Quantifying the Impact of Services Liberalization in a Developing Country
The authors consider how service liberalization differs from goods liberalization in terms of welfare, the level and composition of output, and factor prices within a developing economy, in this case Tunisia. Despite recent movements toward liberalization, Tunisian service sectors remain largely closed to foreign participation and are provided at high cost relative to many developing nations. The authors develop a computable general equilibrium (CGE) model of the Tunisian economy with multiple products and services and three trading partners. They model goods liberalization as the unilateral removal of product tariffs. Restraints on services trade involve both restrictions on cross-border supply (mode 1 in the GATS) and on foreign ownership through foreign direct investment (mode 3 in the GATS). The former are modeled as tariff-equivalent price wedges while the latter are comprised of both monopoly-rent distortions (arising from imperfect competition among domestic producers) and inefficiency costs (arising from a failure of domestic service providers to adopt least-cost practices). They find that goods-trade liberalization yields a gain in aggregate welfare and reorients production toward sectors of benchmark comparative advantage. However, a reduction of services barriers in a way that permits greater competition through foreign direct investment generates larger welfare gains. Service liberalization also requires lower adjustment costs, measured in terms of sectoral movement of workers, than does goods-trade liberalization. And it tends to increase economic activity in all sectors and raise the real returns to both capital and labor. The overall welfare gains of comprehensive service liberalization amount to more than 5 percent of initial consumption. The bulk of these gains come from opening markets for finance, business services, and telecommunications. Because these are key inputs into all sectors of the economy, their liberalization cuts costs and drives larger efficiency gains overall. The results point to the potential importance of deregulating services provision for economic development.
| Summary: | The authors consider how service
liberalization differs from goods liberalization in terms of
welfare, the level and composition of output, and factor
prices within a developing economy, in this case Tunisia.
Despite recent movements toward liberalization, Tunisian
service sectors remain largely closed to foreign
participation and are provided at high cost relative to many
developing nations. The authors develop a computable general
equilibrium (CGE) model of the Tunisian economy with
multiple products and services and three trading partners.
They model goods liberalization as the unilateral removal of
product tariffs. Restraints on services trade involve both
restrictions on cross-border supply (mode 1 in the GATS) and
on foreign ownership through foreign direct investment (mode
3 in the GATS). The former are modeled as tariff-equivalent
price wedges while the latter are comprised of both
monopoly-rent distortions (arising from imperfect
competition among domestic producers) and inefficiency costs
(arising from a failure of domestic service providers to
adopt least-cost practices). They find that goods-trade
liberalization yields a gain in aggregate welfare and
reorients production toward sectors of benchmark comparative
advantage. However, a reduction of services barriers in a
way that permits greater competition through foreign direct
investment generates larger welfare gains. Service
liberalization also requires lower adjustment costs,
measured in terms of sectoral movement of workers, than does
goods-trade liberalization. And it tends to increase
economic activity in all sectors and raise the real returns
to both capital and labor. The overall welfare gains of
comprehensive service liberalization amount to more than 5
percent of initial consumption. The bulk of these gains come
from opening markets for finance, business services, and
telecommunications. Because these are key inputs into all
sectors of the economy, their liberalization cuts costs and
drives larger efficiency gains overall. The results point to
the potential importance of deregulating services provision
for economic development. |
|---|