OECD talks up benefits of economic reform

Now is a good time to remind the public of the benefits to be had from serious economic reforms. On Tuesday the OECD published a new working paper, The benefits of liberalising product markets and reducing barriers to international trade and investment: the case of the US and the EU, which shows just how much Europeans are missing out by avoiding the tough decisions.

The paper estimates that reducing trade, investment and competition barriers to "best practice" levels could increase GDP per head over the medium term by the following amounts:

* 2 to 3½ per cent in the European Union.
* 1¼ to 3 per cent in the OECD area as a whole.
* 1 to 3 per cent in the United States.
* ½ to 1½ per cent in the OECD area outside the United States and the European Union.

These higher levels of GDP, once in place, would have a cumulative effect on earnings. The study estimates that the benefit to workers in OECD countries could amount to the equivalent of a full year's income across a working lifetime.

As OECD Chief Economist Jean-Phillippe Cotis writes in the introduction:

In a paradoxical way, this work is very topical. At a time when Europe may be losing momentum in its drive to opening product and services markets, the study shows that the economic rationale for such liberalisation remains very strong. Room for progress is indeed still large in the area of product market reforms in Europe and so are the rewards to be reaped in terms of higher living standards. As past OECD research strongly suggests, more open product markets translate ultimately into higher productivity growth. Such a boost would be welcome in a context where Europe’s economic performance over the past 15 years has been poor relative to other OECD countries and especially the United States.

Hat tips to Daniel Drezner, Robert Tagorda and Ben Muse.

UPDATE: Macroblog provides a more detailed account of this paper, including some tables and charts, and a discussion of related reading in his field. Worth a look.

Comments

[Edward Hugh]

Hi,

This post provokes a couple of thoughts in my head. In the first place I am an adamant free trader. I am also a strong supporter of China and India on social equity grounds. But........ having said that, you have to take a long hard look at Samuelson's paper last summer. The issues aren't as clear as they once were. We can get a much better global optimum, of this I am sure, and this as economists is our responsibility. But this higher level of global welfare is not incompatible with a rebalancing where some find that their relative position has deteriorated. I come from Liverpool, and it isn't what it once was, if I make my point.

So I think we need to be very careful in being honest with the non-specialist public with these kinds of arguments. Add to this that I have absolutely no professional respect whatsoever for Jean-Phillipe Cotis, and you can see I have some difficulty with the post.

One important detail: any study about growth and productivity prospects in europe which doesn't mention population ageing - and global population imblances between young and old societies (see Afoe posts this week) should be put where it belongs, IMHO, in the waste paper basket.