Regulation and growth Giuseppe Nicoletti OECD Departm ent of - - PowerPoint PPT Presentation

Regulation and growth

Giuseppe Nicoletti

OECD Departm ent of Econom ics

Ninth ACCC Regulatory Conference Revisiting the rationale for regulation 24-25 July 2008, Surfers’ Paradise

Outline

• Regulation, competition and growth: why should

OECD countries be concerned?

• Measuring and comparing anticompetitive policies

across countries

• What determines productivity growth?
• Exploring the link between regulation and productivity

growth

• What’s in it for Australia?

Growth divergence within the OECD?

• Cross-country differences in GDP p.c. growth have

been large over the past two decades

• And many countries have diverged from leading

countries more recently

• Developm ents in productivity growth are the

m ain source of differences, more specifically:

– ICT investment and contribution to productivity – Efficiency in use of inputs and innovation (MFP) especially in ICT-producing and ICT-using industries – Productivity developments in market services crucial

Are policies responsible?

• Growing consensus that business environment affects

growth through productivity

• Many factors affect business environment:

– Financial markets/ access to credit/ risk capital – Education/ skilled labour – Governance/ property rights protection

But policy drivers of competitive pressures are key:

– International openness – Low barriers to entry in competitive markets – Promoting competition in network industries

Are policies responsible?

• Incentives provided by open, competitive and better-regulated

markets appear to have been crucial for reversing productivity slowdown in some OECD countries

• Only open, competitive and better-regulated countries appear

to have reaped the full benefits of global ICT shock

• OECD research agenda for a decade:

– Measure differences in policies that affect competitive pressures across countries/ sectors – By which channels do these policies affect aggregate productivity?

6

Measuring PM policies and reforms in the OECD area

• Not easy Several approaches possible:

– Outcomes - market structure/ market power/ government presence – Survey data - with businesses or consumers – Dummies at policy turns - e.g. NAFTA, EU Single Market – Survey of laws and regulations

• Area of measurement is also an issue -

competition/ bureaucracy/ interventionism?

• OECD approach summarizes objective and comprehensive data on laws

and regulations that bridle or promote competitive pressures

• Special focus on non-manufacturing industries:

– Sheltered from international competition – More regulated (market failures) higher risk of regulatory failure – Contribute to aggregate productivity growth both directly and as increasingly important intermediate inputs into other sectors – Regulation-induced inefficiencies in non-manuf. can propagate throughout economy

7

Evolution of PM policies in OECD

• Evidence from OECD measures suggests extensive liberalization of PM over

past two decades, but at very different pace and depth across countries

• Convergence towards more liberal approach accelerated over past decade, but

differences in policies across countries remain significant

• Cross-country dispersion in PM rigidities increased precisely at the time of

the ICT shock (mid 1990s)

• And in many laggard countries (i.e. Euro area) inappropriate PM policies put

a burden on crucial ICT-using sectors:

– Because they are themselves inappropriately regulated (e.g. retail and business services) – Or because they are intensive users of inappropriately regulated non-manufacturing products (e.g. machinery and equipment)

• Cross-border and cross-state service trade still hampered by explicit barriers

and heterogeneous service regulations

8

PM policies and growth

• There is evidence that competition-friendly regulation raises labour

utilisation

• But (de)regulation com petition productivity is the

m ost relevant link to growth because

– Can have larger and potentially more persistent effects through investment, efficient use of inputs and innovation – For brevity, I will skip policy effects on capital deepening , which however can be relevant especially if there is a link between capital accumulation and growth – I will focus on policy effects on capital quality (ICT share) and so-called “multifactor productivity” (MFP)

• PM policies can affect all sources of productivity growth

9

Sources of productivity growth

• elimination of inefficiency (MFP)
• investment in new capital assets (K/ L)
• technology adoption (ICT)
• technological and organizational

innovations (MFP)

• strength of creative destruction process
• opportunities for experimentation/ market

testing

• ability to nurture and develop most successful

firms

• ability to reallocate resources to most

productive firms and industries 1. Within firm growth

• 2. Firm dem ographics
• 3. Reallocation between

firm s/ industries

10

Sources of productivity growth

• Aggregate productivity growth highest where resources flow

m ost easily to fast growing high productivity firm s and industries –Wide heterogeneity of productivity levels and growth across industries –ICT-intensive industries have driven aggregate growth performance over past decade –Wide heterogeneity of firm-level productivity performance within markets, industries, countries –ICT-intensive sectors tend to have higher dispersion with fatter right tail (the gazelles) driving aggregate performance

Stylized facts

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Regulation and productivity

• Inappropriate product market regulations affect activity in two main ways:

– They curb competitive pressures where competition is viable – They increase firms’adjustment costs

• Effects of inappropriate non-manufacturing regulations propagate to other

sectors through cost and quality of intermediate inputs (proportionally to the intensity in use of non-manufacturing inputs)

• Vast and growing theoretical and empirical research suggests negative effects
• n aggregate productivity by weakening:

1. Incentives and ability to improve efficiency of incumbent firms 2. The cleansing and nurturing role of creative destruction 3. Reallocation of resources to fast-growing firms/ industries

• Empirical results suggest this is particularly the case in ICT-intensive

industries that have driven aggregate productivity performance in OECD countries over past decade

• At the aggregate/ industry level the detrimental effects of inappropriate

regulation also show up as an induced slowdown in the rate of catch-up to best practice

12

PM easing and productivity

Results from cross-country/ industry panels focusing on labour productivity:

• In countries/ industries with lighter regulation median productivity growth

was higher and above-median growth more common

• Countries/ industries that have lighter regulation were found to have

invested more in ICT (and used ICT more efficiently?)

– estimates suggest that easier regulation can increase ICT adoption substantially – e.g. in Australia up to 5 percentage points of 1985-03 increase in ICT explained by good PM policies

• In countries/ industries with lighter regulation catch-up to international best

practice was faster, especially in ICT-using industries

• Countries/ industries with lighter regulation benefited more than others from

global ICT productivity shock

– e.g. in Australia estimates suggest that good regulation made it possible to reflect up to 80% of such a shock in domestic labour productivity of ICT-using industries (vs 65% in Italy) – deep reform concomitant with general purpose technology shock was very fortunate – at industry level, the further from the frontier the larger the benefit of good regulation for productivity because of faster induced catch-up

13

PM easing and productivity

Results from cross-country/ firm -level panels focusing on MFP perform ance:

• Countries/ industries with lighter regulations were more able to

reallocate resources towards most productive and fast-growing firms, which were largely responsible for heterogeneity and growth acceleration over past decade

• Within each country/ industry larger benefits of good regulations

fell on:

• Most dynamic firms, i.e. those catching up to international

best practice through technology adoption and retooling

• Firms closest to international best practice, i.e. for which

prevailing in neck and neck competition was key

• Hence, at firm level the closer to frontier the larger the benefits

from regulations that promote competition

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What lessons for Australia?

• Strong productivity acceleration over past two decades supported

by good product market policies

• Trade openness, liberalisation of non-manufacturing industries and

administrative and regulatory reforms made it easier for Australia to catch ICT train

• Good business environment likely to have benefitted most firms

that have potential to excel internationally

• But not all that glitters is gold, OECD analysis suggests that there

are product market areas in which more needs to be done to keep sustaining growth, e.g.:

– Eliminate regulatory barriers to interstate trade in services – Eliminate cross-jurisdictional inconsistencies in regulation of network industries – Accelerate establishment of competitive energy market – Ensure that regulatory policies are conducive to adequate and efficient infrastructure investment

• 2
• 1

1 2 3 4 5 6

IRL LUX PRT ESP JPN NLD GBR ITA USA BEL AUS FIN DNK FRA DEU SWE GRC CAN

GDP per capita growth Contributions to GDP per capita growth from trend changes in: GDP trended per hours worked Total hours/working-age population Working-age population/total population 1986-1995 1995-2006

• 2
• 1

1 2 3 4 5 6

IRL LUX GRC FIN ESP GBR SWE AUS NLD CAN PRT USA BEL DNK FRA DEU JPN ITA

Decomposition of GDP per capita growth

Catch-up and convergence in OECD income levels, 1995-2006, relative to the United States

Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Mexico Netherlands New Zealand Norway Poland Portugal Slovak Rep. Spain Sweden Switzerland Turkey UK

• 1.5
• 0.5

0.5 1.5 2.5 3.5

• 80
• 70
• 60
• 50
• 40
• 30
• 20
• 10

10

Gap in GDP per capita (%), 1994 Gap in average growth rate (%) 1995-2006

Convergence zone Divergence zone

Productivity growth in total market services

Value added per person employed , percentage change at annual rate

• 3
• 2
• 1

1 2 3 4 % 2000-2005 1995-2000

Contribution of ICT capital to GDP growth, 1985-2006 and 2001- 2006 (or closest year available)

percentage points

• 0.1%

0.0% 0.1% 0.2% 0.3% 0.4% 0.5% 0.6% 0.7% 0.8% 2001-2006 1985-2006

Hourly productivity growth and its components

1985-2006

• 1.0%
• 0.5%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%

contribution of capital deepening MFP growth Labour productivity growth

Regulation and productivity acceleration are negatively correlated

Australia Austria Belgium C anada Denmark Finland France G ermany G reece Ireland Italy J apan Netherlands New Zealand Norway Portugal S pain S weden S witzerland United Kingdom United S tates

• 2.5
• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 R egulation in non-manufac turing s ec tors , 1980-95 average

C

• rrelation coefficient=-0.4

t-statistic=-1.91 without Greece: C

• rrelation coefficient=-0.74

t-statistic=-4.62 Annual average percentage point acceleration in labour productivity growth 1996-2005 vs 1985-1995

Liberalization in energy, transport and communication

1985-2003

1 2 3 4 5 6

Barriers to entry Public ownership Market structure Vertical integration Price control

1985 1995 2003

Aggregate regulation and its components in 2003

0.0 0.5 1.0 1.5 2.0 2.5 3.0

S tate control B arriers to entrepreneurship B arriers to trade and investment

manufacturing (norm) 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9

Sweden Netherlands Denmark Ireland Australia United States Finland United Kingdom New Zealand Canada Switzerland Spain Greece Portugal France Norway Belgium Japan Germany Italy Austria

0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1

Ireland Netherlands New Zealand Sweden Denmark United Kingdom Switzerland United States Australia Finland France Belgium Canada Germany Spain Portugal Norway Japan Italy Greece Austria

ict producing ict using non-ict

Burden of non-manufacturing regulation

Product market regulation and the diffusion of ICT are negatively correlated

Australia Austria Belgium Canada Denmark Finland France Germany Greece Ireland Italy Japan Netherlands New Zealand Norway Portugal Spain Sweden United Kingdom United States

5 10 15 20 25 30 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 Average ICT investment (% total investment), 95-05 Average regulation in ETCR sectors, 93-03 Correlation coefficient = -0.71 t-statistic = -4.29

This simple correlation is confirmed by multivariate regression analysis.

1 0 2 0 3 0

• .0 5

.0 5 .1

DEU ESP FRA IT A GBR I RL U SA

1 0 2 0 3 0 4 0

• .05

.0 5 Hi gh re gu la tio n L o w re gu la ti o n

By impact of regulation

Distribution of productivity growth across country/industry/time

By country group

26

Wide differences in allocative efficiency, especially in services

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% FIN BE L PR T FR A E S P ITA S WE G BR Manufacturing S ervices

Contribution of resource allocation to sectoral MFP levels (Based on Olley-Pakes productivity decomposition)

• 3
• 2.5
• 2
• 1.5
• 1
• 0.5

0.5 1 1.5 2 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

E S P FR A ITA GBR

Growth of real value added by productivity quartiles (relative to average of country/sector/year group)

Least productive Most productive

Average

Growing faster Growing slower

ESP FRA ITA GBR

27

Different abilities of countries to channel resources towards most productive firms

Productivity dispersion across firms in telecommunications

United Kingdom France

The figures present the distribution of labour productivity in each industry and year between the 5th and 95th percentiles. The upper bound of the grey bar represent the 75th percentile, the lower bound the 25th percentile and the line in the middle of each grey bar being the median. Labour productivity is measured as value added per worker in 100 thousands of 1995 Euros. Source: Authors’ calculations from AMADEUS database.

25th %ile 75th %ile 95th %ile 5th %ile

Much of the increase in dispersion comes from top performers.