Africa's trade in services and the opportunities and risks of economic partnership agreements

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Services matter for economic growth and development. In most non-oil producing sub-Saharan African countries, the services sector is now the largest part of the economy, and as countries develop, the importance of the services sector tends to rise further. The provision of clean water, effective sewerage, a stable supply of energy, and access to education and health services is critical to increasing welfare and alleviating poverty. Services, such as telecommunications, energy, transport, and business services are important inputs into the production of goods and other services and hence influence productivity and competitiveness. Increasing the availability, affordability and quality of these services is crucial for economic growth and poverty reduction in all developing countries. In this context, international trade can play a key role in the development of services sectors in Africa. Opening up to services imports and foreign direct investment can be an effective mechanism to increase competition and efficiency in the provision of services in the domestic economy. In addition, services offer dynamic new opportunities for exports, but too often services are overlooked as a source of export diversification, with trade policies focusing solely on goods. Exports of services are of particular importance for land-locked countries for which opportunities to diversify into the export of manufactures is more limited by the high costs of transporting goods.
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60103 Africa's Trade in Services and the Opportunities and Africa Trade Policy Notes Risks of Economic Partnership Agreements Note #6 Paul Brenton, Nora Dihel, Larry Hinkle and Nicholas Strychacz August, 2010 Introduction Services matter for economic growth and of services in the domestic economy. In development. In most non-oil producing addition, services offer dynamic new sub-Saharan African countries, the services opportunities for exports, but too often sector is now the largest part of the services are overlooked as a source of export economy, and as countries develop, the diversification, with trade policies focusing importance of the services sector tends to solely on goods. Exports of services are of rise further. The provision of clean water, particular importance for land-locked effective sewerage, a stable supply of countries for which opportunities to energy, and access to education and health diversify into the export of manufactures are services is critical to increasing welfare and more limited by the high costs of alleviating poverty. Services, such as transporting goods.1 telecommunications, energy, transport, and business services are important inputs into However, trade opening may need to be the production of goods and other services coordinated with regulatory reforms to and hence influence productivity and ensure efficient outcomes, while additional competitiveness. Increasing the availability, policies may be necessary to ensure that affordability and quality of these services is public policy objectives regarding equity are crucial for economic growth and poverty achieved. This emphasizes the importance reduction in all developing countries. of developing the capacity to define and implement sound regulatory policies for In this context, international trade can play a services sectors, capacity that is limited in key role in the development of services many African countries. sectors in Africa. Opening up to services imports and foreign direct investment can be 1 Indeed, over the past 10 years exports of services an effective mechanism to increase from non-oil exporting land-locked countries in competition and efficiency in the provision Africa have increased at a rate more than 3 times faster than their exports of goods. 1 and the adjustment costs that arise from This policy note examines the role that service sector reforms are likely to be lower international trade agreements, particularly than those arising from reducing protection the Economic Partnership Agreements of goods. This is because the dominant (EPAs) that are currently being negotiated mode of cross-border supply in many with the European Union (EU), can play in services sectors is through commercial supporting coordinated trade and regulatory presence (mode 3), which means that reforms. Such reforms will enable African services will likely continue to be produced countries to exploit the considerable locally, albeit following investment and the opportunities for the expansion of trade in transfer of expertise and assistance by services both within Africa as well as with foreign firms. the global market. The note discusses the key issues that EPAs will have to address if However, liberalizing services trade can be they are to support the development of more complex than the liberalization of service sectors in Africa, while recognizing goods trade and requires considerable that EPAs might not necessarily be the most technical capacity, which is often lacking in effective way to pursue service sector Africa. The complexity arises from the reform for all African countries. The note necessity for many services sectors to be proceeds by first reviewing the role that regulated in order to ensure that they operate trade liberalization can play in the reform of efficiently in the face of market failures. services sectors. Opening up to services trade in the absence of appropriate regulations may not Trade Liberalization and Regulation of necessarily increase trade and generate Services sectors greater efficiency in the provision of services and hence. Trade policy plays an important role in determining the nature of competition in It may also be necessary to put in place domestic services sectors. Countries that mechanisms to ensure that social objectives place restrictions on foreign service regarding access to key services are not providers may limit access to the most compromised by trade reform. The efficient suppliers and the best technologies, challenge is to achieve an appropriate and deny producers and consumers balance between greater competition by throughout the economy access to low-cost improving market access for foreign services. Empirical studies have shown that providers and achieving public policy openness to trade in services is associated objectives. A particular concern is that with greater efficiency and faster economic increasing competition and liberalizing growth.2 In addition, liberalization of services will lead to a deterioration in the services trade has positive impacts on trade provision of services to the poorest or less in goods and allows developing countries to populated areas because these are the least better exploit their comparative advantages profitable to serve. This could arise if new in labor-intensive manufactures. The gains competitors in formerly monopolized sectors from services liberalization are likely to be compete away monopoly profits that were larger than those from goods liberalization previously used to cross-subsidize unprofitable provision of services to poorer 2 Hoekman and Mattoo (2008) provide a full review regions. In response, Governments can use a of the empirical evidence regarding trade in services, range of market-based mechanisms to trade liberalization and growth. 2 Figure 1: Restrictiveness of Applied Services Trade Policies by Region GCC 48.2 SAR 41.6 EAP 39.4 MENA 39.3 AFR 29.6 LAC 20.7 ECA 19.9 OECD 18.9 W Restrictiveness of services trade policy N ote: W is average STR I of total 102 countries Notes: Regional abbreviations: GCC Gulf Cooperation Council, SAR South Asia, EAP East Asia and Pacific, MENA Middle East and North Africa, AFR Sub-Saharan Africa, LAC Latin America and Caribbean, ECA Europe and Central Asia, OECD Organization for Economic Co-operation and Development. Source: Gootiiz and Mattoo (2009). ensure the provision of key services to To be able to effectively plan trade poorer or under-populated areas in a liberalization and negotiate agreements on competitive environment. trade in services bilaterally, regionally or at the multilateral level it is essential for policy Coordinating services trade liberalization makers and negotiators to have extensive with regulatory reform is therefore information on the nature of regulation and important. Although there is no strict trade restrictions in all of the sectors that are sequencing necessary such that regulatory subject to discussion. In many African reform should precede trade liberalization or countries as well as other developing vice versa, in general efforts should be made countries, though, comprehensive data on to ensure competition in the market. In services sectors are not available, and some cases, trade liberalization can be a developing countries typically face driver of regulatory reform, such as when difficulties in effectively participating in regulatory agencies have been captured by trade negotiations on services. incumbent producers and trade liberalization leads to greater participation of consumers To address the shortage of data on applied and new suppliers of services in the policies governing trade in services in regulatory process. In other cases, developing countries, the World Bank has regulatory reform or an improvement in the recently carried out a survey to assess business climate may be necessary to allow applied (actual) trade policies in five investment or cross-border trade to take services sectors--financial services, place. telecommunications, retail distribution, maritime transport, and professional 3 services--in 78 developing and transition trade in services reflected in Figure 1 has countries and 24 developed countries in been implemented unilaterally. 2007 and 2008. Twenty-two African countries are considered in the analysis. The This caution reflects that negotiation of results show that, on average, African reciprocal commitments under the GATS countries have relatively liberal services has given insufficient attention and trade policies (Figure 1). For these African resources to enable developing countries to countries, the overall restrictiveness index of assess the impact of making market access applied services polices is just above the concessions on domestic regulations and world average and lower than the market outcomes. A lack of attention to restrictiveness index in all other developing concerns over regulation and the ability to country regions except for Eastern Europe regulate have constrained effective and Latin America. There is, however, participation in negotiations. Regulators considerable variation across countries in will respond to substantive arguments for Africa. Madagascar and Mauritius have reform, while GATS-style mercantilist very open policies towards trade in services bargaining over market access alone will be with a value of the restrictiveness of little importance to them. This supports considerably below the world average and the need for careful analysis of the economic also below the average for OECD countries. benefits as well as wider consequences of On the other hand, the value of the index for reform and the involvement of key Ethiopia is the highest score of any country stakeholders in discussions of regulatory in the sample. Only 7 of the 22 African reform. countries have an overall services restrictiveness index that exceeds the world There are several additional challenges to average. services trade liberalization negotiations. Developing countries often have concerns The Role of International Trade that negotiated global liberalization of Agreements in Services Reform services trade and negotiations over an EPA will be largely one sided, with developed International trade agreements can support country service providers likely to gain governments that wish to implement improved access to developing country services reforms but which are opposed by service markets but with little improved powerful vested interests. Such agreements access for developing-country service can help break domestic deadlocks by providers in developed country markets. improving market access for the country's The standard mercantilist bargaining over exporters and mobilizing export groups to liberalization of trade in services may, support the reform effort. Trade agreements therefore, not deliver improved outcomes in can also provide a mechanism for many of the poorest countries. In addition, overcoming domestic resistance to desirable many African countries face serious reforms by locking in the commitment to technical and administrative capacity reform and enhancing the credibility of the constraints in designing, negotiating, and reform process. However, most African implementing liberalization of their trade in countries have been reluctant to make services and complementary regulatory commitments on services at the WTO under reforms. The unwillingness of many African the General Agreement on Trade in Services countries to bind existing services trade (GATS). Almost all of the liberalization of policies at the WTO/GATS level may also 4 reflect their inability to prepare negotiating compete. For this reason, it is important to positions, and to participate meaningfully in carefully assess the potential costs and the negotiations in a way that will positively benefits of proceeding with preferential affect the negotiation's outcome. regional liberalization. Countries should also look for ways to make binding commitments In general, the greatest gains from to ensure that there is subsequent MFN liberalizing trade in services will arise when liberalization. access is provided to all suppliers on an MFN basis. By so doing a country gives its Reform of Services in Africa and consumers and produces access to the best Economic Partnership Agreements service-providers in the world. Sequencing preferential liberalization of trade in services The provisions on services in the before broader MFN liberalization can have CARIFORUM EPA between a group of adverse long-run consequences by handing a Caribbean countries and the EU, suggest first-mover advantage to a less efficient that a similar EPA with African countries supplier that a subsequent increase in could be a mechanism for locking in openness cannot dislodge or force to become existing levels of openness, enhancing the more efficient. Liberalization at the regional credibility of reform and providing a signal level first may be justified if there are to investors of the stability of the current important learning effects that local firms policy stance on services. The have not been able to exploit due to the CARIFORUM EPA also defines small size of national markets or restrictive frameworks for the regulation of a number national regulatory regimes that have of services sectors, which could provide a inhibited opportunities for growth. basis for increasing the quality and Preferential regional liberalization may then credibility of regulations in Africa. In other allow regional service providers to emerge sectors in which Africa has export interests, in Africa that are then able to compete such as tourism and IT related services, effectively when MFN liberalization is commitments that go beyond the GATS implemented. could provide important precedents for future regional and multilateral trade Liberalizing first on a regional basis may agreements. Provisions in the CARIFORUM allow regulators to gain experience before EPA for cooperation between competition full opening is implemented. Regional authorities, especially the specific agreements may also make it possible to commitments in tourism, could be useful in reap scale economies in regulation and disciplining anti-competitive behavior by supervision, particularly where national EU firms in African markets and in allowing regulatory agencies face skill constraints; African firms to effectively compete in they could also reduce scope for the capture vertically integrated production chains. of national regulation by private sector Regional regulatory cooperation and a interests and reduce regulatory regional preference clause could be useful heterogeneity. However, regional policy for advancing regional integration in makers also need to avoid creating protected services in Africa. Putting in place regional service sectors that will be difficult structures for dialogue on mutual to liberalize and giving first mover recognition at the EPA level may facilitate advantages to inefficient regional suppliers progress at the regional level. against which more efficient international suppliers will not subsequently be able to 5 However, an EPA is unlikely to offer much be targeted at those factors with the greatest in terms of improved access for African impact on performance in the market and countries to the EU
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