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Quantifying the impact of services liberalization in a developing country

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  • Konan, Denise Eby
  • Maskus, Keith E.

Abstract

The authors consider how service liberalization differs from goods liberalization in terms of welfare, the level and composition of output, and factor prices within a developing economy, in this case Tunisia. Despite recent movements toward liberalization, Tunisian service sectors remain largely closed to foreign participation and are provided at high cost relative to many developing nations. The authors develop a computable general equilibrium (CGE) model of the Tunisian economy with multiple products and services and three trading partners. They model goods liberalization as the unilateral removal of product tariffs. Restraints on services trade involve both restrictions on cross-border supply (mode 1 in the GATS) and on foreign ownership through foreign direct investment (mode 3 in the GATS). The former are modeled as tariff-equivalent price wedges while the latter are comprised of both monopoly-rent distortions (arising from imperfect competition among domestic producers) andinefficiency costs (arising from a failure of domestic service providers to adopt least-cost practices). They find that goods-trade liberalization yields a gain in aggregate welfare and reorients production toward sectors of benchmark comparative advantage. However, a reduction of services barriers in a way that permits greater competition through foreign direct investment generates larger welfare gains. Service liberalization also requires lower adjustment costs, measured in terms of sectoral movement of workers, than does goods-trade liberalization. And it tends to increase economic activity in all sectors and raise the real returns to both capital and labor. The overall welfare gains of comprehensive service liberalization amount to more than 5 percent of initial consumption. The bulk of these gains come from opening markets for finance, business services, and telecommunications. Because these are key inputs into all sectors of the economy, their liberalization cuts costs and drives larger efficiency gains overall. The results point to the potential importance of deregulating services provision for economic development.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3193.

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Date of creation: 15 Jan 2003
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Handle: RePEc:wbk:wbrwps:3193

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Keywords: Payment Systems&Infrastructure; Environmental Economics&Policies; Decentralization; Economic Theory&Research; Banks&Banking Reform; Economic Theory&Research; Environmental Economics&Policies; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Health Economics&Finance; Banks&Banking Reform;

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  1. Sherman Robinson & Zhi Wang & Will Martin, 2002. "Capturing the Implications of Services Trade Liberalization," Economic Systems Research, Taylor & Francis Journals, vol. 14(1), pages 3-33.
  2. Hoekman, Bernard, 1995. "Tentative First Steps: An Assessment of the Uruguay Round Agreement on Services," CEPR Discussion Papers 1150, C.E.P.R. Discussion Papers.
  3. Joseph Francois & Ian Wooton, 2000. "Market Structure, Trade Liberalization and the GATS," Tinbergen Institute Discussion Papers 00-059/2, Tinbergen Institute.
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  16. Rutherford, Thomas F. & Tarr, David G., 2002. "Trade liberalization, product variety and growth in a small open economy: a quantitative assessment," Journal of International Economics, Elsevier, vol. 56(2), pages 247-272, March.
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  20. Philippa Dee & Kevin Hanslow, 2002. "Multilateral liberalisation of services trade," International Trade 0207002, EconWPA.
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