Romania - Accelerating the transition : human resource strategies for the 1990s

V \.. Report No. 9577-RO Roman Ia Accelerating the Transition: Human !Resource Strategies for the 1 990s October 21, 1991 Human Resources Sector Operations D)ivision Central and Eastern Europe Departments Europe, Middle East and North Africa Region FOR OFFICIAL USE ONLY .. . Q .~~~~~~~~~~~~~~~~~~~~~C o . (~ o , . .~~~~~~~~~~~~' '3~~~~~~~~~ Doumn ef the WlBn Tidocmn ha a etitddsrbto ndmyb je yrcpet onl i te erormneonhi fiildte.Iscnet a o tews 'e dicoe wihu.ol ak uhrzto.  CURRENCY AND EQUIVALENT UNITS Currency - ieu April 1, 1991 US$1 - L7i 60 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS CBR Crude Birth Rate CDR Crude Death Rate DEI District Education Inspector DHD District Health Director IMR Infant Mortality Rate MCH Matemal and Child Health MOES Ministry of Education and Science MOF Ministry of Finance MOH Ministry of Health MOLSP Ministry of Labor and Social Protection NGO Non-govemmental Organizations OECD Organization for Economic Cooperation and Development OTC Over-the-counter PAYG Pay-as-you-go SMR Standardized Mortality Rate STD Sexually Transmitted Diseases TFR Total Fertility Rate  FOR OFFICIL USE ONLY ROMANIA ACCELERATING THE TRANSITION: HUMAN RESOURCE STRATEGIES FOR THE 1990s Paae No. I. INTRODUCTION AND CONCLJSIONS ................................................... 1 A. Introduction .................................... 1 B. Overview of Social Sector Trends and Prospects. 4 C. Employment and Wage P icies ................................................. 9 D. Social Insurance and Social Assistance ........................................ 10 E. Reforms in the Education Sector . ........................................ 13 F. Health and Family Planning Services ............... ..................... 16 ANNEX 1: Social Sector Reform ................. ................... 20 11. LABOR MARKETS ...................... .......................................... 25 A. Introduction ..................... ......................................... 25 B. Policies, Institutions and Trends .................................... 25 C. Issues for the 1990s .................................... 31 Ill. SOCIAL SECURITY AND SOCIAL ASSISTANCE .................................... 39 A. Introduction .................................... 39 B. Policies, Institutions and Trends .................................... 40 SocL, Security System Programs ................. ................... 40 Benefits Funded by Other Social Insurance Funds .45 Social Assistance Benefits and Other Cash Transfers to Households .46 Govemment Reform Proposals .47 C. Issues for the 1990s .47 D. Recommendations for Reform .53 ANNEX 1: Institutional Description of the Cash Benefit System . . .58 This report was prepared by Louise Fox, based on the findings of the social sector team of an economic mission to Romania in October/November 1990 comprising: Nicholas Barr (social insurance and social assistance), Louise Fox (health), Ralph Harbison (higher education and science), Stephen Heyneman (pre-university education), Clive Sinclair (labor markets and training), Steven Sinding (population and family planning), and Ilona Szemzo (statistical assistance and education). Subsequent analysis by Malcolm Potts (family planning) was also incorporated. Angie Wahl and Unda Mih were responsible for document preparation. The mission wishes to thank the Romanian authorities for their support and cooperation in providing the information and data on the social sectors used in this study. Peer Reviewers: C. Allison, E. Jimenez, P. Musgrove Dept. Director R. Cheetham Division Chief R. Harbison This document has a restricted distribution and may be used by recipients only in the performance t-' t *r cffie-l Isit' i ltc ennt it- r v nnt ntt r .t d -1 r1 4 jithn"t Wr--LI n- %ithnHi tir-l  ii Page No. IV. EDUJCATION, TRAINING AND SCIENTIFIC RESEARCH ............... .. ..................... 73 A. Introduction ................................................. .............. 73 B. Policies, Instiutions and Trends . ................................................ 74 Pre-primary and Primary Education . ........................................... 74 Secondary Education .................................................... 77 Post-Secondary Education and Training ............ ........................... 79 Finance, Expenditures, and Unit Costs ............. ........................... 82 C. Issues for the 1990s ..................................................... 84 Issues in Pre-University Education ............................. ............. 84 Issues in Higher Education and Research ........... .......................... 87 Issues in Training and Retraining . ........................................... 90 D. Recommendations for Reform .................................................. 90 Reform of Pre-university Education . ........................................... 91 Reform of Higher Education and Science ........... ........................... 92 Training and Retraining ................................................... 93 V. HEALTH ................................................................ 97 A. Introduction ............................................................... 97 B. Policies, Institutions and Trends . ................................................ 97 Trends in Health Status . .................................................. 97 The Service Delivery System . .............................................. 103 Inputs to Health Care Delivery .............................................. 111 Health Care Expendtures and Financing ...................................... 116 C. Issues for the 1990s ......................................................... 120 D. Recommendations for Reform . .................................................. 122 Short- to Medium-run Measures to Improve Health Care Delivery ..................... 123 Elements of a Medium Term Reform Program ................................... 126 VI. POPULATION AND FAMILY PLANNING ............................. 133 A. Demographic History and Current Situation ......................................... 133 B. Issues for the 1990s ......................................................... 141 C. Recommendations for Reform .................................................. 141  iii Paqe No. APPENDIX 1: LOCAL GOVERNMENT STRUCTURE AND FINANCING ............................ 145 APPENDIX 2: SOCIAL SECTOR BUDGET PREPARATION AND EXECUTION IN ROMANIA ......... 147 APPENDIX 3: STATISTICAL TABLES ......... 149 TABLES IN TEXT Table 1.1: Comparative Social Indicators .......................................... 5 Table 1.2: Financing and Expenditures In the Social Sectors ............................ 7 Table 2.1: Population and Employment, 1960 to 1989 ................................. 26 Table 3.1: Overview of the Pension System, 1991 .................................... 40 Table 3.2: Overview of the Cash Benefit System .42 FIGURES IN TEXT Figure 2.1: Employment Distribution by Sectors, 1960, 1970, 1980, 1989 ............ ................................... 27 Figure 3.1: Expenditure on Social Insurance and Family Allowance, 1980-89 ........................................................... 39 Figure 4.1: Structure of the Educational System.. 75 Figure 4.2: Enrollment by Education Levels, 1960-1989 ............ .. .................. 76 Figure 4.3: Enrollment by Education Levels, 1989/90 ............. .. ................... 76 Figure 4.4: Secondary Enrollment by Type of School, 1970, 1980 and 1989 .............. ................................... 78 Figure 4.5: Higher Education Enrollment by Field of Study, 1970, 1980 and 1989 ................................................. 80 Figure 5.1: Total Mortality in European Countries, 1985 ................................ 98 Figure 5.2: Infant Mortality Rate Trend .99 Figure 5.3: Infant Mortality by District .100 Figure 5.4: Etiology of Aids, 1990 .102 Figure 5.5: Network of District Health Units .105 Figure 5.6: Hierarchy of Health Care DeUivery Facilities .106 Figure 5.7: Structure of a Local Hospital .107 Figure 5.8: Distribution of Nurses per 10,000 Inhabitants, 1989 .113 Figure 5.9: Distribution of M.D.s per 10,000 Inhabitants, 1989 .114 Figure 5.10: Distribution of Beds per 10,000 Inhabitants, 1989 .................. 115 Figure 5.11: Expenditures per Capita by District, 1989 ...... .. ......... 118  iv Pawe No. Figure 6.1: Age-Sex Pyramid, 1985 ...................... ................ 135 Figure 6.2: Crude Birth Rate in Romania, 1947-1987 ............ ...................... 136 Figure 6.3: Maternal Mortality Rate in Selected Countries 1970Oand1986 ...................................... 136 Figure 6.4: Crude Death Rate in Romania, 1956-1988 .................................. 138 Figure 6.5: Age-specific Fertility, Romania, 1987 ..................................... 138 Figure 6.6: Crude Birth Rate by District, Romania, 1983 . ............................... 139  ROMANIA ACCELERATING THE TRANSmON: HUMIAN RESOURCE STRATEGIES FOR THE 199O L. INTRODUCTION AND CONCLUSIONS A. Introduction 1.1 This study reviews trends, programs and policies in the social sectors in Romania It Is the first such study eve, by the World Bank in Romania, and covers labor markets, socal insurance and social assistance, education, training and scientifir research, health care delivery and financing, and population and family planning issues. The focus of the study is primarily on economic issues in these sectors during the transition to a market economy. However, as this is also a first report, a significant amount of basic sector desciption Is also Included. This overview chapter begins with a brief discussion of overall sector issues within the context of Romania's transition to a market economy, and then summarizes the main themes and recommendations In each of the five sectors. An outline of the major issues Is also shown In Annex I following this chapter, with paragraph references Indicating where these Issues are discussed in the main body of the report. Subsequent chapters cover each major topic area in more depth. 1.2 The transition In Romanla. Romania, with 23 million people, is one of the largest of the formeriy centrally-planned economies in Central and Eastem Europe (CEE). Following 41 years of communist party rule, Romania In December 1989 began a transformation to a market economy and a more open society. During 1990, a number of major economic policy reforms were adopted, Including the cessation of central planning, the ending of govemment-owned firms' monopoly powers in most areas, the liberalizaton of roughly 50 percent of previously iagulated prices and the adjustment to intemational levels of most of the rest, the launching of privatization efforts, the relaxation of wage controls and the decentralization of a number of central govemment powers and responsibilities to lower levels of government. In May, 1990, a president and a pariament were elected who are currently remaking Romania's legal structure, including drafting a new constitution. 1.3 Despite the population's high hopes after a decade of hard times under the previous govemment, the first year of reform did not bring Romania a rapid increase in living standards. GDP per capita feil 8 percent in 1990, as Romania was hit with the same malaise as her reforming neighbors. The Inevitable confusion surrounding the disappearance of command structures, the collapse of CMEA trading arrangement, and the disruption caused by the rapid changes in relative prices all contributed to accelerating Inflation, economic stagnation, and widening macroeconomic Imbalances. In late 1990, Romania began a stabilization program. 1.4 Prospects for 1991-92 are not very rosy. Stabilizaton is expected to continue to be a key economic policy goal throughout the period, as exports are likely to remain depressed, while imports of raw materials and technology are crical for economic restructuring. Most of Romania's industrial infrastructure is technologically obsolete, energy Inefficient, and environmentally destructive. The majority of enterprises are  - 2 - overstaffed arn1 poorly prepared to operate In a market economy. The agricultural sector holdc great ootential, but needs first, to be reorganized into private holdings (a process currently underway), and second, to receive a major Injection of capital. Economic growth should bring increased demand for services, (which were underdeveloped during the communist years), but currently these sectors also suffer from shortages of capital and technology, a lack of technical, managerial and entrepreneurial know-how, and difficulties of starting up new enterprises in an uncertain legal envi,onment. Sustained commitment to structural reform is required if Romania is to reach its goal of rising income levels in a market economic setting. 1.5 Why are the soclal sectors Imporlant now? Following the overthrow of the communist regimes, the initial focus of most new governments in Central and East Europe (CEE) was on how to transform the productive sectors in order to get economic growth started again, thus improving the welfare of the population. While it is true that it is almost impossible to improve the welfare of the population in the medium term without output growth in the productive sectors, experience in OECD as well as developing countries has shown that is also very dmfficuft to sustain economic growth or to raise living standards without effective and affordable policies and programs in the social sectors. New govemments in CEE are now becoming aware of this linkage. In these countries it is particularly important to give priority attention to labor markets, social insurance and social assistance, and social service delivery during the transition for the following reasons. (a) Improving efficiency. Key to the development of a market economy is reforming incentive structures. Many social sector policies developed during the era of central planning actually discourage efficient resource allocation. Reform is thus essential if the transition is to proceed smoothly. At the same time, systematic restructuring of social sectors policies and programs (especially with respect to labor markets, education, and training) is essential to generating and sustaining a supply response. Wihout this restructuring, CEE economies will continue to be handicapped by skill and technology deficits. (b) Restoring macroeconomic balance. Enthlement payments and social sector spending are a major portion of government budgets. Loopholes in entilement payment programs and inefficiencies in the organization and management of social service delivery, if left unremedied, could jeopardize macroeconomic stability. (c) Protecting the poor. Business cycles and the fluctuations in household income which usually accompany them are unavoidable elements of a market economy. Groups at risk need adequate measures to maintain living standards, and labor force participants need efficient labor markets to minimize unemployment during the transition. Keeping social services functioning and improving their quality is also essential to retain poliical support in a more open society. 1.6 The challenge ahead. As with the productive sectors, the social sectors require fundamental reform if they are to support a market economy. In a market economy, both the qualitative nature of the social services required and the organization of service provision is completely different from that of a centrally pianned system. In Romania, effecting this transformatioan will involve:  - 3 - (a) reforming the policy framework In these sectors to provide incentives for both cost-effective service delivery and the smooth operation of the market economy; (b) decentralizing operation, management, and financing to encourage quality, innovation, and responsivoness to consumer demands; (c) reforming the system of providers to allow individual choice (and by implication multiple providers); and (d) strengthenine the role of the government and NGOs to provide the information social service consumers need to make an informed choice. 1.7 In the productive sectors, many of these goals can be achieved through privatization and competition. However, in the social sectors, this is not always the case. The market for social services is characterized by a number of deficiencies. These deficiencies include: (a) information asymmetries, for example in health care where consumers cannot be expected to have the knowledge to choose which prescription drugs to take, or where the costs of collecting the information are very high (e.g a drug overdose); (b) financina problems, for example in education where it is difficult for private citizens to borrow to finance human capital investments because collateral is difficult to obtair; (c) insurance problems, or risks which the private markets can insure only at a very high price, such as health care for the elderly or chronically ill or pensions in periods of uneven and unpredictable inflation; and (d) underconsumrtion problems, where because society as a whole gains more from an individual's consumption of social services than the individual, without regulation or subsidy the individual will tend to underconsume (e.g. inoculations). 1.8 As a result, In all OECD countries, the government plays a strong role in the regulation, financing and provision of social services. The degree to which the government is involved, and the level of government involvement (central vs. local authorities) differs from county to country, and is essentially a political choice. For example, the United States depends more heavily on the private sector for the provision of social insurance and higher education than most other OECD countries. Likewise, the Netherlands relies heavily on the private sector for the provision of primary and secondary education, a model not followed elsewhere in Europe. This report does not attempt to prescribe these choices for Romania. Instead, it is suggested that Romania study carefully the expe.ience of both OECD countries and LDCs in this area in order to make an informed choice. However, where the expenence of other countries clearly demonstrates the superiority of an approach, this is identified. 1.9 Transforming the social sectors will be a more difficult task in Romania than in other CEE countres because of policies of the Ceausescu Govemment during the 1980' which were particular to this country. Not only Is Romania currently one of the poorest countries in Europe, but is social sectors are in particularly bad shape (reflected In the social indicators displayed in Table 1.1). Under Ceausescu, the social sectors were: (a) underfunded, sometimes having to engage in *productive activites Just to survive; (b) isolated from developments outside of Romania; and (c) centralized and politicized. The Isolation and underfunding resulted in a deterioration of physical infrastructure, (which was not replaced/maintained), a shortage of equipment and supplies (and what existed was often obsolete), and a decline In the quality of human cas:A in the sector. Romania now faces the difficult task of trying to rebuild its infrastructure, update its systems, and design a reform without knowledge of options and experience In these areas of other countries outside CEE in these areas. For example, in education,  only a small minority of sector policy makers are very familiar with current teaching methods in OECD countries, or how western universities are organized. In the health sactor, not only Is the average professional's knowledge somewha* obsolete, but virtually no one Is trained in western health policy analysis and management techniques. Romania does not now have the analytical tools to fuliy analyze pension reform optionp (although there are trained mathematicians and statisticians who can understand these tools quickly once the methodology Is transferred). If Romania is to progress quickly, accelerated knowledge and technology transfer will be needed. 1.10 However, Romania does have a number of strengths on which it can build. Although the sociai infrastructure has deteriorated, it is still in place and is wel! d.stributed geographically.' While Romania lacks knowledge and technology, its professionals are well-trained theoretically, and thus should be able to catch up quickly. And strong central government involvement in the provision of social services has brought Romania a well organized system which equitably provides services, even if the quality is mediocre (by OECD standards), and does so at a low cost (also by OECD standards). International experience suggests that raising quaiity standards will involve more autonomy for providers and more choice for consumers, couplea with more funding, usually in the form of user fees or co-payments. This will almost certainly involve some compromises on equit>. In designing Vs reform program, Romania should build on the strerZ -af the current system and thus insure that its achievements in access to a basic package of social service are not lost. This is necessary in a more open society for political as well as economic reasons. 1.11 The Government is committed to reversing the Ceausescu legacy in the social sectors. Despite falling GDP and foreign exchange earnings and a tight budgetary situation overall, the Government increased overall expenditures in the social sectors by 23 percent in 1990 (Table 1.2), and, more importantly, increased the sectors' foreign exchange alloca:ion dramatically. Combined with a relaxation of controls on travel and foreign contacts, the provision of foreign exchange is allowing the isolation of the last fifteen years to end, and sector development to begin again. Ir. each sector, reforms have been initiate:l. In some sectors, new legislation has already been approved by Parliament (e.g the new wage law). In others, legislation is still in draft or under consideration. Sector ministries have regained a measure of control over resource allocation, as these decisions are no longer under communist party control. In each sector, the Government is firmly committed to fundamental reform (even if the shape of these reforms has yet to be designed) and there is no turning back. B. Overview of Social Sector Trends and Prospects 1.12 Achievements In the social sectors. Romania has made significant progress in the development of human resources since World War II. When compared with other countries at its income level, Romania Is well above average (Appendix 3, Table 1.1). Labor force participation is high as is the level of industrialization, indicating a fairly high level of development and economic diversification. With respect to health outcomes, only Chile, one of the best performers in Latin America, does better than Romania on the broad Inu,ators (life expectancy and infant mortality) among the comparator countries outside of Europe. But when See Appendix 3, Table 1.1 and Table 1.1 in this chapter for evidence on the quantity of social infrastructure relative to Romaniaes neighbors and other countries at its income level.  -5 - TABLE 1.1: ROMANIA - COMPARATIVE SOCIAL INDICATORS CEE a/ OECD b/ LAC Romania w/o Romania Low Income Average Pop (mi) 1989 23.1 19.4 15.8 GNP per capita (USS) 1989 1,524 2,60S 6,813 1,950 HEALTH Crude Birth Rate 15.4 13.7 12.8 27.9 Want Mortality c/ 26.9 16.4 10.1 51.7 Life Expectancy at Birth (years) 70.5 71.6 75.6 67.0 Public Health Expenditures/ODP - 1984 2.3 5.0 5.9 n.a. Pop per: physician 554 379 440 938 hospital bed 114 93 211 na. Maternal mortality 150 40 11 n.a. EDUCATION Gross enrollment ratios Primary - (% school-age group) 97 99 110 100+ Secondary ( " ") 79 76 87 48 Tertiary: Science/Engineering 68 34.3 26.2 n.a. Pupil-Teacher ratio: primary 21 18 23 24 secondary di 39 11 16 n.a. Illiteracy rate - 198S (% pop. > 15) n.a. n.a. 9.8 16 LABOR FORCE Totai Labor Force ('000) 11,744 9,695 6,077 n.a. % in Agriculture 27.9 21 18 n.a. % in Industry 38.1 39 32 n.a. Participation Rate e/: overall 49.6 46.7 39.4 35.1 female 45.6 37.7 22.9 18.5 a/ Includes Poland, Yugoslavia, Bulgaria, Czechoslovalda, and Hungary; arithnetic average b/ Includes Portugal, Spain, Greece, and Ireland; arithmetic average c/ Infant deaths per 1,000 live births d/ Pupil-teacher ratio for Romania does not include staff of enterprises who teach part time e/ Percentage of population of all ages in the labor force Sources: Social Indieators of Development, 1990; Population P.efercace Bureau, 1990 World Population Data Sheet; Labor Force Statistics, 1968-1988, OECD, 1990; Health Caze System in Trnsition, The Search for Efficiency, OECD, 1990; UNICEF, State of the World's ChiJdr4. i991; Tymowska, 1986.  - 6 - Romania Is compareO with its nelghboring CEE countries, (whose level of development is similar and whose incoms Is only slightly higher!, or with the low Income OECD countries (who were in a comparable position to Romania at the ena of aorld War II), the evaluation is not so favorable (Table 1.'). Its health indicators are among the lowest in Europe. Romnania is on all counts an outlier on maternal mortality as a resul of Its harsh population policy. In 1990, this rate fell by two-thirds with the availability of legal ar.d safe abortion. But even this decline still leaves Romania well above its neighbors. Romania's performance on education indicators Is better, esp, cially with respect to educational attainment of the population (although none of the indicators measures quality). Higher education is disproportionately concentrated in science and engineering, leavirng Romania with a snortage of skills in the social sciences, business, and the humanities. The challenge for Romania in the 1990s Is to raise the gualitv of social services. 1.13 Public expenditures and financing. Centrally planned economies typically spend a smaller share of government revenue on the social sectors than market economies, in part because the expenditure base is much larger (higher levels of subsidies and transfers), but also because expenditures in the social sectors were often viewed as 'unproductive'. Until 1990, Romania followed the planned economy pattern (Table 1.2). Social sector expenditures were low as a share of GDP, even by comparison with Romania's .,eighbors, and were only about 25 percent of total government expenditures. In 1990, as a result of the post-revolutionary policy to improve the social service delivery and an expansion of entitlement payments, expenditures jumped 23 percent overall, rising to 41 percent of total public expenditures. 1.14 As Romania moves to a market economy, the share of social sector spending in government expenditures wIll cor-inue to rise, t. several reasons. First, other expenditures will decline as the government scales back its role in the economy. Second, changing relative prices associated with the transition to a market economy will increase social sector expenditures in value terms, even if volumes remain constant. This is because many of the inputs used in service delivery have been supplied and accounted for at subsidized or artificialiy low prices (for example pharmaceuticals and medical supplies), and salaries in these sectors have been artificially low given the levels of education and training of sector personnel. Third, some current public expenditures are now unaccounted for in the consolidated budget, as the system of cantral planning required enterprises to provide resources in kind, (e.g. tea;:ners for vocational courses, space for health facilities whose staff is paid out of the MOH budgit). The finar*-ing of these expenditures is being shifted to the budget. Thus, by 1995, finance, budgeting, and expenditure management in the social sectors will dominate fiscal policy discussions in Romania. A key issue in t'.ase discussions should be how to secure high cevels of access to social services of improved quality without an uncontrolled explosion of axpenditures -. that is, how to regulate demand and increase efficiency in service provision. 1.15 IssuCS in sector resource allocation. Even without considering the challenges posed by the transition, the govemment will face constant demand for social sector spending. Demographically, the population is aging, Implying increased demand fkr social lisurance benefits and health care. Epidemiologically, infectious diseases have become less important causes of morbidity and mortality and chronic diseases more important ones. As many of thesa diseases have no cure, the best that can be achieved is maintenancs in a state of lesser disability.  TABLE 1.2: ROMANIA - FINANCING AND EXPENDITURES IN THE SOCIAL SECTORS (million lei or percent) 1985 1989 1990 FROM THE CONSOLIDATED BUDGET ExDendltures 87,740 109.206 134,849 Education 17,345 16,649 23,132 Health (including childcare) 17,869 18,975 23,500 Social Insurance (main fund) 37,207 46,021 59,580 Social Insurance (supplementary) n.a. 3,730 5.000 Famlly Allowances 14,800 23,349 22,775 Social Assistmce 519 482 862 Financina 87,740 109.206 134,849 Earmarked Revenues 46,109 53,146 63,210 Social Insurance (main) 40,009 44,306 53,270 Social Insurance (supplementary) 6,100 8,840 9,940 Other 41,631 56,060 71,639 FROM OTHER SOURCES a/ Hedth Sector n.a. 5,381 6,723 Educadtion Sector n.a. 4,012 n.a. MEMORANDUM ITEMS: Budgetary Expenditures as share of: Government Expenditure 23.4% 24.2% 40.7% GDP 10.7% 13.7% 16.1% al Includes fees paid and household expenditures on drugs. Does not include in-kind financing by enterprises and other household expenditures in these sectors (e.g. gratuities). Source: Minisy of Finance and mission estimates Heolth 17.4% Shae of Grt Expmfldltursi Educatlon Social Sector (| . _17.1% Social AssistancO 0.6% Social Ins. (main) 44.2% .Famly Allowances Social Ins. (supp.) 3.7%  In OECD countries, the burgeoning of expensive technology for diagnosing and maintaining patients with these diseases has caused demand for health care (and consequently the cost of providing and financing it,) to explode. In education, Romania has the lowest higher education enrollment ratio in Europe, and is already experiencing significant pressure to expand enrollment. As if meeting these existing needs were not enough given Romania's limited resources, the transation to the market economy will bring new and equally urgent needs. Industrial restructuring and increased labor market flexibility implies a need for unemployment insurance, employrrment services, and new training and retraining programs. Business cycles, unavoidable ir a market economy, will cause household incomes to fluctuate more and enhance the need for social assistance programs to prevent the development of long term poverty. 1.16 Romania will not have the resources to meet all these needs. If major reforms are not undertaken to restructure sector policies and programs consistent with a market economy, Romania will be able to meet very few of these needs. In any case, priorities will have to be set and choices made. The amount spent globally out of government revenues for the social sectors and the allocation among sectors is essentially a political decision. In a more open society, where debate is important, the government vill have to seek consensus on these allocative priorities. To aid in forging the consensus, designing and implementing the system-wide reforms required, and in making the allocative choices, the preparation of a strategy for reform for each sector is urgently needed. The strategy preparation process should involve a detailed projection of expenditure and financing trends under various reform options. Alternative financing schemes (e.g. general revenues, earmarked taxes, user fees) should also be explored. 1.17 Sectoral reform will involve restructuring expenditures and financing. In all sectors, waste has been identified and resource-saving measures have been suggested in the body of this report. In some sectors, it is recommended that total expenditures increase substantially over the medium term to meet the population's demands for more services (for example, in higher education). In this case, given tight budgetary constraints, the government will have no choice but to increase cost recovery to help finance this expansion (e.g. require more contributions from households). In other cases, more effective service delivery can be achieved by restructuring expenditures without increasing them globally in real terms (e.g. social insurance and social assistance). In either caso, implementing these reforms will be difficult, as there will be winners and losers. 1.18 The sectoral strategies and reforms should be complemented by a reform in the budgeting and resource allocation process within the government. The new public finance law provides broad scope for decentralization which for the most part has not been implemented in the social sectors (see Appendix 2). There is also provision for transforming units from direct budgetary support to (a) autonomous status within the public sector or (b) full privatizadion. Candidates for transformation include: (a) units where a known quantity of a product or a service is or can be delivered on a fee-for-service basis, financed by the consumer or by the government on a contractual basis; (b) units where standards can be set for the quality of the outout and compliance with these standards can be easily monitored; and (c) units where the market failures identified in para 1.7 (above) are not present or can be easily corrected and thus private sector competition Is desireable.  -9.. Applying these criteria will involve political judgements, but some examples of these types of units are: in the health sector, childcare facilities, and spa facilities; and in the education and science sector, adult re-training programs, Other candidates include service departments of sector units, e.g. textbook production or vehicle maintenance. 1.19 For those facilities which should remain as direct budgetary units, the sector ministries and the finance ministry (MOF) should develop new rules for budget elaboration to replace the central planning norms (which are, for the most part, still followed). These rules should encourage program budgeting, relating requosts for funding to sector priorities and the programs which underpin them. Sector budget requests should bo accompanied by an evaluation of the previous year's performance with respect to sector outcome objectives. For proposed investments, the recurrent cost implications should be analyzed. Innovative and pilot programs should be encouraged, both by the MOF and the sector ministries in their resource allocation process. Above all, the process should be as transparent as possible so that accountability can be ensured. C. Employment and Wage Policies 1.20 The transformation into a market economy necessarily includes the establishment of a labor market, with employers and employees contracting privately on all aspects of employment, hours of work, and compensation. Establishing a labor market will require policy reform as well as the creation of new institutions to insure that the market runs as smoothly as possible, that negotiations are conducted fairly, and that those unable to find work are given assistance to become productive again. Labor market policy during the transition period should have the following goals: (a) contribute to the reduction of macroeconomic imbalances; (b) support the process of economic restructuring by encouraging the efficient allocation of labor within the economy - i.e. its shift to more productive use; and (c) maximize productive employment. 1.21 The pace at which the labor market can be decentralized and decontrolled depends on the overall rate at which competition is increased in the economy. Without a competitive output market, the government has no choice but to regulate the labor market very tightly to prevent the emergence of cost-push inflation. But once competition and more private ownership is introduced in the production of goods and services, the Government can let market forces operate. 1.22 Wage increases granted in 1990 (not accompanied by productivity improvements) are one of the key factors contributing to the current macroeconomic imbalance. As prices move upward in response to the devaluation and price liberalization, wage earners will naturally seek to maintain real incomes, But during the stabilization period, maintenance ov real incomes for everyone is inconsistent with macroeconomic stability. The Govemment, as the main employer, will have to administer this real wage fall, preferably in a manner which supports the economic restructuring (i.e. provides incentives for firms to adjust wages and employment such that profits are maximized, within limits consistent with stability).  - 10- 1.23 The Government s new wage law significantly decontrols wages at the enterprise level, and allows for collective bargaining. However, its stabilization tool (incomes policy) depends on tax-based controls on Individual wages, which are difficult to administer. The Government should consider moving to a system of tax- based controls on the total firm payroll - either an absolute limit on increases or a limit on the averaae Increase. The choice between the two would depend on whether the Government wants to favor restructuring and the shedding of labor (control over the total wage bill) or increasing employment, especially of low skill workers (controls on average wages). 1.24 In a market economy, the government no longer (a) assigns workers to frms for most of their working life at age 14; or (b) encourages firms to keep workers even in times of slack production. This should cause a major increase in labor turnover. In OECD countries, on average over 10 percent of the labor force changes jobs in any one year (many by choice). The Govemment recognizes the need to develop policies and programs to facilitate labor mobility, and in 1990, created the unemployment insurance fund (legislation was approved by Parliament in February, 1991). Using funds from this source, the Govemment is creating and staffing unemployment offices to assist job seekers to find new employment, and will begin paying benefits to the unemployed. The Government should consider the following steps to facilitate the restructuring process and assist the unemployed: (a) complementing existing legislation with a labor code which defines the rights and obligations of employees and employers with respect to the termination of employment, (b) accelerating the pace at which the Government is currently staffing, equipping and training staff at employment centers, possibly with international assistance; (c) continuing to remove obstacles to labor mobility and flexible use of labor in enterprises, including regulations discouraging part time employment, flexible hours, and short-term contracting; and (d) encouraging employment by keeping average labor costs low, including holding down the minimum wage, reducing regulation and red tape' for employment in small private businesses, and reducing payroll taxes as part of the tax reform program. D. Social Insurance and Social Assistance 1.25 Romania!s social insurance and social assistance system, combined with a policy of universal employment and administered wages and prices, has provided an affordable level of social insurance benefits, aided in consumption smoothing, and kept most of the population out of poverty. However, without significant reform, It is unlikely to do so in the future, because (a) recent policy measures to lower temporarily the retirement age, as well as the interaction of the currently low retirement age with a slowly growing labor force, is stretching the ability of the system to meet current obligations out of revenues; (b) universal employment and controlled prices of subsistence items are not likely to persist in a market economy, so household income fluctuations are expected to become more variable, placing more households at risk of poverty unless the system Is rtformed; and (c) in a decentralized system, the ability of the govemment to monitor behavior, thus preventing abuse, will be less, so benefit demands are likely to increase unless the system is reformed. Finally, the system has achieved its results at the expense of micro-efficiency, as incentives embedded in the system discourage efficient use of resources in the  - 11 - econorny (especially the structure of pension benefits, which discourages labor supply). As part of its social sector reform program, Romania will need to revamp completely its social insurance and social assistance system. 1.26 Reform of social insurance is a complex issue. Anticipating the economic and financial effects of alternative policies is difficult in the area of social insurance, as the behavior of a number of actors must be evaluated, and long term trends predicted. Experimenting with change is dangerous, because once a benefit is provided, a sense of 'entitlement' arises in the beneficiary which is politically difficult, if not impossible, to erase, especially in a more open society. In addition, i' social insurance is to fulfill its function, it must indeed be available in a predictable fashion when individuals expe:ience the risk. For this reason, governments usually change social insurance policies very slowly, and in a more open society, only after a wide discussion of the issues and options among the population. Information and analysis of the current system and policy options, presented in a coherent and intelligible fashion, is critical to this process. Thus in the short run, the government must provide a functioning social safety net to protect the truly needy using existing institutions and programs. Finding the fiscal resources for such programs (and meeting other urgent priorities of the restructuring program) implies holding the line as tightly as possible on entitlement payments that do not go to the needy, or where abuse is occurring (see paras. 1.29 - ,.30 below). At the same time, the studies and debate required to develop systemic reforms for the medium-term program to resolve the issues identified above should begin. 1.27 Protecting the poor during adjustment. While it is expected that in the medium term almost all Romanian households will benefit from the adjustment program through a return to stable economic growth, adjustment will impose temporary but major costs on some households. In addition, the market economy will bring a higher variability in individual real household income in the future than has been typical under a centrally planned economy. This is because: (a) prices will fluctuate more, and (b) cyclical economic events will translate into fluctuating earnings and employment much more than in the past. Thus households are likely to be more at risk of falling into poverty. To protect households from the devastating effects of long term poverty, Romania will need an effective social safety net both during the adjustment period and thereafter. 1.28 The objective of social safety net policies and programs should be to keep households from falling below a 'social minimum' level of consumption. Not only are such policies humane and politically necessary, they are also a good investment economically. This is because it is much cheaper to maintain a household at a minimum living standard than to repair the damage done once a household's living standard falls well below the minimum. For example, targeted nutrition supplements for children are much cheaper than hospitalization to treat malnourishment. Thus, government policies and programs to assist households to maintain minimum income levels by either providing cash or income in kind (e.g. food coupons or free health care) to households whose income is inadequate are essential in a developed market economy. 1.29 l'ousehold poverty may be related to a transitory condition (for example, the family of an unemployed worker) or to a longer-term one (families of the disabled, the elderly, the handicapped, families with many dependents and few eamers such as single parent families). Although poverty is usually defined as those whose household income falls below a minimum threshold (a poverty line), it is not usually an on/off condition but rather one which varies in duration and intensity depending on the needs and resources of the household and on local economic conditions. Romania currently has in place social insurance or assistance programs which provide  - 12 - Income support to the major vulnerable groups: (a) family allowances to protect children; (b) pensions to protect the elderly; and (c) unemployment benefits for those who lose their job during restructuring. 1.30 However, these programs will not meet all needs. For those households where all benefits to which household members are entitled combined with the earnings of those able to be economically active still do not provide a minimum living standard, additional social assistance is recommended. Romania already has a modest system of locally administered social assistance programs, primarily targeted at the elderly, the disabled and the handicapped as these groups were most likely to need assistance in the centrally planned system. These programs could be expanded quickly to protect the broader cross section of society who are likely to need help In the first years of the transhion. The easiest program to expand would be the free meals program, which could be offered to all who presented themselves. These programs tend to be self-targeting (meaning that those who don't need them tend to select themselves out). 1.31 At the same time, studies and analysis should begin now to develop a comprehensive social assistance program, Including (a) community-based programs for those with special needs (the disabled or handicapped, the elderly); and (b) means-tested cash or in-kind assistance for those not covered by other programs. 1.32 Pensions. The current pension system provides benefits which are very low to too many people, and are poorly related to contributions. At the same time, the system is short of resources. It is also administratively complex, as there are a number of small pension funds. The existence of these separate pension funds Is a barrier to labor mobility. In addition, the Ovoluntary* pension funds (in which participation is now compulsory) will likely not be able to maintain the real value of their assets during the transition if it is accompanied by high or variable Inflation. In Its reform program, the Government should: (a) consolidate all mandatory pension funds into one fund, operated on a pay-asyou-go basis, with universal provisions and a benefit structure linked to contributions, which is affordable given existing tax rates and macroeconomically solvent over the long run; (b) alter the structure of the pension benefits to provide more incentive for workers to stay in the workiforce and raise the normal retirement age; (c) provide a minimum pension benefit to all contributors who reach normal retirement age which is at about subsistence level (adjusted regularly for inflation); and (d) develop other mechanisms by which the working population can begin to save for old age or disability, including voluntary insurance schemes regulated by the government (once the financial sector Is more developed). 1.33 Sick leave benefits. Currently, all workers whose employer contributes to the state social Insurance system are eligible for up to two years of leave benefits (with a doctor's certificate of illness), financed out of the social Insurance fund. As state enterprises become autonomous and private enterprise develops, the sickness bonefit Is much more likely to be abused, as both firms and workers have an incentive to use this program to shift salary costs to the state. Indeed, this has already begun to happen, and it is very difficult and expensive for governments to monitor this behavior. The Govemment should reform the incentive system so that both firms and workers have less Incentive to use this benefit as an 'unemployment fund. This would include: (a) having workers  - 13 - self-finance the first day of sick leave; (b) having firms finance the first 2-20 days of sick leave; and (c) leaving only the long term sick leave to the public fund, which can be more easily monitored. 1.34 Maternity and family benefits. Currently, these programs provide higher benefits for each additional child, up to three, as an incentive for couples to have more children. International experience, as well as Romanla's own experience of the last 25 years, suggests that couples will go to many extremes to reach their desired family size, and that this type of payment does not change behavior. Thus Romania's current benefit structure is wasteful. The G, vernment should save resources and still support families with children by (a) setting a flat rate for benefits regardless of birth order; and (b) eliminating new pensions paid 1.r life to mothers of three or more children and, for current beneficiaries freezing benefit levels in nominal terms. The Government should also review whether it still needs to provide this benefit to all who currently receive it, since the new wage tax provides for a 20 percent tax credit for employees with children (any number). This credit, combined with the family allowance which currently averages about 10 percent of the average wage per child, is well above the combined tax credit/family benefit found in western European countries today. The Government should consider: (a) eliminating the separate payment of family benefits, and retaining the existing wage tax credit, but setting it at fixed amount (at a maximum of five percent of the average wage per child) and claimable by households with incomes below the tax threshold (e.g. it could be paid as part of unemployment benefits); or (b) removing the tax credit for households with children and retaining family benefits (with equal payments for all children), but extending eligibility to those not employed by the state. 1.35 Unemployment benefits. Romania's program includes two questionable groups: (a) the self employed; and (b) new entrants to the labor market (graduates of secondary or higher education institutions). Most countries exclude the self-employed from insurance-type benefits because they can exercise control over their employment status, and thus unemployment for them is not a *risk. New entrants are usually excluded because their commitment to the labor force is unknown, and thus including them can invite abuse. If they live in a household In poverty, they are usually best handled through a system of social assistance. Romania should Immediately revoke benefit eligibility for new entrants and the self employed (the latter group should also not be required to pay the earmarked payroll tax). Romania might wish to extend the duration of benefit to a maximum of one year, and, at the same time, simplify the benefit structure by the introducing a flat rate benefit. Consideration should also be given to shifting the source of funding both the pro-active employment programs and the unemployment benefits from the current earmarked wage tax to general revenues because (a) wage taxes are regressive; (b) during the transition, unemployment is not an individual risk but rather a system risk and (c) the fund also finances public programs such as employment services and training which benefit society as a whole and not just the contributor, so an insurance-type funding scheme is not appropriate for these expenditures. E. Reforms In the Education Sector 1.36 Romania's education system is overly centralized and specialized. The system is designed in the first instance to turn out factors of production (semi-skilled and skilled workers) according to the projected needs of the economy as embodied in the central plan. But a more open society's polWical system and market economy will  - 14 - need more from its labor force and its educational system. It will need citizens capable of performing civic duties - formulating judgements on policy issues, choosing candidates, and demanding service from their govemment. It will need employees and entrepreneurs capable of exercising initiative and responding to events - including the loss of a job and the need to retrain in order to switch occupations. And it will need a labor force with a different skill mix: fewer engineers but more managers, social scientists, and service industry personnel. The educational system will now have to be responsive to the needs of a market economy, and to the needs of individuals (whose parents, and in the case of adults they themselves, will have a voice through the ballot box). Achieving these goals will require major system reform. 1.37 Although the Government recognizes the need for fundamental reform of the system, it also recognizes that such changes take time, and can only be achieved in the medium term. This is because the education system touches almost everyone's life with important and far reaching consequences. In a more open society, changes in national policy in education are difficult to introduce without extensive public discussion. Currently, the public is for the most part unaware of why these changes are necessary. The MOES and the Govemment as a whole will need to build a consensus around educational reform before a full-fledged reform can be implemented. The Government should begin to build this consensus now, as it is designing the reforms. 1.38 Pro-university education. Romania needs to undertake reforms in five areas: pedagogy, curriculum, textbooks, examinations, and finance and management. The starting point for education reform must be pedacioov. In order to increase problem solving abilities, more emphasis should be placed on the higher order skills of synthesis and evaluation. This will require content changes in textbooks, teacher training, certification and evaluation, and examinations. It will also require a swift opening of exchanges between Romanian educational institutions and the outside world in order to bring the country up to date and to fill the gap with the West resulting from the previous regime's ban on pedagogical information. Concurrent with the changes in pedagogy should be: (a) reform of the curriculum, to provide more emphasis on general topics: basic sciences, math, languages, humanities, and general preparation for living; and (b) reform of the structure of secondary education, reducing the specialization and the vocational emphasis. 1.39 Changing the curriculum, structure and pedagogical approach will require the production of new textbooks. However, Romania currently faces a shortage of textbooks as the state-owned publishing industry cannot meet all demands for publications. To alleviate this shortage, competition should be encouraged in the printing sub-sector. This would imply limihing the role of the Ministry to setting specifications for textbook contei t, contracting for textbook production, and evaluating the results. In redesigning textbooks, more emphasis should be placed upon teaching textbooks' (geared to different student levels) as opposed to *information-providing textbooks. More maps, charts, supplementary readers, dictionaries, encyclopedias are also needed. 1.40 National examinations should be created for entrance to both secondary and higher education. Requirements that students choose between vocational and academic tests ahead of time and that they sit for the exam at the school they hope to enter should be eliminated. Emphasis should be placed on evaluation skills; the shift in emphasis should be widely advertised, and the results analyzed with teachers and headmasters. The Govemment may wish to consider instituting examination fees to pay for these improvements. Finally, the Government is commtted to decentralizing the finance and manaaement of education, within a framework of overall  -Is - devolution of revenue and expenditure functions to districts and sub-district level units. This will require adequate provision for quality control and performance evaluation to ensure accountability, through effective central government review and increased local participation. 1.41 Higher education. By Western European standards, higher education in Romania has been available to only a small proportion of the population, especially considering that enrollment in secondary education is nearly &6 percent of the age group. Higher education enrollments have been strictly limited to the narrowly calculated manpower needs of a command economy and declined in the 190 s. For many students whose marks on admissions exams were not materially different from those who were admitted, denial of access to higher education was another manifestation of the lack of freedom and individual choice. The result is a large pent up demand for higher education, and an expectation that with the advent of a more open society, the Government will respond to the pressure for places by permitting more admissions. However, the resources are not available to accommodate a major influx without sacrificing quality. The need, therefore, is to find mechanisms by which the pressure to expand can be balanced against the imperative for quality improvement, and a reasonable compromise reached. Options include the vigorous encouragement of priv ne higher education (under a suitable regulatory framework), and cost recovery in the public sector. In the mrri im term, as the market economy develops and retums (in the form of higher wages) to higher education increase, the Govemment should begin to develop a student loan program to ensure equitable access. 1.42 Higher education curriculum would also benefit from a lowering of the degree of specialization and compartmentalization. Students should be encouraged to take courses in a broader range of subjects. At the same time, whole disciplines which are critical to the functioning of a market economy are missing or completely inadequate, including public policy and administration, western-style economics, psychology, finance and business, pedagogy, and other social sciences. Faculties and curriculums will need to be constructed as soon as possible, using external resources as required. 1.43 Resource allocation in higher education remains highly centralized. Resources are allocated according to non-transparent criteria, accountability is weak, and quality, innovation, and efficiency are not rewarded. This system should be replaced with a decentralized one, transparent to all actors in the higher education system. Since resources will not be sufficient to cover all needs everywhere, a strong element of competition for scarce public resources also needs to be injected. Within such a system, the role of the MOES should be: (a) to set rational and transparent rules, to which institutons and the Ministry are committed; and (b) to evaluate institutions' performance in following those rules. 1.44 Training and Retraining. One of the major challenges for Romania in the 1990s will be the development of modem pre-employment training and adult re-training programs. The Government has already recognized how important the retraining of the unemployed is, and has included funding to develop and implement programs as part of the funding provided for in the Unemployment Compensation Fund. But the currently employed will need training and retraining also. Romania has excess capacity in industrial skill training, especially in heavy industry, and insufficient capacity for training in areas whose skills are likely to be in increasing demand over the next five years: management and finance, communication skills, commerce and trade, and entrepreneurship. The Government should take steps to expand pre-employment training and adult retraining programs in these areas,  -16 - and cut back on the number of places in narrow industrial fields. As with other elements of Romanla's education system, the training curriculum and teaching methods need to focus much more on learning by doing and experimentation and less on rote (repetitive) teaching methods. In expanding training, the Government should not seek to be a monopc'y provider of training, but instead a regulator (certification) and partial financier. Companies should be encouraged to develop their own training programs, financing policies should be developed to encourage multiple providers, and the Government should develop its own regulatory capability. F. Health and Family Planning Services 1.45 In addition to providing low quality health care, Romania's system is over-centralized, with few incentives for efficient service delivery, and little consumer choice. Citizens are assigned to primary health care centers based on where they work, or, if they do not participate in the labor force, where they live. Although districts now have significant budgetary flexibility, a ma7a of regulations still restricts the ability of managers to use resources efficiently. Physical resources are still scare in the health sector, as the failure to develop a domestic medical supply industry has left this sector heavily dependent on imports. But even if managers had more resources, they face few incentives to deploy them more efficiently, as they are neither rewarded for good performance nor sanctioned for bad. 1.46 Romania's health care delivery system needs a fundamental reform to correct these deficiencies. This will take time, and critical issues need to Ue attended to in the short run in order to halt the deterioration in health status of the population. At the same time, resources ar6 tight, so wastage needs to eliminated where possible to help finance improvements. Over the next 18 months, the Government should: (a) halt the deterioration in health status, by improving supplies and maintenance of facilities so that the primary health units and testing centers can do their job to check the spread of infectious diseases and lower infant mortality; (b) improve internal resource allocation, by reviewing regulations on the allocation of physical resources, and eliminating or modifying unnecessary ones (such as the minimum size of hospital departments) so that districts and managers can use their new budgetarv flexibility more effectively to meet local needs; (c) reduce wdste and increase consumer choice, by eliminating rigid rules with regard to where patients can seek treatment, analyzing the existing distribution of facilities (health mapping) and closing or consolidating underused faclities or faclities in inappropriate location (e.g public enterprises about to be closed or privatized); and (d) improve matemal and child health, by developing an integrated reproductive health education and family planning service program, focussing on the importance of individual choice and consumer participation in family planning, alerting the public to the risk of STDs and the role of condoms and to the need for regular screening exams, and providing for an expansion of family planning centers to moet the demand for safe family planning methods. The Govemment should also initiate measures to increase unit manager accountability. This involves (a) setting up performarce measures for the health system; (b) monitoring outcomes and providing feedback to managers, and  - 17- (c) requiring local authoritles to justify their 1992 budget requests on the basis of their performance on these indicators. Finally, to strengthen its ability to evaluate economic policy options in the health sector, the MOH might wish to develop an Internal policy unit. 1.47 The Government is understandably anxious to foster a private health sector. However, its initial steps In this area could seriously damage the health sy3tem In the medium term. Experience in other countries suggests that a private sector can provide health services equitably, at high quality, and at an affordable cost only within a proper regulatory framework (which Romania does not now have). Romania should either move very rapidly to develop this framework (including a new financing scheme), or it should slow down its privatization program. This applies especially to recent steps to allow public facilities to rent their facilities out to public physicians for private practice, which are likely to encourage corruption without improving overall quality. Romania should, however, rapidly privatize facilities where a financing scheme is in place (e.g. childcare centers, spas, pharmacies). 1.48 At the same time, the Government should begin the development of a medium ternn reform strategy, which addresses the future structure of Romania!s health care provision and financing, including the respective roles of consumers, the government, and the private sector. These reforms need to be considered as a package, as decisions with respect to one area will determine options in others. In formulating these reforms, the Govemment may wish to review the experiences of other OECD countries, as there is no one model for health care reform. An integrated reform program should address the following issues. (a) Financing. The central issue for the Government is reimbursement of providers. Currently, only budgetary units are reimbursed with public funds, and this is done according to expenditure categories. In order to encourage multiple providers and consumer choice, Romania should switch to a system of reimbursement based on product (i.e. patients under care, operations performed, etc.), which treats public and private providers equally. This reform should be enacted regardless of how revenues financing the health system are collected, or what the share of health sector spending is in govemment expenditures or GDP. The share of public resources devoted to health care is essentially a political choice, independent of the tax structure or whether tax revenues are earmarked. The GovernmentYs current efforts to earmark taxes for the health system is misplaced, as Romania will only be able to devote more public resources to health care once it is able to cut back on other, less productive expenditures (e.g subsidies to unproductive firms). (b) Decentralization of service delivery. In addition to developing a financing system which facilitates consumer choice, the Government will need to face the issues of ownership, management and accountability in designing the future health care system. Ambulatory care Is more suited for private sector provision (under govemment regulation), as providers can enter and exit more easily given the low overhead costs. To effect this reform, the Government will need to develop a plan for privatizing or leasing existing public facilities. Institutional care is more difficult to privatize fully, as (i) information asymmetries and high costs of poor quality make relying a patient choice for accountability more difficult, and (ii) the large fixed costs imply that the number of providers required for competition and consumer choice will lead to overcapacity and more expensive health care if the costs of this overinvestment are passed on to consumers through  *18- financing schemes. But even without full privatizatlon, management can be decentralized and consumers given some choice of provider once local management accountability (e.g. elected hospital boards or other local regulatory body) are established and protocols for reimbursement defined. (c) Ensuring quality. Key to a reform strategy which implies more consumer choice, as well as to better outcomes from the current system will be consumer education and Increased outcome monitoring. The Government needs to develop a program of health education which would educate consumers: (a) regarding health care choies (e.g. what to look for in a doctor, where to complain if they are not satisfied with their health care); and (b) regarding steps they can take to stay healthy (e.g. how and why to stop smoking, reduce cholesterol and fats In the diet, the importance of regular screening examinations for treatable diseases, etc.). At the same time, the Government should improve information systems at the federal, local and institutional levels to increase the ability of mangers and oversight bodies to monitor the quality of the system outcomes. 1.49 The sequencing of reform. This report presents an agenda of reforms, not all of which can be or should be implemented immediately. Indeed, an overly ambitious, poorly prepared, partially implemented reform program is often at least as dangerous as no reform at all. Highest priority should be given to two types of activities in the short run: (a) creating the enabling environment for private sector development and public sector restructuring; and (b) develcping a medium term strategy for effective social service delivery and human capital development in the medium term, and reaching political consensus on that strategy. Included in group (a) is the deregulation of the labor market, the development of pro-active employment programs (including retraining activities), the reform of the system of social insurance and social assistance to provide a functioning, affordable social safety net, and the removal of the responsibility of providing social services from enterprises (see box). Once the these initial activities have been completed and strategies prepared, the new investments necessary to reshape the sector should begin (see Annex 1).  SOCIAL. SECTOR REFORM PRIORITIES, 1991492 Labor M1g1SB. * Remove inr,fviauaC wage conttols * Legatize flexible ernployment contracts Provide emnployment services Restsruzture supp'rt fos fanmiles (W.x iedl & atlctwance), improve targeting * Reduce abuse of side leave borteaits * tmprove Wministration, targeting of unemployment bnefts * Develop strategy for pension reform, begin Implern,nation Dsvelop mean8 tested soial asstanw svstm Develop strtegy to increase output of higher level cognitive skIlls, decrease special.atfior and improve transparency of management and resource allocatfon ff baltb bvicas adF lnn -emove unnecesawy regulations on organizaton and us. of f%cMes * evelop prograrm to c e/oonsolidate/transter enterprse. faWIoe * Decentralize management of resourcs etc. * Reform financing syste3m to facilitate autonomy, private seor dovelopment * Develop and train network of family planning providers Formulate National Health Stiategy to guide medium term reform program  - 20 - ANNEX I ROMANIA: SOCIAL SECTOR REFORM Issue Objective Means 2 1. Labor Markets A. Wage Policy Prevant cost-push Inflation Incomes policy [l,M] (2,21-2.25, 2.37-2,38) Provide incentives for De-control individual wages [I] performance, human capital acquisition B. Employment Maximize productive Provide employment services [I,M,L] Policy employment (2.26-2.35,2.39) Keep minimum wage low [1,M,L] Draft regulations to facilitate part-time and short term employment [I] Lower payroll taxes as part of tax reform [M] Facilitate restructuring, new Provide training in entrepreneurship, new skills ventures needed by the market economy (see 4.C below) [1,M] Draft legislation defining the rights and obligations of employers with respect to the termination of employment [lJ Remove obstacles to labor market mobility (uniform benefit system, housing reform, etc.) [I,M] Improve information/policy Develop labor market information system IM] analysis capability 2. Poverty Relief Develop/strengthen progrmms Establish subsistence poverty line [l] durina Adiustment to raise living standard of poor (3.30-3.32,3.36- Broaden in-kind social assistance programs 1I] 3.38,3.44) Develop and implement means-tested cash social assistance program [Ml Monitor levels of minimum insurance benefits; review duration of unemployment benefit [1,M] Continue to ensure access to health care, education regardless of income l1,M,L] Maximize productive employment (see 1. B above) Numbers in parentheses refer to paragrap.:s in Chapter 2-6 where the issue is discussed. 2 Letters In parentheses refer to the sequencing and expected duration of actions; I = Immediate (within 0-12 months); M = Medium term (within 9 - 24 months); L = medium to long term (within 2 - 5 years).  - 21 - ANNEX I Issue Oblective Means 3. Social Assistance and Sca Insurance A. Pensions Develop reform strategy Develop model to simulate effects of reform (macro, (3,19-3.23,3.41- micro) [I] 3.42) Improve labor supply incentives, Gradually raise and unify retirement age for full mobility pension; strengthen benefit/contribution; increase employee contribution (Ml Improve macro balance, Unify penbion funds on a PAYG basis (1] management Improve transparency, Develop computerized records of contributions, accountability entitlements available on demand for individuals (Ml B. Family Eliminate wasteful spending Restructure benefits with declining or equal benefts Allowance for additional children [I) (3.25,3.39-3.40) Eliminate (a) birth grant; (b) pension for mothers with 3+ children [I] Target toward the poor Eliminate payment of family benefits, and retain existing wage tax credi, but making it flat rate and refundable for those below the tax threshold or remove tax credit for households with children and retaining the family benefts with universal eligibility 1li C. Sick Leaer. Reduce potential for abuse Introduce a one-day waiting period [I] Benefirs (3.24r.-'1.0 Require employers to bear costs of days 2-20, monitor abuse [I] Reduce costs of administration Remove requirement for enterprise doctors to certify short-term sick leave; MOLSP reviews certification on a spot check basis [1) D. Unemploy: it Target benefits, reduca cost Eliminate benefts for self-employed, new entrants [I) Benefits (3.26-3.28,1 4)1 Simplify benefit structure [Ml Improve administration, Develop administrative review procedure (I] transparency 4. Educa2on and Trainina A. Pro-Univorsity Pedagogy which supports Teacher training and exchanges (l,M] Education acouisition of higher order (4.37-4.45, 4.62- cognitive skills Develop new materials [M,LJ 4.67) Reform examinations [M,L] Curriculum which develops More emphasis on general subjects and general higher order cognitive skills, preparation for living [M,L] flexible, well-rounded graduates Complete reform o; secondary school curriculum, eliminating emphasis on job-specific skill acquisition [LI Textbook production to support Privatize textbook production [Ml reforms Train MOES staff in bid specification, contract award techniques (Ml  - 22 - ANNEX 1 Issue Objective Means Fair examination system which Develop national examination for entrance to tests for higher order cognitive secondary school and higher education [Ml skills Institute exam fees to pay for development [M] Greater responsiveness to local Decentralize management, establish accountability needs (e.g. local school board) [M,LJ Provide information to citizens on performance of schools [L] Increase resources available for Evaluate options for local finance [Ml pre-university education B. Higher Expand access to higher Increase places available in 4 year public higher Education and education education; finance expanded access through user ScientHifc fees [L] Research (4.46-4.59, 4.68- Develop short courses, 2 year programs [M] 4.71) Support growth of private higher education through accreditation systems [Ml Investigate feasibility of studen* loan program [LI Improve resource allocation Develop transparent and competitive systems for funding programs [M] Allow rectors more freedom to allocate budgetary resources 11] Improve quality Solicit assistance from westem institutions to rapidly transfer technology, knowledge [I] Reduce specialization in curriculum [Ml C. Post-Secondary Training in skills in demand by Reform curriculum [Ml Education and market economy Training Improve quality (less focus on rote methods) [L] (4.5-4.59, 4.72- 4.76) Encourage private sector providers (esp. with Unemployment Fund resources) [LI Improve equity Evaluate altemative systems of finance [LI Improve flexibility Develop short courses [I] Encourage private sector providers [I] 5. Health Services and Restructure health service Develop and implement national health strategy V] Eamil-v Planning delivery and financing (5.51-5.74, 6.22- 6.28) Short run improvements to Review regulations on physical allocation of reduce waste, increase resources [1] flexibility, consumer satisfaction Eliminate rigid patient allocation rules, provide choice [I] Begin development of management information system [M,L] Equip primary health care centers to reduce usage of tertiary centers [M,L]  - 23 - ANNEX I Issue Objective Means Reduce parallel healtiH facilities, Develop program to consolidate/close/transfer underutilization enterprise facilities [Ml Encourage local authorities to consolidate/close/redeploy underutilized faclities [i] Develop private sector Reform financing system [Ml Develop regulatory framework for private sector [1,M] Decentralize resource allocation Prepare handbook for budget preparation and and increase transparency execution which (a) clarifies roles of district and MOH and (b) promoted decentralization (1,MJ Convert spas, childcare centers to autonomous management [1] Improve quaiity of health care Equip and supply health care systems [M] delivered Develop health education program [Ml Improve accountability for health outcomes [M] Develop training programs to (a) update professional and technical staff; (b) increase the supply of skills in short supply (e.g. nurses) [Ml Improve access to family Develop and train network of providers [1,M] planning Develop education, social marketing program [M] Improve demographic plinning, Undertake fertility and contraceptive methods survey policy capability [M] Improve health policy Train staff in health economics, management and formulation capability \ public health [M] Develop policy unit in MOH [1,MJ  - 25 - II. LABOR MARKETS A. Introduction 2.1 Rornania's system of centralized planning and resource allocation provided most of the working age population with stable employment and a steady income for over 40 years. All who wished to work were allocated a job, inflation was for the most part avoided, and real wages increased with economic growth (Table 2.8). However, the same system also contributed to inefficient resource allocation and perverse economic behavior, leading to economic stagnation. Dissatisfaction with opportunities to earn a living led 15 - 20,000 Romanians to emigrate annually in the 1980s, despite strict controls on foreign travel. 2.2 Romania is undertaking a transformation to a market system. This process necessarily includes the establishment of a labor market, with employers and employees contracting privately on issues of employment, hours of work, and compensation. Establishing a labor market will require policy reform as well as the creation of new institutions to insure that the market runs as smoothly as possible that negotiations are conducted fairly, and that those unable to find work are given assistance to become productive again. In this chapter recent trends in labor allocation and compensation are discussed, issues surrounding this transition process are reviewed, and recommendations on reform of the labor market are offered. B. Policies, Institutions and Trends 2.3 Employment. Labor force participation is high in Romania (Table 2.1). 87 percent of working age men and 81 percent of working age women participate in the labor force. Women account for 45 per cent of the workforce, and within state sector employment are most highly represented in the public health and education sectors (Appendix 3, Table 2.3). They are under represented in the transport, construction and state agriculture (as opposed to cooperatives), but are proportionately represented in industry. 2.4 Under the system of central planning, the employment structure in enterprises and budgetary units (autonomous agencies) was determined centrally, as a result of output targets and technical production coefficients. The distribution of employment by sector and geographical area was simply an aggregation of these technical decisions. Upon leaving school, new labor force entrants were assigned a position.2 To ensure that labor remained In its centrally determined location, most cities with a population of over 100,000 were declared closed, requiring a residency permit to emigrate. Graduates of professional schools (doctors, teachers, etc.) were given five year assignments in rural area, and only after completion of these assignments could they apply for jobs in the cities (regardless of whether they already possessed a residency permit). 2 Some new entrants were actually assigned to a firm at age 14 and this firm paid part of the cost of their training. In return, new employees were obligated to work at the firm for a certain number of years. (See Chapt. 4).  - 26 - TABLE 2.1: ROMANIA - POPULATION AND EMPLOYMENT. 1960 TO 1989 (thousand or percent) 1960 1970 1980 1985 1989 Total population 18,495 20,361 22,282 22,779 23,211 Urban n.a. 37.0 46.3 50.2 53.2 Rural n.a. 63.0 53.7 49.8 46.8 Males 48.82 49.11 49.34 49.34 49.33 Females 51.18 50.89 50.66 50.66 50.67 Under 16 n.a. 5,640.1 6,247.9 5,979.5 5,907.0 Working age population n.a. 11,430.3 12,422.3 12,806.1 13,004.5 Males: 16 to 59 n.a. 5,912.7 6,528.2 6,762.2 6,873.4 Females: 16 to 54 n.a. 5,517.6 5,894.1 6,043.9 6,131.1 Over working age n.a. 3,290.8 3,611.7 3,993.0 4,299.9 Dependency ratio n.a. 78.1 79.4 77.9 78.5 Total employment a/ 9,537.7 9,875.0 10,350.1 10,586.1 10,945.7 of which: Males 53.5 54.1 56.1 55.1 54.8 Females 46.5 45.9 43.9 44.9 45.2 Male Participation Rate n.a. 90.4 88.9 86.2 87.3 Female Participation Rate n.a. 82.1 77.1 78.7 80.6 In Industry & Construction 20.0 30.9 43.8 44.5 45.1 In Agriculture 65.4 49.3 29.8 28.9 27.9 In other sectors 14.6 19.8 26.4 26.6 27.0 In State Sector 33.9 51.0 71.3 72.6 72.9 Total Pensioners n.a. 2544.3 3053.6 3165.7 3347.6 As percent of employed n.a. 26.8 29.5 29.9 30.6 a/ Excluding military personnel. Source: National Commission of Statistics  27 - 2.5 Reflecting Romania's Industrialization strategy, the distribution of employment In the economy shifted from agriculture to Industry over the last three decades (Figure 2.1). Agriculture's share of total employment has fallen from almost two-thirds of total employment in 1960 to slightly over one-quarter of total employment today, while the Industrial and construction sectors are the largest employer of labor, accounting for 45 per cent of all employment (Table 2.1). The shift from agriculture, where private or cooperative employment was more common,to Industry and services has also resulted in the increasing dominance of the state sector In employment. In 1960, only 34 percent of total employment was in the state sector, but today almost three-fourths of total employment Is in state-owned enterprises, budgetary units and central government. The next largest employer Is the cooperative sector, with over 20 percent of the labor force. Official statistics show 5 per cent of aWl employment In the private sector,3 but since the revolution, private sector employment is reportedly growing rapidly. Figure 2.1: Romania - Employment Distribution by Sectors, 1960, 1970, 1980, 1989 100% - 75% - 50% - 25% - 0%- 1960 1970 1980 1989 Agriculture Industry l Services 3 fit Is possible that this figure reflects a statistically convenient compartment to record persons theoretically in the worktorce but unidentified through official recording procedures.  - 28 - 2.6 Historically, unemployment has not been a problem in Romania, but there are indications that higher levels of unemployment are emerging. In September, 1990 only 50,000 persons had registered at unemployment offices (less than 0.5 percent of the labor force) (Tables 2.11, 2.12). However, with the passage of the unemployment benefits legislation in February 1991, registrations increased, such that by end May, 1991 over 150,000 had registered of which roughly 87,000 were collecting benefits. The MOLSP believes that actual unemployment is more than the registration would indicate. Of the 120,000 school leavers entering the labor market In June of 1990, only 40,000 have reportedly found employment in enterprises; the balance have not registered at unemployment offices and are believed to be unemployed. The Ministry also estimates that as many as 500,000 workers (about 4.6 percent of the workforce) are redundant, but still employed In the state enterprise sector. 2.7 Trade Unions. Prior to the revolution, the role of trade unions in enterprises was to ensure that target outputs were met at the enterprise level. Thus, they essentially represented the interests of the state, not the interests of the workers. After the revolution, the enterprise structure of unions organization was maintained, but now unions are expressly concerned with protecting the living standards of their members, and are adopting a more confrontational role inside enterprises. New wage legislation approv6 I in February, 1991 gave unions the right to participate in collective bargaining negotiations to set enterprise compensation policy. 2.8 Wages and Productivity. Until 1989, real wage increases were moderate. Real salaries in the state sector (including bonuses) rose by only 3 percent from 1985 to 1989 (Appendix 3, Table 2.4). However, since shortages were pervasive during this period, price indexes cannot accurately measure changes in the standard of living. Owing to the low variation in basic wages allowed in the wage schedule, the distribution of wages in 1989 was very narrow, 72 per cent of all state sector employees earned between 2251 and 4000 lei per month in 1989 (Appendix 3, Table 2.5). Wage differentials by skill level were small, with 'specialists earning only about 14 percent more than workers on average. There was also relatively little variance among sectors. The lowest paid sectors were agriculture and social service delivery (municipal services, education, and health) while the construction sector pays the highest salaries on average. 2.9 In the industrial sector, inicreased employment, shorter working hours, and falling output has caused average labor productivity in 1990 to be well below 1989 levels. Productivity fell most sharply in the electric and thermal energy and coal sectors (Appendix 3, Table 2.6). Concurrently monthly wages rose by an average of 19 per cent in nominal terms In the industrial sector. For the economy as a whole, it is estimated that real wages rose by 12 percent (not including the November 1990 cost-of-living bonus). Even allowing for inflation (which was modest), there appears to have been a significant rise in real wages and labor costs In all sectors. 2.10 Wage determination In enterprises. Until 1991, compensation in enterprises was primaril4 determined by a govemment schedule, which set the employee's basic wage and allowances, and by firm performance. The basic wage schedule distinguished between workers and 'specialists with roughly 80 percent and 20 percent respectively of employed persons in 1989.4 Specialists pay was primarily determined by education 4 The Romanian term for specialists is technical, economic and other staff. For convenience this term is replaced by the term *specialists' in this report.  -29- and osxperlence on a common scale with 41 steps, which started at 2000 lei per month, and rose to a maximum of 7070 lei per month. Workers' pay determination was more complex, and was determined by the job. Each of the forty branches of Industry had its own scale and each scale category had seven pay levels. Workers qualified for a particular level by virtue of experience and qualifications. Within each category there were three steps, promotion from one to anothe, coming with age and experience. There were significant distinctions in terms of basic pay between industrial branches: underground mining workers enjoyed the highest wage rates, while forestry workers the lowest. 2.11 In addition to the basic wage, a number of allowances were paid. Workers were eligible for all of these allowances, and spe:ialists qualified for some such as the longevity allowance and paid holidays. The main allowances were as follows: (a) overtime: calculated as an additional 50 per cent of base salary for the first 2 hours; an additional 100 per cent for subsequent hours; an additional 100 per cent for working on Saturday or Sunday; subject to an annual limit of 120 hours of overtime; (b) special conditions such as dusty or hot working conditions: between 5 per cent and 25 per cent of base wage; (c) dangerous conditions, such as areas of high voltage or areas of height between 5 per cent and 25 per cent of base wage; (d) shift working: 25 per cent of base wage; (e) holidays: wages are paid for between 15 to 24 days per year, depending upon the duration of service within the enterprise; (f) longevity: based on the longevity of employment within the enterprise, at a rate of between 5 per cent and 15 per cent of base wage. 2.12 Enterprises often also provided cash and non-cash benefits to employees, through the enterprise social fund (fees for government childcare, for example). However, the value of these benefits does not appear to have been a high fraction of pay. The principal financial benefit was profit sharing, which was distributed only after payment of (a) taxes, (b) loan repayments, and (c) allocation to various enterprise funds. In practice, profit sharing was a relatively minor part of compensation. Other benefits includes canteens which offer cheap meals to workers (and sometimes to families and pensioners). 2.13 Total employee compensation was tied to output targets (until 1990, as agreed in the central plan). Each year, enterprises would commit to achieving agreed target outputs, and to fulfil certain other conditions, such as to deliver output of a particular quality and to export a given proportion of output. Failure to achieve tither output targets or qualitative targets resulted in the deduction of up to 30 percent of individual workers' wages and 50 percent of individual specialists' wages. The system encouraged abuse, as enterprises employed numerous devices to raise reported output and avoid docking workers' pay. For example, fictional stocks were used to justify the difference between factory gate exports and reported product on. But each year the norms rose, so that in the last years before the revolution, norms had risen to such unrealist,c levels that planning agreements were  - 30 - meaningless. Nevertheless, throughout the latter half of the 1980s, most employees reported being subject to end- of-year pay cuts, a source of great resentment. 2.14 Changes in 1990. The new Government which followed the revolution of December, 1989, Immediately took measures to improve worker satisfaction. Wage increases were given throughout the economy, and normal working hours per week were reduced by 8 hours, to the current 40. Previous limits on those eligible for special allowances were cancelled, and all workers who qualified for special payments were to receive them. The target system was cancelled, and enterprises were instructed to pay wages at the scheduled rates, irrespective of achievement. The resulting decline in productivity persuaded the Govemment in April of 1990 to restore in part the previous basis of pay, and linking salaries to new 'norms', of marketable production. However, the level of the new norms were a matter for negotiation, and so firms negotiated more favorable norms enabling workers to receive higher wages for the sr,ne or a lower level of output. As wages continued to rise the Government finally 'froze wages and salaries for six months from June 30th, 1990. 2.15 Stabilization policy. In October, 1990, the Government began a price liberalization program and initiated an incomes policy to help moderate inflation. A forward-looking 'indexation' system to compensate employees for the effects price increases was instituted. The indexation is granted in the form of a fixed payment in addition to wages. In November 1990, this payment was set at 750 lei/month, (subsequently raised to 975 lei/month in January to compensate for the new tax regime). In April, as more prices were adjusted or liberalized, the payment was raised to 2825 lei/month. On May 1, this payment was incorporated into base wages. 2.16 The Government also prepared, and Parliament approved in February 1991, a law covering the setting of wages in enterprises and autonomous agencies. This law revoked the complicated wage fixing mechanism described in para 2.10 and sets the same rules for all sectors. Under the new law, wage scales (base wages, entitlement to bonuses and amount), hiring, and promotion criteria are to be set by collective contracts between workers and managers. Contracts are valid for one year, and disputes are to be subject to ;ompulsory arbitration. Collective bargaining agreements are, however, subject to the national income policy. The policy set forth in the law divides occupations into six groups, and sets a minimum base wage (2000 lei/month) for all groups and maximum base wages for each group. Maximums ranged from 2900 lei/month to 11400 lei/month. Extra payments for overtime, hazardous conditions, etc. may be added to these maximums within limits set forth in the wage law. Firms may raise wages of individuals above the maximums set forth in the law, but they will then face a tax on profits equal to 40 to 80 percent of the amount of the wage increase above the limit. These max,.nums and the minimum have subsequently been adjusted upward as the above 'indexation payments* were incorporated into wages. 2.17 In order to control the fiscal deficit, the Govemment also increased taxes on wages, both to the employee and to the employer, significantly increasing labor costs (see box). The largest increase was in the social insurance contribution, which rose from an average of 10-13 percent of the wage bill depending on the sector, to a flat 20 percent in January 1991. This tax was further increased to 22 percent to fund a pharmaceutical insurance scheme. The Govemment also instituted a wage tax, meant to be converted into an income tax by 1993. The scale is progressive, although the threshold is quite low - only the first 500 lei/month is exempted. The marginal tax rate on income above the minimum wage is 24 percent, and the maximum tax rate (over 25,000 lei/month) is 45  - 31 - percent. Employees with children are given a 20 percent tax credit. The Government estimates the average wage tax rate to be about 18 percent. WAGE (PAYROLL) TAXES IN ROMANIA As a result of the tax measures enacted in 1990, Romania taxes wages very heavily. ftaid by Emiloyers Social Insurance 22% Unemployment Insurance 4% Patd OX Employees from Saiary Supplementary Social Insurance 3% Unemployment Insurance 1% Wage Tax (average) TOTAL 48% Thus, for every 100 lei Increase In pay, 48 lei must be paid to the Govemment Irnternational experience 1uggests such high rates of wage taxation (a) decrease emnployment; and (b) induce the growth of a parallet economy to escape taxation. Wage taxes are also regressive, as poorer people tend to rely on wages for a greater fraction of their income than the rich. C. Issues for the 19908 2.18 The GovernmentYs decision to transform the economy into a market oriented one, with significant private ownership of the means of production and competition in goods and factor markets is a courageous one. The Government recognizes that this will involve major reforms in pricing, tax, ownership, and incentive policies, as well as the liberalization of product and factor markets. To date the steps the Govemment has taken toward liberalization in the product market and toward establishing financial independence in enterprises are bold. Uberalization of the labor market is clearly an important next step in the reform process. But determining salaries and employment through the market will be problematic in the short run. Forty years of central determination of employment and salaries means that an integrated labor market does not exist. The system of centralized planning leaves a legacy of Inefficient resource allocation and economic behavior unsuited for a market economy, so many firms report both overstaffing (primarily in unskilled and semi-skilled labor) and shortages (in skills such as accounting and marketing). At the same time, current rigidities in the system (e.g the shortage of housing) will continue to prevent employees from moving to the best job given their skills and preferences, thereby lowering  - 32 - productivity. Finally, firms are inexperienced in choosing their own employment levels and skill-mix, and basing wages on performance and value to the firm. Romania faces a difficult transition period. 2.19 Labor market policy during the transition period should have the following goals: (a) contribute to the reduction of macroeconomic imbalances and to price stabilization; (b) support the process of economic restructuring by encouraging the efficient allocation of labor within the economy; and (c) maximize productive employment. 2.20 The pace at which the government can decentralize and decontrol labor market policies depends on the overall rate at which competition is increased in the economy. Without a competitive output market, the government has no choice but to regulate the labor market very tightly to prevent the emergence of cost-push inflation. But once competition and more private ownership Is introduced in the production of goods and services, the government can let market forces operate. In the sections below, these transition issues are discussed In more depth. 2.21 Wage policy during stabilization. A significant portion of the macroeconomic imbalance between supply and demand in the economy is related to the large wage increases which were granted In 1990. In the short run, the Government will have to have tight controls on global wage Increases in the state enterprise sector to prevent an inflationary spiral following the price liberalization and realignment of ce",rolled prices. As pri^es move upward in response to the devaluation and the price liberalization, wage eaMers wii. naturally seek to mainrqin real incomes and will demand an adjustment in nominal wages. At least in the short run, ma ntenance of real incomes for everyone is inconsistent with macroeconomic stability, and average real wages must fall. The Government can administer this fall through controls on individual wages or through controls on the wage bill at the firm/entiy level. 2.22 The Government's current policy, expressed in the new law on compensation is to continue to control individual wages (although the new law does allow for global wage controls or wage freezes at Govemment's discretion). The new law is a major step forward in liberalizing the labor market. Firms now have significant freedom to adjust wages according to performance, supply and demand, and so from a micro economic perspective it is a major improvement. From a macro economic perspective, however, the Govemment's policy may be problematic, as in a more decentralized economy enforcement of limits on individual wages are difficuh to monitor. Experience in other countries has demonstrated that enterprises are endlessly creative in redefining job specifications and reclassifying employees in order to avoid penalties. As a result, wages Increase while wage rates remain unchanged, a phenomenon known as 'wage drift". Second, during the initial period of price liberalization when inflation is unavoidable, the Government will have regularly to review the limits. For this purpose, the Govemment Intends to continue to apply flat rate "price compensation type adjustments monthly throughout 1991. This approach could jeopardize the ability of public sector firms to attract or retain employees with skills In high demand, whose wages should rise faster than the average.  -33- 2.23 An alternative, less complex approach to fighting cost-push Inflation Is for the Government to avoid completely the problem of setting individual wages and instead set rules on the allowable nominal increase in the overall wage bill of firms over a given time period (6-12 months). This limit can be enforced (and at the same time made more flexible) through the use of an excess wage bill tax, similar to the tax on individual wage Increase in the new law. Firms which are profitable could increase the overall wage bill above the limit, but a tax would be levied on the amount of the salary fund awarded above the limit. Less profitable firms could raise wages by a lower amount, or shed labor in order to grant a wage increase. It is preferable to establish the permitted increment to the wage and salary fund based on expected inflation (e.g. a forward-looking approach), adjusted for the change in national labor productivity, as backward looking schemes tend to continue inflation. But in order to ensure that firms do not award Increments to labor when productivity is falling, some adjustment must be made for national labor productivity gains (not enterprise level productivity, which would unnecessarily favor capital intensive firms). If the Govemment adopts this approach it could also do away with the flat rate *indexation scheme, which is awkward and has the disadvantage of compressing an already compressed wage structure. 2.24 The pre-conditions for this scheme to work satisfactorily are: (1) enterprises must operate according to the normal rules of market behavior, in particular loss making enterprises must be closed and not subsidized by government; (2) managers must have the right to determine the appropriate level of wages and salaries for their employees; and (3) managers must have the right and the capacity to determine how many employees to hire. 2.25 The proposed policy instrument is relatively simple to administer, and will support other macro- economic policies to prevent 'cost-push' inflation from wage increments. The disadvantage of the approach proposed is that it discourages employment growth within enterprises. Recognizing these disadvantages, some economists have recommended a tax on averace wages instead of the wage bill. The choice is not clear cut, as an average wage approach encourages enterprises to replace high wage employees with lower paid ones, eroding productivity. Most enterprises have excess labor and compressed wages, and thus a limit on the wage bill appears more appropriate in the short run. Modifications for the medium term are proposed below. 2.26 Employment policy Issues. As Romania moves away from centralized planning no longer will: (a) workers be assigned to firms at age 14; (b) school places be determined on the basis of a detailed central olan; or (c) firms be encouraged to keep workers even in times of slack production. This should cause a major increase in labor turnover. In OECD countries, on average over 10 percent of the labor force changes jobs in any one year, most by choice. In addition, there will always be new entrants from school (and retirees), as well as people leaving the labor force temporarily for various reasons. The govemment needs to develop policies and programs to facilitate this movement. 2.27 For planning and analysis purposes, unemployment Is traditionally divided into three categories. (a) Frictlonai unemployment is caused by voluntary movements into the labor force or by firings for individual-specific reasons; the duration is determined by the time it takes the unemployed to search for a job, which is in turn determined in part by whether unemployed have any income  - 34- support available and how much (e.g. intra-household transfers, unemployment benefits or other government Income support). (b) Structural unemployment, caused by mostly Involuntary movements of the labor force between sectors/occupations as the structure of the economy changes In fesponse to external or internal events; the duration is determined by the time it takes those laid-off from declining Industries either to find a job with their existing skills in a new industry or to retrain. (C) Cyclical unemployment, caused by firms laying c0 workers In a recession; the duration is determined by the length of the economic cycle. 2.28 Romania is likely to suffer from all three types of unemployment during the transition period, and from some level of frictional unemployment as well as bouts of structural and demand-deficient unemployment as long as it has a market economy. As unemployment is essentially a waste of resources, governments should and do try to lower unemployment through a variety of means. Frictional unemployment can be reduced by helping to mrke the unemployed's search shorter, e.g. (a) by providing or encouraging the provision of information about job openings; (b) by providing or encouraging the provision of information to the unemployed about how and where to find a job (interview skills, counselinq and job search training, etc.); and (c) by not providing excessive income support, which reduces the incentive to take a job. Government programs in this area are usually called employment services. 2.29 Structural unemployment can also be reduced by shortening the search time through the provision of employment services, but here there is an opportunity to be gro-active, as plant closings or industry declines are usually anticipated. Government or private teams can move in quickly to enterprises where mass- layoffs are expected to work with the potentially une,nployed before they become dependent on unemployment benefits. In addition to the measures identified for frictional unemployment, such a program could include government-sponsored training/retraining programs, (or at least the provision of information regarding such programs), and relocation information and assistance. Studies in Canada found that such programs reduced the average duration of unemployment for a displaced workers by two-thirds, demonstrating how cost-effective these programs are. 2.30 Cyclical unemployment is reduced primarily by increasing the demand for labor. This type of unemployment usually occurs in concert with the other two types, and indeed for the most part is really a prolongation of the other two types, as firms usually try to keep existing employees in a downturn, but they then avoid hiring new ones even as demand is picking up. But firms whose product is subject to heavy cyclical fluctuations (such as capital-goods or consumer durables producing firms) may have to lay-off workers during a downturn. While all of the above programs can be of some help during this periods, most countries fight this kind of unemployment by (a) trying to help workers stay out of poverty by financing consumption through unemployment benefits, the period of which may be lengthened if the economy Is in a severe recession; (b) trying to increase overall demand for labor through incomes policies which lower wages, through temporary wage subsidies, which accomplish the same purpose, or through emergency public sector employment policies; or (c) using appropriate macroeconomic and microeconomic policies to try to promote the overall economic growth and to minimize economic cycles and their impact on business investment and growth. Policies which help firms retain workers  - 35 - during a down turn (such as allowing part time contracting) can also be effective. In the capital-constrained environment of Romania, small business support services are one microeconomic policy which could have a large growth and employment payoff. Cyclical unemployment can also occur when a region's economy is depressed. Regional development policies can be useful in alleviating this type of unemployment. 2.31 Income support. All OECD countries and many middle income developing countries provide some income support to unemployed workers. This is done for three reasons. First, if managers know that they are not throwing workers and their families into starvation, they will be more likely to lay them off or fire them when appropriate. Second, finding a new job does take time. If a worker has no income support, s/he and their family could fall into a cycle of poverty involving loss of housing, malnutrition, etc, which in the long run would be more costly to society than the provision of temporary unemployment benefits. Third, unemployed workers are usually a politically powerful and potentially destabilizing force (especially since they have time on their hands), and a government undertaking a difficult stabilization or reform programn cannot afford *o neglect this group. This support is usually provided, in the first instance, through unemployment insurance programs, and as a fallback, through means-tested social welfare programs. To avoid prclonging unempioyment, support which is not means- tested should be of short duration (e.g. one year or less). 2.32 Facilitating the restructuring process. Despite the fall in production, open unemployment in Romania is currently low for several reasons. First, the government has, until now, subsidized loss making enterprises. Therefore, managers have had no incentive to make workers redundant, since there was no penalty for inefficiency. Second, managers were not allowed, by government regulation and enterprise practice, to dismiss workers except for absenteeism or misbehavior. Specifically they could not make workers redundant for purely economic reasons. Third, managers have been reluctant to dismiss workers because there has not been an alternative source of income to the unemployed, and redundancy would mean serious deprivation for many. 2.33 Recognizing the importance of labor mobility to the restructuring process, the Government has taken steps to change this situation. First, enterprises are to be financially independent, and loss making enterprises closed. There will therefore be a considerable incentive for managers to shed surplus labor. Managers estimate that up to 20 per cent of their current staff are surplus. Second, the unemployment benefit law, effective in February 1991, will diminish th' reluctance of managers to dismiss staff for income-related reasons. The Government believes ;4'-at the p. ;ing of this law provides an adequate framework for managers to dismiss redundant staff. However, given the .urrent reluctance of managers to act, and the resistance of unions, the Government should consider comolementina these policw measures and lenislation by further legislation definina the rights and obligations of emplovees and emplovers with resDect to the termination of emnlovment, including the right of management to dismiss employees for economic reasons. This legislation should cover all sectors, and should be drafted and sent to Parliament as soon as possible. 2.34 The Government has also taken some steps to develop the programs listed above to reduce the duration of unemployment. The MOLSP is opening and staffing unemployment offices to provide employment services and to administer the payment of unemployment benefits. However, as many of the functions of such offices are new to Romania (e.g. counseling applicants on job openings, search strategies, and retraining opportunities, assessing benefit levels and administering benefits), substantial training of staff will be required, as  -36- well as office space and equipment. Based on experience in other countries, a ratio of about 1 staff for every 60 unemployed will be required in benefits are to administered smoothly. Creatina and staffing these offices should be a hiah prioritv of the Government in the short run. 2.35 Experience in OECD countries suggests that displaced workers have a better chance of returning to productive employment if spells of unemployment can be kept short (e.g. under 1 year). In a time of restructuring, this will be almost impossible if the provision of unemployment benefts is not complemented by pro- active employment services, including retraining programs, counseling programs, etc. This is a new area for the Govemment, and therefore should be a high priority area for technical assistance, including (a) the training of staff and the development of appropriate materials in employment offices; (b) the development of pro-active services for plants and industries where mass-layoffs are anticipated; and (c) the development of effective retraining programs. Given the importance of these activities in reducing the economic costs of unemployment, it is recommended that the Government allocate 20-25 percent of expenditures on the provision of benefts to providing these services. 2.36 Even with the best possible employment services and pro-active programs, and an outstanding supply side response to privatization and restructuring plans, unemployment is inevitable. Government may wish to complement its programs and policies discussed above with other policies to increase labor mobility and demand for labor in the economy, including: (a) removing obstacles to labor mobility, including regulations discouraging part time employment, flexible hours, and short term contracting; (b) keeping unemployment benefits below the minimum wage, to encourage job search (see chapter 3, below); (c) standardizing social insurance benefts across sectors (see chapter 3); and (d) keeping wages low, especially minimum wages, to encourage firms to hire workers. Govemment should also, as part of its overall tax reform orogram, accelerate the substitution of income and value added taxes for payroll taxes, and shift more of the burden of social insurance contributions to employees. 2.37 Wage policy in the medium term. In the medium term, to encourage price stability, the govemment should seek to keep average wages from growing faster, in real terms, than the average growth of productivity. In an economy with low levels of public ownership of productive assets and a very competitive input and output markets (such as the United States), the tools of fiscal and monetary policy may be enough to ensure this result. In Romania, even with a very rapid pace of restructuring and privatization, the economy will still have important sectors characterized by monopolistic or oligopolistic structures and significant public ownership. A public role in wage policy is likely to continue to be necessary to prevent cost-push inflation and high unemployment. The Government may need to ke6p the excess wage bill tax as a means of controlling wage settlements. However, as this tax is a disincentive to employment expansion, the Government may therefore wish to consider modifying the tax to limit the growth of averane wages in the firms, instead of the overall wage bill. The tax could be modified only for firms which have undergone a successful restructuring, or for all firms. A combined policy would have the disadvantage of more difficult administration but would provide the Government with more flexibility. Any controls on individual waaes which persist in the short run should be fully eliminated.  - 37 . 2.38 Private sector wage and employment policy. Currently the small private sector is not subject to excessive government control with respect to employment and compensation policy. However, the Govemment has indicated that it is considering forcing the private sector to operate under the same employment and compensation rules as the public sector. This approach should be reconsidered, since in the initial period, the private firms are likely to be small, predominately in commerce and services, where entry and exit are easy and thus competition is keenest. Little regulation of the sector is therefore required, as problems of oligopolistic pricing behavior generating cost-push inflation do not occur. This sector will operate most efficiently (and absorb labor fastest) if the Government lets the forces of competition regulate employment and compensation. As the private sector develops and expands to sectors where few firms dominate and competition is limited, some regulation might be required to prevent these firms from contributing to cost push inflation. This could be done by extending the excess wage tax to these firms. In this uase the tax should be on average wages and not on the wage bill, in order not to discourage employment. 2.39 Over-regulation of the private sector, especially when combined with the high , iyroll taxes currently in place, also poses another darnger - the development of a dynamic private sector is stunted and a agrey" or informal sector grows instead. Not only woujld this slow the transition but it will also erode ths tax base. More open societies and market economies rely heavily on voluntary tax compliance, especially with respect to contributions for social insurance. Within the system of social insurance, the high tax rate combined with the structure of benefits already provides few incentives for young and older workers to contribute, encouraging evasion. The high wage tax rates worsen this problem. If the Government then saddles the emerging private sector with an unrealistic and inappropriate set of rules and regulations, it will simply increase the incentives for the small, 'shadowF activities which have emerged in most highly regulated economies. Once this type of activity starts, recovering the tax base is very difficult. 2.40 Conclusion. Labor force participation is high in Romania, and the labor force is educated and skilled. The majority work in industry, commerce or services. These characteristics should serve Romania well as it begins the processes of integrating into the competitive world economy and restructuring the domestic economy. However, the labor force is also used to operating under the rigid control of a centrally planned economy, not the flexibility of a modem market economy. Labor force participants are used to being allocated a job, not searching for one, and having pay based on rules and seniority, not on performance or relative skill scarcities. Managers are also not used to deciding on employment and skill mix needed in the enterprise, negotiating with workers on working conditions and compensation, motivating staff, or rewarding workers for performance. This transition will require new policies, programs, institutions, and a change in culture. It will not happen overnight. The Government has taxen some bold first steps toward achieving this transition, including dramatically simplifying wage policy, promoting collective bargaining, and creating policies and programs for the unemployed. The Govemment's challenge for the next few years is to build on this start by further decontrolling the labor market to increase flexibility, and at the same time continuing to build the institutions required to help workers and managers with the transition. Most important during this period will be: (a) continuing to develop policies and programs to promote employment and restructuring; and (b) insuring that wage policies are consistent with macroeconomic stability.  .39- III. SOCIAL SECURITY AND SOCIAL ASSISTANCE A. Introduction 3.1 iRomania has an extensive system of government cash transfers designed to complement the income distribution of the labor market and to aid needy individuals. In 1990, these programs accounted for over on fifth of consolidated government expenditures and almost 10 percent of GDP. They represented on average 12 percent of household income in 1989. The programs are funded both from general revenues and from earmarked taxs (socia securky contributions and unemployment contributions). Benefits include: sickness benefits, maternity beneft, pensions for retirement, disability and widowhood, family allowances, unemployment benefits, and special assistance for the poor and handicapped (Table 3.2). Pensions and family allowances account for the bulk of expenditures, and these have been rising in nominal terms throughout the decade (Figure 3.1). Administration Is complex as there are over ten separate pension programs and funds, each with different benefits (Table 3.1). To date, all social insurance in Romania is provided under govemment programs; there are no private or enterprise- based pension or sickness funds, for example. This chapter describes the main elements of the system and reviews the issues that can be expected to arise during the transition to a market economy, including the system's ability to ease the social costs by protecting the poor. Annex 1 provides details on the various programs. Figure 3.1: Romania - Expenditure on Social Insurance and Family Allowance, 1980-1990 Billion Lel 50 ,_ 30- 10 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 I Sick Leave & Others M Fam. Allowance = Pensions  -40 - TABLE 31: ROMANIA - OVERVIEW OF THE PENSION SYSTEM, 199 No. Average Rec3pients 8eneftl/ Man State fund 2736.6 low Of which: Retirement (full) 1362.7 2460 Retirement (Partial) 697.2 1588 Disabiflty 196.2 1721 Non-60riwcgltural Cooserwtives Fund 112.4 1703 Of which: Retirement (Full) 38.5 2227 Retirement (Partial) 49.7 1466 Disability 11.7 1593 Agricultural Cooperatives Fund 9983 518 Of whicht Retirement (Full) 21.1 650 Retirement (Partial) 914.3 518 Disability $7.3 502 Othier Funds 12.1 2122 Of whidi. Retirement (Full) 0.1 2572 Retirement (Panial) 1.9 1670 Disability 0.2 2113 $uprlem9ntarv funds 3197.6 Of whict Stag 9468.2 Norn-Ag. Coop. 88.2 AgL Coop. 6311.11 Other Pensioners 10.1 31 First Quarter. On April 1, 1991, these benefits were raid 10001.1 n avXeiX to ajust for inflation. Source: MOLSP B. Policies, institutions and Trends Social Security System Programs 3.2 The main state social security system provides benefits for workers in the state and private sectors (except in cooperatives) and the self employed. The system covered roughly three quarters of the labor force in 1989. (See para. 3.11 below on programs for cooperatives and others). There are two main types of benefits: (a) pensions for the elderly and disabled; and (b) sickness and maternity benefits. Benefits are funded from an earmarked payroll tax, paid by the employer (20 percent of the total wage bill of enterprses) on a pay-as-you-go (PAYG) basis.5 Until 1990, the revenues were not kept separate b:ut absorbed into govemment revenues (Appendix 5 Prior to 1990, the tax was lower and varied by sector. See Annex 1.  - 41 - 3, Table 3.1). Between 1980 and 1988 there were more earmarked revenues collected than benefits paid out, although the surplus was gradually declining. In 1989, pension expenditures jumped 10 percent and sickness expenditure 22 percent, causing the system to run a 1.7 billion lei deficit (four percent of expenditures). Following an expansion of benefits in 1990, the deficit jumped to almost 11 percent of expenditures, forcing the Government to raise the payroll tax to its current level. The main reason for the declining surplus is that expenditures have grown faster than GDP. Total expendiures were only 4.1 percent of GDP in 1980 but were 7.1 percent of GDP in 1990.6 Government transfers from the social security fund accounted for 6.8 percent of household income (on average) In 1989, but 74.8 percent of income in households headed by pensioners (estimated to be only about 4.5 percent of households in Romania, as most pensioners live with working family members). 3.3 Old age and disability pensions are the largest component of social security expenditures, amounting to about 80 percent of expenditures. The next largest component is sickness benefits (paid to workers when they are ill or injured), followed by maternity benefits and other expenditures. Pension benefits are administered and paid out by the central government monthly in cash (distributed by the post office). Sickness and maternity benefits are administered and paid out by the enterprise, deducted from their payroll tax obligation. 3.4 Social security fund pensions. The standard retirement age in Romania is 55 for women and 60 for men, but early retirement with full pension is allowed for those working under stressful or dangerous conditions. Depending on the occupation, this type of retirement can take place as early as age 50 for both women and men. Prior to 1990, about 10 percent of workers worked in occupations where early retirement was possible. In 1990, two changes were made. First, for 1990 only, all workers were allowed to retire five years earlier without any cost to their pension in terms of reduced years of service, allowing some to retire as early as 45. Second, entitlement to early retirement was expanded. As a result, about 500,000 workers retired in 1990, the number of pensioners increased by 22 percent, and expenditures increased by roughly 30 percent. Retirees can receive a pension and continue to work as long as their pension plus the salary is not greater than the pre-retirement wage. The two main exceptions to this are (a) cooperatives members or the self-emp oyed, and (b) employees of certain key industries, where retirees may be employed for up to three months without loss of pension. Pensions are also provided for disability, including those caused by occupational hazard. e Note that these numbers are not shown in Appendix 2, Table 3.1, which only shows the global estimates.  TABLE 3.2 ROMANIA - OVERVIEW OF THE CASH BENEFIT SYSTEMI Type of beneflt/ Coverage Beneftt Adrmnistration Fnance spedtn baertM I. UNEMPLOYMENT BENEFIT Urnemplyment benefit AA workers Including new entrants. Fradion of previous wage, payable MOLSP2 through local offces. 4% enterprlse payroll contribution except members of agricutural for 180 days. Benemfi delivered in cash through the plus ndhMdual conrtrlbuton or 1% of cooperatives. posL wages. Law prides for budgetay transfer In case of defict Training/retraIning: financal support Same benefit as above; timo llmit. As above As above As above for woticer plus cost of traIning IL SOCIAL INSURANCE BENEFITS Sick pay3 AI workers In an sectors Fraction of previous wage rising with MOLSP through the enterprise. Out of the state soclal nsurance fund years of servie; If work-related. 85% (SIF) for most worksrs; there are of previous wage Irrespective of years separate socal Insurance funds for of service. Benefit Is payable for up members of agrcultural co-operatives to two years, alter whach a disablity (ACSIF) and for warous other groups. penslon Is payable. The revenue of the SIF derives from a 20% payr corMbuon, that of the ACSIF from varous sources Icuding a con_trbution of 9.5% of the agriultura coopeatvs sales. Maternly benefit Mothers In all sectors, provkded they FractUon of mnothWs previous wage, MOLSP through enteiprpse or local As above have an appropriate conributon rising wth length of service; for third office. record. and subsequent chldren. 94% of previous wage. Befit payable for up to 112 days. A moer may stay at hone with a child under one year old at 65% of her previo wage, and mnay stay at home with a slck chIld. Standard retirnemet pension Al wokers In an sectors. Retirement Depends on ength of service. MOLSP through to offices, Benefit As above age Is between 50 and 65. depending previous wage, age at retirerent, and delired hI cash through the posL on Industry and sex the sector/Industry of prvous employmei  TABLE 3.2 (cmon) Typ of benefl/ Coveae nefit Mmnsaton FInnc woednc benet DIablIy All works In all sectos; eligIbilty Depends an pension entilement (see MOLsr 'lrough local offices. Benellt As above begins after expry of wors above) and degree of disabIlty delihered In cash through the pst. enttitement to sick pay. WkdoWs pension Suvivors of wokers In all seto. Depends on pns entiemen age As above As above of sunvMng spouse and whether or no there are any chitdren. Supplementary retiement pension All workers In all sectors Depends on previous wage and Integrated wlth admInistration of the Worker corbution d 3% of wage. number os cornrlbution yeas main social Insunc pension. Note th the supplmientwy penrson Benefit delifered In cash thrh the Is the only benefm which Is funded. posl NI. FAMILY BENEFITS Faty alowan (cunern l All famIlis exce the self-employed, Depends on number of children and MOLSP through the enterprise or. Central govem_me budget worker In the prvate sector and famny bInome. Normly payable where Irnpactical, through MOLSP prive agriculture, and unemply untI child Is 16. local offices. pecope. I Family akance (drmf Iaw) AR families In all sector Depends on number o0 children, and As aboe As above > Income. Normnay payable untl chld W I1s.1 Maternity pension Any mother o three or more chikdren. Penslon for fe n a nomter has three Nofnally MOLSP through local As aboVe or more children. odlces. IV. SOCIAL ASSISTANCE Socdi assdance pension People wth no oher Income and no Small pension (below subsstence). MOLSP through local deies. Local budge close family Who can support thm. Reddenta care People wih veWy flMe hcome and no Residential care (or which a charge MOLSP at local le As abowe close ftamiy wo can support them. may be made). Sociat us_nce canteens As above Two tfre meals a day. As aboVe As above I Onry the maor berefA are tIcWhd 2 MOLSP - Mhnly dt Labor and SoCIW PrtectIon. Sick payrefer to nocome replcmeme during absence frm work due to llhal, not to healhcare costs.  .44 - 3.5 Years of service and previous salary (last five years) determine the size of pension benefits. For a full pension, the minimum contribution years are 25 for women and 30 for men unless s/he works in an occupation where early retirement is possible. In this case, minimum years of contribution are lower. Additional years of contribution result in an additional one percent of pension for each extra year for the first five years, and an additlonal 0.5 percent for each year thereafter. Pension benefits are not indexed, although they are regularly reviewed and increased to compensate for inflation. Ali pensions were raised by 400 lei/month in November 1990, and by an additional 1070 in April, 1991. 3.6 Pensions in Romania are low (Appendix 3, Tables 3.4, 3.5). In 1989, the average pension paid out was 1,665 lei per month (about $48 at the 1990 offcial exchange rate of 35 lei/S), the median pension only about 1300 lei/month, and 80 percent of pensions received were below the October, 1990 minimum wage of 2,000 lel/month. Of the 1.5 million receiving retirement pensions, 40 percent did not qualify for a full pension. 65 percent of this group received a pension under 1,200 lei, and 90 percent received a pension under 1,500 lei/month. The average full retirement pension was 2,016 lei, and the average disability pension was 1.296 lei. The fact that there are so few pensioners living on their own suggests that, in addition to the housing shortage, few pensioners can survive on their pensions alone. 3.7 Prior to 1990, Romania's ratio of pensioners to employed (the pension dependency ratio) was 30 percent. As a result of the early retirement act of 1990, which caused a jump in the number of ret;rees, the dependency rato climbed to 34 percent in 1990. With an average post-retirement life span of 22 years for those eligible for early retirement, and few new entrants to the workforce expected annually owing to already high participation rates and low birth rates since 1970, this ratio can be expected to continue to climb in the near future. 3.8 Accident and sIck-leave benefits. These are available to all workers covered by state social Insurance with a medically certified illness or injury for up to 180 days. There is no minimum length of service for eligibility. Where the injury or illness is work related, the benefit is 85 percent of previous earnings. Where the condition is not work related, the benefits depend on length of service in the labor force (including time spent on maternity leave), rising from 50 percent for under two years of service to 85 percent for over eight years of service. 3.9 Expenditures and numbers of recipients are shown In Appendix 3, Tables 3.1 and 3.3. In 1989, the average benefit was 91 lel per day (up from 73 in 1988), which on a monthly basis is about 12 percent above the minimum wage and 76 percent of the average wage. Average sick days per worker were low, however, only 5.6 per worker for the year.7 The reason for the low number of sick days is that firms in general and enterprise doctors in paticular, (who are the only ones allowed to certify eligibility for sick leave), were under tremendous Govemment pressure to keep sick leave claims as low as possible. These pressures were relaxed in 1990, and sick leave claims jumped to 7.2 days per worker per year. 7 Note that in 1989 Romania still had a 6 day work week. Thus workers were only absent for sick leave about two percent of the time. The OECD average is 15 days per year on a five day work week.  . 45- 3.10 Maternity and mother's sick child benefit. These are available to all women covered by state social insurance at the time they become pregnant, or who are covered and have children living at home under age three. Benefits are a fraction of the mothers previous wage, rising from 50 percent for mothers who have been In the labor force for less than six months to 85 percent for over 12 months. For the third and subsequent child, the mother receives 94 percent of her previous wage, irrespective of length of time In the labor force. Matemity benefit is paid for 112 days, after which mothers have the option of extending their leave through the first year of the child's life at 65 percent of previous wage. For mothers who stay home to care for a sick child, there Is no limit on number of days. In addition, for the last three months before taking maternity leave a woman is entitled to work for only six hours a day with no loss in pay, and social Insurance pays the wage differential to her employer. Benefits Funded by Other Social Insurance Funds 3.11 In addition to the main state social insurance fund, Romania also has a fund for members of cooperatives, a number of supplementary pension funds, and, since 1991, an unemployment benefits fund. Revenues and expenditures of the first two types of funds were kept in off-budgetary accounts until now, so little Information regarding the financial position of these funds is available. Numbers of beneficiaries and average pension benefits during the first quarter of 1991 are shown in the box (p. 38). The soclal Insurance for members of cooperatives (actually two separate funds, agricultural cooperative members and non-agricultural cooperative members) covers about one-quarter of the labor force, and, since 1990, provides benefits along the same lines but at silghtly lower levels than those provided under the state scheme.8 Until 1991 these expenditures were financed on a PAYG basis by a turnover tax (9.5 percent), and transfers from the state budget as necessary. In late 1990 (after the land reform was initiated), tax collections fell sharply. Since March, 1991, these pensions obligations have been met from the main state fund. 3.12 The main supplementary pension fund was initiated in 1980 as a voluntary supplementary pension fund, for workers In the state sector, to be financed on a fully funded basis with a voluntary contribution by workers of two or four percent of net wages. Since 1986, contributions of three percent of net wages have been mandatory. Benefits are related to previous wage and years of contribution. For less than five years of contribution, no pension Is pad and contributions are returned. Five to ten years of contribution reaps a benefit of eight percent of previous wage, and from there the schedule rises gently so that after 20 years of contributions 15 percent of previous wage is provided. Cooperative and other supplementary pensions are paid out In the same fashion as state social insurance pensions, and the administration is Integrated. 3.13 Unemployment benefits. In February, 1991, Parliament approved thed asibllshment of the Unemployment Insurance Fund to provide unemployment compensation, labor market services, and training to the unemployed. The fund is financed by an earmarked payroll tax (five percent, with one percent paid by employees and the rest paid by the employer). If the fund is in deficit, transfers from the general budget will make up the diffrence. All workers dismissed for economic or technological reasons, and recent graduates of secondary schools or univermity are eligible for compensation; all workers regardless of reason for unemployment are eligible a Prior to 1990, these ft nds provided benefits at a much lower level.  .46- for training and labor market services. Eligibility lasts for six months, but can be revoked if a "reasonable' job offer has been refused. For those in the workforce who become eligible, benefits are a fraction of previous base wage, the percentage rising whh time in the labor force and ranging from 50 percent for less than five years of service to 60 percent for those with over 15 years of service, with a floor of 75 percent of the minimum wage. Recent secondary school graduates receive 60 percent of the minimum wage, university graduates receive 70 percent. Benefits are to be paid by local employment centers, which are currently being established, and distributed in the same manner as pensions (through the post office). The new legislation contains no provision regarding administration and makes no provision for adjudication of claims (for example, whether a job offer is 'reasonableo). These issues will have to be settled by executive decree. Social Assistance Benefits and Other Cash Transfers to Households 3.14 In addition to all the above social insurance schemes financed by earmarked taxes, Romania provides a family allowance to households wih children and social assistance to selected needy groups, both financed out of general budget revenues.9 The largest expenditure in this group is the family allowance, which accounted for five percent of total government expenditures in 1989. Family allowance is paid to employees in the state enterprise sector; the amount depends on the salary of the recipient (negative relationship) and the birth order of the child (positive relationship).'