Transcript Productivity growth in the medium to long run: An outline

Quantification of
reforms
Balázs Égert
OECD, Economics Department
Structural Surveillance Division
Quantification Unit
What we do
at the Structural Surveillance Division
• Going for Growth publication
• Quantification unit
– Producing indicators
• Product Market Regulation (PMR) indicator
• Electricity, Transport and Communication Regulation
(ETCR) indicator
• Regulatory Impact (regimpact) indicator
– Work on the framework of quantifying the
impact of structural policies on economies
outcomes (growth)
Renewed interest in quantifying the
impact of reforms on growth
• low economic growth in the aftermath of the
crisis
– help mitigate the negative impact of fiscal
consolidation
– help restore fiscal sustainability (public debt
crisis => more growth lower debt)
– mitigate the impact of slowing potential growth
(population ageing)
Quantifying the effects of reforms
Key drivers in a production function approach
GDP per capita
Labour productivity
(GDP per employee)
Investment in
physical capital
Multi factor
productivity
Employment rate
(No. of employees / Pop)
Labour force
participation
Unemployment
rate
Purpose:
• Links to policies assessed through well-established channels
• Supported by empirical evidence from aggregate, industry and firm-level data
Framework allows for multiple policy
channels to be explored and quantified
GDP per capita
Top level
performance
Capital deepening
(capital per hour)
Intermediate
drivers
Policies and
institutions
Labour utilisation
(Hours worked per capita)
Labour productivity
(Output per hour worked)
Knowledgebased
capital /
innovation
Openness to
foreign trade
and FDIs
Product and financial
market policies
Hours worked
per worker
Multi-factor
productivity
Human
capital / skills
development
Innovation policies
Framework conditions and institutions
Employment rate
Structural
unemployment
rate
Education policies
Labour force
participation
Labour market policies
Policy variables can be classified
according to their systemic importance
Channel-specific policies
• Knowledge-based capital (R&D tax credit or grants, industry-university links)
• Openness to foreign trade and investment (barriers, trade support measures)
• Human capital and skills development (education and employment policies)
Framework conditions => Market competition, resource allocation
• Product and labour market regulation (barriers to entry and labour mobility)
• Competition Law and Policy
• Efficiency of bankruptcy legislation
Legal infrastructure and basic institutions
• Rule of law, contract enforcement and efficiency of judicial systems
• Intellectual property rights
• Public sector efficiency
6
Main steps of quantification exercise
Policies
Supply-side
impact
Macro
outcome
• Mapping of specific reform into corresponding
policy indicator
• Assessing effect on productivity, investment and
employment
• Aggregating the effects coming through different
channels to provide profile of impact on GDP
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Step 1 - Mapping reforms into indicators
Policy area
Indicators
Restrictiveness of regulatory barriers Product Market Regulations (PMR),
to competition
including trade openness and FDI
Employment protection legislation
Strictness of employment regulation
(EPL)
Share of indirect taxes in total
Tax structure
revenues
Research and Development
Share of R&D spending in GDP
Childcare / maternity leave
Childcare spending (CHILDC)
Active labour market policies (ALMP)
Active labour market policies
(ALMP) – spending
Incentives of unemployment benefits
Average gross unemployment
benefit replacement rate (ARR)
Labour tax wedge
Labour income taxes and SSC
Coverage of exercise defined by
existence of indicators
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Step 2 – Unit effect on productivity
Step 2 – Unit effect on productivity
Policy Indicator
Policy shock
PMR (overall index)
20% reduction
Tax structure
R&D spending
Employment protection
of open-ended contract
Structural impact after 5
years
2.4% level gain (AMEs)
3.4% level gain (EMEs)
3 p.p. rise in the share of
0.75% level increase
indirect taxes
20% increase in
0.2% level increase
R&D/GDP ratio
20% reduction
0.4-0.5 p.p. level increase
Benchmark elasticity but allows for
country-specific impact in some cases
Step 3: Aggregation of reforms
Example of quantification: Reform programme in Italy
Impact after 5 years, %
GDP
Product market reform1
Labour market reform
(Jobs Act)2
Tax reform
Public administration
and judicial system
reform
Total
Additional average
annual growth
Via
employment
growth
1.5
Impact after 10 years, %
Via
productivity
growth
GDP
1.5
2.6
Via
Via
employment productivity
growth
growth
2.6
0.6
0.5
0.1
1.2
1.1
0.1
0.7
0.5
0.2
1.6
1.6
0.0
0.6
0.9
0.6
0.9
3.4
1.0
2.4
6.3
2.7
3.6
0.7
0.2
0.5
0.6
0.3
0.4
1. OECD estimates for the impact of product market reform include the results of reforms from 2012 onwards.
Approximately two thirds of the quoted impact are due to measures taken in 2012-13.
2. The impact of the labour market reform is based on a judgement, based on the Jobs Act Legge Delega (enabling
law), although not all details are defined yet.
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The estimated longer term impact on the
profile of GDP
Per capita GDP, index 2000=100
130
120
Growth with reform
110
100
Growth without reform
90
80
70
1990
1995
2000
2005
2010
2015
2020
2025
2030
Expected medium-term benefits for reforms introduced in
“normal” times, i.e. in broadly favourable economic conditions
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The pace of reforms has been faster in
countries facing hardest macro conditions
Average pace of reform 2011-14
0.9
GRC
0.8
0.7
PRT
IRL
0.6
MEX NZL
POL
GBR
ISR
HUN
FIN
CHN AUTAUS
CAN ITA
BRA DNK FRA
KOR
JPN
USA
RUS
NLD
DEU
TUR
NOR
CHL
LUX
SVN
CHE
SWE
BEL
0.5
EST
ESP
SVK
CZE
0.4
0.3
0.2
0.1
ZAF
ISL
0.0
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Unemployment rate in 2010
Countries reforming most were also those engaged into
strongest fiscal consolidation efforts
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Contrast between medium-term expected gains and
persistently weak growth performance raises questions
Are we asking too much from structural reforms?
• Structural reforms a substitute for demand?
• What type of reforms would best support (weak) demand
in the near term?
How best to mitigate contractionary effect?
• Is going for broader reform package better?
• Does the usual argument in favour of boldness hold in
weak demand?
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Reforms to be promoted in a context of weak demand
Shift in the composition of public spending towards investment
• Public infrastructure investment with high growth impact (broadband network)
• Regulatory harmonisation
Product market reforms in specific service sectors
• Removing restrictions on the entry of new suppliers in services characterised by
low entry costs – and in some cases – latent demand (professions, taxis, etc).
Reforms of benefit entitlements in the areas of pensions and/or health
• Improve sustainability of public finances and create space for fiscal stimulus
• Effective/credible back-loaded consolidation
Reforms easing frictions in the reallocation of resources
• Reducing barriers to geographical or jobs mobility
• Housing market policies and job-search assistance
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Product market reforms that can ease supply constraint
can bring benefits even in a difficult context
Regulatory barriers to competition in regulated professions (legal services,
engineering, architecture and accounting)
Reducing entry barriers in service sectors with large pent-up
demand and low entry costs can unleash the entry of new firms
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Reforms least likely to succeed in a context of weak
demand
Reforms that initially put downward pressures on wages or mark-ups
• Employment protection legislation, minimum wages or product market
regulation (network industries)
Factors mitigating the impacts of such reforms
• Packaging: Simultaneous reforms of labour and product markets reduce risks
or extent of contractionary effects.
• Synchronisation: In euro area, help to reduce transition costs by giving greater
scope to monetary policy
• Boldness: Once and for all price level adjustment vs lower inflation expectations
Measures to shift the relative strength of channels
• Addressing financial sector dysfunctions to improve credit flow
• Reducing policy uncertainty to boost the positive confidence channel
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Improving on the current
quantification frameworks
Improving on the current
quantification frameworks
1. Updating outdated estimates
– Existing estimations mostly run only
till mid-2000s
2. Extending to more policies and channels
– Including complementarities
– Taking into account more country-specificities
3. Better mapping policy changes into
indicators
4. Incorporating emerging markets (EMEs)
– Current frameworks cover mostly OECD
Increasing consistency
For the different channels (MFP,
investment, labour market outcomes)
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•
•
•
Similar time period and
Similar country coverage
Same data sources and variable definitions
Harmonised estimation approach
Extending policy channels
• Policies specific to production factors
(widely used in earlier studies)
• Innovation, trade (MFP)
• Corporate tax (physical capital)
• Active labour market policies (employment)
• Framework conditions
(used to varying extent in earlier studies)
• Product and labour market regulations (widely used)
• Competition law and policy (not used)
• Efficiency of bankruptcy legislation (used to some extent)
• Basic institutions, legal infrastructure
(rarely used in earlier studies – infrequent observations)
• Rule of law, efficiency of judicial systems
• Intellectual property rights
Better mapping policies into existing
indicators
• Starting point of quantification: the
identification of actual policy changes
in existing indicators
– The more policies we manage to bring into the
new framework, the impact of more actual
policy changes we will be able to evaluate
– A better mapping of actual policy changes into
existing indicators (PMR) also increases the
preciseness of quantification. This is a very
challenging task
Thank you