Services Negotiations in Southeast Asia:

Transcription

1 March 2018 Inclusive Economic Transformation Services Negotiations in Southeast Asia: Implications for Low-Income Countries in the Region Batshur Gootiiz Issue Paper

2

3 March 2018 l Inclusive Economic Transformation Services Negotiations in Southeast Asia: Implications for Low-Income Countries in the Region Batshur Gootiiz World Bank Group, Trade Research Unit Issue Paper

4 ii Published by International Centre for Trade and Sustainable Development (ICTSD) International Environment House 2 7 Chemin de Balexert, 1219 Geneva, Switzerland Tel: Fax: ictsd@ictsd.ch Publisher and Chief Executive: Managing Director: Programme Manager: Programme Officers: Ricardo Meléndez-Ortiz Deborah Vorhies Judith Fessehaie Nicholas Frank and Kiranne Guddoy Acknowledgements This paper was produced under ICTSD s Programme on Inclusive Economic Transformation as part of a project focused on leveraging services to drive sustainable economic growth. The author wishes to thank the ICTSD team involved in the conception and review of this paper as well as Rob Scollay (University of Auckland) and Aaditya Mattoo (World Bank) for valuable comments on a previous draft. The author would also like to thank the participants in the workshop organised by ICTSD in October 2017 in Yangon, Myanmar for their helpful comments. ICTSD is grateful for the generous support from its core donors including the UK Department for International Development (DFID); the Swedish International Development Cooperation Agency (SIDA); the Ministry of Foreign Affairs of Denmark (Danida); the Netherlands Directorate-General of Development Cooperation (DGIS); and the Ministry of Foreign Affairs of Norway. ICTSD welcomes feedback on this publication. This can be sent to Judith Fessehaie (jfessehaie@ictsd.ch) or Fabrice Lehmann, ICTSD Executive Editor (flehmann@ictsd.ch). Citation: Gootiiz, Batshur Services Negotiations in Southeast Asia: Implications for Low-Income Countries in the Region. Geneva: International Centre for Trade and Sustainable Development (ICTSD). Copyright ICTSD, Readers are encouraged to quote and reproduce this material for educational and non-profit purposes, provided the source is acknowledged. This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Licence. To view a copy of this licence, visit: The views expressed in this publication are those of the author and do not necessarily reflect the views of ICTSD or the funding institutions. ISSN

5 Inclusive Economic Transformation iii CONTENTS FIGURES, TABLES, AND BOXES ABBREVIATIONS FOREWORD EXECUTIVE SUMMARY 1. INTRODUCTION 1 2. THE ROLE OF SERVICES Services in the Domestic Economy Services Trade Performance Services as an Enabler of Manufacturing Performance Services Availability and Quality 7 3. MULTILATERAL AND REGIONAL COMMITMENTS IN SERVICES Multilateral Commitments in Services Types of Limitations Scheduled in Selected Services Sectors Services Commitments under Regional Trade Agreements Services under ASEAN+1 Agreements Comparison of GATS, AFAS, Blueprint, and Applied Policy Commitments THE STATE OF APPLIED POLICY IN SERVICES Applied Policy Restrictions The Importance of Procompetitive Regulation Absence of Policy MEGA-REGIONAL TRADE AGREEMENTS AND IMPLICATIONS FOR SEA Regional Comprehensive Economic Partnership Trans-Pacific Partnership POLICY RESPONSES AND STRATEGIES FOR FUTURE NEGOTIATIONS Domestic Policy Reform: Strengthening Procompetitive Regulations and Eliminating Remaining Barriers to Trade Broadening Access to Services Building a Strong Domestic Foundation: Human Capital Development Continuing International Engagement CONCLUSION 34 REFERENCES 35 iv vi vii viii

6 iv FIGURES, TABLES, AND BOXES Figure 1: Figure 2: Figure 3: Decomposing gross domestic product growth in developed and low-income and middleincome developing countries by sectors, and (percentage) Share of direct services and goods exports for SEA4 countries, 2006 and 2015 (percentage) Breakdown of direct services exports for SEA4 countries and Southeast Asia, 2006 and 2014 (percentage of total services) Figure 4: Gross exports of goods and services compared with value-added exports globally, 1980, 1995, and 2009 (percentage) Figure 5: Figure 6: Figure 7: Figure 8: Figure 9: Figure 10: Figure 11: Figure 12: Figure 13: Figure 14: Figure 15: Figure 16: Access to financial services: deposit accounts in SEA4 countries compared with neighbouring countries, (per 1,000 adults) (a) Domestic credit by banks for the private sector in the East Asia and Pacific region (percentage of gross domestic product) and (b) value of collateral (percentage of loan amount), 2016 (a) Internet penetration in the East Asia and Pacific region, 2015 (per 100 habitants) and (b) air passengers carried, 2016 (per 1,000 habitants) Obstacles in the business environment for firms in Cambodia, the Lao People s Democratic Republic, and Myanmar, 2016 (percentage of total) Level of restrictions of the GATS commitments in five main services sectors by SEA4 countries (percentage, by mode of supply) Restrictiveness of GATS commitments, Doha Round offers, AFAS commitments, and Blueprint 2015 goals for 10 Southeast Asian countries, 2012 (by STRI) Restrictiveness of AFAS commitments, applied policy, and 2015 Blueprint goals for ASEAN members, 2012 (by STRI) Restrictiveness of AFAS commitments, applied policy, and Blueprint 2015 goals by industry for ASEAN members, 2012 (by STRI) Restrictiveness of applied services trade policies of ASEAN members compared with other countries, 2008 (by STRI) Restrictiveness of applied services trade policy by industry for ASEAN, 2012 (by STRI) Restrictiveness of Doha offers, best PTA, AFAS and TPP commitments, and applied policy in services sectors for ASEAN members of TPP, 2015 (by STRI) Restrictiveness of Doha offers, best PTA, AFAS and TPP commitments, and applied policy in transport and financial services for ASEAN members of TPP, 2017 (by STRI) Table 1: Sector value added as share of gross domestic product in SEA4 countries, 2000, 2010, and 2016 (percentage) Table 2: Table 3: Table 4: Services sectors coverage under GATS in SEA4 countries (percentage and by type) Comparison of SEA4 regional trade agreements that contain services with GATS and liberalisation approaches Work experience requirements for architecture and engineering in five Southeast Asian countries under different trade regimes (mode 4)

7 Inclusive Economic Transformation v Table 5: Table 6: Table 7: Restrictiveness of GATS commitments, Doha offers, AFAS commitments, applied policy, and Blueprint 2015 goals for 10 Southeast Asian countries, 2012 (by STRI) GATS, AFAS, and Blueprint 2015 commitments, and applied policy in fixed telecommunications (mode 3) for SEA4 countries Independence of regulatory authority in telecommunications sector for ASEAN countries, 2012 Box 1: Excerpts from ASEAN Economic Community Blueprint 2025

8 vi ABBREVIATIONS AANZFTA AEC AFAS ASEAN ATISA FTA GATS ICT IMF MFN MRA OECD PTA RCEP SDG SEA4 STRD STRI TPP WTO ASEAN Australia New Zealand Free Trade Agreement ASEAN Economic Community ASEAN Framework Agreement on Services Association of Southeast Asian Nations ASEAN Trade in Services Agreement free trade agreement General Agreement on Trade in Services information and communications technology International Monetary Fund most favoured nation mutual recognition agreement Organisation for Economic Co-operation and Development preferential trade agreement Regional Comprehensive Economic Partnership Sustainable Development Goal Cambodia, Lao People s Democratic Republic, Myanmar, and Viet Nam Services Trade Restrictiveness Database Services Trade Restrictiveness Index Trans-Pacific Partnership World Trade Organization

9 Inclusive Economic Transformation vii FOREWORD Trade in services, and the development of domestic services sector capacity, plays a crucial role in fostering inclusive economic growth in Southeast Asia. Services make up approximately half of the Association of Southeast Asian Nations (ASEAN) gross domestic product (GDP) and roughly 60 percent of foreign direct investment. When measured on a value-added basis, percent of Southeast Asia s total exports and 30 percent of manufacturing exports are accounted for by services. In the economies of Southeast Asia s low- and lower-middle-income economies (Cambodia, Lao People s Democratic Republic, Myanmar, and Viet Nam), the share of services as a percentage of GDP has also grown over the past decade and now accounts for more than 40 percent of GDP in the respective economies. Encouragingly, since 2012, the share of services as a percentage of total GDP has exceeded that of agriculture. However, the share of services in the economies of Southeast Asia s low- and lower-middle-income economies remains below that of other lowincome countries in Latin America and in Eastern and Central Asia. In this paper, Batshur Gootiiz (World Bank) examines the role of services in the economies of Cambodia, the Lao People s Democratic Republic, Myanmar, and Viet Nam and analyses the services commitments, both regional and multilateral, of the region s low-income and lowermiddle-income economies. The paper also provides an overview of the applied policies in services and of the state of procompetitive regulation for each of the countries. The paper concludes with a series of proposed policy responses and strategies to enhance the performance of the services sector in the region. This paper, the seventh in a series of publications on services and the Sustainable Development Goals, is designed to both expand the body of knowledge in this area and support positive and innovative services sector policy change in the world s most vulnerable countries. We hope that this paper, as well as the companion pieces in the series, will prove useful to policymakers and researchers.

10 viii EXECUTIVE SUMMARY Services play an important role in Southeast Asia, supporting about half the region s combined gross domestic product (GDP) and 60 percent of total foreign direct investment inflows. As part of the vibrant regional bloc of the Association of Southeast Asian Nations (ASEAN), Southeast Asia s low- and lower-middle-income economies, Cambodia, the Lao People s Democratic Republic, Myanmar, and Viet Nam (SEA4), have engaged in several preferential trade agreements that cover services. Despite dynamism in services sectors and in trade in services, services are still underperforming, in terms of both quality and access. Firms indicate that access to finance and the high cost of transportation are major bottlenecks. While liberalising the remaining barriers in services trade is important, it is also crucial to focus on strengthening procompetitive regulations, which are non-discriminatory in nature. Procompetitive regulations, such as the independence of sector regulators in the telecommunications sector, and horizontal measures, such as transparency and predictability of licensing decisions, are crucial to improving competition in the services sectors. To enhance services sector performance, the SEA4 countries should focus on four priorities, namely: 1. Domestic policy reforms, including eliminating remaining barriers to trade and strengthening procompetitive regulations. 2. Introducing policies aimed at broadening access to services. 3. Building up skills required by service sectors. 4. Engaging in international cooperation through services trade negotiations in the context of deep regional trade agreements and leveraging Aid for Trade technical assistance to improve the technical capacity to regulate key sectors. In addition, improving the performance of service providers and broadening access to services will help the SEA4 countries to reach their Sustainable Development Goals (SDGs) successfully, as services are related closely to achieving SDGs 8 (decent work and economic growth), 9 (industry, innovation, and infrastructure), and 10 (reduced inequalities).

11 Inclusive Economic Transformation 1 1. INTRODUCTION Services and services trade matter in Southeast Asia s development. Services sectors provide significant contributions to the regional economy, supporting about half of the combined gross domestic product (GDP) of the Association of Southeast Asian Nations (ASEAN) and 60 percent of its total foreign direct investment inflows (Ahsan et al. 2015). Services include critical sectors that support the rest of the economy, such as finance, telecommunications, transport, distribution, health, education, and tourism. Services trade encompasses cross-border trade in road and air transport; use of tourism services by foreigners; foreign direct investment in banking, communications, and distribution; and temporary migration of doctors, lawyers, and engineers. Recent research finds that improving performance of and access to services namely, financial, health, education, and sanitation services has a significant impact on achieving the Sustainable Development Goals (SDGs) (Fiorini and Hoekman 2017). Given the breadth of these sectors and their importance in achieving the SDGs, it should hardly need arguing that services are critical to the overall economic performance of countries and the well-being of their people. A large body of research shows the importance of services in enhancing the productivity of firms, diversifying trade, and increasing the competitiveness of manufacturing firms in global value chains. Services matter even for developing countries, whose exports are largely concentrated in agriculture, mining, and low-value-added sectors. This is because the quality and competitiveness of service suppliers in the domestic market enable exporters in other sectors to achieve higher value-added in the global value chain. Domestic firms rely on access to finance, availability of telecommunications, and transportation services to access international market. Other services such as health, education, water, and sanitation services are directly related to achieving SDGs and increasing inclusiveness. With the rise of digitisation and transformation in the information and communications sectors, the role of services will become even more critical in determining countries competitiveness in the global trade landscape. Despite the increasing role of services in the economy and liberalised services trade policies, services in SEA4 countries (Cambodia, Lao People s Democratic Republic, Myanmar, Viet Nam) are still underperforming, in terms of both quality and access to services. Openness to services trade in SEA4 countries has not broadened access to services. In fact, Cambodia has one of the most liberal policies in services (financial, telecommunications, distribution, and transportation services), with its openness ranked at the same level as New Zealand and Singapore on the World Bank s Services Trade Restrictiveness Index (STRI) of However, Cambodia has not benefited much from this openness. The lack of access to, or poor quality of, services in sectors ranging from finance to transport is hindering the performance of domestic firms in other sectors. For example, only about a quarter of adults in Cambodia and Myanmar have access to deposit accounts at commercial banks (International Monetary Fund (IMF) Financial Access Surveys 2016). Even fewer people have access to retail bank loans. Domestic credit to the private sector provided by the banking sector, as a share of GDP, is still very low. The value of collateral needed for a loan is large. According to the 2016 Enterprise Surveys, firm-level surveys conducted by the World Bank, access to finance and transportation are perceived as major bottlenecks. Internet penetration is also low, even compared with countries at the same level of development. The latest research on services trade suggests that liberalisation needs to be managed and sequenced carefully along with introduction of procompetitive regulations and improvements in institutional capacity (Beverelli et al. 2017). The SEA4 countries are part of a dynamic region that has negotiated several preferential trade agreements (PTAs) that cover services, including the ASEAN+1 agreements. However,

12 2 little is known about the breadth and depth of liberalisation of these agreements. How much did these PTAs achieve beyond the countries commitments under the General Agreement on Trade in Services (GATS)? To assess the value-added of the PTAs, one could compare the services commitments under the PTAs with the applied policies in services. This paper does so, making use of the World Bank s STRI, which covers the applied policy restrictions of five major services sectors for the ASEAN countries in 2008 and The results show that the applied policies are much more liberal than the regional and multilateral commitments in services. The gap between the PTAs and applied policy is less than that between the GATS and applied policy; these gaps show that the countries are less willing to bind their services sectors under the regional and multilateral trade agreements. While liberalising the remaining barriers in services trade is important, it is also crucial to focus on the strengthening procompetitive regulations, which are non-discriminatory in nature. These regulatory measures include the independence of sector regulators in sectors such as telecommunications, banking, and insurance, the technical capacity of regulators, transparency and predictability in licence allocation, administrative procedures, and consultation with private-sector players. To achieve transparency and predictability in domestic policy, countries could engage in deep plurilateral regional trade agreements that cover services. Recent studies such as Mattoo and co-authors (2017) and Gootiiz (2017b) indicate the importance of deep agreements in improving such predictability. This paper will examine the role of services in Southeast Asia s low- and lower-income countries and the implications of services sector growth for policymakers, given the current regional and international negotiating landscape for services. The first section will discuss the role of services, and the second section will analyse countries current commitments under regional and multilateral agreements in services. The third section will describe applied policies in services and the state of procompetitive regulations. The fourth section will describe the implications of mega-regional trade agreements for the SEA4. The final section will discuss the policy response and strategy for these four countries in the context of ongoing services negotiations in the region and beyond.

13 Inclusive Economic Transformation 3 2. THE ROLE OF SERVICES 2.1 Services in the Domestic Economy Services matter for the Southeast Asia region, and especially for low- and lower-middle-income countries, including Cambodia, the Lao People s Democratic Republic, Myanmar, and Viet Nam the focus of this issue paper. Services already contribute a significant share to the domestic economy, employment, and the performance of other sectors. As of 2016, services value added contributed more than 40 percent of total GDP in each of the four countries, compared with about 30 percent a decade earlier (Table 1). The share of services value added has been increasing in these countries, exceeding the share of agricultural value added since 2010 (World Bank Development data). Although the services share of GDP continues to increase across SEA4 (Table 1), this share is lower than that of other low-income countries. In the lowincome countries of Latin America and the Caribbean and Eastern and Central Asia, the share of services has exceeded 60 percent. In 2016, the global average for the services value added share of GDP for lower-middle-income countries was about 53 percent (Table 1). There is room for further growth for services in the Southeast Asia region. Table 1: Sector value added as share of gross domestic product in SEA4 countries, 2000, 2010, and 2016 (percentage) Country Sector value added Cambodia Laos Myanmar Viet Nam Lower-middle-income (global) Agriculture Industry Services Agriculture Industry Services Agriculture Industry Services Agriculture Industry Services Agriculture Industry Services Note: Data on employment share by industry are limited; no recent data are available. As of 2010, employment data for lower-middle-income counties showed about 45 percent working in agriculture, 21 percent in industry, and 34 percent in services. Source: World Bank Development Data, accessed in September 2017 Moreover, services now account for almost 75 percent of global economic growth, including 55 percent of growth in developing economies. Figure 1 shows the composition of services and industry-to-gdp growth in the past 20 years for developed and developing countries. For both developed and developing countries, the contribution of services to total growth is higher than the other components of GDP (industry and agriculture) and has been growing.

14 4 Figure 1: Decomposing gross domestic product growth in developed and low-income and middleincome developing countries by sectors, and (percentage) 100 % Low income Developing 39 Source: Ahsan et al. (2015) Middle income Advanced World China Asia Developing India Services Industry Agriculture Turkey ASEAN Services Trade Performance Services trade can play a central role in determining the state of services because it encompasses cross-border trade in road and air transport; use of tourism services by foreigners; investment in finance, telecommunications, and distribution; and temporary migration of doctors, engineers, and architects. Greater regional and global integration could alleviate constraints on the development of SEA4 countries services sectors due to limited endowments of capital and skills, and small market size. The studies indicate that trade in services is closely linked to productivity in both lower-income and middle-income countries (Ahsan et al. 2015). Since 2006, with the exception of Myanmar, where the percentage has more than doubled, the share of direct services trade export has been lagging behind goods trade export (Figure 2). Furthermore, the SEA4 countries mainly export traditional services such as transportation, travel, and tourism services and are less successful in tapping into new services opportunities such as information technology (IT) and business-related services (Figure 3). Travel services are the most dynamic component within services exports, making up percent of total services exports, followed by transport (6 20 percent) and other services (10 20 percent). Between 2006 and 2014, the composition of services exports of these countries has not changed much, except for Myanmar. In 2006, Myanmar s services exports were mostly in transportation; in 2014, travel services accounted for about half of services exports. The composition of services exports of the SEA4 countries contrasts with the wider regional composition where the other services category makes up a larger share of services exports (Figure 3). This category contains higher value-added services such as financial, telecommunications, and information and communications technology (ICT) sectors (World Bank 2016).

15 Inclusive Economic Transformation 5 Figure 2: Share of direct services and goods exports for SEA4 countries, 2006 and 2015 (percentage) % Cambodia Laos Myanmar Viet Nam Southeast Asia Cambodia Laos Myanmar Viet Nam Southeast Asia Goods Services Source: UNCTADSTAT database ( accessed July 2017 Figure 3: Breakdown of direct services exports for SEA4 countries and Southeast Asia, 2006 and 2014 (percentage of total services) % Cambodia Laos Myanmar Viet Nam Cambodia Laos Southeast Asia Myanmar Viet Nam Southeast Asia Goods-related services Travel Transport Other services Note: Southeast Asia represents the value for the regional average. Source: UNCTADSTAT database ( accessed July 2017 Moreover, it is crucial to consider the contribution of services value added to total exports. Measuring exports on a value-added basis provides a more complete picture of the overall importance of services trade, because it considers services that are used as inputs in other sectors exports. While the share of services in trade has remained at around 20 percent since 1980 in gross terms, in valueadded terms it has increased from under 30 to over 40 percent, although the share differs significantly across countries, ranging from about 30 to 90 percent. For countries that specialise in exports of commodities (Chile, Norway) or manufacturing (Viet Nam, Mexico, Republic of Korea), services value added make up about percent of gross exports, while it constitutes about 90 percent of exports for countries such as Luxembourg that export services directly (Heuser and Mattoo 2017).

16 6 Figure 4: Gross exports of goods and services compared with value-added exports globally, 1980, 1995, and 2009 (percentage) Gross exports of goods and services as share of total world gross exports Value-added exports of goods and services as share of total world value-added exports Goods Services Source: Heuser and Mattoo (2017) Goods Services The share of services in value-added trade is large and increasing, and this is true even for low-income countries. Let us look at the examples of Cambodia and Viet Nam, the countries covered by the joint Organisation for Economic Co-operation and Development (OECD) World Trade Organization (WTO) Trade in Value Added (TiVA) database (2011). While the share of direct services export in total export was 7 percent of Viet Nam s total exports in 2015 (available year in Figure 2), the services value added proportion of total exports was close to 40 percent. For Cambodia, the direct services trade export was 25 percent of total exports; the services value added share was more than half of total exports (TiVA database) Services as an Enabler of Manufacturing Performance Services can have a substantial economic impact because they are vital inputs into producing downstream goods and services. Recent findings show that services value added accounts for about 30 percent of manufacturing exports of developed economies and about 26 percent of developing economies (Roy 2017). The share of services value added in goods exports for low-income countries has been increasing to double digits, reaching 16 percent in 1992 and 22 percent in 2012 (Hoekman et al 2017). The important role of services in manufacturing has been well established in several studies. A study by Arnold et al. (2016) offers a powerful example of the benefits of services reform in manufacturing. The authors analysed the link between such reforms and manufacturing productivity in India. Reforms in the services sectors, with greater openness and improved regulation leading to a growth in domestic and foreign investment, helped Indian manufacturing firms to perform better: thanks to services reforms, manufacturing firms gained access to better, diverse, and more reliable services. The improvements in services enhanced firms ability to invest in new business opportunities and better production technology. Such results suggest that procompetitive reforms in banking, transport, insurance, and telecommunications boosted the productivity of manufacturing firms (Ahsan et al. 2015). Several other studies showed that access to low-cost and high-quality (domestic or foreign) producer services can promote productivity and economic growth (Hoekman and Mattoo 2008). Arnold et al. (2011), using firm-level data from 1 Country profiles for Cambodia and Viet Nam are available in the Trade in Value Added and Global Value Chain: Please note that the database is available only for 2011.

17 Inclusive Economic Transformation 7 the Czech Republic for the period , find a positive effect of services sector reforms, leading to greater foreign direct investment and positive impacts on the productivity of domestic firms in downstream manufacturing. Fernandes and Paunov (2012), using the annual manufacturing survey of Chilean firms, find a positive effect of substantial foreign direct investment inflows in producer services sectors on the total factor productivity of Chilean manufacturing firms. Their findings also suggest that services foreign direct investment fosters innovation activities in manufacturing and offers opportunities for laggard firms to catch up with industry leaders (Ahsan et al. 2015). 2 A World Bank study of the Lao People s Democratic Republic (Varela et al. 2016) shows that services value added in manufacturing was about 21 percent; for Cambodia and Viet Nam the numbers are higher, reaching about 36.7 percent and 29.1 percent, respectively (TiVA database). For the SEA4 countries, the services value added in manufacturing is concentrated mostly in two services sectors distribution and transport services (TiVA database 2011). The contribution of modern services that add most value to manufacturing, such as financial, telecommunications, business, and ICT sectors, is small. 2.4 Services Availability and Quality Achieving broader access to financial, transportation, and communications services is crucial in reaching the SDGs. Several studies showed that access to low-cost and highquality services can promote productivity and economic growth (Fiorini and Hoekman 2017). They found that services trade policies are associated more strongly with measures of the availability of (access to) a number of services such as access to banking services, availability of internet services, and affordability of air transport services. Improving access to these services will help countries to achieve some of the goals mandated in the SDGs. Despite the growing importance of services in domestic economies and in trade, the performance of services in Cambodia, the Lao People s Democratic Republic, Myanmar, and Viet Nam (SEA4) are lagging, in terms of both availability and quality. Access to financial services remains low for the SEA4 countries. International Monetary Fund (IMF) data from financial access surveys shows that in 2016 there were only about 250 deposit accounts per 1,000 adults in Cambodia and Myanmar (Figure 5). This is very low compared with neighbouring countries. Access to banking services appears to be better in the Lao People s Democratic Republic and in Viet Nam, with 500 accounts in the Lao People s Democratic Republic and 980 accounts in Viet Nam per 1,000 adults. The remarkable achievement of Viet Nam should be noted: in 2010 only about 25 percent of adults had access to deposit accounts; in 2016 the percentage had jumped to 96 percent. Access to loan accounts is much worse: the IMF survey reveals the access to loans in Cambodia, Myanmar, and the Lao People s Democratic Republic to be very limited and mostly unavailable. As of 2015, only 48/1,000 adults in Cambodia, 30/1,000 adults in the Lao People s Democratic Republic, and 3/1,000 adults in Myanmar had loan accounts at commercial banks (IMF Financial Access Survey 2015). Although these three countries have been and are very open to trade in banking services, access to basic banking services remained highly unequal and limited. Provision of credit is indeed underperforming: domestic credit offered to the private sector by banks in the Lao People s Democratic Republic and Myanmar represents only 21 percent and 15.5 percent of GDP respectively, much lower than the regional average of 124 percent (Figure 6a). Moreover, in comparison with other countries in the region, firms in the Lao People s Democratic Republic and Myanmar need large collateral, compared with the value of the loan, to obtain credit. Figure 2 Similar results have been found for sub-saharan Africa (Arnold et al. 2008) and Indonesia (Duggan et al. 2013).

18 8 Figure 5: Access to financial services: deposit accounts in SEA4 countries compared with neighbouring countries, (per 1,000 adults) 2,500 2,000 1,500 1, Cambodia Laos Myanmar Viet Nam Brunei Indonesia Malaysia Philippines Thailand Note: 2010 data for the Lao People s Democratic Republic are missing. The bar height indicates the number of deposit accounts per 1,000 adults at commercial banks. Source: IMF Financial Access Survey (2010 and 2016) Figure 6: (a) Domestic credit by banks for the private sector in the East Asia and Pacific region (percentage of gross domestic product) and (b) value of collateral (percentage of loan amount), 2016 a b % of GDP Cambodia Laos Myanmar Viet Nam Year 2010 Year 2016 East Asia & Pacific Source: (a) World Bank World Development Indicators; (b) World Bank Enterprise Surveys (2016) % of loan amount Cambodia Laos Myanmar Viet Nam East Asia & Pacific 6b uses data from the Enterprise survey and shows the amount of collateral that local firms have to pledge before getting a bank loan (expressed as a percentage of the value of the loan). The regional average value of required collateral to secure bank loans ranges about 200 percent of the value of the loan, but firms in the Lao People s Democratic Republic and Myanmar need to pledge an average of 300 and 400 percent of the loan, respectively, as collateral. Furthermore, internet penetration is key in determining competitiveness in e-commerce

19 Inclusive Economic Transformation 9 in the digital era and this is also lagging behind for some countries in the region: internet penetration stood at 20 per 100 habitants in Cambodia, the Lao People s Democratic Republic, and Myanmar in 2015, much lower than the regional average of 50 per 100 habitants (Figure 7a). Air transportation services are an important sector for goods trade and tourism services. The usage of air transport services, measured in air passengers per 1,000 habitants, also suggests a limited use of air transport in Cambodia, the Lao People s Democratic Republic, and Myanmar in 2016, compared with the regional average (Figure 7b). Figure 7: (a) Internet penetration in the East Asia and Pacific region, 2015 (per 100 habitants) and (b) air passengers carried, 2016 (per 1,000 habitants) a 2500, b 2300 per 100 habitants Cambodia Laos Myanmar Viet Nam Lower middle income East Asia & Pacific per 1,000 habitants 2000, 1500, 1000, Source: World Bank Development Indicators, accessed in September Cambodia Laos Myanmar Viet Nam Lower middle income East Asia & Pacific Furthermore, the perception of firms in the Lao People s Democratic Republic, Myanmar, and Viet Nam suggests that services are underperforming. According to the World Bank s latest Enterprise Surveys, access to finance is the biggest hurdle in the business environment (Figure 8). Figure 8: Obstacles in the business environment for firms in Cambodia, the Lao People s Democratic Republic, and Myanmar, 2016 (percentage of total) % Cambodia Laos Myanmar Viet Nam East Asia &Pacific Access to finance Practices of the informal sector Transportation Source: World Bank Enterprise Surveys (2016) Access to land Tax rates

20 10 Given the increasing importance of services, and the consequences of underperformance of services for the wider economy, there is room for improvement. The main objective of services sector reform is increased competition in services and better availability of services. To achieve these goals, it is important to manage liberalisation of trade in services, while strengthening procompetitive domestic regulations. Countries can achieve these goals through a combination of domestic policy reforms and regional and multilateral trade agreements in services.

21 Inclusive Economic Transformation MULTILATERAL AND REGIONAL COMMITMENTS IN SERVICES 3.1 Multilateral Commitments in Services All SEA4 countries have submitted services commitments under GATS, the set of multilateral rules covering international trade in services. Myanmar submitted its commitments in 1995, much earlier than Cambodia, Viet Nam, and the Lao People s Democratic Republic, which acceded to the WTO in 2004, 2007, and 2013 respectively. GATS rules operate at two levels: first, there is a set of general rules that apply across the board to measures affecting trade in services, of which the most important are transparency and the most-favoured-nation (MFN) principle. Second, there are so-called specific commitments by members on market access and national treatment. Article XVI (market access) lists a set of measures that restrict market access and that a WTO member may not maintain or adopt, unless this is specified in its schedule. 3 The national treatment covers both de jure and de facto discrimination against foreign services or service suppliers. GATS defines four ways in which services can be traded, known as modes of supply: Mode 1 Cross-border: services supplied from the territory of one member into the territory of another. Mode 2 Consumption abroad: services supplied in the territory of one member to the consumers of another. Mode 3 Commercial presence: services supplied through any type of business or professional establishment of one member in the territory of another (i.e. foreign direct investment). Mode 4 Presence of natural persons: services supplied by nationals of one member in the territory of another; this mode includes independent service suppliers, intra-corporate transferees, and contractual service suppliers. Countries GATS commitments cover a wide range of services sectors, including professional services, transportation, financial services, and health services. In total, GATS covers about 55 broad categories of services, which are further disaggregated into some 160 subsectors. 4 There are only two sectors that are not covered by the GATS: services provided to the public by the government authority and air traffic services (both international and domestic air cargo and passenger services). The SEA4 countries submitted GATS commitments with sector coverage ranging from 3 to 38 out of a total of 55 services sectors (Table 2). Myanmar s schedule covers only 3 sectors: hotels, travel agencies, tour operators services, and services auxiliary to all modes of transport. The commitments of Cambodia, the Lao People s Democratic Republic, and Viet Nam cover a wider range of sectors, ranging from 30 to 38 sectors out of a total of 55 sectors. The scope of the commitments of WTO members is determined by what they include in their schedules. These schedules of specific commitments are made on a sector-by-sector and mode-of-supply basis, with countries having the option of making no commitments at all ( unbound ), a partial commitment, or a full commitment ( none ) that is, specifying that no limitations are maintained. These three categories are used in analysing the depth of commitments made by WTO members (Hoekman 1996, Adlung and Roy 2005). Figure 9 provides an overview of the distribution of full, partial, and no commitments across modes 1 (cross-border), 3 (commercial presence), and 4 (temporary movement of natural persons) for SEA4 countries. The analysis is based on five major services, 3 These include the number of service suppliers; the total value of services transactions or assets; the total number of services operations or the total quantity of service output; the total number of natural persons that may be employed in a particular sector; specific types of legal entity through which a service can be supplied; and foreign equity participation (e.g. maximum equity participation). 4 The sector classifications are provided in a document called WTO Sectoral Classification List (W/120).

22 12 Table 2: Services sectors coverage under GATS in SEA4 countries (percentage and by type) Services sectors Cambodia Laos Myanmar Viet Nam Total number of sectors Total coverage as specified in W/120* Sector coverage 62% 55% 5% 69% 100% Business Communications Construction and related engineering Distribution Educational Environmental Financial Health-related and social Tourism and travelrelated Recreational, cultural, and sporting Transport * Indicates number of sectors/subsectors indicated in the respective category of services. Source: WTO World Bank I-TIP Database on Services, accessed in September 2017 including financial, retail, telecommunications, transport, and professional services, which are broken down into 44 subsector modes (Gootiiz and Mattoo 2015). Myanmar s commitments were quite limited, since the sector coverage is limited to begin with. The other three countries made full commitments more frequently under mode 1 than under mode 3 and mode 4. About 60 percent of the commitments made in mode 1 are full commitments. It is notable that the mode 3 commitments of Cambodia contain more full commitments than those of the other countries. Although the pattern in Figure 9 is based on the five main services sectors of these four countries, the analysis made by Adlung and Roy (2005) shows similar patterns for the WTO members GATS commitments in other services sectors. 3.2 Types of Limitations Scheduled in Selected Services Sectors Myanmar made full commitments in the following sectors under GATS: tourism, tour operators services, and auxiliary to transport services. The schedules of Cambodia, the Lao People s Democratic Republic, and Viet Nam are much deeper and wider but they maintained unbound or provided no commitments in transport sectors and scheduled foreign equity restrictions in finance and telecommunications sectors. A distinctive feature of the accession schedules of the Lao People s Democratic Republic and Viet Nam is that they contain phase-in liberalisations in a number of sectors, including banking, insurance, telecommunications, and transport services.

23 Inclusive Economic Transformation 13 Figure 9: Level of restrictions of GATS commitments in five main services sectors by SEA4 countries (percentage, by mode of supply) % Cambodia Laos Myanmar Viet Nam Full Partial Unbound or No Commitment Note: Total sector-mode analysed is mode 1; 3 mode 3 (or commercial presence); 4 mode 4 (or temporary movement of natural persons). Note: Financial (retail banking, life and non-life insurance, reinsurance), telecommunications, retailing, transport, higher education, medical services, and selected professional services (legal, accountancy, engineering, and architectural services) are included in this analysis. Myanmar does not have commitments for any of the services sectors covered here. Source: Gootiiz and Mattoo (2017a) 3.3 Services Commitments under Regional Trade Agreements The SEA4 countries are part of the world s most important and far-reaching regional trade agreement in services, the ASEAN Framework Agreement on Services (AFAS), which was signed in December AFAS was created to substantially eliminate restrictions to trade in services among the 10 members of ASEAN. In addition to AFAS, the SEA4 countries are members of several ASEAN+ agreements, namely the ASEAN Australia New Zealand Free Trade Area (Table 3), ASEAN+ India, and ASEAN+ China. In this section, we will analyse the services components of these PTAs and examine how they interact with the SEA4 countries commitments under GATS. Table 3 summarises these regional agreements main disciplines, liberalisation approach, and sector commitments. The GATS equivalent (GATS=) means main obligations and sector commitments are the same as those committed to under GATS. GATS plus (GATS+) means more obligations, broader sector coverage, and deeper commitments than those committed to under GATS. GATS minus (GATS ) is a situation where obligations and services commitments in a free trade agreement (FTA) are lower than the commitments in GATS of the same country. GATS minus also entails commitments that consists of higher and additional restrictions inscribed in the regional trade agreements. Apparently, GATS minus commitments occur frequently in regional trade agreements; research by Adlung and Miroudot (2012) shows that 80 percent of the 56 regional trade agreements analysed contain GATS minus commitments.

24 14 Table 3: Comparison of SEA4 regional trade agreements that contain services with GATS and liberalisation approaches Preferential trade agreement ASEAN Framework Agreement on Services (AFAS) ASEAN Australia New Zealand Free Trade Agreement (AANZFTA) ASEAN China Free Trade Area (ACFTA) ASEAN Korea Free Trade Area (AKFTA) ASEAN India Free Trade Area (AIFTA) Japan Viet Nam Economic Partnership Agreement (EPA) Korea Viet Nam Free Trade Agreement (FTA) Year Parties Main obligations Liberalisation approach 1995 ASEAN GATS= Positive ASEAN, Australia, New Zealand ASEAN, China ASEAN, Korea ASEAN, India Japan, Viet Nam Korea, Viet Nam Progressive liberalisation (packages) Yes (9 packages) Sector/ subsector commitments GATS+ GATS= Positive Yes GATS+ GATS= Positive Yes (2 packages) GATS+ GATS= Positive Yes GATS+ GATS= Positive Yes GATS+ GATS= Positive GATS+ GATS= Positive GATS+ Note: The year indicates the time the services component of the free trade agreement came into force. GATS= refers to GATS equivalent; GATS+ refers to GATS plus. Source: WTO I-TIP on Services database, World Bank Deep PTA Project Database ( dataset/content-deep-trade-agreements); ASEAN Secretariat ( In terms of main disciplines and obligations, the SEA4 countries have signed PTAs that mostly follow the GATS approach on market access and national treatment and use a positive list approach in scheduling the sectors (Table 3). The sector coverage and the depth of commitments under these PTAs exceed the sector coverage and commitments under GATS, and thus we see GATS+ for all the PTAs with services. Among these PTAs, the most important and the deepest PTA is AFAS AFAS and blueprints in services AFAS is one of the most important regional trade agreements in services for the member countries. It contains more liberal and wider commitments compared with the services commitments of the

25 Inclusive Economic Transformation 15 other PTAs involving the SEA4. AFAS is related closely to GATS and follows its main principles, disciplines, and approach to liberalisation. It contains liberalisation commitments that aim to reduce restrictions between ASEAN member states to services trade gradually and calls for services trade to be liberalised through several rounds of negotiations of sector-specific commitments. Since 1995, numerous packages of AFAS commitments have been concluded and signed by ASEAN member states. As of 2012, these negotiations have resulted in eight packages of commitments in a wide range of services sectors (Ahsan et al. 2015). Currently, ASEAN member states are negotiating the ninth package of commitments in services. In addition, air transport services and financial services are also being liberalised and negotiated separately, with nine packages completed for air transport (as of 2017) and seven for finance (as of 2016). With each package, a deeper level of liberalisation is achieved and the member states commit more subsectors Blueprint 2015 and Blueprint 2025 In addition, in 2007 ASEAN leaders adopted the ASEAN Economic Community (AEC) Blueprint of 2015 to further liberalise services trade among ASEAN member states and create a free trade area in services trade by In 2015, when this original Blueprint 2015 expired, ASEAN members adopted the ASEAN Economic Community Blueprint The Blueprint 2015 aimed to remove substantially all restrictions on trade in services for the four priority services sectors (air transport, e-asean, healthcare, and tourism) by 2010, and the fifth priority services sector (logistics services) by It also aimed to remove substantially all restrictions on trade in services for all other services sectors by 2015, and to undertake liberalisation through consecutive biennial rounds until 2015 (2008, 2010, 2012, 2014). In 2012, a joint study of the ASEAN Secretariat and the World Bank evaluated the progress of Blueprint goals and implementation. The study found that ASEAN members were far from achieving their Blueprint goals as of 2012, only three years before the deadline of In 2015, ASEAN members renewed the Blueprint goals, creating the Blueprint This aspires to achieve the following main goals: affirm ASEAN s intent to further broaden services integration, deepen ASEAN s integration into the global supply chains in both goods and services, and enhance ASEAN Member States competitiveness in services (ASEAN 2015). It also stipulated that ASEAN s next agenda was to negotiate and implement the ASEAN Trade in Services Agreement (ATISA) as the legal instrument for further integration of services sectors in the region. Overall, it appears that the goals mandated in the Blueprint 2025 have further strengthened the regional integration goals of Blueprint 2015 and widened the coverage of ASEAN member states commitments to eliminate restrictions to trade in services among the member states. Negotiations for ATISA are currently ongoing (ASEAN Secretariat website).