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