CIS Regional Workshop on WTO Accession Services Sector : its importance for development and potential impacts of its lib

1. CIS Regional Workshop on WTO AccessionServices Sector : its importance for development and potential impacts of its liberalization Lessons learned from Vietnam’s experience By Cristina Hernández UNDP/SURF-WCA, Dakar

2. Presentation based on research undertaken in 2004-2006 in the framework of UNDP-funded project VIE/02/009: “General Framework for a National Strategy for the Services Sector in Vietnam up to 2020” by Dorothy Riddle, Nguyen Hong Son and Cristina Hernández (June 2006)

3. Structure of the Presentation: • Some basic concepts • Importance of services • Misconceptions about services • Prerequisites for stimulating services growth • Proposed National Services Strategy for Vietnam • Recommendations for optimizing services trade negotiations • Vietnam’s actual services sector liberalization upon WTO accession • Potential costs of services liberalization and lessons drawn

4. Some Basic Concepts: • There is No single definition of services (They are Intangibile, Instorable, Instable in quality, Inseparatability between production and consumption) • Classification of Services & Differences some national systems & the International (GATS) System 1. Business services 2. Communications 3. Construction 4. Distribution 5. Education 6. Environment 7. Finance 8. Health and social services 9. Tourism 10. Recreation, culture/sports 11. Transportation 12. Others: Utilities

5. I. Some Basic Concepts (cont): GATS Definition of “Traded” Service: Supplying a service to a foreigner, regardless of location Modes of Trade in Services: #1: Cross-border Service moves #2: Consumption abroad Consumer moves #3: Commercial presence Supplier moves permanently #4: Presence of natural persons Supplier moves temporarily

6. II. Services are important because: • They are facilitators of domestic growth –In 2003, contributed on average 68% of the global GDP (However, in Vietnam services are growing more slowly than GDP; accounts for less than 40%) • They anchor and support the entire goods production process by providing value-added inputs for competitive industrial development (However, in Vietnam policy appears focused on final demand services, with a major degree of “internalization”). • They are increasing as a percentage of world trade and FDI–constitute approximately 36% of world trade and FDI in services is reaching over 60% of all investment flows worldwide (However, in Vietnam services trade deficit is growing/ expectations are low)

7. II. Services are important because (cont): • They contribute to job creation –services activities have become primary creators of new jobs, accounting for over 90% of new jobs globally since mid-1990s (However, in Vietnam the shift of labour structure out of agriculture and into services is still low) • They arevital to poverty alleviation and key to realizing the MDGsboth: directly –in terms of enhancing the availability and affordability of education, health, energy, ITC services-; and Indirectly –by alleviating poverty and empowering women through entrepreneurial and employment creation opportunities in services enterprises (Vietnam’s overall progress towards the MDGs is impressive; the services sector is already contributing to this purpose but more needs to be done)

8. III. Misconceptions about services: 1) When a developing country or transitional economy has scarce resources, the development priority should be industry, not services –this is based on idea that services are primarily to satisfy final demand. However, half services produced in an economy are “intermediate” services –so, services dynamically supports agricultural and manufacturing sectors 2) Developing countries do not have a comparative advantage in services exports; and having a negative balance in their trade in services is normal In fact, these economies are active exporters of services –already export on average 68 different types of services to an average of 33 export markets (aprox. 2/3 with other developing and transition economies).

9. III. Misconceptions about services (cont): 3) Developing and transition economies benefit from services trade liberalization primarily through attracting increased FDI (Mode 3) and exporting labour (Mode 4), and not through making their own domestic service sector more competitive Foreign investors, however, will be competing with existing national suppliers & potentially undermining their ability to compete in regional/ global markets 4) If domestic demand for services is low, the focus on developing the services sector will fail The solution lies in export markets –many services do not require high fixed asset investment to get started and thus is feasible to start as small niche players supplying services to foreign firms in their own national market (via Mode 2) and to regional markets

10. III. Misconceptions about services (cont): 5) Services “Trade liberalization” is equivalent to deregulation in services It is not possible to discharge government’s primary responsibility for consumer protection unless there is a transparent and appropriate regulatory framework in place –so, the issue is to strengthen the domestic regulatory environment in support of competition • Based on such misconceptions, Services Sector development is either neglected or left to foreign investors (through indiscriminate liberalization) As such, many developing countries enter into binding commitments in services without following any comprehensive strategy; and services sector regulation develops in response to requirements of int’l treaties

11. IV. Prerequisites for Stimulating Services Growth: • Stimulate demand for quality services(in Vietnam, SOE monopolies in strategic service industry remains/ distort competitiveness dynamics) • A strong proactive policy framework and a coherent domestic regulation (in Vietnam the policy and legal environment is complex & contradictory; review & reform needs to address competition policy, licensing of professionals, tax rates & incentives equal to goods, ability to monitoring & enforcement) • Meet regional and international standards (yet, in Vietnam standards for services are still underdeveloped and poorly implemented)

12. IV. Prerequisites for Stimulating Services Growth (cont): • Reinforce the inter-linkages among service sub-sectors to produce dynamic effects (in Vietnam, key service sub-sectors are at initial stage of development) • Establish effective mechanisms of co-ordination in planning and implementation (in Vietnam, coordination & supervision is weak) • Enact specific developmental strategies -including staff training, support structures for small services enterprises (like service industry associations), services quality assurance and trade promotion- and strategize services trade negotiations

13. Service Inputs for Manufacturing Consumer Production Distribution Business services: Advertising Engineering services Equipment leasing Industrial design Legal services Packaging services Research & development Repair & maintenance Translation ICT Other services: Commission agents Construction Customs brokerage Freight forwarding Storage & warehousing Transport services Wholesaling Education & training Finance

14. V. National Services Strategy for VietnamOverall Goal for Service Sector: • Provide high value added inputs to export-oriented industries • Reverse the growing deficit in services trade by increasing services exports • Provide an attractive environment for FDI • Support sustainable growth & transfer to a knowledge-based economy • Assist in meeting national human development objectives for poverty alleviation Develop an efficient and internationally competitive services sector in order to:

15. V. National Services Strategy for VN (cont): Specific Goals Proposed: 2010 Goal: Services = 42% GDP 2020 Goal: Services = 50% GDP Core recommendations: Recommendation #1: Coordinated Approach Recommendation #2:Strong Regulatory Framework Recommendation #3: Employment Creation in Services

16. V. National Services Strategy for VN (cont): Stage 1: 2005-2010 -China Model • Strengthen services as industrial supports: • Telecoms; Education & training; Finance (banking & insurance); Business/ professional services; Logistical services • Strengthen services as social supports: • Health services; Tourism Stage 2: 2010-2020 –India Model • Leverage competitive position in ICT: • Back office operations; Software development • Leverage competitive position in science & technology: • Contracted research & development • Leverage competitive position in tourism: • Health tourism

17. VI. Optimizing Services Trade Negotiations:Roadmap for International Integration • Current situation: • Types of services exported: 70 • Export markets: 23 • Primary mode of supply: Mode 2 • Business service firms need exports to survive • Strengthen Vietnamese competitiveness: • National service export development strategy • Regulate Mode 1 competitors

18. VI. Optimizing Services Negotiations (cont):Approaches to Market Liberalization • Services with high export potential & low capital costs • Reserve modes of supply; make requests • Services with high export potential & high capital costs • Attract joint venture FDI • Services with low export potential but high job creation potential • Economic needs tests • Services with low export potential & low job creation potential • Exchange for market access concessions

19. VII. Vietnam’s actual Services Sector liberalization upon WTO accession • Signatory of ASEAN Framework Agreement on Services (AFAS) –A GATS-Plus agreement (currently in negotiations with Australia, China, Korea, N.Z…) • VN-US BTA, with much more extensive coverage and more binding commitments than AFAS • WTO accession offer, with even more far-reaching commitments than under the BTA • Bilateral Investment Agreement with Japan (based on NAFTA) whereby VN renounces to applying all kinds of performance requirements to non-excluded sectors

20. VII. Vietnam’s actual Services Sector liberalization upon WTO accession (cont): • Vietnam’s WTO accession offer on services includes commitments in practically all services sectors –with only a few sub-sectoral exceptions • Commitments are based primarily on phase-in of liberalized market access for foreign suppliers, and few performance criteria/conditions have been noted • If compared with other newly acceding countries in Asia (Re UNDP ATII 2006 Study on Mode 3), Vietnam exceeded level of commitmentsby other ‘radical’ liberalizers, including China –China kept exceptions and imposed limitations in forms of establishment (preference for ‘green’ investment); with marked preference for joint ventures

21. VII. Vietnam’s actual Services Sector liberalization upon WTO accession (cont): • In such context, there is little correlation between liberalization offers made and reality of Vietnam’s current services export activities –e.g., Mode 1 is listed with no restrictions for wide range of professional services; what will certainly entail negative impacts of national services suppliers (supplying domestic market & exporting via Mode 2) • This situation compromises the success of the services sector development strategy to be adopted, and emphasizes the need for assessing the impacts of services trade liberalization –Sample Framework has been developed under the Study

22. VIII. Potential costs of services liberalization and lessons drawn: • Economies (like Vietnam) that are acceding to the WTO in the past few years are being pressured to make very liberal commitments under the GATS –they have not been given enough time to assess the impacts • As an economy liberalizes market access for trade in services, care is needed so that the role of foreign firms stimulates rather than depresses nat’l competitiveness • Liberalizing terms for market access in services can make an economy more attractive to foreign investors, and these can bring much-needed capital & expertise –However, attractiveness can also be influenced by the competitiveness of local infrastructureand by a transparent regulatory environment

23. VIII. Potential costs of services liberalization and lessons drawn (cont): • There are a number of potential costs to developing countries of services FDI: potential for monopolistic practices with accompanying rise in prices, control of cultural activities, crowding out of local suppliers, and employing local workers only in low-paying, lower skilled jobs • There is also potential for negative impact on balance of payment due to the use of foreign suppliers (also via Mode 1) and profit repatriation • More worrisome is the potential impact on the poor. –Unless care is taken, the gap in access to, and affordability of, essential services can widen and a divergence of funds commonly used by government to subsidize access to the poor

24. VIII. Potential costs of services liberalization and lessons drawn (cont): • The most important prerequisite to benefit from services FDI is a strong regulatory framework to ensure positive multiplier effects in the domestic economy (UNCTAD 2004) • Performance criteria are important to ensure positive multiplier effects from services foreign direct investment particularly as, without regulatory restrictions, large corporations tend to import skilled staff and a wide range of service inputs, thus providing few, if any, domestic multiplier effects

25. VIII. Potential costs of services liberalization and lessons drawn (cont): • Important to ensure that negative impacts such as e.g. the following do not occur: a) loss of jobs due to imported expertise and contracting of support services from abroad; b) a drop in net foreign exchange earnings due to importation of support services by foreign owned enterprises; c) a concentration of service provision in more profitable urban areas, leaving the rural and remote communities even more disadvantaged • To counteract them, performance requirements that could be used are: transfer of technology, hiring, training and promoting local staff, use of national service suppliers, employment equity, export activity from foreign-owned entities

26. VIII. Potential costs of services liberalization and lessons drawn (cont): • Finally, in order to meet national social objectives, it will be important that market opening not jeopardize universal access to essential services (such as health, education, electricity, basic telecoms), especially for the poor. In addition, market opening should result in increased employment in services and increased entrepre-neurial opportunities in services for women. • (Re. UNDP Study“Impacts of Basic Public Services Liberalization on the Poor and Marginalized People: The Case of Health, Education and Electricity in Viet Nam” –Edited by Murray Gibbs (August 2006)

27. Thank You!