universal service requirement for railways and domestic airlines drives a large portion of Croatia’s score in this indicator.

# **5. Regulation in Non-manufacturing Sectors**

**Regulation of non-manufacturing sectors in Croatia is pervasive and has important knockon effects for the rest of the economy.** Non-manufacturing sectors represent around two-thirds of economic activity across OECD countries. Furthermore over the past two decades they have proven to be the sectors contributing the largest share of growth both in terms of productivity and employment in several OECD countries. Non-manufacturing sectors are also the area in which government regulation is concentrated given that manufacturing sectors have usually been the object of generalized de-regulation and liberalization associated with free trade agreements, such those associated with membership of the World Trade Organization (WTO) and, even more so, as a consequence of the adoption of norms from the _acquis communautaire_ in countries that are members of the EU or in the path to accession. This is implies that final and intermediate consumers of non-manufacturing products across the economy have to bear the costs of heavy regulation in non-manufacturing sectors, with consequences for consumer welfare and efficiency of economic organization.

**The OECD indicators of regulation in the energy transport and communication sectors (ETCR) provide a framework to benchmark Croatian non-manufacturing sectors to EU and other OECD countries.**<sup>**9**</sup> The OECD ETCR indicator system for regulation in nonmanufacturing sectors is structured around precise criteria. As for the OECD economy-wide PMR indicators, the overarching criterion to assess regulations is their effect on competition where competition is viable. The ETCR indicators assess regulation in electricity, gas, telecoms, post, air transport, rail transport and road freight. Sectoral indicators summarize information on the restrictiveness of regulation in four main areas: state control, barriers to entry, involvement in business operations and, in some cases, market structure. The resulting ETCR indicators cover the 1975-2003 period in 21 OECD countries and –together with the retail distribution and professional services indicators covered in the PMR for 1998 and 2003 in 30 OECD countries – map the restrictiveness of regulation in non Manufacturing sectors.

**Regulation in energy, transportation and telecommunications is more restrictive in Croatia than in EU countries.** The aggregate ETCR indicator reveals that regulation of nonmanufacturing sectors in Croatia is more restrictive of competition than both the OECD and EU15 averages (Figure 22a). However, Croatia appears to have made considerable progress since independence to make competition viable in these sectors. Most of these efforts are associated with Croatia’s progressive compliance with the provisions of the _acquis communautaire_ relating to these sectors, which has led to convergence in regulatory frameworks. Convergence in regulation with the EU has occurred more rapidly in the electricity and telecoms sectors (Figure 22b).

> 9 See Annex for a detailed description of the methodology of ETCR indicators based on Conway and Nicoletti (2006).

24