14. The indicators are calculated on the basis of the qualitative and quantitative information obtained from questionnaire answers. Qualitative data are assigned a numerical value that allows ordering each of the possible responses to a given question. Quantitative information is ranked by subdividing it into categories based on a system of thresholds. The coded information is then normalized over a scale of zero to six. These data are then aggregated into basic or ‘low-level’ indicators by assigning subjective weights to the various regulatory requirements. Given the normalization of the basic data, all the low-level indicators also have a scale of zero to six, reflecting increasing restrictiveness of regulatory areas.<sup>4</sup> A detailed description of the low level indicators is presented in the Annex.

15. Basic indicators are then aggregated into broader regulatory domains. Higher level indicators are calculated as weighted averages of their constituent lower level indicators. The attribution of lower-level indicators to each higher-level indicator, and the weights used in the aggregation, are based on principal component analysis (Nicoletti et al., 1999). At the highest level of aggregation the overall indicator of product market regulation summarizes the restrictiveness of the regulatory framework in the product market. The structure of the PMR system, with progressive levels of aggregation, has the advantage of allowing a decomposition of higher-level indicators, with an increasing degree of detail, into the values of the more disaggregated indicators, each corresponding to specific regulatory provisions.

# **CHOOSING BENCHMARKS**

16. The most obvious benchmarks for Romania are Bulgaria (for which data are available for 2006), and the countries of Central and Eastern Europe that are also OECD members (Czech Republic, Hungary, Poland and the Slovak Republic collectively referred to as the OECD CEE). The fact that the data are from 2003, when the OECD CEE were at about the same point as Romania in 2006 relative to their accession to the EU, makes them even better benchmarks. Nevertheless, when interpreting comparative results, it should be kept in mind that comparators are likely to have made further progress since 2003.

17. Additionally, comparison with Romania’s 2002 PMR results provides an indication of the progress made in product market policies. However, since the 2002 PMR was estimated using an earlier methodology, the 2006 and 2002 scores for Romania are not strictly comparable. Nonetheless, both the order of magnitude and the relative standing of Romania clearly show an impressive drive towards adoption of product market policies that are less restrictive of competition in recent years.<sup>5</sup> 18. Extension of the benchmarking exercise to Brazil, Mexico and Turkey offers a broader perspective on other middle income countries (MICs) with different historical

> 4 The calculation of low-level indicators, including the weights used, is based on Conway et al. (2005). 5 See Nicoletti and Scarpetta (1999) for a description of PMR 1998 results. Conway et al. (2005) reestimate PMR 1998 indicators using the PMR 2003 methodology and show that orders of magnitude and country rankings remain virtually unchanged.

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