The Contribution of Services Liberalization to Poverty Reduction: What Role for the GATS?

in The Journal of World Investment & Trade
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The Contribution of Services Liberalization to Poverty Reduction: What Role for the GATS?

in The Journal of World Investment & Trade


1 See, for example, Martin Ravallion, "Looking Beyond Averages in the Trade and Poverty Debate", in Machiko Nissanke and Erik Thorbecke (eds), The Impact of Globalization on the World's Poor (New York: United Nations University, Palgrave, 2007) pp. 118-144. A comprehensive prcsentation of the state of research, the conceptual and methodological problems involved, is provided by L. Alan Winters, Neil McCulloch and Andrew McKay, Trade Liberalization and Poverty: The Evidence So Far, 42 Journal of Economic Literature 1 (2004) pp.72-115. 2 An overview of available studies on the broader developmental implications of services liberalization is provided by Bernard Hoekman, Liberalizing Trade in Services: A Survey, World Bank Research Working Paper 4030 (Washington D.C., 2006); John Whalley, Developing Countries: Liberalisation in Services, 27 The World Economy 8 (2004) pp. 1223-1253; as well as Matthias Lücke and Dean Spinanger, Liberalizing Interrtational Trade in Services: Challenges alld Opporttinitiesfor Developing Countries, Kieler Diskussionsbeitrage 412 (Kiel Institute for the World Economy, 2004).

3 A Member's trade comnitments under the GATS relate to measures affecting cross-border imports (cross- border trade: mode 1), the consumption of scrvices in another Member's territory (consumption abroad: mode 2), as well as the services-related activitics of forcign established suppliers (commercial presence: mode 3) and foreign natural persons (presence of natural persons: mode 4) in the Member's domestic market. See Rudolf Adlung et al, "The GATS: Key Features and Sectors", in Bernhard Hoekman, Aaditya Mattoo and Philip English (eds), Development, Trane, acid the Wro (Washington D.C.: The World Bank, 2002) pp. 259-279. ' WTO, International Trade 5 (Geneva: WTO, 2005) p. 8. 5 Note that Article XIX:1 of the GATS commits Wo Members, subject to certain flexibilities for developing countries, "to enter into successive rounds of negotiations ... with a view to achieving a progressively higher level of liberalization".

6 Deardorff has developed a theoretical framework illustrating how liberalization of 'trade service' may increase the gains from trade in goods. See Alan V. Deardorff, Irttentatiortal Provisions of Trade Services, Trade, and Fragmerttation (The University of Michigan: Research Paper No. 463, 2000). In a similar vein, Jones and Kierzkowski associate the emergence of incrcasingly fragmented production processes, not necessarily stable over tirne, with more easily available service links (transport, communication and coordination) whose provision is subject to scale economies. Ronald W. Jones and Henryk Kierzkowski, ["tematilmaIIragmerltat;on and the new economic geography, 16 The North AmericanJournal ofEconol1lics and Finance 1 (2005) pp. 1-10. For an overvicw of relevant studies see 01)1 Briefing Paper, Can Tourism Hely Reduce Poverty in Africa? (London: Oversees Devclopment Institute, 2006, available at 8 World Bank, Economics Prospects 2002 (Washington D.C.: The World Bank, 2001) p. 100. `' Ibid, p. 99. 10 Ibid, p. 97.

�� Hildegunn Kyvik Nordäs, Enrico Pinali and Massirno Geloso Grosso, Logistics and Time as a Trade Barrier, OECD Trade Policy Working Paper No. 35, TD/TC/WP(2006)3/FINAL (Paris, 2006) p. 13. �2 The above estimates are taken from Carlo Maria Rossotto et al, Competition in International Voice Communications, World Bank Working Paper 42 (Washington D.C., 2004). �3 Jens Arnold, Boutheina (Uucrmazi and Aaditya Mattoo, "Telecommunications: The Persistence of Monopoly", in Aaditya Mattoo and Lucy Payton (eds), Service Trade and Development - 77m bxperience o12ambia (Washington, D.C.: Palgrave and the World Bank, 2007) pp. 119 and 124. 14 imid. 15 See, for example, Charles Schlumberger, "Air Transport: Revitalizing Yamoussoukro", in Aaditya Mattoo and Lucy Payton (eds), as note 13 above, p. 201. Similar problems related to cabotage rights may arise in land and maritime transport.

For example, least-developed countries such as Bangladesh or Zimbabwe provide medical transcription services to international clients whose health records and patient interviews are digitally transcribed. See Urvern�, World Investment Report 2004 -The Shift Towards Services (New York and Geneva: United Nations, 2004) p. 150. See Rudolf Adlung and Martin Roy, Turning Hills into Mountains? Current Commitments under the General Agreement on Trade in Servires and Prospects for Change, 39 Joumal of World Trade 6 (2005) p. 1168f, and Aaditya Mattoo, "Negotiating Improved Market Access Commitments", in Bernhard Hoekman, Aaditya Mattoo and Philip English (eds), as note 3 above, pp. 280-289. 18 An empirical study found that, if geographical region and income levels were controlled for, countries with GATS commitments in basic telecommunications tended to outperform others that had not made commitments with respect to fixed and mobile penetration as well as sector revenues (as a percentage of G�N). Kent Bressie, Michael Kende and Howard Williams, Telecommunications trade liberalization and the WTO, 7 info 2 (2005) p. 20.

" Rolf Langhammer, Service 1'rade Liberalization as a Handmaiden of Cnmpetitiveness in Manufacturinq: An Industrialized or Developing Country Issue?, 41 Journal of World Trade 5 (2007) forthcoming (preliminary version available as Kiel Working Paper 1293). 20 Rashmi Banga and Bishwanath Goldar, Contribution of Services to Output Growth and Productivity in Indian .MaKM/fKfHnK�, Indian Council for Research on International Economic Relations (ICRIER), Working Paper No. 139 (2004). In contrast, a recent study for 12 developing countries suggests that the costs associated with protected intermediate services, as compared to other protected inputs, are relatively moderate. (The author signals, howcvcr, the possibility of underestimates due to intonnation gaps.) Nevertheless, the combined effects of restricted Services and non-services inputs were suüiciently serious in a number ofcascs to offset thc tariff�protcction granted to final user industries. Thcir effective rates of assistance turned negative, rejecting the net tax burden caused by over- priced inputs. See OECD, Impact of Services Barriers on Effektive Rates ofa Protection in Agriculture and Manufacturing, TD/TC/WP(2004)49/REv1 (Paris, 2006) p. 12f. z� Langhammer, as note 19 above. These findings are necessanly subject to various methodological and statistical problems which are attributable, inter alia, to the modal structure of services trade under the GATS; the intangibility of many services transactions; and the difficulties of identifying the wide range of possible and permissible (non-tariff) barriers to services trade and relating them to performance indicators. Zz Philippa Dee, "The Economy-Wide Effects of Services Trade Barriers", in OECD (ed), Enhancin,q the Performarue of the Services Sector (Paris: OECD, 2005). The study concerned focuses on seven sectors - air passenger transport, maritime transport, banking, distribution, electricity generation, engineering services, and telecommunications - in six developing countries, two from Africa, Asia, and Latin America.

z3 The risks of refonu are not equally distributed across sectors. For example, they may prove lower in telecommunications, where more universally valid templates are possibly available, than in financial Services where country-specific institutional and Economic conditions tend to play a stronger role. =^ See Rossotto, as note 12 above, p. 7. -e The (non-)application of the GATS to foreign employees of domestic service companies has given rise to doubts. These have been fuelled in particular by the - somewhat opayue - language in an Annex that deals with the movement of natural persons. However, whilc this Annex seeks to outline governments' scope for operating measures that affect mode 4 suppliers, it does not modify the definition of services trade contained in' Article 1:2 of the GATS. Accordingly, mode 4 consists of the supply of a service "by a supplier of one Member. through presence of natural persons of a Member in the territory of any other(!) Member." Obviously, in order to be covered, both the supplying Company and its employees must operate in Foreign territory. 2f> World Bank, Global Economic Prospects 2004 (Washington D.C.: The World Bank, 2003) p. 148.

27 L. Alan Winters et al. Liberalising Temporary Movement of Natural Persons: An Agenda for the Development Round, 26 The World Economy 8 (2003), pp. 1137-61. The authors explicitly qualify their estimates as "quantitative experiments to suggest possible orders of magnitude" rather than as unconditional predictions of future policy impacts (p. 1143). In the context of the current discussion, it needs to be kept in mind that the GATS only covers natural persons supplying Services or working for service suppliers, and that the latter need to be foreign owned (see note 25 above). The exclusion ofpersons employed by domestic suppliers may disproportionately affect sectors such as health or social services, which are potentially attractive targets for foreign professionals (doctors, nurses), but not necessarily for foreign investors. 28 Ibid, p. 144, and Sumanta Chaudhuri, Aaditya Mattoo and Richard Self, Moving People to Deliver Services: How can the WTO help?, 38 Journal of World Trade 3 (2004) p. 371. 1. 29 Antonia Carzaniga, "The GATS, Mode 4, and Pattern of Cotnmitments", in Aaditya Mattoo and Antonia Carzaniga (eds), Moving People to Deliier Services (Washington D.C.: The World Bank and Oxford University Press, 2003) p. 24f. 3° Chaudhuri et al, as note 28 above, p. 371. 31 WTO (2005), as note 4 above, p. 8. 3z Tellingly, the status of host-country's social and labour law, including that of collective agreements, proved one of the most sensitive issues in complcting the European Comnmnity's recent Dircctive on Services in the Internal Market. The revised version, adopted as Directive 2006/123/EC in Decembcr 2006, explicitly excludes from coverage "any contractual provision concerning employment conditions, working conditions... , which Member States apply in accordance with national law which respects Community law" (Article 1:6). 33 Note that a footnote to Article XVII of the GATS (National Treatment) provides that Members are not required under specific commitments. "to compensate for any inherent competitive disadvantages which result from the foreign character of the relevant services or service suppliers".

For an overview of relevant considerations see World Bank, as note 26 above, pp. 143-176. 35 As of mid-2007, 32 of the 150 WTO Members were LDCS. The `Luc Modalities', adopted by the Council for Trade in Services (Special Session) in September 2003, are contained in WTO document TN/S/13. 36 See, for example, the discussion in the Council for Trade in Services (Special Session) in May 2006 (WTO document TN/S/M/20).

37 See Rudolf Adlung, Public Services and tlre Gats, 9 Journal of International Economic Law 2 (2006) pp. 470-482. 38 For example, various policy initiatives in India require higher education institutions to reserve a certain share ofseats for disadvantaged students. See Pawan Agarwal (2006), "Higher Education Services in India and Trade Liberalization", in Rupa Chanda (ed), Trade in Services & India - Prospects and Strategies (New Delhi: Centre for Trade and Development, 2006) pp. 305-307. Other countries oblige licensed telecom companies to install payphoncs in all villages, banks to operate branches in the capitals of all provinces, and so on. 3" Minimum subsidy auctions have been held, for example, in Chile, the Dominican Rcpublic, Nepal, Peru and Uganda. See Arnold et al, as note 13 above, p. 134. 4° Aaditya Mattoo and Lucy Payton, "Services Trade for Zambia's Development", idem, as note 13 above, p. 16. 41 See K.M. Gopakumar and Nirmalya Syam, "Health Services Liberalization in India", in Rupa Chanda (ed), as note 38 above, pp. 250-264.

a2 Of course, the pools of wealthy private patients (students) that would now seek treatment (education) in their home country as well as the stafhabsorbed domestically tend to be larger than those flocking abroad under more restrictive domestic regimes. New policy challenges might ensue (prevention of 'internal brain drain' between public and private institutions and the 'crowding out' of poorer patients, etc.). See, for example, the discussion in Chantal Blouin, Nick Drager and Richard Smith (eds), International Trade in Health Services and the GATS (Washington D.C.: The World Bank, 2006). 43 Rudolf Adlung, Services Negotiations in the Doha Roiind: Lost in Flexibility?, 9 Journal of International Economic Law 4 (2006) p. 892.

44 See also Adlung and Roy, as note 17 above. as See Martin Roy, Juan Marchetti and Hoc Lim, Services Liberalization in the New Generation of Preferential Trade Agreements (P'tAs): How Much Further than the GATS?, WTO Staff Working Paper EmsD-2006-07 (Geneva, 2006). ae See Rudolf Adlung, N��otiatiol1s on SafeRuards and Subsidies in Services: A Never-endinq Story?, 10 Journal of International Economic Law 2 (2007) p. 253. " The most frequent signatories of BiTs are Germany and China, with some 130 and 115 Treaties, respectively, followed by Switzerland with over 100. Unlike the BITS concluded by the US and Canada, these Treaties are generally confined to guaranteeing national treatment post-estabhshment. See M. Sornarajah, The International Law on Foreign Investment (Cambridge: Cambridge University Press, 2004) p. 215. ;" Mozambique has not listed any sectoral or horizontal exemptions in its BIT with the US. The other Treaties contain exemptions for small- and rnedium-sized enterprises (Senegal); telecommunications, insurance and various other services (Bangladesh); postal, telecommunications, radio and television, banking and insurance services, and infrastructure-related projects in areas such as water, energy, health, roads, railways and ports (Congo). Among the exemptions listed by the US in all four cases are air and maritime transport, banking and insurance services. The Treaties are available at

4" See Roy et al, as note 45 above, p. 7. 50 There is some empirical evidcnce of the benefit of policy bindings, whether under the GATS or elsewhere. As regards GATS commitments on basic telecommunications, see Bressie et al, as note 18 above, pp. 3-24. The existence of a link between BITs and Investment flows has been explored and confimied, subject to certain qualifications, by Rashmi Banga, Do Investment Ayreements Matter?, 21 Journal of Econontic Integration 1 (2006) pp. 40-63, and Eric Neumayer and Laura Spess, Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?, 33 World Development 10 (2005) pp. 1567-1585. Other studies could not corroborate the existence of strong links, however: Zachary Elkins, Andrew T. Guzman and Beth A. Simmons, Competing for, Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000, 60 International Organization (Fall 2006) pp. 811-846; Jennifer Tobin and Susan Rose-Ackerman, Foreign Direct Investment and the Business Envirortrnent in Developing Countries: The Impact 0/ Bilaterallllvestmmt Treaties, Yale Law School Research Paper No. 293 (2005); and Mary Hallward-Dnemeier, Do Bilateral Investment Treaties Attract Foreign Direct Investment?, World Bank Policy Research Paper 3121 (Washington D.C., 2003). In a similar vein. a recent study on the impact of the agreements signed with the United States could not establish a significant link with investment flows; see Kevin P. Gallagher and Melissa B.L. Birch, Do Investment Agreements Attrart Investment? - Evidence from Latitl America, 7 J.W.LT. (2006), pp. 961-974.

�� The above percentages provide a first approximation of scheduling preferences. They do not reflect, however, the number of the sub-sectors actually covered within these large areas, their econornic importance, or the depth of the commitment taken under individual modes. For more details sec Adlung and Roy, as note 17 above, p. 1168f. 52 This wording is inspired by Article IV:3 of the GATS ("Particular account shall be taken of the serious difficulty of the lcast-developed countries in accepting negotiated specific cotnrnitrnents in view of their special economic situation and their development, trade and financial needs") and the 'LDc Modalities' referred to in above n 35. The latter Modalities, however, urge Members to take into account "the serious difficulty of LDCs in undertaking negotiated specific commitments in view of their special economic situation, and therefore ... exercised restrairrt in seeking commitments from LDCS" (emphasis added). 53 Adlung and Roy, as note 17 above, p. 1168f.

54 WTO, Trade Profiles (Geneva: WTO Publications, 2006) pp. 31 and 119. A General Council Decision of 2 December 2002 expressly calls on WTO Members to "exercise restraint in seeking concessions and commitments .... from acceding LDCS, taking into account the levels of concessions and commitments undertaken by existing WTO LDCS' Members". 55 Gopakumar and Syam, as note 41 above, p. 274.

56 Adlung and Roy, as note 17 above, p. 1170. 57 For example, the commitments could be made subject to (i) non-specified or Only vaguely defined econornic needs tests; (ii) remain confmed to modes that offer little opportunities for trade, e.g. cross-border imports of hotel or restaurant services; or (iii) 'liberalize' transactions that cannot be prevented in any event, especially those falling under mode 2, when the consumer has lett the country. 58 Only four of the 22 Membcrs that acceded between January 1995 and June 2007 undertook phase-in commitments on cross-border trade that were not related to restrictions scheduled under mode 3. The sub-sectors concemed are insurance services (three cases), franchising and commission agents' services. m For an account of these negotiations see, for example, Laura B. Sherman, `Wildly Enthusiastic'About the First Multilateral Agreements on Trade in Telecommunications Services, 51 Federal C:ommunications Law Journal 1 (1999) pp. 61-110. An overview of the commitments assumed is provided by Aaditya Mattoo, as note 17 above, pp. 284f.

f'° If horizontal phase-in provisions related to forcign equity ceilings (mode 3) are taken into account, the relevant shares for Vietnam and Oman would rise to 100 per cent. 61 For example, thc longest implementation period foreseen in China's schedule, completed in 2001, is six years, while somc phase-in commitments assumed in the extended negotiations on basic telecommunications are subjcct to timeframes of up to nine (Thailand), ten (India) or 14 years (Indonesia). 62 For more information on the accession process see Constantine Michalopoulos, "W ro Accession", in Bernhard Hoekman, Aaditya Mattoo and Philip English (eds), as note 3 above, pp. 61-70.

63 Bemard Hoekman and Aaditya Mattoo, Services, Economic Development and the Doha Rβttt�.' Exploiting the Comparative Advantage of the WTO (mimeo, 2006), and WTO document WT/AFT/W/26, 29 May 2007. 64 The relevant provisions would differ in scvcral respects from the safeguards clause proposed by ASEAN members (except Singapore) in the context of the Working Party on Gats Rules. In particular, invocation would not be related to actual surges in trade, but to political, institutional or economic dcvclopments that might impede thc scheduled implementation of commitments. Also, the relevant measures would not discriminate between foreign established and domestic suppliers under mode 3. See also Adlung, as note 46 above.

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