Tuesday, July 17, 2012

Policy barriers to international trade in services

Borchert, Gootiiz and Mattoo (2012) find that “some of the fastest growing countries in Asia and the oil-rich Gulf states have the most restrictive policies in services, whereas some of the poorest countries are remarkably open”. Furthermore, they also find that professional and transportation services are among the most protected in both industrial and developing countries, while retail, telecommunications and even finance tend to be more open. Furthermore, OECD countries are found to restrict transportation services and movement of natural persons as service suppliers.

Below is part of their paper’s abstract:

[..] An illustrative set of results suggests that trade policies matter for investment flows and access to services. In particular, restrictions on foreign acquisitions, discrimination in licensing, restrictions on the repatriation of earnings and lack of legal recourse all have a significant and sizable negative effect, reducing the expected value of sectoral foreign investment by $2.2 billion over a 7-year period, compared with "open" policy regimes. In terms of access to services, credit as a share of gross domestic product is on average 3.3 percentage points lower in countries with major restrictions on the establishment of foreign banks as compared with those that only impose operational restrictions.

The paper comes with Services Trade Restrictions Database (STRD) that provides comparable information in five service sectors, particularly the policies that affect international trade in services (mostly foreign providers):

  • Financial services (banking and insurance)
  • Telecommunications
  • Retail distribution
  • Transportation
  • Professional services (accounting and legal)

It covers the supply of a service through cross-border delivery (Mode 1), establishing a commercial presence or FDI (Mode 3) and the presence of a natural person (Mode 4). But, it excludes consumption abroad (Mode 2) and subsectors such as business processing services (outsourcing) and policies affecting international movement of less-skilled workers (immigration). They assess policy regimes based on five broad categories:

  • completely open, i.e. no restrictions at all
  • completely closed, i.e. no entry allowed at all
  • virtually open but with minor restrictions
  • virtually closed but with very limited opportunities to enter and operate
  • middle category of regimes which allows entry and operations but imposes restrictions that are neither trivial nor stringent

Furthermore, they assign a value to each of these five categories of regime on an openness scale from 0 to 100 with intervals of 25 (i.e. completely open gets zero and virtually open gets 25 and so on with 100 for completely closed ) and call the resulting score a STRI (final aggregation is done based on various weights given to each sub-sector depending on the services sectors’ standardized share in total services output for an average ‘industrialized’ country—see p.50, Table A.1). A value of zero indicates the greatest level of openness.

Based on the above methodology (see this paper for full methodology), the table shows how Nepal stands as of now. Based on the scoring method above, judge yourself the extent of ‘openness’ of Nepal’s policies related to services trade. Later on when I have time, I will upload a table showing how Nepal’s score compares with scores of regional economies. Overall, it looks like Nepal is relatively more open in Mode 1 than in other modes of service delivery/trade. A score of 100 indicates that Nepal is completely closing these sectors for trade as per its commitment during WTO accession.

Services Trade Restrictions Index
Nepal Overall Mode 1 Mode 3 Mode 4
Overall 42.9 36.66 42.06 85
Financial 23.2 33.5 25  
Banking 23.1 12.5 25  
Lending by banks 21.3 0 25  
Acceptance of deposits by banks 25 25 25  
Insurance 23.3 66.67 25  
Automobile Insurance 32.5 100 25  
Life Insurance 32.5 100 25  
Reinsurance 5 0 25  
Telecommunications 50   50  
Fixed-line telecommunications 50   50  
Mobile telecommunications 50   50  
Retail 25   25  
Transportation 56 75 48.86  
Air Passenger Domestic     50  
Air Passenger International 63.8 75 37.5  
Road Freight Domestic 25   25  
Rail Freight Domestic 100   100  
Professional 76 33.33 75 85
Accounting and Auditing 50 50 37.5 62.5
Accounting 30 0 25 50
Auditing 70 100 50 75
Legal 93.3 0 100 100
Legal Advice Foreign Law 80 0 100 100
Legal Advice Domestic Law 100   100 100
Legal Representation in Court 100   100 100

Here is another paper from the same authors where they look at landlocked countries’ comparative advantage in services trade. They argue that protection of services sector (telecommunications and air transport) by landlocked countries is not a smart policy because it is the one of the few sectors in which they have comparative advantage.They find that even moderate liberalization in these sectors could lead to an increase of cellular subscriptions by 7 percentage points and a 20 percent increase in the number of flights.

For more, see this previous blog post about services trade competitiveness of Nepal. Computing RCA index for Nepal’s exports of each services sector category reveals that Nepal actually enjoys comparative advantage in all of them (this despite the fact that there is trade deficit in three of the six sub-sectors).

2008 2009 2010 2008 2009 2010
Product name RCA index Trade balance (US$ million)
Total services 1.52 1.47 2.23 -128.09 -136.86 -199.07
Transportation 0.37 0.59 0.63 -304.62 -233.07 -241.42
Travel 4.23 5.00 4.55 -45.93 -20.56 -58.09
Communications services 5.59 4.54 8.62 40.91 16.11 3.13
Insurance services 0.10 0.19 0.06 -29.79 -25.41 -29.59
Other business services 1.11 1.31 1.87 -6.41 35.79 63.25
Government services, n.i.e. 26.73 11.46 10.63 217.75 90.28 63.65

Source: Author’s computation based on ITC’s Trade Map database.

A review of Finance Minister Pun’s partial budget

It was published in Nepali Times online on July 16, 2012.

Budget discord

After much disagreement over the size and nature of budget for fiscal year 2012/13, Finance Minister (FM) Barsha Man Pun finally unveiled, through ordinance, “The Bill for Authorizing Withdrawal and Expenditure from Consolidated Fund for the Services and Works, 2012” (simply a partial budget) on July 15. The expected expenditure is approximately Rs 161.24 billion, of which Rs 51.29 billion is earmarked for debt servicing and expense of constitutional bodies. The remaining expenditure of Rs 109.72 billion is equal to one-third of the revised expenditure estimate of fiscal year 2011/12.


It will be just enough to meet administrative expenses and to finance ongoing development works, which should be of the same expenditure sub-heads as of the last fiscal year. The tax structure and revenue collection will be guided by the Finance Act 2010/11, which means they won’t change until the full budget is unveiled. Moreover, the government is not allowed to use domestic and foreign loans to finance expenditure during this period. It will have to issue overdrafts as per Nepal Rastra Bank Act 2001 in case revenue collection cannot cover expenditure.

The partial budget does not include new programs except for Rs 3 billion for CA election, Rs 3.69 billion for payment to PLA combatants who chose voluntary retirement, and Rs 3 billion for the establishment of proposed Directorate of Nepal Army. Understandably, the opposition has objected to such ad hoc allocations. Visibly unhappy with the way he was compelled to unveil a partial budget, FM Pun defended his track record and outlined, in his budget speech, what he would have done if a full budget were allowed. He mentioned populist programs like 100 days of employment guarantee to unemployed, free education up to 10+2 level for dalits, allowances to elderly and handicapped people, cultural centers, allowance to girls to attend school and universal insurance, among others.

FM Pun boasted that the economy—particularly growth rate, balance of payments (BoP) and foreign exchange reserves—had performed better during his tenure than previous years. According to government’s projection, the economy grew at 4.6 percent in 2011/12, up from 3.9 percent in 2010/11 and 4.3 percent in 2009/10. Let us be clear that this happened not due to any special effort by the government, but due to favorable monsoon and availability of agriculture inputs, which increased paddy production and pushed agriculture growth rate to 4.9 percent, the highest in the last four years. While the growth rate in service sector remained unchanged at 3.6 percent, industry sector grew at just 1.6 percent, which is lower than 2.9 percent in 2010/11.

It points to the fact that the major constraints to robust industrial activities were not addressed. In fact, the industrial sector is still crippled by power cuts, lack of affordable raw materials and qualified human capital, persistent labor problems coupled with expensive workforce (Nepal has the highest wage overheads in South Asia), strikes, lack of R&D and innovation, and policy implementation paralysis. No wonder gross fixed capita formation as a share of GDP was 19.6 percent, the lowest in the past decade. There is no improvement in cost competitiveness and efficiency of the industrial sector. Unsurprisingly, due to lack of adequate inventory and production hassles in export-oriented sectors, Nepal could not take advantage of weakening of Nepali rupee against major currencies.

Meanwhile, during the first eleven months of 2011/12, BoP surplus and forex reserves reached a record Rs 113 billion and Rs 427 billion respectively. It has resulted not from any novel government policy and structural change in the way the economy is functioning, but because of high remittance inflows and net transfers. There are still worrying signs in the economy: inflation is still high (government’s projection of 8 percent for 2011/12 is gross underestimation), trade deficit is widening, industrial woes are persistent, recurrent expenditure is rising, fiscal deficit is increasing, financial sector troubles are not sorted out, and some inefficient state-owned enterprises continue to drain taxpayer’s hard-earned money.

Given that this is just a special arrangement for revenue and expenditure, there is no relief program for the public, who are hammered by rising cost of living. Similarly, the troubled industrial sector—the most important sector for generating high and sustainable growth and employment opportunities—is also not getting immediate relief. The grand plan for Nepal Investment Year 2012/13 is now out of gear and completion of development works will be delayed.

Against this backdrop, the best the caretaker government could do is to create good industrial relations, maintain investor’s confidence and earnestly implement the ongoing projects by plugging leakages. Importantly, the primary focus should be on sustaining growth rate given the impending impact of late monsoon and fertilizer scarcity during planting season.