Regional Integration beyond Tariff Reduction Trade in Services. Mombert Hoppe Trade Economist May 9, 2011

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1 Regional Integration beyond Tariff Reduction Trade in Services Mombert Hoppe Trade Economist May 9, 2011

2 Regional Integration Issues The tariff agenda progress, but still incomplete Removing tariffs for internal movement of goods Harmonising tariffs for entry of external goods Other issues emerging as constraints and opportunities Non-Tariff Barriers (NTB) and trade facilitation (lack of) integration of services markets Just focusing on physical tariffs is not enough

3 Non-tariff barriers Regulatory measures aim at achieving important national policy objectives health, safety, But they often function as barriers to trade Or are overly restrictive and not adequate for the environment (dairy in EAC) Often NTBs appear in addition to tariff peaks NTBs are being identified (policy measures AND market failures) inefficiencies in transport, border management and logistics cumbersome fiscal arrangements restrictive rules of origin poorly designed technical regulations and standards other non-tariff barriers such as import bans, permits and licensing But addressing them has proven more difficult than thought How can these objectives be achieved with simpler, less distortionary measures?

4 Non-tariff barriers (2) High costs on regionally active companies, reducing potential for economic growth and employment creation In Eastern and Southern Africa, one fifth of trade is affected by NTB not taking prohibitive and unreported measures into consideration In Southern Africa, each day a truck is held up at a border costs about USD 500 to Shoprite Complex rules of origin are costly: Woolworths does not use preferences, and Shoprite has admin costs of USD 6 million to obtain USD 14 million in preferences What is needed? Disciplining AND removing NTBs Improved and adequate regulations (i.e. standards in the dairy sector in EAC) Simple rules of origin

5 Beyond Goods: Services matter For competitiveness and growth Productivity growth can be higher than in manufacturing Technological change important for services Significant learning and knowledge spillovers through clustering. Economy-wide impacts from improvements in services 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 5

6 Services can contribute substantially to export diversification Discussion of export diversification too often ignores opportunities in services Conquering new markets for export services e.g. Potential 18 million new jobs in developing countries from offshoring (with each job generating a further 3 jobs) - McKinsey Catalyzing diversification in other sectors (e.g. demonstration effects of tourism to foster export good discovery) Services are part of the solution to export diversification constraints transport services, telecoms, information, consulting, etc.

Kencall - example of successful African services exporter Operational since 2005 Strong growth - 600+ employees

Intense focus on quality and training of their staff Established processes and tools World-class facility in

7 Kencall - example of successful African services exporter Operational since 2005 Strong growth employees High profile clients in East Africa and abroad Management team with vast international and domestic experience Intense focus on quality and training of their staff Established processes and tools World-class facility in Nairobi Global award winner CCF rated best non-european Call Center 2008, KPMG - Fastest growing Kenyan Top 100 company

8 Services are key input to other sectors Companies that use more professional services, tend to show higher average labor productivity. i.e. In Southern Africa, it is 10 to 45 percent higher for companies using accounting, legal or engineering professional services Transport and telecommunication services are key determinants to accessing global markets Recent research suggests that Lack of competition drives up prices for transport services land-locked countries are further isolating themselves through high policy restrictions on these services Engineering services key input to infrastructure and manufacturing sectors Entertainment services to restaurants and bars

9 Regional market integration is happening For example, in West Africa, both within UEMOA and ECOWAS, in principle free right of establishment, but restrictions remain Within UEMOA, specific directives allow free circulation of service providers i.e. doctors, architects, and lawyers How do these directives translate into market integration? Power Pools in South Africa, West Africa Regional banks Transit arrangements

10 But there is enormous scope for further development of services in Africa In general, services in Africa are less efficient, more costly, and less widely available than in other regions But significant differences across countries and sectors Transport services Telecommunication services

Africa s international road transport has missing links, while administrative and regulatory barriers block existing connections 14 Average transport prices (in US cents per tkm) 12 10 8 6 4 2 2 3.

11 Africa s international road transport has missing links, while administrative and regulatory barriers block existing connections 14 Average transport prices (in US cents per tkm) Pakistan Brazil USA China Western Europe long distance Africa- Durban- Lusaka Africa- Lomé - Ouagadougou Africa Mombasa Kampala Africa- Douala- Ndjaména Source: Transport Prices and Costs in Africa, Raballand and Tervaninthorn, (World Bank, 2008)

12 Source: Broadband for Africa, World Bank 2008 Comparison of Regional Average Broadband Retail Prices

13 WB studies show opportunities for services exports in Africa Cross border mobile banking in Southern Africa ICT services in Nigeria and Ghana Professional services in Eastern and Southern Africa Financial services in East Africa Tourism

14 Services Trade policy matters a lot! Current market sizes small: magnitude and differences in current regulations and restrictions keep them small preventing competition and regional integration Preventing economies of scale and efficiency increases Liberalization and increased imports of services and FDI increases competition and can lead to greater competition, lower prices, higher quality and more variety Effective competition in the market (in non-infrastructure services): eliminate market power Effective competition for the market (in infrastructure, segments of markets that have natural competition characteristics): concession contracts, PPPs Magnification of impact: services are important inputs into production of other goods and services, allowing to create new export opportunities in goods and services access to lower cost services will allow new industries to be competitive Increased regional market access will lead to new opportunities in professional services exports, transport services, etc Openness can enhance effectiveness in achieving public policies (eg health), and is an element of good regulatory policy

15 Coordination of trade and regulatory reform Successful international integration requires not just liberalization, but appropriate regulation, and effective policies to widen access to services to disadvantaged households/informal operators/small firms Trade opening with inappropriate regulations can result in adverse outcomes Need for capacity to design and implement appropriate regulations and monitor impact

16 How to achieve more competitive services markets? Regulations often used as protective barriers, not primarily to achieve policy objectives What options for addressing NTBs? What options for integrating transport, telecoms, financial, professional services markets? How to address policy barriers such as import permits, or prohibitions Dynamic effects (telecoms!) are often not considered in policy debate? How can that be changed? Lack of capacity to design and implement effective regulations How to catalyse coordinated regulatory and trade reform and required capacity building? Vested interests of current beneficiaries -- opposing reforms How to ensure that vested interests -domestic and foreign- do not impede competition or capture and distort the definition and implementation of regulations

17 What works, what doesn t? Learn from failures in the past, nationally, regionally, internationally Learn from successful reforms, nationally, regionally and internationally How to make these experiences accessible to policy makers? What is needed and how can this initiative contribute?

18 Regional Integration beyond Tariff Reduction Trade in Services Mombert Hoppe Trade Economist May 9, 2011

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