|HOW DEREGULATION AND GLOBALISATION INTERACT TO BOOST ECONOMIC GROWTH|
Aruba, January 30, 2017 - Globalisation offers many benefits, some of which cannot be separated from other types of policy. This column examines how the benefits from removing regulations that impede competition are partly contingent on openness to import competition. Using recent firm-level analyses of productivity growth, it argues that those firms that contribute the most to overall growth could also be held back by reduced openness, harming overall advances in incomes.
Enthusiasm for reducing domestic regulation, or ‘red tape’, has been gaining momentum in some OECD countries, and there are many reasons to think that reducing such red tape – including at local levels – could be beneficial for productivity growth by encouraging firm entry, competition, and efficiency gains. Evidence from an analysis of firms and industries in panels across OECD countries suggests that this is indeed the case (OECD 2017). Easing the strictness of regulation in network industries (e.g. energy, telecommunications, and transport) especially, as well as in retail and professional services, would improve productivity and competitiveness in downstream sectors, not least manufacturing, which use services from these upstream industries as inputs for their own production. This ‘knock-on’ effect of regulation in upstream industries on manufacturing through input-output linkages is particularly strong (Bourlès et al. 2013). Furthermore, such product market reforms would put greater emphasis on new firm entry as a means to strengthen competition, encouraging incumbents to increase innovation efforts to protect their market shares.
In light of these economic gains, countries have, step-by-step, removed obsolete or badly designed regulations in product markets over the past decades, reducing state involvement in business sectors, making it easier for entrepreneurs to start businesses and expand, and facilitating the entry of foreign products and firms. While in some cases regulation was largely removed, in others it was replaced by better-designed legislation that can even help to enhance competition (OECD 2014).