Liberalizing trade in services

Akhmad Rizal Shidiq, Jakarta

Minister of Trade Mari Pangestu, as quoted by this newspaper on Jan. 24, stated that Indonesia was preparing to liberalize seven sectors -- legal services, health services, vocational education, construction, hospital, business visa and banking -- by at least May this year. This step might indicate one important direction of the country's services trade policy, namely, pursuing a more liberal regime.

Indeed, the services trade policy is too important to be ignored. The size of the service sector is significant to the Indonesian economy. As with other ASEAN middle-income countries, Indonesia's service sector accounts for about 40 percent of gross domestic product -- slightly smaller than the manufacturing industry, but about two and half times larger than agriculture.

Yet, despite the fact that services trade is the fastest growing component of world trade, at 14.2 percent per annum from 1980 to 1999, as estimated from Balance of Payments statistics, and already outpaces the trade in goods, Indonesia seems unable to take advantage of this growth, as indicated by a rather large deficit in trade in services of US$10.26 billion in 2002.

Moreover, much research on quantitative trade in services barriers also point out that in general, the Indonesian services sector is not yet liberalized.

However, opening up the sector is not easy. There are three underlying problems responsible for this difficulty, namely, weaknesses in the negotiating framework, lack of knowledge regarding services liberalization measures and the political economy of domestic regulations and domestic stakeholder consultancy.

First, a somewhat common obstacle for all countries, it has been found the negotiating framework of the General Agreement on Trade in Services (GATS) under the WTO is problematic. The GATS framework lacks knowledge of the extent of liberalization taken by member countries, is short of clear and credible schedules for removing existing barriers in services subsectors and has an absence of clear safeguards for developing countries.

Second, the lack of knowledge of services liberalization to some extent reflects the inherent complexities in the way the services trade is interpreted and regulated. Such complexities range from an inadequacy of statistical data to capture a whole concept of the services trade or modes of supply, to an absence of clear-cut and quantifiable barriers to trade in services in contrast to trade in goods and inadequate details of service subsector specifications.

As a result, it implies a lack of knowledge and capability to manage the complexities of sectors and subsectors, to coordinate across sectors and negotiation processes, and to assess actual restrictions as well as commitments and progress.

The third problem is the political economy of services trade liberalization and domestic stakeholder consultancy. Following Stephenson and Nikomborirak (2001), the underlying reluctance of many domestic stakeholders to open up their services sectors is that Indonesia does not have a comparative advantage in most service sectors, except probably tourism and the movement of temporary workers (mostly low-skilled migrant workers).

Agreements on how liberalization can be organized in the service sectors can become time consuming and lack focus. This is particularly evident since Indonesia does not yet have politically effective and established institutions for making decisions on sensitive issues, such as in the case of services liberalization when there is a strong anti-liberalization sentiment from various interest groups, mainly domestic providers.

As a matter of fact, the argument against -- or at least for more cautious -- liberalization in the service sectors can be credible. Liberalizing services inflicts adjustment costs on the losers, since the winners of liberalization are only end users and owners of capital and labor in services with a comparative advantage. Liberalization can also undermine the role of public utilities as sources of social employment in developing countries if they are not competitive.

Also, there is concern of social loss from liberalization as low-income households lose access to necessary services when cross-subsidization is removed and providers only focus on segmented profitable markets.

What then is the condition in Indonesia regarding service sector liberalization? First, it is found that we are not adequately well informed on market and service industry structure, existing regulations, levels of restrictions and actual practices of foreign provision. As such, the impact of opening or restricting the domestic market is rather difficult to determine.

With the more practical issue of diplomacy in the WTO forum, this obstacle often creates difficult situations since negotiators must, to put it mildly, creatively improvise the Indonesian position on other countries' requests and queries on various service sectors.

Second, we do not yet have good coordination among government agencies and regulatory bodies. Indeed, with the wide coverage of services and modes of trade, as well as interagency pride and prejudices, the task of coordinating is daunting. Within some sectors, it is also found that while making a commitment to liberalization can be done, it is often not clear how to enforce the commitment and monitor violations.

Third, while credible arguments on more cautious liberalization are possible, as aforementioned, the general arguments from stakeholders and affected groups often do not make sense economically.

Take, for example, the initiative of The Forum of Indonesian Rectors to stop liberalization in a bid to "save education from the negative effects of globalization". This is certainly a weak argument, as is the desire to preserve the national culture in the case of tourism. Trade in services is an economic issue, and economics can provide a case of not opening the market.

In sum, all of this suggests that liberalization should be pursued cautiously on the condition of sufficient information from the respective sectors to be liberalized. Since service sectors in Indonesia are under-researched, further rigorous investigation on the current stances of the sectors is of importance. By that we can hold more fruitful and transparent public debates and greater domestic consultancy to pursue greater welfare effects and minimize the adjustment costs of liberalization.

The writer is a researcher and lecturer at the Institute for Economic and Social Research, School of Economics, University of Indonesia (LPEM-FEUI). He can reached at rizal@lpem-feui.org. The views expressed here are personal.