Liberalizing trade in services<\/p>\n
Akhmad Rizal Shidiq, Jakarta<\/p>\n
Minister of Trade Mari Pangestu, as quoted by this newspaper
\non Jan. 24, stated that Indonesia was preparing to liberalize
\nseven sectors -- legal services, health services, vocational
\neducation, construction, hospital, business visa and banking --
\nby at least May this year. This step might indicate one important
\ndirection of the country's services trade policy, namely,
\npursuing a more liberal regime.<\/p>\n
Indeed, the services trade policy is too important to be
\nignored. The size of the service sector is significant to the
\nIndonesian economy. As with other ASEAN middle-income countries,
\nIndonesia's service sector accounts for about 40 percent of gross
\ndomestic product -- slightly smaller than the manufacturing
\nindustry, but about two and half times larger than agriculture.<\/p>\n
Yet, despite the fact that services trade is the fastest
\ngrowing component of world trade, at 14.2 percent per annum from
\n1980 to 1999, as estimated from Balance of Payments statistics,
\nand already outpaces the trade in goods, Indonesia seems unable
\nto take advantage of this growth, as indicated by a rather large
\ndeficit in trade in services of US$10.26 billion in 2002.<\/p>\n
Moreover, much research on quantitative trade in services
\nbarriers also point out that in general, the Indonesian services
\nsector is not yet liberalized.<\/p>\n
However, opening up the sector is not easy. There are three
\nunderlying problems responsible for this difficulty, namely,
\nweaknesses in the negotiating framework, lack of knowledge
\nregarding services liberalization measures and the political
\neconomy of domestic regulations and domestic stakeholder
\nconsultancy.<\/p>\n
First, a somewhat common obstacle for all countries, it has
\nbeen found the negotiating framework of the General Agreement on
\nTrade in Services (GATS) under the WTO is problematic. The GATS
\nframework lacks knowledge of the extent of liberalization taken
\nby member countries, is short of clear and credible schedules for
\nremoving existing barriers in services subsectors and has an
\nabsence of clear safeguards for developing countries.<\/p>\n
Second, the lack of knowledge of services liberalization to
\nsome extent reflects the inherent complexities in the way the
\nservices trade is interpreted and regulated. Such complexities
\nrange from an inadequacy of statistical data to capture a whole
\nconcept of the services trade or modes of supply, to an absence
\nof clear-cut and quantifiable barriers to trade in services in
\ncontrast to trade in goods and inadequate details of service
\nsubsector specifications.<\/p>\n
As a result, it implies a lack of knowledge and capability to
\nmanage the complexities of sectors and subsectors, to coordinate
\nacross sectors and negotiation processes, and to assess actual
\nrestrictions as well as commitments and progress.<\/p>\n
The third problem is the political economy of services trade
\nliberalization and domestic stakeholder consultancy. Following
\nStephenson and Nikomborirak (2001), the underlying reluctance of
\nmany domestic stakeholders to open up their services sectors is
\nthat Indonesia does not have a comparative advantage in most
\nservice sectors, except probably tourism and the movement of
\ntemporary workers (mostly low-skilled migrant workers).<\/p>\n
Agreements on how liberalization can be organized in the
\nservice sectors can become time consuming and lack focus. This is
\nparticularly evident since Indonesia does not yet have
\npolitically effective and established institutions for making
\ndecisions on sensitive issues, such as in the case of services
\nliberalization when there is a strong anti-liberalization
\nsentiment from various interest groups, mainly domestic
\nproviders.<\/p>\n
As a matter of fact, the argument against -- or at least for
\nmore cautious -- liberalization in the service sectors can be
\ncredible. Liberalizing services inflicts adjustment costs on the
\nlosers, since the winners of liberalization are only end users
\nand owners of capital and labor in services with a comparative
\nadvantage. Liberalization can also undermine the role of public
\nutilities as sources of social employment in developing countries
\nif they are not competitive.<\/p>\n
Also, there is concern of social loss from liberalization as
\nlow-income households lose access to necessary services when
\ncross-subsidization is removed and providers only focus on
\nsegmented profitable markets.<\/p>\n
What then is the condition in Indonesia regarding service
\nsector liberalization? First, it is found that we are not
\nadequately well informed on market and service industry
\nstructure, existing regulations, levels of restrictions and
\nactual practices of foreign provision. As such, the impact of
\nopening or restricting the domestic market is rather difficult to
\ndetermine.<\/p>\n
With the more practical issue of diplomacy in the WTO forum,
\nthis obstacle often creates difficult situations since
\nnegotiators must, to put it mildly, creatively improvise the
\nIndonesian position on other countries' requests and queries on
\nvarious service sectors.<\/p>\n
Second, we do not yet have good coordination among government
\nagencies and regulatory bodies. Indeed, with the wide coverage of
\nservices and modes of trade, as well as interagency pride and
\nprejudices, the task of coordinating is daunting. Within some
\nsectors, it is also found that while making a commitment to
\nliberalization can be done, it is often not clear how to enforce
\nthe commitment and monitor violations.<\/p>\n
Third, while credible arguments on more cautious
\nliberalization are possible, as aforementioned, the general
\narguments from stakeholders and affected groups often do not make
\nsense economically.<\/p>\n
Take, for example, the initiative of The Forum of Indonesian
\nRectors to stop liberalization in a bid to "save education from
\nthe negative effects of globalization". This is certainly a weak
\nargument, as is the desire to preserve the national culture in
\nthe case of tourism. Trade in services is an economic issue, and
\neconomics can provide a case of not opening the market.<\/p>\n
In sum, all of this suggests that liberalization should be
\npursued cautiously on the condition of sufficient information
\nfrom the respective sectors to be liberalized. Since service
\nsectors in Indonesia are under-researched, further rigorous
\ninvestigation on the current stances of the sectors is of
\nimportance. By that we can hold more fruitful and transparent
\npublic debates and greater domestic consultancy to pursue greater
\nwelfare effects and minimize the adjustment costs of
\nliberalization.<\/p>\n
The writer is a researcher and lecturer at the Institute for
\nEconomic and Social Research, School of Economics, University of
\nIndonesia (LPEM-FEUI). He can reached at rizal@lpem-feui.org. The
\nviews expressed here are personal.<\/p>",
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