Regulation, Trade and Productivity in Romania : An Empirical Assessment

Inappropriate regulation can influence
productivity performance by affecting incentives to invest
and adopt new technologies, as well as by directly curbing
competitive pressures. Results of a labor productivity
growth model for European countries suggest that improving
the regulatory environment -- proxied by the Worldwide
Governance Indicators regulatory quality indicator -- and
boosting effective exposure to competition through
increasing trade integration -- expressed as the ratio of
exports plus imports to gross domestic product -- have
positive effects on productivity growth. In Romania a 10
percent increase in openness to global trade over 1995-2010
would have boosted productivity growth by 9.7 percent per
year. A 10 percent increase in openness to European Union
trade, in particular, would have led to an annual increase
in productivity of 7 percent. Realizing the benefits from
trade integration depends to some extent on regulation. In
this regard, the effects of regulation on productivity
growth are found to be positive, regardless of the indicator
used to measure regulation, and both through direct and
indirect channels (by increasing the speed at which a
country catches up with productivity leaders). Simulation
results also show how countries with different levels of
regulatory quality would benefit from a regulatory
improvement: had Romania improved its regulatory environment
to the same level as Denmark in 2010, its annual
productivity growth would have been 14 percent higher over 1995-2010.