Luxembourg, December 2012 Structural Reforms: Need and Impact The case of the product market reforms G ILBERT C ETTE B ANQUE DE F RANCE AND U NIVERSITÉ OF A IX -M ARSEILLE 1
General introduction Luxembourg, December 2012 General introduction - After recovery plans , in 2008-2009, European countries have now engaged public finance consolidation plans - Since 2008, numerous papers on the size of the fiscal multipliers Among others, Romer and Romer (2010), Perotti (2012), Ramey (2011), Alesina and Ardagna (2012), Parker (2011), Corsetti, Meier and Gernot (2012), Auerbach and Gorodnichenko (2012), Alesina, Favero and Giavazzi (2012)... - Incertainties , in particular in times of recessions Gilbert Cette 2
General introduction Luxembourg, December 2012 General introduction The three main questions are now: - What is the GDP impact of a coordination of country consolidation plans ? Particularly in Europe? - What is the public finance impact of a coordination of country consolidation plans ? Particularly in Europe? - What is the best consolidation plan schedule (less GDP costly)? My presentation deals with the two first questions. Gilbert Cette 3
General introduction Luxembourg, December 2012 General introduction Four questions are raised in particular in this presentation: - The two previous ones For this, I will use a multinational modelisation tool, named MacSim. This tool is a software to simulate multinational macroeconomic policies, built by Brillet, Cette, Gambini and Lagoarde-Segot. - What could be other sources of growth? I will show that product market structural reforms could be one of these sources. Labour market also, but I will stay on the product market - How would it be possible to articulate product market structural reforms and fiscal consolidation? Gilbert Cette 4
General introduction Luxembourg, December 2012 General introduction In all presented simulations: � One MU including: Germany, Belgium, France, Italy, Luxembourg, The Netherlands, OEA (for Other countries of the Euro Area) � Interest rates: Taylor rule (Option 3) Risk premium coefficient = 0.2 � Exchange rate: Purchasing Power Parity (Option B) � External trade price elasticities: Supposed equal to one � Result presentation: Differences with a reference situation without the policy GDP and consumer price: difference in % Public finance balance and current account: differences in GDP points Gilbert Cette 5
General introduction Luxembourg, December 2012 General introduction Fiscal consolidation Public demand shock: Dicrease of the public demand by one GDP point 2 scenarios: - Scenario 1: Consolidation in one country - Scenario 2: Simultaneous consolidation in all industrialised countries MacSim simulation results Time France Luxembourg GDP Cons. Cur. Public GDP Cons. Cur. Public Price Acc. acc. Price Acc. acc. -0.70 0.12 0.57 0.71 -0.16 0.23 0.54 1.10 Year 1 Scenario 1 -0.57 -0.57 0.61 0.63 -0.06 0.18 0.80 0.92 Year 8 -1.39 -0.05 0.27 0.50 -1.22 -0.10 0.54 0.62 Year 1 Scenario 2 Year 8 -1.56 -2.83 0.17 0.10 -1.69 -2.18 0.40 -0.59 Gilbert Cette 6
General introduction Luxembourg, December 2012 General introduction - Standard low multipliers for scenario 1 8 years: France 0.6 and Luxembourg 0.1 - In the scenario 2, high multipliers 8 years: France 1.6 and Luxembourg 1.7 - Public finance account consolidation impact: Standard in scenario 1 8 years: France 0.6 and Luxembourg 0.9 Nill or negative in scenario 2 8 years: France 0.1 and Luxembourg -0.6 - Fiscal consolidation is inefficient in case of coordination of the fiscal consolidation - Other sources of growth have to be associated to the fiscal consolidation - Structural reforms Here, product market ones Gilbert Cette 7
Upstream Product Market Regulations,… Luxembourg, December 2012 Upstream Product Market Regulations, ICT, R&D and Productivity by Gilbert Cette Jimmy Lopez Jacques Banque de France, Banque de Mairesse DEFI France, LEG CREST-INSEE, UNU-MERIT, NBER, BdF Gilbert Cette 8
Upstream Product Market Regulations,… Luxembourg, December 2012 Motivation Competition is an important determinant of productivity growth: • According to endogenous growth theory, the link between competition and productivity growth relies on incentives to escape peer pressure and reap temporary rents by improving efficiency through innovation/adoption/imitation Most of previous empirical research focus on competitive • conditions within each sector (or market): Nicoletti and Scarpetta 2003; Inklaar et al. 2008; Buccirossi et al. 2009; Nickell, 1996; Nickell et al. 1997; Blundell et al. 1999; Griffith et al. 2002; Aghion et al. 2004 ; Haskel et al. 2007; Conway et al. 2005; Aghion et al. 2009..... Gilbert Cette 9
Upstream Product Market Regulations,… Luxembourg, December 2012 Motivation • Only few papers are accounting for indirect effect of lack of upstream competition, using data on: � cross-section: Allegra et al. (2004), Faini et al. (2006), Barone and Cingano (2008) � single country: Arnold et al. (2006) and Forlani (2010) � cross country/industry panel: Conway et al. (2005), Bourlès et al. (2010, RES forthcoming) Gilbert Cette 10
Upstream Product Market Regulations,… Luxembourg, December 2012 Motivation Bourlès, Cette, Lopez, Mairesse and Nicoletti (2010) Underlines two channels from upstream competition to • downstream productivity: � upstream market power is used to grab part of the downstream rents � barriers to competition upstream generate less entry and weaker competition downstream Examine empirically this link: • � using industry-level/cross-country panel data � proxying upstream competition with the OECD indicators of sectoral product market regulation, focusing on non- manufacturing Find that anticompetitive regulations upstream curb significantly • MFP growth Gilbert Cette 11
Upstream Product Market Regulations,… Luxembourg, December 2012 Purpose and findings of paper Go in detail on the channels of the upstream competition impact • Estimate the impact of upstream regulations on ICT and R&D � investments downstream Evaluate the importance of these channels relatively to the whole � impact of upstream regulations on productivity Using, as Bourlès et al. (2010, RES forthcoming), industry- � level/cross-country panel data and OECD upstream regulations indicators Main findings • An important significant negative impact on R&D accumulation � A smaller but significant impact on ICT accumulation � � The R&D and ICT channels explain between 30% and 60% of the whole impact on productivity Gilbert Cette 12
Upstream Product Market Regulations,… Luxembourg, December 2012 Outline 1. Empirical specifications 2. Data 3. Main empirical results 4. Economic significance of estimates: policy simulations 5. Further analysis 6. Sensibility analysis 7. Conclusion Gilbert Cette 13
Upstream Product Market Regulations,… Luxembourg, December 2012 Productivity specification The cointegrated relationship between domestic and leader MFP is • augmented by the ‘Regulatory Burden’ indicator: With: small letters for logarithm; sector (s), country (c), and year (y) indices omitted The MultiFactor Productivity defined by: • With: Y the value added; L the level of employment; C, Cn and K the ICT, non-ICT and Knowledge capital stocks, respectively In order to estimate the elasticities, we introduce the accounting • MFP into the cointegrated relationship: With π = β + α + γ the return to scale � Gilbert Cette 14
Upstream Product Market Regulations,… Luxembourg, December 2012 Productivity specification The benchmark specification assumes: • Constant return to scale (π = 1) � � The non-ICT capital elasticity is equal to its share in total costs ~ in the US, specific by sector (noted , sector specific) α The MFP gap with the US is bounded on the long-run (ρ = 1) � We check the sensibility of the estimates to these assumptions Finally the estimated long-term productivity equation is: • � With u scy = θ s + θ cy + ε scy in our favourite specification � 5 sectors among our estimation sample are almost not investing in R&D. For these sectors we assume τ = 0 Gilbert Cette 15
Upstream Product Market Regulations,… Luxembourg, December 2012 Capital demand specifications We use a common factor demand specification: • � With X a production factor (X = L, Cn, C, K) This common specification come from an intertemporal maximization of profit for a firm with a CES production function The specifications of ICT and R&D intensity relatively to labor are • then deduced and augmented by the ‘Regulatory burden’ indicator: � With u i,scy = θ i,s + θ i,cy + ε i,scy , i = { k, c }, in our favourite specifications � With a lagged employment level because of simultaneity issues Note that we relax the assumption of equal factors elasticity of substitution between K and C Gilbert Cette 16
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