Urgent policy decisions are needed to train individuals for enhancing their capability with regards to services negotiations. This necessitates increased investment in capacity-building in service sector negotiations. Nepal has done nothing to prepare regulatory framework governing professional services under Mode 4 liberalization. It is mandatory to sign Mutual Recognition Agreement (MRA) between two countries or the entire member countries in South Asia for the movement of professionals under Mode 4. In other words, there is no explicit legal provision for registering and recognizing foreign medical professionals. Furthermore, it is sad that Nepal has already committed to open up most competitive financial sectors without even enhancing its technical and human resources capabilities.
The nature of trade in services in developed and less developed countries is varied. It is largely science and technology in the former and traditional areas such as tourism, movement of natural persons, retail trade, etc in the latter.
In developed countries, services share in GDP is 72 percent and its share in total employment is 70 percent. In South Asia, this sector contributes over 50 percent to their GDP and employs 35 percent of its population in the organized sector. The contribution of this sector to GDP in Nepal exceeds 50 percent. By mid-March, 2009, 1,743 industries were opened for foreign investment. The percentage of service industries stands at 941, which is 54 percent. It indicates the future potential of service trade in Nepal.
Although there are potential sectors in trade in services in the region, for most of the South Asian countries, excluding Maldives, trade in services as a proportion of GDP has not been very high i.e. less than 10 percent. There are some visible factors that reveal growing importance and future for trade in services. The emerging factors include consumer demand; statistical transfer of activities from manufacturing to services; and the productivity price effect.
It is sad that Nepal has already committed to open up most competitive financial sectors without even enhancing its technical and human resources capabilities.
CONSUMER DEMAND
Various literatures show a secular shift in consumer demand toward services. The commonality of available findings reveal that income elasticity of consumer demand for many services such as housing, tourism, recreational activities, medical services, banking and insurance is above unity and exceeds the average income elasticity of demand for manufactures and food/beverages These demand factors in services with high-income elasticity has led to a rapid growth in national expenditure than on manufactures or food and beverages.
The world over, especially after 1980s, it is common to find many large manufacturing establishments (also in some cases with agriculture and mining) – who maintain increased specialization – outsource non-core activities to outside contractors to improve efficiency. Such outsourcing results in value-added being reclassified from the manufacturing sector to services.
Available data shows that Nepal’s labor productivity defined as GDP per worker is lowest in south Asia and it is almost stagnant in comparison to other South Asian countries. For example, Nepal’s labor productivity increased from US$544 in 1995 to US$613 in 2006 while during the same period, it increased from US$968 to US$1,613 in India and from US$1,796 to US$2,551 in Sri Lanka.
In competitive markets, productivity improvements are reflected in lower prices. Due to uneven productivity gains, the relative prices of manufactures and farm produce has decreased compared with those of many services. These changing price relativities has led to a slower increase in the value of manufactures and farm output in current price terms than the rise in the current price value of services.
As Nepal’s rain-fed agriculture still depends largely on weather conditions, it has failed to make the transition from subsistence farming. However, its contribution to GDP is significant at a time when the industrial sector only involves a minority of the population. In contrast to the stagnation in both these sectors, provided that the binding constraints to infrastructure development are addressed on time, the service industry can provide a great hope especially through tourism, financial sector development, health services, etc.
India’s share in world services exports has increased from 0.5 percent in 1995 to 2.3 percent in 2005. In Pakistan, growth in services trade is ahead of merchandise trade. In Sri Lanka, trade in services remains insignificant when compared to trade in goods. The effort is commendable when key sectors of service economy are linked with foreign competition by carefully assessing the impacts of liberalization of the economy. Bangladesh has realized growth in service sector since the last three decades. This sector has grown faster than the overall GDP in past decade. Nepal after its accession to WTO has liberalized service sector rather aggressively with private sector participation, including foreign sector. Given strong institutional foundation to discourage anti-competitive practices, Nepal has potential in tourism, higher education, and health services. Maldives has visible advantages from service sector, largely from tourism. Bhutan has begun to explore the possibility of taking advantages in prospective service sector. Tourism and electricity are major service exports in Bhutan.
In 10 years (1993-2003), South Asia’s exports of commercial services increased by four times i.e. from US$7.9 billion to US$29 billion of which US$25 is from India alone. I suspect such a low growth of service sector in other countries is probably because of the underestimation of real flows. Secondly, the low growth is because in South Asia trade liberalization of goods expanded over to services only in 2000, when GATS negotiation on services’ liberalization started.
Presently, Pakistan, Sri Lanka and Nepal are experiencing a fall in average percentage of trade in services on total trade. As trading in manufacturing goods is not performing well and trading services, especially in tourism, health, education and labor can be attractive for consumers beyond SAARC, there is a strong need to develop advanced services infrastructure to boost regions’ share in global services trade.
Although regulation in health, education, finance, environment, etc is really important to enhance the scope for service sector growth, special care needs to be given while designing the implementing rules for over-regulation and effective regulation.
bishwambher@yahoo.com
Related story
Cooperation for trade
