Trends by Martin Khor
20 Feb 2006
Don’t rush to open up services sector
United Nations agency has warned that opening up the service sectors
to foreign firms may not be beneficial unless the developing countries
are prepared through flanking policies and regulatory frameworks. This
warning is timely as countries are pressurized through the World Trade
Organisation or bilateral trade agreements to open up quickly.
United Nations agency has warned that developing countries should not
just rush into opening up their services sectors to foreign enterprises.
so does not necessarily lead to growth. And there are costs involved,
including the displacement of local firms, job losses and adverse effects
on social services and on culture.
report by the UN Conference on Trade and Development (UNCTAD) is timely
as developing countries are now being pressed at the World Trade Organisation
to make commitments to liberalise more deeply in various service sectors
such as finance, telecommunications, wholesale and retail trade, construction,
and professional services.
free trade agreements are also being used, especially by developed countries
such as the United States and Japan, to get the developing countries
to open up quickly.
developing countries have already increasingly opened up to foreign
participation as part of national policy. But they are reluctant to
make legally-binding commitments on liberalization at the WTO because
once these are made, it would not be possible to reverse the policies,
unless the country is willing to compensate the countries affected.
makers often prefer to take new measures (for example, allowing foreign
finance firms to enter and engage in a certain activity) and retain
the ability to reverse certain policies if circumstances change (for
example, to curb speculative activities to prevent or to deal with a
is also the understandable fear of local players that if foreigners
are allowed to enter the market, they will lose their business entirely
or at least their market share.
balance has thus to be struck between allowing foreign firms to enter
and give the consumer more choice, and affording some protection to
local service providers, so that they are not altogether subject to
the full winds of foreign competition.
of these concerns are dealt with in the UNCTAD paper, Trade in Services
and Development Implications, which was presented on 9 February at the
agency’s Commission on Trade in Geneva.
main conclusion is that liberalisation does not automatically led to
services growth in developing countries, and there is a need to establish
necessary preconditions such as flanking policies and regulatory frameworks
for liberalization to yield development-oriented results.
paper, which is based on country studies, highlighted concerns on the
effect of services liberalization. They include displacement of local
firms by foreign services providers, the loss of jobs, reduced access
of the public to essential services, effects on social goals in education,
health and culture, and effects of foreign investment on development.
advises developing countries to conduct an analysis of the costs and
benefits when planning reforms in the services sector. Reforms should
be undertaken at a suitable pace and with proper sequencing. In particular,
whether regulatory frameworks are in place will affect whether the liberalization
exercise results in development gains.
the paper: “There is widespread recognition that the gains from reform
will not materialize or will be seriously undermined if a competitive
environment is not assured. A strengthened regulatory framework and
the institutional development of competition and other regulatory authorities
often represent preconditions for meaningful liberalization.”
adds that each country should carefully assess the costs and benefits
associated with liberalization, which could result in employment displacement
versus employment creation, skill transfer and transfer of technology;
efficiency gains versus effects on the informal sector and employment;
local sourcing versus imports and effects on the balance of payments;
and positive and negative effects of foreign investment.
of sectors and countries found the following:
This sector is high-risk, and 50% more volatile than manufacturing.
Small and medium firms play an important role and developing countries
are striving to build their capacity, with government procurement having
an important role.
study on Jordan found many problems. Foreign firms do not have any
interest in developing local expertise; property prices increased;
foreign participation did not lead to technological capacity building;
there was a rising he number of local construction contracting firms
forced out of the market; and foreign companies employing foreign workers
are paying less than the national average, which forces Jordanian workers
out of the job market.
Liberalization and privatization of this sector have to be
carefully managed to prevent anti-competitive behaviour, ensure universal
coverage and affordable pricing, and widen access to all types of
study in Kenya shows how the expected immediate negative impact
on employment has made reforming the sector particularly difficult.
need to be put in place, including: development of infrastructure; establishing
a fund for extending telecom services to rural areas; improving the
business environment; human resource development, and establishing policy
and legislative frameworks.
Benefits from liberalization of tourism depend on the degree of
integration of domestic sector tourism, global business practices, competitive
conditions in foreign markets, access to distribution networks, and
the degree of “leakage” (how much of the tourist dollar is spent on
Indonesian case study showed concerns of excessive ownership of land
and buildings by foreign investors, which can displace local players
from potential tourist destinations, and monopolistic practices applied
by large foreign suppliers.
liberalization to proceed successfully, complementary policies are needed
to help domestic firms to compete, to promote competition and minimize
the costs to local people whose land, assets and jobs are displaced.
SERVICES: Modernisation of distribution services and the entry
of foreign firms can increase productivity, lower prices, and a provide
consumers with more choice of products. However it also displaces small
local retailers, with job losses.
countries are also concerned with the leading position of global retailers
on the domestic market, who may acquire dominant market and buyer's
situation to avoid is when the product or service of several sellers
is sought by only one buyer – as happened in Ecuador’s wholesale trade.
In such cases, liberalization would mean a domestic monopoly provider
would be replaced by a foreign one.
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