Quantifying the Impact of Services Liberalization in a Developing Country

31 Pages Posted: 20 Apr 2016

See all articles by Denise Eby Konan

Denise Eby Konan

University of Hawaii at Manoa

Keith E. Maskus

University of Colorado at Boulder - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 2004

Abstract

Konan and Maskus 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.

This paper - product of the Trade, Development Research Group - is part of a larger effort in the department to measure the benefits of services trade.

Suggested Citation

Konan, Denise Eby and Maskus, Keith E., Quantifying the Impact of Services Liberalization in a Developing Country (January 2004). World Bank Policy Research Working Paper No. 3193. Available at SSRN: https://ssrn.com/abstract=636613

Denise Eby Konan (Contact Author)

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

Keith E. Maskus

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309
United States
303-492-7588 (Phone)
303-492-8960 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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