Vox
October 1, 2011Compared to the goods sector, we know relatively little about the effects of trade liberalisation on the services sector, despite this being the main employer in many countries. This column presents firm-level data from the Czech Republic that suggests that services sector reform can improve the performance of domestic manufacturing firms – something that protectionist sympathisers should be wary of.
Services liberalisation is a controversial subject, as is evident from recent policy debates in the EU and WTO. The scope for controversy is deep and wide. In contrast to the large body of empirical research on the impact of trade liberalisation in goods, little is known about the effects of allowing greater foreign entry in services industries. As Francois and Hoekman (2010) note, “services have not figured prominently in the economic growth and development literature, and have only recently been highlighted in the trade literature”. Since a wide range of manufacturing and services industries rely on services inputs, it seems reasonable to presume that large gains could be achieved through the liberalisation of services sectors.In a recent paper (Arnold et al. 2011), we provide empirical evidence on the link between reforms in services sectors and the productivity of downstream manufacturing industries. Our analysis focuses on the Czech Republic, which introduced far-reaching reforms of services industries during the 1990s, including opening services sectors to foreign investors. The results, based on firm-level data for the period 1998-2003, suggest a positive association between liberalisation in services industries and the productivity of manufacturing firms using services inputs. Allowing entry of foreign services providers appears to be a key channel through which services liberalisation benefits the manufacturing sector.
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