Methodology for deriving the STRI Hildegunn Kyvik Nordås Alexandros Ragoussis OECD Trade and Agriculture OEC D/TAD Services expert meeting 2 July

OECD Trade & Agriculture 2 Observation of empirical data Estimate discrepancies in prices or trade flows Empirical index number Observe policy measures How much does each policy measure contribute to the index number? STRI Weights How important is each measure? Expert judgement, equal weights, statistical or econometric methods Scores Assigning numbers to observed policies Observation of policies Which to include? Top DownBottom Up Approaches to quantifying barriers to trade in services

OECD Trade & Agriculture 3Overview Selection of indicators Sources of information Scoring Weighting Aggregation Robustness checks

OECD Trade & Agriculture 4 Selection of indicators Explicit barriers to trade and investment Barriers and regulations that are: –mentioned explicitly in the GATS –mentioned explicitly in regional trade agreements –identified by experts at services expert meetings –Related to future negotiations on rules in the WTO/GATS Statistical methods to prevent overlap

OECD Trade & Agriculture 5 Sources of information OECD Product Market Regulation –STRI added questions on treatment of foreign parties; OECD restrictions on foreign investment indicators and codes of liberalisation and capital movement; Surveys undertaken in relation to three services expert meetings; OECD Communications Outlook; ITU Government websites; Other

OECD Trade & Agriculture 6 Scoring – transforming qualitative information to quantitative scores Objectives: –Independent of the sample can easily be extended to new countries –Retain the variation in the underlying data –Comparable across countries and time –Comparable across sectors –Simple

OECD Trade & Agriculture 7 Choice of scoring methodology The objectives The features of the data ComputerProfessionalConstructionTelecoms Binary47 (81%)361 (94%)77 (86%)200 (87%) Continuous Total Several alternatives were explored Binary scores chosen

OECD Trade & Agriculture 8 Transforming continuous to binary data MethodologyCommentsExample Above or below an absolute threshold Independent of sample May reduce variance Foreign equity limit < 50% Multiple absolute thresholdsIndependent of sample Preserve variance Foreign equity limits < 33% < 50% < 66% Above or below sample mean Dependent of sample May reduce variance Local loop unbundling price mean Multiple sample related thresholds Dependent of sample Preserve variance < mean – one s.d. < mean < mean + one s.d. Above or below global threshold(s) Independent of cross- section sample, but still not comparable over time Number of countries f.w. visas for business trips required

OECD Trade & Agriculture 9 Choice of weighting scheme Ideal: The marginal impact on trade; –Cannot be confidently estimated Preliminaries: –A large number of regulations; –Relatively few observations (29 countries); –Regulations categorised using principal component analysis in the PMR Methodologies explored –Expert judgement –Principal component analysis –Equal weights –Random weights (for robustness checks)

OECD Trade & Agriculture 10 Weighting schemes cont. Expert judgement: –Observations on regulation categorised as in the PMR –Experts at the sectoral expert meetings ranked categories and scored individual measures

OECD Trade & Agriculture 11 Example: Expert ranking, professional services

OECD Trade & Agriculture 12 Example expert scoring, professional services

OECD Trade & Agriculture 13 Weighting: expert judgement and equal weights Total Each measure is assigned a weight that combines the two Measures Relative importance within the category Categories Translate rankings into weights

OECD Trade & Agriculture 14 For telecommunications Regulations necessary for competitive markets; Absence of regulation can be trade restrictive when markets are not competitive; Therefore an interaction term is introduced:

OECD Trade & Agriculture 15 Weighting schemes: PCA Principal Component Analysis (PCA) assigns the highest weights to the measures with the largest variation More variables than observations in the dataset PCA for measures by category Calculate index for each category PCA on categories

OECD Trade & Agriculture 16 What difference does the weighting scheme make? ComputerConstructionProfessionalTelecoms

OECD Trade & Agriculture 17Aggregation Is the additional burden of another measure – Constant? –Increasing in the number of measures? –Declining in the number of measures? Constant is assumed –More research needed to assume otherwise –Allows for multiple classifications

OECD Trade & Agriculture 18 Multiple classifications By regulatory category (from PMR) By GATS definitions (MA+NT; DR) By discriminatory/non-discriminatory By mode By restrictions on operations/entry

OECD Trade & Agriculture 19 Summary - methodology Scoring: Binary Weights: Equal weights of measures within categories, expert judgement on categories; Aggregation: linear

OECD Trade & Agriculture 20 Example: professional services Restrictions on foreign ownership and market entry Foreign equity limits Restrictions on mergers and acquisitions Residence requirements … Restrictions to the movement of people Quotas Labour market needs tests Nationality requirements … Discriminatory measures Eligibility to subsidies or taxes Public procurement Standards and certification … Barriers to competition National, state or provincial government control Number of competitors restricted Exclusion or exemption of general competition law … Price controls Exclusive rights Restriction on the form of business Prohibition on partnerships … Regulatory transparency Single contact points Licensing Mandatory procedures to register … STRI Rank 1 40% Rank % Rank 3 15% Rank 4 10% Rank 5 7.5% Rank 6 5% Equal weights within categories Expert judgment Categories of measures are ranked from the most to the least trade restrictive

OECD Trade & Agriculture 21 Robustness: rank correlations ComputerConstructionProfessionalTelecoms EJ/EQ EJ/PCA The STRIs are not very sensitive to the weighting scheme Possible exception: Computer services

OECD Trade & Agriculture 22Conclusions The STRI is a composite index calculated on the basis of information on regulation only; A number of scoring and weighting schemes have been explored; Choice of scoring scheme is data driven Choice of weighting scheme is based on the literature: –some restrictions are more important than others –Which measures are more restrictive is based on expert judgement OECD countries have relatively even regulatory profiles results are not very sensitive to weighting schemes

OECD Trade & Agriculture 23 Contact OECD Trade and Agriculture