Services and development: The role of regulatory reform and trade liberalisation
Dirk Willem te Velde - Programme Leader / Research Fellow, ODI
Karen Ellis - Programme Leader / Research Fellow, ODI
Massimiliano Cali - Research Officer, ODI
Claire Melamed - Action Aid
John Cooke - Chairman, Liberalisation of Trade in Services (LOTIS) Committee, International Financial Services London
HE Mr. Abhimanu Kundasamy - The High Commissioner of Mauritius
The Hon. High Commissioner for Mauritius opened the discussion through an exposition of how Mauritius has seen a substantial growth in its financial sector through a gradual and prudent implementation of international standards in the sector. Mauritius has had in the past two years a multipronged development strategy, implementing a number of bold reforms to turn it into a globally competitive and open economy. The financial sector in the Mauritius now accounts for 10.6% of GDP as opposed to 2.3% for Sugar, a product on which it traditionally relied.
The global financial crisis has however exposed the fragility and vulnerability of the global financial system. Better regulations and corporate behaviour is needed in order to restore confidence in the financial system.
Dirk Willem Te Velde took the floor affirming that very few countries pay enough attention to the service sector within their economy. It is however important to think of the role services in development and how they can stimulate development.
Part of the problem is the polarised view of services, to which there are two dimensions:
1) Services are underplayed in development, they do however still play an important role
2) There are opposing views on how services can be stimulated to aid development as well as what role trade liberalisation plays in development
Risks and benefits should be carefully analysed, with regulation introduced in order to minimise risks.
In all countries there has been a rapid increase in the percentage share of the service sector in GDP, including an increase in the share of income and employment especially for sectors such as tourism which tends to employ poor people. Services contribute to the investment climate and provide public services such as healthcare, education and the opportunity to diversify the economy.
Trade liberalisation can help exploit comparative and competitive advantages, improve the performance of domestic players as well as bring in new products at cheaper prices. Two examples include the liberalisation of trade (together with privatisation) which has led to widespread adoption of ICT in developing countries, ICT initially used by foreign firms bringing in new capital, especially in Africa and Latin America, and the liberalisation of air access in Southern Africa which led to an increase in passenger arrivals and a decrease in prices.
Appropriate regulation is needed in order for liberalisation to bring benefits: A level playing field, competition laws, financial stability, provision of information, access to services, provision and maintenance of utilities (such as electricity), the protection of consumers etc.
Karen Ellis continued the discussion by highlighting the role played by the financial sector. The financial sector plays a crucial role in the economy – it underpins private sector development, investment and growth as well as mobilising savings, facilitates transactions & entrepreneurship, allows risk to be managed and reduces poverty at the household level. One study shows that an increase of 10% in credit will lead to a 3% decrease in poverty.
Evidence shows the entrance of foreign banks brings a number of benefits:
1) Increased efficiency, dynamism and innovation in the banking sector
2) Better services for consumers
3) Increased domestic bank performance
4) Better access to international capital
5) More efficient allocation of capital – better credit assessment
Countries where foreign bank entrance has occurred have had on average 1.2% more growth than countries which have not allowed foreign bank entrance. Risks are however involved with foreign bank entrance such as financial instability and vulnerability to financial contagion.
Washington consensus policies advocate that in order to minimise risks a sound macroeconomic framework is needed, domestic banks need to be restructured and commercialised and a sound financial regulatory and supervisory system needs to be implemented.
Integration in international capital markets may increase vulnerability to contagion; however some studies show foreign banks decrease instability, perhaps due to better access to international capital, and greater portfolio diversification.
There is also evidence that foreign banks cherry pick high income customers, although this may force domestic banks to look for customers in riskier income groups (such as people on low incomes); the evidence on the overall impact of foreign banks on access to financial services is mixed.
Governments can help to improve access to financial services in various ways, for example by implementing:
1) Credit Bureaux
2) Better contract Enforcement
3) Well designed regulation
4) Stronger incentives to widen access to services through for example:
a. Basic Bank Accounts
b. Monitoring and Benchmarks
Massimiliano Cali continued the discussion by exposing the risks and benefits of health service liberalisation.
Health service liberalisation is widely regarded as a controversial subject, due to the public good nature of health services provision which calls for the involvement of the public sector. However the public sector has often been ineffective in developing countries. For instance In India, one of the countries that welcomed the idea of universal healthcare provision by the state, public health services provision has often been rigged with inefficiencies. Trade in health services can prove beneficial to complement the role of the public sector in improving access to healthcare.
Health service can be traded in a number of ways:
1) Temporary movement of workers (especially nurses)
2) The establishment of commercial ventures to provide healthcare in a country
3) Health tourism (e.g. Mauritius) which attracts people looking for healthcare
4) Online transactions of health services (such as C.T. Scans sent from the US for analysis in India)
Health is generally the most regulated service since there are concerns of vulnerability, quality, the price of services etc. There are three main barriers to health trade:
1) Qualification and licensing requirements for professionals
2) Approval requirements for clinics and hospitals
3) Rules governing the reimbursement of health services abroad
Regulation can also constrain the sector such as the limit to doctors imported from India to the UK or of foreign doctors allowed to work in South Africa. However these are not always the main constraints to healthcare trade. For example, the poorer countries in the ASEAN group have more liberal Mode 3 regulations but also receive less FDI, the same also occurs in India where the same regulatory regime is in place throughout the country but there are big differences, in terms of commercial presence, across Indian states, where we find more private sector participation within the richer states.
When a country experiences an increase in trade of health services this doesn’t necessarily harm the domestic healthcare sector – the effect in India is either negligible or positive as there is a reduction on the burden of public healthcare structures. There are however some potential costs:
1) A reduction in the quality and accessibility of health services for the poor
2) Internal brain drain from public to private health institutions
Case studies in India and South Africa however show that these costs are not very relevant, while others (such as subsidies to the private sector to operate hospitals) may be potentially serious. Effective regulation rather than restrictions in health services trade is the key in order to ensure that such costs of health services liberalisation are minimised.
Mr. John Cooke took the floor, agreeing with most of the issues raised in the discussion. Mr. Cooke agreed that a polarised view of services is negative as services are best looked at by identifying what works best across countries, sectors and markets.
Services generally count for over 50% of GDP and not all are internationally traded, they are not discrete sectors for which there can be single policy responses. The liberalisation of services will only be positive if it is accompanied by the right degree of regulation, especially in financial services.
Claire Melamed followed by stating that the liberalisation of services could impact poor people as:
1) Direct consumers of services
2) Providers of services (employees)
3) Beneficiaries of growth
In the short term the main impact on the poor will be as consumers, whilst in the medium and long term there will be impacts on the poor as both employees in the service sector as well as beneficiaries of growth. The role of the poor as providers of services has however been overplayed.
The service sector (e.g. tourism, distribution, health, education, financial and ICT services) makes a key contribution to gross domestic product (GDP) in most countries, providing jobs, inputs and public services for the economy. Trade in services can improve economic performance and provide a range of traditional and new export opportunities. However, as the global financial crisis shows services liberalisation also carries risks. Appropriate regulation and other complementary policies are essential to ensure that liberalisation delivers the expected benefits in the long-run. ODI research has reviewed the literature on these issues for six service sectors (tourism, financial services, energy services, information and communications technology and temporary migration, Mode IV). This public meeting discussed the importance of services and the role of trade liberalisation and regulatory reform with introductions by contributors to the study followed by comments from key discussants.