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Services Liberalisation and Evolving Regulation: Trends and Outcomes in OECD Countries
Pierre Sauvé and Nora DihelOECD Trade Directorate
Symposium on Assessment of Trade in ServicesGeneva, 14-15 March 2002
2
Introduction Highlight features of liberalisation
and regulatory reform in OECD countries
Illustrate economy-wide and sectoral benefits arising from services liberalisation and regulatory reform
3
Stylised Facts: Services - Source of Significant Value-added, Productivity Growth and Trade Benefits
Services account for a substantial and rising share of output and employment in the economy
Share of employment in services - proxy of an economy’s development level
Benefits from services trade liberalisation: export opportunities and reduced costs for imported intermediate services
4
Services Account for a Substantial and Rising Share of Output and Employment in the Economy
Share of services in world GDP increased by 5 percentage points between 1980-1998
The corresponding increase for low and middle-income economies : 9 percentage points
Services account for close to 70 percent of production and employment in OECD area
5
Relationship between services employment andnational income
$6 $11 $16 $21 $26 $31 $3630%
40%
50%
60%
70%
80%
ServicesShare ofCivilianEmploy-ment,1998
Gross National Product Per Capita, 1999Thousands of U.S. Dollars, Purchasing Power Parity
Source: Calculated from OECD data.
ICELAND
NETHER-LANDS
NORWAY
TURKEY
HUNGARY
SPAIN
U.K.
ITALY
UNITEDSTATES
PORTUGAL
KOREA
R 2 = 0.64
LUXEM-BOURG
MEXICO
POLAND
CZECHREPUBLIC
GREECE
NEWZEALAND
IRELAND
FINLAND
Correlation coefficient = 0.80
6
Share of Skilled Workers in Sector Employment In manufacturing, skilled workers
account for 20 percent of total sector employment
The share of skilled workers in numerous services sectors lies above 30%
7
Share of Skilled Workers in Sector Employment
Sector share of skilled workers
In sector employment
Computer and related activities 72.1
Research and development 71.3
Insurance and pension funding 46.4
Auxiliary financial activities 41.6
Financial intermediation 40.9
Other business activities 38.8
Electricity gas 32.3
Post and telecommunication 30.1
Wholesale trade 30.1
Relative Wage Levels in Services Sectors: Percentage Difference With Wages in Manufacturing, Selected Countries and Sectors
-13.2
4.1
5.1
5.1
5.9
5.9
6.5
9.5
9.6
21.9
-20 -10 0 10 20 30
Austria
Netherlands
France
Norway
Spain
Switzerland
UnitedKingdom
Australia
New Zealand
Mexico
Percent
-28.5
-13.4
-8.2
-1.4
3.3
3.8
7.9
15
17.6
28.2
39.3
-40 -30 -20 -10 0 10 20 30 40 50
Hotels and restaurants
Wholesale & retail trade, repairs
Construction
Other community, social & personal
Health and social work
Transport, storage & communication
Real estate
Education
Public administration & defence
Electricity, gas and water supply
Financial intermediation
Percent
Converging Trends in Services Trade Share of services in total trade, 1980-2000
1980 1985 1990 1995 2000
OECD Countries
Rest of World0
5
10
15
20
25
Per
cen
t
OECD Countries Rest of World
10
Degree of Liberalisation, Regulatory Reform and Market Structure in Selected Services Sectors:
Trends in OECD Countries
11
Degree of Liberalisation, Regulatory Reform and Market Structure in Selected Services Sectors
Fully/largely competitive industries versus industries with non-competitive segments Road freight, retail distribution and air
travel industries versus Electricity, railways, fixed telephony
Dimensions of liberalisation, regulation and market structure: Barriers to entry into competitive segments
of the industry Public ownership Degree of market competition Degree of vertical integration (electricity)
12
Fully/largely Competitive Industries
Road freight industry
Beyond lifting entry restrictions, less extensive deregulation than in other industries
By 1998 barriers to entry and services constraints had been virtually eliminated
Some price controls and state-controlled trucking companies still remain in a few countries
13
Fully/largely Competitive Industries
Air travel industry
Most striking regulatory changes By 1998, domestic and regional
routes were liberalised and airlines were given the freedom to set fares
Public ownership significantly reduced Highly regulated bilateral air service
agreements between governments
Services Liberalisation in OECD Countries
Road freight
Air passenger transport1
Notes : See annex for details on the construction of the indicators.High regulation : Entry is restricted, public ownership is substantial and prices or services are set or approved by a regulatory authority.Medium regulation : Some limited entry is allowed, public ownership is limited and businesses have some freedom to set prices or services.Low regulation : Public ownership is very limited and businesses are free to entry and have full control over prices and services they supply.
1. Domestic and regional routes.
Source: OECD, Regulatory reform, privatisation and competition policy, 1992; and OECD International Regulation Database.
Figure 1. Regulatory reform in OECD countries Fully or largely competitive industries
100
80
60
40
20
20
40
60
80
100
1975 1990 1998 1975 1990 1998 1975 1990 1998 1975 1990 1998
Percen
tag
e o
f O
EC
D c
ou
ntr
ies
Service restrictions
Barriers to entry
Price controls
Public ownership
100
80
60
40
20
20
40
60
80
100
120
1975 1990 1998 1975 1990 1998 1975 1990 1998 1975 1990 1998
Percen
tag
e o
f O
EC
D c
ou
ntr
ies
Service restrictions
Barriers to entry
Price controls
Public ownership
-50-30-101030507090
110130
1986 1990 1998 1986 1990 1998 1986
High Medium Low
High regulation Medium regulation Low regulation
15
Industries With Non-competitive Segments Electricity, Railways, Fixed Telephony
Changing regulatory approach General movement towards lower
barriers to entry and private ownership Strongest liberalisation in
telecommunications Entry liberalisation and privatisation were
much less pronounced in railways and electricity supply
16
Services Liberalisation in OECD Countries
Electricity
Notes : See annex for details on the construction of the indicators.High regulation indicates that access to competitive markets is restricted and the supplier(s) of the good or service is (are) fully state-owned.Medium regulation indicates that some limited market access is allowed and the supplier(s) is (are) partially private.Low regulation indicates that market access is free and the supplier(s) is (are) private.1. In electricity generation.2. Fixed telephony: trunk and international.
Source: OECD International Regulation Database.
Figure 3. Regulatory reform in OECD countriesIndustries with non-competitive segments
5030101030507090
110130
1986 1990 1998 1985 1991 1998 1985 1990 1998
Some competition/limited vertical unbundling No competition/vertical integration Competitive/vertically unbundled
100
80
60
40
20
20
40
60
80
100
120
140
1986 1990 1998 1986 1990 1998 1986 1990 1998
Percentage of O
EC
D countries
Industry integration Barriers to entry 1 Public ownership
100
80
60
40
20
20
40
60
80
100
120
140
1985 1990 1998 1985 1990 1998 1985 1990 1998
Percen
tag
e o
f O
EC
D co
un
tries
Market structure Barriers to entry Public ownership
Telecommunications2
100
80
60
40
20
20
40
60
80
100
120
140
1985 1990 1998 1985 1990 1998 1985 1990 1998
Percentage of O
EC
D countries
Market structure Barriers to entry Public ownership
Railways
High regulation/vertical integration Medium regulation/limited vertical unbundling Low regulation/vertical unbundling
High regulation/no competition Medium regulation/some competition Low regulation/competitive
High regulation/no competition Medium regulation/some competition Low regulation/competitive
17
A Map of Regulatory Environments in Services SectorsRetail
distributionRoad
freightMobile
telephonyAir passenger
transport
Fixed
telephony2 Electricity Railways
Australia
United States3
Sweden
United Kingdom
Germany
Netherlands
New Zealand -
Finland
Norway
Korea -
Canada -
Ireland -
Mexico -
Iceland - - -
Denmark -
Belgium
Japan4
Austria -
France
Switzerland -
Czech Republic -
Hungary - -
Portugal -
Poland -
Spain
Italy
Turkey -
Greece -
Very liberal. Restrictive.
Liberal. Very restictive.
2. Long distance (international and trunk) only.
3. The indicators for the retail distribution and mobile telephony industries were partially estimated.
4. The indicator for the retail distribution industry was partially estimated.
Source : Nicoletti (2001).
1. The table provides a partial update of information that first appeared in Nicoletti (2001). The partial update is based on information provided by a number of Member countries on reforms undertaken since 1998 A complete update for all Member countries has not been done. The table summarizes a number of detailed indicators which are set on a scale from 0 to 6 according to an increasing degree of restrictions to competition in each sector. Detailed information on regulatory conduct is then summarized by using statistical techniques that determine the appropriate weight for each of the indicators. Countries are then classified as "very liberal", "liberal", "restrictive", or "very restrictive" according to their distance from an OECD mean.
Competitive industries Network industries
18
A map of regulatory environments in services sectors - Conclusions
Dispersion of regulatory approaches within major services industries and among countries
Wide scope for further reform in OECD countries continues to exist
19
Economy-wide Benefits Arising from Services Liberalisation and Regulatory Reform:
Outcomes in OECD Countries
20
Economy-wide Outcomes - Impact on GDP
Empirical evidence indicates significant and positive effects of liberalisation and regulatory reform on the levels and growth rates of GDP
OECD study: The long-run potential output gains (over a period of 15 to 20 years) varied from 1 per cent for the United States to 5-6 per cent for Japan, reflecting the different state of existing regulation in different countries
21
Regulatoryreform in
electricity air travel road freight telecommuni
cations retail
distribution
8 OECDcountries
long-run (15 to20 years)
United States
Japan
Germany
France
United Kingdom
Netherlands
Spain
Sweden
Impact on GDPgrowth
0.9
5.6
4.9
4.8
3.5
3.5
5.6
3.1
Regulatory Reform and Performance
22
Welfare Gains From Liberalising Trade in Services
Modelling liberalisation of services trade Additional data requirements Different modelling frameworks than those
used for analysing goods liberalisation Large welfare gains
US$ 130 billion (or 0.46 percent of world real income)
(Dee and Hanslow (2000)) Powerful impact on agriculture and
manufacturing through inter-sectoral linkages in each economy
Product market regulations influence employment rates
Employment rates in non-agricultural business sector and regulations, 1998
AUS
AUT
BEL
CAN
CHEDEU
DNK
ESPFIN
FRA
GBR
GRC
ITA
NLDNOR
NZL
PRTSWE
USA
35
40
45
50
55
60
0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 2.2 2.4
Employment rate
Product market regulation, economy-wide
Correlation coefficient -0.68t-statistic -3.81
AUS
AUT
BEL
CAN
CHEDEU
DNK
ESPFINFRA
GBR
GRC
ITA
NLDNORNZL
PRTSWE
USA
35
40
45
50
55
60
1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
Product market regulation, non-manufacturing industries
Employment rate
Correlation coefficient -0.53t-statistic -2.60
24
Macroeconomic Effects - Impact on Employment
Pro-competitive regulations in services sectors are positively correlated with employment rates
Pro-competitive product market regulations in Australia, the United Kingdom and the United States have been accompanied by a relatively high private sector employment rate
Relatively stringent state control, barriers to entrepreneurship, and/or barriers to foreign trade and investment in France, Greece, Italy and Norway have contributed to lower private sector employment rate performances
Pro-competitive regulatory reform fosters employment
The contribution of product market liberalisation to changes in the employment rate, 1978-1998
(Percentage point change)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
26
Pro-competitive Regulatory Reform Fosters Employment
Regulatory reforms have played a significant role in increasing employment in the OECD area
Product market reforms in New Zealand and the United Kingdom have added around 2½ percentage points to their employment rate in the non-agricultural business sector over the 1978‑98 period
Countries where regulatory reform has made more modest progress have experienced correspondingly smaller employment gains, with Greece, Italy and Spain only adding around ½ to 1 percentage point to their employment rate via such reforms
27
Pro-competitive Regulations Enhance Innovative Activity
Pro-competitive product market regulations have a positive effect on R&D intensity in manufacturing
Pro-competitive regulations explain more than one third of the higher R&D intensity in the United States, Japan, Germany and Sweden relative to the OECD average and made a large positive contribution in the United Kingdom, Canada and Ireland
The opposite effect was particularly strong in Italy, Greece, France and Belgium
Pro-competitive Regulations Enhance Innovative Activity
Contribution of product market regulation to differences in R&D intensity
Percentage deviations from OECD average
-100
-50
0
50
100
150Product marketregulationOther factors (2)
Total
Per cent
29
Economy-wide Effects - Preliminary Conclusions
Liberalisation and pro-competitive regulatory reform:
Generate significant gains in output growth and welfare
Raise overall employment rates Stimulate innovative activity in the
long run
30
Industry-level Benefits Arising from Services Liberalisation and Regulatory Reform
Overwhelming cross-industry evidence that liberalisation of entry and prices has improved static and dynamic efficiency, enhanced quality and lowered prices to consumers
31
Telecommunications Extensive liberalisation and regulatory reforms ABT - significant role in the opening of markets for telecommunication services
Global revenue reached $US192 billion in 1999, and
$US230 billion in 2000,
( Annual increase of 25 per cent) 650 million mobile cellular subscribers world-wide in 2000, compared with 214
million in 1997, a number the ITU predicts will grow to 1 000 million by 2005
32
Telecommunications
Degree of market competition and time to liberalisation - two main explanations for the differences in output growth and prices among OECD countries
The good price performance of the UK, whose prices are estimated to be 40 percent lower than the OECD average, can be explained mainly by its regulatory and market environment accounting for 35 percentage points for this difference
33
Electricity
Important new GATS issue Most countries have just begun to
consider and to implement regulatory reform in the electricity supply industry
Most liberal countries: United Kingdom, Finland, New Zealand,
Norway and Sweden Least liberal countries:
Belgium, Canada, France, Greece, Ireland, Italy, Netherlands, Portugal and Spain
34
Electricity
Estimated price impacts of regulation range from 0 to 35 per cent, with a mean of 13 per cent
Lowest overall price impacts (0%) : The United Kingdom, Norway,
Finland, Sweden, Australia, New Zealand
Highest price impacts (25-35%): Iceland, Switzerland, Turkey
35
Air Passenger Traffic Wide ranging reforms implemented by OECD economies
Variation across countries and routes
The United States and the United Kingdom had gone farthest with liberalisation
Poland and Turkey had barely started regulatory reforms in this industry
36
Air Passenger Traffic Price of average airfares in the united states, the first
country to engage in far-reaching airline deregulation, has dropped from 14.4 cents per mile in 1970 to 7.89 cents per mile in 1997 (in 1982 dollars)
Removal in 1993 of bilateral restrictions on the free access to other EU markets for air transport services, price restrictions and slot allocations resulted in the issuing of nearly 800 new operating licenses, notably to small airlines. Demand for air transport has in turn risen about 20 per cent
37
Air Passenger Traffic
Estimated price impacts of restrictions in international passenger transport vary between economies — ranging from 3 to 22 per cent for discount fares
United States has the lowest price impacts, reflecting the liberalisation measures adopted in its open skies agreements
38
Retail Distribution Outlet restrictions distorted industry structure
and kept prices high (e.g. in Japan)
Empirical research hints that liberalisation of entry and opening hours may increase industry employment and lower prices
39
Retail Distribution Liberalisation of entry, shop opening hours
and zoning determined price decreases of
2.0 percent in the Netherlands
0.6 percent in Sweden
Liberalisation measures determined increases in employment:
15000 jobs in the Netherlands and
1.3 percent (full time equivalent) in Germany
40
Industry-level Outcomes: Effects on Employment The effects on employment vary according to
the industry and the country concerned:
Liberalisation had favourable impact in road freight and telecommunications in several countries (Mexico and Korea for telecommunications and United States and Mexico for road freight)
Evidence from the united states suggests that in rail freight post-reform efficiency gains were matched by a substantial decrease in employment
41
Conclusions(1) Favourable outcomes in those OECD countries where
competition-enhancing regulatory reforms in service industries have gone further:
Telecommunications and electricity supply have become more efficient and cheaper
Air transport networks have been modernised and made more efficient
Airfares for all categories of travellers declined substantially
42
Conclusions(2)
Areas where a deepened commitment to regulatory reform and to liberalisation could contribute substantially to improve economic performance and raise living standards in the OECD area
The elimination of restrictive provisions concerning entry and/or investment in competitive service industries, such as retail distribution
The opening up of international air travel routes to competition and the elimination of ownership restrictions in airline companies
The deepening of liberalisation in telecommunications
The acceleration of reforms in the electricity supply industry