United Nations System in Romania. Common Country Assessment

United Nations System in Romania Common Country Assessment Bucharest, 2003

ROMANIA Common Country Assessment 2003 The United Nations System in Romania International Labor Organization (ILO) International Monetary Fund (IMF) Joint United Nations Program on HIV/AIDS (UNAIDS) United Nations Development Program (UNDP) United Nations Educational, Scientific and Cultural Organization (UNESCO) United Nations Population Fund (UNFPA) United Nations High Commissioner for Refugees (UNHCR) United Nations Children's Fund (UNICEF) World Health Organization (WHO) World Bank (WB) The following agencies have been consulted in the preparation of the CCA Food and Agriculture Organization (FAO) International Atomic Energy Agency (IAEA) International Telecommunication Unit (ITU) International Organization for Migration (IOM) Office of the United Nations High Commissioner for Human Rights (OHCHR) United Nations Conference on Trade and Development (UNCTAD) United Nations Development Fund for Women (UNIFEM) United Nations Economic Commission for Europe (UNECE) United Nations Industrial Development Organization (UNIDO) United Nations Office on Drugs and Crime (UNODC) United Nations Environment Programme (UNEP) Office of the Resident Coordinator of the United Nations System in Romania UN House, 48A Primaverii Blvd., Bucharest 1, Romania Telephones: (40-21) 201-7872, (40-21) 201-7876 Fax: (40-21) 201-7828 Website: http//:www.un.ro ii

Table of contents Foreword iv List of Acronyms v Executive Summary vii Introduction 1 Chapter 1: Towards Sustained Economic Growth to Reduce Poverty 6 Chapter 2: Good Governance and Policy Capacity 18 Chapter 3: Improving People's Lives in Romania 27 3.1 Population, Migration, Refugees, Human Trafficking, Drugs and Crime 27 3.2 Health and HIV/AIDS 35 3.3 Education 41 3.4 Child Protection, Child Labor 45 3.5 Environmental Sustainability 55 Chapter 4: Recommendations and Proposed Areas of Cooperation 60 The Development Situation in Romania 60 Key Recommendations and Potential Areas of Cooperation for the United Nations System and Possible Programming Options 61 General Considerations for UN Areas of Cooperation 61 Possible Programming Options 61 Annex: Indicator Framework 66 iii

Foreword with Romania being one of the eighteen pilot contries in the world, the United Nations system prepared the first Common Country Assessment (CCA) in 1998. Five years later, the UN system is releasing the second CCA for Romania, a collective instrument of all UN agencies that analyzes the national development situation and identifies key development issues. The CCA takes into account national priorities, with a focus on the Millennium Development Goals. It establishes an analytical framework for the design of a coherent and integrated UN system assistance in support of the Romanian Government and the Romanian people. In recent years, Romania made significant progress towards macroeconomic stability, while successfully strengthening its institutional capacity to address the needs of vulnerable population groups. When looking back to where the country was fifteen years ago, before the collapse of the communist regime, one feels overwhelmed by the magnitude of change experienced in Romania. However, in spite of significant progress, the long transition from a situation in which the state was basically served by its citizens, to a democracy in which the state is serving the needs of its citizens, has been marked by prudent reforms and uneven progress. This ultimately resulted in what the 2003 CCA identifies as a transition project marked by gaps that affect various policy and development areas. Closing these gaps is in the view of the UN system the main development challenge for Romania in the immediate future. The CCA pays special attention to the strengthening of the institutional capacity to help vulnerable population groups. It stresses that further action is needed to ensure access to basic services and to improve the lives of disadvantaged social groups, from the elderly and the unemployed to large families and the Roma. It emphasizes that on the medium and long-term, such investments in human development pay off; ultimately, these investments facilitate economic growth and have a favorable impact on the society as a whole. The CCA also underlines the importance of ensuring the proper funding required for implementing poverty reduction measures and points to the need for improving monitoring and evaluation components. Clearly, over the coming years, the on-going legislative alignment to the EU legal framework and the increased financial assistance from the EU will play a major role in the closing of developmental gaps. The efficiency of this process will much depend on the authentic internalization of a modern public administration culture, leading eventually to a harmonious completion of the reform process and to the achievement of the country-tailored Millennium Development Goals. Soknan Han Jung UN Resident Coordinator UNDP Resident Representative iv

List of Acronyms AIDS CASPIS CCA CEDAW CEE CLU CRC DOTS EU ECOSOC FDI FDSCE FOIA GDCOC GDI GDP GEF GEI HDI HDR HIV IDD IFAD ILO IMF IMR IPEC IOM LHIH MDGR MDGs MDTs MH MOU NACPA NAGCL NPA NATO NGO NHDR NHIH NSC ODIHR OPFI PPP PPPs RC ROL SC SIDA SME SRH Acquired Immune Deficiency Syndrome Anti-Poverty and Promotion of Social Inclusion Commission Common Country Assessment Convention on Eliminating the Discrimination against Women Central and East European Child Labor Units Convention on the Rights of the Child Directly Observed Treatment Short Course European Union Economic and Social Council Foreign Direct Investment Social - Economic Fund of Council of Europe Freedom of Information Act General Directorate for Combating Organized Crime Gender Development Index Gross Domestic Product Global Environmental Facility Gender Empowerment Index Human Development Index Human Development Report Human Immunodeficiency Virus Iodine Deficiency Disorder International Fund for Agricultural Development International Labor Organization International Monetary Fund Infant Mortality Rate International Program on the Elimination of Child Labor International Organization for Migration Local Health Insurance House Millennium Development Goals Report Millennium Development Goals Multi-Disciplinary Teams Ministry of Health Memorandum of Understanding National Authority for Child Protection and Adoption National Advisory Group on Child Labor National Plan of Action North Atlantic Treaty Organization Non-Governmental Organization National Human Development Report National Health Insurance House National Steering Committee Office for Democratic Institutions and Human Rights Office for Promotion of Foreign Investment Purchasing Power Parity Public Private Partnership Resident Coordinator Romanian Lei (currency) Steering Committee Swedish International Development Agency Small and Medium Enterprises Sexual and Reproductive Health v

STI SURF TG UNAIDS UNCT UNDAF UNDP UNECE UNESCO UNFPA UNGASS UNHCR UNICEF UNODC USD WHO WB Sexually Transmitted Infection Subregional Resource Facility Theme Group Joint United Nations Program on HIV/AIDS United Nations Country Team United Nations Development Assistance Framework United Nations Development Program United Nations Economic Commission for Europe United Nations Educational, Scientific and Cultural Organization United Nations Population Fund United Nations General Assembly Special Session United Nations High Commissioner for Refugees United Nations Children's Fund United Nations Office on Drugs and Crime United States Dollar World Health Organization World Bank vi

Executive Summary Purpose and Background of the Romanian Common Country Assessment 2003 As defined by the General Assembly, the Common Country Assessment (CCA) is a common instrument of the United Nations (UN) system in a country, which helps to analyze the national development situation and identify key development issues. Both a process and a product, the CCA takes into account national priorities, with a focus on the Millennium Development Goals (MDGs) and the other commitments, goals and targets of the Millennium Declaration and international conferences, summits and conventions. Ultimately, the CCA helps to establish a common database and analytical framework for use by agencies of the UN system to plan their activities. This is known as the United Nations Development Assistance Framework (UNDAF). The preparation of the Common Country Assessment (CCA) for Romania comes at a crucial moment in the country's recent history. Romania has achieved a significant level of economic stability, following a difficult transition process of political and economic reforms. In this context, the United Nations system has been supporting successive Governments in the process of transition. From 1995 onwards, EU accession has been the top priority of Romania's political agenda. It is against this background that the CCA provides an analytical overview of Romania's development situation from the perspective of the different United Nations' agencies that have activities in the country. Moreover, the CCA process occurred simultaneously with the completion of the first Romanian MDGs exercise. This provided an excellent opportunity for incorporating the country-tailored goals and targets into the CCA. The CCA Process in Romania This is the second time that the UN in Romania has conducted a CCA exercise. The previous one took place in 1997-1998. Because of this past experience, the 2003 CCA process was efficient. The United Nations Country Team (UNCT) in Romania initiated the CCA/UNDAF formulation process in December 2002. It was a highly participatory process, with both Government counterparts and within the UN agency system. Six Working Groups (WGs) were the basis of the 2003 CCA process. Each one was responsible for conducting the assessments, interacting and consulting with respective Government counterparts and civil society organizations (CSOs) and for drafting inputs and analysis in their respective areas and themes. The overall CCA process was overseen by an inter-agency Steering Committee (SC). UNICEF chaired the SC, and UNDP and the Inter-Agency Support Unit (IASU) actively participated. The SC reviewed the various draft versions, provided detailed recommendations to the WGs and edited the final draft. The first draft of the CCA was submitted to the Subregional Resource Facility (SURF) in Bratislava for review. Following the finalization of the second draft, the UNCT held two high-level consultations with the Government. In September 2003, the UNCT held a UNDAF retreat in which UN areas of cooperation were selected and where expected outcomes, cooperation strategy and lines of action were delineated. In accordance with the CCA/UNDAF formulation work plan, the UNDAF was finalized in December 2003. The Development Situation in Romania In 14 years of transition Romania has made significant progress towards creating an economic system that combines efficiency and sustained growth with equity and a system of governance based on pluralist democracy. Nevertheless, the Romanian transition from a centrally planned governance and economic vii

system to a democratic, market oriented model, has been strenuous, hesitant and rather slow. The persistence of development challenges, such as poverty, the quality of governance and the public administration reform, is a clear expression of this difficult course. To only take the 2003 poverty level, this indicator, although reduced from previous years, still stands very high at 25.1%. In 2003 Romania finds itself at a decisive time, both in terms of opportunities and new challenges, as the target date for the accession of Romania to the EU, the year 2007, is only three years away. The main challenge for Romania today is accelerating its preparation for accession, while promoting synergies between economic growth, good governance and policies to improve people's lives. This approach would not only have an intrinsic value for people, but would also address the objectives of all international conventions and charters. The governance basis to fight poverty implies that public action and institutions must provide the enabling environment for the expansion of development opportunities. That is, for the poorest and most vulnerable members of society, poverty and insecurity are linked in a vicious circle. Breaking that cycle requires measures to translate economic growth into development, through access to reliable employment, education and social services. It also requires measures to further promote personal security by offering protection from crime and violence, respect for human rights and equitable access to justice. Major Findings Identified in the CCA 2003 Poverty Poverty in Romania still affects approximately one third of the population and is more acute in the northeastern region. The hardest hit are the unemployed, farmers and large families. Long-term unemployment rates decreased in the last two years. Following the adoption of a National Anti-Poverty Strategy, poverty alleviation efforts in Romania have progressed, although slowly. Moreover, the private sector has not fully benefited yet from economic growth and there are still structural barriers preventing the evolution of SMEs, including low foreign direct investment and the absence of support networks. Population/Demography Romania has lost nearly one million inhabitants since the 1992 census (due to high mortality, low fertility and external migration). In 2002 the Total Fertility Rate was 1.2 per woman, well below replacement levels, creating potential negative consequences and an imbalance in the population structure, including concerns and costs related to the aging of the population. The Government has begun to address these challenges, but a coherent demographic policy is yet lacking. Good Governance, Rule of Law and Justice Romania has achieved a level of stability in institutions guaranteeing democracy that meets the political criteria for EU accession. In spite of this achievement, the governance experience of Romania reflects a common trend of many transition countries, namely the challenge of building democratic institutions, while at the same time managing the high social costs associated with programs at reforming the economy. The integrity of functioning institutions, which are able to effectively oversee the enforcement of the law and the practical adherence to protection principles for individual citizens' rights, is critical for guaranteeing the rule of law, human rights and personal security. The main goal is to strengthen institutions of governance, to raise efficiency in public action, implement the anti-corruption legislative package and measures, further improve legal and administrative procedures and promote transparent and participatory decision-making processes. viii

Public Administration There is a continued need to strengthen the administrative capacity to design, implement, monitor and evaluate policies. Bureaucratic procedures continue to affect citizens and the business community, while the emergence of a more effective public administration is hampered by the persistence of outdated recruitment and career management practices, and the slow development of a performance and results oriented culture. Recent legislative and institutional measures were adopted for the reform of the public administration. The implementation of this reform package is crucial for the effective capacity of the administration to respond to the needs of citizens and the requirements of EU membership. Health The complex process of implementing the health reform has generated uncertainty among the public and medical community. In addition, there is an alarming resurgence of infectious diseases, such as tuberculosis, which had been very much under control. Similarly, Romania still has some of the highest rates in the region in maternal and child mortality and HIV/AIDS in children. In many cases, crucial steps are being planned and put in practice to protect, prevent and make the population aware, as well as to get the necessary support for these activities from all key players, including religious and political leaders. The overall dynamic of the transition process, including the economic contraction, has put great pressure on the health sector. Thus, the critical issue is to continue to implement reforms, while at the same time ensuring efficiency and sustainability, institutional capacity to implement reform, and its capacity to monitor key demographic indicators, incidence of infectious diseases and the related rising threats of HIV/AIDS and drug abuse. Education The overall analysis of education in Romania shows that significant gains have been made, as the Government develops new legislation and addresses the issues of equal opportunity and educational curriculums for minority groups, especially Roma. However, there is a decrease in the family resources available for early and pre-school education. This is a consequence of the socio-economic decline recorded during the transition. Certain social sectors, such as poor and isolated rural communities, families with a large number of children, Roma families and refugee families are still disadvantaged with limited access to quality education. Given the dimensions of the transition process, people are beginning to reevaluate their educational needs to face a rapidly changing world that demands new skills. Furthermore, the educational system needs to realign to meet the needs of a market economy. There is a real need for the rehabilitation of schools (buildings, equipment and learning materials). Even more importantly are measures to improve the quality of education, the development of institutions and capacities to manage and operate the educational system. ix

Child Protection The process of child protection reform initiated in 1997 has accelerated since the year 2000. Key accomplishments include a 50% reduction in the number of children living in residential institutions, the development of a broader range of services to children and families and interventions that are based more on the best interest of the child. The main goal is to decrease the threat of violence and reduce vulnerability for all children groups at risk. The critical issue is not only to continue implementing child protection reform, but also the broad anti-poverty strategy that tackles the underlying causes for child abuse and abandonment. Environment Sustainability Several decades of industrial development have left Romania with a legacy of environmental problems. Taking into account the aspirations of joining the EU in 2007, Environmental management is now a priority for the Romanian Government. The Government faces a number of development challenges in the environment sector, for example: ensuring a reliable and clean water supply for both domestic and commercial uses throughout the country; controlling air pollution, including greenhouse gas emissions; managing sustainably the country's natural resources and conserving biodiversity; and providing a reliable supply of energy for both domestic and commercial uses, while promoting energy conservation. Gender Gender was a crosscutting theme throughout the CCA. As such, the CCA has particularly highlighted the condition of rural and elderly women who are increasingly affected by poverty, primarily due to the gender wage gap and limited employment opportunities. Similarly, in spite of some progress, women's representation in the political arena is still limited. Key Issues Emerging from the CCA g People in Romania need to be better informed about development issues, whether it is regarding HIV/AIDS, organized crime, new laws protecting their rights, immunization or environmental matters; g People in Romania need to have better access to safe drinking water, health services, education, information, employment opportunities and to democratic government; g Administrative capacity, infrastructure development, privatization, the legislative process, access to new technology and the reform process are all areas that need to be strengthened; g Strengthening partnerships with governmental policy makers, non-governmental organizations, civil society organizations, private sector and other multilateral and bilateral donors; and g Root causes for not implementing policy initiatives are often the same or similar in all sectors. They include limited financial resources, while capital investment is inhibited by the persistence of bureaucratic practices, reduced transparency, perceptions of corruption and legal instability. x

General Considerations for UN Areas of Cooperation The CCA 2003 for Romania has analyzed the national development situation and identified an array of key development issues. Cooperation and support from all the UN organizations will be essential to translate CCA recommendations into UNDAF programming activities. The CCA 2003 has identified seven potential areas of cooperation: g Sustained economic growth; g Good governance and public administration; and g Improving people's lives in Romania: - Population, Migration, Refugees, Human Trafficking, Drugs and Crime; - Health and HIV/AIDS; - Education; - Child Protection; - Environmental Sustainability. These CCA areas analyzed not only take into account national priorities, but are also linked to the MDG framework. They should provide strategic inputs to the UNDAF process and help nourish national development goals, expected outcomes, cooperation strategies, major lines of action and program modalities. xi

Introduction Purpose and Background of the Romanian Common Country Assessment 2003 As defined by the General Assembly, the Common Country Assessment is a common instrument of the United Nations system in a country, which helps to analyze the national development situation and identify key development issues. The CCA process should result in a high quality, strategic analysis that identifies the root causes and impact of poverty and other development challenges. As such, it can become a substantive contribution to national strategies for poverty eradication, sustainable development and economic growth. At the same time, the results of the CCA nourish the UNDAF process and help to strengthen national capacities for analysis and policy priority-setting, including risk and vulnerability assessments with geographic and beneficiary targeting. The Millennium Declaration and Goals The new century opened with an unprecedented declaration of solidarity and determination to rid the world of poverty. In 2000, the UN Millennium Declaration, adopted at the largest-ever gathering of heads of state, committed countries - rich and poor - to doing all they can to eradicate poverty, promote human dignity and equality and achieve peace, democracy and environmental sustainability. World leaders promised to work together to meet concrete targets for advancing development and reducing poverty by 2015 or earlier. Emanating from the Millennium Declaration, the Millennium Development Goals (MDGs) bind countries to do more in the attack on inadequate incomes, widespread hunger, gender inequality, environmental deterioration and lack of education, health care and clear water. They also include actions to reduce debt and increase aid, trade and technology transfers to poor countries. Source: United Nations Development Programme, Human Development Report 2003. Through the lens of the transition experience the CCA not only identifies policy gaps, but also focuses on relevant indicators in order to highlight the most important development trends. To facilitate this analysis, UNCT has reviewed an array of documentation and has established a common database of key indicators, in addition to collecting relevant information. Based on these tools and the accompanying analysis, the CCA suggests priority areas for policy and programming cooperation, where United Nations agencies may be able to bring a value-added dimension for supporting current and future Government actions and policies. The CCA process for Romania takes into account four key elements specific to the national development situation. First, that the Romanian Government has already adopted a Pre-accession Economic Program for 2001-2004, which is a key policy tool in Romania's negotiations for accession to the European Union (EU) in 2007. Second, that the Romanian Government has produced and adopted a National Anti-Poverty and Social Inclusion Plan in July 2002. Third, the CCA process has taken into account the country-tailored MDGs and targets. Finally, it drew on the findings of the latest report from the European Commission on progress by Romania towards accession. The CCA Process in Romania This is the second time that the UN in Romania conducts a CCA process. The previous one took place in 1997-1998. Because of this past experience, the CCA process was relatively efficient. The UNCT in Romania initiated the CCA/UNDAF formulation process in December 2002. The preparation of the Romanian CCA has been a participatory process from the very beginning. Government counterparts from 1

the line ministries were kept informed of the ongoing process and at a later stage, consulted by the various Working Groups. In early December 2002, the UNCT sent three delegates from Romania to the CCA/UNDAF workshop organized by the United Nations Development Group Office (UNDGO) for training and introduction. After returning to Romania, these three delegates became the resource persons for the CCA/UNDAF processes and assumed an executive role in support of the UNCT. Six Working Groups were the basis of the 2003 CCA process. Working Group 1 on Human Rights and Democratic Governance; Working Group 2 on Poverty and Socio-Economic Issues; Working Group 3 on Education and Child Protection; Working Group 4 on Environment; and Working Group 5 on Gender Issues. The existing Health and HIV/AIDS Theme Group (TG) became Working Group 6. These WGs were responsible for conducting the assessments, interacting and consulting with respective Government counterparts and CSOs and for drafting inputs and analysis in their respective areas and themes. In addition, to complement the WGs work the UN Resident Coordinator met with a number of key ministerial representatives to engage them in the process and solicit inputs. In March 2003, in a retreat of all UNCT members, an inter-agency Steering Committee was established. UNICEF chaired the SC, and UNDP and IASU actively participated. In addition to overseeing the entire CCA process, the SC also made several key contributions to the process and the document. The SC reviewed the various drafts, provided detailed recommendations to the WGs and subsequently edited the document. The SC also contracted a senior expert of the National Institute of Statistics to verify the accuracy of the statistical data being used. The involvement of the SC was crucial in the latter part of the CCA process, particularly by helping the prioritization of policy areas for cooperation, organizing several rounds of high-level consultations with the Government, and preparing the formulation of the UNDAF. At the end of May 2003, the first draft of the CCA was submitted to the Subregional Resource Facility for review. Feetback from six reviewers was followed by a comprehensive synthesis of all suggestions. These valuable suggestions were subsequently integrated into the document. Immediately after the finalization of the second draft, the UNCT held two high-level consultations with the Government. The strong interest showed by all counterparts from key ministries in the CCA's considerations was reflected in a series of observations submitted to the SC. A significant number of the comments that were received were subsequently incorporated into the document. The consultation process was followed by a UNDAF retreat in which UN areas of cooperation were selected and where expected outcomes, cooperation strategy and lines of action were set out. In accordance with the CCA/UNDAF formulation work plan, the UNDAF was finalized in December 2003. CCA Analytical Approach For more than a decade, Romania has been going through a transition period characterized by profound transformations and numerous challenges. The systemic transformations specific to the transition process demanded fundamental changes in the attitude of the individuals, as well as the political and policy processes. At the same time, accepting to operate under the rules of the market also meant adopting an adequate institutional framework, capable of stimulating behavioral changes among business owners and consumers, as well as among policy-makers. Furthermore, the 2001-2004 Romanian Pre-Accession Economic Program has expressed full commitment of the Government to finalize the necessary reforms needed for integration in the EU. During this past decade the development situation of Romania has reflected the arduous process of transition. For example, Romania is still ranked in the upper tier of countries with medium human development, although in 2003 its Human Development Index (HDI) value has decreased from 0.775 to 0.752. Romania's transition impact on its human development profile becomes even clearer, when it is analyzed in the context of the countries that are considered candidates to join the EU. 2

In as much as observers of transition processes have become accustomed to think of them as linear events, with defined goals such as market economy and democracy, in reality, as the Romanian experience shows, they are far more complex and intertwined with an array of endogenous and exogenous factors. Transition processes are the products of a complex web of interactions containing a high degree of uncertainty and linkages. Thus, the web of interactions between transition policies (including EU accession initiatives) and development can make them mutually reinforcing or weakening. When the links are strong, they contribute to each other. But when the links are weak or broken, they can become mutually stifling as the absence of one can undermine the other and expand gaps between policy and results. In the long run, transition policies and development can move together and be mutually reinforcing, but only if they are accompanied by a coherent economic and political strategy, that closes policy gaps. When opportunities such as the EU invitation materialize, there is a need for a greater political breakthrough, one that can be sustained with a more systemic approach that guarantees goals, consensus from a host of political and social sectors, equilibrium between shocks, gradual policies and sequencing to avoid policy gaps and traps. CCA Structure Based on Romania's national priorities and on the experience of UN agencies in Romania and their respective mandates, the UNCT has identified seven major themes for analysis in the CCA. These closely interconnected thematic areas, are arranged in three chapters as follows: 1) Towards sustained economic growth to reduce poverty; 2) Good governance and policy capacity; and 3) Improving people's lives in Romania. The CCA reviews and analyzes these themes from a number of perspectives such as Government commitments and policy initiatives, UN Millennium Goals and targets and implications of the transition process on poverty and development. Each chapter reviews and analyses key development areas, and generates particular findings. Many of these findings show positive trends, while others reflect more negative trends. Irrespectively, the CCA findings reflect the impact of the numerous reforms that have taken place since the fall of the dictatorship in 1989. Many of the outcomes of the reforms have been translated into national policies and are currently being implemented under a legal and policy framework. In some cases, specialized authorities like the Anti- Poverty and Promotion of Social Inclusion Commission and the National Authority for Child Protection and Adoption have been created to undertake the reform measures. In other cases, key laws have been passed and steps taken to enforce the new legislative acts. However, many of the development areas identified and analyzed in the CCA highlight the existence of policy gaps. For example, the gap between the development of a legal framework and the financial resources available to implement projects; the gap between the public administrative capacity and the ability to meet the requirements of the accession to the EU; the implementation gap that exists between the mandate and the capacity of the local counties (Judete); and the gap between the demand for improved health services and the infrastructure available to meet the demand. The CCA devotes one chapter to identify proposed areas of cooperation among UN agencies, the Government and other development partners. Similarly, a set of recommendations is presented to help delineate possible programming options during the UNDAF process. 3

4 MAP OF ROMANIA

COUNTRY PROFILE Indicator Year Territory 237,500 square kilometers 2003 Forests as % of territory 27.71 2002 Arable land % of territory 62.30 2002 Population 21,680,974 2002 In which female population - as % of the total population 11,109,376 51.3 2002 2002 In which male population - as % of the total population 10,588,624 48.7 2002 2002 Urban population share (% of total) 52.7 2002 Rural population share (% of total) 47.3 2002 Population structure based on ethnic identification (% of total) - Romanians - Others (mainly Hungarians and Roma) Life expectancy (years) - males - females 89.5 10.5 71.18 67.61 74.90 2002 2002 2002 2002 2002 Crude birth rate (per 1,000 inhabitants) 9.7 2002 Crude death rate (per 1,000 inhabitants) 12.4 2002 Total fertility rate 1.2 2002 Average age of females at time of first birth (years) 24.2 2002 Registered unemployment rate (%) 7.58 2003 Infant mortality rate (per 1,000 live births) 17.3 2002 Mortality rate in children aged 1-4 years (per 1,000 live births) 0.8 2002 Maternal mortality rate (per 1,000 live births) 22 2002 GDP in US$ 50 bilion 2003 GDP per capita (USD at PPP) 6,720 2003 Real GDP growth rate (%) 4.9 2003 Consumer price inflation (av., %) 15.3 2003 Exports as % of GDP 35.4 2001 Informal sector as % of GDP 26 2002 FDI 1.574 bilion USD 2003 FDI as % of GDP 2.9 2001 Expenditures for health as % of GDP 4.2 2002 Expenditures for education as % of GDP 3.05 2001 Crimes per 100,000 inhabitants 4,427 2002 HDI 0.752 2003 GEM 0.460 2000 5

Chapter 1: Towards Sustained Economic Growth in Romania to Reduce Poverty Economic progress is a fundamental element for development. Countries in transition face a challenging situation related to fostering economic growth and development. Economic growth is indispensable in the process of transition because human development depends on productive economic activity. The question becomes one of understanding what the engines of economic growth in an economy are and how they work and, ultimately, of how best to encourage the productive use of a nation's resources to create the opportunity for human development, to reduce poverty and create employment. Economic growth is necessary to meet the MDGs for two reasons. First, economic growth directly increases income for many households, freeing social assistance resources for investments in development activities. Second, economic growth tends to increase Government revenues, and in turn more resources become available to promote pro-poor development policies. Overview Key Macroeconomic Trends According to figures provided by the 2002 Population and Housing Census, the population of Romania is nearly 22 million inhabitants. Romania has the second largest population among the ten Eastern European candidate countries for the European Union. However, among the same group of countries, Romania ranks sixth in terms of Gross Domestic Product (GDP). In 2003, Romania's GDP was over US$ 50 billion, a value that is 81% of its 1989 value. During the first three years of the transition process, GDP growth in Romania showed negative trends. From 1993-1996, GDP growth recuperated reaching a nearly 7% growth rate in 1995, but stabilizing at 4% in 1996. From 1997-1999, GDP growth contracted again and showed negative trends, although not as low as the rates registered between 1990-1993. In 2000, the GDP grew sluggishly by 1.6%, but in 2001 an impressive 5.3% rate was achieved. GDP growth rates recorded in 2002 and 2003 are identical: 4.9% (Figure 1.1). Figure 1.1: Real Change in GDP (in % over previous year) Source: National Institute for Statistics, 2002 6

The European Union in its 2002 annual report noted that, macroeconomic stability had improved noticeably in Romania, although progress towards key structural reforms has been slow, citing the Government's failure to meet its own privatization program. The report went on to note that, a variety of measures had been taken to stimulate domestic and foreign investment and in spite of the fact that Romania experienced a steady growth, overall levels of investment remained relatively low. Indeed, since mid-2000 macroeconomic trends have improved distinctly in Romania, building upon the cumulative impact of successive rounds of structural reforms, a more favorable external environment and the adoption of a more balanced and responsive policy mix (Table 1.1). Table 1.1: Main Economic Indicators, 2003 Real GDP Growth (in %) 4.9 Unemployment Rate (Year's end, in %) 7.2 Consumer Price Inflation (Average in %) 15.3 Consolidated Government Balance (as % of GDP) -2.3 Current Account Balance (as % of GDP) -5.9 Exchange Rate (Average Leu value to the US$) 33,200 Source: National Statistics; International Monetary Fund (IMF) and Economist Intelligence Unit, 2002 Growth has resumed, inflation declined and the external vulnerability decreased. Nonetheless, Romania has failed to attract larger amounts of foreign investment and in 2003 it lagged behind many of its neighbours. From 1990 to 2001, Romania received approximately US$ 6.9 billion in Foreign Direct Investment (FDI), including US$2 billion from the privatization process. Other countries in the region have attracted during the same period far more FDI than Romania. For example, Poland reported US$36.4 billion, the Czech Republic US$21 billion and Hungary US$19.8 billion. One cause of the large difference between the FDI level in Romania compared to other countries in the region is the slower evolution of the privatization process. Another explanation is the poor quality of the information that is offered to the potential foreign investors in Romania. In addition, two main causes for investor caution are the slow progress towards introducing and implementing the standards and institutions of West-European countries and the range and magnitude of obstacles that investors face once they start doing business (such as corruption, bureaucracy and legal instability). The source of FDI in Romania shows a strong integration with the European economy as more than 80% of investment comes from European countries. FDI trends are also geographically concentrated within Romania, disproportionably in favor of the capital. According to the National Trade Registry Office, by December 2003, 57% of FDI was directed to Bucharest, 17% to Transylvania, 16% to Muntenia, while other regions received below 5% of total inflows. Even though the Government has developed a package of incentives for domestic and foreign investors, evidence suggests that problems in the existing business climate such as those mentioned above, constitute the major restriction to larger foreign investment inflows into Romania, rather than the absence of incentive schemes. 7

Situation Description and Analysis Employment Unemployment and the employment situation are a permanent priority for Romania. According to the National Agency for Employment, during most of the decade the unemployment rate 1 has shown declining trends. In 2001, unemployment was higher among males (6.9%, above the EU average of 6.6%) than females (6%, below the EU average of 9%). This trend continued in 2003, when the unemployment rate for males was 7.4%, compared to 6.4% for females. In 2003 the total average unemployment rate decreased to 7.58%. An analysis of the evolution of unemployment between 2000 and 2003 is indicating: - A downwards trend, leading to the lowest level from the last 7 years in 2003; - A flattening of the unemployment rate curve, which expresses the absence of significant differences between the winter period (when the unemployment rate is usually high) and the periods of the most intense seasonal activity (when the unemployment rate is usually low) (Table 1.2). Table 1.2: Evolution of the Unemployment Rate of the Registered Unemployed* between 2000-2003 Year/ Month Jan. Feb. Mar. April May June July Aug. Sept. Oct. Nov. Dec. Average of the year 2000 12.3 12.5 12.2 11.9 11.5 11.2 10.8 10.5 10.2 10.2 10.3 10.5 11.2 2001 10.7 10.7 10.3 9.8 9.2 8.7 8.3 8.0 7.8 7.7 8.0 8.8 9.0 2002 12.7 13.5 13.4 11.4 10.5 9.9 9.2 8.7 8.4 8.2 8.1 8.4 10.2 2003 8.6 8.8 8.6 8.0 7.6 7.3 7.2 6.8 6.7 7.0 7.2 7.2 7.58 Source: National Agency for Employment, 2004 As in many other countries, unemployment in Romania is concentrated in urban areas. In the fourth quarter of 2003, the unemployment rate was twice higher in urban areas (8.9%) than in rural areas (4.3%). The gap has narrowed since 2000, when the urban unemployment rate stood at nearly 12% compared to 2% in rural areas. The unemployment distribution by education level showed the decrease of their number regardless of category, while a certain constancy is maintained as far as the shares are concerned: around 77.0% are unemployed with elementary, gymnasium and vocational education level, 20.0% are the unemployed with high-school and post-high school education; only 3.0% of the unemployed graduated from higher education. The permanent high share of the category that includes the unemployed with low education level proves that this social group still represents the most vulnerable category on the Romanian labor market. It also points out the population the efforts of employment agencies should mainly target. 1 Unemployment rate is the ratio between unemployed and active population (unemployed plus occupied population). * To apply Art. 6 and Art. 12 c) of Law No. 76/2002 on the unemployment insurance system and employment stimulation and of Art. 1 on the methodological norms for applying the Law No. 76/2002, a common order of the Minister of Labor and Social Solidarity and of the president of the National Institute for Statistics was issued. The order sets a system of relevant statistical indicators, with a clear and unitary methodology, for monitoring the evolutions on the labor market. 8

Long-term unemployment 2 remains rather high in Romania. In 2001, nearly 49% (or over 3% of the labor force aged 15 and over) of the total unemployed 3 had been out of work for one or more years. Nearly 50% of these had been unemployed for two or more years. In 2001, long-term female unemployment did affect over 50% of all unemployed females (or 3% of the female labor force), while long-term male unemployment affected 47% of unemployed men (or 3% of the male labor force). By 2003, when it was 6.5%, the share of the long-term adult unemployed has registered a permanent decreasing trend, as result of the new modalities and durations of granting indemnities that were implemented following the entry into force of the Law No. 76/2002. Similar to other post-communist countries, the most affected by unemployment is the 15-24 age group, recording a rate of over 17% in the fourth quarter of 2003, in sharp contrast to 7% for the 25-34 age group and 5.9% for the 35-49 age group (AMIGO, 2004). According to the same survey, although the unemployment rate for the 15-24 age group has declined since 1994, from nearly 23% to around 18.5% in 2003, such rate is yet more than twice higher than the total unemployment rate (Table 1.3). Table 1.3: Unemployment Rate for 15-24 Age Group in % (1996-2003) Year 1996 1997 1998 1999 2000 2001 2002 2003 Total 20.3 18.0 18.4 18.9 18.6 17.5 21.6 18.5 Men 17.5 15.9 17.3 19.0 19.6 17.6 21.7 18.4 Women 24.1 20.9 19.8 18.8 17.3 17.4 21.6 18.7 Source: AMIGO, 2004 The positive aspect is that the share of young unemployed, under 25 years old, is continuously decreasing as compared to the other age groups (from 27.6% in January 2002 to 19.69% in January 2003, in July 2003 being around 13.1%). At the regional level, unemployment rates are relatively even. In 2000, five out of the seven development regions in Romania had unemployment rates that were close to the national average, except for the Southeast region (8.6%, above the average) and the Southwest region (5.6%, below the average). However, much greater is the difference among the 42 counties in Romania. Unemployment rates in January 2003 ranged between 2.5% in Bihor County (Western region) and 12.2% in Vaslui County (Eastern region). Box 1.1 Key Factors Affecting Unemployment Rates in Romania g The measurement of employment and unemployment, which is, to a certain extent, biased. Persons recorded officially as unemployed may in fact be working for companies that bypass employment regulations; g Early retirement, which adversely affect the occupation rate (number of employees); g The existence of regional economic disparities; g Unemployment tends to speed up the erosion of social benefits, while the number of dependants also increases; g The deterioration of the Romanian pensions system, leading to a decrease in the number of taxpayers and an increase in the number of retired persons; 2 Long term unemployment refers to unemployment for two or more years. 3 Unemployed are persons registered with the territorial occupation and vocational training agencies, who receive or don't receive unemployment benefit, integration allowance or support allowance. 9

The downwards trend recorded for the total number of unemployed and the unemployment rate especially in 2003 was mainly determined by the following factors: a) The implementation of measures stipulated by the Law No. 76/2002 with its further modifications and amendments; b) The maintenance of the economic growth that gave way to more employment opportunities on the labor market (Box 1.2). Box 1.2 The Small and Medium Enterprise Sector in Romania The Small and Medium Enterprise (SME) sector in Romania has grown rapidly during the transition years. Already in 2000, the SME sector accounted for 57% of the number of employees within the private sector and 41% of the total number of employees within the national economy. In spite of these positive trends, the overall environment in Romania does not yet fully support SME development. Specific characteristics of SMEs in Romania include: g A high concentration in the trade sector (50.2% in 2002); g A still underdeveloped presence in the service sector; g Disparities in numbers across Romania, from 9.0% of total number of SMEs in the Western region, to nearly 20% of total in the Bucharest area; and g Males are twice as likely to be entrepreneurs than women; in the fourth quarter of 2003, 25.77 % of employed males were self-employed, compared to 13.66% of employed women (AMIGO, 2004). Romania also has a sizeable informal sector. 4 Reliable information available suggests that the informal sector has been growing in Romania from an estimated 20% of GDP in the mid-1990s to 49% in 1998. In addition to non-declared units, the informal sector includes family associations, self-employed as well as farmers. An important part of the informal sector provides the main source of income for subsistence activities. Moreover, according to the National Institute of Statistics, the gross added value from the informal sector represented 156.5 billion of Romanian Lei (ROL) or 29% of GDP in 1999 and 211 billion ROL or 26% of GDP in 2002. According to estimates by the National Labor Research Institute, the share of the labor force engaged in informal activities (either on a permanent or temporary basis) would range anywhere from 20% to 27%, representing between 2.4 and 3.1 million people. During the 1990s, unemployment was primarily generated by a contracting economy, marked by gradual layoffs, as a direct consequence of a continuous, although poorly planned industrial restructuring. Low competitiveness of state enterprises led to a more and more limited marketable production, and to a growing debt towards various contractors. In this context, also characterized by the absence of alternative work opportunities and by slow and often clientele-oriented privatizations, few options were available for avoiding unemployment. The level of education also had an impact on employability: school abandonment before the completion of the secondary course reduced dramatically the employment capacity, while the graduation of higher education institutions was a generator of high employability. 4 There are many definitions of the informal sector. According to ILO (Enterprise Approach, Thomas, 1992), informal economic activities mainly ensure the survival of poor population who pay high social risks to meet basic consumption needs. 10

Poverty After December 1989, poverty in Romania increased dramatically. The share of the population living below the national poverty line doubled in the second half of the 1990s. Following the dramatic collapse of the economy and a slow recovery during the transition period, social disparities increased rapidly as reflected in the Gini index measuring social inequality, which rose from 20 to 30 during the decade of transition, to decrease to 28.1 in 2003. Poverty remains widespread with 25.1% of the population living below the poverty line in 2003. The evolution of the poverty rate (1995-2003) that stands as the official assessment in Romania (Table 1.4) has been calculated by the Anti-Poverty and Promotion of Social Inclusion Commission (CASPIS), according to a methodology that was elaborated with the assistance of the World Bank, UNDP and several Romanian research institutes and universities. Table 1.4: The Evolution of the Poverty Rate and of the Severe Poverty Rate (1995-2003) Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 Poverty Rate Severe Poverty Rate 25.4 20.1 30.3 30.8 33.2 35.9 30.6 28.9 25.1 9.4 6.3 11.2 11.3 12.5 13.8 11.4 10.9 8.6 Source: CASPIS/World Bank, 2003 methodology According to CASPIS, in 2002, extreme poverty, defined as the percent of the population living on less than US$1/day (at the purchase power parity rate), affected around 1% of the population. Rural poverty is a significant phenomenon in Romania, mainly manifested in low incomes and limited employment opportunities. In rural areas, the population often has limited access to modern education, health facilities and adequate housing, while rural youth are increasingly running the risk of being recruited into the drug trade and human trafficking. Between 1995-2002, rural poverty rates were on average over twice higher than urban poverty rates. In 2003, the poverty rate in rural areas was close to three times higher than in urban areas, with 38% of the rural population living below the poverty line, compared to 13.8% in urban areas. Most of the people in the rural areas practice a subsistence economy, being able to produce much of their own food, which prevents them to fall in extreme poverty. Indicators from 2001 suggested that no more than 1% of the population in Romania fell under the US$1 per day rate in the rural areas. Nonetheless, the rural population has fewer opportunities to move out of poverty, mainly because of constraints such as small and fragmented plots, limited access to productive assets, barriers to market participation, low wages and limited opportunities to engage in formal labor. The poverty status in rural areas in Romania is also determined by the limited conditions of rural health centers, the long distances that children must travel to school and poor water and sanitation facilities. In spite that men are currently more adversely affected by the general economic situation than women, the wage gap between men and women is still wide in Romania. This makes women more vulnerable than men in terms of getting into poverty, as well as getting out of it. The wage gap is even more pronounced for rural women (Table 1.5). 11