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CIS Regional Workshop on WTO Accession

Services Sector : its importance for

development and potential impacts of its

Lessons learned from Vietnams

By Cristina Hernndez

Presentation based on research

undertaken in 2004-2006 in the
framework of UNDP-funded
project VIE/02/009:
General Framework for a
National Strategy for the Services
Sector in Vietnam up to 2020
by Dorothy Riddle, Nguyen Hong Son and
Cristina Hernndez (June 2006)

Structure of the Presentation:


Some basic concepts

Importance of services
Misconceptions about services
Prerequisites for stimulating services growth
Proposed National Services Strategy for Vietnam
Recommendations for optimizing services trade
Vietnams actual services sector liberalization
upon WTO accession
Potential costs of services liberalization and
lessons drawn


Some Basic Concepts:

There is No single definition of services (They are Intangibile,

Instorable, Instable in quality, Inseparatability between
production and consumption)

Classification of Services & Differences some national

systems & the International (GATS) System
1. Business services

7. Finance

2. Communications

8. Health and social services

3. Construction

9. Tourism

4. Distribution

10. Recreation, culture/sports

5. Education

11. Transportation

6. Environment

12. Others: Utilities


Some Basic Concepts (cont):

GATS Definition of Traded Service:

Supplying a service to a foreigner, regardless of location
Modes of Trade in Services:
#1: Cross-border
Service moves
#2: Consumption abroad
Consumer moves
#3: Commercial presence
Supplier moves permanently
#4: Presence of natural persons
Supplier moves temporarily

II. Services are important because:

They are facilitators of domestic growth In 2003,

contributed on average 68% of the global GDP
(However, in Vietnam services are growing more
slowly than GDP; accounts for less than 40%)
They anchor and support the entire goods production
process by providing value-added inputs for
competitive industrial development (However, in
Vietnam policy appears focused on final demand
services, with a major degree of internalization).
They are increasing as a percentage of world trade
and FDI constitute approximately 36% of world
trade and FDI in services is reaching over 60% of all
investment flows worldwide (However, in Vietnam
services trade deficit is growing/ expectations are low)

II. Services are important because (cont):

They contribute to job creation services activities

have become primary creators of new jobs, accounting
for over 90% of new jobs globally since mid-1990s
(However, in Vietnam the shift of labour structure out
of agriculture and into services is still low)
They are vital to poverty alleviation and key to
realizing the MDGs both: directly in terms of
enhancing the availability and affordability of
education, health, energy, ITC services-; and
Indirectly by alleviating poverty and empowering
women through entrepreneurial and employment
creation opportunities in services enterprises
(Vietnams overall progress towards the MDGs is
impressive; the services sector is already contributing
to this purpose but more needs to be done)

III. Misconceptions about services:

1) When a developing country or transitional economy
has scarce resources, the development priority should
be industry, not services this is based on idea that
services are primarily to satisfy final demand.
However, half services produced in an economy are
intermediate services so, services dynamically
supports agricultural and manufacturing sectors
2) Developing countries do not have a comparative
advantage in services exports; and having a negative
balance in their trade in services is normal
In fact, these economies are active exporters of
services already export on average 68 different types
of services to an average of 33 export markets (aprox.
2/3 with other developing and transition economies).

III. Misconceptions about services (cont):

3) Developing and transition economies benefit from
services trade liberalization primarily through
attracting increased FDI (Mode 3) and exporting
labour (Mode 4), and not through making their own
domestic service sector more competitive
Foreign investors, however, will be competing with
existing national suppliers & potentially undermining
their ability to compete in regional/ global markets
4) If domestic demand for services is low, the focus on
developing the services sector will fail
The solution lies in export markets many services do
not require high fixed asset investment to get started
and thus is feasible to start as small niche players
supplying services to foreign firms in their own
national market (via Mode 2) and to regional markets

III. Misconceptions about services (cont):

5) Services Trade liberalization is equivalent to
deregulation in services
It is not possible to discharge governments primary
responsibility for consumer protection unless there is a
transparent and appropriate regulatory framework in
place so, the issue is to strengthen the domestic
regulatory environment in support of competition
Based on such misconceptions, Services Sector
development is either neglected or left to foreign
investors (through indiscriminate liberalization)
As such, many developing countries enter into binding
commitments in services without following any
comprehensive strategy; and services sector regulation
develops in response to requirements of intl treaties

IV. Prerequisites for Stimulating Services Growth:

Stimulate demand for quality services

(in Vietnam, SOE monopolies in strategic service industry
remains/ distort competitiveness dynamics)
A strong proactive policy framework and a coherent
domestic regulation (in Vietnam the policy and legal
environment is complex & contradictory; review & reform
needs to address competition policy, licensing of
professionals, tax rates & incentives equal to goods, ability
to monitoring & enforcement)
Meet regional and international standards (yet, in Vietnam
standards for services are still underdeveloped and poorly

IV. Prerequisites for Stimulating Services Growth (cont):

Reinforce the inter-linkages among service subsectors to produce dynamic effects (in Vietnam, key
service sub-sectors are at initial stage of
Establish effective mechanisms of co-ordination in
planning and implementation (in Vietnam,
coordination & supervision is weak)
Enact specific developmental strategies -including
staff training, support structures for small services
enterprises (like service industry associations),
services quality assurance and trade promotionand strategize services trade negotiations

Service Inputs for Manufacturing




Business services:
Engineering services
Equipment leasing
Industrial design
Legal services
Packaging services
Research &
Repair &

Other services:
Commission agents
Customs brokerage
Freight forwarding
Storage &
Transport services

V. National Services Strategy for Vietnam

Overall Goal for Service Sector:

Develop an efficient and internationally
competitive services sector in order to:

Provide high value added inputs to exportoriented industries

Reverse the growing deficit in services trade by
increasing services exports
Provide an attractive environment for FDI
Support sustainable growth & transfer to a
knowledge-based economy
Assist in meeting national human development
objectives for poverty alleviation

V. National Services Strategy for VN (cont):

Specific Goals Proposed:
2010 Goal: Services = 42% GDP
2020 Goal: Services = 50% GDP
Core recommendations:
Recommendation #1:
Coordinated Approach
Recommendation #2:
Strong Regulatory Framework
Recommendation #3:
Employment Creation in Services

V. National Services Strategy for VN (cont):

Stage 1: 2005-2010 -China Model

Strengthen services as industrial supports:

Strengthen services as social supports:

Back office operations; Software development

Leverage competitive position in science & technology:

Health services; Tourism

Stage 2: 2010-2020 India Model

Leverage competitive position in ICT:

Telecoms; Education & training; Finance (banking &

insurance); Business/ professional services; Logistical services

Contracted research & development

Leverage competitive position in tourism:

Health tourism

VI. Optimizing Services Trade Negotiations:

Roadmap for International Integration

Current situation:
Types of services exported: 70
Export markets: 23
Primary mode of supply: Mode 2
Business service firms need exports to survive
Strengthen Vietnamese competitiveness:
National service export development strategy
Regulate Mode 1 competitors

VI. Optimizing Services Negotiations (cont):

Approaches to Market Liberalization

Services with high export potential & low capital costs

Reserve modes of supply; make requests
Services with high export potential & high capital costs
Attract joint venture FDI
Services with low export potential but high job
creation potential
Economic needs tests
Services with low export potential & low job creation
Exchange for market access concessions

VII. Vietnams actual Services Sector

liberalization upon WTO accession

Signatory of ASEAN Framework Agreement on

Services (AFAS) A GATS-Plus agreement (currently
in negotiations with Australia, China, Korea, N.Z)
VN-US BTA, with much more extensive coverage and
more binding commitments than AFAS
WTO accession offer, with even more far-reaching
commitments than under the BTA
Bilateral Investment Agreement with Japan (based on
NAFTA) whereby VN renounces to applying all kinds
of performance requirements to non-excluded sectors

VII. Vietnams actual Services Sector

liberalization upon WTO accession (cont):

Vietnams WTO accession offer on services includes

commitments in practically all services sectors with
only a few sub-sectoral exceptions
Commitments are based primarily on phase-in of
liberalized market access for foreign suppliers, and
few performance criteria/conditions have been noted
If compared with other newly acceding countries in
Asia (Re UNDP ATII 2006 Study on Mode 3), Vietnam
exceeded level of commitments by other radical
liberalizers, including China China kept exceptions
and imposed limitations in forms of establishment
(preference for green investment); with marked
preference for joint ventures

VII. Vietnams actual Services Sector

liberalization upon WTO accession (cont):

In such context, there is little correlation between

liberalization offers made and reality of Vietnams
current services export activities e.g., Mode 1 is
listed with no restrictions for wide range of
professional services; what will certainly entail
negative impacts of national services suppliers
(supplying domestic market & exporting via Mode 2)
This situation compromises the success of the services
sector development strategy to be adopted, and
emphasizes the need for assessing the impacts of
services trade liberalization Sample Framework has
been developed under the Study

VIII. Potential costs of services

liberalization and lessons drawn:

Economies (like Vietnam) that are acceding to the

WTO in the past few years are being pressured to make
very liberal commitments under the GATS they have
not been given enough time to assess the impacts
As an economy liberalizes market access for trade in
services, care is needed so that the role of foreign firms
stimulates rather than depresses natl competitiveness
Liberalizing terms for market access in services can
make an economy more attractive to foreign investors,
and these can bring much-needed capital & expertise
However, attractiveness can also be influenced by the
competitiveness of local infrastructure and by a
transparent regulatory environment

VIII. Potential costs of services liberalization

and lessons drawn (cont):

There are a number of potential costs to developing

countries of services FDI: potential for monopolistic
practices with accompanying rise in prices, control
of cultural activities, crowding out of local
suppliers, and employing local workers only in lowpaying, lower skilled jobs
There is also potential for negative impact on
balance of payment due to the use of foreign
suppliers (also via Mode 1) and profit repatriation
More worrisome is the potential impact on the poor.
Unless care is taken, the gap in access to, and
affordability of, essential services can widen and a
divergence of funds commonly used by government
to subsidize access to the poor

VIII. Potential costs of services

liberalization and lessons drawn (cont):

The most important prerequisite to benefit from

services FDI is a strong regulatory framework to
ensure positive multiplier effects in the domestic
economy (UNCTAD 2004)
Performance criteria are important to ensure positive
multiplier effects from services foreign direct
investment particularly as, without regulatory
restrictions, large corporations tend to import skilled
staff and a wide range of service inputs, thus
providing few, if any, domestic multiplier effects

VIII. Potential costs of services

liberalization and lessons drawn (cont):

Important to ensure that negative impacts such as

e.g. the following do not occur: a) loss of jobs due to
imported expertise and contracting of support
services from abroad; b) a drop in net foreign
exchange earnings due to importation of support
services by foreign owned enterprises; c) a
concentration of service provision in more profitable
urban areas, leaving the rural and remote
communities even more disadvantaged
To counteract them, performance requirements that
could be used are: transfer of technology, hiring,
training and promoting local staff, use of national
service suppliers, employment equity, export activity
from foreign-owned entities

VIII. Potential costs of services

liberalization and lessons drawn (cont):

Finally, in order to meet national social objectives,

it will be important that market opening not
jeopardize universal access to essential services
(such as health, education, electricity, basic
telecoms), especially for the poor. In addition,
market opening should result in increased
employment in services and increased entrepreneurial opportunities in services for women.
(Re. UNDP Study Impacts of Basic Public Services
Liberalization on the Poor and Marginalized
People: The Case of Health, Education and
Electricity in Viet Nam Edited by Murray Gibbs
(August 2006)

Thank You!