With weak European growth performance over a longer period of time, it is time to push reforms raising the rate of productivity growth. The EU’s best strategy for it is to cut restrictions for single market trade in the services sector. There are still major restrictions in place and services regulations differ substantially between EU countries. Reforming regulatory barriers that create excessive costs for production and trade in services is therefore key to improving productivity growth. Although some reform has taken place over the last year, changes in these regulatory barriers however have been marginal and much more needs to be done in order to create significant economic gains. As a result, there is a strong economic case for countries to reduce excessive regulation, find as much harmonisation in regulation that is possible, and instruct regulators to cooperate across countries to synchronize their regulatory systems in services.
Despite these relationships, the way in which services are supplied for businesses and consumers is not always efficient and therefore policy reforms could improve the conditions for the services sectors to make a greater contribution to productivity growth. As a matter of fact, many of these services are still restricted in the sense that burdensome regulations for firms impede the useful employment of labour, skills and knowledge in services within and across countries. For instance, Europe still has relatively high regulatory restrictions on accounting, legal services, and air transport services. Most services are labour intense and therefore require an easy cross-border flow of skills (either low or high-skilled people) to have them produced, delivered or traded between countries. Regulations often prevent the efficient production of skills and hence the easy flow of services across borders, inhibiting an allocation of production to where they are produced best.
Which countries are therefore most restricted in services? And, more importantly, which countries have been willing to undertake reform over the last year with an aim to deliver higher productivity? Figure 1 below plots the OECD index of services trade restrictions for the years 2014 and 2015, which cover both trade and domestic regulatory restrictions. The horizontal axis shows level of regulations in 2014 whilst the vertical axis shows the level regulations in 2015.
Figure 1 leads to various conclusions. First, worldwide, emerging economies such as India, China, Indonesia, and to a lesser extent Russia and Brazil are still the most restricted countries in the world with relatively high regulations in services in both 2014 and 2015. As part of a second league of countries, there are countries such as Brazil, Israel, Mexico and Iceland, which still have some major restrictions in place. Turkey also falls into that group, but as an emerging economy it shows a level of restrictions that is much less than some of its comparators. Finally, there are European countries plotted in blue, which, on the whole, show lower levels of burdensome restrictions. In the same group of those European countries are also Norway, Japan, New Zealand and Canada and the US, which share a similar level of restrictions as the most European economies.
Nonetheless, there are large differences between European countries. Figure 2 replicates Figure 1 but zooms in on European Union countries. The first message from this figure is that Poland and Austria show the highest services trade restrictions in both 2014 and 2015. Other European countries such as Greece, Finland, Italy and the Slovak Republic also still have some major services restrictions in place and therefore form a second-tier group. On the lower end of this group one can find Denmark and Ireland. On the other side of the spectrum there are the Netherlands and Luxembourg, both of which have very open services markets. Hence, for countries to obtain the level of restriction of this latter group, some work still needs to be done to “free” services regulations from being tradable.
Which countries have been able to move away from restrictions in services and, therefore, committing themselves to deliver on productivity and growth? It is possible to analyse this “move” towards greater services reform in favour of productivity by analysing the two figures from both axes presented. If a country is placed below the straight diagonal line which runs from the lower left corner up to the upper-right corner, it means that the level of reform in 2015 is lower than in 2014, which points to positive reform of the country’s services market. On the other hand, a country placed above the diagonal line moves into the opposite direction of higher levels of regulations, which points to increased regulations in 2015 compared to 2014.
In the EU not much has happened between the two years. Nonetheless, the main reformers, although modestly, are Greece and Austria which have lowered their services restrictions. Greece is involved in structural reforms in many sectors, including the lowering of market-entry barriers, whilst Austria has liberalized some professional services and computer services by improving regulatory transparency – for instance visa-processing times, cost of procedures to set-up a company and whether there is a public-comment procedure open to interested persons, including foreign suppliers. Italy is another country that has reformed modestly in some of the professional business services such as architectural services and legal services, also mainly in the area of regulatory transparency.
On the other hand, the Netherlands, Denmark, Latvia and the UK have moved away from the diagonal line in the opposite direction, which means that they have increased their restrictions in services. This is in great part due to the fact that these countries have tightened their restrictions regarding the movement of people in some of the professional services (Latvia has also increased some restrictions in regulatory transparency). Overall, some of the countries which have been more restricted have slightly liberalized, whilst some of the countries which were already more liberal have slightly increased their regulatory restrictions. In this regard, perhaps the EU is slowly moving to an average point in which some regulatory convergence is taking place.