Services Trade and Logistics Reforms for Growth and Competitiveness Gianni Zanini April 2008

Services Trade and Logistics Reformsfor

Growth and Competitiveness

Gianni ZaniniApril 2008

Six questions:

I. What is trade in services?

II. Benefits of services trade liberalization?

III. How to identify and assess barriers to services trade?

IV. Elements of successful services reform?• Zambia case study

V. What do international negotiations offer?

VI. How to improve trade logistics?

What are Services?

1. Business services 2. Communication3. Construction4. Distribution5. Educational6. Environmental

7. Financial 8. Health and social 9. Tourism and travel10.Recreational,

cultural and sporting11.Transport services12.Other

A wide definition of trade

MODES1. Cross-border Trade

2. Consumption Abroad

3. Commercial Presence

4. Movement of Natural Persons

EXAMPLE Software, insurance or tele-diagnosis from country B to 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

Services trade grew faster in developing than in high-income countries...

Real Service Export Growth (%)

0.0

5.0

10.0

15.0

20.0

25.0

Low inc Lower mid inc Upper mid inc High inc

1995-99 2000-04 2005-06 2007

And services trade is becoming more important for upper middle income countries

Service Export (% of GDP)

0.0

5.0

10.0

15.0

20.0

25.0


1995-99 2000-04 2005-06 2007

Mode 1: Cross-border trade in business services

Regional distribution of business services exports, 1990-2005 Average growth rates of business services

exports, 1995-2005

Regional Distribution of Business Services Exports

223 7 9

256

79

4 11 8

380

86

10 17 12

530

171

35 23 23

0

100

200

300

400

500

600

East Asia & Pacif ic South Asia Latin America & Caribbean Middle East & Africa OECDs

(in b

illio

n of

US

dolla

r)

1990 1995 2000 2005906

Average Growth Rate of Business Service Exports for Selected Countries during 1995-2005

9.3

9.4

9.7

9.8

10.6

10.6

10.9

10.9

11.5

11.9

12.2

12.2

12.3

13.6

14.4

14.7

15.1

16.6

25.4

31.6

0 5 10 15 20 25 30 35

United States

Norway

Sweden

Mauritius

Malaysia

Morocco

New Zealand

Nigeria

Jamaica

United Kingdom

Spain

Finland

Malta

Israel

Argentina

Romania

Brazil

China

India

Ireland

(%)

Second question:I. What is trade in services?






Liberalizing Services Imports Promotes Efficiency and Growth

• Removing barriers to services trade leads to lower prices, improved quality, greater variety

• inefficient and limited supply acts as a tax on production and works against economic growth and export diversification

• benefits from liberalization vary: 1-50% of GDP• temporary and partial (3%) movmt of foreign

service providers might yield $150+ billion gains

Services reform has a big impact on manufacturing productivity

• Empirical study relating TFP of Czech firms in manufacturing to a measure capturing progress in services liberalization, weighted by the dependence on services inputs and controlling for other aspects of openness.

• Key finding: 10% increase in FDI in each services sector led to a 3% increase in the average productivity of Czech manufacturing firms.

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.

Services policy affects not just the size but also the pattern of trade in goods…

Benefits from more open transport services

• Sub-Saharan African exporters pay transport costs 5 times greater than tariffs.• Duopolies still flourish in international air transport. • Collusive arrangements in maritime transport are still exempt from competition

law in US and EU

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

Source: Fink, Mattoo and Neagu (2002)

Mode 3: Significant benefits from eliminating barriers to FDI

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 (2006)

In recent years, India has radically reformed its services sectors

Newly created index of services reform

0

0.5

1

1.5

2

2.5

3

3.5

4

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Banking Insurance Telecom Transport

Newly created index of services reform

0

0.5

1

1.5

2

2.5

3

3.5

4

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Banking Insurance Telecom Transport

0

5

10

15

20

25

30

35

40 Growth Rate (CAGR)

36%

20%

FDI in Services*

FDI in Non-services

India: FDI in services sector is growing faster than in non-services . . .

(1992/93 values are indexed to 1; Unit: US$)

1992

/93

1993

/94

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

0

5

10

15

20

25

30

35

40 Growth Rate (CAGR)

36%

20%

FDI in Services*

FDI in Non-services

India: FDI in services sector is growing faster than in non-services . . .

(1992/93 values are indexed to 1; Unit: US$)

1992

/93

1993

/94

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

Which benefited the performance of downstream manufacturing industries

Gains in Annual TFP Growth After Services Reform

0

1

2

3

4

industries withlimited

dependence on banking

industries with high


industries with limited

dependence on telecomms



Percent Gains in Annual TFP Growth After Services Reform

0

1

2

3

4

industries withlimited




industries with limited




Percent

New study based on panel data for 10,000 Indian firms for the 1990-2005 period finds that

banking, telecommunications and transport reforms all have significant positive effects on the productivity of manufacturing firms

Source: Arnold, Javorcik, Lipscomb and Mattoo (2008).

Third question:I. What is trade in services?


III.How to identify and assess barriers to services trade?




Trade Barriers in Services• Tariffs are relatively uncommon. • Quotas are pervasive

– Limits on the number of foreign firms; limits on percent foreign ownership in banking, insurance, etc.

– Foreign providers completely shut out in some sectors (transport within a country)

– Foreign exchange restrictions can limit consumption abroad (tourism, education)

– Limits on movement of foreign personnel– Local content requirements in broadcasting

Trade Barriers (2)

• Discriminatory measures– Preferential taxes and subsidies– Preferential procurement– Preferential access to essential facilities

• Non-discriminatory measures– Qualification and licensing requirements– Qualification and licensing procedures– Technical regulations

Synthetic Services Trade Indices

• WTI includes services GATS commitment restrictiveness, transport, telecom, logistics indices

• DECRG is working on an index of actual services trade restrictiveness

• Most extensive liberalization GATS commitments are by recently acceded countries to WTO and developed countries

• Weakest commitment are by low and lower middle income countries, that could benefit the most

WTO accession countries and developed countries are least restrictive

Top 20: Bottom 20:

Country GATS Commitments Country GATS Commitments

Moldova 15.7 Togo 96.0 Georgia 29.5 Namibia 96.1 Latvia 30.9 Bangladesh 96.7 Kyrgyz Republic 33.4 Mauritania 96.7 Albania 34.9 Burkina Faso 96.8 Iceland 35.6 Uganda 96.8 Armenia 36.8 St. Kitts and Nevis 96.9 United States 37.3 Cameroon 96.9 Lithuania 40.3 Mali 97.0 Macedonia, FYR 41.9 Costa Rica 97.2 Hungary 42.0 Chad 97.3 Oman 42.6 Central African Rep. 97.5 Estonia 43.3 Guinea-Bissau 97.65 Norway 43.5 Maldives 97.67 Jordan 43.6 Niger 97.70 Saudi Arabia 44.5 Fiji 97.8 Australia 45.2 Congo, Dem. Rep. 97.8 Switzerland 46.3 Belize 98.4 South Africa 46.6 Tanzania 99.0 New Zealand 47.8 Madagascar 99.6

Lower Income countries are the most restrictive

Overall GATS Commitments Restrictiveness Index

84.477.1

73.7

61.2

0

10

20

30

40

50

60

70

80

90

100


Travel and Tourism is least restricted across all income groups

GATS by Sectors

0102030405060708090

100

Busine

ss

Communic

ation

Constr

uction/E

ngine

ering

Distrib

ution

Educti

onal

Enviro

nmen

tal

Finan

cial

Health

/Soc

ial

Touri

sm/T

rave

l

Recre

ation

al/Cult

ural

Trans

port

Other S

ervice

s


Current policies on FDI in services (Mode 3): significant unilateral liberalization

Countries Banking (retail) Telecom-Fixed Retail services Maritime Shipping Accounting

China

India

Malaysia

Indonesia

Philippines

Argentina

Brazil

Chile

Colombia

Mexico

Jordan

Morocco

Ghana

Nigeria

South Africa

Kenya

Australia

Denmark

Japan

South Korea

United States Mattoo, Gootiiz 2007

Open

Restricted

Closed

GATS commitments and offers in Mode 3 do not even capture existing openness

Countries Banking Telecom-Fixed Retail Maritime Shipping Accounting

China

India NC

Malaysia NC

Indonesia NC NC

Philippines NC NC

Argentina

Brazil

Chile NC

Colombia NC

Mexico

Jordan

Morocco

Ghana NC NC

Nigeria NC NC

South Africa NC

Kenya NC NC NC

Australia

Denmark

Japan

South Korea

United States NC

Current policies on cross-border trade in services (Mode 1): openness differs across sectors

Countries Bank: Loans Insurance: lifeInternational Maritime

Shipping Accounting Dom/law

China

India

Malaysia

Indonesia

Philippines

Argentina

Brazil

Chile

Colombia

Mexico

Jordan

Morocco

Ghana

Nigeria

South Africa

Kenya

Australia

Denmark

Japan

Korea

United States

But GATS commitments and offers on mode 1 are far from capturing even existing openness

Countries Bank: Loans Insurance: lifeInternational Maritime

Shipping Accounting Dom/law

China NC

India NC NC NC

Malaysia NC

Indonesia NC

Philippines NC NC

Argentina NC

Brazil NC

Chile NC

Colombia NC NC

Mexico NC

Jordan

Morocco NC

Ghana NC NC

Nigeria NC NC NC

South Africa NC

Kenya NC NC NC

Australia NC

Denmark NC

Japan NC

Korea NC

United States NC NC

Fourth question:I. What is trade in services?



IV.Elements of successful services reform?• Zambia case study



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


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


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

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

Regulation to protect consumer interests

Fourth question: Zambia case studyI. What is trade in services?



IV.Elements of successful services reform?• Zambia case study



Zambia: Some services have benefited from openness

• Since mobile telephony was opened to international competition in 1995, subscribers have risen by 300,000.

• In tourism, investments by Sun International have created 350 permanent jobs, supported by 500 or more casual and contract workers.

• In insurance, since the liberalization of the sector in 1992, non life premium rates have dropped; e.g., motor vehicle insurance premium rates fell from 10-16% of the value of the car in 1992 to 6% today.

Zambia: openness has not always improved access to services

• The national air carrier was liquidated and the sector was opened to foreign airlines. International air transport grew by 7 per cent per annum between 1995 and 2004, but domestic traffic declined at an average of 5 per cent per annum.

• Even by poor country standards, access to telecom, health and education is unusually low.

Zambia: openness has not improved access to banking services

• Banking was liberalized before establishing a proper regulatory framework. 1991-1994: Ten new bank licenses issued 1995-2001: Nine bank failures, causing estimated losses

equivalent to 7 percent of GDP.

• Foreign banks today account for over two thirds of total assets, loans and deposits. But credit to the private sector is only 8 per cent of GDP -

lower than in 1990 and in most other Sub-Saharan African countries.

Only 5,000 people hold 90 percent of loans.

Zambia: access to banking services is not just low, it is extremely unequal

• Only 5,000 people hold 90 percent of loans. • Firms outside of Lusaka, Ndola, and Livingston had to

give 65 percent more collateral (relative to the size of the loan).

• Large firms and goods exporters borrow at rates much below the average rate of 48 percent in 2005.

• Nearly 80 percent of fixed lines are located in Lusaka and the Copperbelt, where only 30 percent of the population lives. Only 0.30 percent of Zambia’s rural households, accounting for 65 percent of Zambia’s population, own a telephone.

Zambia has also failed to exploit its advantage in tourism

• In 2005, real growth of the travel and tourism sector was ten times faster in Botswana and Tanzania than in Zambia –not attributable to Kwacha appreciation alone.

• Contribution of tourism to GDP and employment is only about 4% in Zambia compared to more than 10% for Botswana and Namibia.

• Benefits of tourism have been unequally spread. Despite the high tourism potential of other poorer provinces, 82% of the tourists visit the Victoria Falls/ Mosi Oa Tunya area only and 93% of employment in nature-based tourism activities is concentrated in Livingstone and the rapids.

• Preliminary cross-country estimates suggest that Zambia is receiving one-third less tourists than would be warranted by its fundamental endowments.

Zambia: flaws in domestic reform

The current crisis of access in Zambia, and hence diminishing faith in reform, is attributable to:

• The persistence of barriers to entry and competition, e.g. in telecom, transport, tourism

• The inappropriateness of regulation (e.g. banking) and weak capacity of regulatory bodies (telecom, insurance, competition)

• The absence of meaningful policies to widen access to services,

• Inadequate efforts to deepen integration of regional services markets.

Zambia: barriers to entry hurt most firms and consumers

• Zamtel’s de facto monopoly in the international telecommunications gateway deprives 30,000 households of access to telephones.

• Denial of Fifth Freedom rights by Zambia and South Africa to third countries to fly the Lusaka-Johannesburg route undermine competition and hurt horticulture and tourism.

• Up to 74 licenses are required in tourism and can take up to a year to obtain at significant cost. Improvements in the business climate and infrastructure could draw 51 per cent or nearly 300,000 more tourists every year.

Zambia: regulatory weaknesses undermine the benefits of opennessWeakness:• The Communication Authority of Zambia is ill-equipped, legally and

technically, to ensure efficient interconnection• The Pensions and Insurance Authority needs deeper capacity to

ensure the solvency of firms, and • The Civil Aviation Authority is not adequately equipped to ensure

competition and safety,• Competition Authority of Zambia needs more resources to address

rigorously anti-competitive practices Inappropriateness:• In banking, burdensome “Know Your Customer” rules, • In accounting, demanding International Financial Reporting

Standards (IFRS) may promote financial integrity, but they effectively shut out small enterprises and poor households.

Tax system discriminates against services, small firms and poor regions

• Exports of services are subject to income tax of 35 per cent and value added tax of 17.5 per cent whereas non-traditional exports of goods are subject to a lower corporate income tax of 15 per cent and completely exempted from value added tax.

• Domestic firms must, in general, pay a corporate tax rate of 35 per cent whereas some large international investors, such as Sun International, are subject to lower negotiated corporate tax rates of 15 percent.

• Tourism in Livingstone alone is exempted from VAT, which risks accentuating existing regional inequalities in the development of tourism.

Zambia: absence of complementary policies to widen access to services

• The market has not and cannot deliver socially desirable levels of access to essential services

• There are virtually no serious pro-active policies to widen access to financial, telecommunication and transport services

• Powerful temptation to revert to inefficient instruments of the past such as public or private monopolies.

• Instead, emulate successful experiments in other countries harnessing markets to improve access to telecommunications, transport and financial services, as well as to enhance conservation of natural resources, through universal access funds that are competitively allocated and exploit synergies between service sectors.

• Assess critically whether there is an empowering role for affirmative action, for example, through preferential public and private procurement, of the type that was employed in distribution services.

Zambia: long term consequences of flawed sequencingEconomic• In banking, allowing new entry without creating a

mechanism to sift the sound institutions from the dubious led to disruptions that have had a durable effect on financial development.

• Liberalizing markets for agricultural output before the development of markets for services inputs like transport, had a durable effect on agricultural development.

Political• The failure to ensure that the benefits of liberalization are

widely shared by implementing policies to widen access has made reform undesirable and unsustainable

Key elements of successful reform

• Emphasis on competition• Effective domestic regulation• Access-widening policies• Appropriate sequencing• Credibility

Six questions:I. What is trade in services?






Three potential benefits

•Deeper liberalization through reciprocal exchange of concessions

•Credibility through binding commitments

•Regulatory cooperation

Two potential costs

• More complexity and intrusion into domestic policy than for goods trade

• Trade-offs in policy flexibility, domestic sovereignty and market access

GATS vs FTAs vs EIAs

• GATS/Doha: little progress, focus on commitments not on actual liberalization, little prospects for Mode 4 unskilled

• FTAs: some bites, some do not; potential for reciprocal Mode 4 liberalization

• EIAs: some bites, some do not; but much potential for regional regulatory cooperation and for reciprocal Mode 4 liberalization

Six questions:I. What is trade in services?






www.worldbank.org/lpi

Ranking and ComponentLogistics Business environment and institutions

Performance data

Available as: Rankings, Maps, scorecards

http://www.worldbank.org/lpi

Customs and border processingDomestic costsInfrastructureTracking and TracingTimelinessLogistics competence of local service providersEase of arranging international shipments

LPI measures seven dimensions of country performance:

Key FindingsAll seven dimensions matter but performance often influenced by the weakest link in the supply chain therefore compromising overall performance and competitivenessEstablishing predictable and reliable supply chains opens opportunities – reliability as important as transport costs and speedReliability contributes to increased investment, diversification, and more competitive trade environmentQuality of private sector services also important No matter what the income level, good performance and best practice is possible

LPI strongly associated with competitiveness LPI strongly associated with competitiveness outcomes: growth, trade expansion and outcomes: growth, trade expansion and diversification of exportsdiversification of exports

Key Policy Implications

Need to expand the traditional reform agenda beyond customs reform and infrastructure developmentImproving the quality of logistics services and increasing border agency coordination also critically importantReforms need to be comprehensive (processes, services and infrastructure) and supported by public and private constituenciesNeed to be tailored to the individual circumstances of each country

Country LPI Rank

South Africa 24Malaysia 27Chile 32Turkey 34Hungary 35Czech Republic 38Poland 40Latvia 42Argentina 45Estonia 47

TOP 10 COUNTRIES

LOWER MIDDLE INCOME

Country LPI Rank

China 30Thailand 31Indonesia 43Jordan 52Bulgaria 55Peru 59Tunisia 60Brazil 61Philippines 65El Salvador 66

TOP 10 COUNTRIESLOW INCOME

Country LPI RankIndia 39Vietnam 53Sao Tome and Principe 57Guinea 62Sudan 64Mauritania 67Pakistan 68Kenya 76Gambia, The 77Cambodia 81

TOP 10 COUNTRIES

UPPER MIDDLE INCOME

LPI Ranks

From LPI benchmarks to ESW

LPI and components are starting points for in depth assessments

1. In LDCs: 1. TTF Audits part of DTIS, CEM or project prep

2. In middle income countries:1. Self standing action plans2. Part of broader growth & competitiveness

agenda and ESW.

Typical components of action plans

• Missing links in infrastructure• Soft measures:

– Port and customs reform– Processes and automation (beyond customs)– Special Customs regimes for exporters– Regulations, barriers to entry in the logistics industry.– Freight services: consolidation trucking sector/ Railways reform,

multimodality– Security and crime– Regional topics: logistics facilities and access to land– Shipper practices & capacities of local services providers,

training...

TTF AUDIT Methodology

• Audit methodology @ www.gfptt.org– home page of Global Facilitation Partnership

for Transportation and Trade bottom of page, under "Useful toolkits"

– newly revised version will be very soon published as a Transport Paper.

http://www.gfptt.org/

Services Trade and Logistics Reformsfor

Growth and Competitiveness

Gianni ZaniniApril 2008

Documents

Services Trade and Logistics Reforms for Growth and Competitiveness Gianni Zanini April 2008