Barriers to entry stifle investment

The U.S. economy grew at an annual average rate of 4.3 percent in the second half of the 1990s, while Germany, France and Italy grew at an average annual rate of 2 percent. A common view is that greater regulation in continental markets has retarded investment and economic growth – and that this was particularly important in the late 1990s, a period of significant technological innovation. However, the impact of product market regulation on investment has received little attention from economic researchers.

In their new study, authors Alberto Alesina, Silvia Ardagna, Giuseppe Nicoletti, and Fabio Schiantarelli found that while most developed countries in the Organisation for Economic Cooperation and Development (OECD) have deregulated product markets over the past three decades, they differ in terms of their starting points and the timing, nature and intensity of reforms.

For example, the United States began deregulating in the 1970s:

In 1977, 17 percent of U.S. gross national product was produced by fully regulated industries, and by 1988 this total had fallen to below 9 percent of GNP.

The United Kingdom was another early reformer, while the laggards include Germany, France and Italy.

The results are powerful. According to the report, there is a significant positive impact of deregulation on investment in the transport, communications, and utility industries, even when controlling for sector or country-specific shocks.

Barriers to entry are the most harmful type of regulation, say the authors. A reduction in entry barriers leads to a reduction in the mark-up of prices over cost, and makes it easier for capital expansions.

Source: Andrew Balls, How Deregulation Spurs Growth, NBER Digest, September 2003; based upon, Alberto Alesina, Silvia Adragna, Giuseppe Nicoletti and Fabio Schiantarelli, Regulation and Investment, National Bureau of Economic Research, Working Paper, No. 9560, March 2003.

For NBER Digest text http://www.nber.org/digest/sep03/w9560.html

For Working Paper text http://www.nber.org/papers/w9560

For more on Burden of Regulations http://www.ncpa.org/iss/reg/

FMF Policy Bulletin\16 December 2003