Service Sector Reforms Could Boost EU, Including Croatias Productivity by Average of 5%, Says World Bank

Stocks and Financial Services Press Releases Thursday October 6, 2016 07:35
ZAGREB--6 Oct--World Bank

ZAGREB, October 5, 2016 – While EU growth is projected to remain low, with limited scope for quick policy fixes, a new World Bank report says reforming the service sector could significantly boost incomes and convergence. The World Bank EU Regular Economic Report (EU RER) projects that service sector reforms could increase productivity by an average of 5 percent, providing more and better jobs, stimulating investments, and deepening integration.

Currently, growth in the EU is expected to reach about 1.6 percent in 2016-17, driven by low oil prices and a supportive monetary policy, while in Croatia it is expected to be about 2.2 percent. The prolonged recession and a slow recovery of growth and jobs have undermined confidence in the EU and national institutions.

"The potential for growth in the EU is being depressed by low levels of investment, a decline in the working-age population, and a productivity slump," said Doerte Doemeland, World Bank Lead Economist and lead author of the report. "Scope for quick policy fixes is limited. Improvement of service sector regulations could be one of the key areas of leveraging growth, incomes, and jobs."

Services account for three quarters of GDP and two-thirds of employment in the EU, and are much more regulated than in non-EU advanced OECD countries. As much as one fifth of the EU labor force is employed in regulated professions such as legal services, engineering, and architecture, and face significant restrictions, creating large disparities across the EU.

Most restricted services - including finance, accounting, transportation, communications, or legal services - are the key drivers of growth in advanced economies. Yet, in the EU, service providers are often not allowed to offer their services in other EU member states, unless they make significant structural changes to their businesses – in areas such as ownership, insurance, professional association membership, or worker qualifications.

"By reducing conduct barriers in service sector legislation, Croatia could increase its firm level productivity by four to eight percent. This would include relaxing the type of practice and shareholding ownership, as well as, nationality restrictions for auditors and accountants, or local residency requirements for lawyers," added Sanja Madzarevic Sujster World Bank Senior Country Economist and co-author of the report.

While the EU Services Directive, adopted in 2006, aims to create a single market of services, service sector reforms at the national level face significant political constraints. The World Bank Report proposes several policy options to facilitate the much-needed liberalization of the service sector:

  • Prioritize service sector reforms across EU member states and formalize them in a 'roadmap'
  • Carry-out previously agreed reforms, including those in the EU Service Directive
  • Make service sector reform a competition policy priority for the European Commission and for national competition authorities
  • Create a common market for professional services
  • Facilitate a debate about the benefits and costs of reform with service sector providers and users.
  • Retrain workers that could be negatively affected by the proposed reforms

"The service sector is likely to strongly impact productivity in a relatively short period of time, and productivity is the key to sustained growth in the EU," said Arup Banerji, World Bank Regional Director for the EU. "We strongly believe that the policy actions recommended in our report can help regain growth, jobs, and confidence across the European Union."

Contacts:
In Brussels: Anna Kowalczyk +1 (202) 290 9281, akowalczyk@worldbank.org
In Washington: Elena Karaban, +1 (202) 473-9277, ekaraban@worldbank.org
In Bulgaria: Ivelina Taushanova, (359 2) 96 97 239, itaushanova@worldbank.org
In Croatia: Vanja Frajtic, +385 1 2357 230, vfrajtic@worldbank.org
In Poland: Filip Kochan, +48 605 282 998, fkochan@worldbank.org
In Romania: Victor Neagu, +40 21 201 0388, vneagu@worldbank.org
For the complete report please visit:http://www.worldbank.org/en/region/eca/publication/eurer

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