Africa’s Trade in Services and Economic Partnership Agreements

1. Africa’s Trade in Services and Economic Partnership Agreements Paul Brenton Africa Region, World Bank Brussels, October 7, 2010

2. Overview • The importance of services • Trade in services • Trade policy for services matters • The challenge of coordinating regulatory reform and trade liberalisation • The opportunities and risks from an EPA

3. Context: Services in the modern economy

4. Context: Services matter • For growth • Productivity growth can be higher than in manufacturing • Technological change important for services • Significant learning and knowledge spillovers through clustering. • For employment • Services largest contributor to job creation • High employment rates for women • For poverty reduction • Poverty reduction more strongly correlated with growth of services than with growth of manufacturing See Ghani, E (ed) The Service Revolution in South Asia, World Bank-OUP, 2010

5. Trade in services plays key role • Exports of services can drive diversification • Potential 18 million new jobs in developing countries from offshoring of services (each job generates a further 3 jobs) • Imports of services and FDI can lead to greater competition, lower prices, higher quality and more variety

6. Trade policy for services • Competition is essential to increase efficiency • Competition leads to lower prices+better quality services. • Competition pushes service suppliers to reduce waste, improve management and reduce operating costs • forces suppliers to pass on cost savings to consumers in the form of lower prices. • Competition undermines costly rent-seeking activities • Trade liberalisation can increase competition + attract FDI • Small national markets in Africa cannot generate level of competition needed to drive efficiency and adoption of new technologies. • Small size means attracting investment from overseas is important for key infrastructure services.

7. Many services require regulation • Market failures in many services sectors can impact on both efficiency and equity. • natural monopoly, systemic risks, asymmetric information, and externalities require regulation. • Effective regulation and capacity • Regulation can be complex • Weak regulation leads to less competition and higher costs • Must avoid regulatory capture

8. Effective regulation and capacity • In electricity need to monitor and consider: • Output and consumption (access levels, Consumption levels and growth, unsatisfied demand); • Efficiency (Productivity levels and growth, Cost levels and changes, Capacity and utilization, losses); • Quality of supply(Continuity, Quality, customer service) • Financial performance(Financial surpluses and losses, rates of return, indebtedness and interest burden); • Capacity, investment, and maintenance(Capacity levels and margins , investment , maintenance expenditure); • Prices(prices and full economic costs, efficiency of subsidies Tariff design and technical and economic efficiency); • Competition (Well-functioning bid auction markets , Well-functioning and competitive generation and supply markets) • Social indicators (Affordability especially for low-income consumers, Impacts on development)

9. Coordination of trade and regulatory reform • a dynamic process – no strict sequencing • Appropriate regulations may be necessary to realize benefits of trade liberalization • emphasis on competition, sound regulation and wider access • Trade brings new technology which may require change to regulatory approach • Trade opening with inappropriate regulations can result in adverse outcomes • Need for capacity to design and implement appropriate regulations and monitor impact

10. Strategy for trade in services • Improve data and initiate dialogue with stakeholders • Focus on priority services sectors • Offensive export interests • Domestic sectors where increase in FDI/competition essential for competitiveness • Assess current regulatory policies and openness to trade and FDI • Discuss appropriate forum for trade liberalisation of services • Unilateral, Regional, EPA or multilateral • Obtain technical assistance to increase capacity of regulator and improve regulations

11. Services trade policies appear less restrictive in Africa Source: Gootiz and Mattoo (2009)

12. But Africa has not bound openness at WTO Source: Gootiz and Mattoo (2009)

13. Reticence to make commitments on services at WTO • Mercantilist bargaining approach not effective for services • GATS/WTO not adequately addressed the issue of regulatory reform and capacity building • Lack of clarity over technical assistance • Need forums/platforms of best practices and lessons for successful trade and regulatory reform

14. Regional integration and services • Risks from preferential liberalisation – MFN dominates – especially in network industries • Regional integration can allow for learning effects • But can give first-mover advantage to less efficient firm • But potential gains from mutual recognition • Move faster at the regional level than in EPA or multilateral in sectors with similar standards and regulatory approaches • Opportunities from regional regulatory cooperation • Avoid regulatory capture • Can allow for faster reform • Pooling of technical capacities for regulation

15. Thick borders in Africa limit integration • High trade costs create “thick” borders. • These are a key barrier to regional and global integration.

16. Opportunities from a services EPA • Provide credibility to reform process • Improvement in access to EU????? • Especially mode 4 beyond skilled workers • Provisions on regulatory issues of particular importance to Africa • Tourism - Shipping? • Financial and technical assistance • Enhance regional integration

17. Risks of a services EPA? • Broad but shallow GATS type agreement • Too much focus on market access • without coordinated regulatory reform and capacity building • Preferential liberalisation

18. A development-oriented services EPA for Africa • A coordinated sector-by-sector regulatory-reform/trade-opening process • Flexible approach to timing of reforms and a phased strategy towards implementation. • An emphasis on locking in non-discriminatory liberalization of services imports • EPA can be a part of processnot an end-point!

20. Thank you for participating Africa Trade Policy Notes http://go.worldbank.org/M8SXRN80G0