Expert Group Meeting on Transport and Trade Facilitation in ESCWA region on 10 and 11 April 2013 in Dubai The Role of Trade in Services in the MENA region Dr. Denise Sumpf Economic Development and Globalisation Division, UNESCWA

The Contribution of Services’ to GDP (in per cent) Slide 2

Employment Opportunities in the Services Sector Slide 3

Enabling Trade in the Region Table 3: The Enabling Trade Index (ETI) rankings in 2012 compared to 2010 for selected MENA countries Country/E conomy Rank (2012) ScoreRank (2010) Country/ Economy Rank (2012) ScoreRank (2010) UAE Morocco Oman Kuwait Saudi Arabia Egypt Bahrain Lebanon933.71n/a Qatar Syria Jordan Yemen n/a Tunisia Source: Excerpt from Table 1 (Lawrence et al., 2012, p. 9)Lawrence et al., 2012, p. 9

Services Supply and Barriers to Trade Slide 5 Prior to Market Entry (e.g. affecting the new establishment of operations) - Mode 3 - Post Market Entry (e.g. affecting ongoing operations) - Mode 1, 2, and 4 - Non-discriminatory  Licensing requirements  Restrictions on direct investment  Restrictions on permanent movement of people  Restrictions referring to core business conduct  Pricing of services  Restrictions on temporary movement of people Discriminatory Mode 1 – Cross-border supply: services supplied from one country to another (e.g. international telephone calls). Mode 1 – Cross-border supply: services supplied from one country to another (e.g. international telephone calls). Mode 2 - Consumption abroad: consumers or firms making use of a service in another country (e.g. tourism). Mode 4 – Presence of natural persons: individuals travelling from their own country to supply services in another Mode 4 – Presence of natural persons: individuals travelling from their own country to supply services in another Mode 3 – Commercial presence: a foreign company setting up subsidiaries or branches Mode 3 – Commercial presence: a foreign company setting up subsidiaries or branches

Barriers to trade in commercial services Restrictions on trade in services can have the effect of being: (a) Price-creating – restrictions protect incumbent firms from competition, which allows firms to increase their prices or rents and expand their price-cost margins; or (b) Cost-creating – restrictions limit potential or existing firms from operating efficiently and thus push up business costs. Many restrictions or too much regulation protect incumbent service suppliers from the entry of new competition, which allows them to increase their prices or create rents and expand their price-cost margins. Restrictions on the entry of foreign service suppliers include prohibitions on entry, placing limits on the number of firms or strict licensing requirements. 6

Assessment of services trade restrictions Slide 7 Example: Telecommunications PolicyMeasure (examples)ResultSourc e Countr y Foreign ownership and market entry restrictions  Joint ventures are required Qualitative Information Link to regulation (e.g. law, administrative decision), etc. Country confirms entry or provides correction  Screening of investment Restrictions on temporary movement of people  Quotas  Labour market tests Other discriminatory measures  Foreign participation in government procurement Barriers to competition  Whether access to networks and interconnection is regulated Regulatory transparency  Information on spectrum regulations publicly available Source: (Organisation for Economic Co-operation and Development, 2013)Organisation for Economic Co-operation and Development, 2013

Different measures of restrictiveness: Services Trade Restrictions Index (STRI) Slide 8 CountryMode 1Mode 3 Financial Services Algeria Egypt Jordan Lebanon Morocco Tunisia Yemen Transportation Services Algeria Egypt Jordan Lebanon Morocco Tunisia Yemen Source: Based on (Borchert et al., 2012b) and (Borchert, Gootiiz, & Mattoo, 2012a)Borchert et al., 2012bBorchert, Gootiiz, & Mattoo, 2012a

Different measures of restrictiveness: Trade Restrictiveness Index Scores (TRI) Slide 9 Aggregate Trade Restrictiveness Index Mode 1 - Cross- border supply: Mode 2 - Consumption abroad Mode 3 - Commercial presence Mode 4 – Movement of natural persons Financial Services Banking Sector Egypt Jordan Morocco Lebanon Insurance Sector Egypt Jordan Morocco Telecommunications Services Fixed Telecom Egypt Jordan Morocco Mobile Telecom Egypt Jordan Morocco Transport Services Maritime Transport Egypt n.a Jordan n.a Morocco n.a Air Transport Egypt n.a Jordan n.a Morocco n.a Source: (Marouani & Munro, 2009)Marouani & Munro, 2009

Services Trade Costs – Globally and in the Region Slide 10 World aggregate trade costs indices for selected industries, (1995=100) Source: (Miroudot, Sauvage, & Shepherd, 2010)Miroudot, Sauvage, & Shepherd, 2010

World aggregate trade costs indices (1995=100) Source: (Miroudot, Sauvage, & Shepherd, 2010)Miroudot, Sauvage, & Shepherd, 2010 Services Trade Costs – Globally and in the Region Slide 11

Inflation and variation in unemployment rate – What does the inverted Philips Curve mean? Slide 12 Overall Trade CostsServices Industry

The Impacts of Liberalization of trade in services: illustration from the transport sector in Egypt Measuring the effects of restrictions on trade in services has, until recently, been put in the “too difficult basket”. This has mainly been because of the difficulty in identifying restrictions on services. Restrictions on trade in goods usually take the form of a tariff, while restrictions on trade in services usually take the form of Government regulation and a certain level of regulation is usually justified to meet regulatory objectives. 13

The Impacts of Liberalization of trade in services: illustration from the transport sector in Egypt (cont.) The methodology for measuring and modeling restrictions involves three broad steps: (1) Calculate a trade restrictiveness index. This measures how restrictive a service sector is in an economy; (2) Estimate the effect of restrictions on the performance of service suppliers – price, cost, price-cost margin or quantity; (3) Project the economy-wide and global benefits of removing restrictions on services using a computable general equilibrium model. 14

The Impacts of Liberalization of trade in services: illustration from the transport sector in Egypt (Cont.) 15 Table : Ad Valorem Equivalents (AVEs) of Barriers to Trade in Transport Services in Egypt

Simulations using the CGE model for Egypt Three simulations have been tested here: 1.a baseline scenario without any policy changes 2.a scenario where Egypt will remove all its trade barriers on goods from the Arab region 3.scenario 2 + liberalization of air and maritime air transportation services 16

Results 17

Policy implications Liberalization of services amplifies the expected gains from GAFTA through two channels: –better resource allocation among the economic sectors –lower costs for trade operations However, the next question is how to improve transport services: 1) through only private investments (domestic or foreigners), 2) through better public spending and governance? or through private-public partnership? The role of Aid for trade in this area is very important: measuring costs, identify projects to reduce trade costs, costing projects and identification of financing options, impacts analysis. The work continue for other countries and other sectors… 18

Selected policy recommendation… Better regional integration in support of economic diversification and services trade requires: reinforcing the current free trade area and adopting - as one objective - the creation of an Arab Customs Union in 2020, reducing transport cost by creating an intra-Arab trade and transport corridor; and reducing transactions costs through trade process innovation and business friendly regulation Public expenditures side: Investment decisions prioritized based on objective cost/benefit evaluations (incl. social and environmental costs and benefits Better measures of trade flows to assess the costs of protection Trade policy measures themselves do not necessarily address the barriers to trade in services. to create functioning and reliable financial, telecommunications and transport sectors substantial infrastructure investments together with policy changes concerning education and labour market are necessary to enhance competitiveness. Other policy measures: monetary policy options, such as lending for priority (value-adding) sectors and investment into bankable projects by modifying the near-term path of interest rates as well as establish more flexible exchange-rate policies

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