Magazine article International Productivity Monitor

The Gains from More Competitive Regulation Settings in Canada

Magazine article International Productivity Monitor

The Gains from More Competitive Regulation Settings in Canada

Article excerpt

In addition to setting the right framework for economic growth, key objectives for government are attaining desirable non-financial outcomes for society such as safe workplaces and a clean environment. However, the multitude of such objectives and the many means of achieving them make design of regulation exceedingly difficult. For example, a particular objective (e.g. a given level of product safety) can be achieved through several approaches, with some designs being more economically costly than others.

In that context, there are potential gains from rationalizing and improving the regulatory framework, the regulations, laws and other rules influencing economic activity. However, the magnitude of these potential gains is unclear. The objective of this article is to examine the potential benefits of making regulations, laws and other rules more competition friendly after taking interactions within the economy into account. We concentrate in particular on the scale at the aggregate level of comprehensive reform rather than targeting individual changes. To this end, we introduce the classic Solow model with a wedge between the resources spent and those that are effectively used to build productive capital. In other words, we assume the competition inhibiting nature of some regulations dissipate productive resources. In practical terms, and in the tradition of Mankiw et al. (1992) and Islam (1995), we estimate a dynamic equation for GDP per capita with an added term reflecting the extent to which regulations are anti-competitive.

Critical to this analysis is an indicator of the anti-competitiveness of regulation. To this end, we utilize the product market regulation (PMR) measures developed by the OECD. These measures are compiled from a survey of laws and regulations in each country. (2) They capture a variety of aspects such as state involvement (e.g. does the government restrict purchase of shares by foreigners?) and business operation restrictions (e.g. are there restrictions on store opening hours?) that increase the economic costs by limiting competition and the optimal allocation of resources. As such, changes in these indicators do not necessarily imply weaker standards on pollution, and health and safety, but rather affect the extent to which existing regulations reduce competition. Indeed, improvement in these indicators is consistent with the objective to put in place smarter, more effective approaches to regulation that enhance economic competitiveness, while maintaining high standards of public health and safety, and protecting the environment.

It is important to note that the OECD PMR indicators capture regulations, laws and other rules set by different levels of government and by those organizations to which regulatory power has been delegated such as self-regulating professional associations. Consequently, we acknowledge that our use of the term "regulation" does not strictly adhere to the definitions used by different governments or international organizations and that, in some contexts, the broad term "policy" could be used interchangeably with "regulation." Finally, the set of regulations on which the measures are based is narrow compared to the universe of all regulatory policies affecting economic activity. As a consequence, cross-country differences in the PMR indicators only arise from cross-country differences over relatively few policies. Nevertheless, these measures are adequate for our purposes so long as the regulations on which the indicators are based reflect their broader universe. We believe that the OECD indicators are the best available measures to evaluate the degree to which countries' regulatory frameworks inhibit competition.

Though our methodology does not treat the possible endogenous relationship between growth and regulatory settings, our findings suggest anti-competitive regulation lowers GDP per capita, particularly if it raises barriers to trade and investment. …

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