In a recent Truth on the Market blog posting, I summarized the discussion at a May 17 Heritage Foundation program on the problem of anticompetitive market distortions (ACMDs), featuring Shanker Singham of the Legatum Institute (a market-oriented London think tank) and me.  The program highlighted the topic of anticompetitive government-imposed laws and regulations (which Singham and I refer to as anticompetitive market distortions, or ACMDs):

Trade freedom has increased around the world, according to the 2016 Heritage Foundation Index of Economic Freedom, due to a decrease in trade barriers, particularly tariffs. Despite this progress, many economies struggle with another burden that is increasing costs for families and businesses. Non-tariff barriers and overregulation, in the form of government-imposed laws and regulations, continue to stifle innovation and competition. These onerous and excessive regulations, backed by the power of the state, benefit the well-connected and act as an additional layer of government favoritism. Meanwhile, individuals are strapped with higher costs and fewer options.  

Singham and three colleagues (Srinivasa Rangan of Babson College, Molly Kiniry of the Competere Group, and Robert Bradley of Northeastern University) have now produced an impressive study of the economic impact of ACMDs in India (which has one of the world’s most highly regulated economies), released on May 31 by the Legatum Institute.  The study applies to India’s ACMDs the authors’ “Productivity Simulator,” which aggregates economic data to gauge the theoretical economic growth potential of an economy if ACMDs are eliminated.  Focusing on the full gamut of ACMDs affecting a nation in the areas of property rights, domestic competition, and international competition, the Simulator estimates the potential productivity gains for individual economies as measured in changes to GDP per capita, assuming all ACMDs are eliminated.  Using those productivity estimates, the Simulator can then be employed to derive resultant nation-specific estimates of potential GDP increases from “perfect” regulatory reform.  Although a perfect “regulatory nirvana” may not be achievable in the “real world,” Productivity Simulator estimates have the virtue of spotlighting the magnitude of forgone welfare due to regulatory excesses.  Even assuming a degree of imperfection in Productivity Simulator estimates applied to India, the results are startling, as the Executive Summary to the May 31 report reveals:

 “The [May 31] Study makes the following key findings:

• If India eliminated all its distortions it would be the fifth largest economy in the world, and in GDP per capita terms, it would rise from being ranked 169th to being ranked 67th.
• If India eliminated all its distortions it would generate over 200 million new jobs, and reduce absolute poverty to zero.
• If India improved its insolvency rules, opened up to foreign investment in certain areas and better protected intellectual property rules, the number of people living on less than $2 per day would be reduced from 770 million to 627 million.
• Simply optimising its regulatory environment with regard to the World Bank Doing Business Index would lead to a productivity gain of only 0.07%.
• Improving its insolvency rules, opening up to foreign investment in certain areas and better protecting intellectual property (L2) could lead to a productivity gain of 148%.
• Fully optimising its distortions could lead to a productivity gain of 1875% of which the Indian economy would capture almost 700%.”

I look forward to further application of the Productivity Simulator to other economies.  Research reports of this sort, in conjunction with studies carried out by the World Bank and the Organization for Economic Cooperation and Development that employ other methodologies, build a strong case for sweeping market-oriented regulatory reform, in foreign countries and in the United States.