|The Courier N° 156 - March - April 1996 - Dossier: Trade in Services - Country Report : Madagascar (EC Courier, 1996, 96 p.)|
|Trade in services|
by Dr Marie Freckleton
The rapid expansion of global trade in services currently being witnessed provides timely opportunities for Caribbean counties to diversify their exports, attract increased flows of foreign investment and create new employment opportunities. Exploiting these will require substantial investment in human resource development and the upgrading of physical infrastructures needed to support the service sector.
Diversification of exports is vital to the development of the region's small fragile economies and the services sector is a new growth area. Global trade trends are weighted against the Caribbean countries' traditional narrow range of exports. These include sugar, bananas, light manufactures, bauxite, petroleum products and tourism. Exports of sugar, bananas and manufactured products are dependent on preferential trade arrangements.
But these preferences, the mainstay of many Caribbean economies, are slowly being whittled away. The reduction of tariffs under the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) has reduced the preferential margin enjoyed by Caribbean countries under various arrangements. These include the Lomonvention, the Caribbean Basin Initiative (CBI) and Caribcan, which grant preferential access to the European, United States and Canadian markets respectively.
In addition to the erosion of preferences, the region faces uncertainty over the continuation of preferential access to the European market for bananas. This follows attacks by the United States against the EU's banana regime, and doubts over whether the duty-free access for the Caribbean's Lomembers will remain in place after 2002, the expiry date for the EU's regulations on the Single Market banana arrangements. This is of major concern to countries such as St Lucia, Dominica, St Vincent and Grenada, where bananas are a major export crop. For example, in the case of St Vincent, banana exports accounted for 55% of total export earnings in 1994. Prospects for the region's agricultural and manufactured exports are not very good given the low likelihood that the region will be able to compete in the absence of preferential treatment. Caribbean countries therefore need to move quickly to develop new exports.
Future in services?
The potential for the development of services in the Caribbean region is quite good. The services with the most potential appear to be tourism, data processing and financial services (banking and insurance). Other services with some prospects include health care and consultancy services.
Tourism has grown rapidly in many countries of the region. In 1993, tourist expenditure in Caricom countries totalled $4.2 billion. In the case of Jamaica, earnings from tourism increased from 30% of total exports of goods and services in 1980 to 53% in 1994. There is scope for further expansion in the region. One possibility is the development of eco-tourism. Caribbean tourism has traditionally been marketed as 'sun, sand and sea'. Consequently, little attention has been paid to selling the other environmental features of the region. However, the physical beauty and diverse flora and fauna of countries such as Dominica, Guyana, Belize, Trinidad and Jamaica offer opportunities in this area. In addition to developing ecotourism, there is scope for increasing visitor arrivals from Europe and Japan. Presently, North America is the major source of visitors to the region.
Literacy rates in Caribbean countries are high, ranging from 90% in Belize to 99% in Barbados. These figures, together with good telecommunications services and relatively low labour costs suggest that Caribbean countries should have a comparative advantage in the development of data-processing services. Some countries - Barbados, Jamaica and Saint Lucia - have already embarked on the development of such services. This process has been assisted by investment incentives which have attracted foreign investors. Close proximity to the large United States market is an added advantage for the countries of the region.
Financial services, telecommunications and people
There are also prospects for the development of financial services based on a fairly well-educated workforce and good telecommunications services. Barbados and some of the smaller Eastern Caribbean islands have already attracted some offshore financial business while other countries, such as Jamaica and Trinidad & Tobago, have potential in this area. However, an important requirement for the development of financial services in the region is the strengthening of the regulatory framework governing the sector. This is necessary to promote investor confidence.
The region has a pool of well trained health care workers which offers opportunities for trade development in the sector. Caribbean countries have traditionally exported health care workers, mainly to North America. The development of trade in health care services could lead to improved earnings for workers in this field, thereby reducing the incentive to leave the region. There is also the possibility of establishing linkages between the tourism industry and the provision of health care services.
In addition, there is a growing pool of highly trained professionals offering services to international clients. This has already taken off on a small scale in Jamaica, Barbados and Trinidad & Tobago.
A major factor holding back the development of trade in services in the region is the shortage of funds to upgrade the physical infrastructure (electricity, transport and water) and to invest in the development of human resources. A number of Caribbean countries are struggling with budgetary problems and low levels of private investment which will make it difficult to mobilise significant sums for the upgrading of dilapidated infrastructures.
The weak regulatory capacity of some Caribbean governments also poses a problem. Institutional and technical capacities to regulate economic activity are weak and underdeveloped in many places. However, effective regulation of monopolies is necessary to promote efficiency and competitiveness in the provision of services.
In the case of financial services, effective regulation is vital to promote investor confidence. Monopolistic practices in some service industries in the region threaten efficiency and competitiveness. The problem is most marked in the telecommunications sector which is dominated by monopolies. The cost of telecommunications is one critical factor in the competitiveness of services such as data-processing and banking. Caribbean governments therefore need to strengthen their regulation of monopolies as well as encourage competition, where possible. The establishment of a Fair Trading Commission in Jamaica is a step in the right direction.
Expansion of tourism is constrained by the threat of environmental degradation. This is particularly so in some of the smaller islands where rapid growth of the industry has placed pressure on the environment. In Dominica and St Vincent, there is also the problem of inadequate access by air due to the inability of small airports to accommodate long-haul jet aircraft. Insufficient hotel capacity and dilapidated infrastructures also militate against tourism expansion in Guyana.
There are other obstacles to the development of trade in services in the region. Restrictions on the movement of persons, on the granting of national treatment to foreign firms, and on entry of some service industries need to be eased in order to promote the sector.
Impact of future liberalisation
Liberalisation of trade in services offers potential benefits for the region. These include increased export earnings, higher foreign investment, greater competition and improved efficiency. In order to reap the full benefits of the future liberalisation of trade in services, Caribbean governments need to invest in upgrading the workforce's skills, strengthen competition policy, introduce legislation to protect intellectual property rights and modernise the physical infrastructure that is needed to promote the development of services. The main drawback of liberalisation is the possibility of inefficient producers going out of business due to their inability to compete with international firms. Caribbean producers of services therefore need to improve their efficiency in order to minimise this possibility. M.F