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Chapter 2: achieving sustainable improvements in living standards.

Luxembourg has achieved rapid and sustained growth over the past 25 years and living standards are the highest in the OECD. However, following the crisis, it now faces the possibility of weaker performance in the years to come even if living standards will remain high. This underlines the importance of structural policies to help boost growth and sustain high incomes. Apart from measures to improve the functioning of the labour market and raise public sector efficiency, there are a number of policy priorities. Education performance is relatively weak: it does not match the demand for high-skilled workers and makes it harder for residents to find jobs. Major reforms now underway to improve the education system are welcome. Product market regulations are highly restrictive of competition, particularly for professional services and in the retail sector. This leads to high prices and inefficiency. The weak enforcement of competition policy is due to inadequate resources and the fragmented structure of the competition authorities. Housing costs are high by comparison with the surrounding region and other financial centres. This contributes to large flows of commuters. While increasing housing supply is recognised goal, this has been frustrated by policy barriers that restrict house building. At the same time, housing demand is boosted by tax subsidies. The transport infrastructure is being upgraded and extended. However, the existing network could be used more efficiently through user charges. Luxembourg has the highest per capita C[O.sub.2] emissions in the OECD. It is committed to malting large reductions, and measures to increase energy efficiency are being put in place. The key problem, however, is large sales of motor fuels to people who live in the surrounding countries. Car taxes and fuel duties have increased but there is scope to go further.

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Luxembourg experienced a remarkably long period of continuous, sustained and rapid economic growth up to the recent recession. This transformed the economy and led to a large increase in per capita incomes, already among the highest in the OECD. At the same time, the social pressures of such rapid changes have been well managed in many respects and there has been only a modest rise in income inequality despite the development of the high-wage financial services sector. While economic performance over the cycle from 2003 to 2008 was broadly in line with developments since the late 1980s (Table 2.1), the level of potential output is likely to be lower than previously anticipated following the crisis and there is heightened uncertainty about long-run growth prospects (Chapter 1).

While living standards will remain high, the more uncertain outlook for future growth underlines the importance of structural policies to sustain growth and to provide flexibility should performance weaken. In particular, if the financial sector were to be negatively impacted by developments in markets or international regulation, new sources of growth would be needed. Furthermore, the case for reform is often difficult to make when the economy appears to be performing well: there have been few major reforms in Luxembourg in recent years, although significant changes are now underway in education and some important efforts have been made in other policy areas (Fontagne, 2009). A slowdown can therefore be a good opportunity to build agreement and undertake reform. Even if the economy continues to grow at a strong pace, improved policy would pay off as high growth itself creates bottlenecks, such as in transport and housing, which need to be addressed to ensure balanced and sustainable development. In recent years, the OECD has identified seven priority areas for structural policies in Luxembourg (OECD, 2010a): improving job search incentives, easing employment protection legislation and reducing implicit taxes on continued work are discussed in Chapter 3, while raising public sector efficiency is discussed in Chapter 1. This chapter outlines remaining structural issues that need to be addressed: improving the education system, increasing competition, tackling high housing costs, improving the transport system and "greening" the economy. Most of these policy areas have been identified as priorities in the OECD's Going for Growth framework but progress towards these objectives has generally been limited (Annex 2.A1). Implementing the measures identified would help to create jobs, boost growth and sustain overall living standards.

A major reform of education is underway

A well-educated and highly-skilled population is required to sustain strong labour productivity and high incomes for luxembourg residents. As discussed in the two previous Surveys, students' secondary school performance is relatively weak on average by international standards, as measured by PISA scores, and showed little improvement between 2003 and 2006. At the same time, the high school drop-out rate is relatively high and many young people have difficulties making the transition to the labour market, despite the strong growth of labour demand in recent years (Chapter 3).

Wide ranging reforms have been introduced to the education system from the 2009/10 school year (Annex 2.A1). Following pilot schemes, the overall approach is based on a new competencies-based framework and makes use of modular learning. These more flexible two-year cycles should help to lower the number of students forced to repeat the school year. In addition, reforms have been made to work practices with teachers now engaged in more team- and interdisciplinary-working, and head teachers have been made more accountable for the performance of their schools. Greater efforts have been made to help students from disadvantaged and migrant backgrounds, including greater flexibility about language requirements and more intensive support prior to full integration into the mainstream school system. Special needs education is now the responsibility of a single body. For early school-leavers with inadequate qualifications to integrate into the labour market successfully or continue with further or higher education, a law was passed in 2009 to create a system of ecole de la deuxieme chance. In tertiary education, the university has been a11ocated additional funding and continues to develop its activities. The current reforms and these other developments will enhance the education system and should lead to substantial improvements in the skills and prospects of Luxembourg residents.

Greater competition would increase productivity and make the economy more flexible

Stronger competition would help to improve cost competitiveness through lower prices, and more efficient and innovative provision of goods and services. Luxembourg's highly open economy and position within the greater region creates competitive pressures in many areas, but some sectors remain relatively sheltered. Competition in the domestic services sector is particularly weak. This sector is important in determining overall living costs and Luxembourg's attractiveness to foreign workers and companies. In addition, the services sector is labour-intensive. Allowing competition and encouraging expansion of these activities, such as retail, has the potential to provide jobs for Luxembourg residents who currently have difficulty entering or adhering to the labour market.

Strict product market regulations hinder competition

Competition is reduced by product market regulations (PMR): these are among the most restrictive in the OECD with only a handful of lower income countries having tighter policies. While there has been some easing in these regulations across OECD countries since 2003, these have actually become more restrictive in Luxembourg. Thus, its relative position is becoming increasingly out of line with the norm (Figure 2.1). While market access to network industries has become somewhat easier, state control of prices and on industries remains more common than in most other countries. Barriers to entrepreneurship are high with heavy administrative burdens on start-ups and a large array of sector-specific regulations. While some regulations are needed to ensure the good functioning of specific industries, the current burden is excessive and unnecessarily limits entry and hinders competition (Figure 2.2). Removing these regulations would boost productivity and create a more competitive economy: if Luxembourg were to reduce restrictive PMR to the 2Sth percentile of OECD countries, econometric estimates based on cross-country growth models suggest that the direct increase in GDP per capita could be of the order of 1.5%. More favourable competitive conditions would boost information and communication technology (ICT) investment, business research and development (R&D) expenditures, and employment for some groups. The EU Services Directive should be implemented swiftly.

[FIGURE 2.1 OMITTED]

Regulation of professional services remains particularly restrictive and there has been little reform in recent years. Regulation is among the most restrictive in the OECD for architects, engineers, and accountants (Conway and Nicoletti, 2006). Regulation of pharmacies is also strict (Paterson et al., 2003). Across professional service activities, licensing restrictions should be eased and certification used to protect standards without unduly restricting competition. The role of paraprofessionals can be increased. Ending restrictions on advertising would be beneficial, particularly those that hinder price competition. The rules governing business and inter-professional co-operation are restrictive. For example, it would be more efficient if accountants were permitted to incorporate with other professions such as tax advisors. Minimum or reference prices for architects and engineers should be removed. Furthermore, specific measures could increase efficiency and the quality of service in certain professions:

* For lawyers, a key problem is that the profession is self-regulating in the sense that it implements regulations covering its members and is responsible for disciplinary matters. This generates a conflict of interest and lacks transparency from the consumer's perspective. For instance, it is the profession rather than legislation which prevents lawyers from advertising their financial terms. An independent regulator for the legal profession would better protect consumers' interest: although there is an ombudsman, this role is usually undertaken by a senior lawyer. Such a reform is particularly necessary given the small number of lawyers in Luxembourg. The creation of a procedure for dealing with small claims, outside the monopoly of lawyers, would further improve the services available. The total number of notaires should not be restricted by law and the profession should be opened to all appropriately qualified EU citizens.

* For pharmacies, the overall number of outlets and the allocation of state concessions is determined by the Minister for Health based on a set of criteria, rather than allowing new pharmacies to open up if entrepreneurs expect them to be profitable. This can slow adaptation to changing needs and limits competitive pressures from new entrants. These restrictions can be removed. In addition, pharmacies and medical professionals have a monopoly of the sale of medicinal products. In many other countries such as Austria, Germany and the Netherlands, retail shops are able to sell a range of such products, providing greater choice and convenience.

[FIGURE 2.2 OMITTED]

There are a number of other important sectors which are relatively sheltered from cross-border competition and where regulations restrict competition, leading to high prices and less choice for consumers:

* In the retail sector, shop opening hours remain highly restricted with outlets required to close by 8 p.m. on working days and 1 p.m. on Sundays and public holidays. While agreement was reached in 2008 for five chains of stores to open until 9 p.m. on Saturdays and before some public holidays, flexibility remains limited. This reduces the productivity of the retail sector and adds to congestion. As argued in the previous Survey, more flexibility is required in planning decisions to support effective competition.

* Taxis are subject to a cap on overall numbers and licenses issued at the level of the commune, restricting choice and the development of an effective national taxi market. This leads to inefficiencies and, in some cases, a shortage of provision. There are high levels of consumer dissatisfaction with the service and high prices (Observatoire de la Competitivite, 2009). The taxi market should be deregulated and opened to competition subject to the minimum necessary requirements. While in some cases consumers may benefit from regulated rares, there seems to be no justification for limiting the overall number of taxis (OECD, 2007).

* Petrol retailing is subject to restrictions that may represent obstacles to price competition: based on the moving average of wholesale petrol prices, the government sets a maximum retail price, based on the price in Rotterdam and a margin for costs set in negotiation with the Groupement petrolier luxembourgeois, a federation of major oil companies (IEA, 2009a). All retailers must display this price, which is typically charged by the large petrol retailers and undercut by independents who account for around one-third of the market. This places a substantial administrative burden on the government to set the price and there is a potential conflict of interest where the retailers contribute to the cost-setting process. The retail market for fuel is highly concentrated with a Herfindahl index value of over 8 000 (based on the number of stations owned by each retailer) and is dominated by vertically-integrated retailers. (1) Fuel is not sold by other retailers, such as supermarkets. This creates the risk of collusive behaviour, which is a common feature of petrol retailing in OECD countries. Setting a price ceiling is one method of avoiding high monopolistic prices. However, it is an imperfect substitute for effective competition that could lower pre-tax prices, offering the prospect of either lower prices or higher government revenues. The potential effects of vertical integration are ambiguous, as this reduces competition at the retail level but may avoid a problem of inefficient double margins. Nevertheless, the experience of other OECD countries suggests that a strong independent sector can help to discipline vertically-integrated suppliers and lead to a more competitive outcome (OECD, 2008a). While there is risk that removing the ceiling puts independents out of business through a price war, a more desirable outcome is to remove the maximum price when the competition authority is in a position to enforce effective competition.

The enforcement of competition policy is weak

The enforcement of competition policy is weak within Luxembourg. Although EU competition law is applied and cases involving some large Luxembourg undertakings have been investigated by the European Commission, few measures have been taken to ensure effective domestic competition. The competition authorities have very limited resources even compared with other small countries (Table 2.2). Furthermore, resources are split between two institutions: the Investigation Division for Competition Affairs and the Council for Competition Matters (chaired by one person). It is therefore unsurprising that there has not been a single successful case brought against uncompetitive practices nor any pleas for leniency. As the Council is not able to direct the Investigation Division, prioritisation of the use of the scarce resources tends to be driven by specific complaints, which is ineffective.

It is important to increase rapidly the effectiveness of competition enforcement. Time is required to build up the necessary case law and to earn the reputation that would create the necessary deterrence effect that other smaller OECD countries have begun to achieve. The resources of the competition authorities need to be increased and the current institutions replaced by a single unified agency as is envisaged in draft legislation. In addition, the scope of its mandate ought to be widened to include an enlarged advisory function and the publication of sectoral reports in line with practice in other countries. These sectoral reports could investigate thoroughly competition issues in such areas as professional services and retail. This is particularly important given that product market regulations are relatively restrictive. Despite the highly open economy, there is scope for anti-competitive practices.

Housing costs are driven up by weak supply and tax subsidies

Housing costs in Luxembourg are high. Housing in Luxembourg City is among the most expensive of European capital cities and financial centres (ERA Immobilier). House prices are also much higher than in neighbouring regions, with the average apartment price in the region of Lorraine around EUR 1 800 per square metre compared with EUR 3 300 in Luxembourg (Immoprix, STATEC, Observatoire de l'habitat). This contributes to cross-border commuting as workers find it too expensive to live in Luxembourg. It has also led to increasing numbers of Luxembourg's citizens moving across the borders. This effect concerns the young especially: while the overall home ownership rate in 2000 was broadly the same as in Belgium, the rate among 25 to 34 years olds was significantly lower. These trends have been exacerbated by rising house prices and rents in recent years (Figure 2.3). (2) The affordability of housing is further complicated by the low share of the rental market, which represents only 30% of total housing market compared with 45% in France and 57% in Germany (OECD, 2008c).

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The housing challenges were explicitly recognised in 2002 in the Integrated Traffic and Territorial Development Concept for Luxembourg known as "IVL" (ministere de l'Interieur, 2002). This outlined two alternative scenarios for economic development until 2020: the first scenario primarily involved an increasing number of cross-border commuters (filling 75% of new jobs), while the second was based on a more balanced mix between commuting and increasing residency (40% of new jobs filled by cross-border commuters and an increase in the number of residents to 560 000 by 2020). While policy aimed to achieve the second scenario, the employment expansion in subsequent years has continued to depend primarily on the increase in cross-border commuting.

Supply constraints are a key explanation for the rapid growth in housing prices. Many of these barriers are policy-induced. According to official projections, around 3 400 new dwellings need to be built each year to keep up with the growth of housing demand. However, this rate has never been reached in the past twenty years with an annual average of around 2 300 new dwellings constructed. This development has continued the pattern of urban sprawl and low-density development. The anaemic housing supply in the presence of potentially available building plots and large price differentials across national borders indicates deep institutional barriers to new housing developments (OECD, 2008c). Firstly, existing regulations and exceptionally low property taxation encourage land hoarding, when further land price increases are expected. Secondly, current property owners have no incentive to vote for local policies promoting increased housing supply, while communities have strong autonomy in spatial planning. Thirdly, administrative procedures related to housing authorisation are very cumbersome, cover multiple administrative fields and require complex co-ordination among different actors. Finally, housing policy has been complicated by the fact that the right of expropriation has been blocked since 2003 and the right of pre-emption has only existed since the Housing Pact law introduced at the end of 2008. Furthermore, Luxembourg's tax system is very favourable to owner occupation of housing. The taxation of imputed rents in a way that is neutral with respect to other assets is extremely difficult and many countries' tax systems are biased towards housing. However, the tax subsidy in Luxembourg is particularly large compared with other euro area countries (van den Noord, 2005): effective property taxes are low because the rates are applied to valuations that are far below the current market level; mortgage interest payments are deductible from income tax up to a ceiling; capital gains on principal residences enjoy favourable taxation; and there are interest rate subsidies. Given the restricted supply of housing, one of the main effects of these demand subsidies is to raise housing costs.

The Housing Pact law, introduced in 2008, aims to provide stronger incentives to local authorities to stimulate new housing development. Localities that sign the Pact and adopt national strategic priorities in their General Planning Programs (PAGs) will benefit from additional financial resources. To reduce the administrative burden, there is a five-year initiative to review, revise and simplify procedures affecting construction project authorisation. This will help, although the administrative simplification programme could be speeded up. However, more comprehensive housing reforms are required. This should include reform to property taxes to encourage sales of building lots and restoring expropriation for public purposes. The creation of a public land agency with broad powers, endowed with the right of pre-emption, could also be considered. Regular monitoring of land and housing prices in Luxembourg against neighbouring regions would provide quick feedback about progress in easing supply constraints.

The transport infrastructure needs to be upgraded and used more efficiently

The pressure of a large and increasing number of commuters leads to congestion, excessive strain on transport infrastructure and environmental challenges (OECD, 2008c). These pressures stem from both resident and cross-border commutes, which are broadly similar in number. High and increasing number of commutes among residents is reflected in Europe's highest car ownership rate and one of the highest annual distances covered by automobile per capita. For cross-border commutes, 85% are made in passenger cars without use of public transport. These patterns lead to alarming levels of congestion on the main road transport corridors and there are now severe bottlenecks at the entrance to urban areas, notably in the city of Luxembourg. This results in wasted time, unsafe driving conditions, noise and high levels of emissions and local air pollution. These quality of life problems also reduce the attractiveness of the Luxembourg labour market for highly skilled professionals.

Luxembourg has followed since 2004 an integrated strategy to tackle transport problems through the IVL (see above) combining planning of housing, transport and sustainable development. This approach is reflected in the draft Transport Sector Plan (PST), formulated in October 2008, involving all levels of national administration and key stakeholders. It sets out a multi-year financing schedule for 49 infrastructure extension and upgrade projects, notably in railway transport. The fiscal stimulus package included measures to speed up investment in these areas. The objective is to encourage a shift in the modal split from individual to public transport so that the share of public transport doubles to 25% by 2020. Several initiatives have already been put in place, including extension of train and bus connections, construction of park and ride centres and promotion of car-sharing.

An important area for further progress is enhancing co-operation with the adjacent regions. This process began in 1995 but has been complicated by the large number of actors in the region and difficulties with cross-border burden-sharing. Luxembourg has provided financial support to extend public transport beyond its borders, including infrastructure projects such as the high-speed rail line. Unified ticketing systems have been put in place and some rail and bus lines operate into neighbouring regions with full or partial financial support from Luxembourg. In the near term, making multilateral and bilateral technical and commercial co-operation with neighbouring regions more effective is a priority, including the exchange of traffic data, coordination of timetables, harmonisation of fares and the wider introduction of mixed travel passes. Luxembourg should continue to be prepared to finance key infrastructure projects beyond its national borders. Finally, while the upgrade of public transportation infrastructure is essential, changes in commuters' incentives are needed, including increases in fuel prices.

While providing additional public infrastructure and subsidies may help, changing the relative price of different transport choices may be an effective way of changing commuting patterns, particularly in the longer term. To date, a system of restrictions on the number of parking spaces within the Luxembourg City has been used to tackle congestion. While there is a system of vignettes for heavy goods vehicles differentiated by their level of emissions, there is no direct user-charge for roads. Introducing a system of congestion charging around Luxembourg City and congested road bottlenecks may help to induce a shift towards public transport or sharing of car journeys. By charging for each journey, this policy solution would help to align the private costs of undertaking a journey with the congestion externality exerted on other road users. In addition, with appropriate differentiation of prices, congestion charging could improve the efficiency with which new infrastructure is used by, for example, encouraging road users to shift their journeys from peak periods to other times when the infrastructure is less intensively used. The experience of similar schemes in London and Singapore could be considered. Such a scheme should be introduced in a non-discriminatory way for both residents and those living in other countries. While such initiatives could reduce the attractiveness of working in Luxembourg for cross-border workers, this could be offset by other policy measures such as increasing the tax deduction granted to commuters.

"Greening" the economy will be a major challenge

Luxembourg's environmental policies have achieved significant progress in recent years but there remain strong pressure on sustainability in terms of air quality, waste, water and land use. The measured intensity of environmental pressures is often influenced by the large volume of commuters, which adds to strains imposed by high levels of consumption and rapid economic growth. A recent review by the OECD of environmental performance makes a wide-ranging set of recommendations to strengthen environmental sustainability (OECD, 2010b). Recurrent themes from this analysis include: the need to implement environmental commitments more effectively; strengthening the application of the polluter-pays principle; ensuring that environmental objectives are met in the most cost-effective way; and better policy co-ordination within the Luxembourg government and with authorities in the wider region.

Limiting the emission of greenhouse gases to mitigate climate change will be a major global challenge in the coming decades. Luxembourg has the highest per capita C[O.sub.2] emissions in the OECD (Figure 2.4). It is committed to playing its part in this process through international and EU agreements. It is required to reduce its greenhouse gas emissions to 28% below their 1990 level for the period 2008-12. Further ahead, emissions from 2005 to 2020 should be on average around 20% lower than their 2005 levels. This is a major challenge and the required percentage reductions are the largest in the European Union. EU targets further mandate that the share of renewable energy in final consumption should rise from under 2% today to 11% by 2020, including a tenth of transport fuels to come from renewable sources, and that energy demand should fall by one-fifth from business-as-usual levels.

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These objectives will be difficult to achieve. There is some scope to use the "flexibility" mechanisms that allow Luxembourg to purchase reductions in its emissions from elsewhere. The European Union Emission Trading System scheme (ETS) is the mechanism for addressing emission from six high-emitting stationary sources of emissions (OECD, 2009). In 2008, the Luxembourg government published the National Energy and Efficiency Action Plan (NEEAP). This aims to reduce energy use by 2016 to 9% below its average level from 2001 to 2005. Almost half of the planned reductions arise from increasing the energy efficiency of residential buildings, including a higher level of building standards in terms of energy efficiency. Taxing residential heating fuel would help to provide better incentives to raise energy efficiency. In 2007, there were important changes in motor vehicle taxes to favour owners of cars with smaller engines and lower emissions. Furthermore, a car scrappage scheme introduced during the crisis was designed to reduce emissions from the stock of cars, although take up appears to have been limited.

The essential problem, however, is high sales of petrol and diesel in Luxembourg to non-residents. These are counted towards Luxembourg's emissions. Cross-border purchases represent 75% of sales. This partly reflects the large number of cross-border workers coming into Luxembourg by car each day, which in turn is related to problems of housing and transport policy, as well as road hauliers transiting through the country. However, the decision to purchase in Luxembourg is driven by low taxes compared with nearby regions: the final price of fuel in 2008 was in the range of 13 to 24% higher in the neighbouring countries (IEA, 2009b). (3) The effects of raising fuel taxes are complex given both the cross-country nature of emissions and the tax base (Box 2.1). Luxembourg has already increased taxes in recent years through the so-called "Kyoto tax". This raised excise duty on petrol by 2 cents and diesel by 1.25 in 2007 with a further increase in line with the EU directive on the taxation of energy products of 1.25 cents for diesel in 2008. However, consideration should be given to further increases as part of the overall package of measures to reduce emissions of green house gases.
Box 2.1. Raising the price of fuel

Reducing demand in Luxembourg for transport fuels (petrol and
especially diesel) is necessary to meet commitments to cut the
emissions of greenhouse gases. Per capita motor fuel sales in
Luxembourg are currently very high by international comparison,
reflecting important cross-border fuel sales to foreign households
and of diesel to the road haulage industry. This is encouraged by
Luxembourg taxing fuel less heavily than the neighbouring
countries, both through lower excise duties and value-added taxes.

There are several effects of increasing the taxation of motor fuels
in Luxembourg given the strong possibility of cross-border
purchases. Increasing taxes would tend to raise the post-tax price,
although not necessarily by one-for-one given the market power of
retailers. This would lower demand through two channels. Firstly,
the incentive for cross-border fuel purchase would be reduced and
more fuel would be purchased in the surrounding regions. Secondly,
the low taxation in Luxembourg effectively sets the lowest price in
the region and hence the overall effective fuel price in the region
would be higher. Only the second of these channels would lead to
lower overall emissions. This would work through the impact on the
transport choices of cross-border workers. It might also affect
Luxembourg's high rate of car ownership and the emissions-intensity
of car choices.

In financial terms, Luxembourg's tax take would be higher on each
litre of fuel sold but this would tend to be offset in terms of
total revenues by reduced fuel sales in its jurisdiction. As a
large part of these revenues come from foreign residents, this
would be a loss to national income rather than simply a change in
transfers within Luxembourg. However, the cost of reducing
emissions in other ways to offset emissions related to automotive
fuels also needs to be taken into account so the government would
save this cost if fuel sales were to fall.

The net impact of these effects depends critically on the
price-elasticity of fuel demand. These are difficult to evaluate
when the economy is undergoing rapid structural change, oil prices
are extremely volatile and with strong cross-border effects.
Government policy is based on estimated elasticities of 0.5 in the
short term and up to 1.6 in the long term (ministere de l'Economie
et du Commerce exterieur, 2006), which are somewhat higher than
commonly assumed for countries with less open fuel markets. Based
on these elasticities, it is likely that some increases in taxation
would be beneficial when the cost of carbon emissions permits is
taken into account.

In a broader sense, lower fuel sales in Luxembourg would partly be
offset by increases elsewhere, so the impact of this policy on
overall emissions would be limited. In addition, taxes on motor
fuel in the European Union are already much higher than is
consistent with the implied cost of emissions derived from the ETS,
although there are other public finance arguments that are relevant
to determining the appropriate level of taxation. The main
justification for higher fuel taxes in Luxembourg stems from the
externality imposed by the tax levels in neighbouring countries:
while high taxes there shift revenue to Luxembourg, there is a
parallel shift in recorded emissions that needs to be priced
correctly. In addition, Luxembourg's commitment to meeting most of
its Kyoto objectives through reducing its own emissions rather than
through "flexible mechanisms" may mean that it ultimately pays a
higher price for abatement than other countries.

Box 2.2. Summary recommendations to support sustainable growth
Education

* Continue to implement and monitor ongoing reforms to the school
system.

Competition policy

* Encourage competition by removing unnecessary administrative
burdens on starts-ups, licensing requirements and price controls.

* For professional services, remove restrictions on advertising and
make co-operation between professions easier. Remove minimum or
reference prices. For the legal profession, eliminate the cap on
the number of notaries, establish an independent regulator and
introduce a special procedure without the need for legal
representation for small claims. Remove the restriction on the
number of pharmacies and allow pharmacists to offer generic
medicines as substitutes for prescribed drugs, as well as allowing
the sale of some medicinal drugs by other retailers.

* For the retail trade, make shop opening hours more flexible. When
the competition authority has sufficient capacity, remove the price
ceiling for motor fuel retailing.

* Remove restrictive regulations fixing the number of taxis and
their ability to compete.

* Increase the resources for enforcement of competition policy to a
sufficient level. Replace the existing two-tier structure with a
single authority and extend its mandate to producing sectoral
reports.

Housing, transport and climate change

* Encourage housing supply through simplification of construction
authorisation, removal of tax incentive for property hoarding, and
the creation of a public land agency with broad powers to enforce
housing policy objectives. Consider changes to the tax system to
reduce the bias in favour of housing.

* Continue investment and further enhance co-operation with
adjacent regions to increase the capacity of the public transport
system.

* Consider introducing a system of congestion charging to increase
the efficiency of the use of the road network.

* Further increase the taxation of petrol and diesel to reduce
Luxembourg's carbon emissions.


ANNEX 2.A1

Progress in structural reform

This annex reviews actions taken on recommendations from the previous Survey that are not fully covered in the main text.
Past recommendations               Action taken since the June
                                   2008 Survey

                           EDUCATION

Improve the match between the      Major reforms are underway:
education system and the need
for high-skilled workers,          * In pre-primary and primary
including reworking the              education, a new law in 2009
curriculum, deemphasising and        introduces a competence-based
redesigning language education       approach.
and improving the funding of
higher education.                  * Reforms have been introduced
                                     to in-service training for
                                     teachers and the institution
                                     in charge of the assessment of
                                     school standards (Service de
                                     Coordination de la Recherche
                                     et de l'Innovation
                                     Pedagogiques et
                                     Technologiques).

                                   * There has been a reform of
                                     the vocational education and
                                      training system since 2008.

                                   * A new framework for dealing
                                     with early school leaves has
                                     been introduced (Ecole de la
                                     deuxieme chance).

                                   The competence-based approach
                                   introduces a new approach to the
                                   teaching and evaluation of
                                   languages. Teaching of languages
                                   is intended to be more
                                   structured and effective.

                                   In addition, reforms are planned
                                   to the structure of the upper
                                   division of secondary education
                                   (including a more differentiated
                                   curriculum for the language
                                   teaching); the first cycle after
                                   primary education; and the
                                   initial training of secondary
                                   school teachers.

                                   The University of Luxembourg now
                                   offers 12 bachelor programmes
                                   and 21 master programmes. It has
                                   123 professors and post-
                                   doctoral assistant-professors
                                   for 4 365 students. The budget
                                   increased more than 2.5-fold
                                   from 2005 to 2009 to reach EUR
                                   86 million.

Restrict the extent of tracking    In the lower section of several
in lower secondary education in    technical secondary schools,
all schools and raise the age at   tracking has been restricted. If
which tracking decision is made.   the PISA 2010 results confirm
                                   apparent gains, restricted
                                   tracking in the lower section
                                   will be introduced in all
                                   technical secondary schools.

Increase the accountability of     The results of students of all
schools for educational results    secondary and technical
by publishing tests results        secondary schools in the final
corrected for socio-economic       examination are published every
background.                        year by the Ministry of
                                   Education.

Strengthen the role of             The reform of pre-primary and
headmaster by giving more          primary education foresees the
decisional freedom and using       creation of a "school committee"
contract renewal to reward good    for each school to increase
performance.                       managerial autonomy and
                                   responsibility. The role of the
                                   inspectorate will be reviewed to
                                   improve quality control. This
                                   builds on earlier reforms to
                                   raise the autonomy and
                                   accountability in secondary and
                                   technical schools.

                                   Time-limited contracts have been
                                   introduced for headmasters.

Merit-based remuneration and       The presence at school of
promotion should be introduced     teachers in primary and
for teachers and teaching hours    secondary schools has been
expanded to increase interaction   increased by two hours per week
with students and extra-           to encourage interaction with
curricular activities.             students, parents and extra-
                                   curricular activities.

                         HEALTH
                                   The Minister of Health and
                                   Social Security is preparing a
                                   reform bill on the health care
                                   system to increase the
                                   efficiency of the system and
                                   guarantee the financial
                                   equilibrium of the health care
                                   insurance.

Encourage the Union des Caisses
de Maladie to act as a "wise"
purchaser based on up-to-date
cost-efficiency analysis and
international benchmarks.

Expand the health care reserve
funds to pre-fund future costs.

Maximise the economies of scale
from the merger of health
insurance funds and bringing in
the four remaining funds.

Increase out-of-pocket payments
for ambulatory care
substantially, possibly
facilitated with tax credits for
poorer households.

Make hospital managers
accountable for outcomes and
budget decisions. Consider
introducing activity-based
funding through a
Diagnosis-Related Group (DRG)
system, taking into account
capital and staff costs.

Increase standardisation of
medical care by introducing
clinical guidelines and
pathways, and holding doctors
more accountable.

Remove the distinction between
the three hospital regions to
allow hospital services to be
designed on a national basis.

Facilitate treatment abroad with
appropriate safeguards by
reducing the administrative
burden for surgery abroad and
introducing the
"money-follows-the-user"
principle.

Use of the harmonized electronic
patient dossier should be
further promoted to strengthen
control of use of ambulatory
care.

Base doctors' remuneration on a
system mixing capitation and
for-service fees.

Monitor doctors' prescribing
more closely and sanction poor
practice.

Update the positive drug list
more regularly and differentiate
reimbursement rates based on the
relative effectiveness and cost
of the drug.

Remove the statutory barrier on
the number of pharmacies and
allow pharmacists to offer
generics.


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Notes

(1.) The index is on a scale between 0 and 10 000, the latter corresponding to a pure monopolist. This analysis is based on the number of petrol stations in January 2005 as measured by the Groupement petrolier luxembourgeois. In the United States, anti-trust authorities consider a market with a Herfindahl based on sales of over 1 800 "highly concentrated".

(2.) There have been significant improvements in the availability of housing data for Luxembourg. STATEC now publishes a quarterly indicator based on detailed transaction data covering apartment prices collected by the land registry (Aclministration de l'enregistrement et des clomaines). This gives prices per square metre.

(3.) Excise duties on diesel were raised in 2008 in line with the EU directive related to minimum levels of taxation on energy prices. The rate is now similar to that in Belgium but well below the rate applied in France and Germany. In addition, the VAT rate of 15% is well below the rates applied in neighbouring countries.
Table 2.1. Summary of structural economic developments
Average annual growth rates

                                   1988-2008   2003-2008

Trend GDP growth                      4.8         3.9
Labour productivity (1)               1.8         0.6
Labour utilisation                    3.0         3.3
Average hours                        -0.4        -0.2
Employment                            3.4         3.5
   Contribution of residents          1.2         1.4
     Employment rate (level) (2)     62.4        64.6
     Working-age population (2)       1.2         1.7
NAIRU (level)3                        2.9         3.9
Contribution of                       2.2         2.0
  non-residents

(1.) Labour productivity in terms of hours worked.

(2.) Calculated for residents only.

(3.) Non-Accelerating Inflation Rate of Unemployment.

Source: OECD, OECD Economic Outlook 86 database.

Table 2.2. The competition authorities have few resources

                                                   Number
             Competition authority                of staff   Population

Iceland      Icelandic Competition Authority         30         319 300
Ireland      The Competition Authority               51       4 422 100
Luxembourg   Investigation Division for               4         488 600
               Competition Affairs and
               Council for Competition Matters
Slovenia     Competition Protection Office           18       2 021 300

Source: Annual reports of the national competition authorities and
OECD, OECD Economic outlook database.
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Date:May 1, 2010
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