International Trade Department

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Services

If developing economies are to grow, they need access to state-of-the-art financial services (banking, insurance), infrastructure services (transport, communications), professional services like law and accountancy, and many others. Often such services will not be available from domestic sources. Their acquisition from abroad will usually mean local investment, and the import of valuable new skills and technology.

There are many benefits to be made from service liberalisation. For example:

Tourism:

Tourism is an important sector for many developing countries especially via commercial presence of international hotels and establishment of domestic travel agencies in foreign countries. Liberalising the tourism sector could improve the lives of the poor by:

• Generating income for the poor through wages from formal employment;
• Creating employment opportunities;
• Generating income from selling goods and services;
• Increasing profits for local companies and also facilitating transfer of skills from abroad.

Generating the much needed foreign exchange revenue in developing countries.

Foreign Direct Investment (FDI):

FDI (as a result of services liberalisation in developing countries) typically brings with it new skills and technologies that spill over into the wider economy in various ways.

Telecommunication:

Recent studies have found that in a typical developing country an increase of ten mobile phones per 100 people boosts Gross Domestic Product (GDP) growth by 0.6%. In Tanzania calls (from a fixed landline) typically cost around 30 United States (US) cents a minute, However the introduction of pre-pay mobile phones is enabling users to send relatively cheap Short Message Service (SMS) text messages across distances that would otherwise take days to travel hence changing lives for the better. Liberalisation in telephone services is making phone calls cheaper - in the 1990s by 4% per year in developing countries and 2% per year in industrial countries, taking inflation into account.

Mode 4:

A number of recent studies have drawn attention to the potential benefits for both developed and developing countries from a progressive, well-managed relaxation of barriers to Temporary Movements of Natural Persons (TMNP) between the two. Most recently, a study by Walmsley and Winters* suggested that if developed countries were to raise their quotas on inward movement of temporary workers from developing countries to 3 per cent of their total labour force, the total gain, shared by both developing and developed countries, would be 1.5 times greater than the total gains from all remaining goods-trade liberalisation.

*Walmsley, T.L. and L.A. Winters (2003), "Relaxing the Restrictions on the Temporary Movements of Natural Persons: A Simulation Analysis", CEPR Discussion Paper No. 3719, London: CEPR.

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Sugar

Sugar is an important product for many developing countries, and trade in sugar raises a number of complicated developmental issues. European sugar producers currently receive a guaranteed price that is three times the world market rate, within certain maximum limits known as quotas.

Because the price is set so high, Europe produces far more sugar than it needs, and gets rid of the excess by dumping 5 millions tons of heavily subsidised sugar on world markets each year. This harms more efficient producers in developing countries who have to compete with these subsidised exports in world markets.

It also drives down the world price. Meanwhile, high tariffs prevent many developing country producers from exporting to Europe, and stops European consumers from being able to buy cheaper sugar.

Some developing countries are able to export set quantities of sugar to Europe without paying the high tariff. These 18 African, Caribbean, and Pacific (ACP) countries are able to receive the same high price for their sugar that the European farmers do.

This 'preferential' access has provided some benefits to these countries, but it has also meant that in some cases they have become dependent on these preferences; their industries have become reliant on the high prices, and other sectors of the economy have suffered as resources were drawn into the sugar industry.

The European Union is planning to reform its sugar industry, to bring down the price and greatly reduce Europe's exports of sugar. In addition to this reform, many of the poorest countries in the world that were previously not able to export sugar to Europe will soon be able to do so, as barriers are gradually removed by 2009 under the Everything But Arms initiative.

This is good for development, since it will mean that many efficient producers in poor countries in Africa will have more opportunities to export to Europe and other markets. But it will harm some of the 18 countries that currently receive preferential access, as the price they receive for the sugar they export to Europe will be cut substantially. It is estimated that under current proposals they will lose €500m in revenues each year.

The European Commission is going to provide these countries with assistance to help them deal with this shock and with the transition to the post-reform world. The UK Government considers this assistance to be very important, and an integral part of the overall sugar reform.

Assistance can either be financial and/or in the form of increased trade access, and will be agreed by the Commission and the countries concerned on a country-by-country basis. The UK is working with the Commission and the ACP countries to help this process so that effective assistance can be delivered in a timely manner.

Last updated: 4 October 2005

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