Download Assessment of Trade in Services and Development Gains

UNCTAD XI
Assessment of Trade in Services and Development
Gains
Draft note by the UNCTAD secretariat
Document for discussion
17 June 2004, São Paulo Brazil
2
Introduction
The main challenge that developing countries are facing is how to strengthen
domestic supply capacity in services and reconcile trade, development, social and
equity considerations. In this context, liberalization of trade in services has become a
concern among many stakeholders in countries who are engaging in the process of
reform. This is particularly true when liberalization reaches out into the areas
previously considered as the exclusive domain of the public sector. The objective of
the note is to identify questions and to provide some preliminary reflections on the
methodology for undertaking assessment of services in their developmental and trade
dimensions in developing countries. The issues raised during the debate at the
meeting will serve to further develop the methodological approach in this area.
The objective of the assessment is to identify what are the best policies that
developing countries could pursue to maximize the contribution of services to
economic growth and sustainable development. The choice of policies that policy
makers are facing, spreads over a broad palette of options: it could range anywhere
between preserving the role of the government in supplying services to choosing full
liberalization of a given sector. All these may be viable options for policy makers
depending on the prevailing economic and social conditions in a country and in the
international markets.
At the same time, on going multilateral trade negotiations on services are posing
increasing challenge to negotiators of developing countries. Undertaking specific
commitments on trade in services means new international obligations, binding
certain policy option. In making such commitments, developing countries need clarity
and assurance that these are the best options in terms of reaching development
objectives.
Assessment in the GATS
As provided by GATS Article XIX for each round of negotiations the WTO Council
for Trade in services (CTS) shall carry out an assessment of trade in services in
overall terms and on a sectoral basis with reference to the objectives of the
Agreement, including those set out in paragraph 1 of GATS Article IV. 1 The CTS
could not reach any agreed conclusions with respect to the assessment prior to
launching on February 2000 the current round of negotiations, and this issue has
become a standing item on the agenda of the Special Session (CSS) of the Council.
Different interpretations of the assessment mandate have made it difficult to agree on
the best approach to fulfil this requirement. Some WTO Members, as well as some
analysts, have emphasized on the benefits of services trade liberalization as the core
issue to be addressed in the context of the assessment exercise. For others the
assessment should focus mainly in evaluating the extent to which the specific
commitments adopted by Members has contributed to achieving the objectives set for
1
According to Article IV, the increasing participation of developing countries in services world trade
shall be facilitated through negotiated specific commitments relating to: (a) the strengthening of their
domestic services capacity and its efficiency and competitiveness; inter alia through access of
technology on a commercial basis; (b) the improvement to their access to distribution channels and
information networks; and, (c) the liberalization of markets access in sectors and modes of supply of
export interest to them.
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in Article IV. Also, there are contending views with respect to the nature of the
assessment exercise. For some Members the assessment should be a collective
exercise in the CSS aimed at arriving to agreed conclusions that would allow
adjusting negotiations to assure that the objectives of the GATS are adequately
fulfilled.2 For other, each Member as the basis for developing their negotiating
objectives and strategies should undertake their own assessment of trade in services.3
There seems to be agreement however on the fact that the existing "knowledge gap"
concerning services and trade in services in developing countries is a barrier against
an effective participation of these countries in the GATS and other negotiations, and
also affecting their ability in defining and implementing domestic policies aimed at
strengthening their domestic services capacity and increasing its efficiency and
competitiveness enhancing its contribution to economic growth and sustainable
development. The lack of adequate data on trade in services is commonly highlighted
in the literature as a limiting factor. However, the limited understanding of the overall
structure and behaviour of services markets in most developing countries should also
be factored into the current status of knowledge of the services economy in these
countries.
Spurred by the Uruguay Round Negotiations a few developing countries undertook in
the late eighties and early nineties National Studies on Services in order to enhance
their understanding of the services economy and to address their negotiating
requirements.4 Since that date a growing number of additional national and sectoral
studies have been done in some developing countries in order to promote the
understanding of the dynamics of services and their contribution to economic growth
and sustainable development. Also, work by international institutions as the World
Bank, WTO, OECD and UNCTAD have contributed to increasing knowledge of
services in developing countries. Obviously, to day we know more about services in
developing countries than during the Uruguay Round. Nevertheless, we have to
recognize that there are still important knowledge gaps affecting the ability of many
developing countries in implementing domestic services policies and participating
effectively in services negotiations. Also, knowledge gaps might be affecting the
ability of international institutions in providing sound overall policy advice and
technical assistance concerning a number of services sectors. Even in the case of the
financial sectors, perhaps one of the sectors were better data is available and one that
has been extensively studied, a World Bank report states "The last several years have
been seen impressive leaps in our understanding of the importance of the financial
sector in development and in the knowledge base for many issues, but there is still
much to be learned" (emphasis added).5
2
This is the approximation that seems has been incorporated in the Guidelines and Procedures for the
Negotiations (S/L/ 93) adopted by the Council for Trade in Services in Special Session (CTSS),
establishing in paragraph 14 of the Guidelines that "negotiations shall be adjusted in the light of the
results of the assessment".
3
For a discussion of the debate and country positions and possible approaches to assessment in the
Council for Trade in Services refer to: Mashayekhi M and Julsaint M (2002) Assessment of Trade in
Services in the Context of the GATS 2000 Negotiations, South Centre, Working papers 13, December.
4
Junta del Acuerdo de Cartagena (1988) National Studies on Services in the Andean Countries
(Bolivia, Colombia, Ecuador, Peru and Venezuela); UNCTAD (1990) Services in Asia and the Pacific:
Selected Papers; UNDP (1991) Mexico a Service Economy. UNCTAD (1991) Services and
Development Potential: The Indian Context.
5
World Bank (2004) Finance for Growth: Policy Choices in a Volatile World.
4
Even though discussion on assessment of trade in services has taken place mostly in
the context of GATS Article XIX negotiations, further work should not be at all only
concerned with the negotiating requirements of developing countries. Assessment
should be fundamentally development oriented providing inputs for the definition of
sound national policies oriented to enhance services contribution to economic growth
and sustainable development. Then, on the bases of such definitions, the question to
be raised would be: How the GATS, and also other negotiating frameworks, can
contribute in promoting national objectives and policies?
Towards a Comprehensive Assessment of Services in Developing Countries
To obtain a better understanding of policy choices available to developing countries
for maximizing services contribution to development a number of questions would
need to be addressed challenging some of the conventional beliefs:
i.
What is happening with services in developing countries?
It has become common practice to recognize in lectures, papers or publications the
increasing role of services in terms of their contribution to GDP and employment
in both, developed and developing countries. However, no further discussion of
the structure and behaviour of services markets in developing countries generally
follows, leaving the comparative analysis between the experience of developed
and developing countries aside.
In developed market economies growth of services has resulted from the
economic evolution leading to what has been defined in the literature as "postindustrial societies" in which modern services have become the more dynamic
sectors of the economy. Services are closely interconnected with the rest of
economic activities in a virtuous circle, in particular with manufacturing, through
which they mutually reinforce each other. The growing externalization of
functions by other economic activities, and also by services companies
themselves, is reputed to explain growth of modern business services in developed
countries, and their contribution to enhancing overall economic efficiency through
its effect on specialization and economies of scale. In a parallel process
manufacturing industries are increasingly generating a higher proportion of their
income through the sales of services.6 At the same time services have emerged as
the main source of demand for ICT products, and other technology-embodying
capital goods, sustaining increasing levels of production of many manufacturing
activities.
Do developing countries following a similar path to modernization as the one
observed in developed countries? Or the significant contribution of services to
GDP and employment in developing countries are portraying something radically
different, even some kind of flawed development? Available information tend to
suggest that in most developing countries the growth of services might be the
expression of a process quite different than the one historically experienced by
6
OECD (2000) The service economy, Business and Industry policy Forum series; Howells J (2000)
Innovation and Services: new conceptual framework, CRIC Discussion paper no 38, Center of
Research on innovation and Competition, University of Manchester.
5
today developed countries. Concerning the evolution of the services economy in
developing countries relevant questions would also be; is the situation the same in
all developing countries? If that is not the case, what explains the difference?
Could developing countries leapfrog the modernization of their services sector?
The following aspects of services in developing countries highlight the relevance
of this type of required research.
7

In many developing countries the more traditional, non-tradable, low
productivity services with reduced capital accumulation potential are the
ones explaining the increasing share of services in GDP and in total
employment.7 This process appears closely related to the expansion of the
"informal economy" that accounts for a significant and growing proportion
of economic activity. The Latin American case can provide some light to
the extent of this phenomenon. For the region as a whole 46.3% of total
non-agricultural employment in 2001 is explained by the informal sector,
having increased its share from 42.8% since 1990. In some countries the
proportion is significantly higher, as Honduras (60.7%), Peru (59.5),
Ecuador (57.4%), Colombia (55.6%) and Venezuela (49.2%). Out of 12
Latin American countries only in three cases employment in the informal
sector as proportion of total non-agricultural employment is below 40%.
These are the cases of Panama (37.3%), Chile (38.0%) and Mexico
(39.6%).8 Informal employment is highly concentrated in services
activities.

In many developing countries government seems to account for a
significant proportion of services contribution to GDP, higher than that
observed in developed countries. This is for example the case of the
Caribbean countries in which government accounts, on average for the
region, for 12.2% of GDP, and in some countries above 15% of GDP. Also
in the case of larger countries as Brazil government explains 15.2% of
GDP, and in other countries the proportion is also significant (Bolivia
11.5%, Panama 11.1%, Haiti 17%) In OECD countries, with some
exceptions, government represent below 7% of GDP, being 5.1% in the
U.S., 3.9% in Australia, 5.4% in Japan, and in Italy 5.6%.9

In those cases of developing countries for which disaggregated
information on GDP by services sector is available it tends to show that in
most cases dynamic modern services, inter alia financial services,
telecommunications, and business services, the so called producer
services- account for a very small proportion of total GDP. While in
developed countries producer services form about 20% of GDP, in low
income developing countries this category constitutes around 5% of GDP,
Small retail trade, restaurants, urban public transport, repair shops, and personal and community
services are the activities experiencing significant growth rates an explaining the increasing
participation of services in GDP and in total employment..
8
Daniel Titelman and Andras Uthoff (2003) El Papel del Aseguramiento en la Proteccion Social;
Revista de la CEPAL No 81, December 2003.
9
Data for 2000. From Ventura-Dias et.al (2003) "Globalizacion y servicios: cambios estructurales en
el comercio internacional; ECLAC Serie Comercio Internacional N0 46, December.
6
and in middle and upper-income developing countries between 7.5 and 10
per cent.

The expected tendency for an increasing share of services of total GDP as
income growths is challenged by the recent experience of many African
countries. Out of 51 countries for which information is available, in 28
cases (56% of the total) services share of GDP declined during the 19902001 period, and in three cases it practically remained the same. This has
been also the case of other developing countries in other regions of the
world.10
The ultimate effect of public policies largely depends on the underlying
characteristics of the markets being targeted. Therefore, a better understanding of the
structure and behaviour of services markets in developing countries, both in overall
terms and concerning the different services sectors, is a necessary condition to address
questions regarding the different policy options available for these countries to
strengthen their domestic services capacities and assessing the possible impact of
alternative policies on growth and sustainable development; as well as their impact on
different stakeholders, in particular their effects on poverty alleviation. This
undertaking should follow a two-track approach: (i) a stocktaking exercise reviewing
the existing literature on services in developing countries aiming to highlight what we
have learned to date, and also where knowledge gaps persist; and, (ii) a cross-country
comparative dynamic analysis of the evolution of the services economy in a
representative sample of developing countries. One of the main problems that would
have to be addressed in this connection is the lack of precision and reliability and the
high degree of aggregation of the services sector statistics in developing countries.
The cross-country study should provide an audit of the available data and attempt to
develop adequate indicators of the evolution of the different services sectors in those
countries included in the exercise.11
ii.
Are services fulfilling their role in the development process of developing
countries? If not, why?
Economic literature has highlighted the importance of services for economic growth
and social development. Services are multifunctional activities: in addition to their
economic role they serve a number of societal objectives. To what extent services in
developing countries are performing such role? There seems to be a growing concern
that services are failing to deliver on this function in developing countries. Services
should play a crucial role in at least five major areas:

10
Services are crucial for the development and reproduction of human
capital, which is widely acknowledged to yield great economic and
social returns through its positive effects on economic growth and
social development. Education, health services and some
UNCTAD (2003) Handbook of Statistics.
This line of work requires an in depth audit of the reliability of available data on services in
developing countries focusing, among other sources, on National Accounts, employment data, inputoutput tables and balance of payments statistics.
11
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environmental services (i.e. water distribution and sewage through
their links with overall health conditions) are the core activities
through which human capital is generated and its productivity and
reproduction assured.
12

Services constitute the underlying basic networks of the economy
allowing for the functioning of the overall economic system. Financial
services, distribution services, telecommunications, and energy and
transport services fulfil this role, albeit each one of them has particular
functions to perform. It can be argued that these services glue the
economy together; and their availability, efficiency and quality
determine to a large extent the systemic competitiveness of an
economy. In the case of transport services basic infrastructure, roads,
ports and airports, are emerging as services in themselves due to the
new type of public private partnerships (PPP) being implemented in all
regions of the world.

Services increasingly constitute important inputs for the production of
goods and also other services, i.e producer services. This is the case of
"business services", inter alia: computer and software services,
research and development services, accounting, advertising,
engineering services, environmental services, marketing and
merchandising, and legal services. The services content in goods and
other services is increasing and every day more the competitiveness of
domestic production rests in the availability and the efficiency of
business services. Also, these services have a key role to play in
enabling a country to adopt and apply advanced technologies in the
productive process, to innovate, and to adjust to competitive forces in
the world market.

Services contribute to the integration of national economies into the
international trading system. Though for many developing countries, in
particular the small-island countries for which traditional services as
tourism have been historically highly relevant in this regard, the
increasing tradability of modern services, in particular business
services are turning this role every day in a more important one.12
Trade in services is becoming one of the most dynamic elements in the
world economy, and an efficient integration into the evolving world
services economy is becoming crucial for the development prospects
of developing countries.

Services, such as the cultural industries and a number of social,
communal and governmental services, are fundamental in developing
what has been defined in economic literature as "social capital"
contributing to the internal social and cultural coherence of society
without which economic growth or human well-being can not be
In ninety developing countries tourism is among the five leading generators of foreign currency, and
for sixty of these is the main source of foreign currency.
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assured.13 Finally, many services, inter alia: entertainment, restaurants
and hotels, environmental services and some personal services,
significantly contribute to improving the overall quality of life in a
society.
The assessment of the extent to which services are adequately performing the
expected role in economic growth and social development, along the lines discussed
supra, requires first to make explicit, for the different services sectors, their specific
role and expected contribution.14 Then, on that bases developmental benchmarks and
operational performance indicators, covering efficiency, distributional and when
possible and relevant environmental aspects, must be developed for each service
sector. Due to the nature of services these indicators probably will have to combine a
quantitative with a qualitative approach. If this is possible then we will have the bases
for comparing on the basis of developmental benchmarks the performance of different
services across-countries, and a database to assess the effect of alternative policies on
the contribution of services to economic growth and sustainable development.
iii.
Which could be the best, or preferred, policies to enhance services
contribution to development?
Strategic policy options, both conceptually as well as those implemented in practice,
attempting to enhance the contribution of services to economic growth and
sustainable development in developing countries are located in a spectrum between
full state provision of services at one extreme, and complete market reliance at the
other. In between different options are available, such as the "infant industry model"
or the "competition model". Options vary according to the different degree of reliance
on markets or on the state – the classical dilemma in political economy; the kind of
state intervention – market friendly or market supplanting measures; according to the
private-public mix in the provision of services; and, also according to the balance that
is sought between foreign and domestic supply of services.
The past experience has showed the negative effects of flawed policies of different
kinds. State failure has been widely documented in the literature. On the other hand,
the experience of developing countries reveals the possible negative outcomes that
can result when liberalization proceeds at a speed that is too rapid for local actors to
successfully develop services industries; when an adequate regulatory framework was
lacking; when governments failed to ensure a competitive business environment or
when accompanying policies were absent. The importance of sequencing the reform is
well established in theory by now, however, the specific content of this sequencing is
less clear and having some benchmarks on how to proceed in each case would
facilitate decision making in developing countries.
As a starting point it should be recognized that there is no "one size fits all" policy
framework, both across-services sectors and across-countries even for the same
services. The question is to elucidate which policy framework for what sectors and
13
World Bank (1998) "The initiative on defining, monitoring and measuring social capital: Texts of
proposals approved for funding"; World Bank, Social Capital Initiative, Working Paper, No 2.
14
A service activity can contribute to one or more of the five areas of expected contribution of services
to development, as there are important interlinkages between services. For example, human capital is
crucial for a domestic supply of efficient business services.
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under what national and international conditions enhance services contribution to
economic growth and sustainable development.
The variety of policy options open to developing countries is more clear in the case of
services such as health and education. In these cases arguments in favour of extensive
government intervention ensuring access to essential services by the people has been
widely accepted, and the need for state participation directly providing services is
firmly established. Concerning these services most of the discussion centres on the
possible additional contribution by the private sector, how that contribution could be
enhanced, and on more efficient forms of state intervention and provision of
services.15 To some extent in the case of these basic social services private
participation is sometimes even promoted as necessary to offset state failure. In the
particular case of health services, it has been highlighted that "the evidence is weak,
no country has discovered any ideal model, and appropriate policies differ widely in
different country settings".16 Central or local state participation in the provision of
urban public transport is also well entrenched both as an idea as in practice. However,
the need, nature and extent of state intervention that is required in the case of other
services are still subject to a heated debate. This issue underlines, for example, to a
large extent the debate concerning the efficacy of market-based or bank-based
financial systems for economic growth and development.17
With respect to foreign ownership society clearly attaches value to domestic
ownership and control in the case of some services. This is clearly the case of
broadcasting and other media services where for a number of reasons, among them
political and cultural reasons, most countries limit foreign ownership and control; this
is also the case, among other services, of air transport, cultural industries, notary
services and private security services. The question of foreign ownership and control
in other services might be also relevant to the extent that the behaviour of foreign
providers would differ from that of domestic providers in detriment of the domestic
economy or national developmental objectives. It can also find justification on
grounds of strategic considerations. The adequate mix of public-private provision of
services is also an issue to be address in many cases. For example, in the financial
sector even under policy frameworks with a high market-reliance many countries,
developed and developing, maintain a degree of public participation in the provision
of services, as is the case of development banks or Export-Import financial
institutions.
Regarding non-basic social service, a prevailing view today is that liberalization of
trade in services –elimination of market access restrictions and discrimination against
foreign providers18- and the highest possible market-reliance in the domestic economy
-minimum or the least trade-distorting state intervention- is the policy framework that
15
U.N (2002) World Economic and Social Survey 2002, Chapter VII Health service delivery in
Developing Countries: Working more effectively with private health providers, Chapter VIII PublicPrivate Partnerships in education.
16
Feachem, Richard (2000), "Editorials", Bulletin of the World Health Organization, Vol 78, No 6,
June.
17
Aybar S and Lapavistas C (2003) "Financial System Design and the Post-Washington Consensus", in
Fine B, Lapavistas C and Pincus J (eds) Development policy in the Twenty-First Century: Beyond the
post-Washington Consensus; Routledge Studies in Development Economics, Rouledge, London and
New York.
18
In the sense or Articles XVI and XVII of the GATS.
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would allow services to best fulfil their role in the process of economic growth and
sustainable development, optimising welfare at the global and national levels. In its
more extreme expression proponents of this policy framework find state intervention
in the markets only to be justified to correct special and isolated cases of market
failure, which can be rectify to restore the competitive optimum. This approach can be
called the market-based competition model. This view is also the one underlining the
GATS rationale as its ultimate objective, as stated in the preamble and in Article XIX
is "achieving a progressive higher level of liberalization". Albeit the GATS
recognizes the particular need of developing countries to exercise the right to regulate
consecrated in the agreement, and that the process of liberalization shall take place
with due respect for national policy objectives and the level of development of
individual members, and that there shall be appropriate flexibility for developing
countries.
The market-based competition model propositions are based in the same theoretical
assumptions that are applied to trade in goods justifying trade policy reform in
developing countries. Besides the issue if the theoretical assumptions for justifying
reform in the case of goods can be directly and completely transferred to the case of
services due to some intrinsic differences both in the nature of services and trade in
services in comparison with goods, the prevailing view can be taken as an appropriate
and plausible working hypothesis. As any working hypothesis it needs to be tested.
Also, the issue if the same assumptions hold true for the different modes of delivering
services has to be addressed.
What needs to be empirically demonstrated is that the closest the policy framework
approaches the ideal type that can be called market-based competition –in terms of
trade openness and market-reliance- better performance indicators of services would
be achieved, and also the relationship between policy framework and the observed
results. This requires the development of operational indicators –of openness and
market reliance- to characterize the prevailing policy frameworks in different cases.
An appropriate approach for this complex task is the elaboration of sectoral case
studies. In countries that have implemented reforms an ex-ante and ex-post evaluation
of the performance of services is required. We should expect a significant improved
performance after the reform. To test the hypothesis the assessment of the
performance of services in a control group, countries with a policy framework that
significantly differs from the ideal type, is also needed. It would be expected that the
overall performance in those countries in which a policy shift has taken place would
be significantly better than that observed in the control group. Also, the incorporation
in the sample of some case studies of sectors in which a policy regime approaching
the ideal type has always been in effect could provide important insights of the overall
performance of services under those conditions, and also on the effects of policies on
the overall performance of services in terms of their contribution to economic growth
and sustainable development. To undertake the assessment and adequate selection of
the case studies by sector allowing for this type of comparisons is necessary.
The assessment of different policy options, to be comprehensive, will also have to
deal with explaining unexpected results from reform in the services sectors. That is
those cases in which the theoretically adequate policy framework has not produced
significant improvement in the performance of services as expected. The issue of
unexpected results from trade reform has been dealt with in economic literature, both
11
in the case of goods and to a lesser extent on services. Different issues has been raised
to this respect, inter alia: (i) Flawed reform programs; (ii) Existence of market failure;
(iii) Lack of regulation or existence of flawed regulations and inadequate institutional
capacities; (iv) Absence of required accompanying policies; and, (v) The effect of
overall economic and social conditions on the impact of policies. Also, conditions
prevailing in the international markets of services could have direct impact and even
nullify the benefits of liberalization at the national level. One example is to consider
effect of industry concentration at the world level. This analysis will provide
important inputs to defining the most adequate type of reform and other policies that
should be put in place to guarantee the beneficial effects. However, the fact that the
underlying theoretical model might not be the most appropriate to explain the
behaviour of services markets in all cases and to guide policy decisions cannot be
discarded a priori.
iv.
What is the value added that could be generated by binding enforceable
international commitments, national policy frameworks?
Even if the case can be made in favour of market-based competition as the optimum
policy for to foster services contribution to economic growth and sustainable
development in developing countries; it is in the first instance an argument for
unilateral trade reform. The case has to be made for binding domestic policies through
international commitments. Reciprocity by other countries allowing for effective
export opportunities for those countries implementing reform could strengthen the
welfare case of this type of commitment. Also, the issue of international commitments
locking-in domestic reforms and providing predictability to the policy framework has
been highlighted in the literature. But the question is still open: do international
commitments really matter?
Concluding remarks
A better understanding of the underlying characteristics and structures of the services
markets in developing countries, in particular on a sector-specific basis, is a necessary
precondition to address question regarding different policy options available for
policy makers in these countries. This would help select policies for strengthening
domestic services capacities and build comparative advantages. Governments in
developing countries need to assess the possible impact of alternative policies on
growth and sustainable development, as well as their impact on different stakeholder
and in particular their effect on poverty alleviation.