global services-9 prof. tarun das

8/9/2019 Global Services-9 Prof. Tarun Das

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8/27/2010 Global Services- 4-6- Tarun Das 1

Global Services- Lectures-7-8-9Globalisation and Its Impact

on Services SectorsProf. Tarun Das, IILM, New India.Formerly, Economic Adviser, Ministry of Finance


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Contents

1. What go we mean by globalisation?2. Global Services production, trade andInvestment

3. Impact of Globalisation on services

4. Impact of WTO-GATS on globalisation ofservices sectors

5. Impact of services on economic growth6. Assessment made by developing

countries on the impact of WTO-GATS7. Assessment made by WTO Secretariat8. WTO-GATS General Issues


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1.1 What is meant by globalisation?

Globalisation means Worldwide intensiveexchange of people, knowledge, capital,goods and services.

Globalisation helps in integration of theworld, and allows new ideas and

technological innovation to spread around theglobe .

Globalisation is much wider than aneconomic process and involves all humanrelationships and civilizations.


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1.2 A Joke on Global Trade A British Princess and her Saudi Arabian

boyfriend died in Paris after being treated byBritish doctors with German medicines whiletheir German BMW car driven by a drunkenTurkish driver consuming too much French wine

and chased by Italian Paparazzi crashed againsta river tunnel.

This news is being sent as SMS by an Indianjournalist using a Chinese made Nokia handset

and a Singaporean Airtel simcard smuggledfrom Korea and using Orange network ofThailand.


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2.1 Average growth rates of worldproduction in 1990s (per cent)

GDP Agriculture Industry Services

India 6.0 3.0 6.4 8.0Developing 3.5 2.2 3.7 4.1East Asia &

Pacific

7.2 3.1 9.3 6.4

Europe &Cent Asia

-1.5 -2.3 -3.8 1.6

Lat,America.& Caribbean

3.3 2.3 3.3 3.4

Mid. East 3.0 2.6 0.9 4.5

South Asia 5.6 3.1 6.2 7.1Sub-Saharan

Africa2.5 2.8 1.6 2.6

Developed 2.5 0.0 0.7 2.5World 2.7 1.4 1.5 2.9


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2.2 Structure of world output(% to GDP)

Country Agriculture Industry Services

1990 2000 1990 2000 1990 2000

India 31 24 28 26 39 50

East Asia 20 13 40 46 40 41

Europe 17 10 44 35 39 57

Latin Am 9 7 36 29 55 64

Mid. East 15 14 39 37 47 48

South Asia 31 25 27 26 43 49

SS Africa 18 17 34 30 48 53

World 7 5 36 31 57 64


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2.3 World exports of merchandise and

commercial services in 2000-2005

Merchandise Com.services

Value ($Bln) 10120 2415

GR 2000-05 (%) 10 10

GR 2003 (%) 17 15

GR 2004 (%) 21 19

GR 2005 (%) 13 11


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2.4 GDP and Trade Growth in 2005

Country Exports Imports

GDP Merchand. Services Merchand. ServicesN.America 3.4 6.0 10 6.5 11

-- USA 3.5 7.0 10 5.5 10SC.America 4.9 10.0 20 14.0 22Europe 1.7 3.5 7 3.0 8

CIS 6.6 4.5 201

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8 Africa 4.5 7.5 12 12.0 15 Asia 4.2 9.5 19 7.5 15-Japan 2.8 1.0 12 2.5 1-China 9.9 25.0 30 11.5 30-India 8.4 27.5 27 31.6 24

World 3.3 6.0 11 2.5


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2.5 Trade of Commercial services in 2005Country Exports Imports

US$Bln GR (%) %Share US$Bln GR (%) %ShareN.America 420 10 17 373 10 16

-- USA 353 10 15 289 10 12SC.America 68 20 3 70 22 3Europe 1233 7 52 1119 8 48-Germany 143 7 6 199 4 8-U.K. 183 -1 8 150 4 6

-France 114 4 5 103 7 4CIS 40 20 2 58 18 2

Africa 5712 2 66 15 3Middle East 54 12 2 80 11 3

Asia 543 19 22 595 15 25-Japan 107 12 4 136 1 6

-China 81 30 3 85 30 4-India 68 38 3 67 40 3World 2415 11 100 361 11 100


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2.6 Industrial composition of inward FDIin 2002 (in percentage)

Industry Developed Developing Cent.& Eastern World

Countries Countries Europe

Utilities 3 4 6 3

Construction 1 3 5 2

Trade 20 14 21 18

Hotels 2 2 2 2

Trans-Telecom 11 10 24 11

Finance 31 22 29 29

Business 23 40 10 26

Social 2 1 1 2

Others 8 6 2 7

Total 100 100 100 100


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2.7 Industrial composition of outward FDIin 2002 (in percentage)

Industry Developed Developing Cent.& Eastern World

Countries Countries Europe

Utilities 2 0 2 2

Construction 1 2 2 2

Trade 10 12 17 10

Hotels 2 2 0 2

Trans-Telecom 11 7 19 11

Finance 35 22 39 34

Business 34 54 19 34

Social 0 0 0 0

Others 2 2 2 2

Total 100 100 100 100


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3.1 Impact of Globalisation on Services

1. Globalisation has helped world trade to surgefrom 23 per cent of world GDP in 1960 to32.5 per cent in 1991 and further to 41 percent in 2000.

Services account for 50% or more of output

in all developing-country-regions except EastAsia.

Service exports are the fastest growingcomponents of global trade. In 1985-2000

annual GR for services exports was over 9%compared with 8.2% for merchandisedexports.


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4. As a result, services trade more thantrebled in 15 years to $1.4 trillion in2000 & accounts for 25% of trade.

5. Developing countries witnessed thefastest increase (four folds) in servicesexports and increased their share inglobal services trade from 14% in1985-1989 to 18% in 1995-2000.


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6. There had been significant advancement inresearch and technology leading to explosivegrowth in knowledge-based industries.

7. As most of the East and Southeast countries

adopted export-oriented strategy, share ofexports in their GDP recorded substantialincrease. Countries in East Asia had, ingeneral, large shares of manufacturing

exports in total merchandised exports.


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4.1 Impact of WTO-GATS

1. The negotiations under WTO hasfacilitated the progress of globalisation,which in turn has helped rising worldeconomic growth and reduction ofpoverty through increased flows ofgoods, services and investment.

2. Under WTO regime, effective tariffrates and non-tariff barriers (NTBs)

reduced significantly (and by 80-90%since 1945).


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4.2 Impact of WTO-GATS

3. Charges for ocean shipping, air transportand telecommunications dropped drasticallyin recent years.

4. Outsourcing has increased substantially inautomobiles and electronics.

5. However, since 1995 foreign affiliates arebeing established to have the advantage of

domestic sourcing and backward linkages inautomobiles, IT and food processing.


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4.3 Composition of developing country

exports (per cent) in 1998-2000

Manu-facturing

Services Others Total

Developing 56 15 29 100East Asia 72 13 15 100

South Asia 60 20 20 100


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5.1 Impact of services tradeon the economy

An efficient and well-regulated financial

sector leads to an efficient transformation ofsavings to investment and ensure optimalallocation of resources among sectors.

Benefits also arise from increased financialproduct variety and better risk sharing in theeconomy.

In the case of telecom, improved efficiency

generates economy-wide benefits as telecomprovides vital inputs for dissemination anddiffusion of knowledge and information.


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(a) An efficient and well-regulated financial

sector leads to an efficient transformation ofsavings to investment and ensure optimalallocation of resources among sectors.

Benefits also arise from increased financialproduct variety and better risk sharing in theeconomy.

(b) In the case of telecom, improved efficiency

generates economy-wide benefits as telecomprovides vital inputs for dissemination anddiffusion of knowledge and information.


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c) Transport services contribute to the efficientdistribution of goods in domestic and globaltrade.

d) Software development is the foundation ofthe modern information-based economy.

e) Education and health services are necessaryin building up the stock of human capital, akey factor long run growth performance.

f) There are other crucial business servicessuch as accounting and legal servicesleading to efficiency and productivity rise.


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Goods liberalization in the absence of servicesliberalization may lead to high transactionscost which in turn could result in negativeeffective protection for goods.

Collier and Gunning (1999) consider hightransaction costs as the most significantimpediment to economic growth in Africa.

According to Summers (1999), the single

most important innovation in the history ofthe American capital markets was the idea ofgenerally accepted accounting principles.


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There are a number of research studies onthe impact of services trade liberalization.

Although each of these studies uses adifferent scenario to project the gains from

liberalization, all show that the economicgains from services liberalization greatlyexceed the gains from merchandise tradeliberalization.

Moreover, studies shows that developingcountries are the major beneficiaries of suchliberalization.


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The key issue is whether the link betweenliberalization of services and economic growthis expected to be different from that betweengoods liberalization and growth.

It is recognised that liberalization of theservices sector in which a country has acomparative disadvantage, will also lead toincreased scale of activity in the goods sector.

This will strengthen the growth impact ofliberalization.


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Levine (1997) examines the link betweenfinancial services and economic growth andidentifies five major functions of the financialsystems which help in minimizing transactionscosts and improving the allocation of real

resources. These are (i) facilitating risk trading, (ii)

allocating capital among productive uses, (iii)monitoring profits, (iv) mobilizing savings

through the use of innovative financialinstruments and (v) easing the exchange ofgoods and services.


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Francois and Schuknecht (1999) regress thegrowth of per capita real GDP on a measureof the general degree of openness in trade,certain macroeconomic variables and aconcentration ratio for the financial sector.

They find a strong positive relationshipbetween economic growth and financialsector competition.

In the long run, services trade liberalizationshifts resources from agriculture tomanufacturing with greater positiveexternalities.


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In sectors like telecommunications, software,financial services and transport, there isconsiderable scope for learning by doing,knowledge generation, expanding product

variety, and upgrading product quality. A number of empirical cross-country studies

by Dollar (1992), Sachs and Warner (1995),Edwards (1993) and Coe et. Al. (1997)

suggest that the impact of liberalization oftrade in goods on the long run rate ofeconomic growth is positive.


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A study by the World Bank as reported in the"Global Economic Prospects for DevelopingCountries" (2001) indicate that:

Liberalization of services in developing

countries could provide them $6 trillionadditional income in 2005-2015.

Services underpin economic developmentefforts, according to the Bank, because more

efficient provision of services in finance,telecom, transportation and professionalbusiness services have broad linkage effects.


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The Bank stresses the importance of effectivegovernmental management of liberalizationprograms, including the elimination ofbarriers to entry for new competitors,

regulatory policies and removal of exportrestrictions.

Bank estimates suggest that countries thathave fully liberalized trade and investment in

finance and telecommunications grew onaverage 1.5% fast than other countries overthe past decade.


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Practices such as cargo reservation,limits on provision of port services andcollective rate setting among shippinglines can increase freight rates by up to

25% on certain routes, the Bank says. Inefficient container services in Brazil

have raised the price of customsservices, warehousing, inland transport

and port services to twice the globalaverage.


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Liberalization of services under the General Agreement on Trade and Services can,according to the Bank, accelerate and lendcredibility to domestic policies as well as

increasing access to markets in industrialcountries.

Gains from a cut of 33 per cent in barriers toservices trade should raise global economic

welfare by $389.6 billion, which exceeds theirestimated gains from manufacturesliberalization of $210.7 billion.


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6.1 Assessment made by theDeveloping Countries

An assessment of trade inservices made jointly by somedeveloping countries viz. Cuba,Dominican Republic, Haiti, India,

Kenya, Pakistan, Peru, Uganda, Venezuela and Zimbabwe (WTO2001b) made the followingobservations:

(a) Developing Countries HaveNot Received Benefits From TheirCommitments


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6.2 Assessment made by theDeveloping Countries

(b) Market Power of ServicesCorporations Dwarf, Even Wipe-outDeveloping Countries Small Suppliers

(c ) Services trade liberalisation underthese circumstances of unequal competition

has aggravated the alarming divide insupply capacity between developed anddeveloping countries.

(d) Developing countries small

suppliers are also disadvantaged in otherways, such as through discriminatory accessto information channels and distributionnetworks


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7.1 Assessment made by theWTO Secretariat

(a) A note from the WTO Secretariat (WTO2001b) appears to argue that thedeveloping countries have benefitedsignificantly from liberation of trade inservices.

(b) The note points out that while a partialapproach with a strong focus on sectorsmay appear to be attractive, from ananalytical angle the sector-specific reformsmay imply awkward trade-offs. Since theservices universe is very diverse-structurally, economically and politically.


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c) Exports growth of commercial services fordeveloping countries in 1990-2000 (9%)exceeded that (5.5%) for developedcountries.

d) The 49 least developed countries alsoexperienced strong export growth ofcommercial services (6.3%).

e) 25 developing countries depend on theexport of commercial services for morethan half their total export revenues.


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f) It would be nave to assume that onesingle, detailed blueprint could be appliedfor assessment purposes across all sectors.

g)The secretariat emphasized that theunderlying question is:

-- What are the economic effects in acountry that liberalizes its own servicesregime in a stable external environment(with no liberalization abroad)?


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h)Direct Economic Impact: Reduction ofprices, increased supply, improved qualityand reliability in services. Examples-Growthof mobile phones and international creditcards.

i) Indirect Economic Impact: Significantindustrial diversification, improvement inexports,profitability,production, employmentof user industries, development of skill and

technology,cyclical resilience of growth. j) Social benefits: Distributional equity,

general improvement in environment, publichealth, safety and national security.


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8.1 WTO-GATS- General Issues

Developing countries made substantialcommitments under GATS with respect tomany services sectors, without havingmuch experience in their implementation.These countries have undertaken ahigher share of full bindings in marketaccess under the cross border andcommercial-presence modes of supply. In contrast they did not get

concessions of meaningful economicvalue under labour intensive services andthe movement-of-natural persons modeof supply.


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Except in the areas of travel andworker remittances, most developingcountries have deficit in trade in services.

Essentially developing countries havemajor supply constraints and do notsatisfy the preconditions for building acompetitive service sector. Developed countries gained more in

world trade growth in services.


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In the case of India, software exports,with an average growth rate of 50 percent since 1995-96, have emerged as animportant source of India's foreignexchange earnings, contributing

substantially to invisible receipts. Other business and professionalservices such as accounting, legal, health,education and construction services couldemerge as significant source of foreignexchange receipts as India has acomparative advantage in thesespecialized human resource intensiveservices.


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The availability of permission to Indiansto undertake such services abroad wouldnot be fruitful, unless the qualifications toprovide these services from IndianInstitutions are recognized abroad.

At the time of negotiations, it needs tobe ensured that standardization of thesequalifications are sorted out to protectinterests of developing nations.

Moreover, social obligations in the caseof services such as telecom (telephony torural areas) and air transport (linking far-flung areas) have to be carefully nurtured.


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9.1 Review Questions

1. What do you mean by globalisation?What has been its impact on globalproduction and trade of services?

2. What has been the impact of WTO-GATS on globalisation and global tradeof goods and services?

3. (a)What is the assessment of developingcountries on the impact of WTO-GATSon services trade?

(b) What has been the assessment ofWTO Secretariat on the impact of WTO-GATS on services trade?

Which opinion would you agree and why?


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9.2 Review Questions

4. (a) Discuss positive and negative impactof services production and trade onoverall economic growth.(b) Would you agree with the view that

globalisation of trade in services has ledto significant increase in growth ofdeveloping countries?

(c) What could be the adverse impact ofservices trade on the economies of thedeveloping countries?


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Thank you

Have a Good Day

global services-9 prof. tarun das

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