and regulatory procedures and the decrease of the transaction costs for business entry and operation. As a result, Romania was ranked as the second most dynamic reformer in the world by the World Bank _2007 Doing Business_ report it terms of improving the legal and regulatory framework for business.

24. These remarkable achievements notwithstanding, important aspects of the regulatory environment still need to be improved. This is true with regard to the quality of the rules and regulations, but more so with respect to their efficient enforcement. Business surveys suggest that sizeable regulatory obstacles to resource allocation remain, unnecessarily increasing the transaction costs for companies and hampering job creation. Some of these will be further documented in the paper.

25. A central element of the regulatory reform agenda to be pursued by Romania is the continued implementation of less restrictive factor and product market policies and, even more so, the strengthening of the institutional framework for their effective implementation. This would encourage a more efficient allocation of resources and improve labor productivity. This is especially important given the significant gaps that Romania has in terms of incomes and productivity with EU members and the demographic trends laying ahead. Romania entered the EU with an estimated per capita income level of about 35% of the average for EU-15.<sup>8</sup> In addition, employment and participation rates, albeit improving recently, remain among the lowest in the EU. Evidence suggests that the reforms are paying off and that Romania is gradually, but constantly, catching up with the EU.

# **BENCHMARKING PRODUCTION MARKET POLICIES IN ROMANIA**

26. Enhancing competition in product markets has been found to positively affect GDP per capita by providing incentives to firms to reallocate resources to more productive activities, increase innovation and technological diffusion. In addition, less restrictive regulations may positively affect employment by reducing the rents that some firms extract from overregulation and force firms to expand their activities<sup>9</sup> .

27. Benchmarking product market regulation has proved to be a useful tool for monitoring the performance of policies and institutions in OECD countries and for identifying specific policy gaps, thus offering the opportunity to benefit from the experience of other member states. Two surveys have been conducted so far collecting data for 1998 and 2003. Results from these surveys point to a convergence in product market policies across OECD countries, with substantial improvements achieved by countries that originally exhibited relatively restrictive product market regulations, such as Poland, Turkey, Czech Republic, Greece, Italy, France, Mexico, Korea, Hungary, and Spain (Figure 2) Substantial improvements in easing product market policies have been also achieved among EU15 countries where the average PMR score fell from 2.1 in 1998 to 1.4 in 2003. While this reflects the increasing harmonization of EU common market rules, the PMR benchmarking may have been instrumental in fostering this improvement.

> 8 Eurostat.

> 9 Conway, Janod, Nicoletti (2005).

8