Global Services- Lectures-7-8

Globalisation and Its Impact on

Services Sectors
Prof. Tarun Das, IILM, New India.
Formerly, Economic Adviser, Ministry of Finance

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 Contents
1. What go we mean by globalisation?
2. Global Services production, trade and
Investment
3. Impact of Globalisation on services
4. Impact of WTO-GATS on globalisation of
services sectors
5. Impact of services on economic growth
6. Assessment made by developing countries on
the impact of WTO-GATS
7. Assessment made by WTO Secretariat
8. WTO-GATS General Issues

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 1.1 What is meant by globalisation?
 Globalisation means Worldwide intensive
exchange of people, knowledge, capital,
goods and services.
 Globalisation helps in integration of the
world, and allows new ideas and
technological innovation to spread around the
globe .
 Globalisation is much wider than an
economic process and involves all human
relationships and civilizations.
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 1.2 A Joke on Global Trade
 A British Princess and her Saudi Arabian
boyfriend died in Paris after being treated by
British doctors with German medicines while
their German BMW car driven by a drunken
Turkish driver consuming too much French wine
and chased by Italian Paparazzi crashed against
a river tunnel.
 This news is being sent as SMS by an Indian
journalist using a Chinese made Nokia handset
and a Singaporean Airtel simcard smuggled
from Korea and using Orange network of
Thailand.

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 2.1 Average growth rates of world
production in 1990s (per cent)
GDP Agriculture Industry Services

India 6.0 3.0 6.4 8.0

Developing 3.5 2.2 3.7 4.1
East Asia & 7.2 3.1 9.3 6.4
Pacific
Europe & -1.5 -2.3 -3.8 1.6
Cent Asia
Lat,America. 3.3 2.3 3.3 3.4
& Caribbean
Mid. East 3.0 2.6 0.9 4.5
South Asia 5.6 3.1 6.2 7.1
Sub-Saharan 2.5 2.8 1.6 2.6
Africa
Developed 2.5 0.0 0.7 2.5
World 2.7 1.4 1.5 2.9
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 2.2 Structure of world output
(% to GDP)

Country Agriculture Industry Services

1990 2000 1990 2000 1990 2000
India 31 24 28 26 39 50
East Asia 20 13 40 46 40 41
Europe 17 10 44 35 39 57
Latin Am 9 7 36 29 55 64
Mid. East 15 14 39 37 47 48
South Asia 31 25 27 26 43 49
SS Africa 18 17 34 30 48 53
World 7 5 36 31 57 64

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 2.3 World exports of merchandise and
commercial services in 2000-2005

Merchandise Com.
services
Value ($Bln) 10120 2415
GR 2000-05 (%) 10 10
GR 2003 (%) 17 15
GR 2004 (%) 21 19
GR 2005 (%) 13 11
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 2.4 GDP and Trade Growth in 2005
Country Exports Imports
GDP Merchand. Services Merchand. Services
N.America 3.4 6.0 10 6.5 11
-- USA 3.5 7.0 10 5.5 10
SC.America 4.9 10.0 20 14.0 22
Europe 1.7 3.5 7 3.0 8
CIS 6.6 4.5 20 16.5 18
Africa 4.5 7.5 12 12.0 15
Asia 4.2 9.5 19 7.5 15
-Japan 2.8 1.0 12 2.5 1
-China 9.9 25.0 30 11.5 30
-India 8.4 27.5 27 31.6 24

World 3.3 6.0 11 2.5

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 2.5 Trade of Commercial services in 2005
Country Exports Imports
US$Bln GR (%) %Share US$Bln GR (%) %Share
N.America 420 10 17 373 10 16
-- USA 353 10 15 289 10 12
SC.America 68 20 3 70 22 3
Europe 1233 7 52 1119 8 48
-Germany 143 7 6 199 4 8
-U.K. 183 -1 8 150 4 6
-France 114 4 5 103 7 4
CIS 40 20 2 58 18 2
Africa 57 12 2 66 15 3
Middle East 54 12 2 80 11 3
Asia 543 19 22 595 15 25
-Japan 107 12 4 136 1 6
-China 81 30 3 85 30 4
-India 68 38 3 67 40 3
World 2415 11 100 361 11 100

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 2.6 Industrial composition of inward FDI
in 2002 (in percentage)
Industry Developed Developing Cent.& Eastern World
Countries Countries Europe
Utilities 3 4 6 3
Construction 1 3 5 2
Trade 20 14 21 18
Hotels 2 2 2 2
Trans-Telecom 11 10 24 11
Finance 31 22 29 29
Business 23 40 10 26
Social 2 1 1 2
Others 8 6 2 7
Total 100 100 100 100

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2.7 Industrial composition of outward FDI
in 2002 (in percentage)
Industry Developed Developing Cent.& Eastern World
Countries Countries Europe
Utilities 2 0 2 2
Construction 1 2 2 2
Trade 10 12 17 10
Hotels 2 2 0 2
Trans-Telecom 11 7 19 11
Finance 35 22 39 34
Business 34 54 19 34
Social 0 0 0 0
Others 2 2 2 2
Total 100 100 100 100

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 3.1 Impact of Globalisation on Services

1. Globalisation has helped world trade to surge

from 23 per cent of world GDP in 1960 to
32.5 per cent in 1991 and further to 41 per
cent in 2000.
• Services account for 50% or more of output
in all developing-country-regions except East
Asia.
• Service exports are the fastest growing
components of global trade. In 1985-2000
annual GR for services exports was over 9%
compared with 8.2% for merchandised
exports.

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 3.2 Impact of Globalisation on Services

4. As a result, services trade more than

trebled in 15 years to $1.4 trillion in
2000 & accounts for 25% of trade.
5. Developing countries witnessed the
fastest increase (four folds) in services
exports and increased their share in
global services trade from 14% in
1985-1989 to 18% in 1995-2000.

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 3.3 Impact of Globalisation on Services

6. There had been significant advancement in

research and technology leading to explosive
growth in knowledge-based industries.
7. As most of the East and Southeast countries
adopted export-oriented strategy, share of
exports in their GDP recorded substantial
increase. Countries in East Asia had, in
general, large shares of manufacturing
exports in total merchandised exports.

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 4.1 Impact of WTO-GATS
1. The negotiations under WTO has
facilitated the progress of globalisation,
which in turn has helped rising world
economic growth and reduction of
poverty through increased flows of
goods, services and investment.
2. Under WTO regime, effective tariff
rates and non-tariff barriers (NTBs)
reduced significantly (and by 80-90%
since 1945).

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 4.2 Impact of WTO-GATS
3. Charges for ocean shipping, air transport
and telecommunications dropped drastically
in recent years.
4. Outsourcing has increased substantially in
automobiles and electronics.
5. However, since 1995 foreign affiliates are
being established to have the advantage of
domestic sourcing and backward linkages in
automobiles, IT and food processing.
    

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 4.3 Composition of developing country
exports (per cent) in 1998-2000

  Manu- Services Others Total

facturing
Developing 56 15  29 100
East Asia 72 13 15 100
South Asia 60 20 20 100

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 5.1 Impact of services trade
on the economy
• An efficient and well-regulated financial
sector leads to an efficient transformation of
savings to investment and ensure optimal
allocation of resources among sectors.
• Benefits also arise from increased financial
product variety and better risk sharing in the
economy.
• In the case of telecom, improved efficiency
generates economy-wide benefits as telecom
provides vital inputs for dissemination and
diffusion of knowledge and information.

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 5.1 Impact of services trade
on the economy
(a) An efficient and well-regulated financial
sector leads to an efficient transformation of
savings to investment and ensure optimal
allocation of resources among sectors.
• Benefits also arise from increased financial
product variety and better risk sharing in the
economy.
(b) In the case of telecom, improved efficiency
generates economy-wide benefits as telecom
provides vital inputs for dissemination and
diffusion of knowledge and information.

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 5.2 Impact of services trade
on the economy
c) Transport services contribute to the efficient
distribution of goods in domestic and global
trade.
d) Software development is the foundation of
the modern information-based economy.
e) Education and health services are necessary
in building up the stock of human capital, a
key factor long run growth performance.
f) There are other crucial business services
such as accounting and legal services
leading to efficiency and productivity rise.

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 5.3 Impact of services trade
on the economy
• Goods liberalization in the absence of services
liberalization may lead to high transactions
cost which in turn could result in negative
effective protection for goods.
• Collier and Gunning (1999) consider high
transaction costs as the most significant
impediment to economic growth in Africa.
• According to Summers (1999), the single
most important innovation in the history of
the American capital markets was the idea of
generally accepted accounting principles.
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 5.4 Impact of services trade
on the economy
• There are a number of research studies on
the impact of services trade liberalization.
• Although each of these studies uses a
different scenario to project the gains from
liberalization, all show that the economic
gains from services liberalization greatly
exceed the gains from merchandise trade
liberalization.
• Moreover, studies shows that developing
countries are the major beneficiaries of such
liberalization.
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 5.5 Impact of services trade
on the economy
• The key issue is whether the link between
liberalization of services and economic growth
is expected to be different from that between
goods liberalization and growth.
• It is recognised that liberalization of the
services sector in which a country has a
comparative disadvantage, will also lead to
increased scale of activity in the goods sector.
This will strengthen the growth impact of
liberalization.

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 5.6 Impact of services trade
on the economy
• Levine (1997) examines the link between
financial services and economic growth and
identifies five major functions of the financial
systems which help in minimizing transactions
costs and improving the allocation of real
resources.
• These are (i) facilitating risk trading, (ii)
allocating capital among productive uses, (iii)
monitoring profits, (iv) mobilizing savings
through the use of innovative financial
instruments and (v) easing the exchange of
goods and services.

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 5.7 Impact of services trade
on the economy
• Francois and Schuknecht (1999) regress the
growth of per capita real GDP on a measure
of the general degree of openness in trade,
certain macroeconomic variables and a
concentration ratio for the financial sector.
• They find a strong positive relationship
between economic growth and financial
sector competition.
• In the long run, services trade liberalization
shifts resources from agriculture to
manufacturing with greater positive
externalities.
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 5.8 Impact of services trade
on the economy
• In sectors like telecommunications, software,
financial services and transport, there is
considerable scope for learning by doing,
knowledge generation, expanding product
variety, and upgrading product quality.
• A number of empirical cross-country studies
by Dollar (1992), Sachs and Warner (1995),
Edwards (1993) and Coe et. Al. (1997)
suggest that the impact of liberalization of
trade in goods on the long run rate of
economic growth is positive. 
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 5.9 Impact of services trade
on the economy
• A study by the World Bank as reported in the
"Global Economic Prospects for Developing
Countries" (2001) indicate that:
• Liberalization of services in developing
countries could provide them $6 trillion
additional income in 2005-2015.
• Services underpin economic development
efforts, according to the Bank, because more
efficient provision of services in finance,
telecom, transportation and professional
business services have broad linkage effects.
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 5.10 Impact of services trade
on the economy
• The Bank stresses the importance of effective
governmental management of liberalization
programs, including the elimination of
barriers to entry for new competitors,
regulatory policies and removal of export
restrictions.
• Bank estimates suggest that countries that
have fully liberalized trade and investment in
finance and telecommunications grew on
average 1.5% fast than other countries over
the past decade.
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 5.11 Impact of services trade
on the economy
• Practices such as cargo reservation,
limits on provision of port services and
collective rate setting among shipping
lines can increase freight rates by up to
25% on certain routes, the Bank says.
• Inefficient container services in Brazil
have raised the price of customs
services, warehousing, inland transport
and port services to twice the global
average.

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 5.12 Impact of services trade
on the economy
• Liberalization of services under the General
Agreement on Trade and Services can,
according to the Bank, accelerate and lend
credibility to domestic policies as well as
increasing access to markets in industrial
countries.
• Gains from a cut of 33 per cent in barriers to
services trade should raise global economic
welfare by $389.6 billion, which exceeds their
estimated gains from manufactures
liberalization of $210.7 billion.
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 6.1 Assessment made by the
Developing Countries

An assessment of trade in
services made jointly by some
developing countries viz. Cuba,
Dominican Republic, Haiti, India,
Kenya, Pakistan, Peru, Uganda,
Venezuela and Zimbabwe (WTO
2001b) made the following
observations:
(a) Developing Countries Have
Not Received Benefits From Their
Commitments

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 6.2 Assessment made by the
Developing Countries
(b) Market Power of Services
Corporations Dwarf, Even Wipe-out
Developing Countries Small Suppliers
(c ) Services trade liberalisation under
these circumstances of unequal competition
has aggravated the alarming divide in
supply capacity between developed and
developing countries.
(d) Developing countries small
suppliers are also disadvantaged in other
ways, such as through discriminatory access
to information channels and distribution
networks
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 7.1 Assessment made by the
WTO Secretariat
(a) A note from the WTO Secretariat (WTO
2001b) appears to argue that the
developing countries have benefited
significantly from liberation of trade in
services.
(b) The note points out that while a partial
approach with a strong focus on sectors
may appear to be attractive, from an
analytical angle the sector-specific reforms
may imply awkward trade-offs. Since the
services universe is very diverse-
structurally, economically and politically.

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 7.2 Assessment made by the
WTO Secretariat
c) Exports growth of commercial services for
developing countries in 1990-2000 (9%)
exceeded that (5.5%) for developed
countries.
d) The 49 least developed countries also
experienced strong export growth of
commercial services (6.3%).
e) 25 developing countries depend on the
export of commercial services for more
than half their total export revenues.

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 7.3 Assessment made by the
WTO Secretariat
f) It would be naïve to assume that one
single, detailed blueprint could be applied
for assessment purposes across all sectors.
g) The secretariat emphasized that the
underlying question is:
-- What are the economic effects in a
country that liberalizes its own services
regime in a stable external environment
(with no liberalization abroad)?
 

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 7.4 Assessment made by the
WTO Secretariat
h) Direct Economic Impact: Reduction of prices,
increased supply, improved quality and reliability in
services. Examples-Growth of mobile phones and
international credit cards.
i) Indirect Economic Impact: Significant industrial
diversification, improvement in
exports,profitability,production, employment of
user industries, development of skill and
technology,cyclical resilience of growth.
j) Social benefits: Distributional equity, general
improvement in environment, public health, safety
and national security.
 

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 8.1 WTO-GATS- General Issues
Developing countries made substantial
commitments under GATS with respect to
many services sectors, without having
much experience in their implementation.
These countries have undertaken a
higher share of full bindings in market
access under the cross border and
commercial-presence modes of supply.
 In contrast they did not get
concessions of meaningful economic
value under labour intensive services and
the movement-of-natural persons mode
of supply.
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 8.2 WTO-GATS- General Issues
 
 Except in the areas of travel and
worker remittances, most developing
countries have deficit in trade in services.
Essentially developing countries have
major supply constraints and do not
satisfy the preconditions for building a
competitive service sector.
 Developed countries gained more in
world trade growth in services.

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 8.3 WTO-GATS- General Issues
  In the case of India, software exports,
with an average growth rate of 50 per
cent since 1995-96, have emerged as an
important source of India's foreign
exchange earnings, contributing
substantially to invisible receipts.
 Other business and professional
services such as accounting, legal, health,
education and construction services could
emerge as significant source of foreign
exchange receipts as India has a
comparative advantage in these
specialized human resource intensive
services.
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 8.4 WTO-GATS- General Issues
The availability of permission to Indians
to undertake such services abroad would
not be fruitful, unless the qualifications to
provide these services from Indian
Institutions are recognized abroad.
 At the time of negotiations, it needs to
be ensured that standardization of these
qualifications are sorted out to protect
interests of developing nations.
Moreover, social obligations in the case
of services such as telecom (telephony to
rural areas) and air transport (linking far-
flung areas) have to be carefully nurtured.
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 9.1 Review Questions
1. What do you mean by globalisation?
What has been its impact on global
production and trade of services?
2. What has been the impact of WTO-GATS
on globalisation and global trade of
goods and services?
3. (a)What is the assessment of developing
countries on the impact of WTO-GATS
on services trade?
(b) What has been the assessment of
WTO Secretariat on the impact of WTO-
GATS on services trade?
Which opinion would you agree and why?
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 9.2 Review Questions
4. (a) Discuss positive and negative impact
of services production and trade on
overall economic growth.
(b) Would you agree with the view that
globalisation of trade in services has led
to significant increase in growth of
developing countries?
(c) What could be the adverse impact of
services trade on the economies of the
developing countries?

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 Thank you
Have a Good Day

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