Is legislation grease or sand to economic growth? An econometric analysis using data from Italian regions before and after the 2008 crisis

Abstract

In this paper the impact of legislation on the GDP growth rate is investigated, both before and after the great economic and financial crisis of 2007–2008. The analysis has been performed using data from the twenty Italian regions from 1995 to 2016. Using several econometric models, the most significant result shows that flows of legislation can push economic growth into a recovery phase of the business cycle, while they should be reduced during recession phases, as they constitute a constraint to economic growth.

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Fig. 1
Fig. 2
Fig. 3

Notes

  1. 1.

    The laws (legislation) constitute the primary legislation. The regulations (or rules) are the secondary legislation issued by government and executive agencies as a way to enforce laws passed by lawmakers (Taylor 2010).

  2. 2.

    For the definition and explanation of business cycle phases, see Zarnowitz (1992).

  3. 3.

    In this research the social costs and social benefits are considered, instead of welfare, to measure the impact of economic policies like laws and regulation. Therefore we rule out the problem of income inequality distribution due to legislation, keeping the share of welfare among the agents of the economy steady. The problem of income redistribution is only indirectly considered because is outside the scope of this paper.

  4. 4.

    den Hertog (2010) affirms that “The inefficiency in the allocation of resources in the absence of regulation is again depicted by the curve EL.”.

  5. 5.

    Masur and Posner (2017) states: “ … The two theories imply different things about regulation. If Summers is right, then the government needs to engage in stimulative policy, one in which cutbacks in regulation may play an important part if monetary policy is failing (as many believe) and government spending is stymied by gridlock. If Gordon is right, stimulus will do no good, and we need to become accustomed to low rates of economic growth. In Gordon’s world, regulation could even become more stringent: as the returns of investment fall, the opportunity cost of regulation falls as well, which should be reflected in a reduction of the discount factor used in cost–benefit analyses of regulation. All of these issues must be resolved. But the regulatory component of macroeconomic policy deserves more consideration than it has received …”.

  6. 6.

    Loeper (2011) affirms that “… Non-uniform consumer protection rules, accounting norms, or governance rules also increase legal uncertainty and compliance costs for firms which produce or invest in different jurisdictions…”.

  7. 7.

    Broughel (2017) underlined that legislative complexity has risen sharply in the last few years.

  8. 8.

    The conflicts (actual and potential) between domestic laws and European legislation are solved by the European court, while the conflict between domestic law and the constitutional Charter is decided by the Italian Constitutional court.

  9. 9.

    Pursuant to the limits of article 117 of the Constitution of the Italian Republic.

  10. 10.

    In matters not listed in article 117 of the Constitution of the Italian Republic.

  11. 11.

    The main difference between the regions with special status and the ordinary status is that while the ordinary statute is adopted and modified by regional law, the special statute is adopted by constitutional law, as well as any change thereof.

  12. 12.

    The overall outcome of the constitutional reforms was an increase in the powers of the fifteen regions with ordinary statutes, thus reducing the gap between them and the five special ones.

  13. 13.

    Art. 117 subsection 2 of Italian Constitutional Chart says “Concurrent legislation matters are those relating to: international relations and with the European Union of the Regions; foreign trade; job protection and safety; education, without prejudice to the autonomy of educational institutions and with the exclusion of vocational education and training; professions; scientific and technological research and innovation support for production sectors; health protection; supply; sports order; civil protection; territorial government; civil ports and airports; large transport and navigation networks; ordering of communication; national energy production, transport and distribution; complementary and supplementary pension; coordination of public finance and the tax system; enhancement of cultural and environmental heritage and promotion and organization of cultural activities; savings banks, rural banks, regional credit companies; regional land and agricultural credit institutions. In matters of concurrent legislation, the Regions have legislative power, except for the determination of the fundamental principles, reserved to the legislation of the State.”.

  14. 14.

    Decarolis and Giorgiantonio (2015) wrote: “ …in the development of national legislation, there has been a proliferation of regulatory initiatives at the local level (Regions, Provinces and Municipalities). This has led to a significant instability of the regulatory framework, leading to uncertainty for public and private operators in the sector. …” (see also Decarolis and Giorgiantonio. 2014).

  15. 15.

    Palermo and Wilson (2014) argue that: “ … while the legal framework for decentralisation remains unclear and contradictory in parts, the Constitutional Court has performed a key role in interpreting the provisions and giving life to the decentralised system, in which regional governments now perform a much more prominent role. This new system of more decentralised multi-level government must nevertheless contend with a political culture and party system that remains highly centralised, while the administrative apparatus has undergone no comparable shift to take account of state decentralisation, leading to the duplication of bureaucracy at all territorial levels and continuing conflicts over policy jurisdiction”.

  16. 16.

    For the advantages of coordination in the presence of negative externalities due to decentralization, see Klibanoff and Murdoch (1995).

  17. 17.

    A specific mechanism exists for regional opinions to be taken into account during the EU legislative process. EU proposals are transmitted to the CRPA, the Conference of the Presidents of the Assembly of Regional Councils and of Autonomous Provinces and to the presidents of the regional executive committees and of the regional councils, which have twenty days to submit their comments to the central Government. In the case of EU legislation of importance for the Regions and Autonomous Provinces, or at the request of one or more Regions or Autonomous Provinces, the Government convenes the State-Region Conference to reach a common decision within twenty days (after which—or in case of urgency—the government can proceed). If the State-Region Conference so requests, the Government undertakes for 20 days not to express an opinion in the EU Council.

  18. 18.

    It is worth noting that if it is difficult to coordinate the law-making process of the European Union, the State, regions and the Constitutional Court. It is quite impossible to ensure that all the regions follow the same pattern in their law production during the phases of a business cycle.

  19. 19.

    In this paper we do not consider the trade-off between growth and income distribution, an issue clearly explained by Barro (2001) and Benhabib (2003).

  20. 20.

    In consideration of the novelty of the analysis of the impact of legislation on the growth rate of the economy, it is not possible to trace this type of analysis to any of the main economic cycle models, namely: (i) Kitchin's short cycle, based on changes in stocks and with a short duration, from 2 to 4 years; (ii) Juglar average cycle, based on changes in credit and bank reserves, of 4–10 years; (iii) Kondratiev's long cycle, of much longer duration (50–60 years).

  21. 21.

    In Italy four different business cycles were detected from 1996 to 2016 (see ISTAT 2018, pp. 22), using the methodology developed by Bai and Perron (1998).

  22. 22.

    Dagher (2018) uses the metaphor of “regulatory pendulum”, to explain the dynamic pattern of regulation that increases during the recovery phase of the business cycle, and falls in times of recession.

  23. 23.

    Regional laws are used to perform distributive spending in district-specific transfers (e.g., pork barrel spending) (Battaglini and Coate 2007).

  24. 24.

    The costs of complexity consist of: (i) legislation costs: resources spent on making law (including influence costs); (ii) information acquisition costs: time spent on verification and interpretation of the rule (including expenditure on advisors); (iii) decision costs: resources spent on analysis of the consequences—private compliance costs (implementation costs); (iv) public compliance costs: costs of enforcement by government agencies and courts In standard neoclassical economics the costs of complexity are simply ignored. (Thomsen 2011).

  25. 25.

    Loeper (2011) affirms that “ … Non uniform consumer protection rules, accounting norms, or governance rules also increase legal uncertainty and compliance costs for firms which produce or invest in different jurisdictions …”.

  26. 26.

    For a formal derivation of Fig. 1 following Klibanoff and Morduch (1995), we assume that the costs of negative externality of coordination EC are a function of the indicator of legislative complexity aci, such that EC = f(aci), with dEC/d(aci) > 0 and d2EC/d(aci)2 > 0, and GDP = g[f(aci)], under conditions that dGDP/d(aci) > 0 and d2GDP/d(aci)2 < 0.

  27. 27.

    The sentences by the Constitutional Court of Italy have the same effects on all the twenty regions regarding national law. In the hypothesis where the constitutional court made a sentence regarding a regional law the effects are limited to the borders of the region in question. This happens occasionally and is ignored in what follows.

  28. 28.

    We also apply the Dumitrescu and Hurlin (2012) test in the pre-crisis period, which is the only period in which the test can be performed due to the limited time dimension of our data, and find that \(aci\) appears to Granger-cause \(reggrowth\) at the 0.01 significance level and not vice versa.

  29. 29.

    We are in debt to Giovanni Ramello for this kind suggestion.

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Acknowledgements

We are grateful to the Editor, prof. Alain Marciano, the two referees whose comments were helpful in order to improve this paper. The usual disclaimer applies.

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Di Vita, G., Ferrante, L. Is legislation grease or sand to economic growth? An econometric analysis using data from Italian regions before and after the 2008 crisis. Eur J Law Econ (2021). https://doi.org/10.1007/s10657-021-09687-5

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Keywords

  • Business cycle
  • Deregulation
  • Economic growth
  • Financial crisis 2007–2008
  • Italian regions
  • Legislative complexity
  • Polycentricity

JEL Classification

  • O17
  • O43