improvements in allocative efficiency, but also has redistributive effects associated with the elimination of rents to incumbents. The net result is a large transfer from incumbent producers to consumers and other using industries, and a relatively small gain to the economy as a whole.

This is in contrast to the situation when services trade restrictions increase the real resource cost of doing business. Liberalization is then equivalent to a productivity improvement (saving in real resources), and yields ‘roughly rectangle’ gains associated with a downward shift in supply curves. This can increase returns for the incumbent service providers, as well as lowering costs for users elsewhere in the economy. The net result is a relatively large gain to the economy as a whole.

Whether barriers create rents or add to resource costs is under-researched currently. In some cases, the empirical evidence from the second stage econometrics is suggestive, but not conclusive. In other cases, a price impact is estimated, and then it is simply asserted whether the effect operates through price-cost margins or through real resource costs. For example, it was simply assumed in the Konan and Maskus (2006) study of Tunisia that barriers were half rent-creating and half cost-escalating.

However, theory can provide some guidance. Rents are likely to be created by quantitative and other barriers that limit entry (or exit, though this is far less common). Some red-tape measures may add to resource costs. There are also many ways in which rents can be dissipated or capitalized. So, regulatory barriers that may once have been rent-creating for the initial incumbent can become cost-escalating for subsequent incumbents. For example, Kalirajan (2000) provides indirect evidence that some of the zoning and other restrictions common in the wholesale and retail sector create rents that are subsequently capitalized into the price of commercial land.

The limited empirical evidence tends to accord with this intuition. In banking and telecommunications, where explicit barriers to entry are rife, barriers appear to create rents. In distribution services, where indirect trade restrictions also apply, barriers appear to increase costs. In air passenger transport and the professions, barriers can potentially have both effects (Gregan and Johnson 1999, Kalirajan et al. 2000, Kalirajan 2000, Nguyen-Hong 2000, OECD 2005c, Copenhagen Economics 2005). And theoretical arguments suggest that barriers in maritime and electricity generation primarily affect costs (Steiner 2000, Clark, Dollar and Micco 2004).

The above reform scenarios were concentrated in sectors where barriers appear to create rents. In addition, the reform measures were largely aimed at removing discrimination against foreign suppliers. This is no coincidence. When regulatory restrictions are targeted only at foreign suppliers, they tend to be explicit quantity controls, since this is the most feasible way of imposing discrimination.

The welfare gains modeled here are significantly smaller than those in the Konan and Maskus (2006) study of the impact of services liberalization in Tunisia. As noted, those authors simply assumed that barriers to foreign direct investment were half rent-creating and half cost-escalating. On the basis of this assumption, their projected gains in 11