# **Annex I: The PMR Methodology**

A regulatory environment propitious to competition in product markets is widely believed to have positive repercussions on long run economic performance (Nicoletti and Scarpetta 2003) and productivity convergence (Conway et al. 2006 and 2007). This may occur by promoting a more efficient allocation of resources both across and within sectors. A more competitive environment may also stimulate innovation and technological diffusion, thus enhancing dynamic efficiency (Aghion et al. 2001).

Product market regulation (PMR) is measurable through a methodology developed at the OECD relying on the OECD regulatory indicators questionnaire. The methodology and key findings of the PMR for OECD countries are presented in Nicoletti et al. (1999) and Conway et al. (2005). The PMR indicators summarize information on economy-wide and industry-specific regulatory provisions.

The PMR indicators are designed to reflect regulations that have the potential to restrict competition in areas where competition is viable. By construction, they have a number of features which make them useful not only for analysis, but, more importantly, for policy advice, since they allow to pinpoint specific policies that hamper competition in product markets. First, PMR indicators are focused on enacted policies and not on outcomes, implying that they are ‘objective’, in that they are not based on opinion surveys. Second, since the summary PMR indicator is constructed as the average of well defined components, PMR scores can be related to specific underlying policies, thus providing precise inputs in the phase of policy recommendation. Finally, PMR indicators focus on regulatory measures that affect the economy at large and can therefore be considered as comprehensive measures of regulatory restrictiveness. Their advantages notwithstanding, PMR indicators are not designed to capture informal regulatory practices nor the effective enforcement of regulations, since they are only concerned with formal compliance with a number of criteria.

Data was collected for Croatia for the purpose of the present exercise on the basis of the OECD product market regulation questionnaire.<sup>10</sup> The first section deals with general regulatory policy issues, concerning public ownership; market access and competition issues; market structure and vertical relationships in utilities and other network industries. The second section covers regulatory and administrative policies, such as processes and capacities in the public administration. The third section covers administrative requirements for start-ups, both sole proprietors and corporations. The fourth section deals with the regulation of professional services (accountancy, legal, engineering, architectural). The fifth section covers regulation in transportation industries, focusing on market access, business conduct, and market structure in road freight, railways and passenger air travel. The final section covers regulation in retail distribution, focusing on the regulatory environment, industry behavior and prices. Information from Doing Business 2006 was used for a fifth section of the PMR - administrative burdens on startups.

The structure of the PMR system is shown in Figure 2. The system is composed of 16 basic or ‘low-level’ indicators, each capturing a specific aspect of the regulatory regime as described in Box 1. The basic indicators are progressively aggregated in more comprehensive policy areas.

> 10 Annex 2 presents responses to the OECD questionnaire provides the responses for Croatia and comparators .

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