Liberalizing trade in services

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.