Measuring economy-wide and sectoral product market regulations in OECD economies

1. Attractivité Economique du Droit (AED)Séminaire “La Mesure du Droit”Paris, Conseil d’EtatDecember 15-16 2006 Measuring economy-wide and sectoral product market regulations in OECD economies Giuseppe Nicoletti OECD Economics Department

2. The OECD indicators systemOutline • Principle, use and characteristics • Structure and coverage • Scoring and aggregation • A flavour of results • Validation approaches

3. What is this all about? Basic idea • Turn qualitative data on laws and regulations that inhibit competition into quantitative indicators, for comparison purposes Main comparison criterion • A country performs worse than another if she imposes a more restrictive regulation to achieve the same aim • Criterion only valid in a homogeneous set of countries Main uses • Benchmarking to encourage convergence to best practice policies • Diagnostic tool for specific policy advice • Empirical analysis of the competition-performance link to provide credibility to policy advice • Used in Going for Growth context, country surveys and specific OECD projects • All data (basic and indicators) available on line for government agencies and academics at www.oecd.org/eco/pmr

4. Main characteristicsof the OECD indicators [1] • Focused on laws and regulations bearing on efficiency-enhancing competition and/or entry • But only where competition is viable • accounts for technology and demand features of sectors (e.g. price controls, barriers to entry in networks not considered restrictive) • Public ownership considered hindrance to efficiency-enhancing competition • Do not account for “quality” of regulation or other public policy objectives

5. Main characteristicsof the OECD indicators [2] • Based on “objective” data (no survey data) • rules “on the books” or hard data on market/industry structure • not in the minds of respondents (to the extent possible) • Most of the data collected by questionnaire filled in by government experts • government officials endorsing exercise • data vetted by Member countries and OECD country experts • final indicators result of “peer review” process • Pros • sense of “ownership” by surveyed countries • verifiable information • isolated from context-specific factors • explicit link with policies (difficult with survey-based indicators) • Cons • little consideration of enforcement • problematic with federal countries and informal obstacles to competition (e.g. litigation)

6. Main characteristicsof the OECD indicators [3] • Bottom upapproach • Qualitative information on individual items turned into aggregate quantitative indicators • Mapping and aggregation to level of policy area, sector or country • OECD International Regulation database 805 items by country • Economy-wide indicator 139 items by country • Sectoral indicators 104 items by country • Pros • Transparent • Possible to trace country position down to individual regulations • Cons • Degree of discretion in aggregation (but see below)

7. Structure and coverage • Tree-structured, modular, combines information on: • general-purpose and sectoral regulations • domestic and border policies • Three major blocks: • Economy-wide regulation (PMR) • three main areas: state control, barriers to entrepreneurship, barriers to trade and investment • 30 countries, 1998 and 2003 • Sectoral regulation (NMR) • four main sub-areas: public ownership, barriers to entry, involvement in business operations, market/industry structure • focus on non-manufacturing • energy transport and communication (ETCR)  21 countries, 1975-2003 • retail distribution and business services (RBSR)  22/30 countries, 1998 and 2003 • Sectoral border barriers (BB) • Tariff barriers  all manufacturing sectors, 30 countries, 1988-2005 • FDI restrictions  9 non-manufacturing sectors + manufacturing, 30 countries, 1980-2005

8. Scoring and aggregation procedures • Three main steps • scoring of qualitative data (0-6) • increasing in restrictions to competition • relative to theoretical best or worst practice (ranking not sensitive to changes in country coverage) • mapping/aggregation into low-level indicators (e.g. 16 in PMR) • subjective weights (often 1/N, but not always) • mapping/aggregation of low-level indicators into summary indicators by broad area, sector or country-wide • Subjective or PC weights depending on the amount of underlying data • Weights of basic data in third step indicators reflect both information available at each step and nesting structure of the indicator • Sensitivity and probabilistic ranking at third step using randomised weights

9. A sample of results • PMR 1998, 2003 • Point estimates by country • Confidence intervals • Probabilistic rankings • ETCR 1975-2003 • Reform by region and area • OECD average regulation by sector • Overall regulation by country • RBSR 1998, 2003 • Retail distribution • Business professional services

10. Validation procedures • Are indicators measuring what they are supposed to? • Correlation with markups, entry rates • Correlation with other indicators of market regulation • Explanatory power in multivariate competition-performance analyses • More exogenous to performance than direct measures of competition • Results more relevant for policy-making

12. Low-level indicator of direct control over business enterprises

13. Low level indicator for the electricity industry

14. Number of basic data points in the OECD questionnaire

15. Items covered by the OECD sectoral indicators

16. Economy-wide indicator system PMR Economy-wide regulation 30 countries 1998 and 2003 Updated every 5 years State control Barriers to entrepreneurship Barriers to trade and investment Current sectoral indicator system NMR Non-manufacturing regulation Border barriers Tariff/non-tariff & FDI restrictions ETCR Regulation in energy, transport &communications 7 sectors 21 countries 1975-03 Continuous update RBSR Regulation in retail distribution & business services 5 sectors 30 countries 1998 and 2003 Updated every 5 years FDI Restrictions in manuf and non-manuf 10 sectors 30 countries 1980-2000 Currently updated Tariff/non-tariff Manufacturing industries 30 countries 1988,1993, 1996 2-digit ISIC Rev. 3 Not updated RI Regulation impact All sectors (manuf and non-manuf) 21 countries 1975-03 Continuous update

17. Product market regulation State control Barriers to entrepreneurship Barriers to trade and investment Public ownership Involvement in business operations Regulatory and administrative opacity Administrative burdens on start-ups Barriers to competition Explicit barriers to trade and investment Other barriers Scope of public enterprise Size of public enterprise Special voting rights Control of public enterprise by legislative bodies Price controls Use of command and control regulation Licenses and permits system Communication and simplification of rules and procedures Administrative burdens for corporations Administrative burdens for sole proprietor firms Sector-specific administrative burdens Legal barriers Antitrust exemptions Ownership barriers Tariffs Discriminatory procedures Regulatory barriers {regulation data} {regulation data} {regulation data} {regulation data} {regulation data} {regulation data} {regulation data} The PMR indicator system

18. The ETCR indicator system ETCR Energy1 Transport Communications Electricity Gas Airlines2 Rail3 Road4 Post5 Telecoms6 Entry Entry Entry Entry Entry Entry Entry Public ownership Public ownership Public ownership Public ownership Public ownership Public ownership Prices Market structure Vertical integration Vertical integration Vertical integration Market structure Market structure

19. The RBSR indicator system RBSR Retail distribution Professional services2 Entry regulation Conduct regulation Entry regulation Conduct regulation Registration1 Shop opening hours Licensing Prices and fees Licenses and permits1 Education requirements Advertising Price controls Large outlet restrictions Quotas and economic needs tests Form of business Protection of incumbents Inter-professional cooperation

20. Random weights technique • No matter what technique is used weights are effectively value judgements. • Random weights: • Technique developed by Anders Hoffmann co-author of the Handbook on Constructing Composite Indicators • Generate 10000 sets of uniformly-distributed random weights (each set summing to 1) • For each country calculate 10000 indicators using randomly chosen weights • Create confidence intervals around mean and probabilistic country rankings, under the assumption of normality • Compare to point estimate obtained with subjective weights • Refinements possible and underway

21. PMR indicators, 1998-2003Point estimates

22. Areas of product market reform in the OECD, 1998-2003

23. PMR indicators, 2003Confidence intervals and point estimates

24. PMR indicators, 1998 and 2003Confidence intervals and point estimates

25. PMR indicatorsProbabilistic rankings

26. ETCR reform by region and area

27. ETCR reform in different industries (average OECD)

28. ETCR indicator, 2003Confidence intervals

29. Retail distribution indicator, 2003Confidence intervals

30. Prof. services indicator, 1998 and 2003Confidence intervals