Growing service sector held back by regulation, protectionism

Protectionism is holding back growth in services around the world, a new OECD survey shows, reinforcing the need to reform such trade barriers

PUBLISHED : Wednesday, 28 May, 2014, 10:28am
UPDATED : Thursday, 29 May, 2014, 4:42am

Considering the prominence of services in the global economy, it is salutary to be reminded of the extent to which costly regulation and protectionism weigh upon the sector.

A database rolled out earlier this month by the Organisation for Economic Cooperation and Development (OECD) does just that. Six years in the making, the Services Trade Restrictiveness Index (STRI) documents 16,000 measures applied in 40 countries to 18 service sectors.

Air transport, legal services, accounting, broadcasting, courier services, architecture, telecommunications and maritime transport top the list in average levels of restrictiveness in the 34 OECD member countries and the BRICS (Brazil, Russia, India, China and South Africa) plus Indonesia.

Transport and professional services - the lifeblood of so much economic activity - are the most regulated and protected.

Wide variance occurs around the average levels of restrictiveness. Individual economies also display very different rankings of restrictiveness among sectors.

China has below average openness in every services sector in the OECD database

But there are certain patterns, with Germany and Britain registering above-average openness within the country sample in all 18 sectors. Brazil, China, Indonesia and South Africa score highest at the other end, with below average openness in every sector. The STRI assigns weights to five policy variables to derive overall values of restrictiveness in the range of zero (no restrictions) to one (highly restrictive).

The five policy elements are: restrictions on foreign ownership; restrictions on the movement of service providers; barriers to competition; regulatory transparency and administrative requirements; and other discriminatory measures.

The database reveals that restrictions to access and the nurturing of monopolistic privilege, along with opaque regulation and administration, are far more commonplace than can be justified on the grounds of public interest or social preferences.

Why does this message matter so much? It goes to the heart of any story about progress and prosperity.

Services account for 75 per cent of gross domestic product and 80 per cent of all jobs in OECD countries. The numbers for major emerging economies are 70 per cent and 40 per cent, respectively. About two-thirds of foreign direct investment is in service industries.

Numbers as big as these mean that for economies to grow and jobs abound, much of the action has to be in services.

The message ought to resonate even more in emerging economies. Productivity growth is an essential accompaniment of progress as export-led growth models reliant on capital and labour addition start to flag, and innovation in service sectors can make a very substantial contribution to that growth.

More generally, success in moving incomes towards industrial country levels implies the rising dominance of services as a source of income and growth.

Services play a particular role in all economies. They are not just a product like any other. They also drive production within and across sectors.

Given that many of the services we are talking about are essential to virtually every sector, improved efficiency has massive multiplier effects. Think, for example, about how many value chains - whether national or international - could not survive without telecommunications, transport, finance, insurance and professional services.

Thus clumsy regulation and protectionist policies take a heavy toll across the economy. Government policies are supposed to provide services, too, not impediments to progress.

Something else worth remembering is that low-quality policy in this field does not affect only foreign economic interests. Restricted access and cost-augmenting interventions hit domestic enterprise too, infecting economic activity in its entirety.

The OECD's STRI project does not just provide information. It is accompanied by analysis, too, showing how large the costs of restrictions are, and therefore how big the benefits of their removal could be.

In a simulation, OECD economists calculate the effects on imports and exports of modest policy changes in a country with a more or less average level of restrictiveness.

Imports of insurance and banking services, for example, would increase by roughly 2.5 per cent and 4 per cent, respectively. The numbers for exports are even larger, at 6.5 per cent and 7.5 per cent. It is interesting to think about why the gains from reduced restrictiveness would be greater on the export side.

One reason is that barriers in the domestic economy affect local service providers as well as foreign ones, so the impact of their removal is greater than in the case of imports.

Another is that reduced competitiveness resulting from bad regulations lessens incentives for local firms to innovate and sell in foreign markets.

Services have been growing faster than goods in the global economy since the 1980s. They also showed more resilience and an earlier recovery following the recession.

In light of the sheer importance of services to well-being and future growth, can governments really afford to neglect poorly designed and administered regulation and remain snug in the thrall of cosseted special interests?

Patrick Low is vice-president of research at the Fung Global Institute