18 December 2015

The UK is the most liberalized country in the EU


If the question is economic growth, the answer is liberalization of the economy. An ever-growing amount of evidence piles up, that opening markets and allowing individual and firms to experiment new products is key to spur development, improve human prosperity, and protect the buying power of salaries. Yet EU member states still prevent markets from working freely, because of several, long-standing barriers to entry and competition. This is what emerges from the recently-released 2015 Index of Liberalization, an annual report from Istituto Bruno Leoni.

The Index of Liberalization covers ten sectors of the economy in 28 EU member states, including motor-fuel retail markets, electricity, natural gas, labor market, postal services, telecommunications, TV broadcasting, air transport, rail transport, and insurance. For each sector, the most liberalized economy is assigned a score equal to 100, while the remaining countries are ranked accordingly. Liberalization is defined through a set of qualitative and quantitative criteria, that measure how newcomers are free to entry, whether entrepreneurial activity is free or ingenuity is constrained by over-regulation, and whether market exit is also free. Sectoral results are then averaged for each country, in order to assess an overall degree of openness of the economy.

According to the 2015 Index of Liberalization, the most liberalized EU member state is the UK, which obtained an overall score of 95%, followed by the Netherlands (79%) and Spain and Sweden (both 77%). The least liberalized countries are Cyprus (49%), Latvia and Croatia (both 56%), and Greece (57%). Other large EU countries stand somehow in the middle: this is the case for France (64%), Italy (67%), and Germany (69%). New accession countries tend to display a lower degree of market openness, albeit Poland provides a major exception as it scores 69%. The Czech Republic and Romania also score relatively well, both at 67%.

Given the way the Index is built – ie each country being scored with respect to the most liberalized one – the Index of Liberalization can be thought of as an indicator of the distance from the frontier: it tells how far is each country from the most advanced economy in the EU, from the point of view of market openness and regulatory quality. Under this respect, the Index is not only a research product that aims at providing a piece of useful information regarding the process of market opening in the European Union. It can also be viewed (and hopefully used) as a policy tool to identify which countries provide the best regulatory practices in each of the surveyed sectors. On the one hand, this makes it easier to spread out information about which institutional settings are performing the best, and helps to understand what is not working in other jurisdictions or under different circumstances. On the other hand, deregulation is consistent with the integration of European markets: hence an EU-wide liberalization policy can contribute to achieve a greater degree of integration without necessarily implying an excessive top-down effort of regulatory harmonization.

At the same time, the Index of Liberalization suffers from an unavoidable limit: as it looks at the distance from the frontier, it cannot perceive whether the frontier itself moves ahead or backwards. Luckily enough generally speaking the most advanced countries tend to push forward their efforts to liberalize the economy, at least as far as the sectors where they have been most successful are concerned. Yet there are cases where the opposite is happening. For example the UK, which has long been viewed (and still is) a benchmark when it comes to energy markets, has been introducing new regulations that to some extent are taking the decision-making process back to the state. This includes a wide array of regulations, including (but not limited to) retail market regulation, the choice of technologies for the generation of electricity, and subsidies to non-fossil fuels.

To summarize, the Index of Liberalization can provide effective guidance to member states which aim at moving towards the edge, but it does not explicitly indicate how to keep broadening economic freedom in those countries which are relatively free already. However, while not explicit in the scores that are awarded to each member state, such indications are implicit in the methodology by which the Index is made. Regardless whether a country leads or lags behind in Europe, it can still make its market more competitive by removing the residual barriers to entry, or by eliminating unnecessary regulations, or by cancelling the regulatory of fiscal obstacles to innovation (not just technological innovation, but also organizational innovation).

If it wants to go back to sustained rates of growth, the European Union should set its market forces free from regulatory constraints that protect the incumbents and prevent innovation. Much can be done at the EU level but even more should be done at national level, by promoting a better understanding of how important liberalization is and spreading out the success-stories of countries that succeeded in opening their own economy. The Index of Liberalization aims at providing clear information on which steps are to be taken in order to become a more dynamic country. However, information alone does little if political will is absent: the choices of national governments with regard to liberalization will tell whether they are sincere when they praise the benefits of economic growth.

Carlo Stagnaro is fellow of Istituto Bruno Leoni.