Regulation, productivity and growth: OECD evidence

In this paper, we relate the scope and depth of regulatory reforms to growth outcomes in OECD countries. By means of a new set of quantitative indicators of regulation, we show that the cross-country variation of regulatory settings has increased in recent years, despite extensive liberalisation and privatisation in the OECD area. We then look at the regulation-growth linkage using data that cover a large set of manufacturing and service industries over the past two decades. We focus on multifactor productivity (MFP), which plays a crucial role in GDP growth and accounts for a significant share of its cross-country variance. We find evidence that reforms promoting private governance and competition (where these are viable) tend to boost productivity. Both privatisation and entry liberalisation are estimated to have a positive impact on productivity. In manufacturing the gains are greater the further a given country is from the technology leader, suggesting that regulation limiting entry may hinder the adoption of existing technologies, possibly by reducing competitive pressures, technology spillovers, or the entry of new high- tech firms. These results offer an interpretation to the observed recent differences in growth patterns across OECD countries, in particular between large Continental European economies and the United States. Strict product market regulations—and lack of regulatory reforms—are likely to underlie the relatively poorer productivity performance of some European countries, especially in those industries where Europe has accumulated a technology gap (e.g. ICT-related industries)

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