The Unexplored Potential of Africa’s Trade in Services
by Nora Dihel and Arti Grover Goswami
Services trade matter for growth, development, gender equality and job creation for countries in Africa. They are also key inputs in the production of important exports and food staples, yet inefficiencies along their value chain can contribute to high prices: in Ethiopia, services account for about 80 percent of the final price of roses, one of the country’s key export products – similarly, between 60 and 75 percent of the price of teff, Ethiopia’s staple food grain, comes from services inputs. Access to more efficient services along the entire value chain – with the possibility of importing those services – has the potential to boost the country’s cut flower exports and help ensuring food security by lowering the price of staple foods. Importing services can also improve productivity through increased competition, better technologies, and access to foreign capital. A new World Bank Group report, From Hair Stylists and Teachers to Accountants and Doctors – The Unexplored Potential of Trade in Services in Africa, sheds light on uncharted opportunities for services trade in Africa, and invigorates the discussion about the role of services in trade diversification and economic upgrading on the continent.
Africa is participating in both traditional services, such as tourism and education services, but also in modern services, such as professional services and telemedicine. Differences in the cost and quality of services are critically driving such intra-regional trade. For example, according to the firm-level surveys on professional services presented in the World Bank report, more than 16 percent of the interviewed accounting, architectural, engineering and legal firms in the Common Market for Eastern and Southern Africa (COMESA) countries are already engaged in exports, mainly to neighboring countries. This contradicts official statistics, which assert that professional services exports for several countries are negligible or nonexistent. Likewise, new data collection methods such as crowdsourcing and mystery shopper surveys reveal that many hospitals in Sub-Saharan African countries are treating foreign patients and are using telemedicine; yet official statistics often do not record such trade flows in medical services.
At the other end of the spectrum, Africa witnesses widespread transactions in informal services ranging from hairdressing, construction, and housekeeping to education, health and finance. Such services trade flows seem to flourish on the African continent – despite the many barriers to the movement of services providers. Tanzanian Maasai hair braiders are in high demand in Zambia, while Congolese, Kenyan, and Ugandan hairdressers are sought after by Tanzanian women from all walks of life, from the girl next door to the wife of the Minister. And these export earnings are often the main source of income for service providers and contribute to significant improvements in their livelihoods.
While trade in services presents African countries with opportunities for growth, there are many challenges to the sector. Domestic regulatory hurdles and trade barriers continue to fragment the services markets on the continent; and the cost of trading in services is high. For instance, education and health services in East Africa are hindered by restrictions on using telemedicine or e-learning. Medical tourism remains restricted by the non-portability of insurance policies. Restrictions on the legal forms of entry to hospitals in countries such as Tanzania and Uganda, or limits on the repatriation of earnings in Kenya and Uganda constrain the establishment of foreign hospitals in the region. Finally, the high cost of visa and work permits in many countries impose stringent restrictions on the movement of health and education professionals to provide services abroad. Although regulations and their heterogeneity across regions cannot completely block trade, they depress the volumes and re-route them to informal channels. Without such burdensome regulations, the government, the suppliers and the consumers could all be better off and the welfare could be much higher. Nonetheless, limited knowledge on the impact of services reforms translates into incomplete guidance on regulatory experiences and liberalization efforts, including good practice.
What can governments do to address these challenges? The World Bank report emphasizes a few potential solutions, including:
- - Strengthening data generation efforts on services trade flows, transaction costs and outcome indicators;
- - Monitoring services integration, focusing on the impact of reforms on lowering trade costs; and
- - Putting informal and knowledge intensive services on the agenda of policy-makers.
Some countries and economic communities are already doing this. The Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC) and the South Africa Development Community (SADC) have taken steps to reduce trade barriers and countries are beginning to discuss practical solutions to trade impediments. Knowledge platforms on professional and tourism services are good examples of tools for translating policy recommendations into action. For example, the East Africa Tourism Platform has recently shown leadership in championing a coordinated approach to enhance the region’s travel and tourism competitiveness. The EAC has also been developing a policy framework for promoting trade in professional services over the past five years through the use of mutual recognition agreements (MRAs). MRAs are used as a potential mechanism to allow foreign suppliers to provide services in another market without the need for duplicate authorization processes in the home and host countries. This removal of duplicate procedures should reduce costs and save time in bringing services into new markets; and this should ultimately be reflected in lower prices and more choice for consumers. Such platforms were designed for practitioners, policy-makers, and regulators to engage in meaningful dialogue about the critical issues that are currently transforming these services in Sub-Saharan Africa.
This report aims to address some of the data challenges by exploring the opportunities in services trade on the continent, while keeping up with the discussion on the role of services trade liberalization and regulation in the structural transformation of African economies and industrialization. To quote from Alemayehu Geda, Associate Professor of Economics at Addis Ababa University, “Cooperation initiatives are necessary to increase the regulatory capacity that African governments need to build over time to engage in meaningful liberalization efforts. Through analytical support and technical assistance, the World Bank Group can assist African countries to improve regulation, facilitate services flows, and ultimately make services in Africa more competitive.”
Nora Dihel is a Senior Economist in the Macroeconomics and Fiscal Management Global Practice of the World Bank. She has previously worked in the Trade and Competitiveness Global Practice focusing on trade issues in Eastern and Southern Africa. Prior to joining the World Bank in 2008, Nora worked in the Chief Economist Unit of the Directorate General for Trade of the European Commission and the OECD Trade Directorate. She has published extensively on the economic impact of services reforms, regional integration and South-South linkages. Her most recent publication, the Unexplored Potential of Trade in Services in Africa, was launched in June 2016 in Addis Ababa. Nora has a Doctorate Degree in Economics from the Helmut Schmidt University, Germany.
Arti Grover is a Senior Consultant Economist at the World Bank and a Research Associate at Harvard Business School. Her work on international trade and on urbanization issues have appeared in leading academic journals, edited volumes and competitiveness reports. Her work is also cited in popular press, including the Economist and the Financial Times. In addition to her recent book on the “Unexplored Potential of Trade in Services in Africa”, she has co-edited another book on trade in services, “Exporting Services: A Developing Country Perspective”. Prior to joining the World Bank in 2009, Arti was a Doctoral Fulbright Fellow at Princeton University and a Lecturer at Delhi School of Economics.