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Schumpeter in the Tropics: Regulation and Macro Performance (work in progress under the direction of Luis Serven and No

Schumpeter in the Tropics: Regulation and Macro Performance (work in progress under the direction of Luis Serven and Norman Loayza ). Guillermo Perry Chief Economist for Latin America and the Caribbean World Bank Bogota July 2005.

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Schumpeter in the Tropics: Regulation and Macro Performance (work in progress under the direction of Luis Serven and No

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  1. Schumpeter in the Tropics:Regulation and Macro Performance(work in progress under the direction of Luis Serven and Norman Loayza) Guillermo Perry Chief Economist for Latin America and the Caribbean World Bank Bogota July 2005

  2. Schumpeter in the Tropics: Regulation and Macroeconomic Performance • Research developed under LAC’s Regional Studies Program, so emphasis on LAC -- but broader international context. • Motivation: perception that regulation is heavier in LAC than other regions (e.g., Djankov et al. 2000 on entry; Botero et al. 2003 on labor...) • Starting assumption: excess regulation hampers Schumpeterian efficiency-enhancing resource reallocation across firms, and hence growth in aggregate productivity and output

  3. Overall Regulation Index Product Market Regulation Index .6 .6 .4 .4 .2 .2 0 0 INL EAP SAS LAC AFR MNA INL EAP SAS LAC AFR MNA Labor Regulation Index Fiscal Burden Index .8 .6 .6 .4 .4 .2 .2 0 0 INL EAP SAS LAC AFR MNA INL EAP SAS LAC AFR MNA Regulation around the world

  4. Regulation indexes: selected countries Loayza, Oviedo and Serven (2005)

  5. Schumpeter in the Tropics: Regulation and Macroeconomic Performance • Paper 1: Regulation reduces economic growth and raises informality and macroeconomic volatility • Particularly clear in the case of product market regulations. Not significant in the case of fiscal regulations (fiscal regulations may increase provision of basic public goods and enforcement capacity) • Economically significant – reducing product market regulation from (median) LDC to IND levels raises growth by 1.7% and lowers volatility by 30% • Good governance helps mitigate (even eliminate) the adverse effects of regulation -- clearly in the case of growth; less so in the case of volatility (high threshold for product market regulation; lower for labor market) • IV estimates suggest these effects are causal

  6. Impact of Regulation on Growth Loayza, Oviedo and Serven (2005)

  7. Impact of Regulation on Informality Loayza, Oviedo and Serven (2005)

  8. Schumpeter in the Tropics: Regulation and Macroeconomic Performance • Paper 2: how does micro regulation affect firm dynamics (i.e., the reallocation process) ? • PMR affect labor productivity growth • All regulations affect sectorial turnover, entry and exit. PMR affect turnover, entry and exit at aggregate manufacture level (others not significative) • Turnover, in turn, affect labor productivity growth, mainly through net entry (not significative through reallocations among incumbents)

  9. Firm Dynamics and Labor Productivity Growth Loayza, Oviedo and Serven (2005)

  10. Schumpeter in the Tropics: Regulation and Macroeconomic Performance • Paper 3: how does micro regulation affect the aggregate response to shocks – which typically require significant reallocation ? • Results: protecting incumbents from adverse shocks reduces volatility at the expense of • Larger aggregate output losses (PDV of deviations from trend) • Slower recovery to pre-shock GDP levels

  11. Schumpeter in the Tropics: Regulation and Macroeconomic Performance • Paper 4: effects of regulatory reforms in factor markets on aggregate labor and capital dynamics • Econometric application to labor market flexibilization in Colombia using plant-level data (other applications under way) • Results suggest ‘adjustment substitution’: increased aggregate labor flexibility and increased capital stock inertia

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