Economic Survey - Belgium 2005: Increasing productivity growth

 

Increasing productivity growth would also attenuate the costs of population ageing

Although the level of hourly labour productivity is high – it is estimated to be somewhat higher than in the United States – there is nevertheless considerable scope to increase productivity growth. Productivity growth has surged in the United States and in some other countries since the mid 1990s, notably in ICT-using service sectors, whereas it has slowed down in Belgium, creating an opportunity to emulate the improved performance in these other countries. If it were possible to increase the average annual hourly labour productivity growth rate by 1 percentage point, the decline in the economic growth rate caused by population ageing would be offset and the budget cost of population ageing reduced by 0.8% of GDP in 2030. While this is certainly a large increase in labour productivity growth, it is comparable to what the United States and some other OECD countries have achieved since the mid-1990s. Again, budget savings from improved economic performance would make room for tax cuts without undermining fiscal sustainability.

Removing barriers to productivity growth in ICT-using sectors and ensuring greater competition in rail freight transport is necessary if a large increase in productivity growth is to be realised

The ICT-using service sectors that underpin the increase in labour productivity growth in the United States (and some other OECD countries) since the mid-1990s are distribution and finance. While labour productivity growth has also increased in the distribution sector in Belgium over this period, the increase has been much smaller than in the United States. In the finance sector, productivity growth has been falling. Although ICT is universally available, other ingredients are necessary for its productive use. The main barrier to greater use of ICT in the finance sector to raise productivity growth is the lack of integration of retail banking across Europe. To remove barriers to integration, the Belgian authorities and their European counterparts should fully implement the Financial Services Action Plan and apply the four level “Lamfalussy framework”. Barriers to greater use of ICT to raise productivity in the Belgian distribution sector include restrictive zoning and licensing regulations for large format retail outlets, restrictive regulations on shop opening hours and a lack of flexibility on working hours – factors which limit economies of scale. A new law will come into effect in July 2005 that reduces regulatory barriers for large stores to enter the market or expand. If the new law does not result in significantly higher entry or expansion of large stores, the authorities should ease zoning restrictions. The government should seek an agreement with social partners, as it is doing, on cutting back on strict and complex rules on overtime and on easing regulation of temporary work contracts. The government should also make shop opening hours more flexible. Although there are factors beyond the control of the Belgian authorities that limit the scope for chain stores to realise productivity gains by exploiting an optimal mix of rail and road transport to save inventory cost and achieve just-in-time delivery, the regulatory framework in the rail freight industry could nevertheless be made more conducive to competition. The legal splitting of the state-owned NMBS/SNCB into an infrastructure company and a transport service provider took place in January 2005, with both companies being part of a new holding company. The rail regulator within the Federal Public Service of Mobility and Transport is now responsible for monitoring non-discriminatory access. In the event that non-discriminatory access is not achieved within the new framework, the infrastructure manager should be more tightly regulated or, better still, the holding company should be broken up, ending ownership links between the incumbent’s infrastructure and transport service companies.

Contribution of ICT-using services(1) to value added per person engaged

Product market competition more generally should be strengthened through horizontal measures…

Product market competition more generally increases productivity growth by improving the allocation of resources and strengthening managers’ incentives to raise efficiency and innovate. In this regard, the authorities’ plan to increase staffing at the competition authority is welcome, although more should be done to bring staffing closer to that in neighbouring countries. Product market competition is restrained by relatively high use of command and control regulations. To reduce recourse to such regulations, regulators should be required to assess alternative policy instruments (regulatory and non regulatory) before adopting a new regulation and guidance should be issued on using alternatives to traditional regulation to achieve policy objectives. In addition, the government should continue to evaluate the need for remaining price controls and abolish them where they are no longer warranted. In this respect, the case for professional bodies or representatives of trade and commercial interests being involved in specifying or enforcing pricing guidelines or regulations seems rather weak as does the case for maintaining price controls on medical drugs, taxi fares and petroleum products. Product market competition could also be strengthened by reducing barriers to entrepreneurship. The government programme to reduce the administrative burden on business is helpful in this regard. The Government intends in 2005 to abolish licences and permits for at least eleven trades (for example photography and watch making). The high burden on entrepreneurship imposed by systems for licenses and permits should be reduced by introducing a “silence is consent rule” (i.e., a rule that stipulates that licences are issued automatically if the licensing office has not acted by the end of the statutory response period) and by creating single contact points (“one-stop shops”) for issuing or accepting notifications for licenses.

…and sector-specific measures

There are also sector-specific measures that should be taken to increase competition. In particular, the laws and regulations that restrict the number of competitors in rail freight transport and in rail passenger transport, urban-, suburban- and inter-urban transport and in the provision of rail infrastructure and in ground handling at the airports should be abolished. In the electricity sector, major obstacles to more competition are the quasi-monopoly held by Electrabel in generation and the integration between generation and transport through majority ownership, slowing down the removal of transport bottlenecks and the increase in international interconnection capacity. Competition should be increased by auctioning a greater proportion of the incumbent’s production capacity, increasing interconnection capacity, facilitating the granting of electricity production operating licences and by better monitoring of the respective markets in which the vertically integrated incumbent operates to reduce its scope to abuse its market power.

Innovation policy should provide more support for organisational change, enhance collaboration between business and researchers and foster more rapid diffusion of knowledge

Innovation policy is also an important lever for increasing productivity growth. In view of the economic importance of service sectors, a refocusing of existing innovation policies is needed to encourage more investments in organisational change, which is a more important aspect of innovation in service sectors than in the rest of the economy. This should be complemented by improving the ICT using competencies of persons with lower intermediate skills and low education attainment. The incentive for the private sector to engage in public-private partnerships will be increased from 2005 with the wage tax reduction granted to private sector R&D staff conditional on co-operation with a public research institution in Belgium. The decision to extend this condition to include public sector research institutions inside the European Economic Area is welcome as it increases the possible number and quality of matches and hence exploits a source of international technology transfer to national production units.

Tertiary education and research need to be strengthened

Universities have difficulty attracting and retaining high quality teachers and researchers. To overcome this difficulty, universities should be given greater freedom to negotiate contract conditions and should have more access to private sources of funding. This could be done through a greater involvement of the private sector (such as Chairs and research contracts). Another possibility would be to increase the scope for tuition fees combined with student loans with income-contingent repayments, especially for higher levels of tertiary education. Such systems in other countries have substantially increased the resources available to universities without having any adverse effects on either the proportion of the population completing tertiary education or the socio-economic mix of students. Public university funding should also be made more dependent on performance criteria and competition between universities should be increased, including by making external evaluations compulsory and publishing the results.

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