Services under SAFTA: How to make it work for South Asia?

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Services under SAFTA: How to make it work for South Asia?

The inclusion of services within SAFTA demands a regional strategy to develop skills of labour force and supply them to the global labour market

By Shiv Raj Bhatt

6 September 2006

The service sector has emerged as one of the major contributors in the global Gross Domestic Product (GDP) and trade. On an average, while services account for more than 70% of GDP in developed countries and 50% in developing countries, their share in global exports have grown from 15% to nearly 25% over the last two decades. In the case of South Asia too, the share of services in GDP and trade has increased.

Besides empirical evidences showing large benefits of services trade liberalization, the growing contribution of services in GDP and trade has led many countries, including SAARC members, to liberalize services trade. Recently, the members decided to include services within the South Asian Free Trade Agreement (SAFTA) framework. The ministerial council meeting, held in Dhaka in April 2006, assigned the Committee of Experts (CoE) to examine the proposal of including services trade in the agreement. The Committee has been mandated to decide over the possibility of including trade in services under the agreement. The ministerial council also entrusted a study with categorical recommendations on the possibility of including trade in services within the SAFTA framework. The study report will be submitted prior to the next CoE meeting in October 2006.

SAFTA services inclusion, though necessary, its implications on members are yet to be assessed. While many people are enthusiastic, some are not. Analyzing prospects and potentials of intra-regional services trade are challenging, basically due to data unavailability. In this context, the inclusion can be said as a mixed bundle of hopes and fears.

The World Trade Organisation (WTO), recently, had decided to suspend the Doha Round of world trade talks. The talks were initiated nearly five years ago to revamp the rules of global trade, boost global economic growth and help poor countries in their development process. It is estimated that a successful conclusion of the Doha Round could bring 144 million people out of poverty by 2015, the year that world leaders have set as a target for halving world poverty. As the Indian trade minister Kamal Nath said "The round is not dead. It is definitely between intensive care and the crematorium". In this context, the regional trade blocs may play an instrumental role in trade liberalization process. And obviously, with the Doha suspended and GATS incomplete, there is considerable scope for SAFTA to boost liberalization within the region.

Benefits and costs

As the Indian trade minister Kamal Nath said "The round is not dead. It is definitely between intensive care and the crematorium". In this context, the regional trade blocs may play an instrumental role in trade liberalization process. And obviously, with the Doha suspended and GATS incomplete, there is considerable scope for SAFTA to boost liberalization within the region.

The inclusion of services within SAFTA framework is a necessity, if members are to realize the benefits of a free trading area. There are many reasons that demand for an immediate inclusion of services within SAFTA framework. First, the capacity of SAARC members, except India, in producing and trading manufactured goods is weak while services are emerging as the most potential sector in all member countries and potential for intra regional services trade are huge. Therefore the members are more optimistic on the issue of trading services rather than manufactured goods. Second, the availability of services (especially tourism, health, education, and labour) within the region will help to attract consumers from other parts of the world. So, an advanced services infrastructure within the region will boost the regions’ share in global services trade. And SAFTA may play an instrumental role in developing such an advanced services infrastructure within the region. Third, in any economy, the competitiveness of producers largely depends on access to efficient services such as banking, telecommunications, and transport facilities (services).

Services are an integral part of other economic activities; so their liberalization will produce a strong and positive spillover effects on other economic activities. Fourth, it can be argued that, in theory, free trade in services and the entry of foreign (regional) suppliers ought to stimulate competition, which, in turn, improves the efficiency of domestic industries that assure better and lower cost services. Improved delivery of services is also a critical input towards the improved efficiency and success of manufacturing and agriculture. Fifth, an enhanced services trade will be an important source of foreign earnings for member countries. Sixth, in the LDCs, where the provision of both essential and commercial services is, at times, inadequate - the imports of services (that is assumed to be increased after inclusion of services within SAFTA framework) can add to the overall availability of services and to the variety and quality from which individual and corporate consumers can choose and be benefited.

In this context, while there are assumptions that the inclusion of services within SAFTA may help member countries to be more competitive and grow faster; the inclusion will be beneficial for the members, particularly the LDC members, including Nepal.

Yet, the claimed benefits cannot be automatic. It can be argued that while regional approach to liberalize services can be beneficial for more advanced countries, particularly India, it may lead to job losses, increases in prices and discontinuation of essential services like health, education and water in the LDCs. It can also be argued that its effects on poor will also not be favorable, mainly because the suppliers choose to focus on more profitable segments of the region. For example, after liberalization of the services sector within SAARC, there is a possibility that a Nepali investor, who wants to invest in health sector, may be inclined to invest in other countries of the region, rather than in Nepal. This will also deprive Nepal’s health sector from possible investment benefits.

The way forward

Such doubts and claims, however, can be nullified and all the above said benefits can be seized with appropriate strategies and actions at the regional level. In order to capitalize on the inclusion of services within SAFTA framework, an initiative to increase services availability in less developed parts of the LDCs is desirable. Such an initiative should also include a regional investment cooperation mechanism, particularly in the context of less developed parts of the region. For instance, India’s fast growing economy and technological advancements could be used as a source of growth (through capital investment and technology transfer cooperation) for other capital scarce and technologically weak member countries. Similarly, since all the SAARC member countries are labour-abundant, there is a huge potential to gain from the supply of labour in labour scarce developed countries, provided the member countries develop skills of their labour force as per the global requirements. The inclusion of services within SAFTA, therefore, also demands a regional strategy to develop skills of labour force and supply them to the global labour market.

Bhatt is a Consultant Economist with the South Asia Watch on Trade, Economics and Environment (SAWTEE)-a Kathmandu-based think tank, and can be reached at shivraj@sawtee.org

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  • Services under SAFTA: How to make it work for South Asia?23-May-2007 | R. Banerjee

    flow of labourers from one country to another may threaten security and enhance the possibility of terrorism. what measures should be taken to counter this problem?

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