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Domestic Preparedness for Trade in Services Liberalization: Are East African Countries Prepared for Further Trade Liberalization?

Discussion paper by E.P Bagumhe, 2011

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Over the past decades East African Countries have witnessed even faster growing rates of the share of trade services in their GDPs. This paper argues that although the importance of services as a share of overall GDP, increase with growth on FDI and employment. Its growth can be driven by number of factors, such as final demand factors and basic structural changes in production, linked to development. Weak domestic preparedness before opening up is likely to be associated with unsatisfactory and undesirable outcomes of Services Trade liberalization. This paper tries to expound issues that are essential on domestic preparedness for Service Trade Liberalization and analyses the associated concerns. The purpose of this paper is not to provide answers but to shed some light on how services Trade liberalization is currently operationalized in the East African Countries, in particular, that is, to open up the “black box,” and indicate the operational design elements around which variance is the highest.

AbstractResumen
1 Introduction
2 Services trade and its liberalization in East Africa
2.1 Rationale for services trade liberalization
in the East African community
2.2 Performance of trade in services
in East African countries
2.3 Contributions to GDP
2.4 Contribution to trade
2.5 Service Sector and FDI
3 Why should we worry about services
liberalization in East Africa
4 East African community services
liberalization and GATS compatibility
5 Domestic preparedness for services
trade liberalization, issues and practical
consideration
6 Concluding remarks
7 References


Domestic Preparedness
for Trade in Services
Liberalization:
Are East African Countries
prepared for Further Trade
Liberalization?


Preparación doméstica
para la liberalización
del comercio de servicios.
¿Están los países africanos
preparados para una mayor
liberalización comercial?


Elias Peter BAGUMHE
Economist


Ministry of East African Cooperation
United Republic of Tanzania


peterbagumhe75@yahoo.co.uk




_29


Domestic Preparedness
for Trade in Services
Liberalization:
Are East African Countries
prepared for Further Trade
Liberalization?*


Preparación doméstica
para la liberalización del
comercio de servicios.
¿Están los países africanos
preparados para una mayor
liberalización comercial?


Elias Peter BAGUMHE
Economist


Ministry of East African Cooperation
United Republic of Tanzania


peterbagumhe75@yahoo.co.uk


Abstract
Services are the fastest growing sectors in the global economy. Over the past decades East African


countries have witnessed even faster growing rates of the share of trade services in their GDPs. The total
services export of EAC countries increased from USD 1868 mills in 1995 to USD 5681 mills in 2008 (WDI
2010) which is approximately three times increase compared to 1995. Along with this growth, liberalization
of services trade is becoming a critical economic agenda of these economies. EAC countries have also
made unilateral liberalizations in a number of services sectors since the mid 1980’s. On top of that EAC
countries have also made commitment to liberalize service trade at the multilateral level. Furthermore a
significant commitment of their services sectors has been made under the East African Integration Process
beginning from first July 2010. This paper argues that although the importance of services as a share of
overall GDP, increase with growth on FDI and employment. Its growth can be driven by number of factors,
such as final demand factors and basic structural changes in production, linked to development. Weak
domestic preparedness before opening up is likely to be associated with unsatisfactory and undesirable
outcomes of services trade liberalization. This paper tries to expound issues that are essential on domestic
preparedness for service trade liberalization and analyses the associated concerns. The purpose of this
paper is not to provide answers but to shed some light on how services Trade liberalization is currently
operationalized in the East African countries, in particular, that is, to open up the “black box”, and indicate
the operational design elements around which variance is the highest.


Keywords: trade liberalization, services trade, East Africa


Resumen
El sector servicios es el de mayor crecimiento en la economía global. En los países del Este de África,


en las últimas décadas, se ha producido el mayor incremento histórico de la proporción del comercio de
servicios en su PIB. El total de servicios exportados en estos países se multiplicó por tres, pasando de
1868 millones de dólares en 1995 a 5861 millones de dólares en 2008 (WDI 2010). Junto con este creci-
miento, la liberalización del comercio de servicios se está convirtiendo en un asunto crucial en la agenda
económica de estos países. Los países del Este de África han llevado a cabo liberalizaciones unilaterales
en una serie de servicios desde mediados de los ochenta. También se han comprometido a liberalizar el
comercio de servicios a un nivel multilateral. Asimismo, un compromiso adicional se ha producido en el


Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies
Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035
Recepción/received: 02.04.2012 Aceptación/accepted: 09.07.2012


* This paper carries the name of the author, and should be cited accordingly. The finding, inter-
pretations and conclusion expressed in this paper are entirely those of the author. They do not
represent the view of his employer. Any errors are the faults of the author.




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies
Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


marco del Proceso de Integración del Este de África, comenzado en julio de 2010. Este
artículo analiza las implicaciones en términos de crecimiento de ayuda externa y empleo.
Otros factores son analizados, como la demanda final y cambios estructurales básicos
en la producción, ligados al desarrollo. Una débil preparación interna antes de la aper-
tura probablemente provocará resultados insatisfactorios e indeseables tras la liberali-
zación del comercio de servicios. Este artículo trata de abordar temas esenciales en la
preparación interna para la liberalización comercial. Su objetivo no es tanto proporcionar
respuestas sino ilustrar cómo la liberalización comercial de servicios se está llevando a
cabo en estos países. En particular, trata de abrir la «caja negra» indicando los elementos
de diseño operativo de mayor variabilidad.


Palabras clave: liberalización comercial, comercio de servicios, África del Este


1
Introduction


There is no single explanation for African poor performance before the
adjustment period that started in the mid 1980’s. However the main fac-
tors behind the stagnation and decline were poor policies both macroeco-
nomic and sectoral, emanating from a development paradigm that gave
state a prominent role in production and regulating of economic activities.
Protectionist trade policies and government monopolies also reduced the
competition which is vital for increased productivity (WB 1994).


Immediately after independence in the 1960’s most sub Saharan Af-
rica economies, East African countries in particular, followed an inward
oriented import substitution strategy supplemented by wide spread use of
tariff and non-tariff barriers. This policy choice reduced external competi-
tion mainly in manufacturing that were vital in increase productivity and
growth. Its impact culminated into economic crisis that engulfed the econ-
omies of the East African countries during the early years of the 1980’s.
The economic crisis provided an initial drive for changing the public-pri-
vate sector relationship in favor of the private sector, against a background
of the non performing public sectors.


The reform program that many East African countries initiated in the
mid-1980’s (structural adjustment program) under the umbrella of the
International Monetary Fund, the World Bank, and other donors reflect-
ed a new paradigm in East African development policy. It comprised all
spheres of economic activities ranging from services trade, industries
and agricultural. One of the precondition of the structural adjustment
program was rolling back of the states, where by governments were re-
quired to withdraw their hands from the production process and let the
private sectors be at the front seat of the development vehicle (Wangwe
2003). This necessitated East African Governments to open the door for
the private services provision. This policy option expended the scope for
private and foreign participation in the economy.


At the multilateral level, until 1995 no multilateral agreements ex-
isted on rules governing services. This was due to lack of knowledge
about the services trade itself (Majid 2003). However it should be noted




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies


Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


that the general agreement on trade in services were introduced during
the Uruguay Round. Developing countries strongly reacted, due to the
believe that trade in services liberalization was an area of interest to de-
veloped countries. Currently this view is no longer held, the importance
of the trade in services in the economy is now widely accepted (Mattoo
2006). Studies predict that liberalization of services trade has positive im-
pact on trade in goods, and allow developing countries to better exploit
their comparative advantages in a labour intensive manufactures (Ragui
2008). The gain from services liberalization are likely to be large than
those from goods liberalization, and the adjustment costs that arise from
services sector reform are likely to be lower than those arising from re-
duction of professionalism in goods (OECD 2003). However liberalization
of services can be more complex than the liberalization of goods trade; it
requires substantial amount of technical capacity, which is often lacking
in Africa (World Bank 2011).


Currently export of services which is the subject mater of this pa-
per is growing rapidly than the export of goods. For instance, the av-
erage growth rate of service sector in the East African community has
increased from 2.08 percent in 1990 to 7.98 percent in 2008 (author cal-
culation based on WDI 2010).


At the global level trade in services account for two thirds of the
global output, 30 percent of global employment and 20 percent of global
trade (Kumar 2005). Services activities in low- and middle-income coun-
tries have been expanding faster than GDP (gross domestic product) for
the last two decades. The implication of this continuous shift toward ser-
vices sector is that the overall growth of productivity in the economy is
becoming increasingly determined by what is happening in the services
sector (Sorsa 1997). For instance, the UNCTAD LDC (2006) indicated
that economically productive population engaged in agriculture would be
outpaced by other sectors, pointing out the services sector as the key
sector. This fact has been proved in all East African countries, where by
the share of service sector to GDP has outpaced that of agricultural as
depicted by Figure 3 of this paper.


This paper is structured as follows. Section 1 provides the introduc-
tory part in terms of unilateral liberalizations pursued by East African
countries since the 1980’s, and rationally for service trade liberaliza-
tion in East African community. Section 2 highlights the performance of
the trade in services liberalization in the East African community and its
contribution to these economies in terms of output, employment, trade,
and investment flows. Section 3 examines why we should worry about
services liberalization in EAC and some special insights in service sec-
tors. Section 4 describes the East African trade in services liberalization
and its compatibility to GATS. Section 5 analyses the states of domestic
preparedness in different services sub-sectors in terms of their competi-
tiveness and the likely positive and negative outcomes of liberalization.
Finally, Section 6 concludes by summarizing the major findings.




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies
Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


2
Services trade and its liberalization in East Africa


2.1. Rationale for services trade liberalization
in the East African community


After the inception of the General Agreements of Trade in Services
(GATS) in 1995, trade in services was getting the necessary importance
in the multilateral trading system. Increasingly services are no longer
seen as a byproduct of manufacturing but an integral part of the produc-
tion and sales process that could determine the success or failure of the
economy (OECD 2002). Trade in services is currently growing faster than
trade in goods. With the GATS, the rules and disciplines of the multilateral
trading system were extended to cover trade in services. Recent statis-
tics indicate that, the sector has an average contribution of 45 percent of
GDP in developing countries and more than 57 percent in middle income
countries and 71 percent in high income countries (www.intracen.org/
servicexport). Today more than half of annual world foreign direct invest-
ment flows are in services. Services have also been among the fastest
growing component of the world trade over the last decade and half.
Statistics also indicate that the share of developing countries in export
of services has increased from 11 percent in 1990 to 21 percent in 2008
the figures above are the good reminder of the role that services play in
facilitating all aspect of economic activity (www.wto.org).


In a heavily protected market, services are often inaccessible, pro-
hibitively expensive and yet of a low quality. This is due the fact that
protection is associated with low competition and less efficient suppliers
(Mattoo 2006). More specifically protection tends to act as a tax on do-
mestic consumers and producers. Improvement of services infrastructure
requires large investment as well as regulatory reform to remove cumber-
some red-tape procedures. Generally an inefficient and costly service
infrastructural hampers the overall economic growth (Hodge 2002). From
the above fact, reforming the service sectors is at the heart of the East
African countries. Through the Common Market Protocols they have so
far liberalized seven sectors. These sectors are communication services,
transport services, financial services, business services, distribution ser-
vices, education services, and tourism and travel related Services.


Furthermore, under the request-offer process of GATS, there have
been the large number of requests from other developing and developed
countries to these East African country to open up a significant number
of their services sectors. The comparison of Table 1 and 3 clearly indi-
cate that more commitments have been done at the regional level than
at the multilateral level. For instance Rwanda which has done 63 percent
commitments of the Services subsectors at the regional level while at
the multilateral level has committed only 6 percent. On average the EAC
has liberalized service under GATS by 12 percent only, compared to 49
percent at the regional level. Despite of the small percent of liberalization




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies


Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


under GATS, there is good sign that progressive liberalization is in gear,
indicated by partial commitments made so far.


The aspiration of EAC in liberalizing trade both at the regional and
multilateral level intended to allow services to freely flow within the re-
gion. This will facilitate the generation the bigger markets. Large markets
will encourage specialization, which leads to greater gains in productivity
and efficiency in both services and in goods market. Technological pro-
gress will also be stimulated by large markets and encourage low cost.


Out of the seven sectors committed in the East African Common
Market, six are producer services. Liberalization of producer services has
a wider spread effect in the whole economy, since producer services are
the input in the production systems. There is substantial evidence that
depicts that policies that reduce competition in these services can be
very costly.


For instance financial services liberalization acts as a life blood of the
commercial activity. Exerting competition in this sector helps to improve
the quality and efficiency of the products offered. A study using a sample
of 60 countries found that between 1990 to 1999 those countries with
full liberalized financial services grew, on average at about one percent
point faster than the others (OECD 2008). Equally important improvement
of the transportation efficiency through liberalization makes trade pos-
sible. Transportation cost is a major factor that determines a country’s
comparative advantage and competitiveness. Availability of reliable, ef-
ficient and low cost port services can be the key factor in the logistics
and distribution chain (OECD 2003). Studies have also established that
countries that embark on comprehensive reform of telecommunication
did systematically better than other that confined themselves to partial
changes (WTO notes). Full liberalization of financial and telecommunica-
tion services tend to increase performance of economic growth by 1.5
percent than those that did not.


NO Country
Sectors


committed
(out of 12)


Subsector
committed
(out of 160)


Commitment
negotiated


(out of 1280)


Partial
commitment


made


Full
commitment


without
restriction


Percentage of
liberalization
commitment


made


1 Tanzania 1 1 8 2 4 0.47%


2 Kenya 5 59 472 195 203 31.09%


3 Uganda 2 11 88 42 46 6.88%


4 Rwanda 4 10 80 4 76 6.25%


5 Burundi 5 28 224 62 162 17.5%


EAC Average 3.4 21.8 174.4 97.8 98.2 12.4%


Table 1
Commitment that have been made by East African country under GATS.
Source: Extracted from TRALAC (2011).




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies
Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


Furthermore services sectors like tourism, distributions and commu-
nication are increasingly being used as a key determinant of the country’s
overall competitiveness. Many of the costs that determines competitive-
ness of domestic industries are associated with the availability of these
services. Above all are the information technologies that are crucial to
explain export success. Even human development index published pub-
lished annually by UNDP has now included services as the matter for
determining development and social equity. Educations, health, safe and
reliable water are relevant for quality of life, social progress, and the de-
terminant inclusive and shared growth in the economy (SAWTEE 2008).


Mattoo and Sauvé (2010) pointed out that to realize the full benefit
from services trade liberalization depends on the country infrastructural
performance, factors of production and institutions relevant to services. In
a country where the infrastructure of services delivery and the institutions
governing services have improved, they will be able to become successful
services exporters. Moreover, how to get services liberalization right and
how to strike the balance between services liberalization and domestic
regulation, is a critical issue confronting all countries implementing this
policy option. There are also growing concerns with regard to domestic
preparedness for opening up of these sectors to international competi-
tion. The underlying arguments is that weak domestic preparation before
opening up is likely to be associated with unsatisfactory and undesirable
outcomes of services liberalization (Mattoo and Sauvé, 2003).


2.2. Performance of trade in services in East African countries


The period between 1990 to 2008 has witnessed an impressive
growth of the services sector in all East African economies as shown by
Figure 1 below. The average annual growth rates of services sectors in
East African countries from 1990 to 2008 indicated a persistent increase
of services sector in East African countries under the mentioned period
as indicated below.


Looking at the growth rates of the services sector across five East
African countries for different time periods, it appears that Uganda was
experiencing a persistent rise in the growth of the services sector over
the last two and half decades. During 1990 to 2000 the average growth
rate in the services sector in Uganda was 8.2 percent when compared to
other East African countries. The period between 2000 to 2008, Uganda
continued to register a high growth rate than its counterpart. Rwanda
and Burundi also registered an impressive performance rate over the
same period. The two countries registered a big jump, from a negative
rate in 1990-2000 to 10.4 and 8.9 growth rates respectively. Apart from
this fact, three countries which are Tanzania Rwanda and Burundi indi-
cated an average growth rate in the services sector which is higher than
the growth rate of their gross domestic product (6 %) during the same
period.




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies


Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


Figure 1
Growth rate of service sector (1990-2008).
Source: WDI (2010).


This momentum of the services sector should not be undermined by
further EAC services liberalization. In this case therefore, the East African
countries need to carry out thorough, comprehensive and full transpar-
ent sustainability assessments so that further obligations should Increase
efficiency in services sector and stimulate growth rates that the services
sector has registered in the past two decade. More work; however, need
to be done on the regulatory capacity assessment needed for services
liberalization. Lack of appropriate regulatory authorities in the face of the
ongoing services liberalization will paralyze the expected objective of
service liberalization (World Bank 2010). It should be clearly understood
that opening up essential services to foreign or domestic competition
could have an adverse effect on the poor if not done property. More over
if a country is a relatively inefficient producer of service, liberalization and
the resultant foreign competition are likely to lead to a decline in domes-
tic prices and improvement in quality.


It is evident from Figures 2 and 3 that export and import of services
trade has continued to increase in East African country with a strong vari-
ation among the EAC countries. Export of services is significant and most
substantial for Kenya followed by Tanzania, while import of services is
more significant to Rwanda and Burundi. This particular scenario depict
that service market is more developed in Kenya than in any other East
African countries.


2.3. Contributions to GDP


The figure below describes the sector composition to GDP from 1995
to 2008, the current period is not covered due to data unavailability.


The finding indicates that there is the broad structural shift in the
Economies of East African country from agricultural sector as the domi-
nant sector toward the service sector. This particular shift has emanated
in these economies for the past one and half decades. Over the last two




36_


DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies
Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


decades the East African country witnessed significant shift in the struc-
ture of their economies towards dominance of the services sector (from
the traditional sectors of agriculture and industry) in national production
and employment. Figure 3 suggests that, with the exception of Kenya, in
which service was the dominant sector since 1995, the rest of East Afri-
can country had agriculture as the dominant sector since independence.


The standard explanation toward this shift that revolves around the
world is both demand and supply side factors. These factors includes
income elasticity of demand for services that exceed one, limited pro-
ductivity improvement in the supply of consumer services, expansion of
the extent of the market as well as incentives for firms and Government
bodies to spin off service activities to specialized providers and advanc-
es of information and communication technology (Hoekman, Mattoo and
Sapir 2007).


In economic terms sector composition to GDP is assumed as the
overall global measure of the sector performance. Figure 3 and above is
a testimony of the increased service productivity in the EAC economies.


Figure 2
Trend of export and import performance of service sector from 2005 to 2010.
Source: UNCTAD, Handbook of Statistics, 2011.


Figure 3
Sector Composition of GDP: East African country in 1995 and 2008.
Source: ITC Calculation based on COMTRADE, Statistics, 2010.




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies


Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


The World Bank study (2010) analyzed the relationship between GDP
and other sector performances. The study concluded that, there is much
stronger relationship of GDP in service than in manufacturing sector. Fur-
ther more Experience across the world indicates that growth of the ser-
vices sector contribute more to poverty reduction than growth of manu-
facturing and agricultural sector (World Bank 2009).


The dominance of Services sector in East African economies has a
fundamental function, which trade in services performs in relation to the
overall economic growth. WTO (2010) supported this fact and argued that,
services underpin every part of the production process, from research and
development, design, engineering, financing, transportation, distribution
and marketing. Without services, there would be little value-added and
innovation. Services are also input into production; the dimension of this
input function is that, they facilitate transaction through space (most in pro-
ducer services) or time. Another dimension is that, services are frequently
direct inputs into economic activities, and a determinant of the productivity
of the fundamental factors of production labour and capital that generate
knowledge, goods and other services (Melvin 1989 cited in Hoekman and
Mattoo 2007). Hence, it is evident that for a meaningful development strat-
egy, East African countries should target on how more efficiency could be
improved in services trade. Important point to note here is that, although
service trade has quick reaction to poverty reduction because of its inclu-
sive growth. The highest percent of the labour forces in East Africa has
continued to engage in the agricultural sector.


2.4. Contribution to trade


The contribution of trade in services to total trade in East African
countries is depicting a mixed trend for Uganda, Tanzania and Kenya.
Rwanda and Burundi has reflected increasing trend indicating that ser-
vices trade is more significance to total trade in Rwanda and Burundi as
indicated by Figure 2 below.


Country 2005 2006 2007 2008 2009 2010


Tanzania
Services exports 42 44 45 38 38 32


Services imports 28 24 22 20 22 20


Kenya
Services exports 36 41 41 39 39 42


Services imports 16 17 16 15 16 16


Uganda
Services exports 34 30 25 26 29 37


Services imports 24 24 23 23 26 29


Rwanda
Services exports 50 47 50 61 64 60


Services imports 43 32 28 32 31 31


Burundi
Services exports 38 37 33 60 44 50


Services imports 35 33 37 41 32 25


Table 2
Significance of services in total trade (% of country’s total trade).
Source: UNCTAD, Handbook of Statistics, 2011.




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies
Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


2.5. Service Sector and FDI


Figure 4 of this paper depict foreign direct investment inflows to EAC
countries since year 2000.


Figure 4
FDI inflow in Esat African countries (in mill, USD).
Source: UNCTAD, Handbook of Statistics, 2011.


Experience across the global and in East African countries shows
that increase in foreign direct investment (FDI) has been associated with
increased liberalization in services sectors. Data in the figure above indi-
cate an increasing trend of FDI inflows since 2000 with more impressive
performance in Uganda and Tanzania. Uganda has continued to register
more FDI in her economy in the past decade than any other East Afri-
can countries. This is in line with the Figure 1 above where Uganda has
registered persistent growth rate of services sectors in EAC, this signify
the fact that there is a sympathetic movement between service sector
performance and FDI inflows. WDI (2011) also highlighted that from 2006
to 2010 Uganda and Tanzania had tended to be stable in FDI inflows in
the regional than any other country. Burundi is hanging in the thin line in
terms FDI inflows in EAC.


To verify whether the extent of the relationship between services
trade liberalization has more influence to FDI flows in EAC, one need
to compute the correlation coefficient between total services as the in
depended variable and FDI inflows as the depended variable as shown
in Table 3 below. However it should be carefully noted that liberalization
of the services in an economy is not the sufficient factor for FDI inflows.
More factors other than services trade liberalization might motivate FDI
inflows in the economy.


The Table 3 above indicate that all the five countries in East African
community have positive correlation coefficient at an average of 0.65.
This suggests that FDI inflows in East African community tend to move
on the same direction with the services trade liberation. Hence liberaliza-
tion of services in the region induces FDI inflows. The individual country




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies


Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


correlation coefficient indicate that Tanzania is leading among the EAC
countries on the degree of the correlation coefficient of Service trade
liberalization and FDI followed by Rwanda, Kenya, and Uganda. This fact
highlight that service trade liberalization in Tanzania has more impact in
terms to FDI inflows than any EAC country.


The existence of sympathetic movement between services per-
formance and FDI has tremendous impact in the economy, as Pascal
WTO (2010) noted that foreign direct investment, through which much
of services trade is conducted, has a dual role of creating opportunities
in new markets, as well as bringing capital and know-how. These are in-
gredients which are so vital for growth. Equally important, workers in the
services sectors tend to have post-secondary education. Interestingly,
some of the best-paid jobs in East Africa are in the services sector – in
financial, legal, advertising, business services and engineering services.
Hence the performance of FDI inflows in Uganda and Tanzania implies
also more performance in skills intensive employments. Services sectors
that receive high employment across East African countries are telecom-
munications sector, banking sector, business related services, and the
subsection. Increased investment into such sectors is also a testimony
of deregulation of Government monopoly.


3
Why should we worry about services
liberalization in East Africa


Services comprise a diverse set of activities including basic services
such as health care, education, water provision and infrastructure. Im-
portant linkage exists between the provision of services and all three pil-
lars of sustainable development. Hence, it is crucial that commitment
made under the East African Common Market and the ongoing negotia-
tion under the WTO to liberalize trade in services do not undermine the
pursuit of sustainable development. New obligation to liberalize trade in


Country Correlation index


Kenya 0.65


Rwanda 0.69


Burundi 0.50


Uganda 0.58


Tanzania 0.81


Average correlation index for EAC counties 0.65


Table 3
Correlation index for Total service and FDI inflows from 2000 to 2010.
Source: Author calculation based on UNCTAD database.




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies
Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


Services in both multilateral and regional trade arrangement should sup-
port and compliment government obligations and efforts to promote so-
cial and economic growth development. The three pillars of sustainable
development are economic growth, ecological balance, and social pro-
gress. Furthermore, social and economic equity as an important aspect
of sustainable development should be taken as an important analytical
issue on how it can be integrated into the East African Community Com-
mon Market Protocol.


It is from this perspective that service is the key for sustainable de-
velopment (OECD 2000). Due to the closes linkage of services trade and
sustainable development, East African countries need to make sustain-
able development the key benchmark of any services trade liberalization.


The service sector also stands at the heart of all development strate-
gies in all East African countries. These development strategies provide
a means in which the livelihood of all East African people will be realize
through the East African Development Strategy (2010). For instance, a
financial and communication service has been identified as the key driver
of the economy in Burundi (www.newvision.co.ug). In Kenya out of the
six priority sectors identified as crucial in the attainment of the vision
2030, four of them are services sectors. In addition Kenya aspire to be
interconnected through a network of road, railway, port, water and sani-
tation facilities and telecommunication by 2020 (www.vision2030.go.ke).
In Rwanda, the services sector has been identified as crucial sectors in
attaining the country’s development goal (Rwanda vision 2020). Equally
important, in Tanzania education services, health, communication, infra-
structural development, services incident to utilities have been prioritized
as key Tanzania development policy focuses, and important sectors in
attainment of Tanzania key development policies (NSGRP II, vision 2025,
and PRSP). In Uganda communication and transportation have been
identified as key drivers to economic development vision 2025.


4
East African community services liberalization
and GATS compatibility


The inclusion of trade in services into the Uruguay Round of negotia-
tions is documented (Hoekman 2002; Francois and Woerz 2008) as one
of the greatest achievements of this round. article 1: 2 of GATS defines
services trade depending on the presence of the supplier and the con-
sumer at the time of the transaction. In this case therefore GATS cover’s
services supplied under model one which is cross border trade. Model
two consumption abroad; Model Three: commercial presence, and Mod-
el four: presence of natural persons. GATS also provide general transpar-
ence and good governance obligation to its members with regard to the
application of trade in services liberalization. Furthermore, GATS does




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies


Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


not describe the extent of market access that a country is required to
commit, country have flexibility on the scope of market opening they
wish to maintain. In this case market access and national treatment ap-
ply only to the sector or subsectors covered in the schedule. East African
countries are all members of the WTO hence they are obliged to comply
with the general GATS obligation.


Service liberalization under GATS is guided under two main obliga-
tions, general obligation which apply across the board and unconditional
obligation which apply in a sector committed by a member. General obli-
gations includes transparence obligation which is stipulated in article iii of
GATS. It requires that members publish promptly any measure pertaining
to, or affecting the operation of GATS. All members also have a general
obligation to establish an enquiry point to respond to requests for infor-
mation from other members. Moreover, pursuant to article vi, developed
countries are to establish contact points to which developing country
service suppliers can turn for relevant information related to trade in ser-
vices


Article ii of GATS provides about the most favored nation which is the
corner stone of the multilateral trading system. The MFN requires that all
WTO members to be treated equally. Under this obligation a WTO mem-
ber has the requirement of ensuring that access condition that may have
negotiated between say the big players in the system must be extended
to the small players automatically without any discrimination.


However for the purpose of ensuring flexibility in this obligation GATS
allows its members during the time of entry of this obligation to seek ex-
emption not exceeding a period of ten years. Furthermore members are
allowed to depart from the MFN obligation if they are in regional integra-
tion or lab our market agreements like the East African partner states.
The commitment that has been made by the EAC countries under the
Common Market Protocol will not be extended beyond the EAC partner
states. Economic integration member that qualify for the most favored
nation exemption must meet the following qualification: must have sub-
stantial sectoral coverage, and provide for the absence or elimination of
substantially all discrimination in the sense of national treatments. On
top of that, the commitment made must not result into raising barriers
against non member.


Although the term “substantial sector coverage” is not defined in the
WTO provision, the footnotes state that, the term must be understood
in terms of the sectors, volume of the trade affected, and model of sup-
ply. It is difficult to draw conclusion whether the East African community
qualify for these exemptions, since the relevant parts of the East African
Common Market Protocol related to the liberalization of trade in services
has not been notified to the WTO Council on trade in services. Besides
the fact that the EAC partner states completed the ratification of Com-
mon Market Protocol by November, 2009, GATS requires that notification
of RTA shall, as a rule, occur not later than the ratification of the RTA
members or any part decision on application of the relevant parts of an




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies
Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


agreement, and before the preferential application of preferential treat-
ment between the parties.


In terms of the substantial sector coverage the EAC Common Market
Protocol so far have covered seven sectors out of twelve sectors in the
GATS language namely, business, communication, distribution, educa-
tion, financial, tourism and travel related services, and transport services.
By the virtue of this fact one can draw conclusion that the question of
substantial sector coverage has been adhered to in the EAC service lib-
eralization.


The second category of obligation applies when members have
scheduled a certain sector or subsector on its schedule of specific com-
mitments. GATS articles related to conditional obligation includes, vi: 1, 3,
4, 5 and 6, article viii: 2, article iii: 3 and article xi. These conditional obli-
gations are additional to the general obligations and are intended to pre-
serve the commercial value of the specific commitments that have been
undertaken. Transparence mechanism is also a conditional obligation. It
requires that where specific commitment have been made, the Council of
Trade must be notified at least annually of all legal or regulatory changes
that significantly affect trade.


Moreover all legal and regulatory measures affecting the opera-
tion of GATS must be notified at least annually. There is also an issue
of trade off between the domestic policy objectives and service trade
liberalization. These agreements ensure that Government measures do
not undermine general obligations such as most favored nation treatment
or specific commitment in a certain sectoral? That is to say in a sector
where commitment exists, measures of general application are admin-
istered impartially and in a reasonable and objective manner. The other
category of conditional obligation is under article vi: 3, which applies if a
supply of a scheduled service is subject to authorization. Members are
required to decide on applications within a reasonable period of time.
Thirdly, article vi: 6 specifically requires members that have undertaken
commitments on professional services to establish adequate procedures
to verify the competence of professionals of other members. The Table 4
provides a summary of the extent of subsector covered in each sector.


The table 4 depicts that Uganda and Rwanda have made more com-
mitments in terms services trade liberalization when computed based on
the WTO services subsectoral classification. Tanzania and Kenya have
opened their services industry by less than forty percent. Since EAC de-
cided to liberalize their service sectors on a progressive basis, additional
commitments were to be made on the subsequent negotiations.


GATS also provides a general framework for negotiations on further
liberalization in services trade. The negotiations take place under the
request-offer process model, whereby WTO members submit requests
to their other members to open up some specific service sectors. On
the other hand, they make offers to others indicating how much they are
willing to open up their specific service sectors. Once a country agrees,




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies


Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


through negotiations in the WTO, to liberalize a sector it must be listed
in a schedule of specific commitments. By committing a particular ser-
vice sector to liberalize, a country is legally bound by GATS to provide
national treatment and MFN (most favoured nation) treatment to other
WTO members.


No Service Sector Tanzania Kenya Uganda Rwanda Burundi


1 Communication 17 17 21 21 6


2 Transportation 9 9 20 20 17


3 Business 7 15 33 32 31


4 Distribution 2 3 4 4 3


5 Education 4 4 5 5 4


6 Financial 16 12 11 15 9


7 Tourism and travel related 4 3 4 4 4


Total number of commitment by sub sector 59 63 98 101 74


% of commitment made by each country
out of 160 subsector under GATS 37% 39% 61% 63% 46%


Table 4
Total number of Subsector covered in EAC Common Market Protocol.
Source: other computation based on EAC Common Market Protocol.


Negotiations under GATS and at the regional level are important for
the East African countries, as they are facing constraints in economic
development due to poor infrastructure, poor institutional settings and
governance deficits. Service sector is the dominant sector in these econ-
omies as shown by Figure 3 above. Also, there is a huge growth potential
of the domestic service market in EAC economies.


Without proper preparedness liberalization might jeopardize the
growth potential of the domestic service market (Mbekeani 2003). Among
the major supply constraints that prevent the building of a competitive
services sector in the East African countries are the lack of the following
factors: human resources and technology to ensure that professional and
quality standards are met; telecommunications infrastructure; a national
strategy for export of services; government support to help service firms,
especially small and medium enterprises; financial capacity of firms;
presence in major markets; and the ability to offer a package of services
(UNCTAD 1998).


The outcomes of ongoing services liberalization under the East Afri-
can Common Market and GATS negotiations will have a significant impli-
cation on the national development strategies since each country strate-
gy put more weight to services sectors as a means of realizing its national
vision. The East African countries should have clearly defined negotiation




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies
Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


strategies, based on a clear conceptual framework and understand what
might be done in order to make trade in services liberalization meaningful
for the economic development of a country.


5
Domestic preparedness for services
trade liberalization, issues and practical
consideration


The previous three phase of this paper reviewed the theoretical back-
ground of the services sector liberalization in the East African countries:
the growth rate of the sector, the composition of services sector to GDP
performance as well as the relation of FDI inflows and trade in services
liberalization in the region. This review is crucial at this particular part of
analysis due to the strong correlation that exist between services sec-
tor liberalization, FDI inflow, rate of services growth, GDP performance
and the likely effect to the livelihood of the people. However opening
services to foreign providers yields significant benefit to the participation
countries. The other side of the coin tells us that services liberalization is
not an easy task. Doing so involves a broad and complex set of policies,
regulatory instruments, institutions and constituencies – domestic and
foreign, public and private (Sauvé notes).


Experience teaches us that considerable care must be given to as-
sessing the nature, pace and sequencing of regulatory reform and liberal-
isation undertakings if they are to meaningfully sustain a country’s growth
and development prospects. Progressive liberalization and investment in
capacity building is critical in this process. Capacity building should be
directed in the area of, negotiation of trade agreements, formulation of
sound regulatory frameworks, effective implementation of trade agree-
ments, and enhancement of supply-side responses.


The above domestic preparedness is important because the role
played by the liberalization of services sectors such as business ser-
vices, telecommunication, banking and transport in the development of
an economy is not without risks. There is a possibility of technical, pro-
cedural, and financial disorder in these sectors which might have serious
economic implications. On top of that, services are deeply integrated into
the production process. When such services are poorly provided, the rest
of the production chain suffers as well (Paracha 2008). For instance in
1991 to 1994 in Zambia banking industry were liberalized before estab-
lishing a proper regulatory framework. During the same period ten new
bank licenses were issued. From 1995-2001 nine bank failures occurred,
causing estimated losses equivalent to 7 percent of GDP (Mattoo 2003).
Beside these fact foreign banks today in Zambia account for over two
thirds of total assets, but loans and deposits credit to the private sector
is only 8 per cent of GDP.




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies


Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


Sauvé and Ward (2009) pointed out that for meaningful services trade
liberalization the five key pillars for services negotiation and implementa-
tion cycle must be pre conceived and be at the heart of the whole agen-
da. These pillars are: mapping out a strategy in a national development
plans, preparing for services negotiations, conducting services negotia-
tions, implementing negotiated outcomes, and enhancing the capacity
for supplying newly opened foreign market.


When mapping a strategy for services in a national development
plans, broad policy objective for services trade liberalization must be
cleary demonstrated. The whole services trade liberalization objective
must be branded with the broad national development and be taken as
an anchor of the ongoing national reform. This tends to help minimize
duplication of effort and resources. A clear problem in East Africa at this
particular point is that services trade liberalization strategy has been un-
dertaken as separate. Because of the wider economic implication of the
services sector reforms and the involvement of a host of national policy
objectives such as prudential regulation, universal access, and main-
tained of the high professional standard. In this case therefore the coor-
dination of these processes should be taken by the highest level of the
Government. As well as all objective be factored in, while involving all
interested stakeholders.


Service negotiation is guided by the request-offer approach. So
when preparing for services negotiations a country need to gather sig-
nificant knowledge before it can submit sensible liberalization requests
to its partner states/trading partners. A full inventory of the regulatory
agencies should be undertaken. This is crucial because the extent of
the services trade liberalization is determined by the regulatory frame-
work, institutions and capacity. Raihan and Ahmed (2008) added that
regulatory institutions should be established to day, and liberalization be
done tomorrow. When analyzing the negotiation request from your part-
ner, governments need to identify opportunities and challenges for its
exporters, determine the capacity building needs of its negotiators, line
ministries, and regulatory agencies and assess the likely economic and
social impacts of various liberalization scenarios.


The third part in the cycle the preparedness process is to conduct
the actual services negotiations. Two important issues are critical at this
stages one is rule making. This involve exposing the negotiator to the
GATS discipline, scheduling of specific commitment, address matters of
cultural cooperation, how best to enhance the treatment of labor mo-
bility; agreeing on operational aid for trade modalities for services. This
particular part is the most challenging area in almost many of the prefer-
ential trade agreements involving developing countries. More attention is
devoted at the second issue which is market opening. This involve iden-
tifying the legally binding obligations that a country will be undertaking
in respect of horizontal, sector- and mode of supply-specific measures
with regard to the two most crucial aspects of the negotiations, which are




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies
Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


level of market access and regulatory treatment. Market opening also is
based on the request for and offer of liberalization. Decision on the offer-
request issues should be based on benefit to be achieved, downside
to be addressed and required regulatory frameworks to be adjusted or
regulatory reform efforts to be undertaken.


Implementing negotiated outcomes involves substantial legal and
regulatory reforms. Establishment of enforcement mechanism, as well as
high degree by the trading partners. Mattoo and Subramanian (2011) has
recently pointed out that since the implementation of negotiated outcome
in terms of regulatory reform has added more burden to the participating
countries. Proposal for regulatory cooperation is critical for proper imple-
mentation of negotiated outcome. Studies has indicated that adopting
and implementing sounder regulation is key to better overall performance
in services liberalization.


The last part in the process of mapping out services trade negotiation
is enhancing the capacity for supplying of newly opened foreign market.
The most critical issues here is that in many of the less developed coun-
try like Tanzania which is dominated by small service suppliers, always
experience limited human resources to build referral networks, find local
partners abroad, identify market opportunities and research regulatory
conditions prevailing in foreign markets. Other problem includes cred-
ibility with international suppliers, problem of export financing, limited
prospect to serve foreign market, and other supply side constraints.


To identify whether a sector can withstand regional as well as in-
ternational competition we need to explore the competitiveness of that
sector in terms of price competition, technical standard, capacity of the
existing firms, etc. The best way is to construct the Ballassa’s index of
Reveled Comparative Advantage (RCA) for the services sectors in East
African countries. Table 3 below depict the RCA of estimates of the RCA
for Tanzania, Kenya, Rwanda, Uganda and Burundi.


In terms of services subsector the finding indicate that Kenya has
comparative advantage on transport, communication, and financial ser-
vices in the region. That means Kenya is more competitive in the men-
tioned services subsector than any other country in the East African
community. Hence, Kenya stands a better chance to withstand interna-
tional as well as regional competition in the above three sectors. Tanzania
has comparative advantages on insurance and business services in the
region. Likewise Uganda has also comparative advantages on insurance
business service, and other services. This sector is the same for Tanza-
nia, in terms of magnitude Tanzania has more competitiveness in these
sectors than Uganda. Rwanda and Burundi have comparative advantage
in other services.


Overall Rwanda is having the lowest RCA index, which indicates
Rwanda comparatively disadvantageous position in services trade com-
pared to other East African countries. Kenya, Tanzania and Uganda are




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DOMESTIC PREPAREDNESS FOR TRADE IN SERVICES LIBERALIZATION. Elias Peter Bagumhe
Revista Iberoamericana de Estudios de Desarrollo / Iberoamerican Journal of Development Studies


Volumen/volume 1, número/issue 2 (2012), pp. 28-51. ISSN: 2254-2035


in strongly advantageous position. The high RCA index for Kenya can be
explained by the fact that among the East African countries Kenya has
experienced transformation in transport and communication subsector.
This transformation has tremendous impact in all services sectors.


6
Concluding remarks


It is evident from this analysis that competitiveness of the services
sectors as well as functioning regulatory system are must for ensuring
gains from services trade liberalization in the developing countries. The
East African countries like Kenya, Tanzania and Uganda have competi-
tive edge in few services subsectors, while Burundi and Rwanda are lag-
ging behind compared to their counterparts in almost all categories of
services trade. It can be argued that development of skills and technolo-
gies in the services subsectors can improve the competitiveness of these
East African countries.


We have also noted that domestic regulation has its importance in
protecting national policy objectives but it should not be applied as a
means for undue trade restrictions. This call for a more sophisticated
method on how to balance services trade liberalization and domestic
policy objective. Equally important the paper has also identified that for
meaningful development strategy, the East African countries should tar-
get on how more efficiency could be improved in services trade. An im-
portant point to note here is that although service trade has quick reac-
tion to poverty reduction because of it’s inclusive growth, the highest
percent of the labour forces in East Africa has continued to engage in
agricultural sector.


Transport Communica-tions Insurance Financial
business
services


Other
services


Total
service


Tanzania 0.72 0.31 1.53 0.09 2.49 0.58 0.96


Kenya 1.50 1.74 0.66 1.65 0.00 0.00 1.97


Rwanda 0.55 0.01 0.14 0.43 0.67 1.11 0.48


Uganda 0.17 0.40 1.40 0.94 1.47 1.07 0.91


Burundi 0.04 0.00 0.78 0.25 0.39 3.06 0.75


Table 5
Revealed comparative advantage of services sectors in East African countries, 2010.
Source: Author Calculation based on data from UNCOMTRADE.




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