The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
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 threedimensional
panel and careful instrumentation of reform shocks using external instruments
enables us to control for economy-wide macroeconomic shocks and address possible sources
of 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 some
time 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 under
weak macroeconomic conditions. These findings provide a clear case for intensifying product
market reform efforts in advanced economies at the current juncture of weak growth.