The dynamic effects of European
Services liberalisation
Globalisation Challenges to Europe and Finland
Prime Minister's Office, Helsinki, August 17, 2006
Henk Kox
joint research with Arjan Lejour
CPB Netherlands Bureau of
Economic Policy Analysis
Structure presentation
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Problem area
A single European market for services?
Estimated static effects of liberalisation
Dynamic effects of services liberalisation
Conclusions and possible policy implications
Problem area:
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What are the longer-term, dynamic gains for EU from
services liberalisation?
 productivity, innovation and competitiveness
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History:
 lively debate Commission's proposals for Services
Directive (SD):
 'trimmed-down' SD version adopted Spring 2006
 to be implemented by 2010, also the benchmark year of
the Lisbon goals
 Sapir report 2004: single European market for services
is top priority for Lisbon goals
Available studies on economic effects: focus only on static
economic benefits
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Product-market regulation in services
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Not regulation as such is a barrier to trade and FDI in
services
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Regulating services sometimes for good reasons:
 ensure quality of service (information asymmetry,
consumers)
 externalities (environmental, safety)
 prevent misuse of market power
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Public authorities have regulated services since ages for
some these reasons
 especially professional services
 medical services
Regulation and trade (I)
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Many forms of product-market regulation cause fixed
qualification costs for firms
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General qualification
educational qualifications (diplomas, certificates)
local professional insurance
nationality requirements
must have local office
membership professional association
licenses
operational demands (inputs, marketing, legal form)
Fixed qualification costs could in themselves be a source of
scale economies and ... MORE trade!
Fixed (qualification) costs generate
economies of scale
... but this only holds in
case of open borders or
mutual recognition
Policy differences as sunk cost
barrier
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Each country regulates in a different way
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Key problem: home-markt qualifications not
recognised in other EU countries
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with different efficiency and administrative burdens
for exporters: regulation in destination country
comes on top of home-market regulation
Economic implications for service providers
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fixed costs for (re-)qualification
country-specific ==> sunk export costs
market - entry barrier
Costs of policy heterogeneity for
individual services firm
Sectoral coverage of Services Directive
Structure of intra-EU services trade 2003
Services
Directive
mostly about
B2B services!
Impacts of reducing policy heterogeneity
in EU by Services Directive: our
conclusions in a nutshell
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Bilateral trade in OCS service trade may rise by 30 - 62 %
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Bilateral FDI may increase by 18 to 36 %
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Deleting the country-of-origin principle (mutual recognition)
from the Directive -as done in 2006 version- reduces
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trade effects by 1/3
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little impact on estimated FDI effects
We further fed the trade effects (not FDI) in CGE model for
EU, yielding:
Macroeconomic effects SD (CGE model)
1.2
GDP
Consumption
1.2
1
0.7
0.7
0.8
0.5
0.6
0.4
0.4
0.3
0.3
0.2
0.2
0
Minimum
Maximum
Min. no
CoOP
Max. no
CoOP
Other studies of static welfare gains
from SD
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Copenhagen Economics (2005):
 CGE model
 EU consumption increase by 0.6%
 CoOP contributes about 10% to the total welfare
effects, partly FDI-induced
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Badinger and Breuss (2005):
 Partial equlibrium model
 Use estimated trade effects of CPB as input
 Find significant effects of SD (more entry) on
competition, and from competition on employment,
investment and productivity
Three channels for dynamic welfare
gains in longer run (1)
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More entry increases competitive selection and consumer
choice
 Recent theory on trade with heterogeneous firms
(Melitz, Baldwin, Helpman, Yeaple, Rubinstein):
• explains why only most productive firms export
• role of fixed/sunk entry cost
 reduction of fixed export costs raises participation
by medium-sized EU firms: often more productive!
 gains: average services firm more productive
 pains: inefficient domestic firms drop out
 more consumer choice, less firm options for
collusion
Firm-size and labour productivity in EU
business services,1999: 6 countries inverted-U
1.0
size class of firms
Firm-size and labour productivity in EU
business services, 1999: 5 ctrs. other patterns
Three channels for dynamic welfare
gains in longer run (2)
1.
2.
3.
Liberalisation facilitates knowledge spillovers:
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through more bilateral FDI in services (studies
Haskel, Keller, Javorzcik)
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through more export of knowledge-intensive
business services (IMF study Guerrieri et al. 2005)
Speed up original innovation
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due to more FDI participation: mixed evidence
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more entry may create incentives for distinctive
product innovation: escape innovation (study
Aghion & Griffith)
Conclusions
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Trimmed-down version of SD (2006) leaves some
unfinished liberalisation business (CoOP)
 mutual recognition regulatory standards further
lowers hurdle of sunk export costs
Dynamic effects of service liberalisation can be
considerable
 more firm entry, generates productivity gains
through competitive selection
 more SME participation
more knowledge spillovers (business services)
 more varieties and possibly also more original
innovation
Accompanying policies may ease the transition process
(social insurance, flexibilise bankruptcy law, re-education)
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Thank you for your attention
research reports downloadable from:
www.cpb.nl
Annex: CPB research on Services
Directive (all reports downloadable)
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Effects Directive on intra-EU services trade / FDI
• The Free Movement of Service within the EU (CPB Document
69, 2004/5, also: Revue Economique July 2006)
• Policy heterogeneity as obstacle for international services
trade (CPB Discussion Paper 49, 2005)
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Macro-economic effects
• Trade-induced effects of the Services Directive and the
country-of-origin principle (CPB Document 108, 2006)
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Role country-of-origin principle
• Trade-induced effects of the Services Directive and the
country-of-origin principle (ENEPRI, WP 44, 2006)