Services comprises over 50% of the economies of most South Asian countries. However, only a few countries have been able to harness trade gains from the sector. What are the current barriers in enhancing services trade within South Asia? What are the measures necessary to reduce these barriers?
Yes, compared to the proportion of services in GDP, trade in services in South Asia is very low. If we look at the global picture, it is estimated that although 60% of global output is in services, only 20% of global trade is in services. Compared to the global output to trade in services ratio (3:1), the South Asian ratio will indicate much lower trade in services compared to output.
The reasons are easy to comprehend. South Asia was a latecomer in implementing trade liberalisation policies and gradually integrating with the world economy. Further, domestic regulations that govern services (licensing, standards, restrictions, etc) still remained in many South Asian countries despite trade liberalisation. In other words, trade liberalisation was mainly confined to goods, not services. South Asia got a wake-up call with regard to liberalisation of services in 2000, when GATS negotiations on services liberalisation started.
There are many barriers in services liberalisation. The complex regulations governing services are well entrenched in South Asian economies. Dismantling outdated regulations, reforming certain other regulations, and introducing new market-friendly regulations is a complex time-consuming exercise. It needs stakeholder consultations and the public must be educated on the pros and cons of services liberalisation.
Relative lack of connectivity, both in terms of transport infrastructure and communications infrastructure, undermines trade in services. For instance, business process outsourcing could play a far greater role if there was improved telecommunications connectivity both within countries and linking the region.
Sometimes, high intensity of trade in goods among countries can trigger services liberalisation. For example, after the India-Sri Lanka Bilateral Free Trade Agreement (ILBFTA) increased the intensity of trade between the two countries, it automatically triggered measures by both governments to facilitate the movement of business people and tourists. Sri Lanka implemented visa-at-arrival for Indian citizens in January 2002, and India gave more destinations for Sri Lankan Airlines in India. This has led to a large flow of tourism between the two countries.
The point I am trying to make is that if SAFTA works and stimulates a lot of trade among South Asian countries, it will automatically trigger services liberalisation among these countries.
The answer, in short, is to show people the benefits of further trade liberalisation. Then there will be less resistance to gradual liberalisation of the restrictions governing services.
The South Asian region faces competition from a large number of developing countries in Southeast Asia, Eastern Europe and South America. Governments are required to be proactive in building domestic infrastructure and increasing competition. What should be the domestic policy agenda for South Asian countries so that they can benefit from trade in services?
Domestic capabilities should be strengthened to benefit from services liberalisation. In other words, what we expect of services liberalisation is not services from a neighbouring country completely wiping out the domestic service sector, but such liberalisation leading to increased competition (just as in the case of goods) and leading to lower prices and better quality of service to the consumer.
If we take Mode 4 liberalisation, especially professional services, we find that in many South Asian countries the regulatory framework governing such services is weak or not well defined. For example, the medical council of a particular South Asian country may not have an Act of Parliament, or even if an Act exists, registration procedures, recognition policy of foreign professionals, etc, may not be well defined. These areas need to be developed for signing a Mutual Recognition Agreement (MRA) between two countries or among all South Asian countries for the movement of professionals under Mode 4.
South Asian countries need to enhance the capacity of their respective Departments of Commerce with technical and human resources. It is the Department of Commerce that has to initiate the liberalisation of services and therefore has to communicate with the stakeholders and educate them on what capabilities need to be developed before opening up a particular service sector to regional competition.
It is suggested that if services trade is included in SAFTA, India is most likely to amass all the benefits. How can other South Asian countries expect to gain from services liberalisation at the regional level?
This is largely an unfounded fear. I recall that before ILBFTA was signed in 1998 it was said that Sri Lanka would be swamped by Indian goods and all SMIs in Sri Lanka would get wiped out of the market. We now have seven years of experience (ILBFTA came into operation in 2000) with ILBFTA and nothing like that has happened.
When working out an FTA or an RTA we can always build our concerns into the framework governing it. In the case of ILBFTA we took note of the asymmetry between the two countries and, accordingly, had a different tariff phase-out timetable for the two countries (India having a shorter period), a different negatives list (India having a shorter list), differentiated rules of origin (more favourable for Sri Lanka), and so on. In fact, the trade ratio between the two countries reduced from 10.3:1 in 1999 to 3.3:1 in 2005 and Sri Lankan exports to India grew much faster than vice-versa.
In the case of services, the governing framework can be formulated in a similar way making use of the flexible GATS framework of ‘offers’ and ‘requests’. Schedules for market access and national treatment for the four modes can be prepared according to the individual country’s comfort level. If a South Asian country feels that Mode 4 liberalisation should be restricted with India, it could do so when preparing the schedules. In fact, under the proposed India-Sri Lanka Comprehensive Economic Partnership Agreement (ILCEPA), Sri Lanka has linked Mode 4 with Mode 3 to start with.
In other words, movement of natural persons from India will be initially linked to commercial presence and will later be considered for de-linking once Sri Lankan professional groups get their act together. However, where shortages exist in the labour market in Sri Lanka, such as nurses to work in hospitals in the conflict zone, and English teacher trainers island-wide, Sri Lanka is considering Mode 4 liberalisation for India without any attachments.
Even without ILCEPA in place, Sri Lanka has many Indian services in tourism, health, education and transport, without any threat to its domestic service-providers. So, it is not correct to say that India will reap all the gains from services liberalisation.
South Asian countries should also look to using regional liberalisation as an opportunity to share with India the large volumes of services exports she is enjoying. For instance, in the BPO sector, Bangladesh has already taken steps to sub-contract some of the work given to major Indian service-exporters. Other South Asian countries can adopt a similar approach and thereby see India as an opportunity rather than a threat.
At the same time, investments in human and physical capital need to be made in order to maximise gains from liberalisation. English language education, telecommunications connectivity and improved transport networks (aviation, in particular) are priority areas that are essential for effective utilisation of a liberal services regime.
South Asia is amongst the worst performers in human and economic development indicators in the world. This clearly suggests that the state of public services, infrastructure services and utilities is abysmal. What broad policy directions do you suggest for reform of these sectors in South Asia?
South Asia has to look at international best practices because services are different and what works in a particular service sector may not work in another service sector. For example, privatisation may produce positive results in the telecommunications sector but not in the water supply sector.
South Asia has to look at the Private-Public Partnership (PPP) or performance contract or franchise model very closely for some public utilities like water supply, electricity, etc. Of course, the PPP model needs a good regulatory framework and to formulate such a framework, good human resources should be mobilised. The reform process will be facilitated by a well developed capital market.
South Asian LDCs are known to suffer from trade problems such as excessive dependency on a few products and low value-addition. What forms of preferential treatment is necessary to ensure that South Asian LDCs gain from services liberalisation in the region?
Preferences for LDCs can be built into the schedules that non-LDCs (India, Pakistan and Sri Lanka) prepare when services liberalisation comes into effect under SAFTA at a future date. For example, under Mode 4, more market access can be offered by non-LDCs in the schedules they prepare for LDCs. The ‘denial of benefits’ (the equivalent of rules of origin for trade in goods) can also be relaxed by non-LDCs for LDCs when formulating the services liberalisation framework. If politically feasible, non-LDCs can engage in unilateral liberalisation of services in certain sectors where they have developed an effective regulatory framework. For instance, Sri Lanka has implemented a visa-on-arrival policy for all SAARC citizens unilaterally. LDCs can benefit from such measures.
Another unilateral measure that South Asian non-LDCs can consider implementing is an ‘open skies’ policy for LDC airlines. India has already implemented this policy for all SAARC countries. Such measures can go a long way in assisting LDC services exports. |
