Product Market Deregulation and Growth: New Country-Industry-Level Evidence

27 Pages Posted: 9 Dec 2016

See all articles by Romain Bouis

Romain Bouis

International Monetary Fund (IMF)

Romain Duval

International Monetary Fund (IMF)

Johannes Eugster

Independent

Date Written: June 2016

Abstract

The paper investigates the economic effects of major product market reforms in some of the historically most protected non-manufacturing industries. It relies on a unique mapping between new annual data on reform shocks and sector-level outcomes for five network industries (electricity and gas, land transport, air transport, postal services, and telecommunications) in twenty-six countries spanning over three decades. The use of a three dimensional panel and careful instrumentation of reform shocks using external instruments enables us to control for economy-wide macroeconomic shocks and address possible sourcesof omitted variable bias more broadly. Using a local projection method, we find that major reductions in barriers to entry yield large increases in output and labor productivity over a five-year horizon, concomitant with a relative price decline. By contrast, there is only a weak positive effect on sectoral employment, and investment is essentially unaffected, suggesting that output gains from reform primarily reflect higher total factor productivity. It takes sometime for these gains to materialize: effects become statistically significant two to three years after the reform, as prices start dropping, and productivity and output increase significantly.However, there is no evidence of any negative short-term cost from reform, including underweak macroeconomic conditions. These findings provide a clear case for intensifying product market reform efforts in advanced economies at the current juncture of weak growth.

Keywords: Fiscal reforms, Nontariff barriers, Industry, Transportation, Energy, Communications services, Production, Labor productivity, Economic growth, Developed countries, Emerging markets, Structural reforms, deregulation, competition, entry barriers, product market,growth

JEL Classification: L51, O43, O47

Suggested Citation

Bouis, Romain and Duval, Romain and Eugster, Johannes, Product Market Deregulation and Growth: New Country-Industry-Level Evidence (June 2016). IMF Working Paper No. 16/114, Available at SSRN: https://ssrn.com/abstract=2882528

Romain Bouis (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Romain Duval

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Johannes Eugster

Independent ( email )

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