Karin Astrid Siegmann
Karin @sdpi.org
From the haircut in the shade of a roadside tree to cashing a cheque at a bank, hospitality in a mountain resort, the provision of schooling, water, and a mobile phone network – these services add up to more than half of Pakistan's gross domestic product (GDP).
The share of services in the economies of most countries has risen steadily during the past decades. Today, its role in GDP varies from more than half in developing countries to about three-quarter in industrialized economies.
The World Trade Organization (WTO) has embarked on a major liberalization of trade in services under the General Agreement on Trade in Services (GATS). Previously, the services sector was seen as involving activities that are non-tradable, assuming that services could not be exported or imported.
The perception has been overcome: Consumers of services as well as service providers move across national borders. One-tenth of world services enter international trade. Foreign direct investment (FDI) in the world's stock of services quadrupled, between 1990 and 2002, to over four trillion dollars. With six percent per year, the annual growth rate of services sector has surpassed that of trade in goods.
Pakistan mirrors the international picture. FDI flows have tripled from 2000-2001 to 2003-2004, and more than half of the foreign investment of about one billion dollars is in the services sector. These investors provide financial services as well as mobile phone connections, and they generate power, and trade goods within and across Pakistan's borders.
The GATS came into force in January 1995 to progressively open up international trade in services. Under the GATS, trade in services is categorized under four different types or “modes” of service supply.
Mode 1 relates to provision of services across borders, e.g. transnational postal services. Mode 2 refers to the use of services abroad, for example, through tourism. Mode 3, a commercial presence, commonly means foreign direct investment in sectors such as banking, telecommunication and utilities. Basic services such as subsidiaries of foreign educational institutions or hospitals and private water suppliers are mostly covered under mode 3. Finally, mode 4 denotes the movement of individual service providers, like labour migration of Pakistani doctors to the UK or of construction workers to the Gulf states.
Service provision under mode 4 is of special interest for the developing countries, including Pakistan. About three million Pakistanis – most of them male - earn their living abroad, their remittances contributing to the stability of the country’s economy.
It is assumed that liberalization of the movement of service providers would be a major source of gains for the developing countries, due to their high degree of un- and underemployment, and the willingness to work in low paid sectors of industrialized countries.
According to an agreement reached by WTO members on the trade liberalization schedule in July 2004, WTO members had to submit their offers for opening up services sector and modes of supply by May 2005. Obviously, in the area of services, as one large part of the WTO's liberalization agenda, success will be demonstrated at the upcoming 6th ministerial meeting in Hong Kong in December 2005. Both WTO officials and a group of industrialized member countries last winter sounded alarm on the slow progress of the negotiations even after the schedule's revision. Only about a third of the members have submitted initial offers.
Until recently, Pakistan did not hurry to prepare an initial offer, though it had already embarked upon a programme of liberalization of services sectors even before the WTO came into being. A number of services were opened to foreign competition and foreign investment.
Obviously, the concern in the WTO headquarters in Geneva, and particularly industrialized countries pushing the cause of liberalization of trade in services, have speeded up the preparations. At a meeting of Pakistan's WTO Council at the Planning Commission in March 2005, the commerce minister emphasized the need to provide a credible initial offer to be able to make realistic requests to fellow WTO member countries.
The stated objective of the GATS offer, to be submitted, would be improvement of service delivery in Pakistan. It has announced its intention to create opportunities for foreign service providers in the financial, transport, telecommunication, education, legal, accounting, health and environment services. This means basically liberalization of services under the GATS’ mode 3.
No doubt, the provision of basic services in Pakistan is woefully poor, and a major obstacle to human development. Although the constitution guarantees that the state shall provide basic necessities of life, the government lags far behind in keeping the constitutional promise.
Only 42 percent of children of primary schooling age are actually enrolled in schools; half the rural population does not have access to safe drinking water; and basic health units are found in less than a fifth of villages in Pakistan. Apart from poor coverage, the quality of basic services also needs substantial improvement.
A recent evaluation of students' performance in various districts of Punjab demonstrated that only six percent of them were able to score more than 50 percent in math tests. Even their teachers’ performance was not much better.
The gaps in provision of health care, education and access to safe water are wide between rural and urban areas, and between the female and male population. Improvement of service delivery is, therefore, a desirable goal.
In many developing countries, investment needs of public infrastructure providers, e.g. electricity and water provision, go beyond the scope of the respective governments' budgets. Privatization and opening up of these sectors for foreign investment may, therefore, offer a solution.
It is assumed that liberalization of trade in services leads to increased competition and thus to improved service quality, lower prices, technology and knowledge transfer, less corruption, as well as employment creation. However, foreign involvement has not always produced the improved scale and quality or lower costs that host countries expect. Private investors may not find it profitable to serve remote or low-income areas or may set cost recovery prices that are considered unacceptably high.
The wide rural-urban divide, obvious in the availability of schools and health facilities in Pakistan, may remain untouched or even widened by liberalization. Given the prevalence of single public providers in utilities, e.g. in the provision of water and electricity, there is a risk of abuse of monopoly power.
Crowding out of local enterprises is another risk, along with the loss of employment. In tourism, FDI may have a negative impact on local communities and environment. FDI in some services may relegate an economy to low-level tasks from which it may find difficult to upgrade.
Local skills development may suffer if transnational corporations in services prefer to use expatriate managers or professionals. Therefore, national policies need not only facilitate the attraction of FDI in services, but also to minimize its possible negative consequences on human development.
GATS provides tools for facilitating trade in services that serve human development. The government should make use of them.
In case of sensitive sectors, where thorough analysis has unearthed more risks than benefits for human development, the government can decide not to offer liberalization. European Union has chosen this option for areas such as education and health in its revised offer.
If it can be safely assumed that FDI in basic services would contribute to enhance services access and quality, and the government decides to commit the respective sector, then it should make use of the GATS flexibilities under articles 6 and 19:2 to implement domestic regulation and conditionalities for opening up. This is to ensure that the benefits of upgrading are extended to all users. A requirement that foreign healthcare providers should set up branches in rural areas on a priority basis or apply lower user fees for the poor would thus be perfectly legitimate.
Other conditionalities might include minimum quotas for coverage of rural areas with healthcare facilities or schools, or priority access given to banks that offer micro-finance services to women.
To enforce such regulation, existing institutions need to be restructured and strengthened simultaneously. Unregulated market forces alone may rather widen geographical, gender, and other socio-economic gaps in access to essential services. This is also crucial for better performance of public services provision.
If regulation was enforced more rigorously, for example, in the case of Lahore’s Water and Sanitation Authority (WASA), sufficient money would be available for necessary investments: It is estimated that the collection of arrears from provincial and federal departments, including the Chief Minister’s House, would be sufficient to raise Rs 28 billion.
Finally, if contracts are made with individual private service providers, a phased approach of service contracts should be chosen rather than comprehensive concessions to service providers. Successful pilots can then be scaled up.
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