affected by technology accumulation and diffusion as well as by market and regulatory integration. In addition, business services play a fundamental role in the process. The idea that growth is enhanced through a virtuous circle of technology accumulation, services and integration is confirmed by our empirical analysis.
In this paragraph we further develop this idea by performing a number of policy simulations to identify the contribution to growth of several policy actions that can be thought as parts of the implementation of the Lisbon Agenda. Note that the policy actions we discuss are, with some exceptions, under the jurisdiction of national authorities. Partial exceptions relate to the decrease in diffusion costs (which may be thought of as partially determined by EU level networks). As Kok (2004) discusses the disappointing performance of the Lisbon Agenda can be largely explained by lack of action at the national level
We perform the following simulation exercises12: a) elimination of the impact of regulation on services; b) deeper integration in the market for services; c) doubling of ICT spending; d) halving of diffusion costs as represented by distance; e) increase of 5% in the level of human capital in both receiving and sending countries; f) a combination of c) and e); g) a combination of a), c), and d).
We report the results of the simulations carried out over a ten year period for the rates of growth of the four endogenous variables, namely output, domestic and imported services, and technology (see figures 1-4) as differences with respect to the baseline (i.e. where the model is simulated with parameters taking on the estimated values). All of the simulated policy measures have a positive impact on output but the effects vary both in size and in pattern over time.
A persistent and significant impact over output is obtained in cases b) deeper integration in the market for services, and d) halving of diffusion costs. In both cases the quantitative impact is similar with rate of growth of output being about 1% higher over the simulation period. Interestingly, the impact of deeper integration in the market for services and of halving the diffusion costs, are also slightly increasing over time. The impact of doubling of ICT investment is also positive but much lower than the previous two cases and slightly decreasing over time.
The elimination of the effect of regulation on services also produces a positive and persistent effect on the rate of growth of output but this effect is lower than in the case of deeper integration in the market for services. Two reasons account for the different size of the impact. First, the impact of deregulation on output is indirect, i.e. it affects output through the higher provision of services, both domestic and imported. Second, deeper integration in the market for services could to some extent be associated with a common regulatory environment, partially captured through parameters beu and ceu.
Simulations with the non linear model have been carried out through Wymer’s APREDIC program (Wymer 2002).