Published on The Trade Post

Assessing Services Policies in Developing Countries

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ImageEmpirical literature confirms the significant contribution that services trade can play in developing economies. High-quality and low-cost services can enhance competitiveness, connect countries to the global economy, and help diversify their exports.

The question is how to foster the development of the services trade in these countries. Research shows that the liberalization of services barriers can increase the performance of manufacturing and agricultural exports, for example, and help boost quality and cut costs, as well as increase service exports.

But liberalization alone is insufficient for successful reform. Services liberalization requires that a country design a careful liberalization process that takes into account its specific conditions. Many countries which have acceded to the WTO and have adopted significant liberalization commitments have not fully reaped the benefits of those reforms. One of the explanations is probably that their process was incomplete. In general, liberalization needs to be complemented by strong and solid regulatory frameworks. Without these conditions in place--- contestable markets, strong regulatory governance, and enforcement capacity--- liberalization will not provide the expected benefits.

Why is it so difficult to create the necessary conditions for successful services trade reforms?

There are several explanations. For one, there are political economy considerations, like affected interests. From an institutional point of view, the complex nature of regulatory reforms is another barrier. And last but not least, reforms are difficult because services trade is related to social policies, including health, education, and social protections like pensions.
A new World Bank toolkit, “The Regulatory Assessment Toolkit: A Practical Methodology For Assessing Regulation on Trade and Investment in Services”---RASTI for short---offers a methodology to help policymakers, experts, and academics better assess services policies and regulations in their country, as well as alternative reforms.

The RASTI acknowledges the critical role that regulation plays in services trade. Clear and stable regulatory frameworks are necessary to reduce risk and attract investment. But if regulations are poorly designed, they may distort the market and negatively impact a country’s welfare.

The RASTI contains guidance for three stages of analysis. The first stage requires mapping all existing regulation that affects services trade. This starts with regulations that have a general impact on services, regardless of the sector--- such as foreign investment, employment, or migration regulations.

Then, one can dig deeper into specific sectoral regulations. This may or may not be necessary depending on the assessment objectives. The toolkit is built to help analyze a full range of sectors, including the financial sector, information and communication technologies, and professional services.

At this stage, the analysis should also take into account the regulatory capacity of a country. That means looking at the existence (or not) of regulatory bodies, their resources, technical supervisory capacity, and enforcement functions. This is a critical part of the process, often overlooked.  

The second section of the RASTI can be used to assess the importance of regulations and their impact, as well as methods to calculate the expected outcomes of reforms. This can be tricky due to limited data availability. That’s why the toolkit provides a review of the data requirements of each of the most widely used analytical techniques to assess the impact of regulations. It may be necessary to try to collect this data while gathering information in step one.

The final section discusses regulatory alternatives. But, again, the alternatives themselves may not be as important as the process of bringing them about. When mapping regulations and assessing the impact of reforms, policymakers must constantly consider how exactly they plan to implement reform. Which is the best alternative? Who will be affected? How will they be affected? How can these impacts be avoided or minimized?  

Reform requires a wide consensus among stakeholders to be sustainable. Any adopted policy will need broad support at the inception and in the future to avoid undesirable backlash. Change could always create significant negative consequences, and policymakers need to be very cognizant of this fact.

The World Bank’s International Trade Unit is currently using the RASTI in partial pilot projects in several developing and least-developed countries. It has proved to be comprehensive enough to give the necessary depth to analysis while maintaining flexibility. This flexibility allows for a context-specific, modular application of the RASTI depending on the objectives, needs, and resources of the country.

The aim is for the RASTI to assist policymakers, trade experts, and academics when assessing policy alternatives in developing countries. So give it a read and let us know what you think.

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