Regulation, productivity and growth: OECD evidence

by Giuseppe Nicoletti & Stefano Scarpetta

Prepared by: Astri Henna & Tatiana Juravscaia

Warsaw 2012

Outline

1. Introduction

2. The problems

3. Stylized facts

4. Theoretical assumptions

5. Data and methodology

6. The main findings

7. Conclusions

Introduction

• Divergence in growth performance of OECD countries in the past 2 decades

• Reason?

institutional environment

economic regulation of product and labour markets

The Problems

• What type of reforms took place?

• Did all nations reform at the same pace?

• What was the impact of those reforms on growth

• Were certain policies and industries reformed quicker?

• Does stronger competition and private ownership help to explain the differences in productivity growth at national and industrial levels?

Stylized facts: Growth patterns

Stylized facts: Productivity growth by sector

Stylized facts: Regulatory reforms in OECD and Europe

Theoretical assumptions

• The role of ownership and performance

• The role of competition

• Product market regulatory environment

Theoretical assumptions (contd.)

• Private ownership:

leads to an increased productive efficiency

stronger incentives for monitoring, cost efficiency and innovation

improved agency relationship

BUT… different benefits in case of network industries

• Competition:

higher efficiency and higher productivity

Innovation

Bell-shape relationship

Theoretical assumptions (contd.)

• Regulatory indicators:

Theoretical assumptions (contd.)

• Regulatory environment in OECD countries (1998)

Theoretical assumptions (contd.)

• Regulatory reform in OECD countries

Data and Method: The basic MFP model and estimation approach

• Standard MFP growth equation augmented to account for impacts of product market regulation

• Growth in MFP depends on:

• Country and industry characteristics

• State of knowledge in the technology leader country

• Baseline equation:

∆ ln MFP = δ (∆ ln MFP Leader) − σ (Technology gap) + β Human capital

• Plus error term and dummies (country specific, industry specific, time specific factors)

• Data: The empirical analysis covers 23 industries in manufactoring and business services in 18 OECD countries over the period 1984-1998.

Data and Method: The basic MFP model and estimation approach

Data and Methodology: extended estimation to capture the regulation-productivity link

• Includes various indicators of product market market regulation and privatization (the whole point, remember?

• Direct and indirect channels of influence

• Extended equation becomes:

∆ ln MFP = δ(∆ ln MFP Leader) − σ(Technology gap) + β Human capital + γ PMR + α(PMR * Technology gap)

PMR= placeholder for the various types of regulation indicators

γ = direct impact of regulation on productividy growth

α = indirect influence through potention hinders to the technological catch-up

Findings

• The impact of aggregate regulation indicators:

• economy-wide product market regulations have a negative effect on productivity --> by slowing down technological catch-up

• The long-run costs of anti-competitive regulation, in terms of foregone productivity improvements, are higher in countries that are further away from the technological frontier

• Lower incentives for change in state owned companies

• Narrower scope for knowledge spillovers

• The role of regulation in manufacturing and services as well as industry-specific regulation:

• Results confirm the positive productivity effect of privatization

• lifting barriers to entry in manufacturing does promote productivity growth where sizeable technology gaps exist

• Results mixed for service sector –heterogeneity of the service sectors across highly competitive industries and those with monopoly elements

Conclusions

• What are the main contributions with respect to policy? Two-fold answer….

• OECD product markets have become more market friendly on average

• BUT policy approaches have never been so different within OECD (esp. Europe).

• Pace of reform

• Different levels of constrains/incentives for harmonization

• Can this explain disparities in growth?

• Yes, to a certain extent significant links between product market policies and productivity performance

• Policy: importance of further regulatory reforms aimed at easing entry conditions and reducing state control due to both direct and indirect productivity gains from the process of privatization.

Discussion

• “In particular, if taken at face value, a gradual (over ten years) move to the OECD-wide average share of state-owned firms in total value added is estimated to boost annual MFP productivity growth by about 0.7 percentage points in some European countries, most notably Finland, Greece, Austria, France and Italy that still have a large stake of business activities in public hands.”

• Include other factors that may influence technological convergence

• Does FDI/trade with leader countries affect domestic R&D?

• How do regulations interact with this?

• Developing countries and privatization/liberalization?