methodology for deriving the stri hildegunn kyvik nordås alexandros ragoussis oecd trade and...

Methodology for deriving the STRIMethodology for deriving the STRI

Hildegunn Kyvik NordåsAlexandros Ragoussis

OECD Trade and AgricultureOEC D/TAD Services expert meeting

2 July 2009

www.oecd.org/trade/stri

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Top Down Bottom Up

Approaches to quantifying barriers to trade in servicesApproaches to quantifying barriers to trade in services

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OverviewOverview

•Selection of indicators

•Sources of information

•Scoring

•Weighting

•Aggregation

•Robustness checks

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Selection of indicatorsSelection of indicators

•Explicit barriers to trade and investment

•Barriers and regulations that are: – mentioned explicitly in the GATS

– mentioned explicitly in regional trade agreements

– identified by experts at services expert meetings

– Related to future negotiations on rules in the WTO/GATS

•Statistical methods to prevent overlap

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Sources of informationSources of information

•OECD Product Market Regulation

– STRI added questions on treatment of foreign parties;

•OECD restrictions on foreign investment indicators and codes of liberalisation and capital movement;

•Surveys undertaken in relation to three services expert meetings;

•OECD Communications Outlook;

•ITU

•Government websites;

•Other

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Scoring – transforming qualitative Scoring – transforming qualitative information to quantitative scoresinformation to quantitative scores

•Objectives:

– Independent of the sample can easily be extended to new countries

– Retain the variation in the underlying data

– Comparable across countries and time

– Comparable across sectors

– Simple

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Choice of scoring methodologyChoice of scoring methodology

The objectives

The features of the data

Computer Professional Construction Telecoms

Binary 47 (81%) 361 (94%) 77 (86%) 200 (87%)

Continuous 11 23 13 29

Total 58 384 90 229

Several alternatives were exploredBinary scores chosen

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Transforming continuous to binary dataTransforming continuous to binary data

Methodology Comments Example

Above or below an absolute threshold

Independent of sampleMay reduce variance

Foreign equity limit < 50%

Multiple absolute thresholds Independent of samplePreserve variance

Foreign equity limits < 33%< 50%< 66%

Above or below sample mean

Dependent of sampleMay reduce variance

Local loop unbundling price mean

Multiple sample related thresholds

Dependent of samplePreserve variance

< mean – one s.d.< mean< mean + one s.d.

Above or below global threshold(s)

Independent of cross-section sample, but still not comparable over time

Number of countries f.w. visas for business trips required

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Choice of weighting schemeChoice of weighting scheme

•Ideal: The marginal impact on trade;

– Cannot be confidently estimated

•Preliminaries:

– A large number of regulations;

– Relatively few observations (29 countries);

– Regulations categorised using principal component analysis in the PMR

•Methodologies explored

– Expert judgement

– Principal component analysis

– Equal weights

– Random weights (for robustness checks)

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Weighting schemes cont.Weighting schemes cont.

•Expert judgement:

– Observations on regulation categorised as in the PMR

– Experts at the sectoral expert meetings ranked categories and scored individual measures

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Example: Expert ranking, professional servicesExample: Expert ranking, professional services

Group 1 Group 2 Group 3 Group 4 Group 5

Restrictions on foreign ownership and other market entry conditions 1 1 1 1 3

Discriminatory measures and lack of transparancy 2 2 2 4 2

Public ownership, size and scope of public enterprises 5 6 5 7 7

Price control and regulations on market behaviour 6 3 4 5 6

Regulatory transparency in licensing and permit systems 3 5 3 3 4

Barriers to competition 4 4 6 2 1

Red tape on start ups and administrative burdens 7 7 7 6 5

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Example expert scoring, professional servicesExample expert scoring, professional services

Restrictions on foreign ownership and other market entry conditions AVERAGE MIN MAXNumber of

not relevantThere are statutory or other legal limits to the number or proportion of shares that can be acquired

by foreign investors 4.2 4 5 0

Only joint ventures are allowed 4.6 4 5 0There are restrictions on mergers and acquisitions 3.8 2 5 0The number of foreign firms permitted to practice is restricted by economic needs test 4.2 4 5 0The number of foreign firms permitted to practice is restricted by labour market needs test 4.0 0 5 1The number of foreign firms permitted to practice is restricted by quotas 4.6 4 5 0Residence requirement applies to foreign suppliers 3.2 2 4 0Number of foreign professionals permitted to practice is restricted by economic needs test 3.8 0 5 1Number of foreign professionals permitted to practice is restricted by labour market needs test 3.8 2 5 0Number of foreign professionals permitted to practice is restricted by quotas 4.2 3 5 0Residence requirement applies to foreign professionals 3.0 1 4 0Service provision reserved for nationals 5.0 5 5 0Nationality requirement of board members 3.6 1 5 0Nationality requirement of directors 3.8 2 5 0Nationality requirement of other personell 3.8 3 4 0Other restrictions on intra-corporate transferees 3.2 2 4 0

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Weighting: expert judgement and equal weightsWeighting: expert judgement and equal weights

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For telecommunicationsFor telecommunications

•Regulations necessary for competitive markets;

•Absence of regulation can be trade restrictive when markets are not competitive;

•Therefore an interaction term is introduced:compdumss kk ˆ

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Weighting schemes: PCAWeighting schemes: PCA

Principal Component Analysis (PCA) assigns the highest

weights to the measures with the largest variation

More variables than observations in the dataset

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What difference does the weighting scheme make?What difference does the weighting scheme make?

ComputerConstruction Professional Telecoms

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AggregationAggregation

•Is the additional burden of another measure

– Constant?

– Increasing in the number of measures?

– Declining in the number of measures?

•Constant is assumed

– More research needed to assume otherwise

– Allows for multiple classifications

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Multiple classificationsMultiple classifications

•By regulatory category (from PMR)

•By GATS definitions (MA+NT; DR)

•By discriminatory/non-discriminatory

•By mode

•By restrictions on operations/entry

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Summary - methodologySummary - methodology

•Scoring: Binary

•Weights: Equal weights of measures within categories, expert judgement on categories;

•Aggregation: linear

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Example: professional servicesExample: professional servicesE

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Expert judgmentCategories of measures are ranked from the most to the least trade restrictive

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Robustness: rank correlationsRobustness: rank correlations

Computer Construction Professional Telecoms

EJ/EQ 0.90 0.92 0.84 0.89

EJ/PCA 0.47 0.76 0.84 0.83

The STRIs are not very sensitive to the weighting scheme

Possible exception: Computer services

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ConclusionsConclusions

•The STRI is a composite index calculated on the basis of information on regulation only;

•A number of scoring and weighting schemes have been explored;

•Choice of scoring scheme is data driven

•Choice of weighting scheme is based on the literature:

– some restrictions are more important than others

– Which measures are more restrictive is based on expert judgement

•OECD countries have relatively even regulatory profiles

results are not very sensitive to weighting schemes

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www.oecd.org/trade

ContactHildegunn.Nordas@oecd.org

Alexandros.Ragoussis@oecd.org

OECD Trade and AgricultureOECD Trade and Agriculture