Trade in services in Latin America and the Caribbean: an analysis of recent trends

This paper compares the dynamism of the Latin American and Caribbean region's services trade with that of Asia, evaluates the determinants of these trade flows, and proposes measures for improving the region's performance. The focus of this study is on "other services", which includes all services except transport and travel services (mainly tourism)."Other services" include many modern service inputs (including communications, financial and information technology services and business services), that play an increasingly vital role in determining many businesses' levels of competitiveness and productivity. Latin America exports of "other services" grew by less than that of the world and Asian averages between 1985 and 2005. As a result, the share of Latin America and the Caribbean in world's "other services" trade diminished from between 1995 and 2005, although the performance varies greatly among subregions, with Argentina, Brazil, Costa Rica and Honduras being the most successful. The region's lack of dynamism relative to that of China and India is also reflected in the drop of the region's share in imports of the United States and European Union.Three key determinants are analyzed to understand the region's poor performance: national regulatory systems, human capital, and information and communication technologies (ICTs). The incidence of regulation contributes little to the understanding of the differences in export performance, as services in countries in Latin America and the Caribbean tend to be less heavily regulated than those in Asia.Together with the privatization of many state enterprises, Latin America attracted larger inflows of foreign capital as a share of GDP between 1995 and 2004. However, most of this investment was motivated by serving local markets rather than creating an export base of services. The quality and cost of human capital provide a better explanation of the superior Asian performance. China, India and the ASEAN countries have an advantage over Latin America and the Caribbean because they have a large number of highly skilled workers (including information technology experts) who are paid competitive salaries. Another factor favoring the Asian countries is that workers have a good grasp of mathematics, an area where the region lags far behind. Third, although the quality of the ICT infrastructure is comparable between the two regions, the cost seems somewhat higher in Latin America and the Caribbean. One factor that raises the cost of access to ICTs in the region is that, by contrast with Asia, only a few countries are signatories to the WTO Information Technology Agreement. To boost trade in these services in the region, both public and private sectors need to make an effort to produce better-quality, competitively priced services. These efforts should target the main obstacles to the sector's development. First, a greater liberalization of services trade, combined with increased mutual recognition and gradual convergence of different countries' regulatory frameworks. The timid approach taken to liberalization in WTO, subregional agreements (Mercosur and Andean Community), and the bilateral agreements with countries outside the region has done no more than maintain the regulatory status quo without achieving any genuine liberalization of trade in services. Second, upgrading human capital is probably the most important task for Latin America and the Caribbean. The public and private sectors should work together to establish ICT university courses and training programmes, especially for small and medium-sized enterprises. Third, an important step in opening up access to modern technologies such as telecommunications is to improve regulatory and competition policy with a view to stimulating investment and ensuring that high-quality services are provided at the lowest possible cost. Greater broadband Internet penetration makes it easier to sell more complex electronic services internationally. Broadband access can also boost companies' competitiveness and productivity. Another measure to encourage service exports is quality certification that enhances international credibility for service delivery.