Product Market Deregulation and Growth: New Country-Industry-Level Evidence
IMF Working Papers, June 9, 2016
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- Product Market Deregulation and Growth: New Country-Industry-Level Evidence
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Bibliographic details
- Authors: Romain Bouis, Romain A Duval, Johannes Eugster
- Published: June 9, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484385029.001
Summary
- Investigates the economic effects of major product market reforms in historically most protected non-manufacturing industries.
- Uses a unique mapping between new annual data on reform shocks and sector-level outcomes for five network industries (electricity and gas, land transport, air transport, postal services, and telecommunications) in twenty-six countries spanning over three decades.
- Employs a three-dimensional panel and instrumentation of reform shocks using external instruments to control for economy-wide macroeconomic shocks and address omitted variable bias.
- Uses a local projection method to estimate dynamic effects of reforms.
Methodology
- Data scope:
- Five network industries: electricity and gas; land transport; air transport; postal services; telecommunications.
- Twenty-six countries.
- Time span: spanning over three decades.
- Econometric approach:
- Three-dimensional panel structure.
- Careful instrumentation of reform shocks using external instruments.
- Local projection method to trace responses over time and control for macroeconomic shocks.
Key Findings
- Major reductions in barriers to entry yield large increases in output and labor productivity over a five-year horizon.
- Reforms are concomitant with a relative price decline.
- Sectoral employment: only a weak positive effect.
- Investment: essentially unaffected, suggesting output gains primarily reflect higher total factor productivity.
- Timing of effects:
- Effects become statistically significant two to three years after the reform, as prices start dropping, and productivity and output increase significantly.
- No evidence of negative short-term costs from reform, including under weak macroeconomic conditions.
- Findings support intensifying product market reform efforts in advanced economies at the current juncture of weak growth.
Policy Implications
- Major product market deregulation in protected network industries can raise output and labor productivity without evident short-term costs.
- Because gains materialize with a lag (statistically significant after two to three years), policymakers should consider medium-term evaluation horizons when assessing reform benefits.
- Weak immediate employment and investment responses imply that reforms operate mainly through total factor productivity improvements rather than through rapid capital deepening or large employment shifts.
- Results provide a clear case for intensifying product market reform efforts in advanced economies experiencing weak growth.
Source: IMF Working Paper "Product Market Deregulation and Growth: New Country-Industry-Level Evidence" by Romain Bouis, Romain A Duval, Johannes Eugster, June 9, 2016.
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- _wp16114 - Appendix 1 and Chapter 21) — Summary