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This concluding chapter presents a synthesis of the discussions in the preceding chapters. It is argued that in no country that engaged in ‘straight’ work-sharing (i.e., decreasing the workweek from, say, forty to thirty-five hours) created extra employment. In all countries there were and still are forces pushing for some form of work-sharing. However, the exact implementation is an equilibrium phenomenon that largely depends on a complex set of factors ranging from institutions, the size and international positioning of the country (contrast Sweden, a small open country, and France, a much bigger country with ambiguous feelings vis-à-vis globalization); the centralization or decentralization of union-firm bargaining (compare Germany, with industry-level bargaining, versus France, with relatively weak unions); and family preferences (contrast the Netherlands, where a significant proportion of citizens prefer women to take care of children, versus Sweden, where men are virtually mandated to take parental leave).

Dismantling the dominant position of an incumbent firm is a daunting task. Liberalization is a difficult process that many European countries have implemented only as a consequence of Directives coming from the European Commission, suggesting that EU institutions which are further away from local specific interests tend to be more market-oriented than national governments. Political commitment to reform is key to its implementation. The reform of the energy, telecommunications, and railway industries; professional services, retailing, postal services, and water are discussed.

Theory is not ambiguous about the impact of competition on economic performance. Empirical evidence, however, suggests that competition raises productivity. Both policy-makers and the academic community agree that the benefits of competition outweigh any eventual costs. Competition boosts the incentives for innovation and raises productivity growth of firms via the process of entry and exit.

This chapter concentrates on the reform opportunities that emerge when a government exploits its parliamentary majority. For example the privatizations and pension reforms carried out in the UK by the Thatcher government. When backed by a large parliamentary majority, the policy-makers' only constraint is the need to win a future election, which provides freedom of action in most cases. Yet, this strategy is not always valuable. The mix of successes and failures suggests that other institutional elements are crucial, such as the (lack of) internal cohesion in coalition governments or the existence of strong opposition. A strong parliamentary majority can thus be insufficient to generate sufficient coalition building.

This chapter discusses an alternate strategy that policy-makers tend to use when they do not enjoy sufficiently strong political power, and when they address reforms in broad-reaching sectors that affect a large fraction of the population. In the absence of a large parliamentary majority or in the presence of strong opposition in the economic or social arena, policy-makers widen the political base for their reform by resorting to social dialogue and to a more consensual style. The need to gather wider social and political support induces policy-makers to increase the share of winners from the reform, while raising expenses for the losers.

This chapter analyses reform over time across countries and sectors. Four scenarios for reforms are identified. In a scenario characterized by strong concentration of power in the hands of the policy-makers, a reform attempt in markets that do not feature entrenched interests may be carried out by exploiting this political power. Policy-makers lacking a substantial concentration of power can instead adopt a consensus building strategy to reform by tailoring the reform package to widen the political base. In the presence of strong entrenched interests, when some specific groups are both too strong to be confronted at once and too expensive to buy out, policy-makers may adopt a strategy of divide and conquer. In several circumstances, the reform efforts of policy-makers are largely affected by the existence of international laws or regulations that make reforms inescapable. Almost regardless of their political power and of the market or institution to be modified, the policy-maker may exploit these external constraints to carry out the reform.

The tertiary sector is increasingly playing a larger role in the economy, particularly in advanced countries. This chapter documents the growing linkages of the service sector with the rest of the economy and how liberalization has contributed to increasing such linkages. Input-output analysis is used to uncover the links between the tertiary sector and the rest of the economy. The tertiary sector is defined in a fairly broad manner by excluding only manufacturing, mining, agriculture, and construction.

This introductory chapter begins with a brief discussion of the main focus of the book, namely structural reforms in the product and labour markets, and the method adopted in the analysis of structural reforms. It then considers the relevant interactions among institutions and the question of whether these interactions can be exploited to obtain political support for reforms. Government exploitation of labour market reforms and the delegation of power to supranatural authorities are also discussed.

This chapter takes a different angle on policy-making by recognizing that several successful reforms were actually implemented under pressure from external constraints. Although strong governments may prefer to be free to select their reform options, governments facing strong opposition may need to rely on external constraints to increase their bargaining power in the coalition building phase and to limit the opposition of lobby groups. The recipe provided in this chapter is hence to exploit external constraints, such as those imposed by World Trade Organization (WTO) rules, the Stability Pact, or International Monetary Fund (IMF) conditionality rules. The chapter concentrates on the reform experience of two transition countries — the Czech Republic and Ukraine — to highlight the role of commitment to reform provided by a truly external constraint; in this case, the European Union.

This chapter considers instances in which widening the political base for reform may still be desirable, but is practically unfeasible. This scenario typically emerges when the benefits from reform are dispersed among many economic agents, postponed to future generations, or are highly uncertain — as, for example, with the liberalization of a ‘strategic’, traditionally highly regulated market — where costs are highly visible and relatively concentrated. Since buying out the opposition of vested interests is too costly or would largely limit the scope for reform, policy-makers must resort to a different strategy. The recipe adopted by successful policy-makers — particularly when liberalizing nonmanufacturing industries — is to ‘divide and conquer’. This strategy aims at disentangling entrenched vested interests by concentrating the costs of the reform on particular groups.

This chapter introduces Part II of the book, which focuses on how to gain political support for reforms. The succeeding chapters focus on the political feasibility of these reforms, in an attempt to provide some policy advice on how to push forward with structural reforms. The case studies include a broad array of economic areas — such as labour and product markets, the welfare state, and privatizations — and of political institutions, ranging from majority systems, such as the UK, to proportional systems and consensus democracies, such as Denmark, to hybrid systems (Italy), and to new democracies (Russia and the Czech Republic). Although this methodological approach may fail to identify universal ‘laws’, the wide range of economic and political framework conditions analysed will provide common lessons on how to design politically feasible reforms.

The case studies of Germany, Italy, and the UK show that liberalization has had positive direct effects on productivity in services, but does not always result in declining prices and employment gains. Liberalization seems to have positive effects on productivity, which — almost invariably because excessively high levels of employment are reduced — increases in all cases where its measurement is possible and reliable. Productivity may even increase well before privatization and liberalization, in anticipation of an increasingly competitive environment.

This chapter introduces the first part of the book, which examines the question: do product market reforms contribute to Europe's poor growth and productivity record? The key finding is that although reforms are difficult to implement and do not always deliver the expected gains, particularly in the short term, deregulation of services in all three countries analysed is found to be associated with faster productivity growth and competitiveness both in the service sector and in the rest of the economy. This latter result is largely due to the fact that services play a much more pervasive role in the overall economy than generally acknowledged as they have a significant input into non-service activities like manufacturing and agriculture. Consequently, changes in efficiency, quality, and costs of services delivered trickle down to large competitive gains in the overall economy. The bottom line is that liberalization in services has the potential to bring large welfare gains and governments need to persevere in their effort to reform the service sector.

This chapter illustrates how regulation in services affected the performance of other sectors in the economy through input-output linkages. The analysis compares the performance of twenty-four non-service (mostly manufacturing) industries in Germany, Italy, and the UK. It is shown that regulation, however measured, has a negative impact on foreign direct investment (FDI).