGES
LOW QUALITY OF GROWTH
A CONDITIONAL SUCCESS IN REDUCING MACROECONOMIC
VULNERABILITY
ROMANIA’S CONVERGENCE WITH THE EU-28 IS STILL SOME WAY OFF
5
Czech Republic
Slovakia
Hungary
Poland
Romania
Bulgaria
EU-28
Portugal
25
35
45
55
65
75
85
95
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
GDP per capita, EU-28 =100 (PPS)
Source: Eurostat, projections 2017-2020 based on the last five-year growth average
Number of years to achieve convergence with EU-28
Romania’s growth rate
Number of years
4% 29
5% 19
6% 14
7% 11
8% 9
Source: WB staff calculations based on Eurostat data on GDP per capita in PPSNote: Annual growth rate of EU-28 is equal with EU-28 last five-year growth
POOR QUALITY OF GROWTH
6
-5
-3
-1
1
3
5
7
9
2010 2011 2012 2013 2014 2015 2016
in percentPublic ConsumptionGross fixed capital formationPrivate ConsumptionNet exportsGDP
Contributions to Annual GDP Growth(expenditure approach)
Source: Eurostat, WB staff calculations
• Consumption is the main driver of growth while the weak performance of investment negatively affects the potential of the economy.
• Romania’s external position has improved, but recent consumption boom has reversed the trend.
• Pro-cyclical fiscal behavior widened the fiscal deficit and threatens the stability of public debt.
SECTORAL DRIVERS OF GROWTH REFLECT THE STRONG PERFORMANCE OF PRIVATE CONSUMPTION
7
Contributions to Annual GDP Growth(production approach)
Source: Eurostat, WB staff calculations
• Wholesale and retail trade are driving growth in recent years reflecting robust domestic demand
• Romanian ICT is one of the main contributors to growth and the 5th largest (as % of GDP) in the EU as of 2016.
• Romanian agriculture still has a higher impact on GDP growth compared to regional peers.
-6
-4
-2
0
2
4
6
2010 2011 2012 2013 2014 2015 2016
in percent
Wholesale and retail trade, transport, accomodation and food service activitiesInformation and communicationIndustryProfessional, scientific and technical activities; administrative and support service activitiesConstructionAgriculture, forestry and fishing
A PRECARIOUS SUCCESS IN REDUCING POVERTY AND SHARING
PROSPERITY
PROGRESS IN POVERTY REDUCTION
9
7000
7500
8000
8500
9000
9500
10000
10
15
20
25
30
35
40
45
50
$5/day poverty (2005 PPP)At risk of poverty or social exclusion (AROPE)Anchored at-risk-of-poverty rateGDP per capita (constant 2005$) (right axis)
Source: WB ECAPOV, WDI and EUROSTAT Source: WB Staff estimation using EU-SILC 2013
• Success in poverty reduction in the last decade
• Poverty reduction was partially reversed by the crisis
• Poverty remains the highest in the EU, significantly higher than in Bulgaria, Poland
Poverty at $5/day
LARGE DISPARITIES PERSIST ACROSS SOCIAL GROUPS AND ACROSS REGIONS
10
Poverty rates by occupational status: self-
employed, unemployed, inactive vs employees
Poverty for people with primary education is ten times higher than for people with tertiary education;
70 percent of Roma vs 25 percent general pop are poor.
At-risk-of-poverty rate by NUTS3 region, 2011
Source: World Bank, 2016.
SYSTEMATIC COUNTRY DIAGNOSTIC PILLAR I
BOOSTING THE ECONOMY’S GROWTH POTENTIAL
GROWTH HAS BEEN DRIVEN BY PHYSICAL CAPITAL
ACCUMULATION AND EFFICIENCY GAINS (TFP)12
6880
50
3
3
-1
-22 -22-5
5038 56
1
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000-2016 2000-2008 2009-2016
Sh
are
of
Re
al G
DP
Gro
wth Capital Stock (α * gK)
Labor ((1-α) * gL*)
Human Capital per Labor ((1-α) * gh)
Total Factor Productivity(gA)
Total Period
Source: World Bank calculations, based on a human capital adjusted Solow model
Efficiency gains (TFP) have been an important driver of Romania’s growth (transition to a market economy)
A higher growth trajectory can be attained with more and better investment in physical and human capital and productivity improvements within firms (competition, skilled labor and technological upgrading)
CORRECTING MISALLOCATION OF RESOURCES WOULD INCREASE AGGREGATE PRODUCTIVITY
13
2.78
2.06
0.22
2.19
1.71
0.53
0.0
0.5
1.0
1.5
2.0
2.5
3.0
State Control Barriers toEntrepreneurship
Barriers to Trade andInvestment
Romania OECD Average
In Romania misallocation is likely due to weak competition in regulated sectors with spillovers for the rest of the economy.
Source: OECD indicators of product market regulation (PMR) 2013.
Product market regulation index (0-6 from the least to most restrictive)
REMOVING BARRIERS TO AGGLOMERATION OF ECONOMIC ACTIVITY IN REGIONAL GROWTH POLES WOULD INCREASE AGGREGATE PRODUCTIVITY
14
.
0
20,000
40,000
60,000
80,000
100,000
120,000
Bu
lgaria
Ro
man
ia
Latvia
Hu
ngary
Eston
ia
Po
land
Lithu
ania
Po
rtugal
Czech
Re
pu
blic
Sloven
ia
Cro
atia
Slovakia
Gre
ece
Spain
Un
ited
Kin
gdo
m
Germ
any
Finlan
d
Italy
Au
stria
Ne
therlan
ds
Swe
de
n
Den
mark
France
Belgiu
m
Irelan
d
PP
S
National Primary city Secondary cities
Romania’s secondary cities are lagging
Source: Eurostat. Note: GDP per Employed person (PPS) in 2014, employed persons include both employees and the self-employed.
Cities and functional urban zones are performing below their economic potential
REMOVING CONTRAINTS TO WITHIN-FIRM PRODUCTIVITY
15
Romania is a modest innovator
34
3.5.1. RESEARCH AND INNOVATION (R&I)
Structural shortcomings in the R&I system are
holding back its growth contribution. Structural
challenges to R&I remain unchanged (European
Commission, 2016a). These include insufficient
funding, institutional fragmentation, low quality of
the public science base, and weak public-private
collaboration. In 2015, the European Innovation
Scoreboard (European Commission, 2016j) placed
Romania in the lowest country category ('modest
innovator'), with scores well below the EU average
on all dimensions and indicators (Graph 3.5.1).
The lack of dynamism in R&I has implications for
long-term competitiveness and growth prospects.
Graph 3.5.1: Innovation performance of EU Member States
in 2015
Source: European Commission EIS2016
R&D intensity improved but the lack of
investment impedes R&I capacities take-off.
Although R&D intensity (56
) improved in 2015
(Graph 3.5.2), Romania still has one of the lowest
levels among EU Member States. Out of the total
2014-2020 structural funds allocated only 3.4 %
were allocated for R&I, far from the EU average of
10.6 % for the same period. The 2016 budget
provided for a slight increase in public R&D
expenditure up to 0.29 % of GDP, largely
(56) Research and development (R&D) is the statistical proxy
for expenditure in the R&I system (Eurostat). Intensity is
measured as R&D expenditure in percent of GDP.
insufficient to reach the 1 % of GDP target of
public investments in R&D (57
) by 2020.
Recently adopted measures to stimulate
business investment have yet to gain traction. In
2015, less than 200 business entities applied for
the 50 % supplementary corporate tax deduction
for R&D expenditure, even fewer than the 223
entities in 2014. Despite the slight increase in
business R&D intensity in 2015, at 0.21 % of GDP
it is still one of the lowest in the EU. To stimulate
business R&D activities, the government
introduced in August 2016 an exemption from
paying the salary income tax for all R&D
activities. Also, to stimulate the activity of
computer programmes development, a measure of
payroll taxes exemption was set up and is in place
starting with 2017, for employees in start-ups with
main activity in this area.
Graph 3.5.2: Evolution of business R&D intensity and public
R&D intensity in Romania, 2000-2015
Source: European Commission
Pervasive bottlenecks obstruct SMEs'
investment in innovation. SMEs have a low level
of innovation and knowledge flows between public
R&D and the business sector (Graph 3.5.3) are
weak, as borne out by Romania ranking at the
bottom of the 'Linkages & Entrepreneurship'
dimension of the Scoreboard (58
). Red tape, poor
(57) Romania's Europe 2020 target is 2 % of GDP investments
in R&D, with 1 % from the public sector and 1 % from the
private sector.
(58) It covers performance indicators on SMEs innovating in-
house, innovative SMEs collaborating with others and
public-private scientific co-publications.
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
RO
BG
HR LV LT PL
SK
HU
ES EL
PT IT CZ
MT
EE
CY SI
EU
FR AT
LU UK
BE IE NL
DE FI
DK
SE
Innovation leaders Strong innovators
Moderate innovators Modest innovators
0.0
0.1
0.2
0.3
0.4
0.5
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
%GDP
Public R&D intensity
Business R&D intensity
3.5. SECTORAL POLICIES
In Romania within-firm
productivity improvements and
the ability to move up global value
chains are constrained by:
➢ underdeveloped infrastructure,
➢ inadequate skills and
➢ a scarce propensity to innovate
Source: European Commission, EIS2016.Note: Summary Innovation Index calculated as the unweighted average of the re-scaled scores for all indicators
INCREASING THE QUANTITY AND QUALITY OF CAPITAL AND LABOR KEY FOREXPANDING THE PRODUCTION
16
0
10
20
30
40
50
60
70
80
90
Ital
yR
om
ania
Cro
atia
Be
lgiu
mG
ree
ceB
ulg
aria
Po
lan
dM
alta
Luxe
mb
ou
rgH
un
gary
Ire
lan
dFr
ance
Slo
ven
iaSl
ova
kia
EU2
8C
ypru
sP
ort
uga
lSp
ain
Cze
ch R
epu
blic
Lith
uan
iaFi
nla
nd
Au
stri
aLa
tvia
Un
ite
d K
ingd
om
Esto
nia
Ger
man
yN
eth
erla
nd
sD
en
mar
kSw
ede
n
% o
f p
op
ula
tio
n
Total Male Female
Infrastructure quality vs. investment expenditure Romania has one of the lowest activity rates in Europe
Source: Eurostat, World Competitiveness Report 2014-2015 Source: Eurostat Note: Activity rates for population aged 15-64 in EU countries (2016)
CHALLENGES TO BOOSTING THE ECONOMY’S GROWTH POTENTIALKEY QUESTIONS WHERE WE SEEK YOUR VIEWS
17
How can Romania allocate resources better across sectors and firms?
What are the barriers to the economic activity in regional growth poles?
What are the incentives for Romanian firms to become more innovative and productive?
What would increase the quality and quantity of capital and labor force in the Romanian economy?
SYSTEMATIC COUNTRY DIAGNOSTIC PILLAR II
MAKING GROWTH MORE INCLUSIVE
POVERTY REDUCTION WAS DRIVEN BY PENSIONS AND LABOR INCOME
19
Source: WB staff estimation using EU-SILC
❖ Pensions and labor income contributed to poverty reduction before the financial crisis
❖ Jobs (labor income) are generally the most important and sustainable driver of poverty reduction
❖ Market income can be boosted by investing in the productive capacity of households, providing more and better employment opportunities, and by addressing constraints to the efficient use of human capital, land and other assets.
Drivers of poverty reduction
ENHANCE THE PRODUCTIVE CAPACITY OF HOUSEHOLDS
20
Source: Eurostat
❖ Romania has one of the highest early school-leaving rates in the EU, which impacts the Roma in particular
❖ But disparities start early in kindergarten: 88% Romania vs 95% EU-average
❖ On health, infant mortality is three times the EU average, mortality from non-communicable diseases is among the highest, life expectancy is among the lowest
Early leavers from education and training(age group 18-24)
INCREASE LABOR FORCE PARTICIPATION AND ACCESS TO BETTER JOBS
21
Source: World Bank, forthcoming
❖ Lack of employment opportunities and low labor earnings have a strong association with poverty
❖ Labor force participation is particularly low among women, the youth and the Roma
❖ The Roma face systematic challenges in access to services and employment
Employment and gender gap by income
ENHANCE RETURNS TO PRODUCTIVE ASSETS
22
Source: Eurostat
❖ While many Romanians migrate externally, internal mobility is the lowest in the EU;
❖ Severe lack of service provision in rural areas: 87% lack public water supply, 96% lack
public sewerage One of the lowest road network density
in the EU Physical infrastructure for education,
health on downward trend
❖ Formalization of land ownership could increase returns to capital (only 15% of rural and 51% of urban real estate is registered in Romania).
% Population that moved in the last five years
THE TAX-BENEFIT SYSTEM CAN HELP REDUCE POVERTY AND INEQUALITY
23
Source: Eurostat
Poverty before and after social transfers
❖ In Romania, social transfers are not effective in reducing poverty.
❖ Low targetingHigh prevalence of categorical
programs: many funds go to non-poor households.
❖ Sustainability and adequacy of pensions.
CHALLENGES TO POVERTY REDUCTION AND INCLUSIONKEY QUESTIONS WHERE WE SEEK YOUR VIEWS
24
What are the main constraints for reducing early school leaving?
What are the main constraints for increasing labor force participation in Romania?
What are the constraints to increasing returns to labor and capital?
What are the challenges for Roma inclusion?
What are the challenges to improving the effectiveness of social transfers for poverty reduction?
SYSTEMATIC COUNTRY DIAGNOSTIC PILLAR III
GREENING GROWTH
LINKING ECONOMIC AND ENVIRONMENTAL POLICIES TO LEVERAGE NATURAL RESOURCES AND TRANSITION TO LOW-CARBON ECONOMY
26
Source: Environmental Performance Index 2016
Romania performs better in ecosystem vitality than in environmental health
❖ Environmentally sustainable growth is a priority for Romania
❖ Romania does well in climate and energy (carbon intensity), agriculture (nitrogen use), and forests (tree cover) but scores worse in environmental health: health impacts (environmental risk exposure), air quality (household air quality and air pollution), and water and sanitation (drinking water quality and unsafe sanitation)
LINKING ECONOMIC AND ENVIRONMENTAL POLICIES TO LEVERAGE NATURAL RESOURCES AND TRANSITION TO LOW-CARBON ECONOMY
27
Source: Eurostat
Romania’s greenhouse gas emission
❖ Romania made progress in reducing greenhouse gas emissions thanks to structural transformation of economy.
❖ Romania lags in measures of air and water pollution management, waste management, biodiversity conservation and natural resources protection.
❖ Insufficient climate change adaptation actionso Prevention of flooding, reduce impact of
droughts.
TRANSITION TO CIRCULAR ECONOMY
28
Source: Eurostat Resource productivity=GDP/domestic material consumption (EUR/kg).
Romania has the second-lowest resource productivity in the EU
❖Romania has the second-lowest resource productivity, the worst waste intensity and the second-lowest recycling rate in the EU
❖ Institutional failures related to the revision of national waste prevention program and adaptation of national measures on waste management and prevention led to repeated actions by EU institutions
CHALLENGES TO MAKING GROWTH ENVIRONMENTALLY SUSTAINABLE
KEY QUESTIONS WHERE WE SEEK YOUR VIEWS
29
How can Romania make better use of its natural capital?
What are the constraints to improving climate change adaptation?
What are the main challenges to transitioning to a circular economy?
How can environmental health outcomes be improved?
What are the challenges to the planning and administrative capacity of the public sector?
SYSTEMATIC COUNTRY DIAGNOSTIC PILLAR IV
STRENGTHENING INSTITUTIONS
QUALITY OF ROMANIAN INSTITUTIONS LAG EUROPEAN STANDARDS
31
Source: World Governance Indicators
Romania and the EU in several dimensions of governance
❖ Romania lags in all dimensions of governance, although more in some than others.
❖ Significant lags observed in government effectiveness, control of corruption, voice and accountability, and rule of law.
COMMITMENT TO POLICY, COORDINATION ACROSS STATE FUNCTIONS AND COOPERATION BETWEEN THE STATE AND CITIZENS
32
Source: European Commission
Romania’s trust in institutions is low
❖Reducing corruption is essential to build trust between citizens and the government, and enhance cooperation.
❖Trust in institutions is low and corruption high by European standards, although the fight against corruption is stepping up.
COMMITMENT TO FORMAL RULES FOR MONETARY AND FISCAL MANAGEMENT AND FINANCIAL SYSTEM STABILITY IS ESSENTIAL FOR FISCAL EFFECTIVENESS
33
Romania had the highest economic risk rating in the EU in 2000-15
❖ Improving macroeconomic management is essential for economic stability and sustainability.
❖However, Romania’s economic management remains subject to riskso Fiscal policy is heavily pro-cyclical.
IMPROVE DELIVERY OF PUBLIC SERVICES (HEALTH, EDUCATION, INFRASTRUCTURE)
34
Health and Education top the list of public services expected by citizens
❖ Inefficiencies in public administration hamper capacity for delivery of public services in education, health and infrastructure:o High bureaucracy;o Inadequate digital framework;o Restricted access for poor.
❖ Limited resources and low efficiency of public spending.
❖ Public investment management suffers from capacity constraints, leading to delays in project preparation and implementation.
CHANLLENGES TO STRENGTHENING INSTITUTIONSKEY QUESTIONS WHERE WE SEEK YOUR VIEWS
35
What are the main challenges to policy commitment?
What are the main challenges to commitment to formal rules for better macroeconomic management?
How can trust in the State and institutions be enhanced?
How can capacity be strengthened for better management of public investment?
How can public spending be made more efficient for better service delivery in health and education?