In one of his posts last week, Daniel Drezner relays a recipe for economic growth in the U.S. and the EU, brought to you by the chefs at the Organization for Economic Cooperation and Development. The OECD study is titled "The Benefits Of Liberalising Product Markets And Reducing Barriers To International Trade And Investment: The Case Of The United States And The European Union."
The paper divides the reforms it contemplates into two categories -- "inward-oriented" policies that alter the competitiveness of domestic markets and "outward-oriented" policies related to tariffs and restrictions on foreign direct investment.
There are a bunch of cool pictures that summarize the study's judgments on these matters. Here's a ranking of overall "inward-oriented" market regulation (click the thumbnail to get a good look):
The report explains how to interpret those figures:
High PMR scores indicate that a country has a relatively restrictive set of product market regulations, while low PMR scores suggest that the regulatory environment is more conducive to competition. Importantly, low scores do not necessarily indicate that there is less regulation in the economy overall. For example, regulations that serve important and legitimate social objectives, such as those covering health and safety standards and the environment, are not included in the measures.
On outward-oriented policies, the OECD calculations imply:
FDI controls on manufacturing appear quite low in both the United States and the European Union, with restrictions mainly confined to the service sectors...
As discussed above, average tariff levels in the United States and the European Union are higher in the agricultural sector than in manufacturing, with particularly high rates of protection in a few product lines such as rice, sugar and dairy products. In addition to these barriers to trade, the agricultural sector in the United States and the European Union is heavily subsidised relative to the “best practice” levels seen in
New Zealand and Australia.
Here's how the she study works:
The approach followed is to simply adjust the levels of the relevant policy settings, as measured by the indicators discussed above, to those of the least restrictive OECD countries. The adjustments are applied to lower level indicators than the aggregate country indicators.14 As a consequence, the reform package considered is quite ambitious -- it would involve an easing of domestic product market regulation and reductions in barriers to external trade and investment to levels that are less restrictive than present policy settings in any OECD member country.
Here's a picture of what's required:
(You can click on these pictures to get a larger version, but here is a PowerPoint version if they are still hard to read: Download oecd_reform.ppt)
The study concludes, as Drezner reports:
The benefits to be expected from such a liberalisation exercise are... substantial:
- In the United States, GDP per capita would increase by 1% to 2.5%;
- In Europe, GDP per capita would be boosted by between 2 to 3%, which is equivalent to two years of growth. Compared with the United States, gains would be stronger in Europe, reflecting its tighter initial stance of regulation.
- Spill-overs outside the European Union and the United States may be large: 2% for Canada and Mexico, 1.5% for Turkey, Japan and Central Europe....
An important lesson of this work is that product market deregulation rather than tariff lowering would provide the main source of economic gains. This finding should not come as a surprise, however, knowing that tariff and non-tariff barriers are now rather small while domestic product market regulations remain often substantial, especially so in the services sector.
Drezner also highlights an editorial from researchers at the Institute For International Economics focusing on the benefits of outward-oriented reforms
:... our estimates of future policy liberalization alone (excluding likely benefits from better communications and transportation) indicate that a move from today's commercial environment to global free trade and investment could produce an additional $500 billion in U.S. income annually, or roughly $5,000 per household each year. Much of the benefit would come from sectors of the economy that were effectively ignored during earlier rounds of liberalization: services, agriculture, transportation and trade with developing countries. No single trade or investment agreement can confer the entire range of benefits on Americans; instead, the prize requires steady liberalization--through agreements such as CAFTA and the World Trade Organization's Doha round, each providing a steppingstone toward the eventual goal.
On a slightly different theme, Tax Policy Blog asks the non-rhetorical question "Do Corporate Taxes Impede Economic Growth?":
According to a new paper from Young Lee and Roger H. Gordon in the June 2005 issue of the Journal of Public Economics, the answer is yes. [Full paper in MS Word]...
Currently the U.S. has the fourth highest corporate income tax rate in the world. If Lee and Gorden are right, by cutting the U.S.'s combined federal and average state corporate tax rate from roughly 40 percent to 30 percent we could boost U.S. economic growth by around 1.1 percent per year—enough to double our nation's wealth every 63 years.
Add to this the World Bank study noted at Truck and Barter that I linked to yesterday, and you have a nice afternoon's reading on the development and growth topic.
UPDATE: Don Boudreaux notices the IIE research too.