The OECD’s recipe for economic growth

Psst… hey, buddy — want to make some more money? Chris Giles writes in the Financial Times on the Organization for Economic Cooperation and Development’s latest working paper:

Workers in advanced economies could gain the equivalent of a full year’s income over their working lives if countries increased competition in their domestic economies and reduced trade barriers, the Organisation for Economic Co-operation and Development said on Tuesday. The international body charged with improving the economic performance of its 30 member countries came down firmly on the side of market liberals after examining the effects of restricting competition. ?At a time when Europe may be losing momentum in its drive to open product and services markets, the study shows that the economic rationale for such liberalisation remains very strong,? said Jean-Phillippe Cotis, the organisation’s chief economist.

You can access the OECD’s summary here, and the full report here. By barriers, the authors are referring to tariffs, limits on foreign direct investment, and product market regulation. The bulk of the gains come from regulatory reforms. How big are the benefits? This is from the report’s cover letter:

The benefits to be expected from such a liberalisation exercise are… substantial:

In the United States, GDP per capita would increase by 1% to 2.5%;

In Europe, GDP per capita would be boosted by between 2 to 3%, which is equivalent to two years of growth. Compared with the United States, gains would be stronger in Europe, reflecting its tighter initial stance of regulation.

Spill-overs outside the European Union and the United States may be large: 2% for Canada and Mexico, 1.5% for Turkey, Japan and Central Europe….

An important lesson of this work is that product market deregulation rather than tariff lowering would provide the main source of economic gains. This finding should not come as a surprise, however, knowing that tariff and non-tariff barriers are now rather small while domestic product market regulations remain often substantial, especially so in the services sector. The magnitude of estimated output gains look very significant to us but they may seem too modest to some observers. A first answer would be that our estimation of the gains of liberalisation are indeed very prudent. In this exercise, we have only assessed the ?one-shot?or ?static gains?, coming from greater international trade specialisation and better allocation of resources. But many would argue that liberalisation produces ?dynamic gains?, that is more open product markets stimulate research, innovation and technical progress on a sustained basis. Empirical research indeed suggests that these gains could be quite large although their estimated magnitude is still surrounded by substantial margins of uncertainty.

Read the whole thing. UPDATE: Robert Tagorda at Outside the Beltway has some more thoughts on the OECD report. Meanwhile, Gary Hufbauer and Paul Grieco’s op-ed in the Washington Post yesterday makes a similar point about the past benefits of economic openness:

Using four different methods, we estimate that the combination of shrinking distances–thanks to container ships, telecommunications and other new technologies–and lower political barriers to international trade and investment have generated an increase in U.S. income of roughly $1 trillion a year (measured in 2003 dollars), or about 10 percent of gross domestic product. This translates to a gain in annual income of about $10,000 per household. Unfortunately for the cause of continued liberalization, Americans do not receive this money as a check marked ?payoff from globalization.? Instead, the payoff is hidden within familiar channels: fatter paychecks, lower prices and better product choices (compare the telephones available now with the standard black model of 1980). Nevertheless, each of our four methods uncovers a large payoff. First, we parse international data that correlate the expansion of international trade with economic growth. This shows that the increase in U.S. income sparked by more intense trade equates to 13.2 percent of GDP. In the second method, we calculate how lower tariffs stimulate U.S. productivity through competitive forces and bring greater product choices to U.S. producers and consumers. The estimate for these benefits comes to 8.6 percent of GDP. Third, we draw on a computable general equilibrium model to suggest how today’s economy would react to the restrictive Smoot-Hawley trading environment of the 1930s. That exercise indicates an estimate of 7.3 percent more in GDP from liberal trade. Finally, we calculate the productivity benefits arising from use of imported components and find a benefit of 9.6 percent of GDP. While none of the four estimates is perfect, the broad result is clear: The benefits of trade and investment liberalization are positive and large. Given the large gains from past liberalization, and today’s low tariffs and modest investment barriers, skeptical commentators might say, “Been there, done that.” But our estimates of future policy liberalization alone (excluding likely benefits from better communications and transportation) indicate that a move from today’s commercial environment to global free trade and investment could produce an additional $500 billion in U.S. income annually, or roughly $5,000 per household each year. Much of the benefit would come from sectors of the economy that were effectively ignored during earlier rounds of liberalization: services, agriculture, transportation and trade with developing countries.

[But the costs… what about the costs!!–ed. Ah, yes, they measure that too:

Surveying several estimates, we arrive at a middle-of-the-road figure of roughly 225,000 trade-related job losses per year. Most dislocated workers find new jobs in six months, many far sooner; but some are unemployed for an extended period. Even workers who are re-employed may face significant pay cuts. Taking these features into account, we estimate that the lifetime costs of a year’s worth of trade-related job losses is roughly $54 billion, about $240,000 per affected worker. This is a huge loss on a personal level, but only about 5 percent of the annual national gains from liberalization. (emphasis added)

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