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  • Policy Research Working Paper 9043

    Productivity Growth in Romania

    A Firm-Level Analysis

    Mariana Iootty Jorge Pena

    Donato De Rosa

    Equitable Growth, Finance and Institutions Global Practice October 2019

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  • Produced by the Research Support Team

    Abstract

    The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

    Policy Research Working Paper 9043

    This paper examines productivity growth in Romania using balance sheet data for a census of Romanian firms in 2011–17. Three measures of productivity are estimated: labor productivity, revenue total factor productivity, and revenue total factor productivity adjusted for markups. Drawing from these measures, the paper follows a two- step approach to answer two fundamental questions: (i) who are the firms—and what are their key characteristics— driving and dragging productivity growth in Romania? and (ii) what are the drivers behind productivity expansion? A first step of the analysis characterizes productivity leaders and laggards, finding that companies at the domestic pro- ductivity frontier are older and larger, have higher capital

    intensity, and pay higher wages. Domestic market leaders charge higher markups, especially in manufacturing, but are not becoming more efficient. A second step of the analysis decomposes aggregate productivity growth and finds that reallocation of market shares to more efficient players has been the main driver in manufacturing but not in services, which are typically more sheltered from competition. At the same time, individual firms are becoming less productive, suggesting that there is scope to improve firm capabili- ties, particularly in services. These findings suggest a policy agenda for Romania centered on removing distortions to competition and boosting human capital.

    This paper is a product of the Equitable Growth, Finance and Institutions Global Practice. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at miootty@worldbank.org.

  • Productivity Growth in Romania: A Firm-Level Analysis1

    Mariana Iootty The World Bank

    Jorge Pena IE University Madrid

    Donato De Rosa The World Bank

    JEL classification: D24, L10, L16, O47 Keywords: Productivity Growth, Markup, Total Factor Productivity, Romania

    Contact information: miootty@worldbank; jpi@faculty.ie.edu; dderosa@worldbank.org 1 This working paper was produced as background paper for the Romania Country Economic Memorandum 2019 - Markets and People. The authors would like to thank for comments received during the “Discussing Productivity” Seminar held in May 2019 at the World Bank headquarters in DC.

  • 2   

    1. Introduction Productivity, defined as the technical efficiency with which firms transform inputs into production, is the ultimate driver of economic growth. As Paul Krugman noted in 1994 “Productivity isn't everything, but, in the long run, it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” In theory, differences in output per worker (labor productivity - LP) across countries can be driven by two key sources: (i) capital deepening - which can be divided into two sub-components, the part related to ICT capital and the portion related to all other types of capital; and (ii) efficiency gains obtained through technological change (i.e. total factor productivity – TFP - growth). Empirical evidence suggests that almost half of the difference in per capita income between countries around the world is explained by differences in TFP (Easterly and Levine, 2001; Caselli, 2005; Hsieh and Klenow, 2010). Therefore, it is key to boost TFP to accelerate convergence to high income levels. Aggregate productivity growth can be decomposed into a number of factors. First, incumbent firms can become more productive - i.e. they can increase the amount of output they produce with a given amount of inputs (the within component) - by upgrading their internal capabilities through innovation, adoption of new technologies and use of better managerial practices. Second, resource allocation - and therefore, economic activity and market shares - across firms and industries can improve when more productive existing firms gain market shares (between-firms component), new and more productive firms enter the market (entry component) and less productive firms exit the market (exit component). Romania offers an interesting example of a country that has dramatically improved its standard of living in a short period of time, with income per capita rising from 26% of EU-28 average in 2000 to 63 percent in 2017. In the course of the 2000s Romania’s labor productivity quickly converged with that of its wealthier EU partners. As of 2017, the level of labor productivity in Romania was 65.3% of the (unweighted) average of the older Member States (EU-15), up from 28.3% in 2000. The pace of convergence, however, slowed dramatically in the post-crisis period, with the compound average growth rate (CAGR) of labor productivity plummeting to 3.1% in 2009-2017 from 9% in the 2000- 2008 period (Figure 1).2 Both capital accumulation (the capital-labor ratio) and revenue total factor productivity (TFPR) have been driving labor productivity improvements. The CAGR of capital intensity over the 2000-2017 period was 4.2%, slightly faster than the 4% CAGR for TFPR. Prior to the crisis (from 2000 to 2008), the CAGR of TFPR was 5.9%, somewhat faster than the pace of growth of the capital-labor ratio (5.4%). After the crisis (2009–17), the trend reversed, with capital intensity experiencing a CAGR of 5.5% and TFP growth slowing to 4.5%.    

                                                                 2 In the post-crisis period, the CGAR of Romania’s labor productivity slightly accelerated from 1.21 percent in 2009-2012 to 4.53 percent in 2013-2017.

  • 3   

    Figure 1. Labor Productivity in Romania: relative to EU15 average

    Source: Own elaboration based on Penn Table 9.0

    Note (1): Labor productivity is output-side real GDP at current purchasing power parities (PPPs, in millions of 2011 US$), divided by the number of persons engaged (in millions); the capital: labor ratio is defined as capital stock at current PPPs (in millions of 2011 US$) divided by the number of persons engaged (in millions); country level TFP is reported as TFP level at current PPPs (USA=1). All values are converted as a proportion of EU 15 (unweighted) average. Note (2): EU15 countries are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and United Kingdom.

    To understand the drivers of aggregate productivity trends, it is important to dive into firm level analysis. Aggregate TFP numbers may be misleading. First, they might be affected by measurement problems, especially related with the emergence of information and communication technologies (ICT) that are difficult to capture in output statistics (Brynjolffsson, Rock, and Syverson, 2017). Second, aggregate TFP is estimated as the residual of an aggregate production function for the whole economy, which ignores technological differences across sectors within countries. Third, and probably more relevant for the current analysis, aggregate TFP figures mask a lot of heterogeneity in firm level behavior. Because of their intrinsic characteristics, firms are different from each other and also differ in terms of performance, even within very narrowly defined industries (Syverson, 2004). These differences could persist either because of supply factors such as management skills, R&D or investment patterns (Bartelsman and Doms, 2000) or due to demand-side factors related to product differentiation, customer-producer relationship, geographical segmentation, among others. Against this backdrop, this paper uses balance sheet data from a census of Romanian firms for the period 2011-2017 to construct three measures of productivity: labor productivity (LP), revenue total factor productivity (TFPR), and revenue total factor productivity adjusted for markups (TFPR-adjusted). This last measure corrects the price effects conflated in TFPR by using firm- year varying markups, following the methodology proposed in De Loecker and Warzynski (2012). Drawing

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