Tailoring Aid for Trade to the services economy

19 May 2016

After ten years of increasing support, how best can the Aid for Trade (AfT) initiative support countries to develop competitive services domestically, and encourage the growth of services exports?


Since its launch at the WTO’s Hong Kong ministerial conference in 2005, the Aid for Trade (AfT) initiative has succeeded in increasing resources available to developing countries to integrate within the global economy. AfT commitments reached more than US$54 billion in 2013 – around 40 percent of all official development assistance – with over US$15 billion specifically for least developed countries (LDCs).

Yet the last decade has also seen a changing context for many developing countries, in which economic activity is driven increasingly by services. Services can help reduce poverty, either directly (as in education or health) or through improving efficiency in “embedded” services (such as communication, banking, and transport) supplied to agriculture, mining, and manufacturing. Sectors such as tourism also generate export revenue themselves: services exports have recently been the most dynamic component of global trade growth, and are especially important for many smaller or landlocked LDCs that lack scale or physical connectivity to global product markets.

Despite this, the relationship between AfT and services is complicated, mainly because trade in services differs significantly from trade in goods. The four modes of service supply (cross-border supply, consumption abroad, commercial presence, and temporary movement) each face different kinds of barriers from those for traditional goods. Liberalisation of services often takes place unilaterally, and regulation tends to be dispersed across government institutions. The nature of how services are traded across borders is also still evolving, as new technologies create new opportunities for services trade.

In this context, how can AfT be tailored to better support the development of services sectors? Broadly speaking, improved services depend upon a number of interlinked investments: a robust policy and regulatory environment, strong infrastructure networks, and specific programmes to support key services export sectors. These three potential AfT intervention areas are discussed in turn below.
 

Aid for trade and the regulatory environment

The main underlying requirement for developing efficient services is a robust governing framework of policies and regulations. Changes here are often the trigger for a liberalisation or dynamic change within specific sectors. The main challenge is that regulatory systems need to balance amongst competing concerns and objectives: promoting competition, providing a stable business environment, supporting innovation and efficiency, protecting consumers (for example through monitoring price and quality standards), and pursuing social objectives (such as universal access). As such, the development of services can be hindered by unnecessary overregulation, including broad “horizontal” measures restricting access to entire markets. Yet services can also be hampered when a lack of adequate modern regulations (especially at the sector level) makes it difficult for businesses to make decisions.

Most developing countries have limited experience of putting in place regulatory frameworks and institutions, especially at the sector-specific level. Legislation and institutions dealing with regulation tend to be highly fragmented, which is partly unavoidable given that oversight tends to require specialist technical knowledge. The advent of new technology – most notably the internet which has created new ways of purchasing and providing services – means that regulations also need to keep pace with technological progress. Where regulation does exist, enforcement is made difficult by a lack of capacity or information.

Aid for Trade (AfT) can therefore play an important role in identifying and reforming outdated regulatory frameworks, and plugging capacity gaps. A first set of possible AfT interventions would include investment in policies: to set out strategic goals and priorities for the services economy (including domestic competitiveness and potential exports); diagnose and assess the costs imposed by poor quality services and the potential benefits of market reforms (for example by comparing sector performance with international benchmarks); conduct regulatory audits to map and understand the measures affecting trade in services; and identify and assess alternative regulatory models or degrees of liberalisation. Here in particular, there is much to learn from other countries’ experiences of liberalising and developing services sectors and building services exports.

Secondly, AfT can build capacity by updating legislation and streamline administrative processes (from licensing and approvals, to investigation and enforcement) and helping establish regulatory institutions, such as telecoms regulators or competition authorities. AfT is most needed during transitional phases, when regulatory authorities are still establishing their role, powers, and enforcement capabilities: AfT can build capacity of regulators and other stakeholders including businesses, consumer groups, members of parliament, and the judiciary. Donor support at the institutional level can also provide a signalling effect that increases the credibility of the regulator, safeguarding against the threat of “regulatory capture”. Eventually however, the need for independence and sustainability requires that self-financing regulatory models are established.

A further list of possible AfT interventions would include building private sector advocacy around services (ensuring better representation for services sectors vis-à-vis others, including agriculture and manufacturing), improving data on services and trade, and supporting the creation of regional services markets (including harmonised regulations, free movement of capital and labour, national treatment, and mutual recognition of qualifications). Development partners can also help governments pursue innovations in service delivery, for example rolling out systems for electronic payments of taxes, mobile-based information systems, or greater e-learning in schools.
 

The critical role of infrastructure

Alongside a robust regulatory environment, high quality infrastructure is the crucial enabler for the development of services sectors. The sheer scale of the investments required for establishing network infrastructure means that most AfT will continue to be concentrated here: in Africa alone, the costs of addressing infrastructure needs are estimated at around $93bn per year.[1]

There are clear linkages between improving services and investment in air, road, and maritime transport facilities, telecommunications networks, and energy infrastructure. A notable recent shift has been towards investments in “corridor” projects, including upgrades to physical transport infrastructure as well as storage capacity at logistics hubs. The latter can facilitate the exchange of goods and multi-modal transport, increasing the level of efficiency in the supply chain, and in many cases making the difference between whether an export industry is viable or not.

In energy, the main concern is to increase capacity for power generation and distribution, including developing regional markets for electricity. AfT can also have positive impacts on energy policy and regulation, including deregulation away from monopoly providers to allow new forms of generation and promote renewable energy. In telecoms, AfT has helped fund fibre-optic networks, as well as assisted developing countries in transitioning from state-owned monopolies towards regulated competitive markets.

Beyond these networks, there are also a number of additional services that might be included as “backbone infrastructure” through their essential contribution to broader economic development. These include the financial system – access to banking, credit and insurance services, and efficient payments systems – given its role in providing credit for entrepreneurs to support economic growth. AfT has a role here, in supporting regulation but also for example in improving financial inclusion.
 

Targetting services exports

Research is only beginning to emerge on where the services export potential lies, even for developed countries. Overall, ICT and communication services are the most dynamic sectors in global services trade, although for LDCs tourism accounts for almost 40 percent of total services exports, which is twice as much as the next biggest sector, transport (which may also include tourism-related travel, alongside freight and shipping services). LDCs themselves have highlighted both of these as priority export sectors, through their recent collective request to the WTO, alongside others such as financial services, IT-related services including business process outsourcing (BPO), and temporary movement of natural persons (Mode 4) across different sectors.

Potential AfT interventions are likely to vary significantly from one individual sector to another, although cross-cutting issues will include:

  • Putting in place sector-specific infrastructure;
  • Strengthening sector-level policy, institutional capacity, and coordination;
  • Maximising linkages with other sectors;
  • Providing assistance with marketing, establishing reputation, and attracting investment;
  • Establishing and improving industry standards;
  • Strengthening information and data;
  • Negotiating on market access barriers where these exist;
  • Building supply capacity and skills.

Applying this framework to tourism, for example, demonstrates the significant role that AfT could play in developing services exports. Compared with goods, a key advantage of tourism is the lack of  administrative barriers – tariffs, customs and quarantine procedures, subsidies for domestic producers – that usually hinder trade: for tourism, an “export market” of overseas consumers comes to you. Furthermore, tourism depends on natural and cultural endowments that are in limited global supply or often unique: it can therefore be exploited by smaller countries with labour and land constraints. It is notable that tourism is important both to small islands and to landlocked LDCs such as Lao, Nepal, Uganda, and Zambia.

Beyond financing for network infrastructure (such as airports), AfT can also play a role in developing the sector, with key interventions including:

  • Strengthening tourism policy with integrated and coherent strategies that incorporate regulatory issues (such as visas, investment rules, consumer protection, licensing laws, security issues), taxation regimes, broader issues such as language, cultural, land, and environmental policies, SME support, and helping spread tourism to outlying areas. This also includes maximising the potential for spill-overs to other sectors, such as agriculture.
  • Strengthening marketing strategies that target geographical markets and types of tourists sought, based on factors such as competition, capacity, and product offering. Operators may also need training with understanding and accessing different markets. “Export diversification” beyond one particular market can include developing new offerings (activities or different types of tourism) or attracting visitors from new countries. AfT can also help improve data for policy and marketing, for example on tourist expenditures.
  • Improving standards related to hospitality, but also in areas such as safety (given the damaging effect of accidents) and food quality, or environmental standards.
  • Supporting the development and protection of tourism assets with development assistance directed towards specific cultural and environmental resources (for example through UNESCO) or on general projects (for example in water, sanitation, and waste management).
  • Supporting skills development: tourism depends heavily on skills and experience, and development assistance can facilitate education, training, and skills exchange. Language skills in particular are essential for attracting new markets.

Despite this, direct AfT support for tourism development is extremely low, especially compared with other productive sectors. Between 2010 and 2014, almost US$14 billion was disbursed in AfT just to LDCs for agriculture projects, roughly eighty times more than the US$175 million committed specifically to tourism projects in LDCs over the same period (table 1).
 

Table 1: Aid for Trade Disbursements to LDCs and other LICs, 2002-14 (constant 2013 US$ million)

 
Beyond tourism, other potential services exports will face challenges that are similar and different. For example, in ICT-related services both network infrastructure (high-quality telecoms, reliable inexpensive electricity) and the regulatory environment will again be important. But governments can also put in place proactive policies to encourage uptake and innovation while improving the provision of public and private services in sectors from education and health to professional services and commerce. Developing countries have already become involved in business processing outsourcing (BPO) with high levels of job creation; it is likely that other not-yet-foreseen ICT-related opportunities will emerge as technology progresses.

Finally, Mode 4 is an area where there is enormous potential for developing countries to benefit, yet where most significant barriers to services exports still exist. Thus far, many developing countries have yet to put in place any kind of “export strategy” for Mode 4 that looks in detail at market access barriers, potential opportunities, and supply conditions, for specifically identified target sectors (such as construction, plumbing, electricians, welding, mechanics, services incidental to mining and agriculture, health and education professionals, and tourism). Taking an “export development” or “supply chain” approach to Mode 4 would be a first step towards building more coherent approaches in this neglected area.
 

Conclusion

In summary, services are the main economic activity in developing countries, and increasing trade in services has enormous potential to improve overall economic efficiency and provide direct export opportunities. AfT can help countries address challenges in building services-based economies, through establishing high-quality infrastructure and strong regulatory frameworks to foster competition. AfT can also support new policy approaches to services exports, and targeted investments in areas such as marketing or ICT innovation.

Yet services issues have received little specific attention so far under the AfT initiative, especially compared to the dedicated support programmes available for specific export products (such as sugar), or issues such as trade facilitation. By contrast, instruments for providing direct support to tourism or BPO, or tackling barriers in Mode 4, are rare and small in size. After ten years of increasing support, the AfT initiative and donors still have much to do to tailor their approach to the services context.


Author: Dan Lui, Programme Associate, European Centre for Development Policy Management (ECDPM).

This article is an adaptation of a forthcoming conceptual paper to be published by ICTSD.


[1] Foster, Vivien and Cecilia Briceño-Garmendia (2010), African Infrastructure: A Time for Change, World Bank, Washington DC.

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