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A Survey of the Economic Effects of Services Trade Liberalization
Nov 5, 2001

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  • Countries with fully open financial and telecommunications markets grow 1.5% faster, on average, than countries closed to trade in these services, according to a recent study by Aaditya Matoo, Randeep Rathindran, and Arvind Subramanian (2001) and published by the World Bank. The study confirms earlier results obtained by Joseph Francois and Ludger Schuknecht (2000). Their research found that more open and competitive financial markets increased growth rates by 1.3% to 1.5%.

    The Matoo-Rathindran-Subramanian (2001) and the Francois-Schuknecht (2000) studies measure the gains of liberalizing services trade by estimating the economic growth effects of these policies. They also serve as a timely complement to a number of exercises that identify one-time gains of eliminating or reducing barriers to trade in services.

    The World Bank “Global Economic Prospects and the Developing Countries 2002: Making Trade Work for the World's Poor” released November 1 is the latest of a series of exercises aimed at determining the income gains of moving from a world with high barriers to trade in services to one were these barriers are reduced. According to the study, a reduction in services trade barriers that spurs cross-border trade in services and causes a 10% reduction in inefficiencies from protected services monopolies and a 10% reduction in price markups due to imperfect competition is likely to increase the income of developing countries by the year 2015 by $900 billion from 1997 levels. This gains from services liberalization are 4.5 times greater than those accrued from the liberalization of merchandise trade.

    George Verikios and Xiao-Guang Zhang (October, 2001) of the Productivity Commission of Australia find that complete liberalization of telecommunications and financial services increase world output by 0.2% or $ 46.9 billion. If all services - not just telecommunications and financial - were liberalized by 33%, world income would increase by $389.6 billion and by $1,168.8 billion if all barriers were removed according to a study by Drusilla Brown, Alan Deardorff, and Robert Stern (2001) that use a variation of the so-called Michigan Model of world trade.

    Although in absolute terms most of the gains from a 33% reduction in services barriers are accrued by developed economies with the U.S., for instance, increasing income by $150 billion, in terms of the size of their economies developing countries stand to gain the most according to the Brown et al (2001) paper. The reduction of services barriers increase welfare by 2.6% of GDP in Singapore, and in other countries such as the Philippines, Thailand, Mexico, Chile, Mercosur and the Andean nations gains stand above 1% of GDP.

    Combined, these studies provide a well-documented framework to the growing debate about the benefits and costs of liberalizing services. Many concerns about services liberalization are not well-founded and constitute more myth than fact. Yet the results of the different exercises rest on the expectation that these reforms will deliver more competitive market structures. The substitution of public monopolies for private monopolies, whether national or foreign, provided negligible gains in most cases studied.

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    Comments [Add Comment]

    References to Survey of Economic Effects of Services Trade Liberalization
    posted by Robert Cohen on 4/17/2003 at 9:09:18 AM

    "Not all of the references in the body of the survey are included in the bibliography at the end of the survey. Can you correct this? bcohen@bway.net"

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