Liberalization of Services in Europe Polish perspective on Economic Implications of the Services Dir

1
Liberalization of Services in Europe Polish
perspective on
Economic Implications of the Services Directive

• Jan Hagemejer, National Bank of Poland
• Jan J. Michalek, Warsaw University,
• Tomasz Michalek, National Bank of Poland

2
The internal market free movement of services

• The internal market has been defined as an area
  without frontiers in which the free movement of
  goods, persons, services and capital is ensured.
  (Treaty Establishing EC (TEEC)

3
List of barriers in services is quite long

• requirements regarding local residence of
  management,
• special licenses, requirements for additional
  diplomas,
• local professional insurance,
• constraints on the use of home country inputs,
• the necessity to fully apply all local labor laws
  (even for temporary services),
• restrictions on marketing, inter-firm
  cooperation, or the juridical form of the
  company,
• not clear regulations,
• a multiplicity of regulatory agencies
• fuzzy implementation procedures.

4
Bolkestein Proposal (2004)

• The objective of the proposal is to provide a
  legal framework that will eliminate the obstacles
  to the freedom of establishment for service
  providers and the free movement of services
  between the Members
• Two specific types of obstacles to trade in
  services are identified
• when a service provider from one EU country
  wishes to establish himself in another EU state
  in order to provide his services.
• when a service provider wishes to provide a
  service from his Member State of origin into
  another Member State, particularly by moving to
  the other Member State on a temporary basis.

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Bolkestein Proposal (2004)

• three major categories of instruments proposed to
  achieve a genuine internal market
• freedom of establishment the proposal called for
  administrative simplification measures,
  particularly involving the establishment of
  "single points of contact"
• free movement of services, the proposal called
  for country of origin (CoO) principle with
  certain derogations. According to this principle
  a service provider is subject only to the
  regulations of the country of origin
• increasing consumer protection by setting some
  rules increasing mutual trust between EU members.

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Opposition to Bolkestein proposal

• Bolkestein Directive has run into strong and
  widespread opposition.
• The Parliament discussed about 1600 amendments to
  the proposal and governments of several countries
  opposed some elements of the proposed directive.
• Commissioner McCreevy "We should address concerns
  about the operation of the country of origin
  principle

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Services Directive (2006)

• The final amendments to the Services Directive
  (2006), were very significant. The changes were
  done with respect to
• (i) modifications regarding the interpretation
  of free movement of services (in fact deleting
  the principle of country of origin),
• (ii) the scope of the Directive
• (iii) rules concerning posted workers.

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Services Directive (2006) free movement of
services

• Free movement of services is interpreted as the
  right of providers to provide services in a
  Member State other than that in which they are
  established.
• If access to provision of services is subject to
  compliance with any requirements it should
  respect the principles of
• (i) non-discrimination,
• (ii) necessity (the requirement must be justified
  for reasons of public policy, public security,.)
  
• (iii) proportionality (the requirement must be
  suitable for attaining the objective pursued).
• ? Thus, services providers are subject to
  regulations and requirements of the country of
  destination and not of origin.

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Services Directive excluded sectors

• (i) electronic communication services (being
  covered by other directives),
• (ii) transport services, including urban
  transport, taxis and ambulances as well as port
  services,
• (iii) financial services (such as banking,
  credit, insurance and re-insurance, etc.),
• (iv) audiovisual services,
• (v) gambling activities (including lottery and
  betting transactions)
• (vi) social services in the areas of housing,
  childcare and support to families
• (vii) taxation matters, those activities that are
  connected with the exercise of an official
  authority in a member state (including notaries)
  and
• (viii) public and private healthcare services
  provided by health professionals to patients,
  including pharmaceutical services.

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Starting point Reveled Comparative Advantages
(RCAa) of Poland in 2005
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Possible implications of the Directive for Poland

• Poland reveals comparative advantage in sectors
  requiring large amounts of low skilled labour
  force and a weak position in sectors requiring
  substantial quantities of physical and human
  capital.
• Can Poland benefit from services sectors in which
  it demonstrates high level of RCA?
• Will Poland be negatively affected by services
  liberalization in the sectors in which it has
  comparative disadvantage?
• It covers maritime and air transport and majority
  of other services (with exceptions of
  construction services, agricultural mining and
  on-site processing and advertising, market
  research and opinion polling).

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The main approaches to estimation of tariff
equivalents

• Commitments undertaken by GATT/WTO members during
  the GATS negotiations (Hoekman, 1996). This is a
  frequency based analysis.
• Analysis of detailed regulatory and other
  barriers in a given sector (Australian
  Productivity Commission). Similar approach was
  followed by Copenhagen Economics (2005).
• Analysis of difference between real and potential
  services flows which can treated as tariff
  equivalent, reflecting the restrictiveness of non
  tariff barriers (analysis basing on gravity
  model). This approach reflects price based
  methods background for our CGE simulations.

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Average tariff equivalents (before
implementation of the Directive)

• Source Copenhagen Economics (2005), p. 18.

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Expected impacts of proposed EU measures - with
and without the CoOP - on intra-EU policy
heterogeneity, by sub-domain
15
Macroeconomic effects of trade increase due to
the proposed SD proposal ( volume changes) with
CoO principle (De Bruijn)
16
Welfare effects of the Services Directive
according to CE (2005)
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GTAP model

• Multi region CGE model
• Multi-nested supply and demand structure.
• Armington assumption in trade (CES in demand, CET
  in supply).
• Non-homothethic private demand.

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Tariff equivalents by Park (2002)
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The initial assumed level of services trade
barriers tariff equivalents (in percent) based on
Park (2002)
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Simulated shocks

• The shocks in the GTAP model are imposed on the
  ams parameter.
• Shocks to ams(i,r,s) represent the negative of
  the rate of decay on imports of commodity or
  service i from region r imported by region s.
• ams(i,r,s) is shocked by 20, ?
• 20 more of the product becomes available to
  domestic consumers -- given the same level of
  exports from the source country.
• In order to ensure that producers still receive
  the same revenue on their sales, effective import
  prices (pms) fall by 20

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Three GTAP simulations (scenarios)

• The most optimistic scenario (100) assumes a
  complete, across the board liberalization.
• Less optimistic scenarios (50 and 30) assume
  respectively less pronounced liberalization of
  initial tariff equivalents.
• The 50 scenario is in our view -- close to
  implications of Bolkestein Directive,
• scenario 30 reflects the implications of
  accepted, narrowed down, Directive (2006).

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Changes in real GDP
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Changes of Polish exports and imports
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Changes of total exports and imports
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Changes of Polish real output
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Welfare change in analyzed countries
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Changes of wages and producer prices
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Conclusions RCAs of Poland

• Poland reveals comparative advantage in some
  transport sectors (mainly road and rail freight)
  and in construction services, which are
  unskilled-labour-intensive sectors.
• According to simulations Poland can strengthen
  these comparative advantages.
• On the other hand Polands position may be
  weakened, due to liberalization, in some business
  services, and especially in financial and
  insurance ones.
• However, the last conclusion should be treated
  with caution, since, financial services are
  sectoraly regulated and excluded from Services
  Directive.

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Welfare gains for EU members

• Poland, like other EU members, will benefit
  adopting the Services Directive.
• But simulated gains, in terms of output, trade,
  and welfare (0.15 of GDP) are fairly limited in
  case of the SD (2006),
• and visibly smaller in comparison to original
  Bolkestein proposal.
• In other, smaller and more open countries
  (Austria, Belgium, the Netherlands, Hungary or
  Czech Republic) the simulated gains are about
  double.
• But even in the case of Germany or France - major
  opponents of the Bolkestein proposal - the likely
  gains are of similar order to Polands ones.

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Opponents of Bolkestein Proposal

• The causes of heated debate on the Bolkestein
  Directive can not be precisely explained in light
  of our simulations.
• The likely gains of major opponents (France and
  Germany) are of similar order to proponents
  (United Kingdom).
• The other opponents, i.e. Austria and Belgium
  would benefit much more in relative terms in
  comparison to Poland.
• Although in some sectors Poland has a relatively
  strong comparative position vis a vis Germany,
  Austria or France, the competition pressure
  should not be overestimated
• Polands share in EU trade in services is close
  to 2.15 percent. Furthermore, the country may
  loose in some human capital intensive sectors.

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Political stance of some EU members

• It seems that the countries attitude towards
  Bolkestein Directive reflected rather a political
  stance and not real economic interests.
• In some cases, narrowly defined lobbies (like
  plumbers or taxi drivers in France) provoked an
  animated political discussions being not well
  grounded in economic terms.
• Probably, the Bolkestein Proposal, would be
  passed and accepted with no major political
  controversies, if there would be no Eastern
  enlargement of the EU at the same time.

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Migrations and quality of services

• Probably liberalization of trade in services can
  be, in many cases, a substitute to large
  migration flows.
• The trade-off is visible, and services
  liberalization might decrease migration pressures
  form NMS.
• Of course, there may be some founded fears
  regarding the quality of services provided by
  foreign firms.
• But a similar problem, existing in merchandise
  trade, has been progressively solved by gradual
  harmonization of EU standards (Old and New
  Approach).