Abstract
The paper identifies France’s structural reforms that would yield the largest competitiveness gains based on macro-empirical evidence, and reviews signs of potential gains from a deregulation of the services sector. It is expected that completing deregulation in the services sector would benefit the entire French economy, by boosting productivity and exports. Econometric results have estimated the impact of reducing the labor taxation and labor market rigidities and of increasing innovation to the average level of other advanced countries.
Gains From Services Sector Deregulation1
1. The contribution of services to growth and competitiveness tends to be underestimated. One reason is the perception that services are non-tradable and their potential for productivity growth is low. This may be true for some services but not for sectors like telecommunications that experience technological improvements. Another reason is that the role played by services as an input for the rest of the economy is largely overlooked. Services have become a crucial input for the rest of the economy and, as a result, the productivity and competitiveness of French firms is increasingly determined by access to low-cost and high-quality producer services.
2. This paper reviews evidence of the potential gains from a deregulation of the services sector. It starts by showing that, despite recent reforms, the services sector remains more regulated in France than in most OECD countries. Next, it investigates the impact of relaxing the regulation of some services on productivity growth by looking at the impact of past regulatory changes on the productivity of the deregulated sectors and by discussing the impact for the whole economy. Empirical literature suggests that this impact would be large for France leading to substantial macroeconomic gains in terms of productivity and export growth.
Product Market Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.Product Market Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.Product Market Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.A. A Highly Regulated Services Sector by OECD Standards 2
3. Despite recent reforms, the French economy remains more regulated than many other OECD countries. In the late 1990’s, the regulation was in France as restrictive as in Italy, Spain, or Switzerland, but much more than in other large European countries and the United States. As other advanced countries, France experienced substantial deregulation in the 2000s but remains one of the most regulated in the OECD. According to the OECD’s product market regulation index, France was the 22nd most regulated OECD economy (out of 28 countries) in both 1998 and 2008.3
4. The deregulation of the various services sectors in the 2000s varies significantly but for most services the regulatory environment remains more restrictive than in most advanced economies.
5. On the one hand, France has deregulated substantially its retail distribution and network services. However, retail distribution remains more regulated in France than in most OECD countries. The French regulation of retail was the 25th most restrictive out of 26 countries in 1998 and ranked 21st a decade later. Autorité de la concurrence provides evidence that contractual barriers add to regulatory barriers leading to significant barriers to entry and substantial protection of existing firms. As a result, the sector is highly concentrated. The market share of the four largest retail groups reaches 65.5 percent. Increase in competition is expected in the future as the sector is a priority for the competition authority (Autorité de la concurrence, 2010a and b) and, as part of the G20 Action Plan for Growth and Jobs, has been identified by the authorities as one of the services to reform in order to boost competition and productivity.
Retail Sector Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.Retail Sector Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.Retail Sector Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.
Network Industries Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.Network Industries Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.Network Industries Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.6. France also deregulated substantially the network services (energy, transport, post and telecommunications), but regulation remains more restrictive than in most other OECD countries. There are, however, large differences across industries. Deregulation was particularly large for the energy and telecommunications but more limited for postal services and transport.
Post and Telecommunications Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.Post and Telecommunications Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.Post and Telecommunications Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.
Electricity and Gas Sector Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.Electricity and Gas Sector Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.Electricity and Gas Sector Regulation
(Index) 1/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ High index = strict regulation.7. Before deregulation, network services were publicly-owned or under public control and often benefited from monopoly power. In such cases, the impact of deregulation on competition depends on the effectiveness of regulators and competition authorities in curbing the power of the former state-owned monopoly. According to Høj and Wise (2006), there were deficiencies in France. They report state aid to the incumbent in form of special fiscal arrangements (electricity) and cross-subsidization of competitive activities from monopolistic market segments aimed at putting competitors at a disadvantage (telecommunication). In the transport sector, the main issue appears to be the rail transport where deregulation started later than for road and air transport and the independent regulator was established late in 2010, more than a decade after the liberalization started. Moreover, according to the Autorité de la concurrence, its areas of responsibilities are too narrow and the power of the historical operator remains in practice too large to promote effective competition.
Professional Service Regulation 1/
(Index) 2/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ Accounting, architect, engineer, and legal services.2/ High index = strict regulation.Professional Service Regulation 1/
(Index) 2/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ Accounting, architect, engineer, and legal services.2/ High index = strict regulation.Professional Service Regulation 1/
(Index) 2/
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: OECD.1/ Accounting, architect, engineer, and legal services.2/ High index = strict regulation.8. On the other hand, professional services have become more regulated. In comparison to other services and other OECD countries, the regulation of professional services was not overly restrictive in France in the second half of the 1990s, but the sector (notably legal services and architect services) became more regulated in the 2000s. This evolution contrasts with a deregulation in other countries.
9. In sum, despite wide differences in deregulation across sub-sectors, services remains more regulated in France than in most OECD countries. The next sections will focus on the impact of this regulation.
B. Regulation and Productivity Growth of the Services Sector
10. A vast literature documents the impact of a change in regulation on the performance of the regulated sector. In this section, we supplement this literature by looking at France recent experience with deregulation of some services sector.
11. Productivity growth varies significantly across services sectors (Figure 1). Three main groups can be identified:
Total Factor Productivity
(Index, 1989 = 100)
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: IMF staff and KLEMS.Total Factor Productivity
(Index, 1989 = 100)
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: IMF staff and KLEMS.Total Factor Productivity
(Index, 1989 = 100)
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Source: IMF staff and KLEMS.The first group includes sectors whose total factor productivity is lower at the end of the 2000s than it was at the end of the 1980s.
A second group consists of services that experienced some productivity growth but this growth remains relatively weak and smaller than in the productivity growth in the manufacturing sector.
The third group comprises “Post and telecommunications” and “electricity, gas, and water supply,” which stand out by their rapid productivity growth.
12. This paper focuses on the link between regulation and productivity growth. The fact that the two sectors that recorded the fastest productivity growth are also sectors that experienced a substantial deregulation would suggest a strong link between the two. However, productivity growth is driven by many other factors and one needs to go beyond anecdotal evidence. Indeed, the sharp increase in the productivity of posts and telecommunications may be more related to the large technological changes in the telecommunications sector than in the change in regulation.4
13. Because of data limitations, only the impact of the change in French regulation on the productivity of the transportation sector and of the post and telecommunications sector is reported in this section.5
14. With all caveats associated with data limitations and despite the simplicity of the specifications,6 econometric analysis suggests that deregulation is associated with faster total factor productivity (TFP) growth of the deregulated services sector. Thus the results provide support to the idea that by reducing entry restriction, price regulation, or licensing, deregulation fosters competition and productivity growth.
15. Deregulation of the rail sector, although more limited than the deregulation of the air and road sectors, had a strong, immediate, and positive (and statistically significant) impact on the sector’s productivity growth while, the positive (and also significant) impact of the deregulation of road transport is somewhat weaker and occurs with a one year lag. In contrast, the deregulation of air transport does not appear to have contributed to the sectors’ productivity growth (Table 1).
Transport Sector: Impact on the Change in Regulation on Total Factor Productivity Growth 1/
For brevity, the intercept is not reported. The dependent variable is the TFP growth of the “transport and storage” sector.
Transport Sector: Impact on the Change in Regulation on Total Factor Productivity Growth 1/
| Rail (Regulation) | 0.745 ** |
| (0.269) | |
| Road (Regulation) | 0.218 |
| (0.214) | |
| Lag1_Road (Regulation) | 0.435 ** |
| (0.188) | |
| Airlines (Regulation) | −0.027 |
| (0.063) | |
| GDP real growth | 0.629 |
| (0.805) | |
| R2 | 53.41 |
| Period | 1993-2007 |
For brevity, the intercept is not reported. The dependent variable is the TFP growth of the “transport and storage” sector.
Transport Sector: Impact on the Change in Regulation on Total Factor Productivity Growth 1/
| Rail (Regulation) | 0.745 ** |
| (0.269) | |
| Road (Regulation) | 0.218 |
| (0.214) | |
| Lag1_Road (Regulation) | 0.435 ** |
| (0.188) | |
| Airlines (Regulation) | −0.027 |
| (0.063) | |
| GDP real growth | 0.629 |
| (0.805) | |
| R2 | 53.41 |
| Period | 1993-2007 |
For brevity, the intercept is not reported. The dependent variable is the TFP growth of the “transport and storage” sector.
16. Deregulation of both postal services and telecommunications is positively and significantly associated with to have a positive impact on the sector’s TFP growth. The impact appears immediate for the postal sector but with a short lag for telecommunications (Table 2).
Post and Telecommunications: Impact on the Change in Regulation on Total Factor Productivity Growth
Post and Telecommunications: Impact on the Change in Regulation on Total Factor Productivity Growth
| (1) | (2) | |
|---|---|---|
| Post (Regulation) | 0.242 ** | 0.229 ** |
| (0.090) | (0.082) | |
| Lag1_ Post (Regulation) | 0.044 | |
| (0.088) | ||
| Telecom (Regulation) | 0.028 | |
| (0.074) | ||
| Lag1_ Telecom (Regulation) | 0.199 ** | 0.204 *** |
| (0.77) | (0.070) | |
| GDP real growth | 1.422 ** | 1.384 ** |
| (0.590) | (0.555) | |
| R2 | ||
| 61.0 | 60.2 | |
| Period | 1986-2007 | 1986-2007 |
Post and Telecommunications: Impact on the Change in Regulation on Total Factor Productivity Growth
| (1) | (2) | |
|---|---|---|
| Post (Regulation) | 0.242 ** | 0.229 ** |
| (0.090) | (0.082) | |
| Lag1_ Post (Regulation) | 0.044 | |
| (0.088) | ||
| Telecom (Regulation) | 0.028 | |
| (0.074) | ||
| Lag1_ Telecom (Regulation) | 0.199 ** | 0.204 *** |
| (0.77) | (0.070) | |
| GDP real growth | 1.422 ** | 1.384 ** |
| (0.590) | (0.555) | |
| R2 | ||
| 61.0 | 60.2 | |
| Period | 1986-2007 | 1986-2007 |
17. Econometric analysis provides support for the idea that, through entry restriction, price regulation, or licensing, a restrictive regulatory environment reduces competition and thus productivity growth. A restrictive regulatory environment by limiting competition also creates rents. Because deregulation reduces prices and rents, it may, in the short run, reduce productivity level of the deregulated sector.7 However, the elimination of the rent and the drop in prices will benefit both consumers and other industries that use the deregulated service as an input for their production. Therefore there is a need to have a broader view of the impact of the deregulation.
C. Regulation and Productivity Growth: Spillover and Macroeconomic Impact
Services as Inputs
18. This section turns to the impact of services deregulation not on the deregulated sector but on the whole economy. In order to understand how services sector deregulation can affect the rest of the economy, it is important to describe the role services play as an input for production.
19. Table 3 shows that services are, by far the largest input, for production. In the mid-2000s, services (including electricity, gas and water supply) accounted for 57 percent of economy’s consumption of intermediates. This was significantly more than manufacturing inputs (34 percent). In other terms, almost 28 percent of the value of the France production was due to services input. That is about 11 percentage points more than the share of manufacturing inputs. Moreover the share of services as an input is growing rapidly: a decade before, services accounted for 50 percent of input consumption and 23 percent of the value of production.
Inputs as a Share of Gross Output
(In percent, mid-2000s)
Inputs as a Share of Gross Output
(In percent, mid-2000s)
| All Economy | Agriculture, hunting, forestry and fishing | Mining and quarrying | Industry | Construction | Electricity, gas, and water supply | Services | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| All inputs | 48.8 | 54.8 | 58.7 | 73.1 | 56.0 | 61.8 | 37.4 | |||||||||
| Agriculture, hunting, forestry and fishing | 1.7 | 18.0 | 0.0 | 4.3 | 0.9 | 0.3 | 0.2 | |||||||||
| Mining and quarrying | 1.4 | 0.2 | 4.1 | 4.0 | 0.9 | 11.7 | 0.0 | |||||||||
| Manufacturing industry | 16.5 | 20.4 | 32.0 | 40.0 | 21.6 | 8.7 | 6.5 | |||||||||
| Construction | 1.5 | 0.3 | 1.0 | 0.3 | 12.0 | 4.1 | 0.9 | |||||||||
| Electricity, gas, and water supply | 1.4 | 1.5 | 2.2 | 1.4 | 0.3 | 20.3 | 0.7 | |||||||||
| Services | 26.3 | 14.4 | 19.4 | 23.0 | 20.3 | 16.5 | 29.1 | |||||||||
| Other Business Activities | 7.8 | 1.7 | 2.2 | 6.5 | 7.8 | 4.5 | 8.7 | |||||||||
| Wholesale and retail trade; repairs | 3.6 | 6.1 | 7.1 | 6.4 | 4.7 | 1.0 | 2.3 | |||||||||
| Finance and insurance | 3.6 | 3.0 | 2.0 | 1.6 | 3.0 | 1.9 | 4.5 | |||||||||
| Transport and storage | 2.9 | 1.4 | 3.4 | 2.6 | 1.4 | 2.3 | 3.3 | |||||||||
| Real estate activities | 1.9 | 0.0 | 0.3 | 0.6 | 0.1 | 0.3 | 2.7 | |||||||||
| Post and telecommunications | 1.4 | 0.0 | 0.4 | 0.3 | 0.3 | 0.5 | 2.0 | |||||||||
| Other community, social and personal services | 1.1 | 0.1 | 0.7 | 0.6 | 0.5 | 1.2 | 1.4 | |||||||||
| Computer and related activities | 1.0 | 0.0 | 0.1 | 0.7 | 0.5 | 1.1 | 1.3 | |||||||||
| Research and development | 0.8 | 0.3 | 1.3 | 2.1 | 0.1 | 0.5 | 0.3 | |||||||||
| Renting of machinery and equipment | 0.7 | 0.9 | 0.8 | 0.5 | 1.1 | 1.9 | 0.6 | |||||||||
| Hotels and restaurants | 0.7 | 0.0 | 0.0 | 0.3 | 0.1 | 0.2 | 0.9 | |||||||||
| Education | 0.4 | 0.2 | 0.7 | 0.3 | 0.2 | 0.5 | 0.4 | |||||||||
| Public admin. and defence; compulsory social security | 0.3 | 0.1 | 0.2 | 0.2 | 0.3 | 0.5 | 0.4 | |||||||||
| Health and social work | 0.3 | 0.3 | 0.1 | 0.1 | 0.1 | 0.1 | 0.3 | |||||||||
| Private households with employed persons | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||||||||
Inputs as a Share of Gross Output
(In percent, mid-2000s)
| All Economy | Agriculture, hunting, forestry and fishing | Mining and quarrying | Industry | Construction | Electricity, gas, and water supply | Services | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| All inputs | 48.8 | 54.8 | 58.7 | 73.1 | 56.0 | 61.8 | 37.4 | |||||||||
| Agriculture, hunting, forestry and fishing | 1.7 | 18.0 | 0.0 | 4.3 | 0.9 | 0.3 | 0.2 | |||||||||
| Mining and quarrying | 1.4 | 0.2 | 4.1 | 4.0 | 0.9 | 11.7 | 0.0 | |||||||||
| Manufacturing industry | 16.5 | 20.4 | 32.0 | 40.0 | 21.6 | 8.7 | 6.5 | |||||||||
| Construction | 1.5 | 0.3 | 1.0 | 0.3 | 12.0 | 4.1 | 0.9 | |||||||||
| Electricity, gas, and water supply | 1.4 | 1.5 | 2.2 | 1.4 | 0.3 | 20.3 | 0.7 | |||||||||
| Services | 26.3 | 14.4 | 19.4 | 23.0 | 20.3 | 16.5 | 29.1 | |||||||||
| Other Business Activities | 7.8 | 1.7 | 2.2 | 6.5 | 7.8 | 4.5 | 8.7 | |||||||||
| Wholesale and retail trade; repairs | 3.6 | 6.1 | 7.1 | 6.4 | 4.7 | 1.0 | 2.3 | |||||||||
| Finance and insurance | 3.6 | 3.0 | 2.0 | 1.6 | 3.0 | 1.9 | 4.5 | |||||||||
| Transport and storage | 2.9 | 1.4 | 3.4 | 2.6 | 1.4 | 2.3 | 3.3 | |||||||||
| Real estate activities | 1.9 | 0.0 | 0.3 | 0.6 | 0.1 | 0.3 | 2.7 | |||||||||
| Post and telecommunications | 1.4 | 0.0 | 0.4 | 0.3 | 0.3 | 0.5 | 2.0 | |||||||||
| Other community, social and personal services | 1.1 | 0.1 | 0.7 | 0.6 | 0.5 | 1.2 | 1.4 | |||||||||
| Computer and related activities | 1.0 | 0.0 | 0.1 | 0.7 | 0.5 | 1.1 | 1.3 | |||||||||
| Research and development | 0.8 | 0.3 | 1.3 | 2.1 | 0.1 | 0.5 | 0.3 | |||||||||
| Renting of machinery and equipment | 0.7 | 0.9 | 0.8 | 0.5 | 1.1 | 1.9 | 0.6 | |||||||||
| Hotels and restaurants | 0.7 | 0.0 | 0.0 | 0.3 | 0.1 | 0.2 | 0.9 | |||||||||
| Education | 0.4 | 0.2 | 0.7 | 0.3 | 0.2 | 0.5 | 0.4 | |||||||||
| Public admin. and defence; compulsory social security | 0.3 | 0.1 | 0.2 | 0.2 | 0.3 | 0.5 | 0.4 | |||||||||
| Health and social work | 0.3 | 0.3 | 0.1 | 0.1 | 0.1 | 0.1 | 0.3 | |||||||||
| Private households with employed persons | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||||||||
20. A closer look at the importance of services as input reveals three important points for the impact of services deregulation on the whole economy.
21. First, most of the services used as intermediates are domestically produced (Figure 2). The importance of imported services inputs is much smaller in absolute and relative terms than imported manufacturing inputs. This does not reflect a French specificity but the fact that trade in services remains more limited than trade in goods. The main implication is that the services sector is less subject than the manufacturing sector to competition from imports. Therefore, a restrictive regulatory environment will affect more competition in the services sector than in the manufacturing sector.
Share of imported intermediates in total consumption of intermediates
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Sources: Author’s calculation based on OECD input-output tables.Share of imported intermediates in total consumption of intermediates
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Sources: Author’s calculation based on OECD input-output tables.Share of imported intermediates in total consumption of intermediates
Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A005
Sources: Author’s calculation based on OECD input-output tables.22. Second, services represent a high share in consumption of intermediates because of a high consumption of services by other services sector (Table 3). Therefore, the deregulation of a particular services sector (such as a decrease in prices or an increase in the variety or quality of output) will have a direct impact that is relatively larger for the production of other services. Nonetheless, the direct impact on non-services sectors will be also significant. For example, if the deregulation of business activities reduces the price of its output by 10 percent, the direct impact will be a reduction in the cost of production of other services by about 0.9 percent and a reduction in the cost of production of manufactured goods by 0.65 percent.8 The total reduction in the cost of production of manufactured goods will be larger as there is an indirect impact. If the 0.9 percent reduction in the cost of production of other services if passed on to their consumer (this depends largely on competition in these services and thus in part of regulation) this will reduce the price of these services. As they are also inputs for manufacturing industries they will reduce further their cost of production. The estimated total impact of these spillovers on productivity growth will be presented in the next section.
23. It should be emphasized that the impact of the increased competition in the services sector is not limited to the reduction in prices. It also allows triggers an increase in the variety and quality of their output and thus of inputs available for other sectors. This opens new production possibilities for other sectors and is a source of productivity and export growth. Literature suggests that their effect on productivity can be large.9
24. Third, Table 3 shows that business activities are the largest providers of inputs: they account for almost 8 percent of the value of production and 16 percent of the economy consumption in services. This sector includes many sectors that are still highly regulated (see previous section) and thus where the gains of liberalization are potentially very large.
Macroeconomic Impact of Services Regulation: A Review of Literature
25. While the literature on the impact of liberalization on the performance of the liberalized sector is large, the literature on the impact on the whole economy is fairly new and still limited (an overview is provided in Appendix 1). It concludes is that a deregulation of the services sector yields substantial macro-economic gains through its impact on services sector’s and non-services sector’s productivity. As productivity growth is an engine of economic growth but also a major determinant of exports, the impact of a change in services sector regulation could help the French economy to take on the two challenges: boosting growth and improving competitiveness.
26. Two studies focus on France. The first study, by Forlani (2010), estimates the impact of an increase in competition in the services sector on 18 manufacturing industries total factor productivity during the period 1996 to 2004.
27. Forlani relies on several measures of competition: (i) the price cost margin (PCM, an approximation of a firm’s mark-up derived from its balance sheet); (ii) the concentration of the operating revenue of the sector measured by the Hirschman-Herfindahl index (HHI); and (iii) the minimum efficient scale (MES, an approximation for entry barriers and economies of scale). It also includes FDI to control for the competitive pressure due to the presence of foreign firms.
28. The main conclusions, summarized in Table 4, are:
Impact of a 1 Percent Change in Services Competition on Average Manufacturing Firm’s Total Factor Productivity.1/
An increase in PCM, HHI or MES is a decrease in competition.
Energy, land, water, and air transports, auxiliary transport activities, and telecommunication.
Impact of a 1 Percent Change in Services Competition on Average Manufacturing Firm’s Total Factor Productivity.1/
| All Services | Network services 2/ | |
|---|---|---|
| PCM | −1.271 *** | −1.533 *** |
| (0.310) | (0.545) | |
| HHI | −1.861 *** | −1.461 ** |
| (0.513) | (0.581) | |
| MES | −0.031 *** | −0.040* |
| (0.009) | (0.022) | |
| FDIPW | 0.057*** / 0.0071*** | 0.066*** / 0.0069*** |
| (0.020) / (0.023) | (0.020) / (0.021) |
An increase in PCM, HHI or MES is a decrease in competition.
Energy, land, water, and air transports, auxiliary transport activities, and telecommunication.
Impact of a 1 Percent Change in Services Competition on Average Manufacturing Firm’s Total Factor Productivity.1/
| All Services | Network services 2/ | |
|---|---|---|
| PCM | −1.271 *** | −1.533 *** |
| (0.310) | (0.545) | |
| HHI | −1.861 *** | −1.461 ** |
| (0.513) | (0.581) | |
| MES | −0.031 *** | −0.040* |
| (0.009) | (0.022) | |
| FDIPW | 0.057*** / 0.0071*** | 0.066*** / 0.0069*** |
| (0.020) / (0.023) | (0.020) / (0.021) |
An increase in PCM, HHI or MES is a decrease in competition.
Energy, land, water, and air transports, auxiliary transport activities, and telecommunication.
There is a positive, robust, and statistically significant relation between the impact of competition in the services sector and manufacturing firm’s productivity.
The spillover effect of competition is larger for network services than for other services.
FDI flows (measured per workers) shows that increasing external competition in the services sector has a positive spillover effect on manufacturing firms.
29. They estimate that annual the TFP of the French economy would grow by 0.6 percentage point more per year in 2011 to 2015 if France was able to instantaneously reduce its regulatory burden in the year 2010 to the level of best practice anti-competitive regulation observed in services sectors in 2007.10 The productivity of the manufacturing sector would grow by 1.6 point more and the productivity of the services sector (including energy and water supply) by 0.6 percent (Table 5).
Average Annual Multifactor Productivity Growth Gains from Simulated Reforms Implemented in 2010 for the Period 2011-2015
(In percentage points per year)
Average Annual Multifactor Productivity Growth Gains from Simulated Reforms Implemented in 2010 for the Period 2011-2015
(In percentage points per year)
| Manufactur- ing sectors (15–37) | Non-manufac- turing sectors (40–74) | Business sectors* (15–74) | Whole economy** (01–99) | |
|---|---|---|---|---|
| Australia | 1.04 | 0.66 | 0.72 | 0.51 |
| Austria | 2.49 | 1.07 | 1.43 | 1.10 |
| Belgium | 2.90 | 1.27 | 1.64 | 1.24 |
| Canada | 1.75 | 1.00 | 1.16 | 0.81 |
| Switzerland | 2.10 | 0.98 | 1.26 | 0.98 |
| Czech Republic | 1.36 | 1.05 | 1.15 | 0.90 |
| Germany | 1.90 | 0.78 | 1.11 | 0.85 |
| Denmark | 0.58 | 0.27 | 0.33 | 0.22 |
| Spain | 1.62 | 0.92 | 1.07 | 0.81 |
| Finland | 1.45 | 0.59 | 0.85 | 0.63 |
| France | 1.58 | 0.62 | 0.80 | 0.58 |
| United Kingdom | 1.38 | 0.55 | 0.70 | 0.51 |
| Greece | 1.63 | 1.09 | 1.19 | 0.84 |
| Hungary | 1.00 | 0.84 | 0.89 | 0.64 |
| Italy | 1.61 | 1.16 | 1.27 | 0.97 |
| Japan | 3.29 | 1.58 | 2.02 | 1.62 |
| Korea | 1.76 | 0.76 | 1.13 | 0.88 |
| Mexico | 1.51 | 0.60 | 0.81 | 0.61 |
| Netherlands | 0.83 | 0.37 | 0.46 | 0.33 |
| Norway | 1.78 | 1.22 | 1.32 | 0.69 |
| Poland | 3.86 | 1.82 | 2.35 | 1.73 |
| Portugal | 1.77 | 1.33 | 1.43 | 1.00 |
| Sweden | 0.63 | 0.31 | 0.39 | 0.29 |
| United Slates | 1.32 | 0.52 | 0.66 | 0.49 |
Average Annual Multifactor Productivity Growth Gains from Simulated Reforms Implemented in 2010 for the Period 2011-2015
(In percentage points per year)
| Manufactur- ing sectors (15–37) | Non-manufac- turing sectors (40–74) | Business sectors* (15–74) | Whole economy** (01–99) | |
|---|---|---|---|---|
| Australia | 1.04 | 0.66 | 0.72 | 0.51 |
| Austria | 2.49 | 1.07 | 1.43 | 1.10 |
| Belgium | 2.90 | 1.27 | 1.64 | 1.24 |
| Canada | 1.75 | 1.00 | 1.16 | 0.81 |
| Switzerland | 2.10 | 0.98 | 1.26 | 0.98 |
| Czech Republic | 1.36 | 1.05 | 1.15 | 0.90 |
| Germany | 1.90 | 0.78 | 1.11 | 0.85 |
| Denmark | 0.58 | 0.27 | 0.33 | 0.22 |
| Spain | 1.62 | 0.92 | 1.07 | 0.81 |
| Finland | 1.45 | 0.59 | 0.85 | 0.63 |
| France | 1.58 | 0.62 | 0.80 | 0.58 |
| United Kingdom | 1.38 | 0.55 | 0.70 | 0.51 |
| Greece | 1.63 | 1.09 | 1.19 | 0.84 |
| Hungary | 1.00 | 0.84 | 0.89 | 0.64 |
| Italy | 1.61 | 1.16 | 1.27 | 0.97 |
| Japan | 3.29 | 1.58 | 2.02 | 1.62 |
| Korea | 1.76 | 0.76 | 1.13 | 0.88 |
| Mexico | 1.51 | 0.60 | 0.81 | 0.61 |
| Netherlands | 0.83 | 0.37 | 0.46 | 0.33 |
| Norway | 1.78 | 1.22 | 1.32 | 0.69 |
| Poland | 3.86 | 1.82 | 2.35 | 1.73 |
| Portugal | 1.77 | 1.33 | 1.43 | 1.00 |
| Sweden | 0.63 | 0.31 | 0.39 | 0.29 |
| United Slates | 1.32 | 0.52 | 0.66 | 0.49 |
30. If deregulation of the services sector boosts a firm’s productivity it should also increase its capacity to export. In a seminal theoretical article, Melitz (2003) has argued that in order to export a firm should have a productivity level high enough to bear the fixed cost associated with entry in export markets. Empirical literature has provided substantial evidence supporting this idea. Again, as the impact of a service regulation affects the productivity of all sectors, it should increase exports of both services and goods.
31. A few studies look at the impact of services deregulation on exports (Appendix 1). In a study of 17 OECD countries Barone and Cingano (2011) find that exports by service-intensive manufacturing industries grow disproportionately more in countries with low levels of service regulation. They also find that the impact of service deregulation is driven by the energy and professional services. In the case of France, Forlani (2010) also finds some evidence that competition in the services sector affects manufacturing firms’ propensity to exports: the effect of aggregate competition in services on export propensity is not statistically significant but the impact of competition in network services is significant. This is consistent with his finding that the spillover effect of services deregulation on productivity is larger for network services than for other services.
D. Conclusion
32. In the past, France often deregulated its services sector as part of a European-wide initiative. France is transposing the EU services directive into national law, but the deregulation of many professional services remain regulated in ways that protect rents and discourage entry and competition. As part of the G20 “Action plan for Growth and Jobs,” France committed to “reinforce competition in consumer services” by increasing “competition in the following sectors: retail, energy, telecommunications, and real estate.” The adoption by the Parliament of the draft law was initially scheduled for end-2011 but has been delayed.
33. This paper provides evidence that completing deregulation in the services sector would benefit the entire economy, by boosting productivity and exports. Empirical studies suggest that the impact of liberalizing network services and professional services would have the largest effect for growth and exports.
34. Hence, the services sector’s deregulation may contribute to address the loss of competitiveness, which predates the current crisis but risks becoming even more severe if the French economy does not adapt along with its major trading partners in Europe, notably Italy and Spain, but also Portugal and Ireland, which are now engaged in deep reforms of their services sectors.
References
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Appendix 3. Empirical Evidence of Spillovers from Services Sector Reform.
| Impact on manufacturing | ||||||
|---|---|---|---|---|---|---|
| Country | Period | Service reform indicator | Services / Manufacturing sectors | Source | ||
| Productivity | Exports | |||||
| 17 OECD Countries | 1996-2002 | Service Regulation (OECD) | Services sector: Energy, Communication, Transport, and Professional services. | * Lower services regulation has a positive and statistically suignificant: impact of value added, productivity and export growth of service intensive manufacturing sector. | Barone and Cingano (2011) | |
| Industry level data. 15 manufacturing industries in 17 countries | * Impact is driven by energy and professional services. | |||||
| 15 OECD countries/ France | 1984-2007 | Product Market Regulation(OECD) | Services sector: Energy, transport, communication, retail distribution, and Firm level data: 20 manufacturing industries. | *Anticompetitive services regulation curbs TFP of the manufacturing sector. * TFP gains in downstream industry in 2007 by adopting in 2000 the best practice in services sector observed in 2007 range from 3 to 13 percent depending of the country (France 7 percent). | Bourles, Cette, Lopez, Mairesse and Nicolletti (2010a, NBER) | |
| * Reducing regulatory burden in 2010 to the level of best practice in services in 2007 would boost France’s TFP growth in manufacturing by 1.58 percent per year over 2010-15 (0.58 percent per year for the whole economy). | Bourles, Cette, Lopez, Mairesse and Nicolletti (2010b, Cesifo DICE Report) | |||||
| France | 1996-2004 | Competition indicators: price cost margin, concentration, productivity, minimum efficient scale, and turbulence | Firm-level data: 13 services sectors and 18 manufacturing sectors | Manufacturing TFP increases with competition in services: * 1 percent increase in services price-cost margin reduces manufacturing TFP by 1.9 percent. * 1 percent increase in services concentration reduces manufacturing TFP by 1.3 percent. | Competition in services is less relevant for manufacturing propensity to exports as it is for their productivity. * Aggregate competition in services is negligible and not significant for exports of manufacturing sector. * But some evidence that competition in network industies has a positive and significant impact on exports. | Forlani (2010) |
| * 1 percent increase in FDI per workers in services increases manufacturing TFP by 0.04-0.07 percent. * Results are driven by network industries. | ||||||
| Chile | 1992-2004 | FDI stock / sector output | Firm-level data: 4900 firms, 9 manufacturing sectors | Statistically significant and positive: * Service FDI penetration accounts for 7 percent of observed increase in manufacturing productivity | Fernandes and Paunov (2011) | |
| Czech Republic | 1998-2003 | Inward FDI; Services liberalization (EBRD); privatization; level of competition (industry concentration) | Firm-level data: 21 manufacturing industries. | Statistically significant and positive for each of three measures of service reform (exception is the level of competition) considered in isolation. * Foreign entry is the key channel through which services liberalization contributes to manufacturing TFP growth. | Arnold, Javorcik and Mattoo (2006) | |
| * 1 standard deviation in foreign presence is associated with a 3.8 percent increase in TFP. | ||||||
| India | 1993-2005 | Composite policy index | Four services sector: banking, telecoms, transport, and insurance. Firm-level data: 4,000 firms | Statistically significant and positive:1 standard deviation in aggregate index of service liberalization * 11.7 percent for domestic manufacturing firms * 13.2 percent for foreign manufacturing enterprises | Arnold, Javorcik, Lipscomb, and Mattoo (2012) | |
| Ukraine | 2001-07 | Services liberalization (EBRD) and Inward FDI. | Firm level data: 11 manufacturing sectors (40,400 firms). Excludes banks and “budgetary organizations” (Public schools, public hospitals, museums, …) | Statistically significant and positive: * 1 standard deviation of services liberalization is associated with a 9 percent increase in TFP. * 1 standard deviation in FDI penetration in services is associated with a 5.5 percent increase in TFP. | Shepotylo and Vakhitov (2012) | |
| Impact on manufacturing | ||||||
|---|---|---|---|---|---|---|
| Country | Period | Service reform indicator | Services / Manufacturing sectors | Source | ||
| Productivity | Exports | |||||
| 17 OECD Countries | 1996-2002 | Service Regulation (OECD) | Services sector: Energy, Communication, Transport, and Professional services. | * Lower services regulation has a positive and statistically suignificant: impact of value added, productivity and export growth of service intensive manufacturing sector. | Barone and Cingano (2011) | |
| Industry level data. 15 manufacturing industries in 17 countries | * Impact is driven by energy and professional services. | |||||
| 15 OECD countries/ France | 1984-2007 | Product Market Regulation(OECD) | Services sector: Energy, transport, communication, retail distribution, and Firm level data: 20 manufacturing industries. | *Anticompetitive services regulation curbs TFP of the manufacturing sector. * TFP gains in downstream industry in 2007 by adopting in 2000 the best practice in services sector observed in 2007 range from 3 to 13 percent depending of the country (France 7 percent). | Bourles, Cette, Lopez, Mairesse and Nicolletti (2010a, NBER) | |
| * Reducing regulatory burden in 2010 to the level of best practice in services in 2007 would boost France’s TFP growth in manufacturing by 1.58 percent per year over 2010-15 (0.58 percent per year for the whole economy). | Bourles, Cette, Lopez, Mairesse and Nicolletti (2010b, Cesifo DICE Report) | |||||
| France | 1996-2004 | Competition indicators: price cost margin, concentration, productivity, minimum efficient scale, and turbulence | Firm-level data: 13 services sectors and 18 manufacturing sectors | Manufacturing TFP increases with competition in services: * 1 percent increase in services price-cost margin reduces manufacturing TFP by 1.9 percent. * 1 percent increase in services concentration reduces manufacturing TFP by 1.3 percent. | Competition in services is less relevant for manufacturing propensity to exports as it is for their productivity. * Aggregate competition in services is negligible and not significant for exports of manufacturing sector. * But some evidence that competition in network industies has a positive and significant impact on exports. | Forlani (2010) |
| * 1 percent increase in FDI per workers in services increases manufacturing TFP by 0.04-0.07 percent. * Results are driven by network industries. | ||||||
| Chile | 1992-2004 | FDI stock / sector output | Firm-level data: 4900 firms, 9 manufacturing sectors | Statistically significant and positive: * Service FDI penetration accounts for 7 percent of observed increase in manufacturing productivity | Fernandes and Paunov (2011) | |
| Czech Republic | 1998-2003 | Inward FDI; Services liberalization (EBRD); privatization; level of competition (industry concentration) | Firm-level data: 21 manufacturing industries. | Statistically significant and positive for each of three measures of service reform (exception is the level of competition) considered in isolation. * Foreign entry is the key channel through which services liberalization contributes to manufacturing TFP growth. | Arnold, Javorcik and Mattoo (2006) | |
| * 1 standard deviation in foreign presence is associated with a 3.8 percent increase in TFP. | ||||||
| India | 1993-2005 | Composite policy index | Four services sector: banking, telecoms, transport, and insurance. Firm-level data: 4,000 firms | Statistically significant and positive:1 standard deviation in aggregate index of service liberalization * 11.7 percent for domestic manufacturing firms * 13.2 percent for foreign manufacturing enterprises | Arnold, Javorcik, Lipscomb, and Mattoo (2012) | |
| Ukraine | 2001-07 | Services liberalization (EBRD) and Inward FDI. | Firm level data: 11 manufacturing sectors (40,400 firms). Excludes banks and “budgetary organizations” (Public schools, public hospitals, museums, …) | Statistically significant and positive: * 1 standard deviation of services liberalization is associated with a 9 percent increase in TFP. * 1 standard deviation in FDI penetration in services is associated with a 5.5 percent increase in TFP. | Shepotylo and Vakhitov (2012) | |
Prepared by Jean-Jacques Hallaert. The author is grateful to Edward Gardner and the participants to the seminar held as part of the 2012 Article IV Consultation at the French Ministry of Finance for their comments and suggestions.
The indices used in this section are from the OECD (2011). They range from 0 to 6 with 6 being the most restrictive regulation.
Since 2008 the ranking may have evolved.
It should be noted that technology changes and a regulation affect each other’s impact on productivity. One the one hand new technologies may undermine the restrictiveness of a regulation and increase competition. On the other hand, the adoption of new technologies may be facilitated by an increase in competition due to deregulation.
The OECD regulatory indexes are available on an annual basis only for network services. The OECD reports that deregulation of electricity started in 1999 and deregulation of gas in 2003. As data for productivity and regulation both end in 2007, the period is too short to run regressions for the energy sector.
We only control for the impact of the change in the business cycle and the existence or effectiveness of institutions enforcing competition is not taken into account. Controlling for the effectiveness of the regulatory and competition institutions would probably increase the magnitude and the significance of the coefficients.
The direct impact is probably larger today than reported given the rapid growth in the importance of services as inputs since the mid-2000s.
See Hallaert et al. (2011) for a review of evidence and Bas and Strauss-Khan (2011) for the case of France.
