Media Briefings

Boosting Growth: The Potential Gains From Deregulating Europe’s Service Sector

  • Published Date: September 2011


Liberalising Europe’s energy markets and reducing restrictions on price competition in professional activities, such as the law, accountancy and
engineering, could have a powerful impact on economic growth, according to research by Guglielmo Barone and Federico Cingano, published in the
September 2011 issue of the Economic Journal.
Their empirical analysis of the consequences of service regulation in OECD countries indicates that lowering anti-competitive regulation of ‘upstream’
service markets would significantly boost the growth rates of value added, productivity and exports of ‘downstream’ manufacturing industries. At a time
when many European economies are seeking to ‘grow out of their debt’, these results suggest the growth potential of an agenda of deregulation to
encourage more competition.
In many advanced economies, key inputs such as professional activities, energy, transport and telecommunication services, are not only scarcely traded
internationally but also sheltered from domestic competition by substantial administrative restrictions.
These include, for example, monetary and non-monetary barriers to entering a market, the integration of a priori competitive activities with natural
monopolies (as in the case of energy) or the existence of restrictions on prices and fees, advertising and the form of firms’ organisation (as in
professional services).
Such restrictions induce distortions in upstream markets (for example, higher mark-ups and prices, lower incentives to innovate and inefficient allocation
of resources), which in turn hamper the economic performance of downstream activities that make intensive use of the regulated services.
The empirical analysis of this study looks at differential growth rates between industries with different intensities in the use of regulated services, over the
period 1996-2002. It tests whether countries with less service regulation see faster growth in service intensive industries (relative to other industries).
The results imply that reducing the level anti-competitive barriers in a highly regulated country such as France to those of a low regulated country such
as Canada would raise the yearly value-added growth rate of a service intensive industry (such as ‘pulp, paper and printing’) relative to a low intensive
industry (such as ‘fabricated metal products’) by nearly one percentage point.
This is a significant boost to the performance of OECD manufacturing industries, whose median yearly growth rate was 1.8% in the period considered.
Similar findings are obtained when looking at the impact of deregulation on productivity and export growth.
Previous research has shown that regulation has relevant and negative direct effects on the regulated activities. Recent examples in the Economic
Journal include Poschke, 2010, and Schivardi and Viviano, 2011.
This new study emphasises that in the case of key service inputs there are also relevant indirect effects on the performance of downstream activities.
The results of this research are supported by complementary evidence provided by two works by the OECD (Bourlès et al, 2010; Arnold et al, 2011)
addressing similar questions.
These findings are relevant for the current debate about service deregulation in Europe. They show that the policies with the largest potential impact on
growth include lowering restrictions on price competition in professional activities (for example, lawyers and notaries, accountants, engineers, etc.), and
‘unbundling’ energy markets (the complete separation of ownership between generation and other segments of the industry).
Both sets of measures are among those ranking highest in the current competition policy agenda of the European Union – for example, the so-called
‘third energy package’ and the Service Directive.
The results of this study are also relevant as they suggest reforms with the potential to sustain the recovery of economies that are today required to
‘grow out of their debt’. According to the OECD indices of service regulation used in the research, in 2008 the amount of anti-competitive regulation in
professional services in Italy and Greece (Spain and France) was three (two) times higher than in the United States and the UK.
ENDS
Notes for editors
: ‘Service Regulation and Growth: Evidence from OECD Countries’ by Federico Cingano and Guglielmo Barone is published in the
September 2011 issue of the Economic Journal.
The authors are at the Bank of Italy: Federico Cingano in the Economic Research Department in Rome; and Guglielmo Barone in the Regional
Economic Research Division in Bologna.
For further information: contact Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com); Federico Cingano via email:
federico.cingano@bancaditalia.it; or Guglielmo Barone via email: guglielmo.barone@bancaditalia.it
References:
Arnold, J., Nicoletti, G. and S. Scarpetta (2011) ‘Does Anti-Competitive Regulation Matter for Productivity? Evidence from European Firms’, IZA (Institute
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 No. 791.
Poschke, M. (2010) ‘The Regulation of Entry and Aggregate Productivity’, Economic Journal 120: 1175-200.
Schivardi, F. and E. Viviano (2011) ‘Entry Barriers in Retail Trade’, Economic Journal 121: 145-70.
Data:
OECD Stan Database (industry data on value added, employment and exports)
OECD Sectoral Regulation Indicators (data on service regulation):
Both datasets are downloadable from OECD.Stat: http://dotstat.oecd.org/Index.aspx