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

by Guglielmo Barone and Federico Cingano

Vox
December 6, 2011

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).

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