An Assessment of Services

Trade Policy Reform:

Some Evidence

Aaditya Mattoo

Three questions:

• How large are the gains from services liberalization?

• What are the elements of successful reform?

• What role can the GATS and international support play?

1. How big are the gains from liberalization?

•Strong intuition but weak evidence

Three examples:

a. Dynamic benefitsb. The link with trade in goodsc. Temporary movement of

individuals

1a. Successful services reform is associated with more rapid growth

Linear prediction

1 8.5

-.024

.059

ITA NZL

SLV

PAN

PRT

FIN

ISL

ARG

CHE

ESP

BEL NLD

NOR USA CAN SGP

EGY

FRA

SWE

GRC

GUY

AUS

GBR

AUT

CYP JAM

BOL

DNK

MLT

MWI

CRI

ZAF TUR

MOZ

KEN

IND

MAR

VEN

MEX PHL

NIC CHL

URY KOR PER

MYS

ECU

AGO

THA

HND

COL

TUN LKA

BRA

IDN

DOM

Composite services liberalization index

Growth rate (adjusted for other factors)

Source: Mattoo, Rathindran and Subramanian (2001)

High Cost of Telecommunications Penalizes Trade, Especially in

Differentiated Goods

0.640.78

1.80

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

homogeneous reference differentiated

Note: The chart is based on 1999 data and uses the Rauch classification of goods.

1b. Services trade policy affects the size and pattern of trade in goods

Some Cross Country Comparisons of Softw are Services

$5.00

$10.00 $10.00

$18.00

$22.00

$0.30 $0.60 $0.60 $1.10 $1.30

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

India Italy Ireland United States Germany

Cos

t per

line

of c

ode

(US

$)

Development

Support

1c. Gains from liberalizing mode 4

1c. Mode 4: Some preliminary estimates

Increase in developed countries’ quotas on skilled and unskilled temporary labour movement equivalent to 3% of their labour force could lead to an estimated $156 billion increase in world welfare

(which is greater than the estimated gains from complete liberalization of goods trade).

2. The elements of successful reform

a. Emphasis on competition

b. Effective domestic regulation

c. Appropriate sequencing

2a. The pattern of reform in basic telecommunications

P r o p o r t i o n o f c o u n t r i e s w i t h p r i v a t i z e d i n c u m b e n t p h o n e o p e r a t o r s ( b y r e g i o n )

0 . 0 0

0 . 2 0

0 . 4 0

0 . 6 0

0 . 8 0

1 . 0 0

1 9 8 5 1 9 9 0 1 9 9 5 1 9 9 9

A s i a

A f r i c a

L a t i n A m e r i c a

P r o p o r t i o n o f c o u n t r i e s w i t h c o m p e t i t i o n i n l o c a l s e r v i c e s ( b y r e g i o n )

0 . 0 0

0 . 2 0

0 . 4 0

0 . 6 0

0 . 8 0

1 . 0 0

1 9 9 0 1 9 9 5 1 9 9 9

A s i a

A f r i c a

L a t i n A m e r i c a

P r o p o r t i o n o f c o u n t r i e s w i t h a n i n d e p e n d e n t r e g u l a t o r ( b y r e g i o n )

0 . 0 00 . 1 00 . 2 00 . 3 00 . 4 00 . 5 00 . 6 00 . 7 00 . 8 00 . 9 01 . 0 0

1 9 8 5 1 9 9 0 1 9 9 5 1 9 9 9

A s i a

A f r i c a

L a t i n A m e r i c a

S o u r c e : W o r l d B a n k / I . T . U . T e l e c o m P o l i c y D a t a b a s e , a n d F i n k , M a t t o o , R a t h i n d r a n ( 2 0 0 1 ) , f o r t h c o m i n g .

2a. The power of competition

1.a. Mainlines

7.30%

13.80%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

privatized privatized+competition

1.b. Productivity

13.80%

31%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

privatized privatized+competition

2a. Questions that remain

• Are there good reasons to limit entry/ownership?

•Why is entry/ownership restricted?

  How much is to be gained from eliminating all barriers to entry/ownership when some is already permitted? 

2b. Effective regulation 

(i) To remedy informational problems (e.g. in financial and professional services)

(ii) To remedy market power (e.g. in transport and energy services)

(iii) To achieve social objectives (e.g. universal access in transport, telecom, financial and health services; and alleviation of adjustment costs).

2b(i) Regulation to remedy informational problems

(e.g. in financial and professional services):

– As a precondition for successful liberalization

– As an impediment to trade

2b(i) Regulation as a precondition: anexample

Several African countries have alreadyundertaken significant liberalizationof financial services…

Market access commitments on commercialpresence under the GATS on banking

Limitations onFull or ltnsonly on thelegal form

Only no.ofsuppliers

Onlyforeignequity

Both no.of ssrs.Andforeignequity

Egypt, Ghana,Kenya,Lesotho,Mozambique,Sierra Leone,Malawi,Nigeria,Senegal,South Africa

Angola,Benin,Gabon,Morocco,Mauritius,Tunisia

Zimba-bwe

Gambia,Morocco

…But Interest Rate Spreads Have Widened Significantly in Some African

Countries with Liberalized Markets, 1980-97 (percent)

4.83.2

5.1 5.5

13.5 13.1

0

2

4

6

8

10

12

14

16

Kenya Nigeria

1980 1990 1997

2b(i) Regulation as a precondition: an example

2b(i) Regulation as an impediment?

Three examples:

•Qualification requirements•Offshore financial services•Privacy

2b(ii) Regulation to remedy market power (e.g. in transport and

energy services)

• As a precondition for market access

• As a guarantor of consumer interests

Port liberalization and Breakup of Private Carrier Agreements:

Estimated Reductions in Liner Transport Prices

8.27

20.05

0

5

10

15

20

25

Liberalization of port services Breakup of private carrieragreements

equivalent to savings of $850 million

equivalent to savings of $2,063 million

2b(ii) Regulation to protect consumer interests

2b(iii) Regulation to achieve social objectives

• Universal service

• Adjustment costs

2c. The sequence of telecom reform inselected countries

Country 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

MalaysiaPrivatization Competition Regulation

IndiaPrivatizationCompetition Regulation

ArgentinaPrivatization CompetitionRegulation

BrazilPrivatization Competition Regulation

El SalvadorPrivatization Competition Regulation

NigeriaPrivatizationCompetition Regulation

South AfricaPrivatization CompetitionRegulation

UgandaPrivatization Competition Regulation

Source: World Bank/ITU Telecommunications Policy Database & Fink, Mattoo, Rathindran (2001),forthcoming.Note: Competition refers to the fixed-line local services segment.

2c. Sequences matter                           

Source: World Bank/ITU Telecommunications Policy Database & Fink, Mattoo, Rathindran (2001), forthcoming.

1.c. Effects of sequencingon mainlines

12.40%

25.50%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Privatization beforecompetition

Competition before privatization

3. International engagement: trade

negotiations

Three benefits:

•Deeper liberalization through reciprocal exchange of concessions•Credibility through binding commitments•Regulatory cooperation

3. Complementary global efforts

• Devising sound policy

• Strengthening the regulatory environment

• Enhancing developing country participation in international standard setting

• Ensuring access to essential services in the poorest areas