Schumpeter in the Tropics: Regulation and Macro Performance work in progress under the direction of

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Schumpeter in the TropicsRegulation and Macro
Performance(work in progress under the
direction of Luis Serven and Norman Loayza)

• Guillermo Perry
• Chief Economist for Latin America and the
  Caribbean
• World Bank
• Bogota
• July 2005

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Schumpeter in the Tropics Regulation and
Macroeconomic Performance

• Research developed under LACs Regional Studies
  Program, so emphasis on LAC -- but broader
  international context.
• Motivation perception that regulation is heavier
  in LAC than other regions (e.g., Djankov et al.
  2000 on entry Botero et al. 2003 on labor...)
• Starting assumption excess regulation hampers
  Schumpeterian efficiency-enhancing resource
  reallocation across firms, and hence growth in
  aggregate productivity and output

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Measuring regulation around the world

• What types of business regulation?
• Labor
• Minimum wages, soc. security contributions,
  unionization
• Fiscal
• Corporate taxes, quality of government spending
• Product market
• Entry barriers, bankruptcy costs, financial
  restrictions, trade impediments, lack of contract
  enforcement

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Regulation around the world
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Regulation indexes selected countries
Loayza, Oviedo and Serven (2005)
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Schumpeter in the Tropics Regulation and
Macroeconomic Performance

• Paper 1 Regulation reduces economic growth and
  raises informality and macroeconomic volatility
• Particularly clear in the case of product market
  regulations. Not significant in the case of
  fiscal regulations (fiscal regulations may
  increase provision of basic public goods and
  enforcement capacity)
• Economically significant reducing product
  market regulation from (median) LDC to IND levels
  raises growth by 1.7 and lowers volatility by
  30
• Good governance helps mitigate (even eliminate)
  the adverse effects of regulation -- clearly in
  the case of growth less so in the case of
  volatility (high threshold for product market
  regulation lower for labor market)
• IV estimates suggest these effects are causal

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Impact of Regulation on Growth
Loayza, Oviedo and Serven (2005)
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Impact of Regulation on Informality
Loayza, Oviedo and Serven (2005)
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Schumpeter in the Tropics Regulation and
Macroeconomic Performance

• Paper 2 how does micro regulation affect firm
  dynamics (i.e., the reallocation process) ?
• PMR affect labor productivity growth
• All regulations affect sectorial turnover, entry
  and exit. PMR affect turnover, entry and exit at
  aggregate manufacture level (others not
  significative)
• Turnover, in turn, affect labor productivity
  growth, mainly through net entry (not
  significative through reallocations among
  incumbents)

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Firm Dynamics and Labor Productivity Growth
Decomposition
Loayza, Oviedo and Serven (2005)
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Firm Dynamics and Labor Productivity Growth
Loayza, Oviedo and Serven (2005)
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Schumpeter in the Tropics Regulation and
Macroeconomic Performance

• Paper 3 how does micro regulation affect the
  aggregate response to shocks which typically
  require significant reallocation ?
• Results protecting incumbents from adverse
  shocks reduces volatility at the expense of
• Larger aggregate output losses (PDV of deviations
  from trend)
• Slower recovery to pre-shock GDP levels

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Schumpeter in the Tropics Regulation and
Macroeconomic Performance
Severity of Recessions and Regulatory Burden
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Schumpeter in the Tropics Regulation and
Macroeconomic Performance

• Paper 4 effects of regulatory reforms in factor
  markets on aggregate labor and capital dynamics
• Econometric application to labor market
  flexibilization in Colombia using plant-level
  data (other applications under way)
• Results suggest adjustment substitution
  increased aggregate labor flexibility and
  increased capital stock inertia