Competition, Regulatory Burden and Competitiveness:

Transcription

1 1 Competition, Regulatory Burden and Competitiveness: Why has Greece s competitiveness ranking being so low and declining? Yannis Katsoulacos Presentation at WIFO, Vienna July, 2012 Athens University of Economics and Business

2 Contents Introduction Objectives Competitiveness of the Greek economy: some facts Competition, Competitiveness and Growth The meaning and significance of a National Competition Policy Problems in Greece: regulatory burden, lack of competition pressures, ineffective or missing institutions, corruption Conclusions

3 3 Just a preliminary: Greek Total Gross Public Debt as Share of GDP (%)

4 4 Introduction - Objectives Briefly review Greece s position in international competitiveness rankings as well as the theoretical and empirical literature linking competition to competitiveness. Reflect on the country s very low and deteriorating international position as being at least partly the outcome of its total failure to develop a comprehensive, coherent and effective National Competition Policy, as typified in the: - Lack of competition in markets, including labor markets, characterized by excessive regulatory burden and heavy unionization especially in the public sector - Lack of independence from political interference of existing regulatory institutions - Inability to apply effectively legal norms - Lack of a competition culture and, - Missing institutions that could be instrumental in lowering the very high regulatory burden and corruption.

5 Contents Introduction Objectives Competitiveness of the Greek economy: some facts Competition, Competitiveness and Growth The meaning and significance of a National Competition Policy Problems in Greece: regulatory burden, lack of competition pressures, ineffective or missing institutions, corruption Conclusions

6 6 The Competitiveness of the Greek Economy The Greek economy: - Is in a very low position on the basis of the Global Competitiveness Index (GCI) as well in terms of all other important (sub) indices of GCI. - It has been subject to a drastic reduction of its competitiveness, on the basis of GCI, especially from 2004 onwards. - The position is similar on the basis of the Doing Business index of the World Bank. Greece is in the 109 th position among 183 countries (12 positions below 2009).

7 7 The Global Competitiveness Index Global Competitiveness Index Rankings Greece Portugal Germany Belgium Denmark Slovenia Turkey China

8 8 The Global Competitiveness Index Institutions Rankings Greece Portugal Germany Belgium Denmark Slovenia Turkey China

9 9 The Global Competitiveness Index Goods Market Efficiency Rankings Greece Portugal Germany Belgium Denmark Slovenia Turkey China

10 10 The Global Competitiveness Index Innovation Rankings Greece Portugal Germany Belgium Denmark Slovenia Turkey China

11 11 The Global Competitiveness Index Business Shophistication Rankings Greece Portugal Germany Belgium Denmark Slovenia Turkey China

12 Contents Introduction Objectives Competitiveness of the Greek economy: some facts Competition, Competitiveness and Growth The meaning and significance of a National Competition Policy Problems in Greece: regulatory burden, lack of competition pressures, ineffective or missing institutions, corruption Conclusions

13 13 Competition, Competitiveness and Growth - 1 Competition (Measurement: Direct and Indirect approaches) is necessary for low prices and high quality of products and services but also very significant for high productivity and for high and sustainable growth rates. Competition and Growth - Theory and Empirical Studies: Relation has been studied for a long time. Competition (measured by direct performance or structural - indices): - Improves the productivity of firms (Nickell, JPE, 1996; Blanchflower and Machin, 1996; Nickell et al., 1997; Disney et al., 2000; Bloom and Van Reenen, QJE, 2007). - Implies easy entry and exit from markets. Many studies confirm the positive impact on the level and growth rate of productivity, at the level of sector and country, of the liberalization of trade and of markets (VanWijnbergen and Venables, 1993; Baily and Gerbach, 1995). Also: 10-40% of the rate of growth of productivity is due to firm turnover (Nickell, 1996; Scarpetti et.al., OECD, 2002, evidence from 6 countries).

14 Competition, Competitiveness and Growth - 2 Competition and growth: Theory and Empirical Studies (cont.): Competition: - Generally improves innovativeness (Blundell et.al., Review of Economic Studies, 1999). The main reason is that in markets with high competition intensity this drives firms to innovation in order to escape the effect of competition on their profit (escape competition effect). Perhaps this is the most significant factor in the effect of competition on growth. - It is worth stressing that innovativeness allows firms to increase their profit and to grow in an environment of low inflation.

15 Competition, Competitiveness and Growth - 3 Competition and growth: Theory and Empirical Studies (cont.): - Empirical studies have also examined the impact of indirect measures of competition intensity, particularly the impact of various state policies and regulations that reduce the intensity of competition, making use of a number of indices like indices of the «intensity of regulatory intervention» in product markets (see Nicoletti et al. (1999)). - These studies: (i) (ii) Confirm the positive impact of competition on innovativeness. Show that a high intensity of regulatory intervention in product markets have especially negative impact on the rate of productivity growth when a country is not near the «technological frontier», because this impedes the adoption of new technologies.

16 Competition, Competitiveness and Growth - 4 Competition and growth: Theory and Empirical Studies (cont.): - Finally, more recent studies have examined the impact of environmental policies, associated with green (low-carbon) growth strategies, on competition and the implications for competition policy (see, for example, Competition Policy and Green Growth, Report by Nordic Competition Authorities, 2010, on which the second part of this presentation is based). - These are motivated by the strong and growing policy emphasis on the development of green growth strategies. - Reflecting this, Ministers of 34 countries at the OECD Ministerial Council meeting of June 2009 endorsed a mandate for the OECD to develop a Green Growth Strategy. - In turn, the above report examines the challenges that Competition Authorities face in respect of the shift towards green growth. - Results from the analysis clearly show that National Competition Policies need to take into account this shift towards green growth.

17 Competition &Environmental Policy (EP) There are significant relations between Competition Policy and Environmental Policies especially between Competition Policy and the Green Growth strategies which have been advocated by many countries in recent years. But while competition policy may be regarded as highly supportive of environmental policy the reverse is not true. There are many environmental policies and measures that can hinder competition and it is crucial that the Competition Policy recognizes and takes into account these effects. Hindering of competition can result in various ways. These can be broadly grouped into two categories: raising market concentration and entry barriers and through enhancement of collusive practices.

18 Contents Introduction Objectives Competitiveness of the Greek economy: some facts Competition, Competitiveness and Growth The meaning and significance of a National Competition Policy Problems in Greece: regulatory burden, lack of competition pressures, ineffective or missing institutions, corruption Conclusions

19 The Meaning of National Competition Policy (NCP) - 1 The National Competition Policy (NCP) includes Competition Policy in the narrow sense that is, the Competition Law, that condemns and deters firm behaviour/practices that distort and lessen existing and / or potential competition (various dominant firm practice, cartels and some horizontal and vertical mergers). But enforcement of Competition Law, even if effective, is certainly NOT enough for creating conditions of effective competition in all, including labor, markets.

20 The Meaning of National Competition Policy (NCP) - 2 For conditions of effective competition in markets, National Competition Policy must include: 1. A modern legal and institutional framework with particular emphasis on the independence of Regulatory Authorities, on the principle of competitive neutrality and on effective enforcement procedures. 2. The development and proliferation of a culture of competition - advocacy measures. 3. Measures, policies and institutions for the creation of conditions of free entry and exit conditions in all markets through the: (i) Abolishment of laws and regulations that distort and hinder competition in markets and create regulatory burden. (ii) Reduction of monopoly power in labor markets, especially, in the highly unionized public sector enterprises. (iii) Reduction of corruption.

21 The Significance of NCP - 1 Examples of benefits of Competition Policy. In the EU: - «Competition Policy plays a very significant role in the Lisbon Strategy for Growth and Employment.»(2005), Ph. Lowe, Director, DG COMP (2007). - As the EU Competition Commissioner Kroes (2008), noted between , the decisions of DG COMP of the EC on Cartels led to direct and indirect benefits to consumers of over 24 billion euro. Equally important were the benefits from the decisions related to the abuse of dominance and anti-competitive mergers. - Example: as a result of market liberalization and deregulation in Europe between in air transport there was a increase in travel frequency of 78% while prices fell by 66%!

22 The Significance of NCP - 2 In a recent important article, Buccirossi et.al. (CEPR, 2010), that also contains a good review of the empirical studies related to the impact of CP on growth, the authors examine extensively the impact of an index of the quality of Competition Policy (the Competition Policy Index, CPI) on Total Factor Productivity growth for 22 sectors in 12 countries of OECD in the period They find a significant positive impact of CPI and show that the relation can be interpreted as a causal one. As they note concluding: Our results provide support for the argument that investing resources in competition policy is beneficial to the longterm performance of a country s economy. Other studies confirm this result [Krakowski M., 2005; Dutz M & A. Hayri, 1999; Mateus A., 2010; Jenny F., 2008].

23 The Significance of NCP - 3 Although effective Competition Law enforcement is important, the other aspects of a NCP are equally or even more important. Such aspects are: - The abolishment of government regulations that hinder competition - The reduction of monopoly power in labor markets extremely high in the Greek public sector and, - The reduction of corruption (see later). Absent these, competition CANNOT function satisfactorily. - Government regulations: governments intervene in markets not only in cases where significant market failures occur but in a lot of other cases as well. For example, markets with sufficient competition intensity, frequently undergo excessive regulation. These regulations usually take the form of entry restrictions and price controls. - The social cost from these regulations (Regulatory Burden) can be extremely important.

24 The Significance of NCP - 4 Regulatory Burden - effects on growth/economic performance: Examples of results from empirical studies : - About 20% of the reduction in the increase of the rate of growth of labour productivity in the USA in 1970 s compared to that in the period was due to the increase of regulations in the mid 1960 s. - EU: OECD report (2000) the deregulation of markets would lead to an increase in GDP of about 5% to 6% in France and Germany and 10% in Greece. - Similar results from more recent OECD and EU reports (2004, 2006). Greece is in very high position among OECD countries in terms of Regulatory Burden. - Conclusions of EU report: Greece has (with Hungary) the highest Regulatory Burden in the European Union.

25 The Significance of NCP - 5 Other very important components of NCP should be: 1. The reduction of monopoly power in labor markets, especially in heavily unionized public sector enterprises, and the opening up of closed professions. Harmful entry restrictions do not concern only the product and services markets: they result in closed /regulated professions (e.g. lawyers, engineers, architects, pharmacists, notary publics, certified accountants etc) a very prominent feature of the Greek economy. These drive-up the cost of intermediate products to private sector and put upward pressure on private sector wages and drive up the production costs in the non-traded and, worse, in the traded sector of the economy. 2. The confrontation of Corruption. As is shown in recent studies, corruption generates social costs MAINLY due to the fact that it acts as a very high entry barrier (bureaucrats choose the height of entry barriers in order to maximize their income from bribery). Empirical research has shown that corruption is the most important entry barrier for new firms even more important than financial factors, taxation and government regulations see, for example, the study of Campos, Estrin and Proto (2010) that uses Brazilian data.

26 Contents Introduction Objectives Competitiveness of the Greek economy: some facts Competition, Competitiveness and Growth The meaning and significance of a National Competition Policy Problems in Greece: regulatory burden, lack of competition pressures, ineffective or missing institutions, corruption Conclusions

27 27 Problems in Greece The quality of micro-policy in Greece, and, specifically, of the legal & institutional framework for the enforcement of a national competition policy, broadly defined (in the sense indicated above), remains very low. The Regulatory Burden is very high - importance of creating an independent Regulatory Impact Assessment Authority Competition culture is non-existent importance of Advocacy Corruption is widespread Operation of labor markets not conducive to raising competitiveness closed markets and heavily unionized markets

28 28 Legal and Institutional Framework- 1 Through a series of amendments between 2000 and 2010 the legal framework has been modernized following European Competition Law. However, the quality of competition policy enforcement in Greece remains very low. The quality has to be assessed on the basis of the policy s ability to deter anti-competitive practices that lower social welfare. As indicated by e.g. Buccirossi et.al. (2010) several characteristics of the legal and institutional framework affect this. Greece is lagging behind with respect to most of these characteristics:

29 29 Legal and Institutional Framework- 2 - Independence of the Competition Authority and other regulators from political interference especially in relation to direct market interventions. Very important given that traditionally the political culture in Greece across the political spectrum favors market interventions. - Absence of a specialist court for assessing appeals against decisions by the regulatory authorities - Low Quality of legal standards and procedures - do not minimize errors - Inadequate resources both in terms of quantity and in terms of quality low coverage rates and low quality of decisions

30 30 Legal and Institutional Framework- 3 So, while the Competition Authority and Legal Framework has been in existence for some years it has been inadequate in 3 major respects: (a) the enforcement procedures adopted have not been appropriate for pursuing the objective of lower prices and innovativeness, relying mostly on antiquated formal Per Se legal standards (b) there is administrative ineffectiveness in terms of low coverage rates and long delays in decision making and (c) the quality of decisions has been low with many decisions overturned in the Courts. The Sectoral Regulators for Energy and Telecommunications are not yet in a position to act independently of government intervention particularly in the energy sector and there is still no efficient coordination between the regulators and the competition authority that cuts down on overlapping responsibilities.

31 31 Legal and Institutional Framework - 4 Also: there is no explicit provision to guarantee the important competitive neutrality principle. That is: - There is no explicit provision that allows regulatory authorities to treat as anti-competitive practices of organizations in the public sector under competition law potentially forbidding such practices or recommending their amendment when they distort competition, as when state organizations operate as suppliers or buyers in markets, in public procurement, provision of local authority services, the supply of information etc.

32 32 Legal and Institutional Framework - 5 The institutional framework required for supporting the creation and maintenance of conditions for high intensity of competition in markets is missing, specifically, the institutional framework for assessing state regulations that distort competition, with the authority of abolition of existing regulations and of prohibition of new regulations which are expected to have significantly negative impact on competition. There is no Regulatory Impact Assessment Authority.

33 33 Regulatory Impact Assessment Authority - 1 The institutional structure of RIAA varies in different countries. In Australia the Authority is part (the Office of Regulation Review) of an Independent Productivity Commission. In UK there is a special Cabinet Office Unit which closely cooperates with a special Department of the Office of Fair Trading. In Holland, where the decrease of the regulatory burden is one of the government s 3 basic priorities for economic improvement, the government has created an Independent Authority, ACTAL (Dutch Advisory Board on Regulatory Burden) with this objective. In US, with the longest experience in RIAA, the Small Business Administration Office of Advocacy, which acts as a RIAA, is directly accountable to the President. Indisputably, if the existence of a RIAA is regarded essential in countries like the above, it should also be regarded as essential in Greece, in which the distortions of competition and the regulatory burden are much greater problems.

34 34 Regulatory Impact Assessment Authority- 2 In Greece, the extremely complicated and ineffective environment of state regulations is probably the most significant factor, with the relatively small sized markets, in constraining the growth of competition, entrepreneurship and investment by foreign firms in the country. As in Australia 15 years ago and other countries, such as Mexico, more recently, it is necessary in Greece too, that there is a systematic examination of all the laws and regulations and the abolition of all those that restrict entry or exit, distort competition through price controls and/or protect domestic firms from foreign competition. Also, assessment of all the new measures that can potentially affect markets with main criterion their impact on competition on the basis of methodologies of «regulatory impact assessment» established by OECD and already applied in many countries.

35 35 Competition culture - Advocacy In Greece there is still no established culture of competition and this makes the effective enforcement of competition law and, even more so, the establishment of a National Competition Policy, in the sense described above, extremely difficult. The Hellenic Competition Commission, the Sectoral Regulatory Authorities and the (new) Regulatory Impact Assessment Authority (that should coordinate this effort) must be the protagonists, in collaboration with Consumer Associations and in conjunction with the establishment of a new specialized Court of Appeals, for creating a culture that recognizes the short and longterm benefits of competition for growth and social welfare.

36 36 Labor markets Finally, it is very important to amend regulations so as reduce the monopoly power in labor markets, especially in the heavily unionized public sector enterprises, and make these markets more flexible. In parallel, there must be a real opening up of closed professions. Harmful entry restrictions that result in closed /regulated professions (e.g. lawyers, engineers, architects, pharmacists, notary publics, certified accountants etc) is a very prominent feature of the Greek economy. Both of these factors, drive-up the cost of intermediate products to the private sector, put upward pressure on private sector wages and drive up the production costs in the non-traded and, worse, in the traded sector of the economy.

37 37 Contents Introduction Objectives Competitiveness of the Greek economy: some facts Competition, Competitiveness and Growth The meaning and significance of a National Competition Policy Problems in Greece: regulatory burden, lack of competition pressures, ineffective or missing institutions, corruption Conclusions

38 38 Conclusions In a recent Newsweek article Greece is referred to (I think rather excessively) as a country that is «unique in its disfunctionality» and as «the most wasteful and corrupt Western nation». It is also mentioned that in the midst of the most serious fiscal crisis that Greece has ever gone through, a very serious effort has started with the (2 nd ) Memorandum «to change these facts» and this has started with the abolition of some of the strict regulations in various sectors of the economy that are for the first time being freed up to competition. Nevertheless Greece is still very far from adopting a coherent National Competition Policy, though many of the measures proposed in the Memorandum do create a very good basis for moving forward in this direction. This is a necessary condition for creating conditions of effective competition in markets, conditions that are, in turn, necessary for getting back into a sustainable economic growth path.