Liberalizing trade in services

Progressive liberalization of trade in services may benefit economic development. Improved market access for developing countries' service exporters is one important benefit. Exports of labour-intensive services have been an important source of income in many developing countries and have contributed to the upgrading of qualifications in several developing countries. However, the asymmetry of globalization processes between product and factor markets and between capital and labour has been to the detriment of the latter, thus limiting the scope for expansion of developing country services exports. Moreover, because of weak infrastructures and inter alia their limited access to technology and distribution network channels, many developing countries have not yet developed the capacity to compete effectively in the world market for services. Strengthening developing countries' domestic service capacity, inter alia through technical and financial assistance, is therefore of utmost importance.

Restrictions on trade in services drive a wedge between domestic and foreign prices of services, thereby creating an economic welfare loss. In addition, since many services are used as inputs into production, higher costs associated by trade restrictions act as a tax on production. Trade in services is often complementary to trade in goods and flows of foreign investment, and barriers to services can be expected to constrain trade and investment growth.

Developing countries' institutional, financial and human capacities and regulatory framework in the services sector should be further enhanced to enable them to engage effectively in international trade in services.

The economic impact of any increased services liberalisation will be affected, for example, by the maturity of the domestic service industries and the capacity of the regulatory framework. If either of these is weak, liberalisation may have an adverse impact in terms of employment and longer-term growth (UNCTAD, 1998a).