deadweight losses, but also a social cost equivalent to the amount consumed times the difference in cost entailed by the less efficient mode. In the “rent” case, policy reforms (liberalization) will mostly involve a redistribution of income across agents. Generally it will involve income being transferred away from producers to consumers, and transfers between factors of production. However, if there are rents there is also the possibility that policy reforms result in international transfers from domestic producers to foreign firms. This can easily arise in instances where liberalization is partial and is associated with entry by a few foreign firms into an imperfectly competitive domestic market. The extreme case is one where a domestic monopoly is transferred to foreign ownership without any change in market structure.<sup>34</sup> The importance of “rents vs. waste” is a well-known issue that is not specific to services regulation – e.g., it played an important role in estimates of the net gains from the EU Single Market program (Baldwin, 1994), and is a matter that has been the subject of much analysis in the public choice literature. The implication for empirical efforts to determine the effects of policy is that it is not enough to focus on price-cost margins as that does allow one to disentangle the two effects.<sup>35</sup> From a normative perspective, what matters of course are not the trade or investment effects of policies and policy reform but what such changes imply for economic growth and welfare. Two types of approaches have been used to do this – econometric studies and numerical general equilibrium modeling.<sup>36</sup>

# _Services liberalization and economic growth_

Economic theory postulates that growth is a function of increases in the quantity and productivity of capital and labor inputs. It accords no special role to services.<sup>37</sup> An important economic characteristic of many services is their “facilitating” role: services support ever-finer specialization. As argued by Francois (1990a), the growth of intermediation services is an important determinant of overall economic growth and development. Much of this

> 34 There are variants on this theme that can also be important in practice. Burgess (1995) notes that if trade reform allows a shift from factor services employed domestically to imports of service products, and the former were taxed whereas the latter cannot be, welfare may decline. See also Findlay and Sidorenko (2003).

> 35 Nguyen-Hong (2000) finds that nondiscriminatory regulations that restrict entry have a significant and negative effect on the price-cost margins of engineering firms, while discriminatory policies affecting foreign establishment and operation have a significant and positive effect on price-cost margins. This suggests that non-discriminatory regulations are likely to raise costs, while discriminatory policies (nationality or residency requirements) generate rents for domestic incumbents.

> 36 Only examples of country-specific CGE analyses are included in this survey, reflecting both space constraints and a judgment that existing multi-country or multi-region models are best seen as illustrative and exploratory, given the limitations of the datasets that analysts have been forced to rely on. Noteworthy examples of the latter include Brown and Stern (2001), Dee and Hanslow (2000) and Dee et al. (2003).

> 37 An exception is the literature stressing the importance of financial development for growth – see, e.g., Levine (1997). Other strands of the growth literature implicitly recognize services dimensions, e.g., the importance of human capital (and thus educational services) in generating (endogenous) growth.

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