of Sound Regulation in Services:
are at the center of all economic activity in the modern economy.
Innovation and efficiency in the production of services have
become crucial to economic growth. One of the most important challenges for governments in todays
economy therefore is to assure that its regulations in the services
sector support innovation and efficiency in the production of services.
This does not imply the elimination of all regulation, but the reform of
regulations that are not well targeted at clear and objective social
goals, or seek to achieve such social goals in ways that hamper
innovation and competition. Regulatory
reform and liberalization of trade in services have thus become
important policy tools for stimulating economic growth in todays
faces many challenges in developing and modernizing its economy.
Its government has correctly identified three linked objectives the reform of the state enterprise sector, the
banking system and the social welfare system - as the top priority.
At the same time, China will not be able to build a solid
foundation for long term economic growth without creating an
economically efficient services sector.
One of the essential prerequisites for an efficient services
sector is a regulatory system that encourages rather than hinders
competition and innovation in the production of services.
This will require major reforms of current regulations.
reform in Services, like the rationalization of state enterprises, will
create adjustment problems, not the least of which will be the added
displacement of workers employed by enterprises protected from
competition by current regulations.
While the reforms themselves can be expected to generate new jobs
in the industry, there is an inevitable time lag and the displaced
workers may not have the skills needed to fill the new jobs created by
expanded competition in the industry.
The government therefore will need to pace the reforms that
create additional job losses to a pace that is socially acceptable.
At the same time, the government should now set the targets and
direction for reform.
paper will examine these propositions ingreater depth, and explore a set
of regulatory principles which can help assure that a government can
both effectively achieve the social objectives of its choice and
minimize the bottlenecks created by regulation to innovation and
efficiency in the production of services.
principles incorporate some of the best insights about good governance.
They have also been widely incorporated in international trade
rules, and thus play an important role in the liberalization of trade in
have become crucial to economic growth and prosperity for three reasons:
the key to success in the new manufacturing economy is innovative
product design and engineering, innovative advances in production
processes, innovative marketing and distribution, innovative
customization, and innovative outsourcing and globalization strategies -
all services activities.
telecommunications, transportation, finance, insurance, distribution and
information services are the central activities that underpin all forms
of international trade and all aspects of global economic activity.
Innovation and increasing efficiency in these infrastructure
services were at the foundation all the remarkable growth of trade and
the accompanying high rates of economic growth in recent years.
Electronic Commerce now promises to revolutionize distribution of goods
and services worldwide by making world markets accessible to small
businesses. The expanded
use of Electronic Commerce promises to unleash a new wave of
entrepreneurial activity worldwide.
Since business services make up an
increasing proportion of the cost of production, anything that adds to
the cost of business services also substantially increases the cost of
everything a country produces. Ineffective and excessively intrusive
regulation of services, government protection of monopolies in services,
and barriers to foreign trade and investment in services thus increase
the cost ofproducing both manufactured goods and consumer services in
the economy, and make such goods and services less competitive on world
markets. Moreover, regulatory rigidities constrain the ability of firms
to respond and adapt to changes in markets, and create infrastructure
bottlenecks that stifle growth by putting a direct cap on the volume of
Any time a government regulation is not
well targeted at a clear social objective, or anytime it seeks to
accomplish the identified social objective through more red tape and
government intervention than is necessary to accomplish the objective,
it introduces an unnecessary cost.
Any time a government regulation seeks to accomplish its
objectives by requiring businesses to follow procedures and practices
based on current technology or current inefficient business practices it
prevents innovation and the search for greater efficiency in the
production of the regulated services.
Anytime a regulation reduces or prevents competition and the
entry of new suppliers in the production of services; it reduces
innovation and the search for greater efficiency.
Poorly targeted and excessively
intrusive regulations not only reduce growth and the competitiveness of
national goods in global markets; they also frequently fail to achieve
their desired social objective. This
was well illustrated by the recent Asian financial crisis. Contrary to
popular belief, the crisis was not caused by the liberalization of
regulatory controls. It is true that the removal of controls on capital
inflows led to the massive flow of liquid capital into these economies,
flows that stopped and were reversed at the onset of the crisis. The
crisis, itself, however, was caused by a combination of inadequate
regulatory supervision of the fiduciary performance of market
participants on one hand and of insufficient liberalization of controls
on investment opportunities on the other hand.
Most countries were focusing on the
wrong things in their regulatory systems.
On one hand, the regulations provided inadequate controls and
monitoring of the overall quality of the asset portfolio acquired by
financial institutions, the level of risk assumed by these financial
institutions, and conflicts of interest created by cozy relationships
and a lack of public transparency of transactions, assets and
obligations. On the other
hand, the regulations continued to restrict investment opportunities in
these economies. This
created seeds for the crisis for two reasons.
First, the discretionary controls built into the regulations
provided opportunities for bribery and corruption, and erosion of the
already inadequate degree of fiduciary supervision provided by
regulators. Second, the restrictions on investment opportunities created
an imbalance between the liberalization of financial capital inflows and
investment opportunities open to foreigners. This created a large pool
of liquid capital and a shortage of qualified entrepreneurs and managers
who could make the judgments necessary for sound long-term investment
the current stage of economic development of the Chinese economy, one
might be tempted to argue that the growth of the manufacturing sector is
a more important priority than the growth of the services sector.
If China has not fully entered into the industrial stage of
development, why should it now worry about its position in the
post-industrial, information-based economy of the future?
Moreover, if many unskilled or semi-skilled Chinese workers are
employed in the services sector, wouldnt
reform of the services sector exacerbate the overall social adjustment
problem associated with the reform of the state enterprises?
questions have some validity, but need to be put into the context of a
broader understanding of the role of trade in growth, and the
transformation of the manufacturing process in the rest of the world. Increasingly, services rather than unskilled manufacturing
labor constitutes the most important input into manufacturing.
Services that serve as direct inputs into the manufacturing
process or into the production of consumer services are therefore a key
to both growth and global competitiveness of a nations
goods and services. Regulatory
reform that is targeted at such business services need not cover many of
the labor-intensive consumer services that employ large numbers of
unskilled or semi-skilled workers.
will undoubtedly be better off if it seeks to adjust its economy to
current production technologies rather than the outdated technologies of
the past. Aside from what
is best for China as an isolated economy, China must consider the role
of trade in its economic growth strategy.
Trade has been the major driver of growth in recent years, and
trade needs to be supported by an economically efficient and smoothly
functioning services sector. If China is to develop its own native capacity to develop
globally competitive products and to market and distribute such products
globally, it cannot delay the development of economically efficient and
globally competitive services sector. These propositions are explored in
greater depth in the next section.
The criteria for achieving a high rate
of economic growth are quite different from what they were in the
economy dominated by large-scale heavy industry.
In the recent industrial economy, success depended on the ability
to produce standard goods cheaply by combining large amounts of cheap
labor with large-scale production facilities dedicated to the production
of specific goods. In the
new economy, success depends on constant innovation in products and
production processes to take advantage of rapidly changing technologies
and to meet the requirements of rapidly changing markets.
Services are at the heart of the new
economic revolution, since they drive economic activities based on the
new production paradigm. They provide the basis for the innovation in
technology and design that is central to global competitiveness.
The new economic revolution affects
everyone tied into the world economy. Effective participation in global
trade and in globalized production systems depends increasingly on
state-of-the-art information systems that provide access to timely
information about markets, production schedules, and product designs.
The efficient production of services is key to participation in
this new global economy because they provide the foundation for the
global communication, transportation and financial linkages that enable
a country to participate in global production and trade.
No country can be successful in its
effort to adapt new technologies to its own needs, or to link itself to
the broader global economy, without establishing the basis for a
thriving, productive, and innovative services industry. Regulatory
reform and liberalization of trade in services are crucial tools for
achieving this objective, because over-regulation and restrictions on
entry by foreign service providers inevitably result in low quality,
high cost, and outdated services.
An indication of the economic benefits
of regulatory reform can be seen from the U.S. experience in reducing
the level of government regulation in key sectors. Regulatory reform in
sectors such as telecommunications, transportation, financial services,
and energy were followed by major bursts of growth in these industries
and a substantial reduction incosts and prices in these sectors.
Corroborative evidence comes from analyses of the economic impact of
European efforts to remove regulatory barriers to trade in the context
of the single market program. Negotiations on trade in services have to
be seenas key catalyst in facilitating domestic reform of regulatory
systems that block growth.
Key Drivers of Industrial
This section provides a brief but in
depth overview of the technological revolution, and the critical role of
trade in services. The key manifestations of the transformation of the
production process are the automation of production, the mass
customization of both goods and services, the shortening of product life
cycles, the flattening out of industrial organizations, the tradability
of services, and the globalization of production, firms and markets.
Automation of production.
Computer control of industrial machinery has led to the increasing
automation of production and the ability to produce customized goods on
mass production lines. Automation not only reduces labor costs, but it
also increases quality. This is because computers and machines do not
get bored or lose attention like human beings, and can therefore produce
to more exact tolerances and maintain a high level of accuracy over
longer periods of time. Automation also makes it possible to produce a
larger variety of goods as cheaply as it was previously possible to
produce uniform goods, thus enabling producers to meet different
consumer tastes. It also makes it easier and cheaper to reprogram
production lines for new products, and thus to introduce new products
more rapidly and more cheaply when consumer tastes shift.
One of the key industries where the automation of production has
had a dramatic impact is the auto industry, where labor costs as a
proportion of the total cost of production have fallen substantially,
where the proportion of blue collar and white collar workers has been
reversed, and total a much smaller number of workers produce a larger
number of vehicles than 10 to 20 years ago.
Customization of Production. The
ability to produce a greater variety of goods on a single production
line increases the possibility for the increasing customization of
products to meet the varied tastes of different niches inthe global
market. Computer driven
advances in materials science, electronic controls, chemical and
biogenetic engineering and software allow firms to design products with
an increasing range of potential features and performance
characteristics to meetconsumer needs.
At the same time, a convergence of costs and increased
competition have raised the importance of customization to competitive
success in the global market place. The more rapid diffusion of
technology leads to a greater convergence of direct production costs and
an increase in competitive pressures.
The greater customization of production has led to increasing
variety in the features and options built into the consumer goods
offered for sale. It has
also led to increasing emphasis in the identification of niche markets,
and in the development of products for such markets.
targeting of the teenage market is a good example.
Shortening of Product Life Cycles. Competitive
success in this new environment requires constant innovation and
flexibility in adapting production to the requirements of the market
place. The need for constant innovation has been reinforced by the
rapid decline in product life cycles, i.e., the average life of a
product from the time it is designed to the time it is replaced by
another product in the market place. The actual product life cycle
differs from product to product, but virtually all products traded in
international commerce have experienced a substantial increase in the
pace of change and innovation. This phenomenon has contributed to a
flattening of the organizational structure of firms because large and
complex hierarchies tend to slow down decision making and the rate of
innovation. The industry
where the shortening of product life cycles has had the most dramatic
result is probably the computer industry, where new models and new
components appear as often as every 4 to 6 months.
Crucial Role of Information Technology.
this new economy, there is a much greater likelihood that products will
fail the market test if they are not well targeted at specific niches in
the consumer market and not updated when consumer tastes shift.
In order to compete successfully in this new economic environment
and to prosper economically, producers in each country have to be able
information about what consumers want to buy;
information about the best available technology to design and engineer
information about least cost methods of production;
information among all facilities involved in the production chain to
shorten the time it takes to respond to shifts in consumer tastes and
minimize idle or unsaleable inventory;
information about new products to potential buyers; and
an information system to closely track what goods and services are being
sold, to whom, and where.
The key element in the achievement of
these challenges is the efficient and timely acquisition, processing,
and distribution of information.
The introduction of computer technology
has also led to the automation and tradability of information-based
services. It has vastly increased the amount of information that can be
processed and transmitted from one location to another instantaneously.
The use of ever-faster and more complex computers and software has
brought down the cost of producing information intensive services, and
the ability to transmit the resulting output over great distances
virtually in real time.
Network Competition. The
ability to collect, process, and transmit information in real time has
increased the possibility of introducing competition in many
network-based infrastructure services, such as telecommunications,
energy and transportation. It has made it possible to separate the
management of the physical infrastructures such as telephone lines,
electric power grids, and pipelines from the services provided through
those facilities. Different service providers can use the same
infrastructure, yet compete with each other in supplying the services
involved to consumers.
The increasing capacity to
automatically collect and analyze information has created the basis for
virtual networks, which are created by tying together telephone lines or
modes of transport owned by different companies as if they were
integrated systems, under a unified management. Overall, these changes
have created the basis for competition in the provision of
Monopolies are therefore no longer
predominant in these industries. This
is best exemplified by the agreement negotiated in the World Trade
Organization on basic telecommunication services.
This agreement establishes competition as the new global paradigm
for regulating these services.
Globalization of Production. The
increased capacity to process and transmit information, and the
associated tradability of services, has led to the globalization of
production in both goods and services. Firms are now able to locate the
production of individual components and business services in
geographically separated locationsand to carry out different stages in
the processing or assembly of a product in different places. Enterprises
can seek out the optimal global location for each production activity,
and thus take advantage of the locational advantages each place has to
offer. At the same time,
such global firms can maintain a high degree of control and coordination
of all downstream and upstream production processes, thus preserving all
the advantages that close control and coordination have to offer,
including low inventories and rapid shifts in production schedules in
response to changes in the market.
The impact of the globalization of
production has been pervasive. Few products can be produced on a
globally competitive basis today by using exclusively national inputs.
No company drawing on purely national resources can possibly match the
cost advantages enjoyed by a company that is able to take advantage of
the cheapest inputs obtained globally.
The most obvious example of the globalization of production can
be found in industries related to information technology
telecommunications, avionics, electronics, computers, etc.
Globalization of Firms. The
globalization of production has lead to the increasing globalization of
firms. Unlike the typical multinational of the 1960s and 70s, the new
global corporation tends to be far more integrated on a global level in
terms of product development and staff management responsibilities.
At the same time, the new technologies have facilitated the
outsourcing of production activities that are not one of the core
competencies of a firm, and managers are left to concentrate on those
activities that are most crucial to the competitive success of the firm.
This has reinforced the flattening out of organizational structures and
enabled firms to increase the rate of innovation and their response to
market signals. It also has expanded opportunities for international
trade in business services.
The globalization of production, firms,
and markets has created an increasing demand by firms for seamless
global infrastructure services, thus creating pressures for the
globalization of many infrastructure services. The global firms of today
increasingly demand network operators that can tie together the globally
distributed facilities of the firm through integrated network services.
The creation of virtual networks based on computer-controlled linkages
among physical networks and facilities has significantly facilitated the
development of customized infrastructure solutions.
The demand for new global operators of network services has had
the most dramatic impact in telecommunications, parcel post and express
mail delivery, and more recently in the provision of intermodal
transportation services. Globally networked firms such as DHL, Federal Express,
Sealand, American Express have gained significant market share.
The Internet and the Revolution in
Electronic Commerce. The
Internet is taking this global economic revolution from the level of
large multinational companies to small businesses and individual
consumers. Internet-based electronic commerce will multiply potential
economic benefits of low cost global communications by enabling many
more businesses and service providers to:
their products to foreign consumers;
information about products and prices available abroad; and
and buy directly over the wire in the case of information-based products
and services. It also will increase the competitive burden imposed on
domestic firms by inefficient and costly business services and by
The production of services and, in
particular, the collection, processing, analysis, manipulation and
distribution of information, is at the heart of every one of the
features of the new economic paradigm. Inefficiencies in the production
of services due to excessive regulation, government protection of
monopolies, and barriers to foreign trade and investment translate
themselves into excessive costs and a lack of innovation in business
services. Since business services make upan increasing proportion of the
cost of production, the increased cost of business services readily
translates into increased costs for everything a country produces.
Moreover, the regulatory rigidities constrain innovation and the ability
of firms to respond and adapt to changes in market signals. Finally, the
bottlenecks in telecommunication and transportation stifle growth by
putting a direct cap on economic activity.
Relevance of New Economic Revolution to
Developing Countries and China
Developing countries such as China
might be inclined to question the relevance to them of many of these
changes in the world economy, since an abundant supply of unskilled
workers and a limited supply of capital restrict the prospects for
automating production in their economies. Moreover, much of the economic
development process in China involves the accumulation of enough capital
to bring the country more fully into the industrial economy. This
perspective, however, misses a fundamental point. The economic
prosperity of developed as well as developing countries today are tied
to world markets. What producers from any one country can sell in
foreign markets is dictated by what producers from every other country
are offering for sale.
Goods and services produced in China
for sale in world markets have to meet the requirements of the new
paradigm. Products have to meet current consumer tastes, and production
has to adjust rapidly to shifts in consumer tastes to avoid wasteful
inventory build-up and loss of market share. There is a niche for cheap,
low quality, undifferentiated products, but that is a heavily populated
niche. Such products also contain little value-added and therefore will
not sustain the increases in real income, which China seeks.
In order to lift the living standard of
its people, China must seek to move to higher value production. That, in
turn, means producing parts and components, business services and other
inputs used in the global production of high quality goods and services.
China has a large pool of educated and
skilled workers who are well qualified to produce world-class
professional services. However, they will not be able to do so unless
they are given access to world quality support services, in particular,
a modern telecommunication and transportation system. Analysts at the
World Bank and the Asian Development Bank have identified the lack of
adequate infrastructure investment as the major obstacle to sustained
growth in many high growth developing country economies.
To produce goods competitively, China
needs to have access to world quality business services that are
competitively priced. Any producer who cannot get access to capital at
competitive rates of interest, reasonably priced insurance, world
quality marketing and advertising expertise, and cutting-edge
engineering know-how will find it difficult to compete in world markets.
budget is even more strained than developed country budgets, and has as
much a reason as developed countries to deliver social services as
efficiently as possible.
In summary, if China wants to take
advantage of the opportunities created by the new economic revolution it
must seek to reform its domestic regulations in services and liberalize
barriers limiting its trade in services.
What China does to open up competition and improve economic
efficiency in services by removing regulatory and other obstacles to the
production of efficient services will increasingly determine its
economic growth and prosperity.
The need for regulatory reform is
driven by four developments:
innovations that have expanded the potential for competition in
of new products and services that do not fit current regulatory
insights into the economics of regulation, which offer the possibility
for designing more economically efficient regulations.
globalization of production and markets, which has increased the cost of
large national differences in regulatory standards.
developments are explored in greater detail below.
First, technological advances have led
to an explosion of new products or services. Regulations that are
product or service specific tend to become increasingly distortive and
they prevent the introduction of new services. Such product or service
specific regulations also become increasingly ineffective as markets
substitute unregulated products and services for the regulated products
Second, many infrastructure services
have traditionally been thought of as natural monopolies because the
major cost in providing the service was in the construction and
maintenance of infrastructure facilities, rather than in the marginal
inputs required to serve individual customers. Modern technology has
fundamentally changed the economics underlying the provision of such
services. It has reduced
the cost of the infrastructure facilities relative to variable costs,
enhanced the possibility of interconnecting independently provided
services through computer inter-mediated systems, and (c) made it
possible to track, monitor, and price network services supplied over a
single network by different enterprises. The net result is that
competition has not only become more viable,but has become essential for
the introduction of more efficient and innovative infrastructure
services. Regulations that stifle and limit competition increase the
costs of businesses dependent on these networks.
Third, much has been learned about the
incentive structures created by various techniques of regulation and
their relative effectiveness in achieving desired social objectives.
Much has also been learned about the advantages and techniques for
focusing regulations more closely on the desired regulatory objective.
Too often regulatory systems seek to achieve desired social objectives
by controlling entry into the industry by new suppliers or the provision
of new services by existing suppliers, when the real issue concerns the
behavior of suppliers with respect particular regulatory objectives.
Moreover, there is a tendency to regulate more of the activities of an
enterprise than is really necessary to achieve a clear social objective.
For example, in order to assure that the owners of telecommunication or
power lines do not charge exorbitant prices or abuse their control over
the basic distribution network, it is sufficient to regulate access to
the network and the price charged for the use of the network. The market
can be allowed to determine the types of services that might be offered
over the network by competitive suppliers, and the prices charged for
Fourth, the globalization of production
has created pressures for harmonizing standards related to he provision
of internationally integrated infrastructure networks. The globalization
of production makes economic sense only where national regulations allow
the adoption of the technologies, information systems, and standards
across national frontiers. Large differences in national regulations
that have a direct bearing on the operation of globally integrated
networks or production systems add to the cost of doing business
The Internet is taking the need for
regulatory reform one step further by opening up the possibility for the
efficient global distribution of many services. Governments will need to
rethink their role in the regulation of many services; the locus of
responsibility for services produced abroad but purchased locally though
the Internet, and the desired scope for international cooperation in
creating a stable commercial environment for Internet transactions.
Already, many information services are provided competitively
over the Internet, as are many financial services such as banking.
number of principles can be identified which can guide governments in
developing sound laws and regulations.
These principles can help assure that the laws and regulations
are well targeted at desired social objectives and that they do not
burden economic activity more than is necessary to achieve those
objectives. Application of
these principles are designed to assure that the social objectives are
effectively achieved, while minimizing the economic opportunity cost of
achieving the desired objectives.
their core, most of these principles are principles of good governance.
Many of them have been recognized as fundamental principles of a
sound legal structure since the time of Hammurabi. Many of them have
also become embeddedin international trade rules and agreements,
including the General Agreement on Trade in Services which governs trade
in services under the umbrella of the World Trade Organization.
of Laws and Regulations
The first and most important
principle is transparency. It
holds that governments should publish all the laws, regulations and
administrative proceedings that affect market participants and all
changes in such laws, regulations and administrative procedures. There
are two important dimensions to transparency.
everyone affected by laws and regulations should know what they are
before they engage in economic activity that may be covered by such laws
and regulations. This is not only a question of fairness in governance,
but also are requirement for economic efficiency. Market participants
cannot make informed decisions about production, marketing and
investment decisions if they do not know how government laws and
regulations will affect them. A firm cannot plan and organize its activities efficiently if
it does not know in advance what rules it will have to follow.
Moreover, it will not be able to make sound decisions on what to
produce or trade unless it knows all the costs it will incur, including
the costs of meeting regulatory requirements.
all potential market participants must have equal knowledge about the
relevant laws and regulations; otherwise, market outcomes will be
distorted. Success in the
market place will be determined by privileged access to knowledge,
rather than by superior economic performance.
Every time a firm with superior economic performance is
disadvantaged, the overall growth of the economy suffers.
with respect to laws and regulations in general is one of the most
fundamental requirements for good governance.
The principle of transparency is
a core principle embedded in virtually at trade agreements. It is incorporated in the General Agreement on Trade in
Services (GATS), which sets out the rules of the World Trade
Organization (WTO) for trade in services, in Article III.
The GATS provides a set of rules which countries belonging to the
WTO must follow in adopting regulations that affect international trade
in services. While many of
the rules incorporated in the GATS depend on national commitments that
each country has negotiated, the one overarching rule that applies to
all regulations that affect trade in services is Article I on
The key parts of the provision
read as follows: Each Member shall publish
promptly �ll relevant measures of general application which
pertain to or affect the operation of this Agreement.
Each Member shall promptly and at least annually inform the
Council for Trade in Services of the introduction of any new, or any
changes to existing, laws, regulations or administrative guidelines
which significantly affect trade in services covered by its specific
commitments under this Agreement.
Transparency is a fundamental
requirement for the efficient functioning of a market economy, because
all market participants need to have all the available information about
laws and regulations to make the correct management decisions, and they
all have to have equal access to such information in order to assure
that their success in the market placeis determined by their performance
rather than by their privileged access to information.
Process in Administration of Laws and Regulations
A second key principle is due
process. This principle holds that firms affected by government laws and
regulations should be given the opportunity
consult the government on the interpretation and application of the
regulations that affect them,
appeal regulatory decisions to appropriate administrative or judicial
obtain a timely response to requests for regulatory decisions.
process is designed to assure that both market participants and
officials have the information they need about the impact of laws and
regulations on economic decisions, and that laws and regulations are
administered in an impartial and objective manner.
The process of consultation is a two-way street.
On one hand, it helps assure that officials making regulatory
decisions have the best possible knowledge of the impact of laws and
regulations on economic activity. On
the other hand, it helps assure that market participants fully
understand how to interpret and adapt the legal language to real world
process also helps to minimize unforeseen but avoidable burdens on
economic activity. Changes
in the interpretation or application of regulations can help to boost
economic growth when such changes reduce costs or expand commercial
opportunities without compromising the desired social objective.
Due process contributes to
economic efficiency in three ways.
It helps assure that all market participants have the information
they need to make sound decisions.
It helps assure that the economic cost of laws and regulations is
minimized to what is necessary to achieve clearly identified social
objectives. It helps assure
that the most economically efficient firms succeed in the market place.
process is incorporated in a number of the Articles of the GATS
Agreement. Two of the
provisions apply to all services sectors, regardless of the specific
national commitments each country has negotiated, while a third
provision applies only to negotiated commitments. The key provisions are
GATS Article III, para 4Each
member shall respond promptly to all requests for specific information
on any of its measures of general application or international
GATS Article VI, para 2 (a). Each
member shall maintain or institute as soon as practicable judicial,
arbitral or administrative tribunals or procedures which provide, at the
request of an affected service supplier, for the prompt review of,
and where appropriate remedies for, administrative decisions affecting
trade in services. Where such procedures are not independent of the
agency entrusted with the administrative decision concerned, the Member
shall ensure that the procedures in fact provide for an objective and
Article VI, para 3.Where
authorization is required for the supply of a service on which a
specific commitment has been made, the competent authorities of a Member
shall, within a reasonable period of time after the submission of an
application-nform the applicant of the decision
third key principle is predictability.
It holds that governments should not arbitrarily change laws and
regulations, but should make such changes only when necessary to achieve
stated social objectives and after proper notification and consultation.
It implies that laws and regulations should be promulgated only
after careful thought has been given to their implementation and effects
in the future.
principle of predictability extends the principles of transparency and
due process over time, and helps to assure that market participants can
make sound long term decisions. The
establishment of a predictable legal and regulatory environment helps to
lower risk for market participants, and thus lowers the risk premium
entrepreneurs have to build into their investment decisions.
A lowering of the risk premium adds to economic growth by
enabling market participants to increase their level of investment.
is built into trade agreements through negotiated national commitments
on policy measures that could affect particular sectors or products. Of
course, the negotiation of such commitments does not remove all elements
of risk that the rules might change in the future. The rules give
governments the flexibility to alter their commitments in the face of
unforeseen events, or to adopt policies that affect the commitments
under certain well-defined circumstances. However, the commitments
provide businesses the assurances that the government involved will not
change the rules arbitrarily and for less than compelling reasons.
Predictability under the GATS
Agreement is provided in provisions set out in Part III, dealing with
Specific Commitments, Part IV, dealing with Progressive Liberalization
and the Modification of Schedules, and Article XIV dealing with General
fourth principle is non-discrimination. It means that governments should
not discriminate in the application of laws and regulations to market
participants, except in so far as there is an objective and explicit
criterion for such discrimination. Discrimination might be appropriate
if the circumstances differ, or if discrimination serves an objective
policy purpose. It
contributes to economic growth and economic efficiency by assuring that
the most effective firms are not disadvantages through arbitrary
discrimination in the design or application of regulations.
between firms or products originating from different foreign countries
is referred to as the Most Favored Nation principles in trade parlance.
Non-discrimination between domestic and foreign firms and
products is referred to as national treatment in trade parlance.
The application of the national treatment principle in the GATS
agreement does not obligate governments to treat all domestic and
foreign firms equally in all circumstances, but rather that any
discrimination be clearly stated, be based on clearly established
criteria, and serve desirable policy objectives.
principle of non-discrimination is built into three key provisions of
the GATS Agreement:
IV on Domestic Regulation, which holds that Members shall ensure that all measures
of general application affecting trade in services are administered in a
reasonable, objective and impartial manner. This
rule applies to all measures that affect trade in services, regardless
of whether or not the country has negotiated a specific national
XVII on National Treatment, which holds that
the sectors inscribed in its Schedule, and subject to any conditions and
qualifications set out therein, each Member shall accord to services and
service suppliers of any other Member, in respect of all measures
affecting the supply of services, treatment no less favorable than that
it accords to its own like services and service suppliers.
This provision clearly applies only to measures or sectors on
which a country has negotiated a national treatment commitment.
II on Most-Favored Nation Treatment, which holds that With
respect to any measure covered by this Agreement, each Member shall
any other Member treatment no less favorable than that it
accords to like services and service suppliers of any other country.
This provision applies to all measures and sectors in services,
except in so far as a country has taken an exception in its national
schedule at the time it adopted the GATS agreement.
Performance Based Criteria
order to be effective, regulations ideally should establish objective,
measurable, performance-based criteria for the supply of services.
This isa goal that is difficult to achieve fully in all cases.
Nevertheless, a regulatory system is more likely to achieve its
desired social objective and is less likely to impose a burden on
economic performance, if its provisions and enforcement are based
onobjective, measurable, and performance-based criteria.
Objective and measurable criteria help assure that enforcement of
the regulation is not based on arbitrary criteria or the whim of the
regulator, but rather on a standard that is predictable and transparent
and can be applied on a non-discriminatory basis to all market
participants. By closely
linking the objective and measurable criteria to performance with
respect to the desired social objective, the government can help assure
that the regulation achieves what it is designed to do, namely to
achieve the desired objective. It
also helps assure that the achievement of the desired social objective
does not impose unnecessary costs or burdens on economic actors and by
extension on economic performance overall.
contrast, regulatory systems that leave a great deal of discretion to
regulators are prone to corruption, to underachievement with respect to
the desired social objectives, and to economic inefficiency.
Similarly, regulatory systems that seek to substitute controls on
entry, on production, or on prices for performance based regulatory
criteria, will neither effectively achieve the desired regulatory goals
nor serve to support the economically efficient delivery of the service
and the growth of the economy overall.
GATS agreement establishes the desirability of basing domestic
regulation on objective and transparent criteria, but only indirectly
alludes to the desirability of basing such objective criteria on
performance closely tied to the desired social objective. The key
provision is found in Article VI, 4 (a) which tasks the Council for
Trade in Services with the development of disciplines that shall aim to
ensure that regulatory provisions are based
on objective and transparent criteria.
the Regulatory Burden
principle for good regulation is that the regulation should be designed
so as to minimize the burden the achievement of the desired social
objective imposes on economic activity.
This is obviously closely related to the last principle, namely
that regulations should be based on objective, measurable,
performance-based criteria. It is only common sense to argue that it is desirable to
minimize the cost of achieving any particular goal.
principleon minimizing the regulatory burden is incorporated in Article
VI, 4 (b) of the GATS agreement. This
provision tasks the Council for Trade in Services with the development
of disciplines that shall aim to ensure that regulatory provisions are not
more burdensome than necessary to ensure the quality of the service.
of Regulatory Objectives
objective of minimizing the burden associated with the achievement of a
regulatory objective can be enhanced through the adoption of a corollary
principle on the transparency of regulatory objectives.
This principle holds that the social objective served by a
particular law or regulation should be transparent, i.e. that it should
be clearly stated at the time the regulation is adopted.
A clear statement of the desired social objective helps to remove
possible confusion over the purpose of the regulation.
It also makes it a great deal easier to judge whether a
regulation is the least burdensome necessary to accomplish the desired
principle on the transparency of regulatory objective is contained in a
draft agreement under consideration in the WTO on accountancy services,
and it is likely that it may find wider application in the future.
of Market Mechanisms
principle is that governments should use a market mechanism to promote
desired social objectives, whenever that is feasible.
The use of across the board economic incentives and disincentives
is an economically efficient method of accomplishing desiredsocial goals
because it allows market forces to determine the most economically
efficient manner of accomplishing the desired social goal.
A corollary of this principle is that scarce resources should be
auctioned whenever possible rather allocated to incumbent firms on the
basis of historic shares. An auction process is more likely to enable
the most efficient firms to gain access to such resources, and is more
likely to ensure that the opportunity cost of using the scarce resource
is properly reflected in the cost of supplying the service and the
prices charged to consumers.
regulations give existing producers or sellers preferential treatment in
the allocation of scarce resources, they not only create domestic
economic inefficiencies by discriminating against potentially more
economically efficient new suppliers; they also distort international
trade and competition. Moreover, there is a significant risk that the
economic inefficiencies and trade distortions are magnified by
political/interest group pressures and corruption.
the Scope of Regulations
principle closely related to the principle that governments should seek
to minimize the regulatory burden is the principle that governments
should minimize the scope of any regulation towhat is necessary to
accomplish the desired social objective.
This principle holds that governments should only regulate
activities directly related to the achievement of the regulatory
objective. Minimizing the
scope of regulations to the minimum necessary to achieve the desired
social objective helps to minimize the economic cost of such
application of this principle is particularly relevant to the regulation
of infrastructure services such as water, gas, electricity,
telecommunications and rail transportation.
The tendency in the past has been for governments to regulate all
aspects of economic activity in these sectors because the network for
distributing these services often constituted a natural monopoly.
In more recent years many governments have recognized that they
can more efficiently accomplish their objective of protecting consumers
by separating the construction and operation of the distribution network
from provision of services over that network.
By separating the production of these infrastructure services
from their distribution through the monopoly network, the government can
regulate access to and use of the network monopoly, while leaving the
supply of the services involved open to market competition. Efforts to
minimize the scope of regulations to the minimum necessary to achieve
the desired social objective helps to minimize the economic cost of such
regulations and the potential distortion of international trade and
has made tremendous strides in the past few years in modernizing its
economy, and it has generated impress8ive growth rates.
These gains have come from releasing the energies of the Chinese
people in a market context, and in more widely participating in the
global economy. The most
important challenge at this stage, undoubtedly, is the rationalization
of the large state enterprises, in order to relieve the banking system
of the continuing burden of subsidizing them.
In order to rationalize the state enterprises, China, in turn,
has to relieve the state enterprises of their social obligations by
introducing a modern social welfare system.
These challenges are well understood, and the top leadership of
the Chinese government has committed itself to achieve these goals in
high priority goals for the near future are not the subject of this
paper, and are mentioned here only for three reasons. First, to
recognize the importance of these near term challenges. Second, to
acknowledge that far-reaching regulatory reforms in financial services
will be difficult to achieve without progress in eliminating subsidies
to state enterprises and putting the banking system on a sound financial
basis. Third, to indicate that the next most important challenge
Chinafaces is the reform of its regulatory system, particularly in
services. It will be
impossible for China to sustain high growth rates over the long run
without such reforms.
most immediate challenges for China in the area of regulatory reform are
the most simple ones, yet also perhaps the most difficult to accomplish
to establish transparency and predictability in its regulations.
The reform process in China rightly involves a great deal of
local experimentation. It
should be possible, however, topreserve an element of pragmatic
experimentation with greater transparency and predictability. Beyond
these fundamentals, China needs to move from a system of entry and
licensing controls to a regulatory system based on transparent,
objective and measurable performance criteria.
Such a system will be more likely to accomplish legitimate social
objectives, as well as allow market participants to search out the most
effective and economically efficient methods of supplying the services
needed by a high growth economy.
up competition to services will be particularly important as China seeks
to develop its own capacity to develop, design, finance, insure, and
market goods and services for the world market.
As long as Chinese enterprises play the role of subcontractors,
foreign firms operating in the competitive global market place can
provide these services. Chinese
enterprises will not be able to go far in developing their own
excellence in these areas without the opening up of competition inside
China, and that will require a major reform of Chinese regulatory
systems in services.
the regulatory systems in services, and opening up the market to wider
domestic and international competition is thus very much in Chinas
domestic economic interest. These
reforms cannot be accomplished overnight, since both the regulators and
the managers of affected firms require time to acquire the necessary
knowledge and skills, and since all reforms are accompanied by economic
dislocations that need to be stretched out to a socially acceptable pace
of adjustment. The need for
a phased implementation of reforms, however, is not an argument for a
delay in mapping out a long-term game plan for reform and to initiate
the process of reform. The
establishment of long term reform targets and a phased plan for
implementing reforms creates a more predictable environment for
enterprises, encouraging risk taking.
It also allows market participants to anticipate reforms through
investment and management decisions,thus easing the future adjustment
process and accelerating the economic benefits of the subsequent
reforms. The establishment of reform targets and plans for their
implementation should also facilitate Chinas entry into the World Trading System.
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