Thursday, July 14, 2011

OECD's paper on structural reforms to raise growth

I have just come across a new and interesting paper by the OECD on "Raising Potential Growth
After the Crisis. A Quantitative Assessment of the Potential Gains from Various Structural Reforms in the OECD Area and Beyond", which projects how much OECD countries could benefit in terms of higher GDP levels after introducing product and labor market reforms.

The conclusion is that "The overall potential GDP gain for the average OECD country from undertaking the full range of reforms considered here might come close to 10% at a 10-year horizon, indicating the presence of ample room for structural reforms to offset the permanent GDP losses from the recent crisis".

This is a useful exercise, although results for Poland are quite doubtful: it is projected to benefit from product and labor market reforms to the tune of almost 18 percent of GDP within the next ten years largely through reforming the supposedly very rigid product market regulations.

But when you look closer, Poland's low position in the product market regulation (in fact, the last one in the ranking) is largely due to to a slightly larger share of state ownership in the economy than elsewhere. The underlying assumption is that state ownership by definition has to always be worse/less efficient than private ownership and by simply privatizing these companies Poland would develop much faster. I am not so sure: private ownership in the long run is indeed more efficient than state ownership, but in a short run and under additional assumptions, partial state ownership (as is the case in Poland for most state-owned firms) may be equally efficient.

OECD's projections for the impact of PMR reforms on Poland's GDP are therefore overestimated. The PMR index on its own has also be taken with a grain of salt, as most international rankings for that matter.

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