International Policy

Regulations Hampering European Productivity

Much has been made of the negative impact of labor restrictions and high taxes on European productivity, without sufficient attention being paid to market restrictions, according to analyst William W. Lewis of the McKinsey Global Institute.

Although both Britain and the U.S. have relatively free economies with flexible labor markets, Britain's gross domestic product per capita is only 45 percent of that of the U.S. Lewis points out that British product markets are severely distorted by productivity-stifling regulations and suggests this is the primary reason for the disparity.

While regulations and product-market restrictions certainly exist in the U.S., they are less pervasive and onerous than in Britain -- where they occur in key sectors of the economy. For instance:

  • Common Agricultural Policy milk quotas prevent the British dairy industry from either producing enough milk to satisfy domestic demand or producing high-value cheese products for export.

  • Myriad zoning restrictions and building codes have prevented the British hotel industry from developing efficient cleaning and other services and from adopting the best practices broadly across hotel chains.

  • Noneconomic pricing of individual telephone calls has led to gross underuse of telecommunications services for both business and social purposes.

  • Such impediments have led to the belated application of computers.

Lewis found similar restrictions among the continent's social welfare economies -- particularly in France, Germany, the Netherlands and Sweden. He prescribes a far-reaching program of product-market liberalization for the economic ills of these countries.

Source: William W. Lewis (McKinsey Global Institute), "Why Europe's Living Standards Are Lagging," Wall Street Journal, May 21, 1998.

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