Trade and FDI in Services in Asia

Kailas Karthikeyan , UNCTAD Fostering Trade through Private-Public

DialogueExpert Meeting on Regional Integration in

Asia28th and 29th March 2007

Contribution of Services Sector

• It has been theoretically argued and empirically estimated that as economic growth proceeds as the services sector grows.

• In 1990, the services sector contributed more than 60% of GDP in most of the developed countries while in developing countries of Asia it ranged between 40 to 45% in 1990.

• In the period 1990 to 2005, we find that the share of services in GDP remained more or less the same in many East and Southeast Asian countries while there has been a rise in its share in most of the South Asian countries

CONTRIBUTION OF SERVICES TO GDP

34.00 36.00 38.00 40.00 42.00 44.00 46.00

1990

2000

2004

SOUTH ASIA

ASEAN

Growth rate in manufacturing sector has been higher in ASEAN countries because of which the contribution of

services sector has not been high.

GROWTH RATE IN SERVICES (AVERAGE ANNUAL%: 1990-2004)

7.475.09

7.047.96

5.049.34

7.377.79

4.759

7.497.88

4.444.69

6.08

IndonesiaLao PDR

MalaysiaMyanmar

PhilippinesSingapore

ThailandVietnam

Bangladesh

BhutanIndia

MaldivesNepal

PakistanSri Lanka

Trade in Services • An important reason for growth of services

sector has been trade in services.• There has been a substantial increase in

services trade as a proportion of GDP in most of the ASEAN countries in period 1990 to 2005.

• In most of the South East Asian countries it averaged around 20%.

• However, for most of the South Asian countries, except Maldives, trade in services as a proportion of GDP has not been very high (less than 10%)

Trade in Services (% of GDP)

0 10 20 30 40 50 60 70 80 90

Cambodia

Indonesia

Lao P DR

Malaysia

P hilippines

Singapore

Thailand

Vietnam

Bangladesh

India

Maldives

Nepal

P akistan

Sri Lanka

Average(1996 to2004)

Average(1990 to1995)

Trade in services in South East Asia

• Almost all the ASEAN countries witnessed an increase in their trade in services in the latter half of the 1990s compared to the early 1990s.

• Liberalisation of their financial sector led to a rapid increase in trade in financial services in these countries.

• But the financial crisis of 1997 led to a lowering of trade in services, especially in the case of the Philippines, Malaysia and Thailand.

Trade in services in South Asia• In South Asia, tourism has been the main form

of trade in countries like Nepal and Maldives.• The proportion of trade in services to total trade

therefore has remained high in these countries, except for periods of political unrest.

• India, on the other hand, has witnessed a steady growth in the proportion of services trade to total trade, which can be solely attributed to trade in IT and ITES.

• Pakistan, Sri Lanka and Nepal, on the other hand, have experienced a fall/stagnation in the average percentage of trade in services in total trade.

South Asia in Global Services Trade

• South Asia as a whole has been able to increase its exports of commercial services between 1993 to 2003 by almost four times, i.e., US$ 7.9 billion to US$29 billion. But out of this US$25 billion is from India.

• However low growth from other South Asian countries is largely attributed to substantial underestimation of the real flows.

• 40% of remittances to Bangladesh are through illegal hundi sources.

• In Pakistan, out of a total US$ 10 billion only US$1billion is through formal channels.

• Of the other South Asian countries, Sri Lanka’s remittance receipts were larger than its tea exports, and in case of Nepal, the remittances accounted for 12 percent of its GDP in 2004.

RCA Analysis for Asian Countries

RCAij=(Exports of i in jth service sector

/Total Exports of i in services) / ( Exports of Asian countries to world in jth services

sector / Total Exports of services of Asian countries to world )

Year 2003 – (UNCTAD Stats 2006)

TRANSPORT SERVICES

COMMUNICATION SERVICES

CONSTRUCTION SERVICES

OTHER BUSI SERV

TRAVEL SERVICES

FINANCIAL SERVICES

China, Hong Kong SAR Bangladesh China China Cambodia

China, Hong Kong SAR

Korea, Republic of

IndiaChina, Hong Kong SAR

China, Hong Kong SAR China

Korea, Republic of

PhilippinesChina, Hong Kong SAR India Singapore

China, Macao SAR Singapore

Singapore Indonesia Malaysia Indonesia

Sri Lanka Pakistan Philippines Malaysia

Philippines Sri Lanka Maldives

Sri Lanka Thailand Myanmar

Nepal

Philippines

Sri Lanka

Thailand

Countries which had RCA in sector more than 1

Intra-Regional Complementarity

• Complementarity in competitive advantages in services between South Asia and East and South East Asia.

• South Asia competitive with respect to Communication services and Travel services while ASEAN competitive with respect to financial services and other business services.

Services Trade: South Asia’s Major Strengths

• South Asia is the second largest recipient of remittances in the world. In 2005 it received US$ 32 billion dollars.

• The region therefore has comparative of advantage in Mode 4 of GATS, in both high skill and low skill workers.

• Cross border trade in services under Mode 1 is important for India and countries like Bangladesh, Pakistan and Sri Lanka are also emerging as regions for BPO outsourcing.

Exports of Total Services (US Million $)

0

500000

1000000

1500000

2000000

2500000

1980 1990 2000 2001 2002 2003 2004

Developingeconomies: Asia

Developedeconomies

World

Market Access Barriers to Services Exports

• Barriers in Cross-Border Trade• The growing business of outsourcing is creating a

more efficient global division of labour and bringing significant welfare gains

• But simultaneously it is affecting the structure of employment in a number of importing countries and impose adjustment costs.

• This has led to big concerns and apprehension in the US and the UK about the IT job loss.

• 112 bills were passed till first three months of 2005 in US restricting government offshoring.

Market Access Barriers in Mode 1

• a) The US Congress included in the fiscal 2004 omnibus spending bill a provision that prohibits federal agencies from outsourcing some kinds of work to private companies that use workers abroad.

• b) Prohibits a company from receiving state or local contracts, grants, loans, or bonds, if the company has a net loss of employees in the state during the prior calendar year caused by the company relocating jobs from the state to a site located outside the United States.

• c) Only individuals who are either US citizens or authorised to work in US permitted to perform certain contracts.

Market Access Barriers: Mode 1

• In Europe also there were legal norms designed to protect workers in outsourced deals known as TUPES (Transfer of Undertakings and Protection of Employees), which also have an inhibiting effects.

• EU even gave wide ranging directives to safeguard the privacy of personal data of EU citizens by backing power to cut data flows to countries that the EU judges not to have adequate data protection.

Barriers for Temporary Movement of Natural Persons from Asia to

developed economies• Wage-parity requirement discourages import of

cheap labour• strict visa procedures • Economic Needs Tests • Non-recognition of professional qualifications• Imposition of discriminatory standards or

burdensome licensing requirements, • payment of social security without corresponding

benefits like medical and pension insurance schemes

• requirements of registration with or membership of professional organisations.

Asian Regional Integration can compensate / make up for lack of liberalisaton seen in developed countries.

Trade in Mode 4 Services within Asia

Source Countries: Bangladesh, Cambodia, China, Indonesia, Lao PDR, Myanmar, Nepal, Phillipines, Sri Lanka & Vietnam

Destination Countries: West Asia and Persian Gulf, Brunei, Hong Kong, Japan, South Korea, Singapore, Taiwan

Both Source & Destination Countries: India, Malaysia, Pakistan and Thailand.

(Wickramasekara, ILO, 2002)

Need for Mutual Recognition Agreements - I

• Mutual recognition of qualification is considered to be the main obstacle affecting trade in professional services.

• Commitments on market access and national treatment are not always sufficient for a foreign service supplier to be able to supply a market because if a profession is regulated, no one can practice it without a license.

• Some professions – such as law, health care, engineering, architecture, and accountancy — fall into the category of “accredited” or “regulated” professions in most countries.

Need for Mutual Recognition Agreements - II

• Article VII of GATS allows Members to enter into mutual recognition agreements (MRAs), enabling them to recognise the education or experience obtained, requirements met, or licenses or certifications granted in one or several other countries.

• The article further requires that negotiations to such agreements be open to all Members that can demonstrate that their qualifications are equivalent.

• However, to date, the number of MRAs and their impact on services trade have been rather limited.

Services Trade Restrictions in Asia – The example of telecom

•Indonesia’s telecom policy – restrictions that enable state enterprise domination – only partial liberalisation in 1990s.

•Similarly Malaysia’s commitments also limited ; important to study reservations for Bumiputras – whether this had a buffer effect in 1997 crisis. Similarly Thailand.

•Case for regional openness – success of India in sequential liberalisation a case in point.

Conclusions

•Complementarities exist in Asia- regional integration in services likely to improve competitive exporters earnings as well as induce efficiencies in importing countries.

•Evidence already suggests high intra-Asian FDI movement in services sector

•Compelling groundss to explore Asian services integration – no significant new opening of traditional services export markets – plus restrictions in accessing these.

•Importance of learning lessons within region – both successes (India telecom) and failures (financial services liberalisation in SE-Asia and 1997 crisis)