Trade in Services: Some Lessons from South Africa Matthew Stern

2 2 Outline Trade in services – facts and theory Case studies –Health services –Construction services The gains from trade Trade policy implications

3 3 Trade in services 25% of global trade Fastest growing sector (trade & FDI) Dominated by OECD (70%) Highly regulated Critical determinant of competitiveness

4 4 World service exports ($ millions)

5 5 Application of trade theory Trade in services, in general, display the same characteristics as trade in goods The theory of comparative advantage does apply to services trade Given high levels of regulation (protection) in the service sector, economic factors alone cannot explain the pattern of trade in services The removal or reduction of barriers to trade in services would contribute to major increases in global welfare

6 6 Developing countries 50% of GDP Fourfold increase in trade over last 15 years Important contributor to economy-wide efficiency and development Labour intensive More dependent on trade in services than industrialised countries

7 7 Service/merch. Exports WDI:2002 Service/merch. imports

8 8 Constraints on liberalization Domestic opposition Lack of expertise and resources Unable to improve access for domestic exporters Cannot fully address anti-competitive practices of foreign firms Inadequate stability or international credibility

9 9 What is GATS? Implemented January member countries All sectors (except government and air traffic rights) Positive list approach All modes of supply

10 GATS: Modes of supply Mode 1: Cross border supply –relatively few bound commitments Mode 2: Consumption abroad –relatively open Mode 3: Commercial presence –market access restrictions prevail Mode 4: Movement of natural persons –most restrictive

11 GATS: Coverage Infrastructure services, capital intensive, scale economies –Communication –Transport Source: Adlung (2000) Traditionally “liberal” services – Distribution – Tourism Other – Environmental services – Recreation – Culture – Sport – Construction Strong institutional & regulatory difference between jurisdictions – Financial services – Business services – Health services – Education

12 GATS: Obligations General –MFN treatment –Transparency Specific –Market access –National treatment

Case Studies

14 SA exports of goods & services

15 GATS: South Africa Scheduled 9 out of 12 major sectors (education, health and recreational services excluded) Relatively liberal commitments in retail, computer, construction, tourism and business services Relatively few commitments in transport, life insurance, communications and education services

16 SA Health Sector Well developed private sector –55% of total health care expenditure –20% of all patients –High cost and specialised care Embattled public sector –80% all patients –30% all doctors –HIV/AIDS Migration

17 Exports of health services Cross border –Call and claim centers

18 Exports of health services Cross border –Call and claim centers Consumption abroad –Health tourism

19 Consumption abroad

20 Exports of health services Cross border –Call and claim centers Consumption abroad –Health tourism Commercial presence –NHS contracts

21 NHS health care contracts 900 cataracts in Lancaster –R10 million –45 personnel ENT in Middlesex 300 hips and knees in Southport orthopedics in Gosport

22 Exports of health services Cross border –Call and claim centers Consumption abroad –Health tourism Commercial presence –NHS contracts Movement of natural persons –Nurses

23 Nurses registered in UK

24 Constraints—international Portability of national health insurance Recognition/registration of medical professionals

25 Constraints—domestic National Health Bill –Certificate of need Immigration –Moratorium on foreign health professionals Community service –45% plan to emigrate Technology/telecommunications

26 SA Construction Sector Large and extremely competent construction firms Highly skilled engineers Dominated by government expenditure Long-term decline in domestic activity

27 Construction works

28 Exports of construction services Civil engineers –20% of turnover offshore –>90% in Africa Consulting engineers –10% of turnover offshore –>80% in Africa

29 Exports and investment Grinaker-LTA –50th largest international contractor* –5th largest contractor in Africa* –Operations: Australia, United Arab Emirates (UAE), Angola, Nigeria and Mauritius Murray and Roberts –54th largest international contractor* –7th largest contractor in Africa* –Operations: Australia, UAE, UK, Botswana, Namibia, Nigeria, Tanzania, Zimbabwe and Indonesia * Engineering News Record

30 Constraints - international Technical standards and regulations Nationality & residency requirements Ownership restrictions Government procurement –Tied-AID –Export credit agencies

31 Constraints – domestic Poor standards Poor regulations Expertise –Immigration

Gains From Trade

33 Gains from exports Employment Complementary exports Foreign exchange Knowledge and skills Economies of scale

34 Gains from exports ModeHealthConstruction Cross-border tradeHighLow Consumption abroadHighLow Commercial presenceMediumHigh Temporary movement of people Medium EmigrationLow

35 Gains from imports Knowledge and skills Product –Price –Quality Capital and infrastructure

36 Gains from imports ModeHealthConstruction Cross-border trade HighLow Consumption abroad Low Commercial presence MediumHigh Temporary movement of people Medium Emigration High

Trade Policy Implications

38 Health services - WTO 40% of member countries have made some commitments –25% hospital services –33% medical and dental services

39 Health services - SA Sub-sectorsMarket accessNational treatmentMode Medical and dental services None Unbound except as indicated in horizontal section 4

40 Health service strategy Remove domestic restrictions on investment and professionals Target foreign barriers to health tourism and electronic trade Access to the national health systems of importing countries is critical

41 But first … Compulsory community service New National Health Bill (certificate of need) Restrictive immigration laws Poor working conditions in the public sector

42 Construction & engineering services - WTO Construction: between 51% and 64% of countries have made full commitments in modes 1 to 3 Architectural and engineering: between 46% and 66% of countries have made full commitments in modes 1 to 3 Within SADC, just South Africa and Lesotho have scheduled both sectors.

43 Construction services - SA Sub-sectorsMarket accessNational treatmentMode General construction work for buildings General construction work for civil buildings Installation and assembly Building completion and finishing work Unbound (technical reasons) 1 None 2 3 Unbound except as indicated in horizontal section 4

44 Engineering services - SA Sub-sectorsMarket accessNational treatmentMode Engineering services None Unbound except as indicated in horizontal section 4

45 Construction service strategy Remove domestic restrictions on investment and professionals Re-consider GATS exemption for Export Credit Agencies (ECAs) Engage in negotiations on government procurement to address tied AID

46 But first … Foreign exchange controls Restrictive immigration policies Inappropriate procurement rules Weak standards and regulations

Conclusion

48 Conclusion Need to understand the economic gains from service liberalisation Need to understand the social costs of service liberalisation and protection Need to identify actual constraints to trade –Foreign barriers –Domestic regulations (or the lack thereof)