Deregulating Services: Impact on Growth in OECD Countries

1. Discussion of“Service regulation and growth: evidence from OECD countries” by Guglielmo Barone and Federico Cingano Francesco Daveri Università di Parma and IGIER

2. Paper Motivation Starting point is widely held opinion: “Excess” regulation is bad for growth And indeed economic regulation in OECD countries thought to have gone too far by the late 1980s or early 1990s Hence: research focus on deregulation and growth, prompted by OECD impressive effort in data collection. Yet little theoretical advances in parallel (exception: Blanchard-Giavazzi, few others) This paper is latest offspring within this strand of literature

3. The paper in short WHAT: Data from 17 OECD countries and 15 industries to carry out thought experiment adapting methodology of Rajan and Zingales (AER, 1998): “Industries most heavily dependent on services (energy, TLC, transports, professional services) likely taxed disproportionately more from regulation” HOW: contrast • PMR data (entry barriers, vertical integration and conduct regulation from the OECD); • Input-output data -- to evaluate “dependence” of any given downstream industry on specific regulated service industries with • Growth of value added per employed person, employment and exports, from STAN, as dependent variables

4. Empirical specification VA(j,c) = α + β * Σsw(j,s) * X(c,s) + φ SHARE + μ(c) + μ(j) + ε(c,j) c= country; j= industry w= share of service s in industry j in the US X= value of service regulation s index in country c wX = overall weight of service regulation on downstream industry SHARE= initial share of industry (j,c) in total value added in country c VA = growth rate of value added, 1996-2002

5. Main results Service regulation is bad for growth in downstream industries Effect is quantitatively sizable • about 1pp productivity growth gain in average downstream industry moving from highly regulated to lightly regulated services Effect is asymmetric between services • Stronger for energy and professional services • Not there for transports Results withstand a few changes of specifications

6. General remarks Useful and interesting paper Being focused on downstream (thus indirect) effects of service regulation goes much beyond existing literature Three open issues to think about

7. Open issues: theory Why a “growth” (as opposed to “level”) effect of regulation? Possible answer: regulation negatively hits scale parameter of production function, hence BC estimate transitional dynamics effect If so, investment rates should be affected as well Implication: to further test “theory” and learn more about mechanisms of transmission, investment as well as price deflator dynamics more sensible dep variables than employment or exports

8. Open issues: interpreting asymmetries Heterogeneity in estimated coefficients suggests puzzle: “Why is Francesco Giavazzi right when he blames regulation for lawyers and “notai” and not when he speaks of taxis?” Or: Why is regulating energy and professional services so bad while regulating transports is not so bad after all? Are transports less useful to firms and more to households? So they should hit GDP and consumption and not investment. This is testable.

9. Open issues: pairwise correlation Is pairwise correlation there? Can graphical evidence show that convergence in regulation (implied by figure 1) has driven to convergent productivity levels? Between countries, within industries – I guess? Evidence on regulation and prices in Figure 2 is at least contentious If pairwise correlation is not there, then something else - and not regulation – determines industry productivity trends. So why bother about deregulating services?

10. Some specific remarks • Why does data set stop in 2002? • Why I-O coefficients for the US and not country specific? Rationale offered is not transparent. Not to me at least • Why STAN and not EUKLEMS? (I guess I know the answer: EUKLEMS more complete, STAN more reliable)