How African countries can improve their services sector: The case of Lesotho and Uganda

13 August 2012

Services play a crucial role in the economic growth and social development of developing countries. They do this by contributing to competitiveness, the social realm, and the generation of employment, income, and foreign exchange earnings.

Services are a key component of the production process especially when they act as ‘inputs’ into economic activities, such as transport, telecommunication, and financial services. Therefore, they can either facilitate or hinder trade and production in other economic sectors, depending on the efficiency with which they are made available to users.

In addition, services including activities like water provision, education, health, financial services, and telecommunications have important infrastructural and social functions. Thus, ensuring access to such services for poor and marginalised groups can contribute to the achievement of the Millennium Development Goals (MDGs).

In the last decades, the economies of developing countries have seen an increase in their share of global services trade, services employment, and foreign direct investment in services sectors. Nevertheless, there remains significant difference when ones compares with developed countries' services exports, which can be partially explained by barriers to trade in services and supply side constraints. Indeed, infrastructural shortcomings, regulatory gaps, inadequate policies, and inefficient institutions all hamper the ability of developing countries to take full advantage of services trade.

In the recent context of economic and financial crisis, services exports proved to be more resilient than merchandise exports. Motivated by the desire to increase the resilience of their economies and tap into potential gains, developing countries have shown a renewed interest in crafting policies to develop the services sector. This is particularly true of highly dynamic sectors, which promote increased participation in services global value chains through the off-shoring of services.

This article highlights findings from recent Services Policy Reviews (SPRs) undertaken in Lesotho and Uganda with the support of UNCTAD.  The sectors covered by the analysis include health, tourism, financial, accounting, insurance, legal, and construction services.

SPRs are systematic reviews of the policy, regulatory and institutional frameworks that characterise the services sectors. They aim to identify policy options, recommendations, and an action plan for reform. The SPR process: (i) contributes to a strategic approach to develop the services sector, (ii) enhances stakeholder consultation and engagement in policy development, and (iii) surveys achievements and examines what needs to be done. Thus, SPRs serve to reinforce national strategies by recommending a series of practical steps, through which strategic objectives can be pursued.

Lessons learned from Lesotho's and Uganda's SPRs
The studies show the importance of integrated policy making for ensuring the contribution of the services sector to the broader economy. It means increased coherence in policy making at different levels: socio-economic management and development policies; sector-specific policies; and trade policies, including trade negotiations strategies.

They also suggest that there is a need for improved coordination at the regional level to implement strategies aimed at pooling resources for developing skills and capacities, sharing infrastructure, and promoting higher service standards. The importance of having the capacity and tools to monitor policies against targets, particularly as challenges are encountered, is also emphasised.

Key challenges faced by policy-makers include: (i) weak human resources and the need to upgrade skills, (ii) insufficient support for SMEs, including access to financing, (iii) supply capacity that does not necessarily meet regional or international standards, and (iv) infrastructural gaps. For certain sectors, the issues of technological upgrade and the promotion of innovation are also of relevance.

Findings from Uganda's SPR
In order to improve the contribution of the analysed services to the economy, the Ugandan SPR indicated the need to upgrade capacity, skills, and existing legal frameworks.

In the insurance sector, capacity constraints were linked to insufficient human professional qualifications and skills. The need to develop or update regulation in this sector is dependent upon solvency requirements, implementation of existing acts, incentives to facilitate enforcement, procedures, and limits for compensation. Also, the need to correct inconsistencies between legal frameworks and government policies; develop innovative products for business (such as insurance for transit goods); and increase confidence in the industry were key findings.

The need to update regulatory frameworks was also raised in the examination of professional services. In the case of accounting, this related to the fact that the majority of people offering services were not regulated. In the case of legal services, action was deemed necessary to separate the disciplinary function from the regulatory and standard-setting institutions. With regards to engineering and construction services, an agreed approach was needed for tendering and procurement, and developing regulation on consumer protection.

In relation to capacity and skills upgrade, recommendations were made related to academic institutions facilitating trainees and sponsorships in different sectors. Skills upgrade was particularly relevant for the accounting sector, given recent reforms that implied changes in practices, and in the engineering sector, to enhance qualifications for consultancy, thereby promoting hiring of local consultants.

In the case of legal services, other aspects that required attention was the lack of a registry and computerised database of up-to-date information on advocates. In the case of construction services, limited access to credit and equipment, as well as weak business support institutions needed further focus. In addition, exploring opportunities for exports of construction services in the EAC and COMESA was deemed relevant.

Findings from Lesotho's SPR
Cross-sectoral recommendations aimed at improving the contribution of the services sector to the overall economy included the following: developing strategies to improve (i) key infrastructure related to the development of the sectors analysed, (ii) employment in these sectors, and (iii) the processing of work and residence permits; improving Lesotho's business climate; making greater use of decentralised bodies to advance strategies and implementation of ongoing initiatives; focus on securing access to other services markets; passing a competition law; creating a competition authority; and enacting a comprehensive investment code.

In the case of Lesotho, major challenges related to financial services included: access to these services in rural areas and access to credit by women in particular, which were only partially addressed by informal financial services. The main recommendations in this sector were directed towards updating the regulatory framework, and in a few areas developing legislation such as microfinance and consumer protection.

In health services, key issues identified included a lack of access to services in rural villages and scarcity of skills due to brain drain. Recommendations in this sector focussed on the need for improved data collection to guide policy choices in the sector and for training of the institutions responsible for the registration and monitoring of medical professionals.

With regards to tourism, the study found the sector to be constrained by infrastructure gaps and limited progress in diversifying source markets. Needs identified in this area related to differentiating Lesotho from key competitor destinations, developing new tourism products, and diversifying the country's tourism product base. Recommendations referred to the need to establish policy planning and legal frameworks to manage the sector, in order to ensure an enabling environment for future growth and strengthened linkages with other sectors.

UNCTAD's experience with assisting countries to conduct SPRs suggests that such an exercise which identifies, through multi-stakeholder consultation (with policy-makers, regulators, operators, consumers, etc.), the elements of a policy, regulatory and institutional reform agenda and a specific action plan is an important tool for countries wishing to improve the competitiveness of the services economy with a view to promoting development gains. The SPR is both a stock-taking and forward-looking exercise and represents a pro-active approach to policy-making and regulation which acknowledges the rapidly evolving nature of today's services sectors and markets that require regular review and adaptation of policies. Many governments, while they may already have consultative processes in place, would benefit from strengthening and formalising such procedures, including the planning of implementation of the recommendations and action plans. UNCTAD provides assistance to countries for the entire process aimed at promoting the adoption by countries of a comprehensive, integrated and coherent services strategy of growth, development and trade, accompanied - where necessary - by further sectoral development planning and macro-economic, social, investment, competition, and environmental policies.

Mina Mashayekhi: Head, Trade Negotiations and Commercial Diplomacy Branch (TNCDB) of UNCTAD's Division on International Trade in Goods, Services, and Commodities.

Luisa Rodriguez and Martine Julsaint Kidane are both Economic Affairs Officers in TNCDB, UNCTAD.

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