OECD Product Market Regulation Brochure

PRODUCT MARKET REGULATION OECD PMR INDICATORS

PRODUCT MARKET REGULATION 2018 . 1

Why is Product Market Regulation important?

Product market regulation is essential for the well-functioning of market-based economies.

Product market regulation ensures that markets work well, and that the health and safety of consumers are protected, in particular by addressing market failures.

However, product market regulation, if not properly designed and regularly evaluated, may unduly restrict entry by new businesses, and limit or distort competition among existing firms.

Competitive markets for goods and services foster economic growth and boost living standards of citizens. Regulations influence business dynamism, investment and innovation through firm entry and exit, as well as and the ease of reallocation of capital and labour resources across firms and business sectors. Hence, procompetition regulatory reforms can raise output per capita by increasing investment and employment, and may help to reduce income inequality.

To support policy-makers and researchers it is important to have quantitative measures of the extent to which existing regulations promote or inhibit competition in individual countries. Such quantitative measures, and the underlying qualitative information, is of great use to policymakers because they permit to: •

Benchmark laws and regulations against international best practices

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Identify areas for regulatory reforms and set priorities

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Access a valuable source of policy options and draw on other countries’ experiences

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Study and evaluate the potential gains from competition-enhancing regulatory reforms

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Examples of benefits from reforming Product Market Regulation?

Reforms that make regulations in the markets for goods and services more competitionfriendly can help boost living standards. These reforms can increase investment and employment, and may help to reduce income inequality. They can also encourage companies to adopt new technologies, innovate and make more efficient use of the available resources, thereby lifting productivity. Further the effects of lower regulatory barriers to competition can be felt in sectors other than those in which the reforms occur. In particular, increase in competition in upstream sectors can ‘cascade’ to improve productivity and employment in downstream sectors and, as a result, through the economy more widely.

Recent analyses from the OECD show that reducing regulatory barriers to competition across the economy, as measured by the OECD Economy-wide Product Market Regulation Indicator, can have a positive impact on many macro-ecomic outcomes. For example policy interventions that lead to a 20 per cent reduction in the value of the OECD Economy-wide .

PMR indicator can raise total GDP up to 5 per cent (Figure 1).

Figure 1. Impact of improving Product Market Competition on GDP Per cent impact on total GDP of a 20 per cent reduction in the value of the OECD Economy-wide PMR indicator broken down into the main channels that lead to the GDP increase.

Percent of GDP 5.0 4.5 4.0 3.5

Employment Productivity Investment

3.0 2.5 2.0 1.5 1.0 0.5 0.0

5 years

10 years

20 years

Source: OECD analysis based on the quantification methodology developed in Égert, B. and P. Gal (2017), "The quantification of structural reforms in OECD countries: A new framework", OECD Economics Department Working Papers, No. 1354, OECD Publishing, Paris. OECD 2013 PMR database.

PRODUCT MARKET REGULATION 2018 . 3

What are the OECD Product Market Regulation Indicators?

In 1998 the OECD developed a unique set of indicators to measure regulatory barriers to competition.

The OECD Economy-wide Product Market Regulation (PMR) Indicators measure how competition-friendly a country’s regulatory enviroment is in a broad range of economic sectors and policy domains: •

Electricity and natural gas;

•

Mobile and fixed e-communications;

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Passenger and freight transport: by air, rail, road and water;

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Retail supply of water for business and residential users;

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Retail distribution, including the retail sale of medicines;

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Professional services;

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Scope and governance of state-owned enterprises,

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Administrative burden on start-ups,

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Licensing regimes;

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Design and evaluation of new and existing regulations;

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Public procurements of goods, services, and public works; and;

•

Barriers to foreign trade and investment

In addition to an Economy-wide PMR Indicator that provides an overall measure of the quality of product market regulation, a set of Sector PMR Indicators quantify regulatory barriers to firm entry and competition at the level of specific network and service sectors.

The indicators for network sectors assess eight industries: electricity, natural gas, air transport, rail transport, road transport, water transport, as well as fixed and mobile e-communications. Each of these indicators is composed of information on how entry and conduct in the relevant sector is regulated, and on the level of public ownership.

The service sector indicators cover six professions (accountants, architects, civil engineers, real estate agents, lawyers, and notaries), as well as general retail trade and retail sales of medicines.

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The structure of the OECD PMR Economy-wide PMR Indicator The Economy-wide PMR indicator is constructed following a bottom-up approach. In a first step, the numerical values assigned to each question are aggregated into 18 low-level indicators. These low-level indicators are then aggregated into six mid-level indicators, which are in turn aggregated into two high-level indicators (in previous vintages there were 3 such indicators). At each step of aggregation, the composite indicators are calculated as simple averages of their components.

Product Market Regulation 2018 Distortions Induced by State Involvement Public Ownership

Scope of SOEs Gov’t Involv. in Network Sectors Direct Control over Enterprises Governance of SOEs

Barriers to Domestic and Foreign Entry

Involvement in Business Operations

Simplification and Evaluation of Regulations

Administrative Burden on Start-ups

Retail Price Controls and Regulation

Assessment of Impact on Competition

Command and Control Regulation

Interaction with Interest Groups

Admin.

Requirements for Limited Liability Companies and Person.-Owned Enterprises

Public Procurement

Complexity of Regulatory Procedures

Licences and Permits

Barriers in Service & Network Sectors Barriers in Services Sectors Barriers in Network Sectors

Barriers to Trade and Investment Barriers to FDI Tariff Barriers Differential Treatment of Foreign Suppliers Barriers to Trade Fac.

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How are the OECD Product Market Regulation Indicators used in practice?

The OECD PMR indicators are widely used by policy-makers and analysts.

The OECD PMR indicators are the most complete quantitative measures of barriers to competition currently available, and they are regularly used by the OECD, as well as by national governments, international institutions and researchers.

Some examples are listed below.

OECD Country surveillance and assessments: The PMR indicators are the basis for policy recommendations in the OECD Economic Surveys and Going for Growth publication. Moreover, the PMR indicators provide key inputs into OECD deliverables to the G20, such as the G20 Enhanced Structural Reform Agenda and the IMF-led Strong Sustainable and Balanced Growth reports.

Quantification of reforms: The PMR indicators are used regularly by the OECD, as well as by academics and other national and international institutions, to quantify the potential effects of product market reforms on macro economic outcomes, such as employment, GDP, and productivity.

National reform initiatives: Governments inside and outside the OECD area have used the PMR indicators to select priorities for reforms, and to evaluate their performance and their regulatory environment with respect to international experiences and best practices .

Key tool in the work of other international organisations: The European Commission has been a major user of the OECD PMR indicators to identify priorities for reforms in EU countries and has collaborated in extending these indicators to non-OECD EU members. The World Bank consider the PMR indicators a very useful diagnostic tool, which complements their own Ease of Doing Business indicator, by providing a wealth of additional information on whether the regulatory environment creates unnecessary obstacles to the entry and expansions of firms. Since 2013, the World Bank has been cooperating with the OECD to broaden the coverage of the OECD PMR indicators outside the OECD area.

The OECD PMR Economy-wide indicator is among the measures chosen by the APEC secretariat to evaluate their members’ progress on structural reforms.

Reviews of barriers to competition: the OECD performs detailed reviews of regulations to help governments identify and remove unnecessary barriers to competition, using its Competition Assessment Toolkit. The PMR indicators are usually employed to perform a first screening of the country’s sectors and identify where such barriers are more extensive and where the most benefits from reforms could be obtained.

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Examples of national reforms in the area of Product Market Regulation Following recommendations formulated by the OECD in its Going for Growth publication, a number of countries have implemented actions to improve their regulatory environment in different sectors. Examples include:

FRANCE In 2015, in order to reduce regulatory barriers to competition, the government has liberalised energy tariffs for large commercial customers, has extended Sunday opening hours in various geographic areas and has opened passenger coach services to competition. Moreover, the government has eased entry into some legal professions, and has allowed these professionals to offer discounts on some regulated fees.

ITALY In 2014, Italy took actions for the development of a wholesale gas market and its integration into the European one, thus giving Italian market participants access to lower prices.

KOREA In order to reduce the regulatory burden on economic activity, Korea has put in place the Regulatory Guillotine and Thorn under the Nails initiatives, that have led to the abolilition of around 10% of all economic regulations in 2014. Moreover, the amount of regulations covered by the sunset rule, which requires either their automatic expiration or their regular review, was increased from 32% to 50% between 2014 and 2017.

SOUTH AFRICA In January 2016, South Africa launched the InvestSA initiative, which includes the creation of one-stop shops at national and provincial level to help investors with the procedures required to start up and run a business, and to provide streamlined access to registration and authorisation processes.

Source: OECD Reform Tracker Database.

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Results of latest PMR update for OECD countries and a group of non-OECD countries Economy-wide results for 2018 The latest PMR Indicators show that a majority of OECD countries have reasonably pro-competitive regulatory stances in product and service markets (Figure 1): two decades of reforms have brought laws and regulations closer to international best practices. The nonOECD economies in the dataset, instead, have regulatory framework that are less conducive to competition, though with differences across countries.

The overall PMR indicator is highly aggregated, as it incorporates in a single figure over 1000 data points. This means that it masks much greater variation at the level of specific regulatory areas.

Therefore, it is necessary to look at lower level components to obtain detailed information about countries’ regulatory stance.

The results show that the Distortions induced by State Involvement in the economy are greater than the regulatory Barriers to Domestic and Foreign Entry faced by firms (Figure 2).

The relative position of countries varies somewhat across these two high-level components of the PMR indicators.

Nevertheless, there is a clear tendency for countries with competition-friendly regulations in one area to have competitionfriendly regulations in the other areas as well.

The higher values for Distortions induced

by State Involvement are primarily driven by widespread public ownership of firms, especially in network sectors, and by the existence of corporate governance rules that still allow state owned enterprises to enjoy some competitive advantages when they compete with privately owned firms.

In many countries, both OECD and nonOECD ones, there is also a lack of regulation that ensures transparency in the interaction between public officials and interest groups during the regulatory processes.

This regulatory void increases the risk that the design of new regulations is affected by undue pressure from lobbyists.

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Figure 2: PMR Economy-wide Indicator: two high-level components Index scale 0 to 6 from least to most competition friendly regulation. 0 represents international best practices.

6 5

Distortions Induced by State Involvement OECD average overall PMR

Barriers to Domestic and Foreign Entry Average of 5 best performing OECD countries

4 3 2 1 0

Note: The averages include only OECD countries. Information refers to laws and regulation in force on 01 January 2018.

Source: OECD 2018 PMR database.

Sector results for 2018: network and service sectors Network Sectors The values of the Sector indicators for the countries surveyed show that, in general, regulatory set-ups in network sectors – which include e-communications, energy and transport - are more conducive to competition than those prevalent in the service sectors – namely retail distribution and professional services.

Further, while barriers in services are, in general, high in most countries, barriers in network sectors tend to be greater in nonOECD countries than in OECD ones (Figure 3).

These findings suggest that in many OECD and non-OECD countries the rules governing professions and retail distribution could be re-assessed to determine whether they strike the right balance between fostering competition and innovation, and protecting consumers and workers.

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Figure 3: PMR Sector Indicator for Network Sectors* Index scale 0 to 6 from least to most competition friendly regulation. 0 represents international best practices.

6 5

Total network sectors

OECD average 2018

Average of 5 best performing OECD countries

4 3 2 1 0

Note: The averages include only OECD countries. Information refers to laws and regulation in force on 01 January 2018.

Source: OECD 2018 PMR database.

http://oe.cd//pmr

PRODUCT MARKET REGULATION

CONTACTS OECD Economics Departement : Cristiana Vitale, (cristiana.vitale@oecd.org) PMR2018@oecd.org