Trade and FDI in Services in Asia

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Trade and FDI in Services in Asia

• Kailas Karthikeyan , UNCTAD
• Fostering Trade through Private-Public Dialogue
• Expert Meeting on Regional Integration in Asia
• 28th and 29th March 2007

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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

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Growth rate in manufacturing sector has been
higher in ASEAN countries because of which the
contribution of services sector has not been high.
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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)

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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.

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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.

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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 US29 billion. But out of this US25
  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
  US1billion is through formal channels.
• Of the other South Asian countries, Sri Lankas
  remittance receipts were larger than its tea
  exports, and in case of Nepal, the remittances
  accounted for 12 percent of its GDP in 2004.

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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)

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Countries which had RCA in sector more than 1
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 India China, Hong Kong SAR China, Hong Kong SAR China Korea, Republic of
Philippines China, 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
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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.

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Services Trade South Asias 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.

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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.

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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.

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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.

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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.

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

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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)

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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.

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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.

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Services Trade Restrictions in Asia The example
of telecom

• Indonesias telecom policy restrictions that
  enable state enterprise domination only partial
  liberalisation in 1990s.
• Similarly Malaysias 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.

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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)