Boosting growth in high-debt times: The role of service deregulation

Federico Cingano, Guglielmo Barone

Many European countries face the challenge of credibly reducing their debt-to-GDP ratios. Boosting output growth is therefore an urgent and key political and economic priority. This column argues that increasing competition in the market for key upstream service activities – in particular, energy and professional services – could have sizeable effects on growth by improving the performance of downstream manufacturing industries.

Many European countries face the challenge of credibly reducing their debt-to-GDP ratios. Boosting output growth is therefore an urgent and key political and economic priority. Given the existing constraints to demand-side measures, most observers see structural (supply-side) reforms as the main policy tool such countries have at their disposal to “grow out” of their debt problems (e.g. Ivanova et al. 2011, Fernandez-Villaverde and Rubio-Ramirez 2011, Amato et al. 2010). The specific measure they should focus on and the gains to be expected from such reforms are, however, less clear.

Based on recent research on OECD data, this column argues that increasing competition in the market for key upstream service activities – in particular, energy and professional services – could have sizeable effects on growth by improving the performance of downstream manufacturing industries.

In many countries, key inputs such as professional services, energy, transportation, and telecommunication services are not only scarcely traded internationally, but also sheltered from domestic competition by substantial administrative restrictions, including:

monetary and non-monetary barriers to market entry;

the integration of a priori competitive activities with natural monopolies (as in the case of energy); or

the existence of restrictions to market conduct (as in professional services).

Such restrictions have negative effects on growth in services, in particular because they reduce investments (Alesina et al. 2005). This direct negative effect is only part of the story, however. Combining service-regulation indexes with data on growth in manufacturing industries for a sample of OECD countries, we have shown that there are also sizeable indirect effects, from service regulation to the performance of downstream activities (Barone and Cingano 2011). Interestingly, similar findings are obtained by other works investigating the same issue with different approaches (see Bourlès et al. 2010, Arnold et al. 2011).

Our studies look at the differential growth rates between industries with different intensities in the use of regulated services, and test whether countries with less service regulation see faster growth in service-intensive industries (relative to other industries). The estimates account for any idiosyncratic country- and industry-specific factors that might influence growth, such as human or physical capital endowments or the quality of institutions.

Our findings indicate that lowering service regulation, as measured by the OECD indicators of sectoral regulation, would have non-negligible positive effects on service-intensive users in terms of value added, productivity and export growth.

To give an idea of the economic relevance of our results, consider a reduction in anti-competitive restrictions from the high level of a country such as France to those of Canada. Our results imply that the yearly value-added growth rate of a service-intensive industry (such as “pulp, paper and printing”) relative to less intensive industries (such as “fabricated metal products”) would rise by nearly one percentage point. This is a significant boost to the performance of manufacturing industries, whose median yearly growth rate was 1.8% in our sample. Similar implied magnitudes are obtained by looking at the impact of service deregulation on (labour) productivity growth and export growth.

Our analysis also highlights that the result is driven mainly by the reduction of anti-competitive regulation in energy sectors (electricity and gas) and among professions (legal, accounting, engineering and architectural services). Reducing regulation in energy implies easing third-party access to the transmission grid and/or increasing the degree of vertical separation between the transmission and the generation segments. In the case of professions, it implies lowering barriers to entry (for example, to foreign firms) and the so-called regulation of conduct (including restrictions on prices and fees, on advertising, on the form of business or on the possibility of cooperation between professionals).

The room for further service deregulation in Europe seems substantial. According to the OECD indices used in the research in 2008, for example, the number of restrictions in professional services in countries such as Italy and Greece (and Spain and France) was three (and two) times higher, respectively, than in the US and the UK.

References

Alesina A., Ardagna S., Nicoletti G. and F. Schiantarelli (2005). “Regulation and Investment”, Journal of the European Economic Association, 3: 791 825.

Arnold, J., Nicoletti, G. and S. Scarpetta (2011). “Does Anti-Competitive Regulation Matter for Productivity? Evidence from European Firms”, IZA Discussion Papers 5511, Institute for the Study of Labor (IZA).

Barone G. and F. Cingano (2011). “Service regulation and growth: evidence from OECD countries”, The Economic Journal, 121: 931-957.

Bourlès R., Cette G., Lopez J., Mairesse J. and G. Nicoletti (2010). « Do Product Market Regulations in Upstream Sectors Curb Productivity Growth?: Panel Data Evidence for OECD Countries”, OECD Economics Department Working Papers 791, OECD Publishing.

Fernandez-Villaverde, Jesus and Juan F Rubio-Ramirez (2011), “Supply-side policies and the zero lower bound” VoxEU.org, 11 November.

Giuliano Amato, Richard Baldwin, Daniel Gros, Stefano Micossi, and Pier Carlo Padoan (2010) , “A new political deal for Eurozone sustainable growth: An open letter to the President of the European Council”, VoxEU.org, 7 December.

Ivanova, Anna, Edouard Martin and Paolo Mauro (2011) “Chipping away at public debt – Sources of failure and keys to success in fiscal adjustment”, VoxEU.org, 9 November.

