Infrastructure Services Liberalization in Developing Countries: Key to Growth and Global Competitiveness

Infrastructure Services Liberalization
in Developing Countries:
Key to Growth and Global
Competitiveness
“The international competitiveness of
traditional sectors of developing
economies is heavily dependent on access
to services at world prices. The best
guarantee that services will be supplied at
world prices is to open an economy to the
pressures and opportunities of
international competition or trade and
investment liberalization.”
Logistics Infrastructure Services:
Distribution and Express Delivery
Services
Office of the U.S. Trade
Representative
UNCTAD, Study Series No. 19
October 24, 2006
Importance of infrastructure
services
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2
As services play an increasingly larger role in growth of
developing country economies, liberalization of “infrastructure
services” becomes paramount.
Infrastructure services are the building blocks of commercial
activity and everyday life, including financing and insuring
transactions, communicating by phone, fax, and Internet,
providing computer networks, supporting exploration and
generation of energy, and ordering and delivering a product or
service.
Logistics is a particularly useful example of an infrastructural
service.
Developing countries that maintain barriers to infrastructure
services are blocking their own economic growth and global
competitiveness.
Key to real growth and competitiveness is market opening and
binding market openness.
Services: The backbone of developing
country economies
Sector Share of GDP 2004
GDP and Services Average
Annual Growth Rates, 1990-2004
Low-income countries
7%
GDP
10%
Agriculture
6%
Services
5%
23%
Industry
25%
Services
52%
4%
3%
2%
1%
0%
World
3
Low-Income Countries
World Bank World Development Report, 2006
Services generate more FDI and new
jobs in developing countries
FDI stock in developing
countries, 2004
(Billion U.S. Dollars)
1400
70
1200
60
1000
50
800
40
600
30
400
20
200
10
1995
2005
0
0
Primary
4
Share of total developing
country employment in services
Manufacturing
Services
East Asia
SE Asia/Pacific
Lat Am/Carib
Sub-Saharan
Africa
UNCTAD, World Investment Report, 2006
ILO, Global Employment Trends Brief 2006
Problem: Developing countries tend to
maintain more restrictions on foreign
services than developed countries
Average restrictiveness score in services trade
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
Th
a il
an
d
Tu
rk e
y
Ind
ia
Ho
ng
EU
Ko
ng
Ch
.
Ar
ge
nti
na
Br
azi
l
Ca
na
da
Ph
il ip
pin
es
Me
xic
o
Ma
lay
sia
So
uth
Af
ri c
a
Ind
on
Re
es
p.
ia
of
Ko
rea
5
Ja
pa
n
Au
str
al i
a
Un
ite
d
St
ate
s
0
The index scores are the average restrictiveness scores for banking, distribution, maritime, professions and
telecommunications. Adapted from McGuire, 2002.
Restrictions in developing countries prevent
them from gaining dynamic benefits from
liberalized trade
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Increased investment
Technology transfer
Enhanced competition
Innovation
Economies of scale
Logistics a critical infrastructure
service
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International trade facilitated by freight logistics services providing
efficient integrated management of point-to-point supply and
distribution chains.
The availability of competitive logistics services, namely on a
global basis, will enhance overall economic efficiency and
competitiveness.
This is particularly the case for developing countries, for which
freight costs can be up to 40% of total export value (World Bank,
2004).
Developing countries have significant interests in export of goods
ranging from agricultural products to industrial goods, and which
could benefit from timely, reliable and efficient supply chain,
distribution and inventory management for their exports.
Barriers are particularly a problem in infrastructure services like
logistics. Useful to look at two aspects of logistics: distribution and
express delivery.
Distribution Services
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Virtually every good or commodity makes its way to the market through
distributors. Wholesalers, retailers, commissioned agents and franchisers provide
the domestic infrastructure for moving goods to consumers.
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The value added in the distribution stages can greatly exceed the value added in
production; for example, the value created in distribution accounts for 70% of total
value for textiles and over 75% for food products (UNCTAD).
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Frequent barriers include limitations on the purchase of real estate, restrictions on
equity holdings, exclusions of products or services due to state monopolies or
national interest, nationality quotas, and residency requirements
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Excess profits enjoyed by uncompetitive distribution firms come at the expense of
consumers and producers.
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Delays for imports and exports not only reduce trade volumes, but also reduce the
probability that firms will even enter export markets for time-sensitive products.
Distribution Services
Benefits of liberalization
9
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Distributors manage inventories efficiently, minimize spoilage
and waste
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Producers assume lower risk
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Consumers pay less, have greater choice.
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Liberalization, trade facilitation reform, and domestic regulatory
reforms in distribution can be implemented at relatively low cost
in low-income countries. The gains from these reforms can be
substantial.
Case study: Lithuania
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Lithuania’s first law on trade, introducing the notion of
retail trade and wholesale and provisions on
competition, adopted in 1995.
By 2003 wholesale and retail trade had become the
third most important sector in the economy, accounting
for 17% of all FDI flows.
Over the last four years, five domestic chains have
emerged as the key players in the distribution sector,
accounting for 70 per cent of food retail sales.
The leading national chain in food and consumer-care
products has expanded into regional markets.
UNCTAD, Distribution Services, 2005
Express Delivery
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Helps improve competitiveness of all aspects of companies’ operations,
including sales, production, customer support, and logistics and storage.
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Directly employs 1.25 million people in 200 countries—more than the
petroleum refinery industry—and indirectly supports another 2.65 million
jobs.
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Growth is twice that of the global economy; jobs expected to grow to 2.1
million by 2013, with a majority in developing and transition economies.
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The express delivery integrators are a vital link in creating a globally
competitive logistics environment.
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Common market access barriers include exclusion of competition to
government-owned or sanctioned provider, preferential treatment, arbitrary
licensing requirements, and restrictions on foreign investment.
11
Express Delivery Services
Benefits of liberalization
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Express services particularly important for geographically
remote countries or where domestic transport infrastructure is
poor. Liberalized express delivery offers secure services that
can leap over entrenched inefficiencies of mail delivery,
transportation, and logistics in many developing countries.
Express delivery reduces need for warehousing. Developing
countries could reduce the unit cost of production by as much
as 20 per cent by reducing inventory holdings by half (Gaush
and Kogan, 2001).
A liberalized express delivery industry in China would result in
estimated increases of US$3 billion in investment, US$85
billion in output, and 800,000 new jobs over five years. (U.S.China Business Council).
Once they liberalize, why
should developing countries bind their
commitments?
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GATS commitments to investors are like
money-back guarantees for consumers:
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provide assurances that increase confidence
an important factor in differentiating options over
where to invest
Overall business environment more
important than specific costs, e.g. labor.
Anchors reform in a international legal
framework, and provides momentum
Myths blocking liberalization
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Services liberalization is not de facto “deregulation”: Liberalization means
removing requirements that discriminate against foreign service suppliers and
providing transparent regulation. It is consistent with maintaining the right to
regulate and promotes good governance. It also creates an attractive business
and investment climate
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Services liberalization should be viewed as part of the solution to
economic dislocation rather than a cause of dislocation: Developing
country transition from subsistence farming and agriculture to greater reliance
on services and manufacturing is essential to produce real increase in living
standards. Overall GDP and employment growth from services liberalization is
key to enabling this transition to occur and to create new jobs and opportunities
for those who suffer economic dislocation.
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Moving to the head of the line
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Pattern is clear: developing economies opening up
services sectors are moving to the head of the line in
global logistics competitiveness
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Attracting investment
Attracting barrier-breaking technology
Lowering costs and risks
Increasing availability and choice
Stimulating activity in related sectors
Making binding commitments in logistics and other
infrastructure services will further enhance this
competitiveness.
Certainty of commitments helps keep costs predictable,
which is especially important in logistics.