Quantification of reforms Balázs Égert OECD, Economics Department Structural Surveillance Division Quantification Unit

Going for Growth publication Quantification unit – Producing indicators Product Market Regulation (PMR) indicator Electricity, Transport and Communication Regulation (ETCR) indicator Regulatory Impact (regimpact) indicator – Work on the framework of quantifying the impact of structural policies on economies outcomes (growth) What we do at the Structural Surveillance Division

Renewed interest in quantifying the impact of reforms on growth low economic growth in the aftermath of the crisis – help mitigate the negative impact of fiscal consolidation – help restore fiscal sustainability (public debt crisis => more growth lower debt) – mitigate the impact of slowing potential growth (population ageing)

Quantifying the effects of reforms Key drivers in a production function approach Purpose: Links to policies assessed through well-established channels Supported by empirical evidence from aggregate, industry and firm-level data GDP per capita Labour productivity (GDP per employee) Employment rate (No. of employees / Pop) Multi factor productivity Investment in physical capital Unemployment rate Labour force participation

Framework allows for multiple policy channels to be explored and quantified Top level performance Intermediate drivers Policies and institutions

Policy variables can be classified according to their systemic importance 6 Channel-specific policies Knowledge-based capital (R&D tax credit or grants, industry-university links) Openness to foreign trade and investment (barriers, trade support measures) Human capital and skills development (education and employment policies) Framework conditions => Market competition, resource allocation Product and labour market regulation (barriers to entry and labour mobility) Competition Law and Policy Efficiency of bankruptcy legislation Legal infrastructure and basic institutions Rule of law, contract enforcement and efficiency of judicial systems Intellectual property rights Public sector efficiency

Main steps of quantification exercise 7 Policies Mapping of specific reform into corresponding policy indicator Supply- side impact Assessing effect on productivity, investment and employment Macro outcome Aggregating the effects coming through different channels to provide profile of impact on GDP

8 Step 1 - Mapping reforms into indicators Policy areaIndicators Restrictiveness of regulatory barriers to competition Product Market Regulations (PMR), including trade openness and FDI Strictness of employment regulation Employment protection legislation (EPL) Tax structure Share of indirect taxes in total revenues Research and DevelopmentShare of R&D spending in GDP Childcare / maternity leaveChildcare spending (CHILDC) Active labour market policies (ALMP) Active labour market policies (ALMP) – spending Incentives of unemployment benefits Average gross unemployment benefit replacement rate (ARR) Labour tax wedgeLabour income taxes and SSC Coverage of exercise defined by existence of indicators

Step 2 – Unit effect on productivity

Benchmark elasticity but allows for country-specific impact in some cases

Step 3: Aggregation of reforms Example of quantification: Reform programme in Italy Impact after 5 years, %Impact after 10 years, % GDP Via employment growth Via productivity growth GDP Via employment growth Via productivity growth Product market reform Labour market reform (Jobs Act) Tax reform Public administration and judicial system reform Total Additional average annual growth OECD estimates for the impact of product market reform include the results of reforms from 2012 onwards. Approximately two thirds of the quoted impact are due to measures taken in The impact of the labour market reform is based on a judgement, based on the Jobs Act Legge Delega (enabling law), although not all details are defined yet. 11

The estimated longer term impact on the profile of GDP 12 Expected medium-term benefits for reforms introduced in “normal” times, i.e. in broadly favourable economic conditions

The pace of reforms has been faster in countries facing hardest macro conditions 13 Countries reforming most were also those engaged into strongest fiscal consolidation efforts

14 Contrast between medium-term expected gains and persistently weak growth performance raises questions Are we asking too much from structural reforms? Structural reforms a substitute for demand? What type of reforms would best support (weak) demand in the near term? How best to mitigate contractionary effect? Is going for broader reform package better? Does the usual argument in favour of boldness hold in weak demand?

Reforms to be promoted in a context of weak demand 15 Shift in the composition of public spending towards investment Public infrastructure investment with high growth impact (broadband network) Regulatory harmonisation Product market reforms in specific service sectors Removing restrictions on the entry of new suppliers in services characterised by low entry costs – and in some cases – latent demand (professions, taxis, etc). Reforms of benefit entitlements in the areas of pensions and/or health Improve sustainability of public finances and create space for fiscal stimulus Effective/credible back-loaded consolidation Reforms easing frictions in the reallocation of resources Reducing barriers to geographical or jobs mobility Housing market policies and job-search assistance

Product market reforms that can ease supply constraint can bring benefits even in a difficult context 16 Reducing entry barriers in service sectors with large pent-up demand and low entry costs can unleash the entry of new firms Regulatory barriers to competition in regulated professions (legal services, engineering, architecture and accounting)

Reforms least likely to succeed in a context of weak demand 17 Reforms that initially put downward pressures on wages or mark-ups Employment protection legislation, minimum wages or product market regulation (network industries) Factors mitigating the impacts of such reforms Packaging: Simultaneous reforms of labour and product markets reduce risks or extent of contractionary effects. Synchronisation: In euro area, help to reduce transition costs by giving greater scope to monetary policy Boldness: Once and for all price level adjustment vs lower inflation expectations Measures to shift the relative strength of channels Addressing financial sector dysfunctions to improve credit flow Reducing policy uncertainty to boost the positive confidence channel

Improving on the current quantification frameworks

1.Updating outdated estimates –Existing estimations mostly run only till mid-2000s 2.Extending to more policies and channels – Including complementarities – Taking into account more country-specificities 3.Better mapping policy changes into indicators 4.Incorporating emerging markets (EMEs) – Current frameworks cover mostly OECD

Increasing consistency For the different channels (MFP, investment, labour market outcomes) Similar time period and Similar country coverage Same data sources and variable definitions Harmonised estimation approach

Extending policy channels Policies specific to production factors (widely used in earlier studies) Innovation, trade (MFP) Corporate tax (physical capital) Active labour market policies (employment) Framework conditions (used to varying extent in earlier studies) Product and labour market regulations (widely used) Competition law and policy (not used) Efficiency of bankruptcy legislation (used to some extent) Basic institutions, legal infrastructure (rarely used in earlier studies – infrequent observations) Rule of law, efficiency of judicial systems Intellectual property rights

Better mapping policies into existing indicators Starting point of quantification: the identification of actual policy changes in existing indicators – The more policies we manage to bring into the new framework, the impact of more actual policy changes we will be able to evaluate – A better mapping of actual policy changes into existing indicators (PMR) also increases the preciseness of quantification. This is a very challenging task

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