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190 QUANTIFICATION OF BENEFITS FROM ECONOMIC COOPERATION IN SOUTH ASIA As in the case of India, the role of the services sector is crucial in sustaining the growth of Pakistan’s economy. The services sector in Pakistan has sustained strong growth for the last six successive years. The sector has been a major contributor to the overall growth in GDP with its remarkable real growth averaging 7% over the past four years while major growth at the rate of 8% or more occurring only in the last two years (Burki and Hussain 2007). Thus, services are assuming the role of a new growth powerhouse in the country by contributing 68% to GDP growth in 2005-06. As Pakistan’s economy has grown rapidly, the sustained high pace of growth in the economy is also reflected in a record level of investment during 2006-07, with the investment to GDP ratio rising to a record high of 23% (State Bank of Pakistan 2007). Another striking feature was the unprecedented level of FDI ($5.1 billion) in the economy. Like Pakistan, with the advent of economic liberalisation in Bangladesh since late 1980s, inflow of FDI registered an upward trend from a very low base. Total FDI inflow increased from $ 92 million in 1995 to $ 579 million in 2000 and reached 845 million in 2005. The economist intelligence unit (EIU) in its report on ‘World Investment Prospects to 2010: Boom or Backlash?’ showed that Bangladesh will receive $ 600 million of FDI on an average a year during the period between 2006 and 2010 (Xinhua 2006). As per FDI projection in the report, Bangladesh is in the third position among the South Asian nations. India and Pakistan securing 19th and 64th position respectively have left Bangladesh behind them in this subcontinent while Sri Lanka attaining 81st position has been placed behind Bangladesh. As regards Nepal, India is the chief source of FDI in Nepal so far, followed by the United States, the People’s Republic of China, the British Virgin Islands, Norway, Japan, the Republic of Korea, Canada and Hong Kong, China in terms of the amount of approved FDI (UNCTAD-ICC 2003). The major area of FDI has been manufacturing, followed by services and, in particular, tourism (Ibid. 18). India is an important source of investments in Bhutan and Maldives as well. Special Treatment for LDCs The GATS regime is particularly important to LDCs, which suffer from severe constraints to economic development due to poor infrastructure and a lack of institutional and human capacities to cope with the challenges arising out of the liberalisation of trade in services (Raihan and Mahmood 2004). Others explain how LDCs are left behind in the services sector (CENTAD 2007). There are systemic domestic factors such as poor quality of public spending in key sectors like education, and skewed direction of public spending – in favour of services consumed by rich households. In view of their special position, the modalities have been developed for LDCs with an aim to provide the required flexibility to actively participate in the ongoing services negotiations. As per the provisions of the LDC Modalities, LDCs should not be obliged to offer national treatment to foreign service providers or to make ‘additional commitments’ (GATS Article XVIII) on regulatory issues – e.g. qualifications, standards and licensing requirements (WTO 2003). In response to requests, LDCs have been given flexibility to make commitments compatible with their development, trade and financial needs and which are limited in terms of sectors, modes of supply and scope. The modalities also provide that ‘preferential market access mechanism’ should be created for achieving effective market access for LDCs to developed country markets. Regarding movement of natural persons members should open their markets to all categories of natural persons from LDCs, particularly unskilled and semi-skilled persons. However, what is interesting about these Modalities is that they significantly reduce the negotiating burden of LDCs, which are now expected to be able to focus on just a few sectors of export and import interests (Raihan and Mahmood 2004) The LDC modalities seem to be one of the reasons why Bangladesh and the Maldives have not yet submitted any offers during the ongoing services negotiations. However, unless they offer commitments they may not be able to seek market access for their services and eventually not making any commitments will not be in their own economic interest. In this regard, Raihan and Mahmood suggest that the GATS negotiations are strategically important for LDCs, including Bangladesh, for the following three fundamental reasons: retaining and deepening competitiveness in goods exports; opportunities through increased tradability of services; and improvement of quality of services in domestic markets (2004). They also argue that LDCs should stop insisting that they do not need to open any sectors. In fact, they further argue, many sectors would benefit through an open policy regime and a predictable competitive environment. Analysis of the requests to Bangladesh made by various developed countries suggests that professional, business services, and construction and related engineering services are among those services in which
CROSS-CUTTING ISSUES AND CONCLUSION 191 Bangladesh has received requests. Construction and engineering services seem to be the main area in which most of the member countries that have sought market access through their requests are interested. Bangladesh has import interest in construction and related engineering services and it ought to undertake commitments. However, what is more interesting about education and tourism services is that Bangladesh has been suggested to have both import and export interests in these services and it has accordingly been advised to offer commitments and make request to seek commitments from other members. In both these services Bangladesh seems to be largely interested in opening Mode 3 in order to have foreign commercial presence. The study suggests that all three services sectors – construction and related engineering services, education services, and tourism and travel-related services – have a negative balance-of-payments and these are thus sectors of import interest to Bangladesh (Raihan and Mahmood 2004). The GDP shares for education services (2.36%), tourism and travel-related services (0.67%) are comparatively low. Opportunities through market opening would only be meaningful where the supply of service providers is of an adequate quality. Investment in training and education (fiscal resource issues) is a must for ensuring improved quality, standards, and competitiveness of service providers (Raihan and Mahmood 2004). Establishment of independent regulatory bodies and monitoring mechanisms to ensure standards is another way to create level playing fields. The strategy should include plans for active negotiations for MRAs with key markets. Short-term bilateral agreements with selected countries and institutions would be useful to understand the difficulties and streamline solutions. These efforts would help to bring transparency in mutual recognition. Hence they argue that incremental liberalisation measures in the services trade might open windows of opportunity. However, the special position of LDCs should be taken into account also in the context of South Asia. One of the problems with regard to the South Asian LDCs is that they lack institutional capacity to cope with the burden of trade negotiations at WTO. For instance, since the Maldives does not have any representation in Geneva, due mainly to financial constraints, participation in the WTO activities is limited to those financed by WTO, e.g. Geneva Week, Ministerial Conferences, and technical assistance opportunities such as training, workshops, seminars, etc. (Maldives’ TPR 2002). Similarly, Bangladesh and Nepal are grossly underrepresented by their Missions in Geneva. However, it is a vicious circle which seems to be difficult to break. As they lack the capacity to fully participate in the proceedings of WTO, they are not able to gain the desired market access and since they do not gain market access, they are not able to generate required interest in international trade and eventually, do not accord priority to the multilateral trading system. Thus LDCs are marginalised in services talks and they may free ride or will be bypassed (CENTAD 2007). In this regard, LDC modalities should not be taken as a pretext not to participate in the negotiations, as other members may not put adequate pressure on them to open their markets. At the regional level the LDCs modalities should give the LDCs a free hand to liberalise their services for other South Asian countries. Rather this should be used as an opportunity to bind-in the prevailing level of liberalisation. This will give them meaningful market access for their services as well as experience with respect to handling negotiations and once they succeed they would like the commitments undertaken at regional level to multilateralise in due course. It is also interesting to note that LDCs are not only looking at markets of developed countries but also developing countries. In this regard, the South Asian market will provide an important window to their exports. Modal Interest in Services Trade South Asia’s modal interests cover all four modes of the GATS. While the primary interest lies in movement of natural persons and cross-border supply, also significant are exports through movement of consumers and overseas commercial presence. However, it is mainly India which has an interest in all four modes, given its more mature services sector relative to the other economies of the region. Mode 1 (Cross-Border) Market access commitments/offers in Mode 1 by the major industrialised countries are fairly liberal. Still there is scope for further liberalisation in Mode 1 through improved coverage of relevant services and through the scheduling of more full commitments, as currently less than half of the commitments are full or unrestricted. The liberalisation of Mode 1 by South Asian countries is significant given recent trends in intra-developing country trade via outsourcing. Therefore, all SAFTA member countries should liberalise this mode.
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QUANTIFICATION OF BENEFITS FROM ECO
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QUANTIFICATION OF BENEFITS FROM ECO
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Preface Our consultations with seni
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viii CONTENTS 7. Revenue and Welfar
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Executive Summary OBJECTIVE This st
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EXECUTIVE SUMMARY xiii Table 1 EAMA
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EXECUTIVE SUMMARY xv India A full S
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EXECUTIVE SUMMARY xvii indicates th
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EXECUTIVE SUMMARY xix ments on basi
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Part I BENEFITS FROM TRADE, INVESTM
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4 QUANTIFICATION OF BENEFITS FROM E
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10 QUANTIFICATION OF BENEFITS FROM
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2 Literature Review and Rationale f
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4 Effective Additional Market Acces
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6 Impact of SAFTA on Member Countri
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7 Revenue and Welfare Implications
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8 Impact of SAFTA on Inward and Out
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Part II BENEFITS FROM DEEPENING INT
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11 Construction and Related Enginee
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BIBLIOGRAPHY 241 Cuba (2002), Negot
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BIBLIOGRAPHY 243 (2004), Impacts of
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BIBLIOGRAPHY 245 Silva, Patricia an
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BIBLIOGRAPHY 247 (1998), Tourism Se
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