Comments on STRI Project OECD Experts Meeting on STRI, OECD, 2-3 July 2009

1. Comments on STRI ProjectOECD Experts Meeting on STRI, OECD, 2-3 July 2009 Joaquim Oliveira Martins OECD

2. Motivation • The construction of policy/reform/institutional indicators has developed in economic literature motivated  by empirical research on the determinants of economic performance and concern to develop a culture of evidence-based decision making. • The OECD has contributed largely to this research effort.  Some OECD institutional indicators, such as the Product Market Restrictions (PMR) or the Employment Protection Legislation (EPL), have become a basic tool-kit for economists.   • The STRI project is in line of this work. Right focus on ex-ante indicators. It developed a sound analytical approach. It has used the network of OECD experts to incorporate policy-relevant information.

3. Main points • Method • The question of weighting & robustness checks • Relating indicators to performance (Top-down approach) • Interactions of policies • Market structure • Possible uses • Research & Policy analysis • Peer pressure vs. Trade negotiations

4. 1. Method • Composite indicators always contain a certain degree of arbitrariness and subjectivity. STRI achieves a good compromise • The problem of weighting: • Mixed approach (EW+EJ): this is reasonable as equal weights are not neutral and their effect depend a lot from the nesting structure; PCA is often not accepted • Random-weights' approach requires caution • Confidence intervals are biased & asymmetric (m=1/N) • Apparent "robustness" may reveal problems with scoring • Weak discrimination across countries (but STRI may be better than PMR)

5. Aggregate PMR scores, 2008 Source: Wölfl, Wanner, Kozluk and Nicoletti (2009)

6. 2. Relating indicators to Performance • Policy complementarities: • When policies are mutually interdependent, changing one without changing another may not materialize expected benefits • Link with 2nd Best • ECO is integrating this dimension in the PMR indicator • But complementarity complicates policy evaluation because performance of one reform area may be closely related to progress in other policies

7. Policy complementarities: restrictions often reinforce each other Source: Nicoletti & Scarpetta (2005)

8. Relating indicators to Performance • Non-linearities: Laffer-curve effects & Imperfect competition • Examples: • Tax policy • Optimal tariffs • Strategic Trade policy • Competition vs. Innovation (Aghion & Howitt model) Outcome Performance Policy

9. Relating indicators to Performance • Sectors are characterised by different types of competition/market structure that could be brought into the picture  The effect of restrictions is likely to be different when output growth (Q=N.X) takes place through the extensive margin (more firms or products, N) or the intensive margin (more output per firm or product, X) (cf. Sutton’s taxonomy of fragmented vs. segmented markets)  Idem whether competition is mainly on costs/prices or product differentiation/innovation

10. Relating indicators to Performance • Modes of trade in services and STRI • Use models of vertical trade to explain why depending on threshold levels of STRI there could be a shift across modes (e.g. 1 to 3)

11. 3. Possible uses • Parallel with the PMR indicator • The PMR indicator has been extensively used for academic research • Could stimulate production of new & better data • Peer-pressure: there has been a movement towards decreasing product market restrictions in OECD countries mapped by the PMR • Could be difficult using the STRI for trade negotiations • Problem of assessing significance of ΔSTRI • Analysing interaction of regulations could be useful to a more systemic view of policies

12. Thank you!