CIS Regional Workshop on WTO AccessionServices Sector : its importance for

development and potential impacts of its liberalization

Lessons learned from Vietnam’s Lessons learned from Vietnam’s experienceexperience

By Cristina Hernández By Cristina Hernández

UNDP/SURF-WCA, DakarUNDP/SURF-WCA, Dakar

Presentation based on research undertaken in 2004-2006 in the

framework of UNDP-funded project VIE/02/009:

““General Framework for a General Framework for a National Strategy for the Services National Strategy for the Services

Sector in Vietnam up to 2020” Sector in Vietnam up to 2020” by Dorothy Riddle, Nguyen Hong Son and by Dorothy Riddle, Nguyen Hong Son and

Cristina Hernández (June 2006)Cristina Hernández (June 2006)

Structure of the Presentation:I. Some basic conceptsII.II. Importance of services Importance of services III.III. Misconceptions about servicesMisconceptions about servicesIV.IV. Prerequisites for stimulating services growthPrerequisites for stimulating services growthV.V. Proposed National Services Strategy for VietnamProposed National Services Strategy for VietnamVI.VI. Recommendations for optimizing services trade Recommendations for optimizing services trade

negotiationsnegotiationsVII.VII. Vietnam’s actual services sector liberalization Vietnam’s actual services sector liberalization

upon WTO accessionupon WTO accessionVIII.VIII. Potential costs of services liberalization and Potential costs of services liberalization and

lessons drawnlessons drawn

I. Some Basic Concepts:

There is No single definition of services (They are Intangibile, Instorable, Instable in quality, Inseparatability between

production and consumption)

Classification of Services & Differences some national systems & the International (GATS) System

1. Business services

2. Communications

3. Construction3. Construction

4. Distribution

5. Education

6. Environment

7. Finance

8. Health and social services

9. Tourism

10. Recreation, culture/sports

11. Transportation

12. Others: UtilitiesUtilities

I. Some Basic Concepts (cont):

GATS Definition of “Traded” Service:

Supplying a service to a foreigner, regardless of location

Modes of Trade in Services:

#1: Cross-border#1: Cross-border

Service movesService moves

#2: Consumption abroad#2: Consumption abroad

Consumer movesConsumer moves

#3: Commercial presence#3: Commercial presence

Supplier moves permanentlySupplier moves permanently

#4: Presence of natural persons#4: Presence of natural persons

Supplier moves temporarilySupplier moves temporarily

II. Services are important because: They are They are facilitators of domestic growthfacilitators of domestic growth –In 2003, –In 2003,

contributed on average 68% of the global GDP contributed on average 68% of the global GDP (However, in Vietnam services are growing more (However, in Vietnam services are growing more slowly than GDP; accounts for less than 40%)slowly than GDP; accounts for less than 40%)

They They anchor and support the entire goods production anchor and support the entire goods production processprocess by providing value-added inputs for by providing value-added inputs for competitive industrial development competitive industrial development (However, in (However, in Vietnam policy appears focused on final demand Vietnam policy appears focused on final demand services, with a major degree of “internalization”).services, with a major degree of “internalization”).

They are They are increasing as a percentage of world trade increasing as a percentage of world trade and FDIand FDI –constitute approximately 36% of world –constitute approximately 36% of world trade and FDI in services is reaching over 60% of all trade and FDI in services is reaching over 60% of all investment flows worldwide investment flows worldwide (However, in Vietnam (However, in Vietnam services trade deficit is growing/ expectations are low) services trade deficit is growing/ expectations are low)

They They contribute to job creationcontribute to job creation –services activities –services activities have become primary creators of new jobs, accounting have become primary creators of new jobs, accounting for over 90% of new jobs globally since mid-1990s for over 90% of new jobs globally since mid-1990s (However, in Vietnam the shift of labour structure out (However, in Vietnam the shift of labour structure out of agriculture and into services is still low)of agriculture and into services is still low)

They areThey are vital to poverty alleviation and key to vital to poverty alleviation and key to realizing the MDGsrealizing the MDGs both: both: directlydirectly –in terms of –in terms of enhancing the availability and affordability of enhancing the availability and affordability of education, health, energy, ITC services-; and education, health, energy, ITC services-; and IndirectlyIndirectly –by alleviating poverty and empowering –by alleviating poverty and empowering women through entrepreneurial and employment women through entrepreneurial and employment creation opportunities in services enterprises creation opportunities in services enterprises (Vietnam’s overall progress towards the MDGs is (Vietnam’s overall progress towards the MDGs is impressive; the services sector is already contributing impressive; the services sector is already contributing to this purpose but more needs to be done)to this purpose but more needs to be done)

II. Services are important because (cont):

III. Misconceptions about services:

1) 1) When a developing country or transitional economy When a developing country or transitional economy has scarce resources, the development priority should has scarce resources, the development priority should be industry, not services –this is based on idea that be industry, not services –this is based on idea that services are primarily to satisfy final demandservices are primarily to satisfy final demand. . However, half services produced in an economy are However, half services produced in an economy are “intermediate” services –so, services dynamically “intermediate” services –so, services dynamically supports agricultural and manufacturing sectorssupports agricultural and manufacturing sectors

2) 2) Developing countries do not have a comparative Developing countries do not have a comparative advantage in services exports; and having a negative advantage in services exports; and having a negative balance in their trade in services is normal balance in their trade in services is normal In fact, these economies are active exporters of In fact, these economies are active exporters of services –already export on average 68 different types services –already export on average 68 different types of services to an average of 33 export markets (aprox. of services to an average of 33 export markets (aprox. 2/3 with other developing and transition economies). 2/3 with other developing and transition economies).

III. Misconceptions about services (cont):3) Developing and transition economies benefit from 3) Developing and transition economies benefit from

services trade liberalization primarily through services trade liberalization primarily through attracting increased FDI (Mode 3) and exporting attracting increased FDI (Mode 3) and exporting labour (Mode 4), and not through making their own labour (Mode 4), and not through making their own domestic service sector more competitivedomestic service sector more competitiveForeign investors, however, will be competing with Foreign investors, however, will be competing with existing national suppliers & potentially undermining existing national suppliers & potentially undermining their ability to compete in regional/ global marketstheir ability to compete in regional/ global markets

4)4) If domestic demand for services is low, the focus on If domestic demand for services is low, the focus on developing the services sector will faildeveloping the services sector will failThe solution lies in export markets –many services do The solution lies in export markets –many services do not require high fixed asset investment to get started not require high fixed asset investment to get started and thus is feasible to start as small niche players and thus is feasible to start as small niche players supplying services to foreign firms in their own supplying services to foreign firms in their own national market (via Mode 2) and to regional markets national market (via Mode 2) and to regional markets

III. Misconceptions about services (cont):

5) Services “Trade liberalization” is equivalent to 5) Services “Trade liberalization” is equivalent to deregulation in servicesderegulation in servicesIt is not possible to discharge government’s primary It is not possible to discharge government’s primary responsibility for consumer protection unless there is a responsibility for consumer protection unless there is a transparent and appropriate regulatory framework in transparent and appropriate regulatory framework in place –so, the issue is to strengthen the domestic place –so, the issue is to strengthen the domestic regulatory environment in support of competitionregulatory environment in support of competition

Based on such misconceptions, Services Sector Based on such misconceptions, Services Sector development is either development is either neglected neglected or or left to foreign left to foreign investorsinvestors (through indiscriminate liberalization) (through indiscriminate liberalization)As such, many developing countries enter into binding As such, many developing countries enter into binding commitments in services without following any commitments in services without following any comprehensive strategy; and services sector regulation comprehensive strategy; and services sector regulation develops in response to requirements of int’l treatiesdevelops in response to requirements of int’l treaties

IV. Prerequisites for Stimulating Services Growth:

Stimulate demand for quality servicesStimulate demand for quality services(in Vietnam, SOE monopolies in strategic service (in Vietnam, SOE monopolies in strategic service industry remains/ distort competitiveness dynamics)industry remains/ distort competitiveness dynamics)

A strong proactive policy framework and a coherent A strong proactive policy framework and a coherent domestic regulationdomestic regulation (in Vietnam the policy and legal (in Vietnam the policy and legal environment is complex & contradictory; review & environment is complex & contradictory; review & reform needs to address competition policy, licensing of reform needs to address competition policy, licensing of professionals, tax rates & incentives equal to goods, professionals, tax rates & incentives equal to goods, ability to monitoring & enforcement)ability to monitoring & enforcement)

Meet regional and international standardsMeet regional and international standards (yet, in (yet, in Vietnam standards for services are still underdeveloped Vietnam standards for services are still underdeveloped and poorly implemented)and poorly implemented)

IV. Prerequisites for Stimulating Services Growth (cont):

Reinforce the inter-linkages among service sub-Reinforce the inter-linkages among service sub-sectors to produce dynamic effectssectors to produce dynamic effects (in Vietnam, key (in Vietnam, key service sub-sectors are at initial stage of service sub-sectors are at initial stage of development)development)

Establish effective mechanisms of co-ordination in Establish effective mechanisms of co-ordination in planning and implementationplanning and implementation (in Vietnam, (in Vietnam, coordination & supervision is weak)coordination & supervision is weak)

Enact specific developmental strategies Enact specific developmental strategies -including -including staff training, support structures for small services staff training, support structures for small services enterprises (like service industry associations), enterprises (like service industry associations), services quality assurance and trade promotion- services quality assurance and trade promotion- and strategize services trade negotiationsand strategize services trade negotiations

Service Inputs for Manufacturing

ICTICT

Education &

training

Finance

Business services:AdvertisingEngineering servicesEquipment leasingIndustrial designLegal servicesPackaging servicesResearch & developmentRepair & maintenanceTranslation

Other services:Commission agentsConstructionCustoms brokerageFreight forwardingStorage & warehousingTransport servicesWholesaling

Production Distribution

Consumer

V. National Services Strategy for Vietnam Overall Goal for Service Sector:

Provide Provide high value added inputshigh value added inputs to export- to export-oriented industriesoriented industries

Reverse the growing deficit in services trade by Reverse the growing deficit in services trade by increasing services exportsincreasing services exports

Provide an Provide an attractive environment for FDIattractive environment for FDI Support sustainable growth & Support sustainable growth & transfer to a transfer to a

knowledge-based economyknowledge-based economy Assist in meeting national human development Assist in meeting national human development

objectives for objectives for poverty alleviationpoverty alleviation

Develop an efficient and internationally Develop an efficient and internationally competitive services sector in order to:competitive services sector in order to:

V. National Services Strategy for VN (cont): Specific Goals Proposed:Specific Goals Proposed:

2010 Goal: Services = 42% GDP2010 Goal: Services = 42% GDP

2020 Goal: Services = 50% GDP2020 Goal: Services = 50% GDP

Core recommendations:Core recommendations:

Recommendation #1: Recommendation #1:

Coordinated ApproachCoordinated Approach

Recommendation #2:Recommendation #2:Strong Regulatory FrameworkStrong Regulatory Framework

Recommendation #3: Recommendation #3: Employment Creation in ServicesEmployment Creation in Services

V. National Services Strategy for VN (cont):

Stage 1: 2005-2010 Stage 1: 2005-2010 -China Model-China Model Strengthen services as industrial supports:Strengthen services as industrial supports:

Telecoms; Education & training; Finance (banking & Telecoms; Education & training; Finance (banking & insurance); Business/ professional services; Logistical insurance); Business/ professional services; Logistical servicesservices

Strengthen services as social supportsStrengthen services as social supports:: Health services; TourismHealth services; Tourism

Stage 2: 2010-2020 Stage 2: 2010-2020 –India Model–India Model Leverage competitive position in ICT:Leverage competitive position in ICT:

Back office operations; Software developmentBack office operations; Software development Leverage competitive position in science & technology:Leverage competitive position in science & technology:

Contracted research & developmentContracted research & development Leverage competitive position in tourism:Leverage competitive position in tourism:

Health tourismHealth tourism

VI. Optimizing Services Trade Negotiations: Roadmap for International Integration

Current situation:Current situation: Types of services exported: 70Types of services exported: 70 Export markets: 23Export markets: 23 Primary mode of supply: Mode 2Primary mode of supply: Mode 2 Business service firms need exports to surviveBusiness service firms need exports to survive

Strengthen Vietnamese competitiveness:Strengthen Vietnamese competitiveness: National service export development strategyNational service export development strategy Regulate Mode 1 competitorsRegulate Mode 1 competitors

VI. Optimizing Services Negotiations (cont): Approaches to Market Liberalization

Services with high export potential & low capital costsServices with high export potential & low capital costs Reserve modes of supply; make requestsReserve modes of supply; make requests

Services with high export potential & high capital costsServices with high export potential & high capital costs Attract joint venture FDIAttract joint venture FDI

Services with low export potential but high job Services with low export potential but high job creation potentialcreation potential Economic needs testsEconomic needs tests

Services with low export potential & low job creation Services with low export potential & low job creation potentialpotential Exchange for market access concessionsExchange for market access concessions

VII. Vietnam’s actual Services Sector liberalization upon WTO accession

Signatory of ASEAN Framework Agreement on Signatory of ASEAN Framework Agreement on Services (AFAS) –AServices (AFAS) –A GATS-Plus agreement GATS-Plus agreement (currently (currently in negotiations with Australia, China, Korea, N.Z…)in negotiations with Australia, China, Korea, N.Z…)

VN-US BTA, with much moreVN-US BTA, with much more extensive coverage and extensive coverage and more binding commitmentsmore binding commitments than AFAS than AFAS

WTO accession offer, with WTO accession offer, with even more far-reaching even more far-reaching commitmentscommitments than under the BTA than under the BTA

Bilateral Investment Agreement with Japan (based on Bilateral Investment Agreement with Japan (based on NAFTA) whereby VN NAFTA) whereby VN renounces to applying all kinds renounces to applying all kinds of performance requirementsof performance requirements to non-excluded sectors to non-excluded sectors

VII. Vietnam’s actual Services Sector liberalization upon WTO accession (cont):

Vietnam’s WTO accession offer on services includes Vietnam’s WTO accession offer on services includes commitments in practically all services sectors commitments in practically all services sectors –with –with only a few sub-sectoral exceptions only a few sub-sectoral exceptions

Commitments are Commitments are based primarily on phase-in of based primarily on phase-in of liberalized market accessliberalized market access for foreign suppliers, and for foreign suppliers, and few performance criteria/conditions have been noted few performance criteria/conditions have been noted

If compared with other newly acceding countries in If compared with other newly acceding countries in Asia (Re UNDP ATII 2006 Study on Mode 3), Asia (Re UNDP ATII 2006 Study on Mode 3), Vietnam exceeded level of commitmentsVietnam exceeded level of commitments by other by other ‘radical’ liberalizers, including China‘radical’ liberalizers, including China –China kept –China kept exceptions and imposed limitations in forms of exceptions and imposed limitations in forms of establishment (preference for ‘green’ investment); establishment (preference for ‘green’ investment); with marked preference for joint ventureswith marked preference for joint ventures

VII. Vietnam’s actual Services Sector liberalization upon WTO accession (cont):

In such context, In such context, there is little correlation between there is little correlation between liberalization offers made and reality of Vietnam’s liberalization offers made and reality of Vietnam’s current services export activitiescurrent services export activities –e.g., Mode 1 is –e.g., Mode 1 is listed with no restrictions for wide range of listed with no restrictions for wide range of professional services; what will certainly entail professional services; what will certainly entail negative impactsnegative impacts of national services suppliers of national services suppliers (supplying domestic market & exporting via Mode 2)(supplying domestic market & exporting via Mode 2)

This situation This situation compromises the success of the services compromises the success of the services sector development strategysector development strategy to be adopted, and to be adopted, and emphasizes the need for assessing the impacts of emphasizes the need for assessing the impacts of services trade liberalization –Sample Framework has services trade liberalization –Sample Framework has been developed under the Studybeen developed under the Study

VIII. Potential costs of services liberalization and lessons drawn:

Economies (like Vietnam) that are acceding to the Economies (like Vietnam) that are acceding to the WTO in the past few years are being WTO in the past few years are being pressured to pressured to make very liberal commitments under the GATSmake very liberal commitments under the GATS –they –they have not been given enough time to assess the impacts have not been given enough time to assess the impacts

As an economy liberalizes market access for trade in As an economy liberalizes market access for trade in services, care is needed so that the services, care is needed so that the role of foreign firms role of foreign firms stimulates rather than depresses nat’l competitivenessstimulates rather than depresses nat’l competitiveness

Liberalizing terms for market access in services can Liberalizing terms for market access in services can make an economy more attractive to foreign investors, make an economy more attractive to foreign investors, and these can bring much-needed capital & expertiseand these can bring much-needed capital & expertise––However, However, attractiveness can also be influenced by the attractiveness can also be influenced by the competitiveness of local infrastructurecompetitiveness of local infrastructure and by a and by a transparent regulatory environmenttransparent regulatory environment

VIII. Potential costs of services liberalization and lessons drawn (cont):

There are a number of There are a number of potential costs to developing potential costs to developing countries of services FDIcountries of services FDI: potential for monopolistic : potential for monopolistic practices with accompanying rise in prices, control practices with accompanying rise in prices, control of cultural activities, crowding out of local of cultural activities, crowding out of local suppliers, and employing local workers only in low-suppliers, and employing local workers only in low-paying, lower skilled jobspaying, lower skilled jobs

There is also potential for There is also potential for negative impact on negative impact on balance of paymentbalance of payment due to the use of foreign due to the use of foreign suppliers (also via Mode 1) and profit repatriationsuppliers (also via Mode 1) and profit repatriation

More worrisome is the potential More worrisome is the potential impact on the impact on the poorpoor. . –Unless care is taken, the gap in access to, and –Unless care is taken, the gap in access to, and affordability of, essential services can widen and a affordability of, essential services can widen and a divergence of funds commonly used by government divergence of funds commonly used by government to subsidize access to the poorto subsidize access to the poor

VIII. Potential costs of services liberalization and lessons drawn (cont):

The most important prerequisite to benefit from The most important prerequisite to benefit from services FDI is a services FDI is a strong regulatory frameworkstrong regulatory framework to to ensure positive multiplier effects in the domestic ensure positive multiplier effects in the domestic economy (UNCTAD 2004)economy (UNCTAD 2004)

Performance criteria are important to ensure positive Performance criteria are important to ensure positive multiplier effectsmultiplier effects from services foreign direct from services foreign direct investment particularly as, without regulatory investment particularly as, without regulatory restrictions, large corporations tend to import skilled restrictions, large corporations tend to import skilled staff and a wide range of service inputs, thus staff and a wide range of service inputs, thus providing few, if any, domestic multiplier effectsproviding few, if any, domestic multiplier effects

VIII. Potential costs of services liberalization and lessons drawn (cont):

Important to ensure that negative impacts such as Important to ensure that negative impacts such as e.g. the following do not occur:e.g. the following do not occur: a) loss of jobs due to a) loss of jobs due to imported expertise and contracting of support imported expertise and contracting of support services from abroad; b) a drop in net foreign services from abroad; b) a drop in net foreign exchange earnings due to importation of support exchange earnings due to importation of support services by foreign owned enterprises; c) a services by foreign owned enterprises; c) a concentration of service provision in more profitable concentration of service provision in more profitable urban areas, leaving the rural and remote urban areas, leaving the rural and remote communities even more disadvantagedcommunities even more disadvantaged

To counteract them, performance requirements that To counteract them, performance requirements that could be used are:could be used are: transfer of technology, hiring, transfer of technology, hiring, training and promoting local staff, use of national training and promoting local staff, use of national service suppliers, employment equity, export activity service suppliers, employment equity, export activity from foreign-owned entities from foreign-owned entities

VIII. Potential costs of services liberalization and lessons drawn (cont):

Finally, in order to meet national social objectives, Finally, in order to meet national social objectives, it will be it will be important that market opening not important that market opening not jeopardize universal access to essential servicesjeopardize universal access to essential services (such as health, education, electricity, basic (such as health, education, electricity, basic telecoms), especially for the poor. In addition, telecoms), especially for the poor. In addition, market opening should result in increased market opening should result in increased employment in services and increased entrepre-employment in services and increased entrepre-neurial opportunities in services for women.neurial opportunities in services for women.

(Re. UNDP Study(Re. UNDP Study “Impacts of Basic Public Services “Impacts of Basic Public Services Liberalization on the Poor and Marginalized Liberalization on the Poor and Marginalized People: The Case of Health, Education and People: The Case of Health, Education and Electricity in Viet Nam” Electricity in Viet Nam” –Edited by Murray Gibbs –Edited by Murray Gibbs (August 2006)(August 2006)

Thank You!