Assessment of services sector in the East African Community (EAC) Partner State Countries

International Journal of Education and Research Vol. 2 No. 5 May 2014 Assessment of services sector in the East African Community (EAC) Partner State Countries Lucia Mary Mbithi * and Caiphas Chekwoti ** Abstract This study assesses the performance of the services sector of the East African Community (EAC) Partner State countries of Burundi, Kenya, Rwanda, Tanzania and Uganda. Like the rest of the world, the importance of the services sector in the EAC has been on the increase, with the sector currently contributing to an average of 51 percentage points of the region s GDP. The sector has been a driver to the EAC Economies growth. Travel services account for the largest component of the services exports from the EAC Partner State countries whereas transport services dominate the import category. Gauged by global rankings, the tourism/travel services component from the EAC appears to be relatively less competitive and ranks quite low. Underlying this outcome could be protectionist regulatory frameworks in place that instead enhance the barriers to services trade as affirmed by the EAC countries GATS commitments restrictive index ratings. The relatively high restrictive index ratings for virtually all the service sectors within the EAC coupled with the relatively poor rankings globally call for a relook of the regulatory framework and implementation strategy of the commitments by the EAC member countries. This will have to go hand in hand with the domestication strategy of the commitments to ensure enforcement by each EAC Partner State. Key words: East African Community (EAC), services sector, services trade, services competitiveness, services trade restrictiveness. 283

ISSN: 2201-6333 (Print) ISSN: 2201-6740 (Online) www.ijern.com Assessment of services sector in the East African Community (EAC) Partner State Countries 1.0 Introduction 1.1 Background information Services play an important role in economic development. The importance of the services sector in the global economy has been on the increase. The period 1980 s to 2000 s has seen the contribution of the services sectors increase from about 56 percentage points to about 72 percentage points of the global economy. During the same period, the contribution of the agriculture and manufacturing sector has decreased from about 7 and 25 percentage points to the current levels of about 3 and 15 percentage points respectively (Figure 1). According to WTO (2011), trade in services in 2010 accounted for 20 percent of the global trade. During the period 2005-2010, both merchandise and commercial services trade grew roughly at the same rate of 8 percent. The largest traded commercial service is travel, accounting for over 25 percentage points of the services traded. This is followed by transportation services. Trade in other commercial services (other than travel and transport), particularly communication and business services have been the fastest growing, this growth largely being explained by the global communication revolution, which has enabled remote supply of these services therefore eliminating major barriers in supply of the services especially through commercial presence and temporally movement of the natural persons. Improved communication has greatly enhanced tradability of services. Globally the services sector accounts for about 50 percent of the total employment. Production of services requires relatively less natural capital and more human capital, hence the services sector presents a potential for employment creation. Growth in services has been explained as a result of increase in intermediate and final demand for services (Guerrieri and Meliciani, 2005). The increase in final demand for services is associated with increase in per capita income, which leads to demand shifts towards services. 284

International Journal of Education and Research Vol. 2 No. 5 May 2014 Figure 1: Increasing importance of the services sector globally 80 70 60 Value added (% GDP) 50 40 30 20 10 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Agriculture Manufacturing Services Source: World Bank (2012) There is a correlation between growth in manufacturing and growth in the services sector (Figure 2). Changes in manufacturing organization of manufacturing production (including outsourcing and assembling) has increased the need for coordination of the manufacturing production process, therefore increasing the service content of many manufactured goods. Guerrieri and Meliciani (2005) have found a clear link between production in manufacturing and the services sector. They find that countries with a high share of activities in knowledge-intensive manufacturing industries to experience a higher demand for financial, communication and business services and argue that such countries are therefore more likely to produce and export these services. 285

ISSN: 2201-6333 (Print) ISSN: 2201-6740 (Online) www.ijern.com Figure 2: Recent trends in global growth in manufacturing and services sectors Source: World Bank (2012) 1.2 EAC Services sector The services sector is an important sector in the economies of the East African Community Partner State Countries of Burundi, Kenya, Rwanda, Uganda and Tanzania. The sector contribution to the GDP ranges from 40 to 66 percent in the various EAC Countries (Figure 3). The services sector has also been the steadiest and fastest growing of the EAC economies, with latest annual growth rates of over 5% in each of the EAC Partner State countries. It is the driver of these countries economic growth. The service sector is also an important sector in providing employment in various EAC Partner States, accounting for over 20 percent of employment in all the EAC and is the leading sector in generation of new jobs. In Kenya, the services sector is the leading sector in wage employment accounting for over 68% of the wage employment in the Country (Government of Kenya, 2008). 286

International Journal of Education and Research Vol. 2 No. 5 May 2014 Figure 3: Structure of the EAC Economies 70 Sector Contribution to GDP (%) 60 50 40 30 20 10 Agriculture Industry Services 0 Burundi Kenya Rwanda Tanzania Uganda Source: World Bank World Development Indicators 1.3 EAC Internal trade services policy Commercial services trade Liberalization in at the heart of the EAC integration programme. The Treaty establishing the EAC (EAC, 1999) provided for establishment of the EAC Common Market to enhance further co-operation in trade liberalisation and development, and therefore contribute to the Community s objectives. The EAC launched her progressive Common Market in 2010 (EAC, 2010). Among the key undertakings by the EAC Partner States in the EAC Common Market Protocol is to remove measures that restrict movement of services and service suppliers, and to harmonise standards to ensure acceptability of services traded in the region. The EAC Common Market Protocol has seven key provisions: five freedoms including free movement of: goods, persons, labour, services and capital; and two rights of establishment and residence for the Partner States. With respect to services trade, the Protocol provides for free movement of persons and labour, with the countries agreeing to guarantee the free movement of services supplied by nationals of Partner 287

ISSN: 2201-6333 (Print) ISSN: 2201-6740 (Online) www.ijern.com States and the free movement of service suppliers who are nationals of the Partner States within the Community, indiscriminately and with national treatment. As is the case with the Common Market implementation, the implementation of services liberalization is progressive with the EAC Partner State countries making commitments to liberalize some services sectors and of their interest, in all the four modes of services supply of cross border, consumption abroad, commercial presence and temporary movement of natural persons. The liberalization period is 2010 to 2015. All the five EAC Partner State countries made commitments to liberalize subsectors in seven key services sectors of: business services, communication services, distribution services, education services, financial services, tourism and travel related services, and transport services. The seven sectors are among the most critical backbone services sectors supporting production. Commitments made by different countries to liberalize services under mode 4 (temporary movement of natural persons) is made in accordance with the EAC Partner States Countries Schedule of commitment on the Free Movement of Workers. Under this Schedule (Schedule of commitment on free movement of workers), countries have identified the category of workers in different sectors, and the time frames (2010-2015) in which they allow free movement. Liberalization of services trade under mode four of services supply is therefore linked to the commitments countries have made with respect to implementation of the free movement of workers. This linkage complicates implementation of supply of services through temporary movement of natural services within the EAC Partner State countries. This identifies design issues that affect implementation of commitments that entered into force and may necessitate changes through formal amendments. Incidentally, there is no clear process in the protocol of reviewing and modifying the annexes (Tralac, 2011). 1.4 Study objectives The purpose of this study is to assess the performance of the services sector in the EAC Partner State countries. This is particularly important given the optimism exhibited in the commitments for reform of the various sectors and sub-sectors within services indicated in the Common Market Protocol. The study will add impetus for the needed reforms in areas that exhibit limited progress. 288

International Journal of Education and Research Vol. 2 No. 5 May 2014 2.0 Assessment of services in EAC 2.1 Importance of services sector Like the rest of the world, the importance of the services sector in the EAC has been on the increase. Contribution of the sector to the GDP has been on the increasing, currently contributing to an average of 51 percentage points of the regions GDP. The relative contribution of the manufacturing sector and the agricultural sectors to the EAC economies has been on the decline (Figure 4). Figure 4: Trends in sector contribution to the economy (% value added to GDP) 80 70 60 Value added (% GDP) 50 40 30 20 10 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Agriculture Manufacturing Services Source: World Bank (2012) 2.2 EAC trade in services Like the rest of the world, EAC Partner State countries trade in service has been on an increasing trend. Since 1980 s, services exports from the region have increased about tenfold while imports of the same have increased six fold. Since early 2000, the region became a net exporter of services 289

ISSN: 2201-6333 (Print) ISSN: 2201-6740 (Online) www.ijern.com (Figure 5). The underlying drivers of this outturn are more linked to the knock on positive effects arising from the structural and macroeconomic reforms undertaken by the member countries that commenced in the early 1990s. The reforms eased the transaction costs through a variety of policyrelated frameworks that improved the investment climate and spurred productivity as competition intensified (Collier and Gunning, 1999a; Siggel and Ssemogerere, 2002; Oyejide, 2002). Figure 5: Trends in exports and imports of services by the EAC Source: UNCTAD (2011) 2.3 EAC services exports Figure 6 shows the main services exported by the EAC Partner States. The most exported services in the region are the travel services. Travel services include hotels and restaurants including catering, travel agencies and tour operator services and tourist guides services. Export of travel services in the EAC is therefore related to export of tourism services. 290

International Journal of Education and Research Vol. 2 No. 5 May 2014 Apart from Kenya, travel services account for largest share of commercial services exports in the EAC countries. They account for about 80 percentage points and about 30 percentage points of all the commercial services exported by Uganda and Kenya respectively. Transport services are also important service exports accounting for about 10 percentage points in Burundi, Rwanda and Tanzania; and for about 50 percentage points of the commercial services exports from Kenya. Figure 6: EAC services exports 80.0 % of Commercial services exports 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Burundi Kenya Insurance and financial services Rwanda Transport Tanzania Travel Uganda Other services Source: World Bank (2012) 2.4 EAC services imports Transport services account for the largest share of services imports into the EAC Partner State countries, with travel coming second (Figure 7). Figure 7: EAC imports of services 291

www.ijern.com ISSN: 2201-6333 (Print) ISSN: 2201-6740 (Online) % of commercial service imports 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Burundi Kenya Insurance and financial services Rwanda Transport Tanzania Travel Uganda Other services Source: World Bank - World Development Indicators Development of the services sector is important for the growth of the EAC manufacturing sector. The services sector is highly correlated to the manufacturing sector with a correlation coefficient of 0.72 as compared to the correlation of the services and the agricultural sector of 0.16. Transport services are important for distribution of the manufactured products. Figure 8 shows the trend in growth of services, manufacturing and the agricultural sector in Kenya. 292

International Journal of Education and Research Vol. 2 No. 5 May 2014 Figure 8: Trends in services and manufacturing sector growth rates in Kenya 14.0 12.0 10.0 Value added (% growth rates) 8.0 6.0 4.0 2.0 0.0-2.0-4.0-6.0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Agriculture Manufacturing Services Source: World Bank - World Development Indicators 2.5 Competitiveness of EAC export services Competitiveness of services sector is important for the improved competitiveness of the whole of the EAC economic sector. For EAC countries to be able to competitively trade globally in agriculture and manufactured goods, competitiveness of the services sector is crucial. The competitiveness of the EAC countries services is lower compared to the rest of the world. The travel and tourism sector of the EAC countries is the best export service of each of the EAC countries (excluding Kenya). Compared to the rest of the world however, this sector is less competitive. Based on the World Economic Forum (2011) Travel and Tourism Competitiveness Report, in general the travel and tourism sector of the EAC countries ranks poorly as shown in Table 1, with the best of the five EAC countries being Rwanda ranking at 102/ 139 countries. An important regional advantage of this sector is the natural resource endowment, with Tanzania being 293

ISSN: 2201-6333 (Print) ISSN: 2201-6740 (Online) www.ijern.com the second best country globally. The countries rank poorly globally with respect to ICT and tourism infrastructure. Table 1: Competitiveness indicators for EAC countries tourism sectors (rank /139) Uganda Indicator Burundi Kenya Rwanda Tanzania Policy rules and regulations 133 103 40 97 100 Environmental sustainability 91 26 8 43 40 Safety and security 132 139 39 115 117 Health and hygiene 120 130 119 134 125 Prioritization of Travel and Tourism 138 18 95 90 110 Air transport infrastructure 129 72 109 121 119 Ground transport infrastructure 84 87 67 123 119 Tourism infrastructure 134 111 139 125 126 ICT infrastructure 137 112 120 130 125 Price competitiveness in the T&T industry 78 93 63 56 57 Human capital 131 106 100 125 113 Affinity for Travel & tourism 103 70 60 80 57 Natural resources 118 28 56 2 29 Cultural resources 138 107 134 101 125 Overall rank /139 137 103 102 110 115 Source: World Economic Forum (2011) The competitiveness of the services sector under the different modes is highly dependent on factor endowments, institutions and regulatory framework (Van der Marel, 2011). For service sectors such as business services that are highly skill-intensive, the availability of highly skilled labour force and ICT stock levels may explain the low rankings of the EAC countries. This is supported by the low rankings in both human capital and ICT infrastructure that account for the limited low competitiveness of the tourism sector in EAC. These observations are supported by the high restrictiveness of the GATS commitments across the various service sectors as illustrated in Table 2. In terms of market access, the EAC average index depicts a very restrictive services sector across the five EAC countries. Among the countries, Burundi appears to have relatively partial GATS commitments while Tanzania is relatively the most restrictive. Similarly, there is an observed pattern with regard to national treatment. 294

International Journal of Education and Research Vol. 2 No. 5 May 2014 Interestingly, the tourism and travel service sector appears to be the most liberal within the EAC according to the restrictiveness index. This would be at odds with the observation based on the global rankings that it is the least competitive. One underlying explanation may be rooted in the poor tourism infrastructure in place within the EAC countries as illustrated by the relatively poor rankings. Based on the GATS commitments restrictiveness index accessed from the World Bank website, the most restrictive service sectors include financial, transport, communication, educational and environmental while the most liberal is the tourism and travel sector. Table 2: GATS commitments restrictiveness index 2006-09 Average* EAC Average Burundi Kenya Rwanda Tanzania Uganda All 9.7 35.4 3.2 5.6 0.98 3.2 Market access 9.7 35.5 3.3 5.6 1.7 2.5 National treatment 9.6 35.2 3.1 5.6 0.3 3.9 Business 3.9 14.9 0 4.4 0 0 Communication 2.1 0 0 0 0 10.56 Construction 17.5 87.5 0 0 0 0 Distribution 13.9 69.3 0 0 0 0 Educational 3.8 0 0 19.0 0 0 Environmental 2.9 0 0 14.3 0 0 Financial 0 0 0 0 0 0 Health/social 14.5 72.6 0 0 0 0 Tourism/travel 72.2 87.5 62.3 77.2 55.2 78.9 Recreational/cultural 8.3 0 0 41.7 0 0 Transport 0 0 0 0 0 0 Other 0 0 0 0 0 0 Source: World Bank - World Trade Indicators 2009/10 *0 most restrictive, 100 most liberal Across the different service sectors, all the other EAC countries exhibit a highly restrictive GATS commitments regime in construction, distribution and health except Burundi. This may indicate underlying comparative advantages in these sectors for Burundi. It may, however, identify Burundi as one of the EAC countries with more liberal approach towards the service sectors in general. Typically, internal resistance to reforms is driven by the fear of exposing a potential local vibrant sector to undue competition. This is more likely, if the local firms in the specific sector exhibit significant lobby pressure on the policymakers. Across, the EAC countries, Kenya has arguably, a 295

ISSN: 2201-6333 (Print) ISSN: 2201-6740 (Online) www.ijern.com relatively more vibrant locally based firms with significant lobby pressure in the construction, distribution and health sectors than Burundi. This may explain why relative to Kenya, for example, Burundi s commitments appear to be less restrictive. As clearly argued by Roy (2012), inference based on the restrictiveness index has its limitations with regard to assessment of the depth and quality of the commitments. This is particularly true given the political sensitivities associated with services reform. The greatest challenge for countries typically is aligning domestic laws to the commitment schedules agreed at the regional level. There are several indications that point to limited progress towards fulfilling a number of the commitments in the common market protocol by the member countries. Potentially, many of the commitment schedules indicated for the EAC countries in the common market protocol that were targeted for full reform by 2010 are yet to be domesticated. This is reflected by the less optimistic responses as captured in the Business Climate Index 2011 survey conducted by the East African Business Council (EABC, 2011). 3.0 Conclusions and recommendations The service sector within the EAC countries has witnessed significant growth. Both export and import trends in value terms identify post 2000 as the period of major growth in the services sector. Wide variations though can be identified across the different sectors in services trade and across the EAC countries. Underlying these trends are levels of commercial activity and policy framework within the EAC countries. In terms of exports the study revealed that travel services account for the largest component of the services trade from the EAC member countries whereas transport services dominate the import category. Interestingly, gauged according to global rankings the tourism/travel services component from the EAC appears to be relatively less competitive and ranks quite low. Underlying this outcome could be protectionist regulatory frameworks in place that instead enhance the barriers to services trade. The GATS commitments restrictive index ratings affirm this assertion. Much as the EAC member countries appear to have made significant commitments to liberalize various sectors within services as spelt out in the common market protocol, the relative pace towards full reform appears to be rather sluggish. This is compounded by the observation that there 296

International Journal of Education and Research Vol. 2 No. 5 May 2014 exist ambiguities in the protocol that complicate implementation of some of the commitments, particularly, mode 4. The relatively high restrictive index ratings for virtually all the service sectors within the EAC coupled with the relatively poor rankings globally calls for a relook of the regulatory framework and implementation strategy of the commitments by the EAC member countries. This will have to go hand in hand with the domestication strategy of the commitments to ensure enforcement by each member country. This is clearly critical particularly given that there is overwhelming evidence linking the competitiveness of the goods sectors (manufacturing, agriculture) to the effectiveness of the services sectors that supports the whole value chain in goods production and trade. 4.0 References Collier, P. and J.W. Gunning (1999a), "Explaining African economic performance", Journal of Economic Literature. EABC (2011), East African community Business Climate Index Survey. East African Community (EAC, 1999). EAC Treaty. EAC Secertariat, Arusha. East African Community (EAC, 2010). Protocol on the Establishment of the East African Community Common Market. EAC Secreatriat, Arusha. Government of Kenya (2008). Economic Survey 2008. Government Printer, Nairobi. Guerrieri, P., Meliciani, V. (2005). Technology and international competitiveness: The interdependence between manufacturing and producer services. Journal of Structural Change and Dynamics. Volume 14, Issue 4. Pages 489 502. Oyejide T.A. (2002), Trade Liberalization, Regional Integration, and African Development in the Context of Structural Adjustment, in African Voices on Structural Adjustment: A Companion to Our Continent, Our Future, edited by Thandika Mkandawire and Charles C. Soludo. Roy, Martin (2012), Services commitments in preferential trade agreements: surveying the empirical landscape, NCCR, working paper no. 2012/02 297

ISSN: 2201-6333 (Print) ISSN: 2201-6740 (Online) www.ijern.com Siggel, E. and G. Ssemogerere (2002), Uganda s Policy Reforms, Industry Competitiveness and Regional Integration: a comparison with Kenya, Equity and Growth through Economic Research (EAGER) Discussion Paper. Tralac (2011), The linking and delinking of the EAC annexes, tralac hot Seat comments by Paul Kruger, www.tralac.org (accessed online on 24 June 2012 at 10 am EAT). UNCTAD (2011). UNCTAD Handbook of Statistics. Van der Marel, Erik (2011) Determinants of comparative advantage in services. Working paper, Group d'economie Mondiale, Paris, France. WTO (2011). World Trade Report 2011. The WTO and preferential trade agreements: From coexistence to coherence. WTO, Geneva. World Economic Forum (2011). The Travel & Tourism Competitiveness Report 2011. Geneva 298