1. CPB Netherlands Bureau of Economic Policy Analysis
The dynamic effects of European Services liberalisation Globalisation Challenges to Europe and Finland Prime Minister's Office, Helsinki, August 17, 2006
Henk Kox
joint research with Arjan Lejour
CPB Netherlands Bureau of Economic Policy Analysis

2. Structure presentation
Problem area
A single European market for services?
Estimated static effects of liberalisation
Dynamic effects of services liberalisation
Conclusions and possible policy implications

3. Problem area:
What are the longer-term, dynamic gains for EU from services liberalisation?
productivity, innovation and competitiveness
History:
lively debate Commission's proposals for Services Directive (SD):
'trimmed-down' SD version adopted Spring 2006
to be implemented by 2010, also the benchmark year of the Lisbon goals
Sapir report 2004: single European market for services is top priority for Lisbon goals
Available studies on economic effects: focus only on static economic benefits

4. Product-market regulation in services
Not regulation as such is a barrier to trade and FDI in services
Regulating services sometimes for good reasons:
ensure quality of service (information asymmetry, consumers)
externalities (environmental, safety)
prevent misuse of market power
Public authorities have regulated services since ages for some these reasons
especially professional services
medical services

5. Regulation and trade (I)
Many forms of product-market regulation cause fixed qualification costs for firms
General qualification
educational qualifications (diplomas, certificates)
local professional insurance
nationality requirements
must have local office
membership professional association
licenses
operational demands (inputs, marketing, legal form)
Fixed qualification costs could in themselves be a source of scale economies and ... MORE trade!

6. Fixed (qualification) costs generate economies of scale
... but this only holds in case of open borders or mutual recognition

7. Policy differences as sunk cost barrier
Each country regulates in a different way
with different efficiency and administrative burdens
Key problem: home-markt qualifications not recognised in other EU countries
for exporters: regulation in destination country comes on top of home-market regulation
Economic implications for service providers
fixed costs for (re-)qualification
country-specific ==> sunk export costs
market - entry barrier

8. Costs of policy heterogeneity for individual services firm

9. Sectoral coverage of Services Directive

10. Structure of intra-EU services trade 2003
Services Directive mostly about B2B services!

11. Impacts of reducing policy heterogeneity in EU by Services Directive: our conclusions in a nutshell
Bilateral trade in OCS service trade may rise by %
Bilateral FDI may increase by 18 to 36 %
Deleting the country-of-origin principle (mutual recognition) from the Directive -as done in 2006 version- reduces
trade effects by 1/3
little impact on estimated FDI effects
We further fed the trade effects (not FDI) in CGE model for EU, yielding:

12. Macroeconomic effects SD (CGE model)

13. Other studies of static welfare gains from SD
Copenhagen Economics (2005):
CGE model
EU consumption increase by 0.6%
CoOP contributes about 10% to the total welfare effects, partly FDI-induced
Badinger and Breuss (2005):
Partial equlibrium model
Use estimated trade effects of CPB as input
Find significant effects of SD (more entry) on competition, and from competition on employment, investment and productivity

14. Three channels for dynamic welfare gains in longer run (1)
More entry increases competitive selection and consumer choice
Recent theory on trade with heterogeneous firms (Melitz, Baldwin, Helpman, Yeaple, Rubinstein):
explains why only most productive firms export
role of fixed/sunk entry cost
reduction of fixed export costs raises participation by medium-sized EU firms: often more productive!
gains: average services firm more productive
pains: inefficient domestic firms drop out
more consumer choice, less firm options for collusion

15. Firm-size and labour productivity in EU business services,1999: 6 countries inverted-U
1.0
size class of firms

16. Firm-size and labour productivity in EU business services, 1999: 5 ctrs. other patterns

17. Three channels for dynamic welfare gains in longer run (2)
Liberalisation facilitates knowledge spillovers:
through more bilateral FDI in services (studies Haskel, Keller, Javorzcik)
through more export of knowledge-intensive business services (IMF study Guerrieri et al. 2005)
Speed up original innovation
due to more FDI participation: mixed evidence
more entry may create incentives for distinctive product innovation: escape innovation (study Aghion & Griffith)

18. Conclusions
Trimmed-down version of SD (2006) leaves some unfinished liberalisation business (CoOP)
mutual recognition regulatory standards further lowers hurdle of sunk export costs
Dynamic effects of service liberalisation can be considerable
more firm entry, generates productivity gains through competitive selection
more SME participation
more knowledge spillovers (business services)
more varieties and possibly also more original innovation
Accompanying policies may ease the transition process (social insurance, flexibilise bankruptcy law, re-education)

19. Thank you for your attention research reports downloadable from: www
Thank you for your attention research reports downloadable from:

20. Annex: CPB research on Services Directive (all reports downloadable)
Effects Directive on intra-EU services trade / FDI
The Free Movement of Service within the EU (CPB Document 69, 2004/5, also: Revue Economique July 2006)
Policy heterogeneity as obstacle for international services trade (CPB Discussion Paper 49, 2005)
Macro-economic effects
Trade-induced effects of the Services Directive and the country-of-origin principle (CPB Document 108, 2006)
Role country-of-origin principle
Trade-induced effects of the Services Directive and the country-of-origin principle (ENEPRI, WP 44, 2006)