The modern economy fundamentally depends on specialization and trade between economies

Oct 27 - Nov 02, 2003




The service sector is the most important sector for most developing economies like Pakistan having a comparative advantage in labour services. It is the largest contributor to gross domestic product, production and employment. Since it is such an important sector, developing economies need to identify their comparative advantage in services and potential export markets. Developing economies. They have an abundance of low and semi-skilled labour that is a major input into tourism, construction and transport services. Developing economies are projected to be better off by US$ 130 billion from services trade liberalization. As developing economies remove their restrictions, their service sectors develop, primarily funded by foreign direct investment, and they become major exporters of services. The main restrictions on service suppliers that are preventing developing economies from realizing these benefits are limits on foreign direct investment, stringent licensing requirements and restrictions on expanding operations.

In 2000, world exports of services were US$ 1,435 billion, or approximately 20% of total world exports (WTO, 2001). As would be expected, the flow of exports and imports of services is the greatest for Asia, North America and Western Europe (figure 3.1). These three regions account for more than 88% of service exports, the European Union (45%), North America (22%) and Asia (21%). Asia and the Rest of the world are the largest net importers of services.

The production of services typically accounts for the largest share of gross domestic product (GDP) and employment in developed and developing economies. The service sector is about 40 to 60 per cent of GDP and employment for developing economies and 60 to 80 per cent for developed economies. While the proportion of GDP attributable to services is generally lower in developing than in developed economies, the rate of growth of service sectors in developing economies is faster than that in developed economies (OECD, 1999). The importance of services to an economy is even greater than that reflected in direct sectoral shares of GDP and employment because services are import ant inputs for all aspects of processing and production. The growth of an economy's service sector is strongly associated with product specialization, income growth and economic modernization. Services provide much of the necessary infrastructure for investment and economic growth, ensuring that their efficient delivery is an important means of improving an economy's overall productivity.


The major distinction between international trade in goods and international trade in services lies in the movement of the factors of production, mainly, labour and capital. For trade in goods, the factors of production are typically fixed in a specific location and the product is transported to the foreign market.

For example, a motor vehicle manufacturing plant is usually located in the domestic market and motor vehicles are transported to the foreign market.

For trade in services, the factors of production move such that services can be supplied in four ways:

The World Trade Organization General Agreement on Trade in Services (GATS) describes the four ways or modes of supply for trade in services i.e.

a. Cross-border,
b. consumption abroad,
c. commercial presence and,
d. the movement of people.


In the same way as goods are traded, services can be traded across borders. There is thus a clear geographical separation between the buyer and the seller. For example, a Pakistani stock-broking firm may buy or sell shares to an American counterpart over the Internet. Pakistan is exporting financial services across the border to US and US is importing financial services from the Pakistan.


Services can be traded by the consumer moving or traveling to the foreign market. For example, a Pakistan fee-paying student may travel to US to study at a US university. US is exporting its education services to the Pakistan and the Pakistan is importing education services from US.


Services can be traded by the capital of the exporter moving to the foreign market.For example, a United States telecommunications company may establish a company in Pakistan. The sale of telecommunications services in Pakistan is an export from the United States to Pakistan and Pakistan is importing telecommunications services from the United States. Most services are traded in this way.


Services can be traded by the producer or service supplier moving to the foreign market. For example, an accountant who is a Pakistani citizen may temporarily work for a Saudi company in Saudi Arab. The Pakistani accountant is exporting professional services to Saudi Arab and Saudi Arab is importing professional services from Pakistan.


Trade liberalisation generally refers to the reduction of barriers to the movement of goods and services in international trade. It applies only to measures restricting imports and exports. Trade liberalisation can be done collectively with other countries (such as multilaterally through the World Trade Organisation) or by one country on its own (unilaterally). When trade liberalisation is done collectively, the benefits multiply significantly.


Countries undertake trade liberalisation for several reasons. The first is based on the theory of comparative advantage. Removing barriers to trade allows economies to produce what they produce best. Another reason is to improve the domestic economy by reducing protection and using resources more efficiently. Both reasons have beneficial economic effects that help achieve higher growth and enhance standards of living.


The modern economy fundamentally depends on specialization and trade between economies. The principle of comparative advantage is the fundamental analytical explanation of the gains from trade.

The theory of Comparative Advantage states that an economy should specialize in the production and export of services in which it has a relative advantage and import services in which it has a relative disadvantage. International trade on this basis will mean that services will be produced by the relatively least cost world producer and the quantity of services consumed will be optimal. The determinants of an economy's comparative advantage are the endowments of the factors of production and technology. Factor endowment is the amount of resources: land, labour or capital held by an economy that can be used for production. Technology entails the productive use of resources and telecommunications undoubtedly provided necessary means to unleash the prowess of services industry for trade.

Comparative advantage should be distinguished from absolute advantage3. Few countries have an absolute advantage in producing something, that is, they are better at it than any other country. However, every country has a comparative advantage in producing something. It must be best at producing something relative to other activities. Many factors determine comparative advantage in an economy. They could include the existence of natural resources; costs of labour; proximity to markets; levels of education; experience; knowledge, and even culture.

International trade allows countries to specialise in production according to their comparative advantage; each country exports goods in which it has a comparative advantage: and imports goods in which others have a comparative advantage. This way both countries will be better off.


Governments can sometimes get in the way of effective trade liberalisation. They can tax imports with tariffs; restrict quantities of imports, and pay subsidies to domestic producers. Governments intervene in these ways for various reasons. For example, it may be to make domestic producers economically strong, or to protect a corrupt interest.



Government intervention can be costly. It can weaken the capacity of the economy to maximize its comparative advantage by distorting resources to activities the economy is not really better at producing. This means important resources are taken away from those goods the economy can produce better. Protection benefits only to narrow interests in the economy and reduces economic welfare. Often the cost to the economy is greater than the benefit businesses are less efficient and products more expensive; less money is available to spend on other things (such as health and education), and money is not invested where the best returns are possible. As a result, the cost of living is higher.

An economy may have abundant factor endowments of unskilled labour and a comparative advantage in labour-intensive services construction and tourism services. On the other hand, an economy may have a small quantity of highly skilled labour such that it has a comparative advantage in legal services. Developing economies clearly have a comparativeadvantage in labour services or services where labour is a major input, such as tourism. Some developing economies also have a comparative advantage in construction and transport services, although this is more variable between economies.

New export opportunities are also emerging for developing economies in communications and computer services and with the aggressive agenda for IT (Information Technology) Pakistan endeavors to gain comparative advantage in not only software exports, but also seizes opportunities among all sectors of the economy where digitization of products and services can take place for trade purposed over digital networks.

Keeping the very context of trade-able services, developing countries as a group have witnessed an even more rapid (nearly four-fold) increase in their services exports, and a consequent increase in their share in world service trade from 14 percent in 1985-89 to 18 percent in 1995-98 (figure 3.2).


Trade liberalisation fosters a more efficient allocation of resources in the economy4. This is because it allows countries to focus in the activities they are best at (comparative advantage) and also because it reduces protection that benefits only narrow interests in the economy. The economic effects of trade liberalisation are increased growth, wealth and standards of living. It improves the national economy by reducing costs and fostering the efficient use of resources5. Imports become cheaper allowing a greater choice of goods and services. Exports expand, adding to national and personal incomes. Investment occurs where comparative advantage is greatest. This encourages competitive pricing and also stimulates technological advances.


The economics of trade liberalisation multiply when countries act collectively to liberalise trade. Higher growth is achieved in all economies. Demand for products increases, including imports from other countries. Welfare and standards of living increase as a result. The recent decade of high growth and increases in standards of living worldwide was characterized by the removal of trade barriers as a result of the Uruguay Round of trade negotiations and subsequent unprecedented levels of trade. Growth and demand slows when protection is increased. The period of the Great Depression in the 1930s was characterised by rapid increases in protection.

Trade liberalisation benefits all countries, including large and powerful ones. Small countries generally lose from imposing trade barriers because they cannot influence prices on world markets. They have much to gain from collective or unilateral liberalisation. For the world as a whole, the imposition of restrictions by one or more countries is inefficient and reduces welfare. All countries, including large ones that may be able to influence world prices, end up with lower welfare under protection than if they applied free trade policies.

Developing countries have gained significantly from trade liberalisation under the Uruguay Round. They have more to gain from further trade liberalisation. The WTO estimates that cutting barriers to trade in agriculture, manufacturing and services by a third would boost the world economy by US$613 billion, and that doing way with all trade barriers would result in an extra US$1.9 trillion, the equivalent of adding two more "Chinas" to the world economy. Most of these benefits would accrue to developing countries.


Market Access is the spirit of WTO negotiations which requires WTO member states to provide non-discriminatory access to domestic markets creating an equitable environment for imported and domestically produced goods and services. WTO rules of National Treatment (not to discriminate between imports and domestic production) and Most Favored Nation (MFN) Treatment (to apply border measures without discrimination among WTO member countries), Tariffication (to protect domestic industry only through tariffs with prohibition of quantitative restrictions) and Tariff Binding (to eliminate protection to domestic production by reducing tariffs and other barriers to trade).

Market access in services is inherently more complex than market access for trade in goods. For trade in goods, market access is about reducing mainly border measures such as tariffs that are imposed on goods as they enter a market. For trade in services, market access is about reducing government policy interventions which are less visible and may be applied after a service supplier has entered the market. These measures take the form of government regulations that are usually aimed at domestic policy objectives rather than trade policy objectives. There is usually little consideration of the effects of such measures on trade and market access for Foreign Service suppliers.


Restrictions on trade in goods usually take the form of a tariff, while restrictions on trade in services usually take the form of government regulation and a certain level of regulation is usually justified for meeting regulatory objectives.

Restrictions can be classified in two ways. The first is by whether a restriction applies to:

ESTABLISHMENT: The ability of service suppliers to establish physical outlets in an economy and supply services through those outlets as of Commercial Presence.



ONGOING OPERATIONS: The operations of a service supplier, after it has entered the market. Restrictions on establishment often include licensing requirements for service suppliers or firms, restrictions on direct investment in existing firms and restrictions on the permanent movement of people. Restrictions on ongoing operations often include restrictions on firms conducting their core business, the pricing of services and the temporary movement of people as of Cross-Border Supply or Movement of Natural Persons.

The second way a restriction can be classified is by whether it is:

NON-DISCRIMINATORY: Restricting domestic and Foreign Service suppliers equally as of Market Access.

DISCRIMINATORY: Restricting only Foreign Service suppliers as of National Treatment.

The above bifurcation call be more clearly elaborated in the following example:
Table 3.4: Classifying Trade Restrictions on Telecommunication Services



(Commercial Presence Mode of Supply)

On-Going Operations

(Cross-border consumption abroad, Movement of Natural Persons mode of Supply)


No. of operator licenses is restricted(as the case of Mobile Operators in Pakistan i.e. three)

Telecom Operator is restricted in the manner it operates. (Say Rural Area only, or GSM only)


No. of foreign operator licenses is restricted.

Foreign Telecom Operator is restricted in the manner it operates.





The restriction categories are then weighted together according to a judgment about their relative economic cost subject to reasonably available information. For example, restrictions on telecom operator licenses are weighted more heavily than restrictions on the temporary movement of people. The weights are generally chosen so that the total restrictiveness index score ranges from 0 to 1.

TRI = FI + DI (Total Restrictiveness)
FI DI = (Total Discrimination against foreigners)

Where FI is Foreign Index,
And DI is Domestic Index.

A foreign index is calculated in order to measure all restrictions that hinder foreign firms from entering and operating in an economy. It covers both discriminatory and non-discriminatory restrictions. A domestic index represents restrictions that are applied index represents restrictions that are applied to domestic firms and it covers non-discriminatory restrictions. The difference between the foreign and domestic index scores is a measure of discrimination against foreigners.

In calculating an overall economy score, it is not determined which restrictions might be justified for enhancing the efficiency of a service sector and which might not. In general, trade restrictions, by reducing competition in a services market, will reduce the efficiency of that market. However, sometimes regulation which limits competition is necessary to deal with market failure and to meet particular social objectives. It is extremely difficult to make an assessment about the merits of regulation for economies with different regulatory objectives and structures.

Furthermore, multilateral trading agreements, such as the GATS, aim to reduce restrictions while recognizing the freedom of trading agreement members to regulate to meet national policy objectives. Governments generally set their own regulation objectives of achieving efficiency, transparency, stability and adequate disclosure.


The most gains from trade reform come from the economic efficiencies created when an economy opens itself to the pressures and opportunities of international competition. There is substantial empirical evidence to show that significant benefits accrue to those economies undergoing trade liberalization, whether it is in the traditional area of goods or the important growth area of services. Sachs and Warner (1995) found a close association between trade openness and economic growth in developing economies. From 1970 to 1989, open developing economies grew at an average annual rate of 4.5 per cent, while closed economies grew at a rate of 0.7 per cent. Dollar and Kraay (2001) found a strong positive effect of trade on growth. Srinivasan and Bhagwati (2001) found that, after accounting for numerous economy-specific factors, trade does seem to create, even sustain, higher growth.

As mentioned above, liberalizing trade in services is about reforming regulation that restricts trade, so as to improve national welfare. While it is necessary for Governments to maintain regulation to meet social and economic objectives, certain regulation may intentionally or unintentionally restrict trade in services. Such restrictions are likely to reduce economic efficiency and hence national welfare by limiting the extent to which economies specialize in providing services according to their comparative advantage.

Liberalization increases competition, lowers prices and improves the quality of services. Competition, especially international competition, is the best guarantee that domestic service suppliers are and will remain efficient. Competition forces service suppliers to reduce waste, improve management and become more efficient. Costly rent seeking activities, for the purpose of gaining or maintaining preferential access to a services market, are also less feasible in a liberalized environment. These pressures reduce the operational costs of providing services. Competition then forces service suppliers to pass on cost savings to consumers in the form of lower prices. The excess profits of service suppliers are reduced and the number of service suppliers is increased.

These benefits of liberalizing independently are not confined to the service sector. Some service sectors like, telecommunications, financial and transport not only provide final consumer services, but also are essential inputs for the production of other goods and services. This congruence between the service sector and other sectors produces substantial benefits beyond the service sector that directly feed into improving an economy's trade and economic performance.




Three trends are making globally linked electronic networks a key feature of the world economy: the declining cost of computing power, the increasing growth of communications capacity ("bandwidth"), and the continuing expansion of Internet-based data networks. The growth and development of the modern networked economy relies upon continued investment and build-out of the basic telecommunications infrastructure. In evaluating the value of liberalization, and its effect on attracting investment, it must be taken into account that the changing nature of telecommunications networks: increasingly, firms investing in networks seek to provide a broad range of integrated services, often involving voice, data, and video, through a variety of narrowband or broadband technologies using wireless (fixed, mobile, terrestrial, and satellite) and wire-line platforms. Evolving networks can use all these services and technologies in a seamless, technology neutral manner.

One of the central roles the WTO can provide is encouraging an environment conducive to investment in and use of such networks. Two important ways in which WTO members can help foster investment in the development of advanced networks is by removing barriers to investment and competition. One way to promote a more favorable investment climate is reducing monopoly power in the telecommunications sector, typically characterized by government ownership of the operator. In the past, governments ensured investment in networks by building telecommunications infrastructure from government resources, and recovering capital needs through high prices in an environment of restricted competition. Therefore, while privatization is an important first step toward a liberalized market, it must be combined with viable competition for full benefits of increased growth and innovation to be realized.

Therefore, market access in telecommunication becomes the kernel of economic activity, directly affecting the performance and scope of trade potential of a specific country or company.


MR. YOUSAF HAROON is working as Assistant Professor (Management) at the National Post Graduate Institute of Telecommunications and Informatics, PTCL Islamabad, coordinator and trainer for professional management courses for top and middle management of PTCL all over Pakistan. He specializes in WTO, GATS, Telecommunications Services, Business Strategy and Policy.

This article is an extract from the thesis written as the partial requirement for completing PGD WTO and IPR from International Islamic University Islamabad.

He can be reached at [prof_haroon@npgiti.edu.pk] or [051-4430247]