Trade in Services and the Doha Development Agenda Aaditya Mattoo April 2005 Two things: the title and “some” evidence My presentation: not so much an assessment as a description of “how little we know” and “how can we do better”? An illustration of the questions that need to be addressed rather than a definitive answer. Title: Kuzents, impostor.

Doha and Services Potentially big gains from: Faster and more credible domestic reform Improved and more secure market access Actually little progress because of: Difficulty in negotiating services liberalization Failure of reciprocity Narrow scope of commitments

What is being negotiated? Business services Communication services Construction services Distribution services Educational services Environmental services Financial services Health-related and social services Tourism and travel-related services Recreational, cultural and sporting services Transport services

A wide definition of trade MODES 1. Cross-border Trade 2. Consumption Abroad 3. Commercial Presence 4. Movement of Natural Persons EXAMPLE Software, insurance or tele-diagnosis from country B into A A’s resident obtains hospital treatment or education in B Bank, telecommunications firm or hospital from B sets up subsidiary in A Engineer or doctor from B provides services in A

Regional Distribution of Business Services Exports Source: IMF Balance of Payments Statistics; Note: -The “Business Services” category includes Total Services minus Transportation, Travel and Government Services. Alternatively, Business Services consist of: Communication, Construction, Insurance, Financial, Computer & info, Other business, Personal, cultural and recreational services, as well as Royalties and License fees.

Source: IMF Balance of Payments Statistics

The comparative advantage of several developing countries is shifting towards a range of business services Change in RCA =236% I will focus on the first but please keep the other two at the back of your mind.

International engagement: trade negotiations Three benefits: Deeper liberalization through reciprocal exchange of concessions Credibility through binding commitments Deeper cooperation

II. Barriers and gains In developing countries, significant liberalization but an uneven pattern…

Successful reform in services is associated with more rapid growth All possible initial controls: initial gdp, education, investment and macro-stability. Nothing attracts attention like a number: 1.5 percent, but then if we add all possible candidates for growth enhancement… To take away: that regardless of the numbers, services openness matters. But mistake to believe gains can be realized through mechanical opening. Especially in light of subsequent discussion. Source: Mattoo, Rathindran and Subramanian (2001)

Services policy also affects the size and pattern of trade in goods…

  Note: Data in million US$ Source: Walmsley and Winters (2002)

The state of WTO services negotiations Ambitious requests Disappointing offers Stagnant rules negotiations Limited developing country participation

Domestic reform priorities must inform liberalizing commitments Identifying the reasons for deferring liberalization Regulatory inadequacies (banking) Adjustment costs (telecom vs banking) Versus Political economy (e.g. in legal and retail)

Poor competitive position of public sector banks: over-manning Business generated per employee (in Rs. thousand): 2001 But this does not call for mindless and indiscriminatory liberalization. There are sectors like, the financial sector, where the domestic firms find themselves disadvantaged by the legacies of historical policies, which perhaps justify a more cautious approach. There are also concerns about the employment effect in labor-intensive sectors like retail and construction services. But such arguments appear less relevant in the case of legal and accountancy services that together account for a meager 0.7 percent of India’s total services employment, primarily employ skilled professionals with relatively high net worth, and are the sectors where India appears to have a competitive advantage over others.

Poor competitive position of public sector banks: NPAs Gross NPAs of SCBs as of March 2002 (% of total lending) But this does not call for mindless and indiscriminatory liberalization. There are sectors like, the financial sector, where the domestic firms find themselves disadvantaged by the legacies of historical policies, which perhaps justify a more cautious approach. There are also concerns about the employment effect in labor-intensive sectors like retail and construction services. But such arguments appear less relevant in the case of legal and accountancy services that together account for a meager 0.7 percent of India’s total services employment, primarily employ skilled professionals with relatively high net worth, and are the sectors where India appears to have a competitive advantage over others.

Regulation to protect consumer interests

Precommitment to enhance credibility… Two dimensions of credibility: not reverse; and future liberalization Failure of infant industry and perpetual infancy Inability to commit to liberalize GATS offers a way of striking a balance.

Domestic reform priorities must inform liberalizing commitments Designing the reform program Emphasizing competition and not just a change of ownership Ensuring effective regulation to remedy market failure and achieve social goals

Market access priorities and negotiating proposals Cross-border trade Presence of natural persons

Inadequate GATS Commitments in Mode -1

Options for liberalizing mode 4 Emphasis on intra-corporate and contract-based movement Obligations also on source country Flexible commitments

Conclusion No new restrictions, especially on cross border trade Precommitment to reform and regulatory assistance Greater scope for temporary migration with source country obligations Local research a la templates. Sharing experiences: rail transport in Britain, electricity in California. Clear prescriptions for policy versus humility in advice. Regulatory cooperation: e.g. in Caribbean on telecom. Assistance, but not hegemonistic. Internal inadequacies can legitimize external barriers; ecom standards. Criteria for determining whether assistance should be given would be that there has been comprehensive reform but no private sector response. Manner of assistance a la Chile: global competition for subsidies. End tying – follow UK example.