Office of the U.S. Trade Representative Infrastructure Services Liberalization in Developing Countries: Key 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

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. The aim of this presentation is to suggest that there is a suite of services sectors that, because of their very influential roles as inputs to production and overall economic growth, are themselves critical infrastructure of the modern economy. Financial services, telecom, energy services, and logistic services such as distribution and express delivery are what we are calling infrastructure services. Generally speaking, these sectors are far more liberalized in developed countries than developing countries. The point I will make is that liberalizing these sectors should be a priority for developing countries, not because of what else they might get in return in trade negotiations, but because of what they gain themselves from having competitive and dynamic infrastructure services.

Services: The backbone of developing country economies Sector Share of GDP 2004 Low-income countries GDP and Services Average Annual Growth Rates, 1990-2004 Services 52% Industry 25% Agriculture 23% 10% Before I discuss infrastructure services specifically, want to provide a brief overview of the trends in services as a whole. Open services markets have become the foundation for global growth The “service economy” is no longer synonymous with just the richest nations—the services sector is now the largest sector of GDP in not only high- and middle-income counties, but in low-income countries as well. It is also driving the impressive growth rates of low-income countries. World Bank World Development Report, 2006

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 The stock of FDI in services in developing countries is double that of manufacturing, and flows are also significantly higher in services. Most of the new jobs in developing countries are opening up in the services sector, and research has shown that many move from agriculture directly into services; the path is not always through industry. UNCTAD, World Investment Report, 2006 ILO, Global Employment Trends Brief 2006

Average restrictiveness score in services trade Problem: Developing countries tend to maintain more restrictions on foreign services than developed countries Average restrictiveness score in services trade While services continue to play an ever larger role in developing countries, services trade is still hampered by numerous government-imposed barriers. These barriers prevent countries from seizing the full benefits of dynamic service sectors. This chart shows an index of trade restrictiveness covering a range of service sectors. (Source: McGuire: TRADE IN SERVICES – MARKET ACCESS OPPORTUNITIES AND THE BENEFITS OF LIBERALIZATION FOR DEVELOPING ECONOMIES UNCTAD POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES STUDY SERIES No. 19) The index scores are the average restrictiveness scores for banking, distribution, maritime, professions and telecommunications. Adapted from McGuire, 2002.

Restrictions in developing countries prevent them from gaining dynamic benefits from liberalized trade Increased investment Technology transfer Enhanced competition Innovation Economies of scale The greatest benefits from competitive markets come from the dynamic gains in efficiency and productivity generated by investment, technology transfer, innovation, and economies of scale. In developing countries, where productivity levels lag behind international best practice, there is substantial scope for rapid “catch-up” economic growth through technology transfer. This is especially the case with infrastructure services.

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.

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. Start with distribution services. [slide text]

Benefits of liberalization Distribution Services Benefits of liberalization 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. Lowering these trade barriers would have many benefits. [Slide text]

UNCTAD, Distribution Services, 2005 Case study: Lithuania Lithuania’s 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. Lithuania has undergone a drastic reform process since 1990 in the transition from a planned to market-oriented economy. [slide text] UNCTAD, Distribution Services, 2005

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 countries—more than the petroleum refinery industry—and 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. Like distribution, express delivery is an important component for the efficient delivery of inputs to business and outputs to customers. [slide text]

Benefits of liberalization Express Delivery Services Benefits of liberalization 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 US$3 billion in investment, US$85 billion in output, and 800,000 new jobs over five years. (U.S.-China Business Council). In some way, the role of express delivery in distribution and logistics is analogous to the impact of cellular technology in the telecom sector, helping step over traditional infrastructure constraints. These traditional constraints have made transport costs relatively much higher for developing countries. The other benefit of express delivery is the ease with which it is accessed by SME’s, improving their competitiveness.

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 Many countries say, I’m liberalizing my sectors—why do I need to make GATS commitments? Our answer is like this: Investors and entrepreneurs have many options for where to invest. Where all else is essentially similar, where is an investor more likely to go: to a country with commitments or without? This is because [slide text] As with most trade, the biggest gains come from what you do yourself. But if making GATS commitments facilitates improved market access elsewhere, all the better.

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. This is not to suggest that sectors be deregulated. Far from it. [slide text]

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. [slide text]