Services Policy Reform and Economic Growth in Transition Economies, 1990-2004 Felix Eschenbach & Bernard Hoekman
Question Asked & Stylized Facts Impact of service sector policy reforms on (differences in) the growth performance of 24 transition economies Pre-1989: services small part of GDP Many of the services that play a central role in market economies missing Producer services finance, design, marketing, etc.
Key characteristics of services Many services serve an intermediation function Economy-wide effects of policies/costs Many are nontradable but most services markets can be contested through movement of provider or demander WTO: Four «modes of supply» (1) Cross border (telecom); (2) tourism/travel (health); (3) establishment (FDI); (4) temporary movement of suppliers (consulting, «guest workers») FDI often needed for access to foreign services
Changes in services shares Share of Services Sector in GDP by Country Group, 1991 vs. 2003 Employment Share of Service Sector by Country Group, 1991 vs. 2001 80 80 70 70 60 60 % 50 40 30 1991 2003 % 50 40 30 1991 2001 20 20 10 0 OECD CEE SE E FSU1 FSU2 FSU3 FSU4 10 0 OECD CEE SEE FSU1 FSU2 F SU3 F SU4
Trade in services Exports of services (BOP basis) up from 2 to 8% of GDP, 1990-2004 EU-15 average = 8% Southern/Eastern Europe = 11%; CIS = 5% Imports similar average and growth rates But imports = 11% of GDP in CIS Services intensity of exports highest in Albania and Croatia; followed by Baltics Indirect services exports much higher everywhere
CEE, shares of destination areas in outgoing telecom traffic, 2002 SEE, shares of destination areas in outgoing telecom traffic, 2002 EU Non-ECA OECD Turkey ECA Middle East/Asia Not specified EU Non-ECA OECD Turkey ECA Middle East/Asia Not specified FSU1 (Baltics), shares of destination areas in outgoing telecom traffic, 2002 FSU2 (Central), shares of destination areas in outgoing telecom traffic, 2002 a, Croatia, Romania EU Non-ECA OECD Turkey ECA Middle East/Asia Not specified EU Non-ECA OECD Turkey ECA Middle East/Asia Not specified FSU3 (Caucasus), shares of destination areas in outgoing telecom traffic, 2002 FSU4 (Central Asia), shares of destination areas in outgoing telecom traffic, 2002 EU Non-ECA OECD Turkey ECA Middle East/Asia Not specified EU Non-ECA OECD Turkey ECA Middle East/Asia Not specified
Services FDI Now 60% of global stock; but some 80% in Baltics Business services = 40% of total inward stock in DCs, vs. 20% in OECD Transport/telecoms = 25% in transition economies vs. 10% elsewhere Utilities (energy/water) = 4-6% for DCs/TEs Much of this is M&A and privatization-driven Note: Non-equity FDI not captured (e.g. franchising, management contracts, leasing hotels/restaurants; airlines )
Utilities privatization in TEs 30 20 20 15 10 10 5 0 CEB CIS SEE 0 Telecom s G as P ower W ater Transport In US $ bn at 2000 prices (1992-2003) In US $ bn at 2000 prices (1992-2003)
Policy changes: EBRD index EBRD index of policy reform, 1990-2004 Ordinal measure, based on annual survey of legal & regulatory regime Ranges from zero (1989) to 4.3 7 services sectors: finance, capital markets, water, telecoms, electricity, road, rail transport
EBRD Infrastructure index = average of five sectoral reform indicators: Electric power: MAX (4.3) = Tariffs cost-reflective. Large-scale private sector involvement in unbundled and regulated sectors. Full liberalization; effective network access; competition in generation. Railways: 4.3 = separation of infrastructure from operations and freight from passenger operations. Full divestment/transfer of asset ownership. Rail regulator established and access pricing implemented. Roads: 4.3 = fully decentralized road administration. Commercialized road maintenance operations, competitively awarded. User charges reflect full costs, incl. congestion, accidents, pollution. Wide private sector participation. Full public consultation on new road projects. Telecommunications: 4.3 = effective regulation by independent entity. Coherent regulatory and institutional framework to deal with tariffs, interconnection rules, licensing, concession fees and spectrum allocation. Consumer ombudsman function. Water and waste water: 4.3 = water utilities fully decentralized and commercialized. Fully autonomous regulator with authority set/review tariff levels and quality standards. Wide private sector participation (service/management/lease contracts). Full concessions and/or divestiture of services in major urban areas.
Services policy index, 2004 (EBRD) 4.0 Index 3.5 3.0 2.5 2.0 1.5 1.0 0.5 CEE SEE FSU1 FSU2 FSU3 FSU4 0.0 Banking Non-Banking Infrastructure Services
20 16 12 8 4 0 Infrastructure reform index, EBRD, 2004 Turkmenistan Belarus Tajikistan Kyrgyzstan Uzbekistan Ukraine Azerbaijan FY ROM SaM Albania Moldova Armenia BiH Georgia Kazakhstan Russia Lithuania Slovak Republic Croatia Latvia Bulgaria Slovenia Czech Republic Romania Es tonia Poland Hungary pow er rail roads tele w ater
Service Sector Reform Index 1990-2004 Group (a) Service Sector Reform Index 1990-2004 Group (b) 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 1990 1995 2000 Hungary Slovak Republic Czech Republic Poland 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 1990 1995 2000 Latvia Lithuania Estonia Slovenia Service Sector Reform Index 1990-2004 Group (c) Service Sector Reform Index 1990-2004 Group (d) 4.50 4.00 3.50 4.50 4.00 3.50 3.00 2.50 2.00 1.50 Croatia Macedonia Romania 3.00 2.50 2.00 1.50 Kyrgyzstan Georgia Moldova 1.00 0.50 0.00 1990 1995 2000 Bulgaria 1.00 0.50 0.00 1990 1995 2000 Armenia
Correlation FDI/GDP ratio and: Service reform index 18.9 (20.4) *** Investment climate index 17.1 (15.0) *** R 2 No. of obs. 0.61 203 0.46 203
Determinants of p.c. GDP growth: Change in I/GDP (not the level of I/GDP due to transition U curve) Inflation Crisis dummies (1) financial (Russia and Albania) and (2) conflict (Georgia, Armenia, Azerbaijan, and Tajikistan Services (Finance &Infrastructure)
Finding: Services Matter Controlling for change in investment/gdp, inflation, crises, addition of services policy variables statistically significant > 1% level Fit (R 2 ) increases to 0.38 from 0.29 Robust to possible endogeneity (instruments) A one-point increase in reform index (range = 1 to 4.3) is associated with an increase in percapita growth of 6.8 (Infrastructure) and 8.5 (Finance) percentage points
Implications High correlation with investment climate as a regressor IC index goes beyond but includes services: governance/enterprise restructuring, competition policy, privatization, price liberalization Same true for Gastil index (political rights/freedoms), (used as an instrument) Important research/policy question: how much do services policies explain institutional variables in growth literature?
Can trade agreements help? Related Eschenbach/Hoekman paper: find an inverse relationship between depth of WTO commitments and actual policy (EBRD index) Partly explained by EU accession But, for others seems that size matters low incentives to enforce/monitor Implications greater need for unilateral reforms; less scope to rely on trade agreements Suggests call for more pro-active WB engagement And, use of aid for trade to address services reform