Inclusive Growth and Policy Reform

Recently, the first joint conference between the IMF, OECD and World Bank was held which discussed topics related to structural reforms.

At this conference, recent research on the linkages between product market regulations and inclusive growth were presented. The conference brought together policymakers and practitioners, international institutions, and leading academics to discuss key policy issues in the area of product market competition and regulation and growth.

One of the research papers was joint work I did with Mariana Iootty (World Bank) and Janez Kren (Leuven University). See below for slides. In there, we analyze how services regulations have had a positive impact on productivity developments in the EU. Interesting fact is that a lot of behind-the-border regulations on how firms operate, as opposed to pure entry barriers, have a particularly strong effect on productivity. 

This is an important finding. Of course, entry barriers still matter for letting services firms enter a closed market so as to bring in more competition resulting in lower prices for those industries that use a lot of services, mainly as inputs. This ultimately translates into greater bang for the buck, which in economic terms is called stronger a productivity level and and eventually growth. 

However, as said, not only entry barriers matter. Once a company has entered the market, it still faces a hurdle of additional regulations which can actually frustrate firms to grow bigger. This growth of firms is an important supplementary force for greater productivity. Markets free from burdensome regulations allow firms to reach greater scale, that in turn forms an extra knock-on effect on productivity.

Many EU countries have over the years come to decrease their entry barriers, but in some cases barriers on the operations (or conduct) of the firm are still there. In other instances countries have in recent years actually increased their regulatory burdens for firms, which precisely are found in these behind-the-border barriers on operations. 

Time to be alert, therefore!