Infrastructure Services Liberalization in Developing Countries: Key to Growth and Global Competitive

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Infrastructure Services Liberalization in
Developing CountriesKey to Growth and Global
Competitiveness
The international competitiveness of traditional
sectors of developing economies is heavily
dependent on access to services at world prices.
The best guarantee that services will be supplied
at world prices is to open an economy to the
pressures and opportunities of international
competition or trade and investment
liberalization.
Logistics Infrastructure Services Distribution
and Express Delivery Services

• Office of the U.S. Trade Representative

UNCTAD, Study Series No. 19
October 24, 2006
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Importance of infrastructure services

• As services play an increasingly larger role in
  growth of developing country economies,
  liberalization of infrastructure services
  becomes paramount.
• Infrastructure services are the building blocks
  of commercial activity and everyday life,
  including financing and insuring transactions,
  communicating by phone, fax, and Internet,
  providing computer networks, supporting
  exploration and generation of energy, and
  ordering and delivering a product or service.
• Logistics is a particularly useful example of an
  infrastructural service.
• Developing countries that maintain barriers to
  infrastructure services are blocking their own
  economic growth and global competitiveness.
• Key to real growth and competitiveness is market
  opening and binding market openness.

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Services The backbone of developing country
economies
Sector Share of GDP 2004 Low-income countries
GDP and Services Average Annual Growth Rates,
1990-2004
World Bank World Development Report, 2006
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Services generate more FDI and new jobs in
developing countries
FDI stock in developing countries, 2004 (Billion
U.S. Dollars)
Share of total developing country employment in
services
UNCTAD, World Investment Report, 2006
ILO, Global Employment Trends Brief 2006
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Problem Developing countries tend to maintain
more restrictions on foreign services than
developed countries
Average restrictiveness score in services trade
The index scores are the average restrictiveness
scores for banking, distribution, maritime,
professions and telecommunications. Adapted from
McGuire, 2002.
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Restrictions in developing countries prevent them
from gaining dynamic benefits from liberalized
trade

• Increased investment
• Technology transfer
• Enhanced competition
• Innovation
• Economies of scale

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Logistics a critical infrastructure service

• International trade facilitated by freight
  logistics services providing efficient integrated
  management of point-to-point supply and
  distribution chains.
• The availability of competitive logistics
  services, namely on a global basis, will enhance
  overall economic efficiency and competitiveness.
  
• This is particularly the case for developing
  countries, for which freight costs can be up to
  40 of total export value (World Bank, 2004).
• Developing countries have significant interests
  in export of goods ranging from agricultural
  products to industrial goods, and which could
  benefit from timely, reliable and efficient
  supply chain, distribution and inventory
  management for their exports.
• Barriers are particularly a problem in
  infrastructure services like logistics. Useful
  to look at two aspects of logistics distribution
  and express delivery.

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Distribution Services

• Virtually every good or commodity makes its way
  to the market through distributors. Wholesalers,
  retailers, commissioned agents and franchisers
  provide the domestic infrastructure for moving
  goods to consumers.
• The value added in the distribution stages can
  greatly exceed the value added in production for
  example, the value created in distribution
  accounts for 70 of total value for textiles and
  over 75 for food products (UNCTAD).
• Frequent barriers include limitations on the
  purchase of real estate, restrictions on equity
  holdings, exclusions of products or services due
  to state monopolies or national interest,
  nationality quotas, and residency requirements
• Excess profits enjoyed by uncompetitive
  distribution firms come at the expense of
  consumers and producers.
• Delays for imports and exports not only reduce
  trade volumes, but also reduce the probability
  that firms will even enter export markets for
  time-sensitive products.

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Benefits of liberalization
Distribution Services

• Distributors manage inventories efficiently,
  minimize spoilage and waste
• Producers assume lower risk
• Consumers pay less, have greater choice.
• Liberalization, trade facilitation reform, and
  domestic regulatory reforms in distribution can
  be implemented at relatively low cost in
  low-income countries. The gains from these
  reforms can be substantial.

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Case study Lithuania

• Lithuanias first law on trade, introducing the
  notion of retail trade and wholesale and
  provisions on competition, adopted in 1995.
• By 2003 wholesale and retail trade had become the
  third most important sector in the economy,
  accounting for 17 of all FDI flows.
• Over the last four years, five domestic chains
  have emerged as the key players in the
  distribution sector, accounting for 70 per cent
  of food retail sales.
• The leading national chain in food and
  consumer-care products has expanded into regional
  markets.

UNCTAD, Distribution Services, 2005
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Express Delivery

• Helps improve competitiveness of all aspects of
  companies operations, including sales,
  production, customer support, and logistics and
  storage.
• Directly employs 1.25 million people in 200
  countriesmore than the petroleum refinery
  industryand indirectly supports another 2.65
  million jobs.
• Growth is twice that of the global economy jobs
  expected to grow to 2.1 million by 2013, with a
  majority in developing and transition economies.
• The express delivery integrators are a vital link
  in creating a globally competitive logistics
  environment.
• Common market access barriers include exclusion
  of competition to government-owned or sanctioned
  provider, preferential treatment, arbitrary
  licensing requirements, and restrictions on
  foreign investment.

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Benefits of liberalization
Express Delivery Services

• Express services particularly important for
  geographically remote countries or where domestic
  transport infrastructure is poor. Liberalized
  express delivery offers secure services that can
  leap over entrenched inefficiencies of mail
  delivery, transportation, and logistics in many
  developing countries.
• Express delivery reduces need for warehousing.
  Developing countries could reduce the unit cost
  of production by as much as 20 per cent by
  reducing inventory holdings by half (Gaush and
  Kogan, 2001).
• A liberalized express delivery industry in China
  would result in estimated increases of US3
  billion in investment, US85 billion in output,
  and 800,000 new jobs over five years. (U.S.-China
  Business Council).

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Once they liberalize, why
should developing countries bind their
commitments?

• GATS commitments to investors are like money-back
  guarantees for consumers
• provide assurances that increase confidence
• an important factor in differentiating options
  over where to invest
• Overall business environment more important than
  specific costs, e.g. labor.
• Anchors reform in a international legal
  framework, and provides momentum

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Myths blocking liberalization

• Services liberalization is not de facto
  deregulation Liberalization means removing
  requirements that discriminate against foreign
  service suppliers and providing transparent
  regulation. It is consistent with maintaining
  the right to regulate and promotes good
  governance. It also creates an attractive
  business and investment climate
• Services liberalization should be viewed as part
  of the solution to economic dislocation rather
  than a cause of dislocation Developing country
  transition from subsistence farming and
  agriculture to greater reliance on services and
  manufacturing is essential to produce real
  increase in living standards. Overall GDP and
  employment growth from services liberalization is
  key to enabling this transition to occur and to
  create new jobs and opportunities for those who
  suffer economic dislocation.

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Moving to the head of the line

• Pattern is clear developing economies opening up
  services sectors are moving to the head of the
  line in global logistics competitiveness
• Attracting investment
• Attracting barrier-breaking technology
• Lowering costs and risks
• Increasing availability and choice
• Stimulating activity in related sectors
• Making binding commitments in logistics and other
  infrastructure services will further enhance this
  competitiveness.
• Certainty of commitments helps keep costs
  predictable, which is especially important in
  logistics.