Driving trade in services reform through regional integration

13 August 2012

Today, trade in services contributes more than 75 percent to GDP in the case of highly industrialized countries but remains below 50 percent in the case of low-income developing countries.  Raising the contribution of trade in services to GDP in the developing countries is critical for sustaining high rates of shared growth. This reflects the dual role of services as tradable and as a major factor in the competitiveness of goods and factors of production.

Yet, it is questionable whether the majority of Sub-Saharan African national governments have accorded the services sectors their due recognition in national planning processes over the past decade.  What initiatives are there for pro-active use of existing regional integration schemes to create a more conducive regional business environment that presents more attractive opportunities for international mobilisation of the huge resources required for modernisation of infrastructure based services?  Is there due appreciation of the role of more cost-effective infrastructure services to promote domestic and foreign investment in agriculture and agro-processing?  What efforts are there to develop key competencies in the skills that are required for the development of sectors in which SSA countries have unique comparative advantages and can transform these into strong competitive advantages?

Resistance to policies for economic transformation has been one of the major impediments against the effective implementation of proclaimed policies that target expediting the processes of structural economic transformation.  This is one of the binding constraints towards the establishment of vibrant market-economies in SSA states, like Tanzania, that operated strong planned economies up to the 1980s.  This impediment is one of the public sector hangovers of a tendency to consider regulatory regimes as a tool for the realisation of the conflicting objectives of regulating the behavior and conduct of businesses and firms simultaneous with government revenue generation.  Preference to prioritise the revenue generation objective undermines the effectiveness of the regulatory function, which seeks to balance conflicting economic and social objectives, such as profit maximisation on one hand versus sustainable use of scarce resources or the protection of human, animal, and plant health, the protection of property rights and other fundamental human rights at the level of the individual.  The end result is a trend of increasing regulatory and administrative burdens due to enforcement of redundant regulations, duplication of regulations and multiplicity of regulatory institutions performing the same function.  This leads to higher enforcement and compliance costs that undermine the competitiveness of national goods and services in regional and global markets.

Increasing regulatory efficiency
Regulatory best practice dictates that governments use a particular policy instrument to achieve a specific objective.  For instance, taxation should be used as a tool for collecting government revenue, while regulatory licenses should be used solely to enforce guidelines that require firms to avoid certain conduct that may be quite sound for the individual firm but are inimical to the wider national or society’s interests.  This approach is critical for ensuring improved delivery of government functions in two areas:  delivery of conventional government services and improvement of economic infrastructure-based services.

Efficiency in government functions in the delivery of services that transcend the business cycle from business start-up – access to premises and capital and operations along the production and distribution cycle – is a key factor in encouraging investment. This depends on the existence of strong institutions operating administering open and transparent regulatory regimes with clarity of objectives.  Information and communication technology (ICT) as an enabler makes it possible for governments, acting through a large number of institutions, to interact with its citizens and investors as a single entity, with a tremendous impact on improved services for private sector development.

Regulatory reform through regional integration
In spite of the powerful evidence emerging from regular annual and biennial publication of several global and regional indices of competitiveness, resistance to change persists.  Regional integration from the East African Community perspective is a powerful tool for national uptake of best-practices in regulatory reforms.

Experience in simplification and harmonisation of sectoral policies at the national level, through sector-wide reform programs, confirms that rapid transformational change in public service delivery is possible at the national and local government level.  Evidence from the EU confirms that regional harmonisation of national policies within the framework of regional integration is a powerful tool for stimulating the adoption and implementation of best practices in reforms at the national level.  Emerging evidence in the EAC shows that Rwanda’s success as an investment destination, attributable to the publicity emerging from its exemplary performance as measured by the Ease of Doing Business, has attracted a lot of attention within the region and is influencing the pace of reforms positively.

The salient lesson from the Rwandan success is the potential of member states in regional integration schemes to advance the agenda through deliberate measures for more rapid harmonisation of sectoral regimes to deepen the process of integration.  At present, most regulatory reform changes in the EAC are being addressed at the national level, creating new regimes that may not necessarily be in harmony from a regional perspective.  For instance, the integration of national credit reference bureaus as an East African joint institution could contribute to the image of East Africa as an economic entity, whose business sector cooperates in harnessing synergies of a regional competitiveness platform targeting competition with the rest of the world.

Initiatives for the transformation of infrastructure services based on modernisation of railways systems such as the Tanzanian Central Corridor linking Dar es Salaam and Bagamoyo ports with Rwanda and Burundi has much higher chances of securing international financing support if considered from the context of exploitation of rich resources in northwestern Tanzania, Rwanda, and Burundi, as well as the Eastern DR Congo.  Likewise, the independence of South Sudan has increased the commercial viability and attractiveness of the project for modernisation of the Northern Corridor linking the Kenyan ports of Mombasa and Lamu with Uganda, Rwanda, and South Sudan.

The lesson from EAC is clear – regional integration can promote expediency in transforming and improving the quality of government services to the private sector. The advantages become enormous when one takes account of the potential to address investment climate challenges from a regional perspective. For this purpose, ceding considerable national sovereignty to regional administrations is a win-win outcome for members. Three policy recommendations emerge from this analysis. First, governments need to adopt and implement decisions to expedite regulatory reforms that contribute to improved service delivery at lower costs. Secondly, they need to work with partner states in regional schemes for joint efforts to address the challenges of infrastructure-based service delivery. Finally, they ought to cede considerable national sovereignty to regional institutions to reap the benefits of economies of scale that will make investment in high cost infrastructure projects a rewarding commercial investment.

Author: Bede Lyimo retired formally from Government service in December, 2010 and is currently working as a free-lance consultant on trade and private sector development issues.  He has also served as a non-executive Director of CRDB Bank Ltd, Tanzania’s leading commercial bank, since 2005.

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