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Ninth ACCC Regulatory Conference Revisiting the rationale for regulation 24-25 July 2008, Surfers Paradise Regulation and growth Giuseppe Nicoletti OECD Departm ent of Econom ics Outline Regulation, competition and growth: why should


  1. Ninth ACCC Regulatory Conference Revisiting the rationale for regulation 24-25 July 2008, Surfers’ Paradise Regulation and growth Giuseppe Nicoletti OECD Departm ent of Econom ics

  2. 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?

  3. 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

  4. 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

  5. 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 6

  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 7

  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 8

  9. Sources of productivity growth • elimination of inefficiency (MFP) • investment in new capital assets (K/ L) 1. Within firm growth • technology adoption (ICT) • technological and organizational innovations (MFP) • strength of creative destruction process • opportunities for experimentation/ market 2. Firm dem ographics testing • ability to nurture and develop most successful firms • ability to reallocate resources to most 3. Reallocation between productive firms and industries firm s/ industries 9

  10. Sources of productivity growth –Wide heterogeneity of productivity levels and growth across industries –ICT-intensive industries have driven aggregate growth performance over past decade Stylized facts –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 � Aggregate productivity growth highest where resources flow m ost easily to fast growing high productivity firm s and industries 10

  11. 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 on 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 11

  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 12

  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 13

  14. 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 14

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