The indicators are calculated on the basis of the qualitative and quantitative information obtained from questionnaire answers. Qualitative data are assigned a numerical value that allows ordering each of the possible responses to a given question. Quantitative information is ranked by subdividing it into categories based on a system of thresholds. The coded information is then normalized over a scale of zero to six. These data are then aggregated into basic or ‘low-level’ indicators by assigning subjective weights to the various regulatory requirements. Given the normalization of the basic data, all the low-level indicators also have a scale of zero to six, reflecting increasing restrictiveness of regulatory areas.<sup>11</sup> Basic indicators are then aggregated into broader regulatory domains. Higher level indicators are calculated as weighted averages of their constituent lower level indicators. The attribution of lower-level indicators to each higher-level indicator, and the weights used in the aggregation, are based on principal component analysis (Nicoletti et al., 1999). At the highest level of aggregation the overall indicator of product market regulation summarizes the restrictiveness of the regulatory framework in the product market. The structure of the PMR system, with progressive levels of aggregation, has the advantage of allowing a decomposition of higher-level indicators, with an increasing degree of detail, into the values of the more disaggregated indicators, each corresponding to specific regulatory provisions.

Data refer to the fourth quarter of 2007 for Croatia and Albania, to the second quarter of 2006 for Bulgaria and Romania, to end-2003 for OECD countries and 2004 for Brazil.

As to benchmarks, the most obvious ones for Croatia are Bulgaria and Romania, who accessed the EU in 2007, and the countries of Central and Eastern Europe that are also OECD members and that accessed the EU in a prior wave in 2004. These include the Czech Republic, Hungary, Poland and the Slovak Republic and we refer to them as the OECD CEE. The fact that the data for Bulgaria and Romania and for the OECD CEE are from 2006 and 2003 respectively, when these countries had not yet completely fulfilled the legislative and regulatory obligations connected with EU membership makes them interesting benchmarks. Nevertheless, when assessing Croatia’s relative performance, it should be kept in mind that the OECD CEE countries are likely to have made further substantial progress in various areas of product market regulation since EU accession.

Extension of the benchmarking exercise to Brazil, Mexico and Turkey offers a broader perspective on other middle income countries (MICs) with different historical experiences. Finally, comparison with the OECD or high income EU15 countries helps identify longer term objectives for policymakers.<sup>12</sup> These benchmarks are used in the graphs. However, Croatia’s score relative to the full sample of countries (30 OECD members plus Brazil, Ukraine, Bulgaria, Romania and Albania) is shown in Annex I for all PMR indicators.

> 11 The calculation of low-level indicators, including the weights used, is based on Conway et al. (2005). 12 EU15 countries are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom.

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