Product Market Regulation and Productivity Convergence: OECD Evidence and Implications for Canada

In this article we investigate the effect of product market regulation on the international diffusion of productivity shocks. The results indicate that regulations that restrict competition slow the process of adjustment through which best practice production techniques diffuse across borders and new technologies are incorporated into the production process. This effect is reflected in cross-country differences in ICT investment and speeds of catch up of sectoral productivity, which are significantly influenced by differences in product market regulation. Thus, persisting cross-country differences in product market regulation can partially explain the recent observed divergence of labour productivity in OECD countries, given the emergence of new general purpose technologies over the 1990s. In the case of Canada, the results suggest that remaining regulatory barriers to competition in a few key non-manufacturing sectors may have prevented the economy from benefiting to the full extent from high productivity growth rates in the United States and other productivity leaders. ONE OF THE ECONOMIC PARADOXES of the past decade was that GDP per capita diverged across OECD countries even as policies converged in many areas, such as macroeconomic stabilization and product market regulation. The paradox was particularly striking in productivity performance across countries, the major driver of divergence in GDP per capita. Spectacular productivity growth acceleration in some countries, in primis the United States, was matched by continued stagnation or even deceleration in many continental EU countries. Yet, product market policies, which are thought to affect productivity growth, became increasingly market-oriented everywhere, with privatization and liberalization spreading throughout the OECD area. How can this be reconciled with the idea that institutional change and produc t marke t r e fo rms sh ou ld l ead to improved productivity performance? This article argues that it is not only institutions and policies per se that mattered for explaining the productivity episodes from the late-1990s, but also the relationship between the 1 Economist and Head of Division in the OECD Economics Department respectively. The authors would like to thank Jorgen Elmeskov, Mike Feiner, Joaquim Oliveira Martins, Dirk Pilat, Annabelle Mourougane and Andrew Sharpe for useful comments and discussion. The statistical assistance of Isabelle Wanner and secretarial help from Irene Sinha are also gratefully acknowledged. The views expressed in the article are the authors’ own and do not necessarily reflect those of the OECD or its Member countries. Email: [email protected] and [email protected].