PAKISTAN TRADE POLICY PROJECT (DFID and AASR)

STUDY ON TRADE IN SERVICES (Volume I)

Prepared for the Ministry of Commerce, Government of Pakistan by Akhtar Mahmood

STUDY
1

ON TRADE IN SERVICES List of contents:

1. 2. 3. Introduction Summary of Recommendations

REVIEW OF DOMESTIC SERVICES PROVISION AND EXPORTS FROM PAKISTAN.

The current structure of services provision and exports from Pakistan. Service- specific and mode specific trade data. y y Availability and comprehensiveness of services trade data for imports and exports in Pakistan. Detailed recommendations o an optimal data and analysis framework for GATS reporting and policy formulation requirements in future.

i. ii.

4.

REVIEW OF PRIOR COMMITMENTS BY PAKISTAN AND ITS TRADING PARTNERS

A survey of domestic policies and regulations affecting market access, national treatment, MFN exemptions and services imports to Pakistan. Interpretation of Pakistans current GATS Schedule of Commitments in terms of liberalizing services imports and the impacts on domestic services providers. Assessment of the compatibility of current policies with Pakistans services commitments. A review of the research on commitments made by WTO members by sectors and modes of supply, focussing particularly on sectors and modes of supply, focussing particularly on sectors and modes of potential interest to Pakistan.

i.

ii. iii. iv.

5.

FORMULATION OF POTENTIAL REQUESTS IN THE POST DOHA ENVIRONMENT

Assessment of Pakistans interests in relation to sectors and modes of supply, including those set out in WTO position paper S/CSS/W/131. Identification of existing and potential barriers to Pakistans services exports. Identification of Pakistans potential services exports sectors and modes of supply. An overview of the positions of other members and (groups of members) in relation to the other services negotiations, with a view to identifying potential strategic negotiating alliances for Pakistan. 2

i. ii. iii. iv.

v.

Definition of potential requests.

6.

FORMULATION OF POTENTIAL OFFERS IN THE POST DOHA ENVIRONMENT

Identification of domestic services sectors which should be opened up to foster domestic development and growth. Identification of domestic services sectors in which protection should be maintained. Assessment of sectors and modes of supply in which autonomous liberalization by Pakistan has outpaced Pakistans GATS bindings and in which there is therefore existing negotiating space available to GOP. Definition of potential offers.

i. ii. iii.

iv.

INTRODUCTION
This DFID- financed study has been prepared, inter alia,:

To analyze present policies of Pakistan relating to its Services Sector, and to assist the Ministry of Commerce to participate more effectively in the current round of negotiations under the GATS; Bearing in mind the recent rapid technological advances in transport, computing and telecommunications including the development of Internet and electronic commerce, to lay the foundations for a longer term approach to the Services Sector; To recommend to the Government of Pakistan to adapt its statistical system to the new framework evolved by the United Nations Statistical Division, in collaboration with the OECD, the IMF, the UNCTAD and the WTO, for compiling statistics of international trade in services; and To recommend an institutional framework that should design, in consultation with the private sector, short and long term policies to promote foreign investment, technological development and export of services.

This study consists of two volumes: Volume I has addressed all issues, except two, listed in its terms of reference. Volume II discusses the two issues excluded from Volume I, namely requests Pakistan has received from its WTO trading partners and possible responses of Pakistan to those requests. For the time being, Volume II remains a classified document. The terms of reference of the study are reproduced in Annex I to this Introduction. This study has addressed every single issue recorded by the its terms of reference and followed scrupulously the prescribed sequence of discussion. As required by these terms of reference, the following stakeholders were consulted during the preparation of this study: The WTO Wing, Ministry of Commerce; *The State Bank of Pakistan; The Ministry of Industries and Production; The Ministry of Science and Technology; The Board of Investment; The Securities and Exchange Commission; *The Federal Chamber of Commerce and Industry; and *The Lahore Chamber of Commerce and Industry.

y y y y y y y y

With the approval of the Ministry of Commerce, the Consultant also met the following additional agencies:

The Pakistan Engineering Council, Islamabad; 4

y y y y y y

*The Institute of Chartered Accounts, Karachi; *The Institute of Bankers; The Ministry of IT and Telecommunications including PTA and PTCL; The Ministry of Finance; and The Ministry of Education. *The NESPAK, Lahore

The Consultant visited Lahore from 16 to 17 January and Karachi from 20 to 22 January, 2003 to meet the entities marked above with an asterisk. The names of the officials met are given in Annex II. The Presentation required by the TORs was held on The following entities participated in this discussion.

This consultant wishes to record his great appreciation of the support given to him by the WTO Centre of the Ministry of Commerce in the preparation of this study. He is particularly grateful to the Ministry of Commerce for the confidence placed by it in his judgment and his sense of responsibility.

Annex 1
TERMS OF REFERENCE FOR A STUDY ON SERVICES (GATS)
5

1. Introduction: Objectives and Outputs

The Pakistan Trade Policy Project (PTPP) provides for a series of trade policy studies to support the Government of Pakistans (GOP) negotiations in the WTO. The principal objectives of the studies are:

To enhance the analytical basis upon which GOP develops its national offers and positions in multilateral trade negotiations; and

to institutionalise processes for policy formulation and preparatory work for negotiations in the longer term.

The principal output will be a comprehensive Final Report, to be utilized by GOP policy makers and negotiators during WTO negotiations, and containing the analytical (quantitative and/or qualitative) work, their results, implications, recommendations and directives to be addressed in the Final Report. The Final report will be prepared by the Consultant, who will also have responsibility for its submission to GOP and the PMA.
The following four central elements will be addressed in the study:

y y y y

analysis of the issues through quantitative and / or qualitative approaches; a clear articulation of objectives and options for formulating offers and requests, and in preparing the Schedule of Commitments in the context of the post-Doha agenda; potential negotiating concessions that could be offered by Pakistan to obtain its objectives; and Identification of broad positions of other members to propose potential strategic alliances for Pakistan.

2. Content of the Study on Services

The topic coverage of the services study is described in Sections 2.1 to 2.4 below, under the respective headings, Review of Domestic Services Provision and Exports from Pakistan; Review of Uruguay Round (UR) and post-UR Commitments by Pakistan and its Trading Partners; Formulation of Potential Requests by Pakistan and Formulation of Potential Offers by Pakistan.

2.1 Review of Domestic Services Provision and Exports from Pakistan

i. ii. The current structure of services provision and exports from Pakistan; Service-specific and mode-specific trade data: 6

y y

Availability and comprehensiveness of services trade data for imports and exports in Pakistan; Detailed recommendations on an optimal data and analysis framework for GATS reporting and policy formulation requirements in future.

iii.

A survey of domestic policies and regulations affecting market access, national treatment, MFN exemptions and services imports to Pakistan.

2.2

Review of Prior Commitments by Pakistan and its Trading Partners

i. Interpretation of Pakistans current GATS Schedule of Commitments in terms of liberalizing services imports and the impacts on domestic services providers; Assessment of the compatibility of current policies with Pakistans services commitments. A review of the research on commitments made by WTO members by sectors and modes of supply, focusing particularly on sectors and modes of potential interest to Pakistan.

ii. iii.

2.3

Formulation of Potential Requests in the Post-Doha environment

i. Assessment of Pakistans interests in relation to sectors and modes of supply, including those set out in WTO position paper S/CSS/W/131;1 Identification of Pakistans potential services export sectors and modes of supply; Identification of existing and potential barriers to Pakistans services exports (drawing on 2.2(iii) above); An overview of the positions of other members (and groups of members) in relation to the services negotiations, with a view to identifying potential strategic negotiating alliances for Pakistan; Definition of potential requests.

ii. iii. iv.

v.

2.4

Formulation of Environment
i.

Potential

Offers

in

the

post-Doha

Identification of domestic services sectors which should be opened up to foster domestic development and growth;

Increasing Participation of Developing Countries in International Trade in Services: Effective Implementation of Article IV of GATS

ii. iii.

iv.

Identification of domestic services sectors in which protection should be maintained; Assessment of sectors and modes of supply in which autonomous liberalization by Pakistan has outpaced Pakistans GATS bindings and in which there is therefore existing negotiating space available to GOP; Definition of potential offers.

3. SPECIFIC TASKS OF THE CONSULTANT 3.1 Undertaking the Analysis and Preparation of the Final Report

The Consultant will have responsibility for undertaking the analysis of Sections 2.1 to 2.4. The topic coverage has been designed sequentially, in that analytical tasks will depend on results from previous tasks in many instances. The Consultant will therefore need to co-ordinate the phasing of the analysis and preparation of the study, in order to ensure a logical progression of the work and integration of outputs.

Responsibility for the preparation of the comprehensive Final Report, structured as described above, to the appropriate standard will lie with the Consultant. A Draft Final Report will be prepared and submitted to the Ministry of Commerce (MOC) and the PMA. The MOC may consult with other stakeholders before giving written comments to the Consultant before the Consultant prepares the Final Report.

3.2 Consultation with Stakeholders2

The analysis and preparation of the Final Report will be undertaken following:

Detailed consultations with government and non-government stakeholders by the Consultant during preparation of the study on the implications of the results for the formulation of negotiating positions, offers and requests by the Government Pakistan.
Dissemination of the results of sections 2.1 and 2.2. to stakeholders through the MOC in advance of the presentation (see below).

4. Further Information on Activities: the Studies Process

In addition to producing inputs into specific WTO negotiations, the studies programme is designed to institutionalize processes for policy formulation and preparatory work for negotiations in the longer term. As an integral component of the work programme, the Consultant is therefore required to undertake a number of activities associated with the study, that will contribute to this longer term goal. These activities are as follows:

See also Section 4: Further Information on Activities: the Studies Process.

y y

Consultations with government and non-government stakeholders during preparation of the study; Working with counterpart officials to be assigned by the WTO Wing.

4.1 Consultation with Stakeholders

During the preparatory work for the study, the Consultant will consult with the following key stakeholders as far as possible, in order to obtain quantitative and/or qualitative data and past reports required for the analysis, and to draw upon their views. Potential stakeholders may include:

y y y y y y y y y y

The WTO Wing, MOC; The Permanent Mission of Pakistan in Geneva; The State Bank of Pakistan; The Ministry of Industries and Production; The Ministry of Science and Technology; The Board of Investment; The Securities and Exchange Commission; The Export Promotion Bureau; The Chambers of Commerce at the Federal and Area levels; and The Project Management Agency (PMA).

Additional stakeholders may be nominated by the MOC and the PMA prior to and during the study program. The PMA will provide the names of contact points in these organizations and, if necessary assist with arranging consultations. The PMA will also make available to the Consultant any related studies and documentation at its disposal that have been prepared previously.

4.2 Circulation of Draft Outputs to Stakeholders

After completion of Sections 2.1 and 2.2 above, draft outputs will be disseminated to the MOC in advance of the presentation. MOC may circulate the drafts to other government departments/agencies and other stakeholders as it sees fit. The Consultant will receive feedback from MOC on the analysis and results of Sections 2.1 and 2.2, prior to completing Section 2.3 and 2.4.

ANNEX II

LIST OF PERSONS INTERVIEWED.

1.

Mr. Tahir Yasin, Senior Joint Secretary, Ministry of Industries, Islamabad.

2.

Dr. Allah Wadhayo Baloach, Joint Education Advisor, M/o Education, Islamabad. Syed Irshad Ali Shah, Deputy Education Advisor, Ministry of Education, Islamabad. Mr. M. Hanif, Assistant Education Advisor, M/o Education, Islamabad. Major General Javed Anwar Hashmi, Secretary / Registrar, Pakistan Engineering Council, Islamabad.

3. 4. 5.

6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Engineer. Muhammad Latif, Deputy Registrar, PEC, Islamabad. Mr. Nadeem Ahmad Khan, Director General, PTA, Islamabad. Mr. Mashkoor Hussain, Member PTCL, Islamabad. Mr Sultan Ahamd Hassan, DG, PTCL, Islamabad. Mrs. Nudrat Bashir, Joint Secretary, Ministry of Finance, Islamabad. Mr. Muhammad Ayub, Deputy Director, Board of Investment, Islamabad. Mr. Yawar Irfan, President, Lahore Chamber of Commerce and Industry, Lahore. Mr. Sabir Chohan, MD, Nespak, Lahore. Mr. Khaliq-ur-Rehman, President, ICAP, Karachi Mr. Ishrat Hussain, Governor, State Bank and President, Institute of Bankers, Karachi. Mr. Riaz Ahmed Tata, President, The Federation of Chambers of Commerce and Industry, Karachi.

17. Mr. Mazhar Hashim, DDG, Federal Bureau of Statistics 18. 19. 20. 21. 22. Dr. Sheryar Khan, Joint Technical Advisor, Ministry of Science and Technology Mr. Gulzar Arain, Federal Bureau of Statistics Mr. Ashiq Hussain Javed, D.G. (T & SP), PTCL Mr. Mehboob Ilahi, G.M. (Technical Audit) PTCL Mr. Baqai_

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SUMMARY OF THE RECOMMENDATIONS OF THE STUDY

This study is essentially an agenda for action rather than a definitive evaluation of the GATS or the possible outcome of the current round of negotiations under the GATS. The provisional drafts of the four chapters required by the TORs were circulated to the Ministry Commerce, the AAS and Mr. Harry Kendall of Maxwell Stamp & Co by November 30, 2002. This version has been prepared in the light of the discussions held with the stakeholders and in the Presentation prescribed by the TORs of the study in the last two months. Its chapter-wise recommendations are given below. Chapter- I: 1. The traditional definition of Services and the traditional methodologies of collecting and compiling statistics on Services are both inadequate and incomplete. At present data on Foreign Affiliates Trade in Services (FATS) is simply not collected. The Manual on Statistics of International Trade in Services published in December 2002 jointly by the OECD, the IMF, the WTO and the United Nations on data requirements of trade in services therefore needs to be studied and a program established to adapt progressively local practices to the recommendations of the Manual. 11

2. A committee on Services Statistics consisting of the Ministry of Commerce, the State Bank of Pakistan, the Federal Bureau of Statistics and Board of Investment should be established to implement the Manual. This Manual was published in December 2, 2002 and it can be down loaded from the WTO website. 3. In the past Pakistan like most countries focused mainly on international trade in commodities. All over the world Services were regarded chiefly as nontradables. Lack of data and an appropriate analytical framework also made it difficult for policy-makers to perceive Services as a coherent and an internally interconnected sector. Consequently this sector as a whole did not receive much attention in the context of international trade. Modern technology has however changed this situation everywhere. This now this needs to be remedied: Pakistan needs to make institutional arrangements for the promotion of trade in services. An ordinance-based committee needs to be formed to deal with short-term policy issues. 4. For handling long-term issues, a research and a training institute relating to international trade in goods and services should be established without further delay. There is no country of any importance that does not have a powerful research and training institute. Pakistan needs to make up this institutional gap as soon as possible. 5. A mechanism, that is, a Committee of Secretaries and representatives of the private sector, should be formed to establish closer interaction between the government and the private sector. 6. There is also need to establish dialogue with Pakistan-based local and donorfinanced NGOs. By and large, these days, these bodies are playing a rather negative role. This needs to be discouraged through education and persuasion. Chapter- II This is largely a descriptive chapter. It discusses issues such as assessment of Pakistans GATS Schedule of Commitments, Current policies of Pakistan relating to the services and an analysis of commitments made by other members of the WTO. Among other things, this analysis has brought forth the following important points: 1. First. Pakistan like a large majority of countries was rather cautious in its approach to GATS commitments. This was only natural. But what was unique to Pakistan was that while it had paid a great deal of attention to inward flow of foreign investment and technology it did not view the GATS as a means of expanding export of its services. 2. Second. Pakistan had embarked upon a program of liberalization much before the WTO came into existence, and had opened up a large number of its services sectors to foreign competition and foreign investment. In this sense the GATS was not an entirely new phenomenon. For Pakistan what was new in the GATS was its focus on services not only as a means of attracting foreign investment but 12

also a means of promoting its exports. The GATS also forced on the attention of the most of the world the fact that, as a result of modern technological development, the services sector was fast becoming increasing tradable and that for policy making purposes it had to be viewed as one coherent whole. 3. This chapter has brought out forcefully that Pakistan has already liberalized substantially at least 16 of its major services. Annex II below therefore needs to be examined carefully. As a matter of fact it is this section (liberalized sectors) together with a subsequent Section in Chapter III (export potential of Pakistan) that has served as the most important base for the recommendations of this study relating to the current round of the GATS negotiations. 4. The central lesson of this Study is that Pakistan should increase the range of its objectives from inward investment and importation of foreign technology to the expansion of its exports. In the future its objective should be attraction of foreign investment, increase importation of modern technology, and promotion of exports of services. 5. Pakistan should also extend its interest to all the four modes of supply instead focusing on politically difficult one or two modes such as Mode 4, the movement of natural persons. This mode (Mode 4) becomes more acceptable if it is recognized that it implies temporary movement of persons, more often in relation to Mode 1 and Mode 3 activities abroad. In the context of Mode 4, Pakistan should also review its own policies and recognize better the constraints that compel it and other countries to follow a restrictive policy. 6. Pakistan should also seek outlets for outward investment (Mode 3) bearing in mind that the State Bank has removed a number of restrictions on investment abroad by Pakistanis. Chapter -III This chapter has discussed the following issues of considerable operational importance: y Export Strategies: The GOP institutions concerned with the 12 sub-sectors of the Services should make arrangements for preparing strategies aimed at the promotion of their exports. The WTO Centre should be given at least an officer of the rank of a deputy secretary to coordinate these strategies. Enquiry and Contact Points. Pakistan should notify to the WTO Secretariat its own Enquiry and Contact point. The WTO Centre as constituted at present is barely able to perform even its normal functions effectively: it is virtually impossible for it to act also as a useful enquiry and contact point. Pakistan should also consider asking advanced countries to transform their enquiry and contact points into effective mechanisms for promoting investment in a country like Pakistan, and assisting Pakistan to take better advantage of the provisions the GATS. In case these contact points can not be so transformed, a new institution should be created to meet the requirements of the GATS. 13

Mutual Recognition Agreements: The Ministry of Education, in collaboration with the Engineering Council, needs to create a specialized institution to deal with issues relating to mutual recognition and pursue in particular the rights conferred on member countries by Article 7 of the GATS. This is a matter of critical importance in the context of Mode 4. Modes of Supply: For facility of reference, the range of each of the four modes of supply is discussed in Annex I. This should help in formulating Pakistans requests and offers.

List of potential Exporters: This list is reproduced in Annex II. This should help in developing Pakistans requests. It needs to be kept in view, first, that exports either act a vent for surplus or emerge as a response to existing demand abroad, or they are a consequence of creation of demand for ones products. Vent for surplus approach does not exhaust the possibilities for export. Second, development of exports is a medium and a long term process. A country has to work steadily and patiently to build an expanding niche for its goods and services. It can not be done overnight. Why commit? This study recommends that Pakistan may undertake partial or full commitment at least in respect of those liberalization policies that have remained in force for five to seven years. A period of five to seven years should be sufficient for the remarkably well-educated and skilful bureaucracy of a country like Pakistan to make a definitive evaluation of its policies.

Chapter -IV The chapter has discussed the following issues: y Need for a policy framework: Taking into account the preceding discussion, Pakistan should evolve an analytical framework and a set of incentives to promote growth and export of its Services Sector in a systematic manner. Autonomous Liberalization: Pakistans horizontal commitments and liberalization measures relating to its telecommunications and banking sector are the most egregious examples of autonomous liberalization. Autonomous liberalization means liberalization going well beyond a countrys commitments in its schedule of commitment. A fuller list of autonomous measures of Pakistan has been developed in this Chapter in the hope that it would help in the formulation of Pakistans responses to WTO members requests.

Strengthening of the WTO Centre

The WTO Centre in the Ministry of Commerce is responsible for handling all issues relating to the WTO Agreements and Understandings, participation in various Rounds of 14

Negotiations, coordination of the WTO related activities dispersed over several Ministries and Autonomous bodies in Pakistan, but it has only six officers at its disposal. The Centre also suffers acutely from the high turnover of its staff which makes it difficult for it to develop its institutional memory or to pursue consistent policies. It is worth remembering that the Results of the Uruguayan Round of Trade Negotiations include 14 Agreements, 27 Decisions and Declarations, 8 Understandings and a Trade Policy Review Mechanism. It hardly needs to be said that it is simply not possible for the for the small team at the WTO Centre to follow developments in international trade, the evolving policies of even the major trading countries like the US, the EU, Japan and China or to keep pace with the enormous amount of WTO case law being developed by the WTO Dispute Settlement Mechanism. It is obvious that the size of the Centre is woefully inadequate for the task facing it. It strongly recommended that the staff situation of the Centre be reviewed and improved.

Concluding Remark
This study has emphasized that economic policies rarely affect all members of a society equally. More often than not, some sections of a society, some industries, and some firms and individuals gain as a result of a particular policy and some lose. Furthermore, some gain in the short and some in the longer term. The point in economic policy-making is therefore not that a particular course of action must benefit all equally and immediately, but that it should serve the more enduring public interest of the country. The participation of Pakistan in the current round of negotiations under the GATS needs to be seen in this perspective.

ANNEX-I

MODES OF SUPPLY
The broad domain of each of the four modes of supply as spelled out by the Extended Balance of Payments Services Classification is3 as spelled out by the Extended Balance of Payments Services Classification (EBOPS) discussed more fully in Chapter I is given below: Mode 1 (Cross-border Supply) includes transportation (except supporting and auxiliary services) that are provided to domestic carriers in foreign ports or to non-resident carriers in domestic ports), communications, insurance and financial services together with payments of royalties and license fees.
This discussion is based on Manual on Statistics of International Trade in Services (Manual)
3

15

Mode 2 (Consumption Abroad) contains all services recorded in balance of payments as travel. EBOPS recommends that expenditure on goods should be excluded to conform to the underlying concept of Mode 2. Mode 3 (Commercial Presence) is primarily concerned with FATS and not balance of payments. Commercial presence should however include construction services. The Manual suggests that the one-year statistical rule should be ignored in this context. Mode 4 (Presence of Natural Persons) needs to be read with Mode 1. Services like computer and information services, other business services, and personal, cultural, and recreational services involve significant elements of both Mode1 and Mode 4 It may be noted that compensation of non-resident employees is included in income in the balance of payments but not included in EBOPS. It (compensation of non-resident employees) may however yield indicators of Mode 4. Services purchased by diplomats are not included in EBOPS because these should be deemed to be a part of Government services which are excluded from the purview of the GATS. To complete the picture, it might be highlighted here that, among other things, the GATS also contain three important exclusions: y Services supplied in the exercise of governmental authority. The GATS does not require any government to privatize any enterprise, and the GATS allow governments to continue to provide preferential assistance to public providers such as educational institutions. The GATS applies only to the private sector in education. Most Air Transport services. Governmental purchases (procurement) of services.

y y

ANNEX-II

LIST OF POTENTIAL EXPORTERS

This list of potential exporters with some explanatory comments is based on the WTO Classification of Service Sectors. A copy of this classification can be seen in Chapter II of this study. It may also be reiterated that Pakistan has removed most of its restrictions on Pakistan residents establishing commercial presence abroad. I. BUSINESS SERVICES

A. Professional Services
16

Accounting, auditing and bookkeeping services: It has been estimated by the US4 Trade Representatives Office that International revenues of accounting firms amount to tens of billions of dollars and are growing annually. Two million accounts are employed worldwide. Pakistan has a strong and a forward-looking body of accountants working in the country. They can organize themselves to join the burgeoning international market. It is a great advantage for Pakistani accounts that British and American accounting systems are now being adopted by most of the emerging markets including China. Engineering Services and Integrating Engineering Services: Pakistani engineers already posses a great of international experience in the US, the UK and the Gulf States. They have also worked with several foreign engineering companies on mega projects in Pakistan. This experience should be put to good through by exporting their services under Mode 1 and Mode 3.

c. Medical and dental services:

Pakistan already has the capacity to join the international job market in this service. It will however be necessary for the concerned associations and the Ministry of Commerce to monitor the offers of WTO members relating to this service. Apparently the US has not opened its market to foreign medical and dental services though Pakistan can advantage of the tele-health system to develop a clientele for itself even in countries like the US. d. Services provided by midwives, nurses, physiotherapists and paramedical services: Pakistan has already demonstrated its capacity to export midwives, nurses, physiotherapists and paramedical services to Gulf States. The problem however is that while a number of WTO members do import these services on a fairly large scale, most of them have kept these services out of their specific commitments under the GATS.

B.

Computer and related services:

Pakistan is rapidly building its capacity to export software implementation services, Data processing services, and Database services. Even at present Pakistan is exporting (Crossborder) supply of these services to the industrialized world though on a rather modest scale. This activity needs to be enlarged substantially. For this purpose Pakistan would need to negotiate easier business and professional visas under Mode 4 to take fuller advantage of the vast market in computer services. Last year for the first time, worldwide spending on IT services ($426 billion) exceeded worldwide spending on IT hardware ($376 billion).

F.

Other business services:

4

USTR Press Release: www.ustr.govt

17

r. Printing, Publishing:
Pakistan can take advantage of its emerging computer related capacity and establish printing and publishing services as Singapore and Hong Kong have done so successfully. This will be an important example of cross-border supply.

2. TRANSPORT SERVICES
Despite present international difficulties, the role of Pakistan as transit country is bound to increase in the fairly near future. Pakistan is already in the process of preparing itself as transit country by building new motorways. Work on the development of infrastructure for cross-country pipelines will also begin as negotiations on gas pipelines mature.

3. COMMUNICATION SERVICES B. Courier Services:

Along with physical infrastructure, labor is the primary component engaged in delivering courier services. On the basis of the experience it has gained by working with large foreign courier services, Pakistan can make a beginning in countries of the Central Asia.

C. Telecommunication services:
The following services help promote export interests of Pakistan. a. Voice telephone services, b. Packet-switched data transmission services, c. Circuitswitched data transmission services, d. Telex services, e. Telegraph services, f. facsimile services, g. Private leased circuit services, h. Electronic Mail, I. Voice Mail, j. On-line information and database retrieval, k. Electronic data interchange that (EDI), l. Enhanced /value added facsimile services including store and forward, store and retrieve.

4. FINANCIAL SERVICES:
Since 1970s Pakistan has developed a strong cadre of professional bankers who have served with distinction both at home and abroad. This group of professionals, if given appropriate policy framework and incentives, can exploit fully the opportunities inherent in Mode 1 and Mode 4.The Bankers Institute should be consulted on how best the government can mobilize their export potential.

5. CONSTRUCTION AND RELATED ENGINEERING SERVICES:

This activity allows a country like Pakistan to operate in three modes of supply: Mode1 (cross-border), Mode 3 (Commercial presence) and Mode 4 (presence of natural persons). Having participated in domestic and Persian Gulf projects, Pakistan has developed a substantial capability in this sub-sector. Policies and incentives now need to put in place to help the industry evolve into an export enterprise.

6. DISTRIBUTION SERVICES
18

This is another relatively labor-intensive service, and Pakistani companies can join foreign enterprises in establishing chains from manufacturers to wholesalers, retailers, and direct sellers.

7. EDUCATION AND TRAINING SERVICES

Specialized education and training is needed in many countries around Pakistan. Pakistan, like many advanced countries, can open its private educational institutions to students and visitors from its neighbors on a commercial basis. Pakistan can also take advantage of the fact that a large part of its educational system uses English as its medium of instruction. If the private sector engaged in education in Pakistan was encouraged, it could take a large segment of the Chinese and Central Asian markets for leaning English as a second language. 8. TOURISM: Pakistan has steadily though somewhat slowly developed the infrastructure required by a thriving tourist industry. Statistics regarding the arrival and departure of tourist and their expenditure on goods and services in Pakistan are however rather weak and to need to be improved. September 11 was a set back for Pakistans tourist industry as it was for many big players in this sub-sector. One hopes that the industry will revive as the international situation stabilizes. It has been estimated that international hotel industry alone earns revenue of $253 billion annually. A market of this size can not be ignored by any country.

The above discussion has brought out quite clearly that Pakistan is already producing and exporting a wide range of services, and that it has opened an equally wide range of sectors to foreign investment and foreign competition. It is also well known that Pakistan regularly exports highly skilled as well as low skilled workers to both industrialized and Oil-based economies. It will be difficult for Pakistan to claim a strong comparative advantage in highly skilled occupations, yet it places no obstacles in the way of a large number of Pakistani professionals like bankers, accountants, engineers, IT specialists, medical doctors and business administrators to work abroad. Pakistan also encourages low-skilled workers to go abroad, and this is a group in which Pakistan does have a distinct comparative advantage.

Regardless of whether Pakistan, as a country, loses or gains as a result of the migration of its high-skilled workers, the fact remains that movements of persons originating in Pakistan do give a powerful indication of the range of services Pakistan can create and export. This study is of the view that, given the capabilities of Pakistan, Government should pay fuller attention to all the four modes of supply, and that this should be done both as an exporter and an importer of services. 19

However, if it is considered that modes of supply need to be prioritized, this study would recommend that while Pakistan delegation in Geneva should continue to participate actively in the great North-South debate on movement of persons, the other three modes should receive more systematic attention at home. In particular, Mode 1 (Cross-border supply) along with Mode 3 (Commercial Presence) should be the central focus of attention of all the Ministries. Pakistan should not remain just an importer in these modes; it should build a place for itself as an exporter as well. It should also link its interest in the movement of persons with these modes of supply to achieve useful results for Pakistani service suppliers. This is where the material interest of Pakistan lies.

To sum up, this study maintains that Pakistan has a strong interest in all four modes of supply because, among other things, modes I, 2 and 3 are deeply interconnected, and that Mode 3 is also connected with modes 1, 2 and 4 together. It also needs to be recognized that Mode 3, commercial presence, has now become fully integrated with the chain constituted by modes 1, 2 and 4. It will be recalled that the State Bank of Pakistan has recently lifted many restrictions on foreign investment by Pakistanis 5.

IMF Country Report N0. 02/246. November 2002

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CHAPTER- I
REVIEW OF DOMESTIC SERVICES PROVISION AND EXPORTS FROM PAKISTAN
This chapter, prepared in pursuance of Article 2.1 of the terms of reference (TORs) of this study, deals with the current structure of service provision and exports from Pakistan, service-specific and mode-specific trade data of Pakistan, and makes recommendations on an optimal data and analysis framework for the General Agreement on Trade in Services (GATS). The survey of domestic policies and regulations governing transactions relating to services required by paragraph 2.1.iii has been discussed in the next chapter. The Services Sector world-wide is now the most important source of economic growth, employment, exports and imports and technological development. The Services Sector in any country is also crucial to the development, efficiency and competitiveness of the rest of the economy. In the decade of the 1990s, world trade in Services grew at a high rate of 6% per annum, a rate well above the growth rate of world output. Consequently international trade in services, despite the non-tradability of some of them, is already about 19% of the total international trades. It was therefore only appropriate that the Uruguay Round of Trade Negotiations (UR) should have brought this large component of international trade under a multilaterally agreed framework of rules and disciplines. It is well known that this was the first time when a multilateral, legally enforceable agreement covering trade and investment in services came into being, and today an overwhelming majority of the UN membership subscribes to it. The GATS, inter alia, Provides a legal framework for addressing barriers to trade and investment in service, Includes specific commitments by member countries to restrict their use of those barriers, and Provides a forum for further negotiations to open services markets around the world. 21

y y y

The first round of negotiation under the GATS began in early 2000. It is expected that, among other things, the results of these negotiations will help developing countries attract stable long-term investment for their infrastructure (transport, telecom and financial services) promote growth and competitiveness of their economies, and support their exports. In Pakistan discussions relating to services whether for analytical or policy making purposes are conducted in the framework established by the following three statistical disciplines: Services as defined by the System of National Accounts (SNA) developed by the United Nations. y Services as defined in the Balance of Payments of Pakistan adapted from the 5th Edition of the IMFs Balance of Payments Manual (BPM5). y The system of WTO classification of services sectors. This system supplements the SNA, BPM5 and Foreign Affiliate Trade in Services (FATS) statistical systems and attempts to meet the statistical requirements of the GATS. It may be noted here that international organizations such as the OECD, the IMF and the United Nations have now jointly completed the preparation of a new and a more comprehensive system of classification of the services sectors. This system, which among other things includes an Extended Balance of Payments Services classification (EBOP) has only recently been published by the UN in the form a Manual on Statistics of International Trade in Services (Manual)6. This Manual is now the definitive, internationally accepted system of classification of service sectors. This study presents its analysis in terms of the above classificatory disciplines including the latest model proposed by the Manual. The study has taken the view that it will not be worthwhile for Pakistan to continue to spend effort on refashioning its data system on a model that has already become obsolete. This study recommends that Pakistan should adopt the Manual as the basis of its data system as soon as possible. y 1.1 NATIONAL ACCOUNTS PERSPECTIVE

I.1.i Value-added in Services: Growth Rates

Services as defined by the National Accounts of Pakistan now constitute a little more than half of the GDP of the country. It can be seen from Table 1 that the services sector as whole grew more or less in step with the commodity producing sector in the last four decades, namely the Sixties, the Seventies, the Eighties and the Nineties of the last century. However, in the last half of the Nineties, a period of relatively slow growth for the entire economy, the services sector maintained a higher rate of growth than the commodity producing sector. In 2001-02 Services grew by 5.1% against 4.8% last year. Economic Survey 2001-02 has reported that large contribution to growth has originated from services sector for quite some time.In Fy 2002, 70% of the real GDP growth
6

This annual was published on 2 December 2002.

22

came from the Services sector. The Services sector is thus the most dynamic of all the economic sectors.

Table -1 REAL GROWTH RATES: SERVICES Source: FBS

Sector 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-1999 1999-2000 2000-01 2001-02 6. Transport, Storage & 6.31 10.46 6.66 3.68 4.14 0.84 3.76 7.21 5.13 3.56 5.01 0.13 Communication 7. Wholesale & Retail 5.35 7.33 2.92 2.86 4.64 6.07 0.72 -1.13 2.97 1.92 5.24 2.24 Trade 8. Finance & Insurance 1.23 4.34 6.98 14.13 6.31 13.83 11.49 23.95 18.87 -4.10 2.75 3.77 9. Ownership of Dwellings 5.28 5.28 5.28 5.28 5.28 5.28 5.28 5.28 5.28 5.28 5.28 5.28 10. Public Admn & Defence 3.30 2.58 2.46 1.39 3.13 3.17 2.21 2.03 2.50 9.40 1.15 18.20 11. Services 6.53 6.53 6.53 6.53 6.53 6.53 6.53 6.53 6.53 6.53 6.53 6.53 B. Services Sector 5.21 6.76 4.63 4.20 4.80 4.99 3.61 1.64 4.99 4.79 4.79 5.09 12. GDP (fc) 5.42 7.57 2.10 4.37 5.06 6.60 1.70 3.49 4.18 3.91 2.45 3.61 13. Net factor income from -44.90 -47.67 -24.55 -64.68 205.61 -146.04 -135.02 -21.46 6.62 -51.00 1.75 148.77 abroad 14. GNP (fc) 3.45 6.42 1.82 3.84 5.58 5.46 1.27 3.31 4.29 3.49 2.50 5.40

The structural change under which the Services Sector is becoming larger than the Commodity Producing Sector in Pakistan corresponds fully with the experience of most other countries. As a matter of fact, like the Services Sectors of other fast growing countries, Pakistans Services Sector would have gained an even greater weight had it not suffered in the Nineties the shocks that broke the momentum of its traditional relatively high growth rates. It is noteworthy that the share of services in the US is 80% of its GDP, in France 71%, in Egypt 53% and in India it is only 43%. In contrast the share of services in Pakistan is around 51%7of its GDP. This share should however rise as the economy as a whole shifts to a faster track.

Selected World Bank Indicators: 1997.

23

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-19999 1999-2000 2000-2001 2001-2002 Sector 2. Services Sectors a. Wholesale & Retail Trade b. Transport, Storage & Communication 48.7 16.5 9.6 48.3 16.5 9.9 2.2 5.4 6.8 7.6 49.5 16.6 10.3 2.3 5.5 6.8 7.9 49.4 16.4 10.3 2.5 5.6 6.6 8.1 49.3 16.3 10.2 2.5 5.6 6.4 8.2 48.5 16.2 9.6 2.7 5.5 6.2 8.2 49.5 16.1 9.8 2.9 5.7 6.3 8.6 48.6 15.4 10.2 2.2 5.8 6.2 8.9 49.0 15.2 10.3 2.5 5.9 6.1 9.1 49.1 14.9 10.2 2.3 5.9 6.5 9.3 50.2 15.3 10.5 2.3 6.1 6.4 9.7 50.9 15.1 10.1 2.3 6.2 7.3 9.9

c. Finance & Insurance 2.2 d. Ownership of 5.5 Dwellings e. Public Admn. & 7.1 Defense 7.7 f. Services

Table 2: SHARES OF SERVICES SECTORS IN GDP

I.1.ii Structure of Services

Though during the last twelve years the share of the Services Sector as a whole did increase slightly, its internal structure did not experience any major changes. It can be seen from Table 2 that between 1990-91 and 2000-01 Wholesale and Retail Trade, the largest sector among the service sectors, and Public Administration and Defence lost some of their weight, while the other four sectors, namely Transport, Storage and Communications, Finance and Insurance, Ownership of Dwellings and Communal and Social services gained slightly. The only change that can be regarded as significant is the increase in the share of the Community, Social and Personal Services sector from 7.68 in 1990-91 to 9.64 percent in 2000-01. (Income arising in this sector consists of income of persons engaged in private education, medical and health and other household and community services). Finance and Insurance also did show an improvement but their rise was rather small: the share of this sector just crawled up from 2.23% to 2.56%. The above discussion is a rather broad review of the structure of the services sector, and unfortunately it can not be deepened very much because the Federal Bureau of Statistics (FBS), the agency responsible for national accounts in Pakistan, does not publish disaggregated data. However, the following largely qualitative comments may be of some use. It may be noted that these sectors conform to the classification of the GATS.

y Transport:
This sector comprises: 24

a. Water Transport covering shipping. Karachi Port authority, Port Qasim, three port terminals and a Tanker Company. b. Air Transport which including PIA, Foreign Airlines, CAA, and other domestic airlines. Pipeline Transport comprising Asia petroleum Limited, PARCO, NRL, and FOTCO.

y Communication:
This sector covers: a. Post Office and Courier Services b. PTCL and Private Telephone Companies c. Radio (Public) d. Television (public and private) These sectors include both traditional and new activities. Pipeline Transport, Courier services, Telephones and private sector media represent relatively new and more dynamic segments of this sector. Pipeline and Road Transport which do not receive much attention these days are bound to become more important as Pakistans role as a transit country expands. Transit traffic to Afghanistan will also become more significant as reconstruction of Afghanistan proceeds and agreements with Afghanistan on crosscountry road transport and gas pipelines mature8. These developments are also important from the point of view of GATS Modes of supply 1 (cross-border supply), 3 (commercial presence) and 4(presence of natural persons)9.

y Banking & Insurance:

Entities included in Banking are: a. The State Bank of Pakistan b. Scheduled Banks c. Financial Institutions Finance is one of the more liberalized sectors of Pakistan. It is therefore expected that in the future this sector will become a site for considerable international activity. The growth rate of this sector in last three years was higher than all other sectors of the economy. In 1998-99 (at 1980-81 prices) it was 18.8%; in 1999-2000 also the growth rate (8.23%) remained well above the overall growth rate of the economy.

I.1.iv Investment in Services Sectors:

The 2001-02 Annual Report of the State Bank has estimated that investment ratios of both the public and private sector as percent of the GDP weakened over the 1990s, though the share of the private sector in total investment has shown a distinct
A framework agreement on a gas pipeline was signed by Afghanistan, Turkmenistan and Pakistan in the last week of December 2002. 9 The four modes of supply are: Cross-border supply Consumption abroad Commercial presence Presence of natural persons
8

1. 2. 3. 4.

25

improvement. The real investment in transport and communication sector also declined, but within this overall context, three of its sub-sectors have experienced a remarkable revival: investment in real terms on Pakistan Railways almost doubled in FY02, The Government also launched an integrated program to develop the Information Technology (IT) sector, and the Pakistan Telecommunication Limited (PTCL) has embarked upon a large program for the expansion of the telecommunication sector. At the same time, private investment in the construction sector increased by 17% in FY 2002. These positive developments once again highlight the growing importance of the services sector in the perceptions of the potential investors. Foreign Direct Investment (Net) FY02 million US$ USA UK Food Group 3.5 0.7 Textiles 6.7 1.1 Chemicals 5.7 0.3

UAE 2.0 3.8 0.2

Germany Others 0.0 -11.34 0.4 6.44 0.5 3.92

Total -5.1 18.4 10.6

Table 3

26

Petroleum refining & petro chemicals 3.7 0.7 Oil-gas mining & quarrying 249.8 14.9 Pharmaceutical group 3.7 0.3 Machinery 0.6 0.0 Electronics 3.5 0.0 Transport & storage facilities 0.8 0.0 Communications 8.0 0.8 Construction 1.9 3.3 Trade 14.9 1.0 Power 11.5 2.5 Financial business 1.6 0.4 Others 10.6 4.4 Total 326.4 30.4 Note: Totals may not tally due to separate rounding off. Source: State Bank of Pakistan Annual Report FY02

0.0 0.1 0.1 0.0 9.1 0.4 0.4 1.4 1.4 0.0 1.8 0.9 21.5

0.0 0.0 1.5 0.0 0.0 0.0 0.1 0.0 0.1 5.4 0.1 3.1 11.2

0.6 10.0 1.6 9.9 3.3 21.3 3.5 6.2 16.8 17.0 -0.3 6.4 95.3

5.0 274.8 7.2 10.5 15.9 22.5 12.8 12.8 34.2 36.4 3.6 25.0 484.7

I.1.v Foreign Direct Investment:

Foreign Direct Investment after several years of continuous decline picked up in FY 02. Oil and Gas sector was the major beneficiary of this rather mild revival. Service sectors like Transport, Storage and Communications, Financial business and IT industry also attracted some of this investment. The volume of investment recorded in FY 02 ($484.7 million) is only one fourth to one third of the levels achieved in the mid-90s.

I.1.vi Employment in Services:

In Pakistan the services sector as whole is as large an employer of the civilian labour force as agriculture. The most recent Household Integrated Economic survey (HIES) 1998-1999 has reported that agriculture and Services each employ 43% of the employed labour force. Occupations like professionals, technicians and Associate professionals, clerks, service workers and shop and market sale workers are also concentrated in the services sectors. The importance of the services sector from the point of view of employment can be seen in some detail in Annexes X and XI

I.1.vii Value-added in Net Factor Income from Abroad

For several years until 1994-95 Pakistan use to have a positive entry under this category of its national accounts. But from 1995-96 to 2001-02 these receipts became negative and their growth rates turned heavily negative. This was partly due to an increase in payments to foreign residents of investment income, payments on account of royalties and trade marks, and a sharp decline in inward workers remittances. The negative balance on account of royalties and trade marks should, however, not be a matter for undue worry because this imbalance implies that, despite current general sluggishness in economic 27

activity, private sector is continuing to import modern technology to keep its plant and machinery up-to-date. Fortunately in 2001-02, net factor income at market prices once again turned positive. Data on net factor income is available in Table 4.

Table 4 VALUE ADDED IN NET FACTOR INCOME FROM ABROAD

(Million RS.) ITEMS

1998-99 (F) 64057 4445 94 49596 9920 89604 89042 468 94 -25547 491.13 -5202

1999-2000 ( R) 67437 6057 311 50891 10178 112136 110427 1605 104 -44699 569.03 -7855

2000-2001 (P) 84144 6806 0 64448 12890 144960 143599 1361 0 -60816 670.48 -9071

Total Receipts Investment Income Royalties/Trade mark Workers Remittance As personal baggage Total Payments Investment Income Royalties Trade mark Workers Remittances Gross Value Added At Current Prices(A-B) Deflator at 1980-81 base Gross Value Added at 1980 -81

Growth % 99-00/ ( R) 98-999 (R) 5.28 36.27 230.85 2.61 2.60 25.15 24.02 242.95 10.64 -74.97 15.86 -51.01

Growth % 00-00/( R) 98-99 ( R) 24.77 12.37 -100.00 26.64 26.65 29.27 30.04 -15.20 -100.00 -36.06 17.83 -15.47

Investment income, Royalties/Trade Marks and Workers Remittances are the three elements that constitute this entry in the national accounts. These categories do not, however, correspond strictly to the GATS four modes of supply though they do provide some general information relating to cross-border supply, commercial presence and presence of natural persons.

I.2 PAKISTANS BALANCE OF PAYMENTS PERSPECTIVE

From an economic perspective, services are traded on cross-border basis as well as through the sales of foreign-based affiliates. Both forms of trade are significant to the balance of payments of a country and its competitiveness. The distinction between crossborder trade and sales of foreign-based affiliates is important for evaluating the problems of the services sector. The definition of Services used by the State Bank in Table 9.1 (partially reproduced below) of its Annual Report 2001-02 presents Pakistan as a net importer of Services. From the export angle, it seems that the entries 3. Other Transportation, 5.3, Other under investment income and 6.2 Other under Other goods, Services & income in Annexure 13 are the most important. It is also evident that from the point of view of the 28

Current Account balance Government needs to pay much greater attention than it has given so far to Shipping and Travel. These two heads represent great drain on its Current Account. Table 5 also shows that the deficit on account of Services is substantially higher than the imbalance between the annual values of exports and imports of commodities. However, if the definition of Services is brought closer to WTO classification of Services, the picture changes noticeably. For instance, if interest payments including IMF charges are deducted from Services (net) and outright purchases listed in the Summary Table below are added, the imbalance between credits and debits reduces to a manageable level. It therefore seems that, for purposes of analysis and policy making in the context of the GATS, definition of Services needs to be clarified and brought in line with the definition being used in the Manual.

Table 5
Current Account of the Balance of Payments
Million US$

FY96 1 Trade Balance Exports (fob) Imports (fob) 2 Services (net) Shipment Other Transportation Travel Investment Income

FY97

FY98

FY99

FY00

FY01

FY02 (360) 9,133 9,493 (2,620) (746) 103 (145) (2,311) 29

(3,704) (3,145) (1,867) (2,085) (1,412) (1,269) 8,311 8,096 8,434 7,528 8,190 8,926 12,015 11,241 10,301 9,613 9,602 10,195 (3,249) (3,659) (3,264) (2,618) (2,794) (3,137) (1,045) (928) (873) (803) (751) (820) 49 (504) 13 (541) 76 (279) 110 (122) 71 (142) 61 (180)

(1,953) (2,167) (2,330) (1,808) (2,018) (2,156)

Interest payments 184 (1,717) (1,720) (1,399) (1,598) (1,547) Profit & dividend (2,137) (450) (610) (409) (420) (609) Other goods, services & income N/A (36) 142 5 46 (42) Current transfers 3 (net) 2,605 3,247 3,430 2,847 3,989 4,737 Private transfers (net) 2,378 2,958 3,210 2,274 3,063 3,898 of i) Workers which: remittances 1,461 1,409 1,490 1,060 983 1,087 ii) FCA (residents) 763 1,347 1,476 539 322 534 iii) Outright purchases N/A 531 1,634 2,157 Official transfers 227 289 220 573 926 839 of which: Saudi 389 790 683 Oil Facility Current account 4 balance (1+2+3) (4,348) (3,557) (1,701) (1,856) (217) 331 Excluding (4,575) (3,846) (1,921) (2,429) (1,143) official (508) transfers Source: State Bank of Pakistan Annual Reports

(1,464) (847) 479 5,724 4,255 2,389 285 1,376 1,469 579 2,744

1,275

It may be noted that according to the State Bank of Pakistans definition of Other transportation listed in the above Table, includes income and expenditure on account of passenger services, passage collections, ship repairs, as also earnings and expenditures of Pakistani air/shipping companies10. The entry Travel includes tourism, hajj, and travel for business, health and educational purposes. The credit entries under item Other under the heading Investment Income, covers, among other things, foreign securities, profits and dividends. On the debit side, this item includes remittances abroad of profit and dividend earned by foreign investors. The entry 6.2 Other under the heading other goods, services & income means royalties and trade marks, technical/legal fees, communication services, and other miscellaneous services as well as insurance premiums and claims on life, fire, accidents, etc. More often than not this entry has a positive though a shrinking balance.

These definitions make it clear that though data relating to Commercial Services as understood by the BPM5 and the WTO is being collected by the State Bank, the presentation of this data needs to be re-designed to facilitate better understanding of the
10

Pakistans Balance of Payments, 1997 State Bank of Pakistan Statistics Department

30

current GATS negotiations and to enable the Government to frame appropriate policy for the promotion of Services. This data, when reorganized, will also serve the informational requirements of the GATS four modes of supply.

I.2.i BOP and GATS Modes of Supply:

The high level of aggregation of the published balance of payments data makes it impossible to establish a precise correlation between modes of supply and the State Bank estimates of the balance of payments. However, a relatively superficial examination of the balance of payments data does show that, from the point of view of exports, Mode 1 (Cross-border supply) and Mode 4 (Movement of Natural Persons) are the more important Modes; while Modes 2 and 3 (consumption abroad and Commercial Presence) are more important from the point of view of imports. In planning and policy making perspectives all modes of supply deserve very careful attention. It may be of some interest to report here that according to a WTO Secretariat estimate Mode 1 and Mode 3 each accounts for some 40% of total world services trade, followed by Mode 2 with 20%, while the value of Mode 4 was found to be insignificant. I.3. EMERGING PERSPECTIVES: WTO, BPM5, AND FATS The WTO publication International Trade Statistics 2002 has reported that in 2001 the value of world merchandise exports was $ 5990 billion and the value of world commercial services exports stood at stood at $1440 billion. This was the result of a 4% decline in merchandise exports and 1.5% decline in the export of commercial services. The year 2001 also saw a fall in the rate of growth of world GDP from 4% in 2000 to 1.5%. During 1990-2000, however, both merchandise and commercial service grew at an average rate of 6.5%. In the year 2000, Pakistans share in world export of commercial services was only 0.09 percent.

PAKISTANS EXPORTS OF COMMERCIAL SERVICES

(Million Dollars)

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Pakistan 1266 1294 1330 1444 1432 1546 1446 1299 1428 ---

PAKISTANS IMPORTS OF COMMERCIAL SERVICES

(Million Dollars)

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Pakistan 2084 2423 2377 2182 2431 2913 2424 1944 2060 --

31

The data for Pakistan relating to its trade in commercial services for the year 2001 has not yet been collected by the WTO Secretariat. But the data that the WTO Secretariat has issued for the ten years beginning from 1991 shows that export of commercial services of Pakistan rose mildly for a few years. The import side presents an almost similar picture; the decade began with imports worth $2084 million, experienced a gentle increase until 1997 and a decline to $2060 million. Pakistan is not only a deficit country, its performance both on export and import side is very weak even in the regional context. In this decade, Chinese exports of commercial services rose from $5748 million in 1990 to $30146 million in 2000, a more than five-fold increase, and India increased its exports of commercial exports $4609million in 1990 to $17569 million in 2000, a little less than four-fold increase. Data on world-wide exports and imports of commercial services is published regularly by the WTO secretariat. A second and a rather important point: The Box (Box 1) given below, which reproduces the WTO definition of the commercial services, confirms the view expressed earlier that the public statistical system of Pakistan most probably collects all the information required by the WTO definition, but nowhere is that information published in a manner that would enable the Government to review the functioning of the Services as a whole. It should therefore be reiterated that this situation needs to be remedied fairly soon, among other things, to take fuller advantage of the export opportunities being opened by the GATS.

BOX 1 TRADE IN COMMERCIAL SERVICES

1. Exports and Imports

Export (credits) and imports (debits) of commercial services are derived from statistics on international service transactions included in the balance of payments statistics, in conformity with the concepts, definitions and classification of the fourth (1977) or fifth (1993)edition of the IMF Balance of payments Manual.

DEFINITION OF COMMERCIAL SERVICES In the fifth edition of the Balanced of payments Manual , the current account is subdivided into goods, services (including government services, n.i.e.), income (investment income and compensation of employees), and current transfers. The commercial services category in this report is defined as being services minus government services n.i.e. Commercial Services is further sub-divided into transport, travel, and other commercial services. 32

Transport covers all transportation services (sea, air and other including land, internal waterway, space and pipeline) that are performed by residents of one economy for those of another, and that involve the carriage of passengers, the movement of goods (freight), rentals (charters) of carries with crew, and related supporting and auxiliary services. Travel includes goods and services acquired by personal travellers, for health, education or other purpose, and by business travellers. Unlike other service, travel is not a specific type of service, but an assortment of goods and services consumed by travellers. The most common goods and services covered are lodging, food and beverages, entertainment and transportation (within the economy visited), gifts and transportation (within the economy visited), gifts and souvenirs. Other commercial services correspond to the following components defined in BPM5:

y Communication services (telecommunications, postal and courier services). y Construction services: The Manual recommends that Construction Services be disaggregated into Construction Abroad and Construction in the Compiling Economy. y y y Insurance services. Financial services Computer and information services (including news agency services):

y Royalties and license fees: Royalties and license fees cover payments and receipts for the use of intangible nonfinancial assets and proprietary rights, such as patents, copyrights, trademarks, industrial processes, and franchises, y Other business services , comprising trade related services, operational leasing (rentals), and miscellaneous business, professional and technical services such as legal, accounting, management consulting, public relations services , advertising, market research and development services , agricultural, mining and on site processing: and Personal, cultural, and recreational services including audiovisual services.

I.4 FOREIGN AFFILIATES TRADE IN SERVICES STATISTICS (FATS STATISTICS)

33

It is well known that international sales can be made through two types of transactions: y First: Transactions between residents of an economy and non-residents that are recorded in the balance of payments of a country; and Second: Transactions through direct investment enterprises or affiliates.

Statistics describing the overall operations of affiliates are termed foreign affiliate trade in services or FATS statistics. Foreign Affiliates are those affiliates in which the foreign investor holds a majority of ordinary shares or voting power. For purposes of trade statistics affiliates and direct investment enterprises are synonymous. The categories for Foreign Affiliates has been established by the International Standard Industrial Classification of All Economic ActivitiesRevision 3. These can be seen in the Manual on Statistics of International Trade in Services11.

FATS statistics are required by the GATS for assessing the effects of commercial presence and presence of natural persons as modes of supply. The importance of FATS can be judged from the fact that, for instance, Canadian-controlled firms account for 69% of Canadas commercial services exports, and that, on the import side, foreign-controlled firms account for 51% of Canadas commercial services imports. In the year 2000, the share of services turnover of foreign Affiliates in national total in the case of Netherlands was 15% and in France about 10%. The WTO Secretariat has estimated that in the year 2000 world-wide sales by Commercial Presence mode of supply (FATS Statistics) was high as $2000 billion. In the same year Cross-border sales were $1000 billion, Consumption abroad on the other hand generated $500 billion and Movement of natural persons $50 billion12. At present Pakistan appear to have no systematic way of monitoring the economic activities of the affiliates operating in its economic space nor does the government keep any account of the activities Pakistani affiliates operating abroad. Even though Government has authorized both inward and outward investment, the authorities have no mechanism in place for developing a coherent policy for making fuller use of the GATS third mode of supply, namely commercial presence. It hardly needs to be emphasized that Pakistan already has a number of foreign affiliates/subsidies like ICI, Nestles, Glaxo doing business in its territory, and it is reasonable to expect that the number of these affiliates will increase in the future as current investment promotion programs take root. It is therefore important that, as soon as possible, Pakistan develops an efficient information system relating to this sector. As pointed out before, FATS statistics are essential for a more beneficial participation in GATS negotiations and the promotion of the Services sector.

These have not been reproduced in this study. Commitments Under GATS: Overview of Current Schedules Trade in Services Division
12

11

34

A list of the relatively more important foreign companies doing business in Pakistan is given below:

Table 6: LIST OF MORE IMPORTANT FOREIGN COMPANIES IN PAKISTAN

1.UniLever 2.P&G Proctor and Gamble 3.Nestle 4.Shell 5.ICI 6.McDonalds 7.Siemens 8.Indus Motors 9.Honda Atlas 10.Citi group11.ABN. Amro Bank 11. 12.Standard Chartered Grindlays 13.IBM 14. NCR 15. British Petroleum 16. Caltex 17.Faysal Bank 18.British Council 19.ILO 20.UNO 21.Novaritis 22.Alcatal 23.Pepsi Co 24.Coca Cola Pakistan 25.Leckson Tobacco Company 26.Gillette Pakistan 27.EFU General Life Insurance 28.Subways 29.Hyundai 30.Ericsson 31.Motorola 32.Nortel 33.American express Bank 34.Nike 35.HSBC 36.Union Bank

I.5 OPTIMAL DATA, ANALYSIS AND POLICY-MAKING FRAMEWORK Bearing in mind the foregoing, the following recommendations relating to optimal data collection, carrying out systematic economic and political analysis and developing institutions for policy-making on WTO issues are submitted for the consideration of the Ministry of Commerce. This discussion consists of two parts: the first deals with statistics, and the second with decision making processes.

I.5.i STATISTICAL SYSTEM:

As suggested earlier, the Federal Bureau of Statistics (FBS) and the State Bank of Pakistan are two focal institutions responsible for collecting most of the data relating to GATS issues. The FBS publishes the annual national accounts estimates and the State Bank issues quarterly and annual balance of payments accounts. At the Federal level, sectoral Ministries and quasi-autonomous bodies and Departments also generate statistics data relating to their work as defined in the Rules of Business and the Acts or the Ordinances promulgated by the Government to describe their functions. Data on higher education and health is published both by the Federal and the Provincial governments. Some professional associations also compile some data about their members and their collective activities

35

This statistical system of Pakistan has been in place for a long time, and over the years it has acquired a great deal of expertise. Its most important problems always have been the lack of professional leadership, the lack of adequate opportunities for the development of the skills of its staff, and weak public and private demand for timely, accurate and adequate information. Consequently the statistical system does not receive the resources that it must have in order to serve the informational needs of a modern economy, namely the collection of data, secondly, the compilation of data in usable forms and, thirdly, the timely publication of the collected data. These are, however, problems of a general nature and they apply more or else equally virtually to all spheres of Pakistans economic life. The specific difficulties that beset GATS statistics are two-fold. First, the GATS is a relatively new and a recent international legal phenomenon. The public and the private sectors in Pakistan are therefore not entirely clear about its statistical requirements. As a matter of fact, the international community itself has yet to bring into being a system that meets fully the needs of the services sector. It will be recalled that the Manual on Statistics of International Trade in Services has just been agreed among the OECD, the IMF, the WTO and the UN. However now that an agreed international model is ready, authorities in Pakistan can brace themselves to take advantage of the costly research carried out by eminent international organizations relating to the GATS informational requirements and to evolve a system of statistics appropriate to the traditions of Pakistan. Secondly, users of GATS data in Pakistan are handicapped not because the FBS or the State Bank or other concerned governmental entities do not collect the required statistics, but because of the limited amount they publish. Moreover, what they do make accessible to the government or private bodies is so aggregated that it loses a great deal of its utility for deep analysis or effective policy-making. As has been suggested above, both the FBS and the State Bank need to publish not just the great statistical categories like Valueadded in net factor income from abroad in the context of national accounts or Other transportation, other in investment income or other in other goods, services & services in the context of the balance of the payments, but to make public the data collected that build these aggregates. It hardly needs to be said that these opaque categories of national accounts or of the balance of payments are not very illuminating. It can be said confidently that a number of data problems of the GATS will disappear when the elements that constitute these categories are published. In the light of these considerations, it is recommended that the Ministry of Commerce, in consultation with the FBS and the State Bank of Pakistan, establish a program of publication of GATS statistics that progressively conforms to the model set out Box 2. This model, called the Extended Balance of Payments Classification (EBOPS), has been designed by the IMF and included in the Manual on Statistics of International Trade in Services. It may be explained here that as a first step these organizations just need to reveal the data they presently collect in the ordinary course of their work; they need not 36

undertake new surveys or collect new data, they The gaps that show up between their routine data collection exercises and the Extended Balance of Payment Classification can be filled progressively as larger resources become available. BOX 2 EBOPS Classification (including memorandum items)

Transportation 1.1 Sea transport 1.1.1 Passenger 1.1.2 Freight 1.1.3 Other 1.2 Air transport 1.2.1 Passenger 1.2.2 Freight 1.2.3 Other 1.3 Other transport 1.3.1 Passenger 1.3.2 Freight 1.3.3 Other
Extended classification of other transport

1.4 Space transport 1.5 Rail transport 1.5.1 Passenger 1.5.2 Freight 1.5.3 Other 1.6 Road transport 1.6.1 Passenger 1.6.2 Freight 1.6.3 Other 1.7 Inland waterway transport 1.7.1 Passenger 1.7.2 Freight 1.7.3 Other 1.8 Pipeline transport and electricity transmission 1.9 Other supporting and auxiliary transport services
Travel

1.10 Business travel 2.2.1 Expenditure by seasonal and border workers 37

2.2.2 Other 1.11 Personal travel 1.11.1 Health related expenditure 1.11.2 Education related expenditure 1.11.3 Other
Communications services

1.12 Postal and courier services 1.13 Telecommunications services

Construction services

1.14 Construction abroad 1.15 Construction in the compiling economy

Insurance services

2. 3.

8.

1.16 Life insurance and pension funding 1.17 Freight insurance 1.18 Other direct insurance 1.19 Reinsurance 1.20 Auxiliary services Financial services Computer and information services 7.1. Computer services 7.2. Information services 7.2.1. News agency services 7.2.2. Other information provision services Royalties and license fees 8.1 Franchises and similar rights 8.2 Other royalties and license fees

Other business services

8.1. Merchanting and other trade related services 8.1.1. Merchanting 8.1.2. Other trade related services 8.2. Operational leasing services 8.3. Miscellaneous business, professional, and technical services 9.3.1 Legal, accounting, management consulting, and public relations 9.3.1.1 Legal services 9.3.1.2 Accounting, auditing, bookkeeping and public relations services 9.3.1.3 Business and management consulting and public relations services 9.3.2. Advertising, market research, and public opinion polling 9.3.3. Research and development 9.3.4. Architectural, engineering, and other technical services 38

9.3.5. Agricultural, mining, and other on site processing services 9.3.5.1.Waste treatment and de-pollution 9.3.5.2.Agriculture, mining, and other on-site processing services 9.3.6 Other Business services 9.3.7 Services between related enterprises, n.i.e 10. Personal, cultural, and recreational services 10.1 Audiovisual and related services 10.2 Other personal, cultural, and recreational services 102.1. Education services 102.2. Health services 102.3. Other 11. Government services, n.i.e. 11.1. Embassies and consulates 11.2. Military units and agencies 11.3. Other governments services

Memorandum Items
Freight transportation on merchandise, valued on a transaction basis

1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7. 1.8.

Travel

Sea freight Air freight Other freight Space freight Rail freight Road freight Inland waterway freight Pipeline freight

2.1 Expenditure on goods 2.2 Expenditure on accommodation and food and beverage serving services 2.3 All other travel expenditure
Gross insurance premiums

3.1 Gross premiumslife insurance 3.2 Gross premiumsfreight insurance 3.3 Gross premiumsother direct insurance
Gross insurance claims

4.1 Gross claimslife insurance 4.2 Gross claimsfreight insurance 39

2. 3. 4. 5.

4.3 Gross claimsother direct insurance Financial intermediation services indirectly measured (FISIM) Financial services including FISIM Merchanting gross flows Audiovisual transactions This item consists of arrange of services and other transactions relating to audiovisual activities. Included are services that may be included in either audiovisual services or royalties and license fees, and also the acquisition and disposal of non-produced, non-financial assets relating to audiovisual activities, such as patents, copyrights, trademarks, and franchises.

The GATS GNS/W/120 list explicitly excludes some services that are supplied by governmentsthose that are supplied on a non-commercial basis and not in competition with one or more service suppliers. These services are included in government services, not included elsewhere, within BPMS and EBOPS. Included in the GNS/W/120 are the distribution services of wholesale trade and retailing. Following BPM5, these services are not identified in the EBOPS classification. In the 1993 SNA, wholesalers and retailers are entities that purchase and resell goods with no or only minimal processing ( in the form of cleaning, packaging, and delivering a selection of goods in convenient locations, and thus making them easy to buy . Such services, with the exception of merchanting services (which are discussed further in section III.H.), are not part of the international services transactions described in BPMS because the margins that represent these distribution services are included in the free on board (f.o.b.) values of the goods to which they relate.

I.6 MODES OF SUPPLY: In a discussion of Modes of Supply it needs to be said that there is no strict or one-to-one correspondence between modes of supply and balance of payments commercial service categories. It is however possible to correlate the two systems of classification in a broad way. The following can therefore be considered as one possible way of relating them. 1. a. b. c. d. e. f. g. Cross-border supply (Mode 1) includes Commercial services such as Communication Services, Construction Services, Insurance Services, Financial Services, Computer and Information Services, Royal and License Fees, Other Business Services, 40

h. Personal, Cultural and Recreational Services. Consumption abroad (Mode 2) includes Travel. Travel is not a specific product; rather it is range of goods and services consumed by travelers during their visit to an economy for less than one year. Broadly it approximates to Tourism including Hajj. The Manual includes expenditure on health and education also in its definition of consumption abroad. Commercial Presence (Mode 3) covers FATS Statistics which record the economic activities of affiliates, subsidiaries and branches of foreign-owned enterprises. Movement of Natural Persons (Mode 4) records compensation of employees. The WTO Secretariat has reported that in the year 2000, the share of Other Services (Modes 1, 2 and 4) in world export of services rose to 45%, the share of Travel (Mode 2) fell to 32 % and the share Transport 23%. I.7 POLICYMAKING FRAMEWORK The recommendations made in this part have been designed to remedy the weaknesses of the current decision-making framework. These proposals deal with the following two broad topics: a. Research Activities, and b. Decision-making processes. I.7.i Research Activities: As awareness of the importance of the services sector increases, the opportunities for export of services become more visible, and the weight of international obligations becomes more perceptible, the need for well-researched policies relating to international trade in services is bound to become more compelling. Experience has already shown that, in addition to a competent research institute, the country can not remain content with the current ad-hoc arrangements for the training of its civil servants, the private sector and the academics in WTO disciplines. Furthermore, the Government can not continue to rely for too long on foreign financial assistance for meeting its research and training needs. The Government has to establish arrangements of its own that serve its own specific needs. It is recommended that the Ministry of Commerce may consider enlarging its institute for the training of a handful of Trade Service officers into a centre of excellence for research and training in international trade and the political economy of the World Trade Organization. Among other things, this institute will have to develop a highly sophisticated multi-disciplinary approach covering at least economics, international commercial law, and international relations to understand and analyze WTO agreements and the fast developing case law being generated by the WTO Dispute Settlement Mechanism, to implement these agreements efficiently and to participate effectively in their future development.

41

There is no gainsaying that this is not a novel idea. In fact several member countries of the WTO felt the need for an Institute of Foreign Trade quite some time ago and have devoted substantial amounts of resources to research and training in the political economy of international trade. The Ministry of Commerce may therefore consider the experience of the following bodies in designing an institution of its own. a. b. c. d. The Indian Institute of Foreign Trade, The Productivity Commission ACT 1998 of Australia, US International Trade Commission, and The Canadian International Trade Tribunal.

I.7.ii Decision- making Processes The Government of Pakistan has been an active member of the General Agreement on Tariffs and Trade, and it is participating vigorously in negotiations being held in WTO bodies at Geneva. It has therefore over the years evolved a fairly elaborate mechanism for the conduct of its foreign trade policy. Experience however has shown that in view of the growing complexity of international trade issues, trade in goods and trade in services, and the vast scope of WTO agreements, the institutional arrangements responsible for negotiating and implementing trade policies need to be strengthened substantially. Some of the areas that deserve greater attention are: a. Coordinating arrangements at administrative level Most of the Federal Ministries, in cooperation with the Ministry of Commerce, have already set up small cells to deal with WTO issues in their domain. As a first step these cells need to be strengthened substantially in order that the Government of Pakistan can deal with on-going WTO negotiating rounds effectively. It also seems necessary that Government establishes a WTO Policy-making Committee of Federal Secretaries to provide guidance to these individual, ministerial cells to oversee their agenda and programs of work and to co-ordinate their output. It is strongly recommended that this Committee may be established through an Ordinance to ensure adequate legal status and continuity for it. The Committee will need to be based in the Ministry of Commerce under the chairmanship of the Secretary, Ministry of Commerce, and the WTO Wing of the Ministry of Commerce would need to serve as its Secretariat. This formalization of the current more or less ad-hoc arrangements will not only enable Pakistan to improve the quality of its participation in crucial international negotiations, it will also greatly facilitate the task of the Economic Coordination Committee of the Cabinet. It is important that this Committee should dedicate all its attention to issues relating to services, and that it is not be merged with the arrangements in place for dealing with trade in goods. The economic importance and tradability of services as well as the provisions of the GATS require that the specificity of services is acknowledged institutionally. b. Consultation mechanism between Government and the private sector: 42

It is fortunate that Pakistan has now a country-wide network of district level chambers of commerce and industry that rise hierarchically into an all-Pakistan Federation of Chambers of Commerce and Industry. This system is further strengthened by an even larger network of business and occupational associations that help the vast private sector, among other things, to articulate its interests and to negotiate with the Government in an organized fashion. As part of its program of increasing awareness of the WTO among civil servants, private business and the academia, the Ministry of Commerce, assisted by the DFID, has already held a number of workshops all over the country, and it is expected that this program will continue for some more time. This has been an important step forward but it is fairly obvious that much more needs to be done to prepare the concerned institutions and persons to cope with ever rising demands of the WTO. The Ministry of Commerce has also established a number of working groups consisting of civil servants, private sector and the academic people to review the working of major WTO agreements and to help the Government evolve its negotiating position for the current Post-Doha WTO Rounds. It is gratifying to see that preliminary comments of these working groups are already available to the authorities. All this is valuable and well-timed and well-organized. However, the need for a more formal and permanent mechanism for holding regular consultations with the private sector remains. It is therefore recommended that the Ministry of Commerce may consider setting up a standing committee of concerned Ministries like Agriculture, Communications, Education, The Higher Education Commission, Health and representative of the Federation of Commerce and Industry capable of speaking on behalf of the major divisions of the Services Sector. The Higher Education Commission has been included in this Committee because of the crucial importance of mutual recognition of educational and professional certificates (degrees) in the application of the GATS mode of supply. This body should meet periodically, at least once every quarter, to review the current situation and to formulate its recommendations. It is important that this entity has a permanent secretariat of it own, and that its work is overseen by the Secretary, Ministry of Commerce personally. It is further suggested that the functions, composition, and governance of this body should be notified through a formal resolution of the Government. A Government resolution will give this body the visibility, the credibility and the status it requires to perform its functions reasonably well. c. Research and training to back-up decision making at administrative level: Most conscientious civil servants are well aware that, unlike civil servants in other progressive countries, decision making processes in Pakistan suffer from a lack of well researched background material and the unavailability of coherent quantitative and qualitative information. In the last two decades Pakistan has tried to remedy this situation by engaging donor-financed foreign and local consultants, but for a number of reasons 43

the results of this experience have not always been entirely satisfactory. The fact of the matter is that while donor technical assistance does fill the gaps in the knowledge available to the administration, it can not always stand for in-house, indigenous research institutions. Government therefore need to developed a system in which foreign technical assistance and local research institutes can work together not to just meet emergencies but to contribute to the building of long term intellectual and administrative capacity necessary to the functioning a modern state. e. Dialogue with NGOs. NGOs all over the world are playing an important role in policy-making and their influence on social, political and economic developments is increasing. Pakistan also has a number of sophisticated NGOs who take a keen interest in WTO related issues. It is time the Government of Pakistan formally recognized the relevance of the NGO perspectives on democracy, human rights, labour standards and environmental protection to public policy-making and established a mechanism for periodic consultation with them at least on WTO agenda. The Ministry of Commerce can play a leading role in promoting a constructive dialogue between the government and the NGOs. Committee on Services Statistics The need for reforming the statistical system of services has already been discussed in considerable detail. It is recommended that a Committee consisting of Ministries of Commerce, Industry, Finance, the Statistics Division and the State Bank of Pakistan may be formed to consider how best to adapt the recommendations of Manual on Statistics of International Trade in Services to needs of Pakistan, and to make arrangements for collecting Foreign Affiliates Trade in Services statistics (FATS). This Committee may well have to establish sub-committees to deal with specific detailed issues, but the main Committee itself should be presided over by the Secretary, Commerce to maintain standards and speed.

44

Annexure-1 GROSS NATIONAL PRODUCT AT CONSTANT FACTOR COST OF 1980-81 Sector (Rs. In Million) 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-1999 1999-2000 2000-01 2001-02 R 1. Agriculture Major Crops Minor Crops Livestock Fishing Forestry 2. Mining & Quarrying 3. Manufacturing Large Scale Small Scale 4. Construction 5.Electricity & Gas Distribution 6. Transport, Storage 47,189 50,333 52,183 54,342 54,798 56,859 60,959 & Communication 64,085 66,364 69,692 69,782 2,565 2,642 2,765 2,646 2,833 2,886 2,744 2,831 106,767 75,710 31,057 21,356 29,463 3,006 3,136 3,254 125.425 118.8 125.005 133.22 148.83 149.02 155.748 158.783 64,426 30,300 57,809 5,477 771 168.459 164.012 74,359 27,544 58,906 6,008 1,642 67,080 P 166.29 66,722

63.213 53,354 54,018 58,714 62,211 59,518 64,439 20,290 21,092 23,754 25,395 26,636 26,886 29,071 36,133 38,308 40,599 42,848 54,172 56,469 56,024 4,650 1,139 4,909 1,132 5,442 1,192 5,047 1,211 4,904 909 5,139 1,004 5,443 771

27,575 27,847 61,768 5,785 1,804 63,880 6,017 1,823

82,672 86,346 90,272 92,561 96,016 95,945 102,593 61,051 63,577 66,294 67,310 69,424 67,941 73,102 21,621 22,769 23,978 25,251 26,592 28,004 29,491 19,566 20,701 21,040 21,253 21,944 22,183 22,462 16,823 17,897 18,464 21,572 23,759 23,068 25,094

108,405 116,623 121,738 75,699 32,706 22,456 28,590 82,180 34,443 22,374 25,434 85,466 36,272 22,581 24,735

45

7. Wholesale & Retail 78,760 81,061 83,377 82,245 92,542 93,208 92,157 Trade 8. Finance and Insurance 9. Ownership of Dwellings 10. Public Admn & Defense 11.Services 12.GDP(fc) 13. Indirect Taxes 14. Subsidies 15. GDP (mp) 16. Net Factor Income from abroad 17. GNP(fc) 18. GNP (mp) 19. Population (in Million) 20. Per Capita Income 4,310 4,273 4,327 4,458 4,588 4,535 4,575 482,710 491,516 510,410 538,892 568,301 575,503 594,554 541,428 549,646 567,634 598,450 621,372 625,188 640,034 112.00 115.04 117.93 120.88 123.87 126.90 129.97 32,495 33,295 33,759 34,814 35,917 36,712 37,459 36,335 38,708 41,236 43,929 46,798 48,854 53,109 477,761 487,782 509,091 534,861 570,157 579,865 600,125 63,722 62,156 60,458 61,584 56,818 52,870 48,617 5,004 4,026 3,234 2,026 3,747 3,185 3,137 25,588 26,938 28,361 29,858 31,435 33,095 34,842 10,343 11,065 12,629 13,426 15,283 17,039 12,958

94,891

96,713 101,784 104,064

15,403

14,711

15,177

15,749

36,682

38,618

40,657

42,804

38,395 56,577 625,233 47,971 3,969 669,235 -5,202

42,003 60,271

42,486 64,207

50,217 68,400

649,656 665,582 689,613 54,864 6,775 57,983 6,845 65,126 6,409

536,479 545,912 566,315 594,419 623,228 629,550 645,605 4,949 3,734 1,319 4,031 -1,856 -4,362 -5,571

697,745 716,720 748,330 -7,883 -7,745 3,777

620,031 664,033 133.01

641,773 657,837 693,390 689,862 708,975 752,107 136.00 139.08 142.07

4,662

4,719

4,730

4,881

46

(fc-Rc) 21. Per Capita Income (mp-Rc) R: Revised P: Provisional Source: Federal Bureau of Statistics 4,826 4,778 4,813 4,951 5,016 4,927 4,924 4,992 5,073 5,098 52,294

47

Annexure-II SECTORAL SHARES IN GDP (Real) (In Percent) 1990- 1991- 1992- 1993Sector 1994-95 1995-96 1996-97 1997-98 1998-1999 1999-2000 2000-01 2001-02 91 92 93 94 1. Commodity 51.3 51.7 50.5 50.6 50.7 51.5 50.6 51.4 51.1 50.9 49.8 49.1 producing Sector a. Agriculture 25.8 26.3 24.4 24.6 24.9 26.1 25.7 26.0 25.4 25.9 24.6 24.1 b. 17.4 17.3 17.7 17.7 17.3 16.8 16.6 17.1 17.1 16.7 17.5 17.7 Manufacturing c. Mining and 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 Quarrying d. Construction 4.2 4.1 4.2 4.1 4.0 3.9 3.8 3.7 3.4 3.5 3.4 3.3 e. Electricity & 3.5 3.5 3.7 3.6 4.0 4.2 4.0 4.2 4.7 4.4 3.8 3.6 Gas Distribution 2.Services 48.7 48.3 49.5 49.4 49.3 48.5 49.5 48.6 49.0 49.1 50.2 50.9 Sectors a. Wholesale & 16.5 16.5 16.6 16.4 Retail Trade b. Transport, 9.6 9.9 10.3 10.3 Storage & Communication 16.3 10.2 16.2 9.6 16.1 9.8 15.4 10.2 15.2 10.3 14.9 10.2 15.3 10.5 15.1 10.1

48

c. Finance & 2.2 Insurance d. Ownership 5.5 of Dwellings e. Public 7.1 Admn. & Defense f. Services 7.7 R: Revised P: Provisional

2.2 5.4 6.8

2.3 5.5 6.8

2.5 5.6 6.6

2.5 5.6 6.4

2.7 5.5 6.2

2.9 5.7 6.3

2.2 5.8 6.2

2.5 5.9 6.1

2.3 5.9 6.5

2.3 6.1 6.4

2.3 6.2 7.3

7.6

7.9

8.1

8.2

8.2

8.6

8.9

9.1

9.3

9.7

9.9

Source: Federal Bureau of Statistics

49

Annexure-III GROSS FIXED FORMATION (GFCF) IN PRIVATE, PUBLIC AND GENERAL GOVERNMENT SECTORS BY ECONOMIC ACTIVITY AT CONSTANT MARKET PRICES OF 1980-81 (Rs. In Million) Sector GFCF (A+B+C) A. Private Sector B. Public Sector C. General Govt. & Private & Public (A+B) Sector Wise 1.Agriculture 2.Mining & Quarrying 3.Munfacturing Large Scale Small Scale 4. Construction 5. Electricity & Gas 6. Transportation & Communication 7. Whole sale & Retail Trade 8.Finance & Insurance 9. Ownerships of Dwellings 10. Services R: Revised P: Provisional
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02

R P 82,223 92,436 96,323 95,423 99,522 104,729 100,693 96,961 92,599 97,268 98,161 95109 39,536 44,827 46,454 47,414 48,554 52,833 57,009 61,396 52,222 55.022 54,585 55,601 23,599 27,679 29,471 28,398 31,097 32,405 28,942 19,754 24,402 26,139 27,388 22,596 19,088 19,930 20,398 19,611 19,871 19,491 14,742 15,811 15,975 16,107 16,188 16,912 63,135 72,506 75,925 75,812 79,651 85,238 85,951 81,150 76,624 81,161 81,973 78,197 8,712 7,911 8,279 8,723 9,614 1,309 1,714 1,447 1,854 2,916 9,227 2,691 6,167 6,251 4,379 2,852 7,799 2,650 7,845 2,100 6,904 6,533 2,386 2,481

13,030 17,859 17,685 18,114 12,071 14,070 14,551 13,110 15,106 14,939 18,141 12,436 10,652 15,292 14,917 15,133 9,163 10,621 10,847 9,132 10,459 10,349 13,212 7,142 2,378 2,567 2,768 2,981 2,908 1,126 2,621 1,939 2,323 2,176 3,449 2,541 3,704 3,978 2,154 1,998 4,647 1,229 4,590 1,200 4,929 5,294 1,409 1,656

12,458 14,036 14,266 14,919 23,006 22,638 16,758 17,360 10,523 12,641 10,994 11,587 9,865 11,140 14,265 10,816 9,624 12,897 18,270 15,603 14,212 17,473 16,167 14,510 880 460 905 496 866 759 959 1,370 811 1,662 1,577 1,769 1,280 1,498 2,977 1,965 1,467 2,554 1,639 2,179 1,856 2,210 1,375 2,198

10,979 11,266 11,575 11,969 11,838 12,198 12,686 13,126 13,757 14,125 14,604 15,147 4,316 4,471 4,751 5,245 5,358 5,630 6,729 7,387 7,329 7,022 8,137 9,439

50

Annexure-I V FOREIGN INVESTMENT

Fiscal Year 198990 199091 199192 199293 199394 199495 199596 199697 199798 199899 19992000 20002001 (Millions US $) Saudi Canada Nether Korea Others Total Arabia land Direct 16.1 1.1 0.9 5.3 -38.3 216.2 Portfolio -4.2 0.6 0.1 0.7 -3.1 -4.7 Total 11.9 1.7 1 6 -41.4 211.5 Direct 26.2 0.9 1.9 2.3 -16.1 246 Portfolio -5.3 -0.2 0.2 ---12.4 -9.0 Total 20.9 0.7 2.1 2.3 -3.7 237.0 Direct 17.7 0.1 3.0 0.8 -36.9 335.1 Portfolio -1.1 -1.3 -34.3 218.5 Total 17.7 1.2 3.0 2.1 -71.2 553.6 Direct 22 8.2 0.3 5.6 -43.3 306.4 Portfolio 6.3 0.4 4.0 5.3 -25.7 136.8 Total 28.3 8.6 4.3 10.9 -69.0 443.2 Direct 0.3 29.7 1.9 1.2 -0.1 53.1 354.1 Portfolio -0.8 -8.8 0.1 208.2 288.6 Total 0.3 30.5 1.9 10.0 0.0 261.3 642.7 Direct 16.3 0.9 0.4 4.5 40.8 84.0 442.4 Portfolio 4.6 1.2 -17.2 11.5 -210.7 1089.9 Total 20.9 2.1 -16.8 16.0 40.8 294.7 1532.3 Direct 82.1 26.9 0.8 11.9 31.5 169.8 1101.7 Portfolio 13.1 -1.1 ---112.3 205.0 Total 95.2 25.8 0.8 11.9 31.5 282.1 1306.7 Direct 36.6 -17.0 1.7 7.7 7.3 67.5 682.1 Portfolio 6.9 -0.8 3.5 -73.1 267.7 Total 43.5 -17.0 2.5 11.2 7.3 140.6 949.5 Direct 17.8 1.2 0.5 26.9 5.9 106.0 601.3 Portfolio -1.2 1.3 ---10.7 221.3 Total 16.6 2.5 0.5 26.9 5.9 116.7 822.6 Direct 57.4 1.1 0.3 5.7 4.6 27 376.0 Portfolio 0.0 0.0 0.0 0.6 0.0 12.4 27.3 Total 57.4 1.1 0.3 6.3 4.6 39.4 403.3 Direct 17.7 28.6 0.2 10.7 9.3 48.4 469.9 Portfolio 0.2 -5.9 0.0 9.4 0 26.0 73.5 Total 17.9 22.7 0.2 20.1 9.3 74.4 543.4 Direct 9.1 56.6 0.1 4.8 3.7 38.7 322.4 Portfolio 0 -1.7 0.5 -1.3 0.0 -40.2 -140.4 Total 9.1 54.9 0.6 3.5 3.7 -1.5 182.0 Direct 4.1 2.1 3 -6.5 0.2 69.6 287.4 Portfolio 0.2 0.1 2.7 -0.8 0 7.1 -2.9 Total 4.3 2.2 5.7 -7.3 0.2 76.7 284.5 Stands for amount less than $ 0.05 million Not Available Source: State Bank of Pakistan Direct Investment consists of cash, capital equipment brought in and reinvested earnings. Japan

51

July, March

Annexure-v PERCENTAGE DISTRIBUTION OF EMPLOYED PERSONS BY INDUSTRY DIVISIONS, OCCUPATION GROUPS, SEX AND AREA, 1998-99
MAJOR INDUSTRY DIVISONS Total Legislators Senior Officials and Managers Professio nals Technicians & Associate Professionals Clerks Service Workers & Shop & Market Sale Workers Skilled Agriculture & Fishery orders Craft & Related Trade Workers Plant & Machine Operator s& Assembl ers Elementary Occupations Armed Forces

1 PAKISTAN Both Sexes Agriculture, Fishing Mining and Quarrying Manufacturing Electricity, Gas, Water Construction Trade, Hotels/Restaura nt Transport & Storage Finance , Real Estate etc Community services etc Activities not defined Male Agriculture, Fishing Mining & Quarrying Manufacturing Electricity, GAS Water Construction Trade, Hotels/Restaura nt Transport & Storage Finance , Real Estate etc Community services etc Activities not defined FEMALE Agriculture, Fishing Mining & Quarrying Manufacturing Electricity, GAS Water

10

11

12

100.0 0 43.68 0.31 12.73 0.67 6.94 12.18 5.52 0.74 16.97 0.26 77.46 30.35 0.29 8.84 0.67 6.79 11.64 5.52 0.73 12.40 0.23 22.54 13.33 0.02 3.89 --

0.82 0.03 0.00 0.20 0.01 0.01 0.16 0.06 0.12 0.22 0.00 0.69 0.02 0.00 0.19 0.01 0.01 0.12 0.06 0.12 0.16 0.00 0.013 0.01 -0.01 --

3.46 0.03 0.00 0.15 0.02 0.04 0.05 0.05 0.08 2.96 0.07 2.38 0.02 0.00 0.15 0.02 0.04 0.05 0.05 0.08 1.90 0.06 1.08 0.01 -0.01 --

2.89 0.03 0.00 0.16 0.05 0.03 0.07 0.14 0.15 2.24 0.02 2.32 0.03 0.00 0.15 0.05 0.03 0.07 0.14 0.14 1.68 0.01 0.58 --0.00 --

2.25 0.07 0.01 0.33 0.15 0.04 0.12 0.22 0.18 1.11 0.01 2.20 0.07 0.01 0.32 0.15 0.04 0.12 0.22 0.18 1.08 0.01 0.05 0.01 -0.01 --

14.12 0.12 0.02 0.46 0.9 0.08 8.29 0.24 0.12 4.68 0.03 12.33 0.11 0.02 0.42 0.09 0.07 7.96 0.24 0.11 3.3 0.03 1.79 0.01 -0.05 --

36.16 35.55 -0.05 0.01 0.08 0.28 0.03 0.01 0.12 0.03 26.50 25.93 -0.05 0.01 0.07 0.28 0.03 0.01 0.1 0.03 9.66 9.62 ----

11.48 0.05 0.02 7.07 0.14 0.80 0.36 0.39 0.02 2.60 0.03 7.16 0.04 0.01 3.9 0.14 0.78 0.31 0.39 0.02 1.54 0.03 4.32 0.00 0.00 3.17 --

5.29 0.22 0.02 1.47 0.11 0.05 0.06 2.77 0.02 0.56 0.00 5.18 0.22 0.02 1.37 0.11 0.05 0.06 2.77 0.02 0.54 0.00 0.12 --0.10 -0.53

23.32 7.56 0.23 2.84 0.08 5.81 2.78 1.64 0.05 2.29 0.06 18.51 3.9 0.21 2.31 0.08 5.7 2.67 1.64 0.05 1.92 0.04 4.81

0.20 0.01 --------0.17 0.19 0.00 -------0.17 0.01 0.01

3.66 0.02

0.01 ---

52

Construction Trade, Hotels/Restaura nt Transport & Storage Finance , Real Estate etc Community services etc Activities not defined

0.15 0.53 0.00 0.02 4.57 0.03

-0.04 -0.00 0.06 0.00

-0.00 --1.06 0.01

---0.00 0.56 --

--0.00 -0.03 --

0.01 0.33 -0.01 1.39 --

0.01 0.01 --0.02 0.00

0.02 0.05 0.00 -1.07 --

-0.00 --0.01 0.02

-0.11 0.10 --0.37

-------

53

Chapter II Review of Prior Commitments by Pakistan and its Trading Partners

This chapter reviews the following topics listed in the Paragraph 2.1.iii and Section 2.2 of the terms of reference of this study: a. Domestic policies and regulations affecting services13 b. Current GATS schedule of commitments of Pakistan, c. Current policies and services commitments of Pakistan, and d. Commitments made by WTO members. Section I. DOMESTIC POLICIES AND COMMITMENTS AFFECTING SERVICES14 In the last few years Pakistan has enacted a number of reforms in some of its major services sectors. In February 1998 it issued two supplements to its April 1994 Schedules of Specific Commitments that provided fresh commitments relating to Telecommunications and Financial Services. Pakistan has also made serious efforts to carry out the structural reforms it had agreed with the IMF and the World Bank. As a result, Pakistans policies are now substantially more transparent and liberal than ever before.

The central features of the reforms implemented since 1995 have been (i) to improve the efficiency of the services sector by deregulation and by opening it to foreign competition (ii) to increase Pakistans exports of services, and (iii) to attract foreign investment. It is now widely accepted in Pakistan that an efficient and more robust services sector is not only important for its own sake, but more so for the competitiveness, efficiency and faster growth of the entire economy. This topic has been brought into this chapter to ensure continuity with section 2.2. 14 This section draws heavily on material contained in recent annual Economic Surveys, annual State Bank Reports, USTR: Foreign Trade Barriers, the WTO Trade Policy Review of Pakistan, and BOIs Pakistan: Investment Policies, Incentives & facilities. 54
13

I.1.i. Investment Policy: The current reformed policy allows foreign investment in any sector falling under the services as defined in Pakistans national accounts; namely Transport and Communications, Wholesale & Retail Trade, Finance, and Social Services (Education, Training and Health). In general foreign investors are allowed to hold up to 100 percent equity subject to the conditions that: a. b. a foreign investor must hold a minimum of $ 300,000 as equity; repatriation of profits will be restricted to a maximum of 60 percent of total equity or profits; and that 40 percent of the equity be held Pakistani investors within five years of initial investment. Foreign investments not meeting the latter two conditions are still permitted, but they can not claim guaranteed repatriation of profits.

I.1.ii. Specific Policies

Against the background of this broad Mode 3 policy, policies of recent origin relating to some specific sectors are discussed below. a. Computer software and Information Technology (Mode 1 and 3): This industry is fully open to foreign investment. In fact, unlike several other industries it is free even from the restriction of a minimum investment. The plant and machinery required by this industry is subject to a nominal duty of 5 percent, and there is no restriction on repatriation of profits and dividends and on the payment of royalty and technical fees. b. Construction Industry (Modes 1 and 3): This industry covers a very large number of activities ranging from road paving, offshore works, airports, sewage works, airconditioning, lifts and escalators, medical equipment, power generation and telecommunication installation. The complete list of engineering activities that Pakistan can handle is given in the Bye Laws of Pakistan Engineering Council, 22 November 1999.

The bye laws of the Council further provide that the share of a Pakistani company in the equity of a joint venture shall not be less than thirty percent. The foreign constructor or foreign operator may be granted license only for specific projects which need expertise and specialized technology of construction not available with a Pakistani constructor or operator. Like Tourism this industry has also been declared a priority industry. It is therefore entitled to all the incentives Government has agreed to provide to other priority industries.

55

The Engineering Council which regulates engineering service in the country has already decided that Pakistan should ask for commitments for Modes 1, 3 and 4 of supply. In return Pakistan should offer at least partial commitments in the these three mode of supply, namely 1, 3 and 4. Pakistan is most fortunate in that its engineering degrees are recognized15 over most of the world. It can therefore enter into international negotiations without any serious technical difficulty. c. Legal Services (Mode1 and Mode3): Any person can provide legal consultancy, but a foreign lawyer can not practice law and appear in courts or otherwise formally plead cases unless he has been licensed to practice law in Pakistan. Foreign lawyers can form law firms in Pakistan as long there is 40 percent Pakistani equity within five tears of initial investment. d. Courier Service (Mode 1, Mode 3 and Mode 4): Pakistan has not made any commitment under the GATS with regard to courier services. However, subject to some conditions, it does allow domestic and foreign companies to compete with national postal services. e. Medical and Dental Services (Mode1, Mode 2, Mode 3, and Mode 4): Pakistan did make some commitments in 1994 in relation to Mode 2 and Mode 3. No further liberalization has however been recorded since then. f. Maritime Transport Services (Mode1, Mode 2, Mode 3 and Mode 4): Pakistan did not participate in WTO negotiations on maritime transport services. This sector is open to both public and private sectors. Recently Government issued 35 licenses but so far only two private companies responded and started their business. It is well known that foreign shipping lines dominate Pakistans shipping business. The national fleet is presently carrying only 10 percent of the regular cargo and 25 percent of the liquid cargo. g. Air Transport

Pakistan Engineering Council letter to Secretary Commerce.(No.PEC/Cons/26a/WTO/2002 of 18 June 2002.)

15

56

At present, alongside PIA, the dominant public-sector airline, three private airlines, namely AeroAsia, Bhoja Air and Shaheen Air International operate in Pakistan. Pakistan has Air Service Agreements with 91 countries.

In accordance with its new aviation policy, Pakistan has granted access to a number of airlines to its northern gateways, namely Lahore, Islamabad and Peshawar. The new aviation policy also provides for foreign investment in the construction of new airports on BOT basis. h. Telecommunication (Modes1and 3): Pakistan has already liberalized a number of deregulated services, that is to say, these sectors are now open to domestic and foreign investors. The deregulated sectors include: 1. 2. 3. 4. 5. 6. 7. 8. 9. E. mail/Internet/Electronic Information Services, Data Communication Network Services, Trunk Radio Services, Circular Mobile Telephone Service, Audiotex Services, Voice Mail Services, Card Pay Phone Services Closer User Group for Banking Operations, International Satellite Operators for Domestic Data Communication Services.

The Pakistan Telecommunication Corporation Limited (PTCL), a public sector monopoly, still controls the rest of the telecommunication sectors. However these monopoly sectors are open to foreign investment in the sense that a foreign investor can invest in them in collaboration with the PTCL. Basic telephony remains the monopoly of the PTCL until 2005, but competition among service providers is now allowed in cellular telephony. Pakistan has also agreed to cross-border access for voice services as of 1 January, 2005, and will allow cross-border provision of packet-switched data and Internet services on competitive network by 2004. . In its Schedule of Specific Commitments, Supplement 2, Revision.1 (GATS/SC/67/Suppl.2/Rev.1) of 16 February attached a reference paper containing important commitments relating to the following:

57

a. b. c. d.

Transparency of Regulation, Interconnection and Numbering, Competition Safeguards and Standards, and Tariff Regime

The financial statements of the PTCL16 show a continuation of positive results. The PTCL has posted 9% year-on year growth in net profits after tax.The total revenue for the year 2001-02 increased from Rs. 66.43 billion from Rs 62.04 billion in 200001..The growth was mostly driven by an upsurge in the domestic sector. The increase in the international revenue was however marginal. i. Tourism (Modes 1and 2: Inward Investment): In a Notification17 issued on 18 June, 2001, Government has declared Tourism, Hotels and Tourism Related Projects as priority industries. This Notification, subject to certain conditions, exempts the Tourism industry from so much of the customs duties under the First Schedule to the Custom Act, 1969 as are in excess of ten percent ad valorem. The new policy also promises to grant long-leases land for hotels, motels, recreation parks, and cultural centres on noncommercial rates. j. Banking Services (Mode 1 and Mode 3): In 2001 Pakistan had 43 banks operating in its economic space. These consisted of 4 nationalized banks, 4 specialized banks, 16 private banks (excluding Indus Bank) and 19 foreign banks. In March 2002, domestic banks had 6926 and foreign banks 83 branches. Recognizing the need to improve the financial soundness of the banking system, in the year 2001 Government embarked upon an accelerated program of privatization. In September 2001, a 6.4% government stake in Muslim Commercial Bank was off-loaded. Now only 10.2% shares remain to be divested. The process of privatization of the United Bank Ltd through sale of a 51% stake was initiated in June 2002. That process is now in its final phase. The process of divesting 26% stake in Habib Bank is also now underway. At the same time Government offloaded 10% shares of National Bank of Pakistan through initial public offering in the stock exchanges. Further sale are planned in the coming months18.

In principle, no restrictions affect the establishment and operation of foreign banks in Pakistan, nevertheless, permission to operate is granted only on a reciprocal basis. Foreign brokers may join one of the countrys three stock exchanges only as part of a joint venture with a Pakistan firm.

16

Pak Telecom: Annual Report 2002. S.R.O.439(1)/2001 18 The Annual State Bank Report, 2001-02.
17

58

Government intervention in the operation of the financial system has been reduced by expanding the autonomy of the State bank. The thrust of the regulatory framework was maintained towards the policies focusing on increasing the ability of the banking system to weather financial shocks, strengthening their capacity to extend credit at lower cost, reducing the direct role of the Government, and fostering good governance.

k. Insurance: (Mode 1, Mode 3, and Mode 4): Of the 61 insurance companies operating in Pakistan, four (two domestic and two foreign) underwrite life business; four foreign and 53 local companies transact general business19. The insurance market in Pakistan is dominated by three public sector companies, National Insurance Company Limited, State Life Insurance Corporation, and Pakistan Reinsurance Company. Of these the later two are now being privatized. At present there are 55 private insurance companies of which 5 are foreign-owned. These own about 3% of Pakistans life insurance and about 9% of the general insurance business20. Foreign investors are allowed to hold 51 percent shares of companies operating in the life and general insurance sectors. They are however required to bring in the minimum amount of $ 2.0 million in foreign exchange and raise an equal amount in equity in the local market. There are no restrictions on the repatriation of profits but capital investment made in these sectors can not be repatriated. A new law entitled, Insurance Ordinance, 2000 was introduced to improve the working of the insurance market and to offer better protection to policy holders. Pakistan in its Specific Commitments of 26 February 1998 relating to its Financial Sector has bound market access conditions for its life and non-life insurance sub-sectors for the existing insurance services providers as to their present scope of operations and equity structure. l. Education and Training Services (Mode 1, Mode 2 and Mode 3): Education was always a multi-dimensional activity, but its trade-related aspect has into fore only recently.
WTO Trade Policy Review December 2001 20 Annual Report 2001: Securities and Exchange Commission of Pakistan.
19

59

Education is now regarded all over the world as an internationally tradable service that has an important place in the balance of payments of a country. However the GATS deals only with the private sector part of education; public sector activities relating to educational are outside the purview of the GATS..

A large, unregulated private sector exists in Pakistan to supplement the public sector education system. The following Table taken from the Economic Survey 2001-02 gives the approximate size of private activities in education.

Table Private Institution by Type Regions

Region 1 Pakistan Islamabad Punjab Sindh NWFP Balochistan FATA General 2 33,893 309 22,855 5,943 3,995 465 326 Professional/Technical (Under Graduate) 3 433 10 263 86 73 01 -(Nos) Professional/Technical Vocational Total (Graduate & Post Graduate) 4 5 6 265 1,505 36,096 12 31 362 157 688 23,963 42 286 6,457 48 335 4,451 6 53 525 -12 338 Source: Federal Bureau of Statistics

Though the Economic Survey does not differentiate between foreign and domestic private sectors, it is well known that a number of foreign establishments operate in the area of higher education. A great deal of cross-border activity can also be observed. Generally speaking, these activities take the form of linkages with foreign universities, commercial presence of foreign universities and long-distance cross-border learning and teaching. The balance of payments data relating to education can not, however, be reported here because the State Bank does not publish it separately.

Pakistan also spends a substantial amount of foreign exchange on education abroad. This is particularly true in area of technical and higher education. On the other hand, a fairly large number of foreign students, mainly from Muslim countries, visit Pakistan for education even outside government-to-government cultural and technical assistance agreements. English is the primary medium of instruction in Pakistan. This gives an enormous potential to Pakistans educational institutions to attract students from abroad, in

60

particular from the Central Asian Countries, and to attract investment in higher education from Pakistani Diaspora. A second advantage of Pakistan in providing cross-border educational and training service lies in that Pakistan has by now gathered considerable experience in distance learning and distance teaching. It may therefore be profitable for Allama Iqbal Open University to consider building capacity for cross-border teaching. It is noteworthy that this substantial though informal liberalization of the education sector (in all four modes) has never been reflected in Pakistans Schedule of Commitments. m. Health and Related Social Services (Mode 1, Mode 2 and Mode 3): In accordance with its original Schedule of Commitments, Pakistan has no restrictions on Mode 2 in respect of market access and no restrictions on Mode 2 and Mode 3 in relation to national treatment.

n. Distribution Services (Mode 1, Mode 2, Mode 3 and Mode 4): Pakistan has no restriction on foreign investment in this sector. There is therefore no restriction on Mode 3 transactions (commercial presence) except that the acquisition of real estate by nonPakistani entities and/or persons is subjects to authorization on a case-by-case basis taking into account the purpose and location of the undertaking. o. Business services Pakistan seems to have considerable potential for developing export/import capacity (Mode1, Mode 3 and Mode 4) in the following business services 1. 2, 3. 4. 5. 6. 7. Accounting, auditing and bookkeeping services, Veterinary services, Services provided by midwives, nurses, physiotherapists and paramedical personnel, Advertising services, Management consulting services, Services related management consulting, and Printing and publishing.

The export of these services is faced with national access and national treatment barriers including onerous licensing requirements and problems associated with mutual recognition of professional qualifications in industrialized countries. It

61

may however be less difficult to enter into mutually beneficial relations with South Asian, African, Persian Gulf, and Central Asian countries. Pakistan could take fuller advantage of its regional arrangement with ECO in promoting trade in business services. n.i. Accountancy is rapidly becoming a globalized profession. It is necessary for this profession in Pakistan to prepare itself for serving clients in other countries and facing competition from foreigners in Pakistan. Bearing in mind the output of the WTO Working Party on Professional Services, Pakistani negotiators also need to work towards securing better access and national treatment under the GATS. n.ii. Movement of Natural Persons (Mode 4): Movement of natural persons is relevant to all services sectors except Mode 1. A uniform facility has therefore been extended to all service sectors. Companies wishing to employ foreign nationals (technical and managerial persons) or wanting to extend the visas of their foreign employees are required to apply to the Board of Investment for work visa for a period up to 5 years or the life of the applicants passport. Businessmen from a list of 45 countries are granted multiple entry visas valid for three years. n.iii. Establishment of Commercial Presence ( Mode 3): A foreign company, i.e. a company incorporated outside Pakistan, is required to deliver the following documents to the registration authority within 30 days of the establishment of its place of business in Pakistan. a. A certified copy of the charter, statue or Memorandum and Articles of Association of the company in English or Urdu languages accompanied by prescribe Form 38. b. Address of the registered or principal office of the company on the prescribed Form 39. c. A list of Directors, the chief executive and secretaries, if any, of the company. d. Particulars of the principal officer of the company in Pakistan on Form 41. e. Particulars of person(s) resident in Pakistan authorized to accept services on behalf of the foreign company on Form 42. f. Address of the principal place of business in Pakistan of a foreign company on Form 43.

SECTION II. PAKISTANS CURRENT SCHEDULE OF COMMITMENTS

62

Pakistan began its program of liberalization of its economy in 1987/88. Among other things, this program included liberalization of production and of international trade both in goods and services. This section will focus on liberalization of Pakistans services sector. In this discussion services include 12 sectors comprising 54 sub-sectors and 160 activities. These sectors and sub-sectors can be seen in Annex I. The 12 Service Sectors are listed below: 1. Business; 2. Communication; 3. Construction and Engineering; 4. Distribution; 5. Education; 6. Environment; 7. Financial; 8. Health; 9. Tourism and Travel; 10. Recreation, Cultural, and Sporting; 11. Transport; 12. Other. Generally speaking, liberalization of services included the following four sets of policies: y y y y Deregulation and Privatization; Introduction of foreign competition in domestic services markets by reduction of barriers; Measures to attract foreign investment in the services sectors; and Removal of restrictions on export of services.

Given the stage of development of its services sectors, Pakistan began its program of liberalization cautiously and moved rather slowly towards the dismantling of its wellentrenched, highly complex and restrictive trade regime. However, with the passage of time, as Government gained experience and confidence in the value of trade liberalization, commitment and implementation gathered pace. Pakistan has also liberalized to a substantial extent its financial sector, and that it has made considerable progress in liberalizing its Telecommunications Sector. However, a number of measures taken by Pakistan have relating to these sectors have not yet been translated into internationally binding commitments. The reasons for widespread hesitation among governments including Pakistan to undertake internationally binding commitments are not difficult to locate. The GATS is an entirely new area in the context of multilateral negotiations, and Pakistan, like most other countries, had not prepared itself well enough to accept international discipline in its trade policies. Not surprising therefore Pakistans first commitments were rather tentative and limited. However the thinness of Pakistans initial schedules of

63

commitments was not due solely to the fear of liberalization. It needs to be acknowledged that at that time incentives for making deeper and wider commitments relating to services (in terms of greater export opportunities and larger investments) did not seem to be compelling enough. However, as disillusionment with its import substitution policies grew and the implications of the success stories of India and East Asian countries became more visible, Pakistan began to open more and more of its sectors to foreign competition and foreign investment. Trade in goods, Telecommunication, and Financial Services are outstanding examples of the sectors that Pakistan has both deregulated and liberalized in the recent past. It is true that in Pakistan import substitution policies neither increased employment nor did they prevent the slowing down of the economy in late 1990s. This, however, is not a sufficient reason for Pakistan to make stronger GATS commitments: What matters for Pakistan is not ideology but concrete opportunities for increasing its exports and attracting greater foreign investment. Pakistan did open finance and telecommunication sectors when opportunities for their faster development presented themselves.

Section III. INTERPRETATION AND IMPACT OF COMMITMENTS Number Of Commitments by Pakistan Pakistans schedule of specific-commitments consists of both horizontal and sectorspecific commitments. The sector-specific commitments cover 47 activities within the business, communications, construction/engineering, health, financial and tourism/travel services. These commitments can be seen in the following three documents: 1. GATS/SC/67 (15 April, 1994) 2. GATS/SC/67/Suppl.2/Rev.1 (16 Februaary,1998) 3. GATS/SC/67/Suppl.3 dated 26.02.1998. Total: 23 11 14 47 Commitments

Pakistan also submitted two Lists of MFN Exemptions, one relating to telecommunications on 11April 1997, and the second relating to banking and other financial services on 26 February, 199821. The activity or industry- specific commitments have been made under Article XVI (market access) and Article XVII (national treatment) of the GATS. MFN Exemptions on the other hand originate from Article II of the GATS. Article XVI (market access) lists six different types of limitations. These are:
21

Relevant documents: GATS/EL/67/ Supplement. 1 and GATS/EL/67/Supplement.2

64

1. Limitations on the number of service suppliers 2. Limitations on the total value of service transactions 3. Limitations on the total number of service operations or on the total quantity service output

4. Limitation on the total number of natural persons employed in foreign owned entity 5. Measures that specify the type of legal entity allowed to operate in the country 6. Limitation on equity participation

Typical national treatment limitations include limitations relating to nationality or residency requirements for executive board members, requirement to invest a certain amount of assets in local currency, restrictions on the purchase of land by foreign service suppliers, special subsidy or tax privileges granted to domestic suppliers, differential capital requirements, and special operational limits applying only to operations of foreign suppliers. All specific commitments of Pakistan apply on an MFN basis except those listed in the Article II Exemptions list i.e. telecommunications and financial services. The horizontal commitments of Pakistan, that is, commitments that apply to all sectors, relate to commercial presence or the presence of natural persons. Pakistans commitments regarding commercial presence are subject to incorporation in Pakistan with maximum foreign equity participation of fifty one percent unless a different percentage is inscribed against a particular sector or sub-sector. All expenses of representative offices have to be met by remittances from abroad. A foreign undertaking is allowed to hire up to fifty percent of its total executives and specialists from abroad. This reflects the more or less universal preference for intra-corporate transferees and other highly skilled personnel in the context of Mode 4 commitments. Acquisition of real estate by non-Pakistani entities and /or persons is subject to authorization on a caseby-case basis taking into account the purposes and location of the undertaking. The list of sector-specific commitments is given in the following Table. Summary of Pakistan's sector-specific commitments under the GATS
Modes of supply Sector or subsector Crossborder supply Consumption Commercial Presence of natural abroad presence persons Market Access/National Treatment

1.

Business Services

65

Modes of supply Sector or subsector Crossborder supply Consumption Commercial Presence of natural abroad presence persons Market Access/National Treatment

A.

Professional Services (e) (f) (h) Engineering services for building infrastructures: harbours, dams, hydal power, and airport, only Integrated engineering services Medical and dental services Consultancy services related to the installation of computer hardware Software implementation services Data processing services Data base services U/U U/U U*/U* U/U U/U U/U U/U U/U U/U U/U U/U U*/U* U*/U* N/N U/U N/N N/N N/N N/N N/N U*/U* U*/U* P/N P/N P/N N/N N/N N/N N/N N/N N/N N/N N/N Uex/U Uex/U Uex/Uex Uex/Uex Uex/Uex Uex/Uex Uex/Uex Uex/Uex Uex/Uex Uex/Uex Uex/Uex

B.

Computer and Related Services (a) (b) (c) (d)

C. F.

Research and Development Services (a) R&D services on natural sciences Other Business Services (e) (f) (h) Technical testing and analysis services Services incidental to agriculture, and forestry (excluding fishing and hunting) Services incidental to mining

2. C.

Communication Services Telecommunication Services (a) (b) (c) (d) (e) (f) (g) (h) (j) (n) (o) Voice telephone services Packet-switched data transmission services Circuit-switched data transmission services Telex services Telegraph services Facsimile services Private leased circuit services Electronic mail Online information and data base retrieval Online information and/or data processing (incl. transaction processing) Other VSAT for domestic data service Video conferencing telemedicine and teleeducation terminal and service Trunked radio service Satellite based telephony services including value added services operating over satellite P/N P/N P/N P/N N/N N/N N/N N/N N/N N/N N/N N/P Uex/Uex Uex/Uex Uex/Uex Uex/Uex P/U P/U P/U N/N P/N N/N P/U P/U N/N U/U P/U N/N N/N N/N N/N N/N N/N N/N U/U U/U U/U P/P P/P N/N N/N N/N P/U P/P P/N P/N Uex/Uex Uex/Uex Uex/Uex Uex/Uex Uex/Uex Uex/Uex Uex/Uex Uex/Uex Uex/Uex Uex/Uex

3. B.

Construction And Related Engineering Services Construction Work for Civil Engineering for bridges, elevated highways, tunnels and subways Construction Work for Civil Engineering for waterways, harbours, dams and other waterworks U*/U* U*/U* U*/U* U*/U* P/N P/N Uex/U Uex/U

7. A.

Financial Services All Insurance and Insurance Related Services (a) (b) (c) Life, accident and health insurance services Non life insurance services Reinsurance and retrocession U/U U/U N/U U/U U/U U/U P/U P/U U/U Uex/Uex Uex/Uex Uex/Uex

B.

Banking and other Financial Services (excl. insurance)

66

Modes of supply Sector or subsector Crossborder supply Consumption Commercial Presence of natural abroad presence persons Market Access/National Treatment U/U U/U P/P P/P U/U P/Uex

(a) (b)

Acceptance of deposits and other repayable funds from the public Lending of all types, incl., inter alia, consumer credit, mortgage credit, factoring and financing of commercial transaction Financial leasing All payment and money transmission services including traveller cheques and banker's draft (but excluding credit, charge and debit cards) Guarantees and commitments Trading for own account only of: Money market instruments (cheques, bills, certificate of deposits, etc.) Foreign exchange Transferable securities Other negotiable instruments

U/U U/U

(c) (d)

U/U U/U

U/U U/U

P/N P/U

Uex/Uex Uex/Uex

(e) (f)

U/U U/U U/U U/U U/U U/U

U/U U/U U/U U/U U/U U/U

P/U P/U P/U P/U P/U P/U

Uex/Uex Uex/Uex Uex/Uex Uex/Uex Uex/Uex Uex/Uex

(g)

Participation in issues of all kinds of securities, incl. only public underwriting and placement as agent & provision of service related to such issues Asset management only: cash or portfolio management; all forms of collective investment management; and custodial and depository services Settlement and clearing services for negotiable instruments (cheques, bills and promissory notes only) Provision and transfer of financial information, and financial data

(i)

U/U

U/U

P/N

Uex/Uex

(j)

U/U

U/U

P/U

Uex/Uex

(k) Financial and Investment advisory (l) 8. A. 9. A. B.

U/U U/U

U/U U/U

P/N U/U

Uex/Uex Uex/Uex

Health Related And Social Services Hospital Services Tourism And Travel Related Services Hotels and Restaurants (including catering) Travel Agencies and Tour Operators Services U*/U* U/U U/U U/U N/N N/N Uex/Uex Uex/Uex U*/U* F/F P/N Uex/Uex

Symbols:
N P U U* Uex No limitations, i.e. Pakistan agreed to place no constraints on the item in question. Partially bound, i.e. subject to specified limitations under GATS Articles XVI and XVII. Unbound, i.e Pakistan undertook no commitments with respect to the item in question. Unbound due to lack of technical feasibility (it was not possible to single out the item /activity under reference). Unbound except as provided by Pakistan's horizontal commitments.

Source: WTO documents GATS/SC/67, 15 April 1994, GATS/SC/67/Suppl.2/Rev.1, 16 February 1998 and GATS/SC/67/Suppl.3, 26 February 1998.

It can be seen from this Table that except for some communication services, cross-border supply (Mode 1) of services is unbound for all sectors. For a number of activities e.g. certain business, construction, health, and tourism services, no bindings have been made ostensibly due to lack of technical feasibility. Consumption abroad and foreign commercial presence however fare somewhat better than cross-border supply. There are no limitations relating to consumption abroad (Mode 2) in respect of several activities included in Computer and Related Services, Research and Development, and Communication services though no commitment has been made regarding the Financial

67

Services. At the same time, Mode 3 (commercial presence) has been given a fairly liberal treatment in the countrys specific commitments, but no binding has been made regarding Mode 4 (Presence of natural persons) except that provided in horizontal commitments. Fifty percent of the executives and the specialists are allowed. III. 2. Sector-Specific commitments are reviewed below in relation to the four modes of supply: a. Business Services: The structure of commitments relating to this sector appears to be rather opaque. At this distance in time, it is difficult to understand clearly why the authorities focused their commitments only on Mode 2 (Consumption abroad) and on Mode 3 (Commercial presence) and ignored the more relevant mode, namely Mode 1(Cross-border supply). Despite this discrepancy, Pakistan has however succeeded in gaining a foothold in the market for computer-related services though its success even this sub-sector has remained limited. It seems that in the future Pakistan should develop a strong export capacity in professional and business services to generate employment and income, and to enhance its technological potential. It is well known that in the last three years the IT sector of Pakistan has experienced an extraordinary growth. Time has therefore come for the authorities not only to expand internal market for IT related activities, but also develop export opportunities (Mode 1) for this dynamic sector.

b. Telecommunication Services: Commitments made by Pakistan in 199822 represent a considerable advance over its commitments of 1994. In 1998 Pakistan made extensive commitments in this sub-sector in the course of its effort to restructure its telecommunication sub-sector, to import advanced technology and to secure foreign investment. It is understood that actual policies of Pakistan go well beyond what the country agreed to record even in its 1998 schedule. The authorities in Pakistan are well aware that Pakistans needs to meet its huge unmet demand in the telecommunication sector in the shortest possible time. It has therefore already opened Cellular Mobile Phones, Card Pay Phones, Paging Service and Data Communication and Internet Services to domestic and foreign investors. As a matter of fact several other segments of this market such as Trunk Radio Service, Audiotex, Voice Mail, and Wireless Local Loop are also available to the private sector though at present activity in these areas is rather limited. Progress is visible also in the field of manufacturing. Three major companies, namely, Siemens, Alcatel, and LG, in collaboration with Pakistani companies are already working actively. A number of small companies are engaged in manufacturing switchgears, PABX, Cables, and UPS in the country.
22

These commitments are set out in GATS/SC/67/Suppl.2/Rev.1, 16 February 1998.

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On the whole, it is evident that liberalization of the telecommunicating sub-sector has been a bracing experience.

c. Financial Sector: The financial sector is another area where Pakistan has made considerable headway. The current revised commitments are given in GATS/SC/67/Suppl.3 of 26 February 1998. The bindings undertaken in this sector are concentrated on commercial presence (Mode 3). The revised schedule also makes it clear that these Mode 3 commitments will apply on a reciprocal basis, and that provision of all banking and financial services in Pakistan are subject to the injunctions regarding Islamic banking. The horizontal commitments relating to executives and specialists (Mode 4) are applicable to this sector. In an assessment of the financial sector reform, the IMF has reported that Pakistans reform program covered seven important areas: financial liberalization, institutional strengthening, domestic debt, money management, banking law, foreign exchange and capital market. Banking sector was liberalized by permitting private banks to operate and compete with nationalized commercial banks. Competition was promoted by privatization of MCB and ABL. Initially at the start of 1990, ten new banks were permitted, of which eight started functioning. Later several new banks joined in the private sector. Governance was strengthened, loan recovery process was streamlined, public sector banks were restructured and prudential measures were reinforced. It is well worth noting here that fears about possible adverse effects of financial sector reform on the countrys balance of payments proved unreal. The reform process, supported both by the IMF and the World Bank, has therefore moved forward briskly. In fact current policies of Pakistan in this sector are even more liberal than what the country promised in February 1998. d. Insurance and Reinsurance: Commitments relating to these activities are rather conservative. Apparently little effort has been made to introduce modern innovations to energize this sub-sector. Market Access: Commercial presence relating to life insurance (Mode 3) is allowed up to 25% of foreign shareholding in existing life insurance companies. Executive and specialists as provided under horizontal commitments are permitted. There is no provision relating to Reinsurance. Services auxiliary to Insurance (including broking and agency services can have only a representative office. Horizontal commitments apply to participation in issuance of securities.

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National treatment: No binding has been offered in this area.

e. Construction and related engineering services: Market Access: Subject to partnership and/or joint venture with Pakistani engineers or engineering companies, horizontal commitments in relation to commercial presence (Mode 3) apply. Limitation on national treatment: Mode 3 (commercial presence): This sub-sector has no national treatment limitations. On the whole commitments in this sub-sector merely confirmed the existing practices. For reasons that are not difficult to understand, entrepreneurs in this sub-sector still want to continue living in their traditional narrow but sheltered markets. These services need to be encouraged to break out of the obsolete, protectionist mould and to look out to take advantage of opportunities for profitable work. f. Health and Related Social Services: Hospital, medical and dental services are free from all market access restrictions relating to Mode 2 i.e. Consumption abroad. Subject to Pakistan Medical and Dental Council Regulations, Horizontal commitments are also applicable to these services. At the same time there are no national treatment restrictions applicable to these services in their Modes 2 and 3 of supply.

g. Tourism and Travel Related Services (Hotels, restaurants, travel agencies and tour operators): These activities represent Mode 2 (Consumption abroad) in its purest form. Pakistan has removed all limitations on market access and national treatment on foreign owned entities operating in Pakistan.

Despite these facilities, tourism has not taken hold in the country. September 9 was also a severe shock to tourist industry. However, it is expected that with the normalization of

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social and political conditions in the country tourism will take its rightful place in the economy of the country.

III. 3. MFN EXEMPTIONS

Under Article II of the GATS, Pakistan MFN exemptions for four financial services/activities with a view to preserving reciprocity requirements, Islamic financing transactions, and joint ventures among ECO countries. Pakistan also maintained exemptions in two international telecommunication services in favour of countries /operators signatories of bilateral agreements on rates with the PTCL. Maintenance of Article II exemptions are not unusual. It is understood that 79 WTO member countries maintained 390 MFN exemptions (147 in transport, 98 in communication services, 51 in financial services, 22 in business services and 73 miscellaneous sectors). The commitments varied from sector to sector, modes and countries. Article II of the GATS provides that each member shall accord, immediately and unconditionally, to services and services suppliers of any other member treatment no less favourable than that it accords to like services and service suppliers of any other country. However, a Member may maintain a measure inconsistent with MFN treatment provided that such a measure is listed in, and meets the conditions of the Annex on Article II Exemptions. In principle, such exemptions should not exceed a period of ten years (beginning from 1995) In any event; they shall be subject to negotiation in subsequent trade-liberalizing rounds. Section IV. COMPATIBILIY OF CURRENT POLICIES AND SCHEDULES OF COMMITMENTS The GATS, being a world-wide multilateral arrangement, is a novel phenomenon for all countries. It is therefore not surprising that most countries have approached it in a rather gingerly fashion. There is however no reason to doubt that, like its counterpart in the area of goods, GATS would also become an integral part of the trade policies of WTO members including the developing countries. It also seems reasonable to assume that this process of integration would take less time in the case of GATS than it did in case of the General Agreement on Tariffs and Trade. It may be recalled that the developing countries took almost eight rounds of GATT negotiations to accept fully the concept of reciprocity in their trade negotiations. It is indeed true that in 1994 authorities took a rather narrow view of the scope of the services sector. Pakistans commitments (or lack of them) cover only 47 out of a total of 160 activities. At the same time most of these commitments are concentrated in Mode 3, 71

commercial presence in Pakistan, that is to say, most of the commitments were designed to attract and accommodate inward foreign investment. In fact even Mode 4 commitments were fashioned to accommodate only 50% of the foreign executives and specialists required by the incoming multinationals. It is no exaggeration to say that this policy of opening the domestic market to inward investment and foreign competition, particularly in the Telecommunications and Financial service sub-sectors did pay handsome dividends. But Pakistan can not continue to ignore the possibilities inherent in Modes1 and 2, particularly for its IT industry which by all accounts is now ready to take off. It may be noted that Mode 2 includes visits for less than a year by foreigners for education, health and sport. Pakistani entrepreneurs should also begin to pay more attention to investment abroad to take fuller advantage of Mode 3 (commercial presence) now that the State Bank has lifted most of the restrictions on Pakistani investment abroad. Notwithstanding Pakistans cautious attitude, it needs to be acknowledged that Pakistans policies with regard to inward investment and domestic competition have gone well beyond its commitments under the GATS. For example, foreign investors can enter virtually all services sectors. They are also allowed 100 percent of equity subject to the condition that the repatriation of profits will be restricted to a maximum of 60 percent of total equity or profits and that a minimum of 40 percent of the equity is held by Pakistani investors within five years23. Policies regarding telecommunications and banking are the other two examples of autonomous liberalization24. Pakistan did not upgrade its commitments to the level of its higher actual liberalization partly because it was too early for it to bind its hands, partly because of lack of a time-tested regulatory framework for services, but mainly because the industrialized countries did not offer sufficiently attractive export opportunities for its services sector. Notwithstanding all this, it remains true that Pakistan has yet to develop the full export potential of its services sector, and to take fuller advantage of the GATS to secure assured markets for its export-related services. There are no doubt many difficulties in way of expanding export of services, but it is also clear that countries of the Central Asia, Africa and Asia do offer valuable export opportunities for Pakistani business and professional services. Pakistani educational and health institutions also can attract consumers from these countries on a large scale.

Section V. REVIEW OF COMMITMENTS MADE BY WTO MEMBERS The commitments of the WTO members currently in force (i.e., undertaken in 1994, recent accessions and extended negotiations on movement of natural persons, maritime
Board of Investment, September 2001 Pakistan Investment policies, incentives & facilities. 24 This issue autonomous liberalization will be discussed later as prescribed by the TOR of this study.
23

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transport, basic telecommunications and financial services) can be assessed in at least two ways: sectors covered and the modes of supply bound. Sectors Covered: The 11 broad sectors and 160 activities covered by them are listed in Annex I of this chapter. It has been estimated that more than 90% of the WTO members have made some commitment relating to tourism. On the other hand, distribution, health and education are the least popular. A fuller picture can be had from the following Table which reports the number of countries with commitments to various sectors.
Structure of WTO Members Commitments by Sector, June 2000 4.Communications 99 7.Recreation 63 10. Health 48 5. Transport 84 6. Construction 74 8. Environment 54 9. Distribution 52 11. Education 46

1. Tourism 128

2. Financial services 106 3.Business services 103

It is interesting to note that 44 relatively less developed countries made less than 20 commitment, 47 more or less developing counties like Pakistan and India made 21 to 60 commitments, and that 45 countries including countries like the USA, South Korea, Jordan, Thailand and China made more than 61 commitments.

Commitments by mode:
A recent survey made by the WTO Secretariat shows that bindings undertaken for Mode 2 (consumption abroad) are significantly more liberal than those for other modes and that Mode 4 bindings are the least liberal. About 50% of the entries made under market access for Mode 2 (consumption abroad, tourism etc) are without limitation, while the share of unlimited commitments on Mode 4 is close to nil. Like Pakistan, most countries found it inconvenient to liberalize Mode 4 except for intra-corporation transferee and specialist. On the hand, unlike Pakistan, a number of countries have made strong commitments relating to Mode 1 (cross-border supply) though technical infeasibility25 held back many countries. Another distinguishing mark of Pakistans schedule is its concentration on Mode 3 (Inward Investment).

Section VI. Concluding Remarks

This brief review of the results of the Uruguay Round in relation to services leaves no in any doubt that the impact of the GATS on world trade has been rather modest. A recent study prepared by the Staffs of the IMF and the World Bank26 has also confirmed the
Cross-border supply of hotel, restaurant, and hospital services are technically infeasible. 26 Market Access for Developing Countries Exports: April 2001
25

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view that, unlike trade in goods, the liberalization of trade in services is at an early stage..Initial commitments under the Uruguay Round did not result in significant liberalization as most countries bound their existing regimes (Stand-still arrangements), although this enhanced the security of market access. Thus, in general, services trade is subject to substantial barriers in industrial and especially developing countries. Areas of particular interest to developing countries such as movement of natural persons (Mode 4) saw the least amount of liberalization. This includes the labour component of construction, distribution, transport services, health services and software services.

ANNEX I WTO CLASSIFICATION OF SERVICE SECTORS

Sectors and sub-sectors
1. Business services Section B
A. Professional Services a. Legal Services 861 b. Accounting, auditing and bookeeping services 862 c. Taxation Services 63 d. Architectural services 8671 e. Engineering services 8672 f. Integrated engineering services 8673 g. Urban planning and landscape 8674 architectural services h. Medical and dental services 9312 i. Veterinary services 932 j. Services provided by midwives, nurses, physiotherapists and para-medical personnel 93191 k. Other B. Computer and Related Services a. Consultancy services related to the 841 installation of computer hardware b. Software implementation services 842 c. Data processing services 843 d. Data base services 844 e. Other 845+849 C. Research and Development Services a. R&D services on natural sciences 851 b. R&D services on social sciences and humanities 852 c. Interdisciplinary R&D services 853 D. Real Estate Services a. Involving own or leased property 821 b. On a fee or contract basis 822 E. Rental/Leasing Services without Operators a. Relating to ships 83103 b. Relating to aircraft 83104 c. Relating to other transport equipment 83101+83102+83105 d. Relating to other machinery and equipment 83106-83109 e. Other 832 F. Other Business Services a. Advertising services 871 b. Market research and public opinion 864 polling services c. Management consulting service 865

Corresponding CPC

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d. Services related to man. consulting 866 e. Technical testing and analysis serv. 8676 f. Services incidental to agriculture, hunting and 881 forestry g. Services incidental to fishing 882 h. Services incidental to mining 883+5115 i. Services incidental to manufacturing 884+885 (except for 88442) j. Services incidental to energy distribution 887 k. Placement and supply services of Personnel 872 l. Investigation and security 873 m. Related scientific and technical consulting 8675 services n. Maintenance and repair of equipment (not including maritime vessels, aircraft 633+ or other transport equipment) 8861-8866 o. Building-cleaning services 874 p. Photographic services 875 q. Packaging services 876 r. Printing, publishing 88442 s. Convention services 87909* t. Other 8790

2. Communication services
A. Postal services 7511 B. Courier services 7512 C. Telecommunication services a. Voice telephone services 7521 b. Packet-switched data transmission services 7523** c. Circuit-switched data transmission services 7523** d. Telex services 7523** e. Telegraph services 7522 f. Facsimile services 7521**+7529** g. Private leased circuit services 7522**+7523** h. Electronic mail 7523** i. Voice mail 7523** j. On-line information and data base retrieva 7523** k. Electronic data interchange (EDI) 7523** l. Enhanced/value-added facsimile services, incl. 7523** store and forward, store and retrieve m. code and protocol conversion n.a. n. on-line information and/or data processing (incl.transaction processing) 843** o. other D. Audiovisual services a. Motion picture and video tape production and 9611 distribution services b. Motion picture projection service 9612 c. Radio and television services 9613 d. Radio and television transmission service 7524 e. Sound recording n.a. f. Other E. Other

3 Construction and related engineering services

A. General construction work for buildings 512 B. General construction work for civil engineering 513 C. Installation and assembly work 514+516
*The (*) indicates that the service specified is a component of a more aggregated CPC item specified elsewhere in this classification list.

**The (**) indicates that the service specified constitutes only a part of the total range of activities covered by the CPC concordance (e.g. voice mail is only a

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component of CPC item 7523).

D. Building completion and finishing work 517 E. Other 511+515+518

4. Distribution services
A. Commission agents' services 621 B. Wholesale trade services 622 C. Retailing services 631+632 6111+6113+6121 D. Franchising 8929 E. Other

5. Educational services
A. Primary education services 921 B. Secondary education services 922 C. Higher education services 923 D. Adult education 924 E. Other education services 929

6. Environmental services
A. Sewage services 9401 B. Refuse disposal services 9402 C. Sanitation and similar services 9403 D. Other

7. Financial services
A. All insurance and insurance-related services 812** a. Life, accident and health insurance services 8121 b. Non-life insurance services 8129 c. Reinsurance and retrocession 81299* d. Services auxiliary to insurance (including broking and agency services) 8140 B. Banking and other financial services (excl. insurance) a. Acceptance of deposits and other repayable funds 81115-81119 from the public b. Lending of all types, incl., inter alia, consumer 8113 credit, mortgage credit, factoring and financing of commercial transaction
*The (*) indicates that the service specified is a component of a more aggregated CPC item specified elsewhere in this classification list.

**The (**) indicates that the service specified constitutes only a part of the total range of activities covered by the CPC concordance (e.g. voice mail is only a
component of CPC item 7523).

c. Financial leasing 8112 d. All payment and money transmission services 81339** e. Guarantees and commitments 81199** f. Trading for own account or for account of customers, whether on an exchange, in an over-the-counter market or otherwise, the following: - money market instruments (cheques, bills, 81339**

certificate of deposits, etc.)

- foreign exchange 81333 - derivative products incl., but not limited to, 81339**

futures and options

- exchange rate and interest rate instruments 81339**

inclu. products such as swaps, forward rate agreements, etc.

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- transferable securities 81321* - other negotiable instruments and financial 81339** assets, incl. bullion g. Participation in issues of all kinds of 8132 securities, incl. under-writing and placement as agent (whether publicly or privately) and provision of service related to such issues h. Money broking 81339** i. Asset management, such as cash or portfolio 8119+** management, all forms of collective 81323* investment management, pension fund management, custodial depository and trust services j. Settlement and clearing services for financia 81339** assets, incl. securities, derivative products, or 81319** and other negotiable instruments k. Advisory and other auxiliary financial 8131 services on all the activities listed in or 8133 Article 1B of MTN.TNC/W/50, incl. credit

reference and analysis, investment and

portfolio research and advice, advice on acquisitions and on corporate restructuring and strategy l. Provision and transfer of financial information 8131 and financial data processing and related software by providers of other financial services C. Other

8. Health related and social services

(other than those listed under 1.A.h-j.) A. Hospital services 9311 B. Other Human Health Services 9319 (other than 93191) C. Social Services 933 D. Other

9. Tourism and travel related services

A. Hotels and restaurants (incl. catering) 641-643

*The (*) indicates that the service specified is a component of a more aggregated CPC item specified elsewhere in this classification list. **The (**) indicates that the service specified constitutes only a part of the total range of activities covered by the CPC concordance (e.g. voice mail is only a component of CPC item 7523).
B. Travel agencies and tour operators services 7471 C. Tourist guides services 7472 D. Other

10. Recreational, cultural and sporting services

(other than audiovisual services) A. Entertainment services (including theatre, live bands and circus services) 9619 B. News agency services 962 C. Libraries, archives, museums and other cultural services 963 D. Sporting and other recreational services 964

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E. Other

11. Transport services

A. Maritime Transport Services a. Passenger transportation 7211 b. Freight transportation 7212 c. Rental of vessels with crew 7213 d. Maintenance and repair of vessels 8868** e. Pushing and towing services 214 f. Supporting services for maritime transport 745** B. Internal Waterways Transport a. Passenger transportation 7221 b. Freight transportation 7222 c. Rental of vessels with crew 7223 d. Maintenance and repair of vessels 8868** e. Pushing and towing services 7224 f. Supporting services for internal waterway 745** transport C. Air Transport Services a. Passenger transportation 731 b. Freight transportation 732 c. Rental of aircraft with crew 734 d. Maintenance and repair of aircraft 8868** e. Supporting services for air transport 746 D. Space Transport 733 E. Rail Transport Services a. Passenger transportation 7111 b. Freight transportation 7112 c. Pushing and towing services 7113 d. Maintenance and repair of rail transport equipment 8868** e. Supporting services for rail transport services 743
*The (*) indicates that the service specified is a component of a more aggregated CPC item specified elsewhere in this classification list.

**The (**) indicates that the service specified constitutes only a part of the total range of activities covered by the CPC concordance (e.g. voice mail is only a
component of CPC item 7523).

F. Road Transport Services a. Passenger transportation 7121+7122 b. Freight transportation 7123 c. Rental of commercial vehicles with operator 7124 d. Maintenance and repair of road transport 6112+8867 equipment e. Supporting services for road transport services 744 G. Pipeline Transport a. Transportation of fuels 7131 b. Transportation of other goods 7139 H. Services auxiliary to all modes of transport a. Cargo-handling services 741 b. Storage and warehouse services 742 c. Freight transport agency services 748 d. Other 749 I. Other Transport Services

12. Other services not included elsewhere 95+97+98+99

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Chapter III Formulation of Potential Requests in the Post-Doha Environment

This chapter addresses the topics listed in Article 2.3 of the terms of reference.. These are: y y y y y Assessment of Pakistans interest, Potential export sectors and modes of supply, Barriers to Pakistans services exports, Positions of other members of the WTO, and Definitional of potential requests

III. 1 Assessment of Pakistans Interests in Relation to Sectors and Modes:

The assessment of trade in services has been on the agenda of the Council for Trade in Services for quite some time now, and the Council has already held extensive discussion on it. The WTO Secretariat had also held a symposium on this subject. But due to the scarcity of statistical data and the complexity of the methodological issues involved a definitive judgment has not yet been reached at the international level. An attempt will, however, be made in this section to put together a partially quantitive but mainly a qualitative assessment of the GATS. It has already been discussed in some detail in Chapter I that the sectoral and modal structure of commitments under GATS does not coincide with the existing structure of trade statistics. It was pointed out, that in the first place the IMF Balance of Payments classification currently in use is simply not comprehensive enough27. In Pakistan this problem is aggravated by the fact that the State Bank does not publish all of the data that it collects. The second problem that analysts of services face is the difficulties caused by lack of data (except in the US) relating to the activities of foreign owned companies in their host country markets. This leaves the magnitude and impact of Mode 3 (commercial presence) wholly unaccounted in conventional national and international statistics. On the basis of the balance of payments classification, the WTO Secretariat has estimated that in the decade of the 90s world trade both in goods and in services grew at almost This is reason why Chapter I recommended the adoption of the new Manual. This document will be published by the UN soon. 79
27

identical rates, that is, 6 percent per annum28. Consequently the share of commercial services in total world exports and imports and services has remained virtually unchanged since the mid-1990s: it has stood still around 19.6 percent in 1999. On the export side, North America and Western Europe continued to record above-average share of services in their total exports, while Latin America and Asia remained below the average. The 2002 Annual Report of the Director- General, WTO has brought out that the above figures are on balance of payment basis. Their coverage of is therefore confined largely to two modes of supply falling under the GATS cross border trade (Mode 1) and consumption abroad (Mode 2). Commercial presence (mode 3), the largest and the most dynamic form of services inflow of foreign investment, is simply not captured29by these data. At the same time the statistical requirements of movement of natural persons also remains unattended. Another point that needs to be kept in view is that while some sectors, such as international finance and maritime transport, were open largely as natural complements to merchandise trade, other major sectors have undergone fundamental technical and regulatory changes in recent decades. International trade in these services is now distinctly easier than before. The emergence of the internet has also generated a number of new, internationally tradable products ranging from e-bank to tele-health and distance learning. There are now no physical barriers in the way of the suppliers and users of services such as computer software, consultancy and many advisory services. But these dynamic developments do not always show up in national and international statistical data. The reality of these developments is however simply undeniable. The data collected by the WTO Secretariat on international trade of Pakistan in commercial services has already been reported in Chapter I. It may however be worth recalling that in the 1990s Pakistans export of services varied between $1200 to $1600 million and its imports ranged from $ 2000 to $2500 million. There was no significant upward movement in this trade during the entire decade. In fact it is rather worrying that in this period the share of services in total exports and imports actually fell. This stagnation is no doubt a result of a number of complex factors, but it is fairly clear that the lacklustre performance of the services sector is at least partly due to the fact that the later half of the 90s was a period of unusually slow growth for the entire economy of Pakistan, and that in these five years its exports and imports of goods and services experienced negative growth rates on several occasions. The main reason, however, seems to lie in the fact that Pakistan, like many other countries of the world, remained

The rate of growth Transport world-wide was 4 percent, of Travel 6 percent and of other commercial services 8 percent per annum. WTO: International Trade Statistics, 2001.
29

28

Annual Report by the Director-General: 15 November 2002 WT/TPR/OV/8

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focused only on trade in commodities, and that it paid scant attention to the opportunities for trade in services opening up as result of recent technological innovations. It was against this rather unexciting background that Pakistan joined like-minded countries and presented the following four communications to WTO Council for Trade in Services: Assessment of Trade in Services: TN/S/W/3, 10 June 2002. Effective implementation of Article IV of GATS: S/CSS/W/131, 6 December 2001. Elements for Negotiating Guidelines and Procedures: S/CSS/W/13, 24 November 2000. Movement of Natural Persons under GATS: WT/GC/W/160, 1 April 1990.

y y y y

The communication of 24 November 2000 has already served its purpose. The Council for Trade in Services in its Special Session held on 28 March 2001 adopted the Negotiating Guidelines and Procedures for the current round of negotiations under the GATS. The guidelines are contained in document S/L/93. The sense of the latest communication of Pakistan (assessment of trade) has already been discussed in the previous chapter. The concepts put forward by Pakistan relating to the movement of natural persons will be reviewed later in this Chapter. The present section will therefore focus mainly on the communication concerned with Increasing Participation of Developing Countries in International Trade in Services. This communication (S/CSS/W/131, among other things, discusses the problems of the developing countries in the perspective of three articles of the GATS, namely Article IV (Participation of Developing Countries), Article VII (Recognition) and Article XIX (Progressive liberalization). This document is therefore the centre of discussion in the following paragraphs. Article IV of the GATS provides that the increasing participation of developing countries shall be facilitated through negotiated specific commitments relating to: y y y The strengthening of their domestic services capacity and its efficiency and competitiveness, inter alia, through access to technology on a commercial basis; The improvement of their access to distribution channels and information networks; and The liberalization of market access in sectors and modes of supply of export interest to them.

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This Article further provides that developed countries in particular shall establish Contact Points to facilitate the access of developing countries service suppliers to information, related to their respective markets, concerning: y y y Commercial and technical aspects of the supply of services; Registration, recognition and obtaining of professional qualifications; and The availability of service technology.

The document S/CSS/W/131 of Pakistan has taken the view that to date Article IV has not been effectively implemented. The developed counties have yet to establish a mechanism to provide adequate assistance to developing countries to strengthen their domestic capacity and to support them in their efforts to take fuller advantage of the opportunities opened by the GATS. The developing countries like Pakistan do appreciate the technical assistance being organized by bilateral donors (e.g. the United Kingdom) for increasing awareness of the WTO, but they also urge transfer of larger resources to them to help them exploit their potential fully. Steps required for promoting greater foreign direct investment in developing countries and the policies aimed at easing restrictions on the movement of natural persons travelling to the developed countries are also yet to be devised. Enquiry and Contact Points: According to the WTO document S/ENQ/78/Rev.2 of 18 June 2002, 109 developed and developing countries have already notified the addresses of the enquiry and contact points established by them in their countries. Theses notifications were issued by the members of the WTO under Articles III.4 and IV.2 of the GATS. (The name of Pakistan has not appeared in this list.) These addresses now need to be made better known to business communities and their associations. The effectiveness of these enquiry and contact points will be known only when the business community begins to make use of them. Mutual Recognition Agreements: Article VII of the GATS allows members to enter into mutual recognition agreements or arrangements of each others standards or criteria for the authorization, licensing or certification of their service suppliers. Recognition may also be accorded by the members autonomously. But this Article also provides that a member shall afford adequate opportunity for other interested members to negotiate their accession to such an agreement or arrangement. The Article further provides for prompt notification to the General Council for Trade in Services by a member who wishes to enter into a new arrangement or modify an old agreement to ensure adequate opportunity to any other member to indicate their interest in participating in the negotiations before they enter a substantive phase. This system of notifications has, however, not been followed fully. The developing countries are therefore apprehensive that mutual recognition arrangements among developed countries are perhaps being used by them to discriminate against developing countries and to restrict their service suppliers. It may be emphasized here that the question of mutual recognition agreements is a matter of critical importance for easy movement of natural persons.

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This brief review of the issues relating to assessment of trade in services brings out that neither the WTO community as a whole nor individual countries singly have yet succeeded in building a comprehensive statistical picture of international trade in services or in creating an analytically acceptable indices of the restrictiveness (or openness) of trade policies of individual countries. The UN has only a few days ago published its agreed Manual on International Trade in Services, and it will be sometime before the concerned authorities begin to take notice of the new system. It is also clear that 1994 specific commitments of member countries by and large reflected the then existing regimes of individual member countries rather than new developments inspired by the GATS. As a matter of fact it is the developing rather than the industrialized countries that in the last seven years have made major policy changes in sectors like telecommunications and Finance, but that was done by them more as a result of their negotiations with multinationals and to meet the requirements of the IMF-World Bank supported structural adjustment programs than under the influence of the GATS. The implementation of some of the major Articles of the GATS is another area that shows rather poor results. The implementation of Articles III (Transparency), Article IV (Increasing Participation of Developing Countries), Article VI (Domestic Regulation), and Article VII (Recognition) has been particularly slow. Pakistan and several other countries are therefore right in asserting that the GATS has yet to make its mark on trade in services.

III. 2 Pakistans Potential Export Sectors and Modes of Supply

The identification of Pakistans potential export sectors and modes of supply is a complex matter. To approach this topic in an orderly fashion, this section will first list the services included in the current round of negotiations in Geneva, allocate them to the four modes of supply, and then, against that background, outline what appears to be the potential of Pakistan and why. Among the services included in the negotiation are professional services such as accounting, engineering and legal services; computer and related services; advertising; telecommunications services, audiovisual services, courier services, construction services; distribution services including wholesale, retail, and commission agents services; educational and training services; energy services; environmental services, financial services, including insurance, banking, securities, and other services; and transport
and tourism services.

The four modes of supply of services include cross-border delivery of services from one market to another by electronic or other means, establishment of a commercial presence

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in another market, travel by individuals to foreign markets to supply services, and travel by individuals from foreign markets to consume services. The broad domain of each of the four modes supply30 as spelled out by the Extended Balance of Payments Services Classification (EBOPS) discussed in Chapter I is given below: Mode 1(Cross-border Supply) includes transportation (except supporting and auxiliary services) that are provided to domestic carriers in foreign ports or to non-resident carriers in domestic ports), communications, insurance and financial services together with payments of royalties and license fees.

Mode 2 (Consumption Abroad) contains all services recorded in balance of payments as travel. EBOPS recommends that expenditure on goods should be excluded to conform to the underlying concept of Mode 2. Mode 3 (Commercial Presence) is primarily concerned with FATS and not balance of
payments. Commercial presence should however include construction services. The Manual suggests that the one-year statistical rule should be ignored in this context.

Mode 4 (Presence of Natural Persons) needs to be read with Mode 1. Services like
computer and information services, other business services, and personal, cultural, and recreational services involve significant elements of both Mode1 and Mode 4.

It may be noted that compensation of non-resident employees is included in income in the balance of payments but not included in EBOPS. It (compensation of non-resident employees) may however yield indicators of Mode 4. Services purchased by diplomats are not included in EBOPS because these should be deemed to be a part of Government services which are excluded from the purview of the GATS.

To complete the picture, it might be highlighted here that, among other things, the GATS also contain three important exclusions: y Services supplied in the exercise of governmental authority. The GATS does not require any government to privatize any enterprise, and the GATS allow governments to continue to provide preferential assistance to public providers
This discussion is based on Manual on Statistics of International Trade in Services (Manual)
30

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y y

such as educational institutions. The GATS applies only to the private sector in education. Most Air Transport services. Governmental purchases (procurement) of services.

Export Potential of Services The identification of the export potential of Pakistans services sector is both a matter of empirical observation and judgment. As a matter of fact, for the reasons explained above the role of informed judgment is more important in the current state of knowledge about services than available statistics. This study has therefore kept the following points in view in making its assessment of Pakistans potential. Lack of disaggregated statistical data makes it difficult to decipher meaningful trends in Pakistans trade in services. But even if disaggregated information were available, it needs to be recognized that past performance in services is rather a poor guide to prospects in the future. Future is rarely a linear development of the past. This is particularly so in the case of services that are undergoing rapid technical technological changes and which have become a focus of trade policy only recently. The GATS may or may not have exerted a strong influence on the behavior of services sectors, but it is undeniable that because of this agreement and the round of new negotiations spurred by it, services are for the first time in the limelight even in developing countries. It is therefore reasonable to expect that most countries including Pakistan will pay much greater attention to their development that they have done in the past. The future is therefore likely to be very different. The expansions of internet, and, along with it, the explosion of e-commerce in the last two decades have greatly increased the scope, the volume and the speed of sale of services both at home and abroad. It therefore needs to be recognized that Mode 1 transactions including long distance education and health have already become important segments of national and international economic life, and that their role is bound to increase with time. The development of services linked to internet and e-commerce is now a major responsibility of governments virtually all over the world. Pakistan has also spent a great deal of effort in the last few years to develop its IT industry. The need now is for the government to take effective steps to enlarge the markets for its output. The issue of trade in services needs to be seen in a developmental perspective. It is true that in the past Pakistan has been a net importer of services, and despite the fact that services are a little more than half the GDP of the country, they have not been a major part of its exports. But it is also true that Pakistan has the dynamism to change this situation. The growth of its services sector should now become an important goal of economic policy just as commodity producing sectors have been for a long time in the past.

List of Potential Exporters

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This list of potential exporters with some explanatory comments is based on the WTO Classification of Service Sectors. A copy of this classification can be seen in Chapter II of this study. It may also be reiterated that Pakistan has removed most of its restrictions on Pakistan residents establishing commercial presence abroad.
I. BUSINESS

SERVICES

A. Professional Services Accounting, auditing and bookkeeping services: It has been estimated by the US31 Trade Representatives Office that International revenues of accounting firms amount to tens of billions of dollars and are growing annually. Two million accounts are employed worldwide. Pakistan has a strong and a forward-looking body of accountants working in the country. They can organize themselves to join the burgeoning international market. It is a great advantage for Pakistani accounts that British and American accounting systems are now being adopted by most of the emerging markets including China.

b. Engineering Services and Integrating Engineering Services: Pakistani engineers already posses a great of international experience in the US, the UK and the Gulf States. They have also worked with several foreign engineering companies on mega projects in Pakistan. This experience should be put to good through by exporting their services under Mode 1 and Mode 3.

c. Medical and dental services:

Pakistan already has the capacity to join the international job market in this service. It will however be necessary for the concerned associations and the Ministry of Commerce to monitor the offers of WTO members relating to this service. Apparently the US has not opened its market to foreign medical and dental services though Pakistan can advantage of the tele-health system to develop a clientele for itself even in countries like the US.

d. Services provided by midwives, nurses, physiotherapists and paramedical services:

Pakistan has already demonstrated its capacity to export midwives, nurses, physiotherapists and paramedical services to the Gulf States. The problem however is
31

USTR Press Release: www.ustr.govt

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that while a number of WTO members do import these services on a fairly large scale, most of them have kept these services out of their specific commitments under the GATS. B. Computer and related services: Pakistan is rapidly building its capacity to export software implementation services, Data processing services, and Database services. Even at present Pakistan is exporting (Crossborder) supply of these services to the industrialized world though, compared with India, on a rather modest scale. This activity needs to be enlarged substantially. For this purpose Pakistan would need to negotiate easier business and professional visas under Mode 4 to take fuller advantage of the vast market in computer services. Last year for the first time, worldwide spending on IT services ($426 billion) exceeded worldwide spending on IT hardware ($376 billion).

F. Other business services: r. Printing, Publishing: Pakistan can take advantage of its emerging computer related capacity and establish printing and publishing services as Singapore and Hong Kong have done so successfully. This will be an important example of cross-border supply.

2. TRANSPORT SERVICES
Despite present international difficulties, the role of Pakistan as transit country is bound to increase in the fairly near future. Pakistan is already in the process of preparing itself as transit country by building new motorways. Work on the development of infrastructure for cross-country pipelines will also begin as negotiations on gas pipelines mature.

3. COMMUNICATION SERVICES B. Courier Services: Along with physical infrastructure, labour is the primary component engaged in delivering courier services. On the basis of the experience it has gained by working with large foreign courier services, Pakistan can make a beginning in countries of the Central Asia.

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C. Telecommunication services:
The following services help promote export interests of Pakistan. a. Voice telephone services, b. Packet-switched data transmission services, c. Circuitswitched data transmission services, d.Telex services, e. Telegraph services, f. facsimile services, g. Private leased circuit services, h. Electronic Mail, I. Voice Mail, j. On-line information and database retrieval, k. Electronic data interchange that (EDI), l. Enhanced /value added facsimile services including store and forward, store and retrieve.

4. FINANCIAL SERVICES:
Since 1970s Pakistan has developed a strong cadre of professional bankers who have served with distinction both at home and abroad. This group of professionals, if given appropriate policy framework and incentives, can exploit fully the opportunities inherent in Mode 1 and Mode 4.The Bankers Institute should be consulted on how best the government can mobilize their export potential.

5. CONSTRUCTION AND RELATED ENGINEERING SERVICES:

This activity allows a country like Pakistan to operate in three modes of supply: Mode1 (cross-border), Mode 3 (Commercial presence) and Mode 4 (presence of natural persons). Having participated in domestic and Persian Gulf projects, Pakistan has developed a substantial capability in this sub-sector. Policies and incentives now need to put in place to help the industry evolve into an export enterprise.

6. DISTRIBUTION SERVICES
This is another relatively labour-intensive service, and Pakistani companies can join foreign enterprises in establishing chains from manufacturers to wholesalers, retailers, and direct sellers.

7. EDUCATION AND TRAINING SERVICES Specialized education and training is needed in many countries around Pakistan. Pakistan, like many advanced countries, can open its private educational institutions to students and visitors from its neighbours on a commercial basis. Pakistan can also take advantage of the fact that a large part of its educational system uses English as its medium of instruction. If

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the private sector engaged in education in Pakistan was encouraged, it could take a large segment of the Chinese and Central Asian markets for learning English as a second language. 8. TOURISM:
Pakistan has steadily though somewhat slowly developed the infrastructure required by a thriving tourist industry. Statistics regarding the arrival and departure of tourist and their expenditure on goods and services in Pakistan are however rather weak and to need to be improved. September 11 was a set back for Pakistans tourist industry as it was for many big players in this sub-sector. One hopes that the industry will revive as the international situation stabilizes. It has been estimated that international hotel industry alone earns revenue of $253 billion annually. A market of this size can not be ignored by any country.

Modes of Supply
The above discussion has brought out that Pakistan is already producing and exporting a wide range of services, and that it has opened an equally wide range of sectors to foreign investment and foreign competition. It is also well known that Pakistan regularly exports highly skilled as well as low skilled workers to both industrialized and Oil-based economies. It will be difficult for Pakistan to claim a strong comparative advantage in highly skilled occupations, yet it places no obstacles in the way of a large number of Pakistani professionals like academics, bankers, accountants, engineers, IT specialists, medical doctors and business administrators to work abroad. Pakistan also encourages low-skilled workers to go abroad, and this is a group in which Pakistan does have a distinct comparative advantage. Regardless of whether Pakistan, as a country, loses or gains as a result of the migration of its highly-skilled workers, the fact remains that movements of persons originating in Pakistan do give a powerful indication of the range of services Pakistan can create and export. This study is of the view that, given the capabilities of Pakistan, Government should pay fuller attention to all the four modes of supply, and that this should be done both as an exporter and an importer of services. However, if it is considered that modes of supply need to be prioritized, this study would recommend that while Pakistan delegation in Geneva should continue to participate

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actively in the great North-South debate on movement of persons, the other three modes should receive more systematic attention at home. In particular, Mode 1 (Cross-border supply) along with Mode 3 (Commercial Presence) should be the central focus of attention of all the Ministries. Pakistan should not remain just an importer in these modes; it should build a place for itself as an exporter as well. It should also link its interest in the movement of persons with these modes of supply to achieve useful results for Pakistani service suppliers. This is where the material interest of Pakistan lies. To sum up, this study maintains that Pakistan has a strong interest in all four modes of supply because, among other things, modes I, 2 and 3 are deeply interconnected, and that Mode 3 is also connected with modes 1, 2 and 4 together. It also needs to be recognized that Mode 3, commercial presence, has now become fully integrated with the chain constituted by modes 1, 2 and 4. It will be recalled that the State Bank of Pakistan has recently lifted many restrictions on foreign investment by Pakistanis 32. III. 3: IDENTIFICATION OF BARRIERS TO PAKISTANS EXPORT OF SERVICES The barriers to trade in services can be deemed to be of three types, first, horizontal barriers that apply to all service sectors, second, sector specific barriers, and, third, crosssectoral barriers. These three types of barriers also apply to all four modes of supply individually, to all four modes collectively, and to combinations of the one or two or three modes. In February 2001, the OECD commissioned a study entitled Assessing Barriers to Trade in Services. This study (TD/TC/WP (99)58/FINAL) is an unclassified OECD document. It can therefore be downloaded without any difficulty. It is recommended that this study may be consulted to assess barriers to trade in services. The OECD study is still fresh and to the point. There is however no need to reproduce it here fully or partially. The Ministry of Commerce has already prepared an extensive inventory of barriers which, among other things, takes full account of this OECD study. The Ministry of Commerce document, entitled Restrictions Facing Services Exports is annexed to this Chapter. Against the background of these studies, it does not appear necessary to go over this well trodden field of barriers once again. Nevertheless this Chapter does discuss below some of the more salient, restrictive barriers to highlight how they operate and limit trade opportunities for developing countries.

32

IMF Country Report N0. 02/246. November 2002

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The first point that needs to be noted in a review of the barriers to trade is that they are concentrated in Mode 4 (movement of natural persons) followed by convergence of restrictions on Mode 3 (commercial presence). This combination then constitutes a most formidable barrier to the expansion of trade of countries like Pakistan. Moreover, the negative effects of this combination do not remain limited to these two modes themselves; they go well beyond them and impact even Modes 1 and 2 (Consumption abroad) activities. Second, in the case of professional services nationality and residency requirements make it very difficult for a foreign professional to compete with the professionals of the host country even on a reasonably equal footing. Regulations governing these activities in most countries are simply too heavily loaded against foreign suppliers of business and professional services. The economic needs test has proved to be a most widely used barrier to discourage entry of developing county professionals into developed countries. The lack of implementation of Article VII (Recognition) by most members of the WTO also makes its virtually impossible for a poor countrys professionals to enter the international market. Mode 4 restrictions that allow temporary movement of intracorporate transferees of companies established in a Members country or of the employees of contractual service suppliers (i.e. the service is supplied, on the basis of a contract, by a foreign company not established in the Members territory) further aggravate the difficulties for the professionals of a developing country. Over and above these problems, MFN exemptions of most members simply rule out the participation of countries like Pakistan in the provision of business and professional services to the industrialized world. Third, Immigration and labour market policies of many countries also act as major barrier to the movement of natural persons. These policies are particularly burdensome for travellers for business and professional reasons. The restrictions on entry and stay of service providers range from strict eligibility conditions for applications and processing of visa and work permits to limitations on the length of stay and transferability of employment in the overseas markets. The quantitative limits on visas in some important developed countries are another form of constraint on the movement of professionals. More recently, Mode 4 has been severely affected by the backlash against Pakistanis and Middle Easterners after the September 11 attacks. The CNN reported on 3 December, 2002 a statement by US Equal Employment Opportunity Commission that complaints of discrimination based on national origin rose substantially. Between September 11, 2001 and November of this year, 688 charges have been filed by these national origins and other alleging backlash discriminations.. The EEOC officials said the number of national origin bias charges likely represent only the tip of the iceberg----that a lot of

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discrimination may be unreported because many fear retaliation or are not aware of the laws. Fourth, the construction and related engineering services also suffers from a number of substantial barriers. These barriers include restrictions on forms of establishment, participation of foreign capital, economic needs tests, limitations on the value of transactions, limitations on national treatment, request for nationality and residency requirements. In other words local presence is generally necessary to operate in this sector. This sector is also subject to many domestic regulations including building regulations, and technical requirements, building permits and inspection, registration of contractors and professionals, regulation of fees and remunerations etc. Fifth, the barriers affecting the Distribution Services include product exclusions such as pharmaceuticals and agricultural raw materials, citizenship and residency requirements, unspecified economic needs test, unspecified approval requirements. Sixth, it is well known that several countries have made considerable progress in liberalizing their financial sector. However, many barriers still remain to be reduced. Some horizontal commitments that continue to affect transactions in the financial sector adversely are listed below: y y y y y y Unspecified authorization requirements; Economic needs tests; Restrictions on equity holdings including high thresholds; Nationality requirements; MFN exemptions; and Restriction on transfer of financial information (mode1) etc.

Seventh, the Uruguay Round had limited implications for the transport sector. Land transport is covered by few commitments of commercial presence of road transport and some maintenance activities. MFN exemptions are related to cross-border provision services.

III. 4: Proposals of WTO Members Relating to Services Negotiations:

The Secretariat has reported33 that, until June 2002, 55 WTO Members had tabled written proposals, either individually or jointly (EU, Andean Community etc). Of the 55 governments who have submitted proposals, a majority (32) are governments representing developing countries. Among the sectors covered are professional services,

WTO NEWS: 2002 Press Release Press/ 300, 28 June 002

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tourism, telecommunications, transport services, financial services, distribution and education. These proposals, horizontal and sector-specific, have been scanned, and communications circulated by WTO members that are of interest to Pakistan are reviewed below to determine the direction of the current negotiations. a. Movement of natural persons: It is well understood that attitudes towards Mode 4 are characterized by widespread ambivalence: on the one hand, movement of natural persons is the focus of the largest number of restrictions, and, on the other, it is also an issue that occupies a central place in current negotiations. The reason for the present preoccupation with liberalization of movement of natural persons is that no other mode (Mode 1&3) can realize its potential without a liberal order regulating cross-border movement of business, professional and manual workers. The fact of the matter is that for demographic reasons some of the most advanced economies simply can not function without migration from the less developed countries. But at the same time there are powerful vested, ethnic, political and economic interests at play all over the world that have successfully blocked liberalization of this sector. Notwithstanding these considerations, a number of regions and countries (EU, US, Canada, Japan, Pakistan, India, Korea and even Australia) have put forward proposals to ease restrictions on Mode 4. In their proposals both the EC and the US have highlighted the need for greater access to information relating to laws and regulations relevant to entry, stay and work authorization of natural persons, and procedural transparency which may include timely government response to applications submitted for temporary entry and stay, and, in appropriate cases, a statement of reasons for denial of such applications. Of the proposals of the US and the E C, the EC proposal is more detailed and covers a wider range of services. The proposals of the EC34 relating to improving the structure of commitments and removing existing limitations are summarized below. b. Improving the Structure of Commitments The EC proposal recognizes some advantage in a sectoral approach based on specific categories of skilled personnel activities. Nonetheless, prior to exploring further this avenue, the EC would consider it logical first to build and improve on the existing horizontal approach. The EC is of the opinion that a sectoral approach at this stage will probably impede the readability of GATS commitments. The EC recommends first to work on increasing the transparency of existing commitments by, for example, by harmonizing at WTO level the existing horizontal categories of Personnel subject to mode 4 commitments before tackling the sectoral dimension.
34

S/CSS/W/45 dated 1 to 4 March 2001,

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c. Removal of existing limitations In this context, the following three proposals of the EC need to be considered.

(i) Economic Needs Test (ENTs)

In its communication S/CSS/W/45, the EC has proposed the elaboration of a common code of practice for economic needs tests. One way forward could be to accelerate the ongoing work carried out in the Transparency Working Party to see how the future principles and disciplines could be applied to mode 4 and whether there is a need to go beyond the general framework for mode 4. (ii) The issues relating to social security issues should be postponed in order to avoid endless controversies. (iii) Work on the recognition of qualifications and diplomas is useful. But the experience of the EC proves that this approach is extremely time and resource consuming for a very meagre result. So an alternative to sector-by-sector work may need to be found. It is recommended that these proposals of the EC should be evaluated carefully because they do provide a useful starting point for negotiations on this thorny issue. It also needs to be borne in mind that temporary movement of service suppliers is a matter of universal importance. Effort therefore needs to be made to develop results which can be applied to all countries including Pakistan. b. Credit for autonomous liberalization of trade in service This issue has been on the agenda of the Council for Trade in Services for quite some time but discussions so far have remained inconclusive. The issue has arisen because as a result of their stabilization and structural adjustment agreements with the IMF and the World Bank many developing countries have liberalized a number of their services sectors, but they are not yet able or willing to bind the full extent of their liberalization in their schedules of commitments. The question now is whether and how this out-of-WTO-negotiated liberalization can be reflected in the current bilateral and multilateral negotiation. In other words, how the developing countries can receive credit for their autonomous liberalization in their bargaining with the advanced countries. The international community is well aware that it would be counterproductive to press the developing countries to bind their liberalized market practices because that would

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discourage them from undertaking further unilateral liberalization in the future. At the same time it is also true that bound market liberalization is essential for assured and credible market access. It is being argued that, given the safeguard mechanisms embedded in the text of the GATS, the apprehensions of the developing countries about the irreversibility of a commitment are not well founded. Against this background, several proposals are now on the table on how to measure the credit and how to incorporate it in the bargaining processes. Of these35, Korean and European Community proposals appear to have attracted the greatest amount of attention. The Korean papers have recommended the construction of statistical indexes of improvement. In the absence of the exact weights of significance among market access, national treatment and additional commitments, the improvement index would be calculated for the three variables independently.For the purpose of calculating the improvement index, horizontal measures are to be allocated in the parts of market access, national treatment and additional commitment36. The European Community proposal on the other hand is more qualitative in nature. The EC has proposed the following criteria to be taken into account in determination of credit. y y y y y The liberalization nature of the specific measure concerned, The WTO conformity of the measure, The contribution of the measure to the objectives of the GATS negotiations, The relevance of the measure to the Member from credit is sought, The binding nature of the liberalization.

The EC proposal goes on to say that A Member wishing to seek credit for any or all of its relevant measures should inform either the Council for Trade in Services, or the specific member, from whom it expects credit, of its intention to seek appropriate credit for such measures37. From the discussions held so far it is clear that this issue of credit for autonomous Liberalization is not an easy one. Apparently WTO members will have to wait for quite some time before they reach an agreement on how to deal with unilateral liberalization while maintaining the integrity of negotiations on the one hand, and ensuring on the other that the developing countries are not discouraged from opening up their economies on an experimental basis in the future.

d. Classification of Services:

Hong Kong proposal is given in its communication S/CSS/W/134 of 15 March 2002. S/CSS/W/126: 30 November 2001 37 S/CSS/W/133: 22 February 2002 and
36

35

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It may be noted that not only national and international statistical systems relating to Services need to be improved, the classification of Services in terms of W/120 and CPC (Central Product Classification) also need a great deal of refinement. For this reason, a number of countries have proposed several refinements in the definitions of business services, professional services, educational services etc. This is an issue of interest to all WTO members including Pakistan. Pakistan therefore needs to develop it own definitions, particularly in the areas of business and professional services, where the currently applied definitions are not sensitive enough to its requirements. d. Sector-Specific issues In addition to the above major horizontal (across-the board) issues, additional proposals of interest to Pakistan are discussed below: Construction Services: The Republic of Korea has proposed (S/CSS/W/84 of 11 May 2001):
y y y y Removal of discriminatory regulations on commercial presence; Elimination of discriminatory treatment against foreign companies in bidding procedures; Relaxation of local content use requirement in the performance of contracts; Elimination of discriminatory provisions against foreign companies in taxation and remittance of earnings.

These proposals may be of some interest to Pakistani construction companies in their discussions with African and Persian Gulf countries. Distribution Services: Among other things, Korea in its communication S/CSS/W/85 of 11 May 2001 has proposed that
y y When a country has taken autonomous liberalization measures beyond its schedule of specific commitments, credit should be given. Since cross-border supply of services (Mode 1) is directly connected with e-commerce issues, discussion on cross-border the supply of services should proceed alongside the discussion on e-mail in the General Council. Restriction on market access and national treatment such as requirements for minimum amount of sales and capital, restrictions on foreign equity participation, and limitations on the volume and variety of sale items should be removed. Transparency in licensing procedures.

Courier Services: The proposal made by New Zealand38 in its communication S/CSS/W/115 of 6 November 2001 may be some interest. It may be recalled that Pakistan has already de-regulated its courier services and allowed at least two foreign companies to operate in Pakistan.

38

US proposal : S/CSS/W/26 of 18 December 2000.

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Services Auxiliary to ALL Modes of Transport: In its communication S/CSS/W/78, 4 May 2001, Switzerland has pointed out All countries stand to gain from the elimination of market access and national treatment barriers currently facing suppliers of services auxiliary to all modes of transport. Producers in exporting countries would waste fewer resources on administrative matters, while consumers in the importing countries would have more rapid access to a greater number of products. This proposal needs to be examined in Pakistan carefully. Education Services: New Zealand in its document to S/CSS/W/93 (26 June 2001) has argued that Trade in education services is of increasing international significance, but the sector remains one of the least committed under the GATS. Short term training courses, language training and practical/vocational courses in a range of subjects, for example, computing, hospitality, driver education programs etc are areas where Pakistan can do well. It may be noted that not only national and international statistical systems relating to Services need to be improved, the classification of Services in terms of W120 and CPC (Central Product Classification) also need a great deal of refinement. For this reason, a number of countries have proposed several improvements in the definitions of business services, professional services, educational services etc. This is an issue of interest to all WTO members including Pakistan.

III. 5 Definition of potential Requests

The terms of reference of this study required this section to define potential requests to Pakistan from WTO members for liberalization commitments. But this orientation of the section underwent a radical change when the Ministry of Commerce decided to share with this Consultant the actual requests Pakistan had received from its trading partners. This section has therefore limited itself to suggesting the broad approach that Pakistan should adopt towards the requests it has received. Pakistans specific response to the requests in question is portrayed in a separate, confidential volume (i.e. Volume II) of this report. This confidential volume will remain classified until the Ministry of Commerce decides to open it. The names of the eleven WTO Members who have submitted requests to Pakistan are listed below:
Requesting Countries South Korea

United States

China

Norway

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European Community Japan

Switzerland Poland

Australia Malaysia

India

The above requests cover all sectors deemed to be part of Services. These requests seek both horizontal and sector-specific commitments (full or partial) under one, two, three or all modes of supply. The main sectors under negotiation are given in the following Table.

Sectoral Coverage of Requests

Legal services Computer and related services: consultancy, software, data processing and other Real estate services Audio-visual services Tourism and Travel related services (Hotels, restaurants. Travel agencies, tour operators, tourist guides services) Transport Services y Maritime transport y Air transport y Road transport y Pipeline transport y Services auxiliary to all modes of transport Telecommunication services (CPC 752): Satellite and VSAT Services

Accountancy services

Construction and Related Engineering services (CPC 511 to 518)

Taxation services

Rental/leasing services without operators

Distribution services

Architectural services

Engineering service

Integrated engineering services

Management consultancy services Services related to management consulting Maintenance and repairs equipment (excluding maritime vessels) Postal and Courier services

Environmental services (Sewerage, refuse disposal, sanitation and similar services) Insurance and insurance related services Banking and other financial services (Details are given in Classification of services)

Urban Planning and landscaping services

Medical and dental services

Telecommunication services including 15 activities listed in WTO classification of services Services provided by midwives, nurses, physiotherapists, and para-medical personnel.

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As stated above, the precise response that Pakistan might consider making to these requests is set out in Volume II of this study. However, the following paragraphs have attempted to discuss the broad considerations that should guide Pakistan in the determination of its negotiating stance. The recommendations of the study set out in Volume II are based on the view that liberalization of services is likely to attract foreign investment, facilitate importation of modern technology, and promote export of services from Pakistan. It is well known in Pakistan that liberalization of the two major service sectors, namely Financial sector (i.e. banking) and Telecommunications, has brought into the country both technology and foreign investment, and at the same time it has enriched and enlarged markets for their products. It is evident that liberalization of these two sectors has neither jeopardized Pakistans balance of payments nor has it stifled Pakistani entrepreneurship. This study therefore strongly recommends that the experience of these two sectors should be analyzed to draw appropriate lessons for future action. The export potential of Pakistan has already been explored in section II of this chapter. The study therefore recommends that Pakistans requests should encompass these subsectors and activities. It goes without saying that the great centres of economic power like the US, EU, Japan and China should be the main targets to whom Pakistans request are to be addressed. But this study recommends that Pakistan must not neglect countries of South East Asia, Africa south of Sahara and its neighbours in its north-west like Afghanistan, Iran and other central Asian countries. These countries offer at least equal if not greater opportunities to Pakistans non-traditional service exports such as education, health related facilities, construction industry, engineering services, and computer related services. The study further recommends that Pakistan should consider making as many GATS commitments as possible. De-regulation and liberalization are indeed important steps forward, but these advances need to be consolidated (i.e. firmed up) by making commitments. The case of this study for commitments rests on the following economic and political considerations: y Commitments contribute towards increasing transparency of government policies in the services sectors. Transparency, that is, due process of law, stability of laws and policies, and timely notification of laws, rules and disciplines contribute to the efficiency and confidence of the domestic companies and it inspires foreign investors to undertake economic transactions in Pakistan with a greater sense of security. Commitment serves to protect policy-makers from the pressures of domestic and foreign vested interests that compel them to change public policies with every short-term market fluctuation. These pressures fragment national interest.

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Commitments reduce the risks associated with investment and provide an assured and a relatively stable environment both to domestic and foreign operators to plan and execute their projects. Commitments are indispensable for long-term, large projects. Short-termism has proved very costly for Pakistan. This is borne out by the low investment, low growth experience of the last seven years. Autonomous liberalization in the context of the GATS means cases in which actual market practices of a country are more liberal than the commitments it has made in its GATS schedule of commitments. It is widely known that Pakistan like many other members of the WTO has liberalized some of its major service sectors like telecommunications and banking well beyond the commitments it has entered in its schedule of specific commitments. Pakistan like other similar autonomous liberalizers has also been arguing in the Council on Trade in Services that developed countries should not press them to convert all of their liberal practices into commitments; rather in their quest (bargaining) for reciprocity, the developed countries should give credit to the developing countries for their autonomous liberalization. These discussions have however not cut much ice, and it seems doubtful if an arithmetical formula like the Korean formula for measuring credit can serve the ends of GATS bargaining. This study recommends that Pakistan should review its autonomous liberalization sectors and, if found necessary, transforms into commitments those of its policy elements that have remained liberalized for at least five continuous years. Five years is long enough for Pakistan to gain some confidence in the appropriateness of its policies. Furthermore, in the context of the current negotiations, Pakistan can take the plea that it will take commitments only in those areas where, in the light of its own experience, it feels confident that, ceteris paribus; it will not have to change its policies drastically at least in the near future. Commitments will strengthen the confidence of Pakistanis living abroad to invest in large range of services. Commitments do not mean irreversible decisions. In this context, Articles X, XII, XXI and XXIII of the GATS need to be read carefully. For example, Article X entitled emergency safeguard measures provides that a member may notify its intention to modify or withdraw a specific commitment after a period of one year from the date on which the commitment enters into force; provided that the member shows cause to the Council that the modification or withdrawal can not await the lapse of three-year provided in paragraph 1 of Article XXI. Article X further provided that there shall be multilateral negotiations on the question of emergency safeguard measure based on the principle of non-discrimination. It can be seen from the decision of the Council for Trade in Services reproduced below that no definitive decision on safeguards has yet been taken, and that negotiations on this question are still to continue. Pakistan can take advantage of these

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discussions and negotiate with the support of like-minded nations the amount of flexibility it needs to cope with emergencies. FOURTH DECISION ON NEGOTIATIONS ON EMERGENCY SAFEGUARD MEASURES Adopted by the Council for Trade in Services on 15 March 2002 The Council for Trade in Services, y Decides as follows: The first sentence of paragraph 1 of Article X shall continue to apply until 15 March 2004. The results of such negotiations shall enter into effect on a date not later than the date of entry into force of the results of the current round of services negotiations. Notwithstanding paragraph 3 of Article X, until the entry into effect of the results of the negotiations mandated under paragraph 1 of Article X, the provisions of paragraph 2 of that Article shall continue to apply.

Article XII allows a member faced with serious balance of payments and external financial difficulties to impose restrictions to safeguard its balance of payments. For a developing country this process has been made easier by allowing it to use restrictions in order to maintain a level of external reserves adequate for the implementation of its program of economic development or economic transition. A member applying restrictions on account of its balance of payments difficulties has however to consult the Committee on Balance of Payments. Fifty years of experience of Pakistan with the work of the Committee of Balance of Payments of the GATT and now of WTO shows that these proceedings are no more onerous than the routine consultations with the IMF. Article XXI, the Article dealing with the modification of schedules provides that a member may modify or withdraw any commitment after three years have elapsed from the date on which that commitment entered into force. However a member who wishes to modify or withdraw a commitment must notify the Council for Trade in Services no later than three months before the intended date of implementation of the modification or withdrawal. This may or may not lead to negotiations and later arbitration between the modifying and the affected member. At the end of the day, a modifying member has to make compensatory adjustment to restore balance of advantage or the affected member may withdraw an equivalent concession. The GATS is essentially an instrument of moral pressure rather than a means of inflicting material damage on a deviant. Finally, it may be added that a country of the size and political importance of Pakistan has to act as a member of good standing. This country must be seen to be

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participating actively in GATS negotiations by making worth while commitments to promote and strengthen the multilateral trading system embodied in the WTO Agreement. Pakistan does not have the protection and the benefits of an effective regional arrangement. It therefore has to do everything it can to strengthen the multilateral system. y At the same time Pakistan can not remain a free rider any longer. Pakistan is not expected to match the commitments of developed countries as Article XIX of the GATS does give it appropriate flexibility to open fewer sectors, and liberalize fewer types of transactions. Nevertheless, it has to play its full role as a responsible member of the WTO. It now needs to be acknowledged that the days when developing countries enjoyed the dubious advantages of non-reciprocity sanctioned by the General Agreement on Tariffs and Trade, 1947 can not be brought back into life in the 21st Century.

Annex to Chapter III RESTRICTIONS FACING SERVICES EXPORTS

y MFN horizontal and sectoral exemptions most prominent being in mode 4 (movement of natural persons). Lack of information/transparency in member countries laws and regulations governing services.

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Market access limitations on number of service suppliers, their operations or employees in a specific sector; the value of transactions or assets; the legal form of the supplier (for instance, limiting to a branch or a joint venture); or participation of foreign capital. Non-extension of National Treatment after permission to enter a country putting the services/service supplier at a disadvantage. Economic Needs Test (ENT) frequently used instrument against Mode 4. ENTs are defined as barriers to market access under Article XVI. These frequently appear as a qualification to commitments relating to movement of natural persons including intra-corporate transferees and independent contracted professionals. ENTs act as quota restrictions and may be qualitative or quantitative in terms of their impact. Out of 145 WTO members, 67 use ENTs to regulate services trade flows.

Discriminatory and stringent licensing requirements. In USA, for example, licensing to practice medicine for qualification obtained from outside USA, which varies from state to state.

Difficulties with recognition or accreditation of foreign professional qualifications and standards. Nationality and residency requirements that vary from State to State. State and Provincial requirements at variance from that of national also serve as a source of uncertainty and restriction.

y y

y y y y y

Stringent immigration regulations. Foreign Exchange Controls affecting repatriation of earnings. Restricted access to examinations for completion of qualifications. Discriminatory regulations of fees, expenses and subsidies. The requirement of registration with, or membership of professional organizations in host/recipient country.. Lack of wage parity tantamount But I wouldnt even need changing in the management of to negation of cost based advantage, social justice and workers rights.

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Licensing to foreign graduates subject to written examination like Educational Commission for Foreign Medical Graduates (ECFMG) and then pursue education in a hospital in USA. In Canada, for example, licensing to practice is subject to endorsement by local medical schools. Agreement from concerned Ministry for need of a professional service i.e. employment authorization for short duration i.e. one year, extendible on yearly basis. This is commonly known as Market Needs Test. Equivalency requirement in terms of qualification/technical know-how. Unethical contract practice rules that are thrust over service suppliers. Discriminatory insurance policies for foreign services providers. Regulations discouraging advertising services prices, discounts and subsidized services. Too many visa classes of temporary resident visas and entry permits. In Australia, for example, out of 24 only 9 are relevant to temporary entry of personnel. EU has a regulatory regime for non-EU nationals giving them work permits subject to labour market needs test. Condition of joint ventures and or local incorporation to provide service in target market. Less favourable treatment to foreign nationals or entities to acquire real estate. Need based quantitative restrictions. Deduction of social security without corresponding benefits. Inability of service provider to invoke arbitration against employer. Pre-employment condition as one of the most widely used criterion for grant of visa for entry into a market. Lumping-up of temporary and permanent movement of labour restricts/discourages eligibility conditions and lengthy application and visa formalities and taxes raising of direct and indirect costs. Mutual Recognition Agreements (MRAs)/Regional Arrangements under-cut competitive/cost effective service suppliers. Burdensome domestic regulations on pricing, marketing and zoning. Complicated customs clearance procedures.

y y y y

y y y y y

y y

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y y

Stricter disclosure requirements on companies and banks. Temporary movement of service providers is linked to residency permits that debars service providers from right to contract, to litigate, acquire property and social security benefits. Such provisions/practices are against national treatment and deny market access. Movement of natural persons are primarily contingent upon commercial presence or establishments that involves high capital cost. This coupled with restriction to acquire land/property makes it difficult provide service under modes 3 & 4. Price-based measures like entry and exit taxes and visa fees; discriminatory airline fees, port taxes and licensing fees are discouraging factors in temporary movement of service providers.

y Requirement to appoint local agent and maintain local professional address. y Cross-border transfer of capital, payments and/or use of credit cards for such transactions subject to authorisation. Requirement for full commercial presence; commercial presence required but granted only to specified "brand name" entities; or local partnership required to maintain supply advantage for permitted local providers. Cross-border transfer of capital, payments and/or use of credit cards for such transactions not permitted. Transfer of capital, payments and/or use of credit cards for such transactions subject to authorisation. Subject to approval based on policy guidelines and overall national interest considerations but without economic needs test or local participation requirements. Approval subject to demonstrated capacity to meet fiduciary standards. Automatic approval except for specific authorisation or concession requirement for foreign investment in public entities or public works, newly privatised companies or government-contracted services. Automatic approval below certain value thresholds, but subject to review and approval above fixed value thresholds. No establishment of new businesses permitted. Numerical quotas for operating licence. (This may apply only to foreign investors, or to both foreign and domestic investment). Hostile take-over of existing business not permitted.

y y

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No establishment of new businesses permitted, only minority shares in existing businesses permitted. Existence of monopoly or exclusive provider such that foreign investment to establish a competing firm is not permitted. Reservation of some sectors or activities, state-owned enterprises to be privatised, or government-contracted services, for investment only by nationals or permanent residents. Incorporation required with foreign equity participation ceiling and mandatory local partnership. Only representative office permitted, for promotional reasons and undertaking research for head office only. Only one legal form permitted (e.g., joint-stock company, private limited liability corporation, joint venture). Requirement that CEO be national or citizen of host country. Requirement that more than 50% of directors are national of host country. Requirement that all directors are resident of host country. Prior residency required to obtain operating licence whilst residency not permitted without licence. Bound only for definitions of personnel permitted, with generally applicable timelimits and/or conditions not specified, such that these may then be arbitrarily or discriminatorily applied. Permission subject to passing local examination to be recognised as professional or specialist; access to the examination by foreigners may be restricted. Requirement to complete or undertake further training in the host country in order to be recognised as professional or specialist. Permission subject to approval and labour market tests for specific categories of personnel. Permission for intra-corporate transferees and specialists is subject to general or specific labour market testing and non-availability of local staff, with the latter decided by host authorities without input from the foreign company concerned. Approval for intra-corporate transferees and specialists are subject to general economic needs test.

y y y y

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Requirements for local recognition of experience and/or qualifications for professionals and specialists, for which the criteria are vague, non-transparently or arbitrarily applied, or discriminatory. Requirement that a specified proportion of foreign staff have local understudies for training/ transfer of skills. Authorisation of intra-corporate transferees subject to performance requirements (e.g. employment creation, transfer of technology, ongoing level of investment). Requirement that specified, significant proportion (e.g. >70%) of staff of foreign established company be nationals of host country, regardless of experience/qualifications. Numerical limitations on foreign nationals in senior positions (e.g. company managers, executives, senior professionals and specialists) and/or requirements of a specified number of host-country nationals relative to foreign nationals in each such category. Only intra-corporate transferees permitted, subject to a limit of 2 foreign transferees per operation, and mandatory training of local staff. Provision of services by self-employed persons not permitted. Prohibition on foreign affiliates established in a country transferring specified types of financial information to their parent company.

y y

y Requirement that personal or commercial information is not to be transferred out

of the country in which it was generated, without specifying the policy reasons for the restriction or permitting transfer subject to adherence to reasonable standards.

y General prohibition on transfer of specified types of data (personal, financial institutional, commercial) without specifying the policy reasons for the prohibition or permitting transfer subject to adherence to reasonable standards.

Sources of Information:

i. Individual countries 'schedules of commitment lists under GATS. ii. "GATS and Developing Countries: A case study for India". Rajesh Chadha, Reader Deptt. Of Economics, Hindu College, Univ. of New Delhi. Revised Abstract Feb., 2000.

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iii. A Positive Agenda for developing Countries. GATS Miscellaneous/V-Major Barriers to Movement of Service Providers.htm. UN, Geneva and New York, 2000. Major Barriers to Trade. iv. OECD - Working Party on Trade Committee. Assessing Barriers to Trade in Services by Julia Nelson. TD/TC/WP(99)/Final-unclassified. v. Quest for An Implementation Mechanism for Movement of Natural Persons. Occasional Papers, South Centre, Geneva July 2001 by Md Shahidul Haque. vi. GATS Miscellaneous/Private Sector Wishlist.htm. Services 2000 Hong Kong.

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CHAPTER IV

FORMULATION OF POTENTIAL OFFERS IN THE POST-DOHA ENVIRONMEN

This Chapter has been prepared in response to Article 2.4 of the terms of reference of this study, and it discusses the following topics: Identification of domestic sectors which should be opened up to foster domestic development and growth; y y Identification of domestic service sectors in which protection should be maintained; Assessment of sectors and modes of supply in which autonomous liberalization by Pakistan has outpaced Pakistans GATS bindings to and in which there is therefore negotiating space available to the GOP; Definition of potential offers.

IV.1 Focus of Pakistan Policy on the Services Sector This section discusses the first two topics of the terms of reference of this study, namely: Identification of domestic service sectors which should be opened up to foster domestic development and growth, and y Identification of domestic service sectors in which protection should be maintained. In discussing Pakistans future course of action, it needs to be recalled that since the mid-90s the dominant consideration that shaped Pakistans policies towards its services sectors was not protection but how best to attract foreign investment and promote the countrys technological development. The examples of the telecommunications and the financial sectors are sufficient to confirm this point. y This study has already reported in some detail that over the last few years Pakistan has opened up virtually its entire economy to foreign investment. According to the Board of Investment The essence of the policy is to strengthen Pakistans competitiveness by improving the policy regime, offering fiscal and tariff relief and providing comprehensive facilitation services39. The sectors now open to foreign investments are: a. Manufacturing/ Industrial sector b. Tourism c. Housing and Construction
Pakistan: Investment Policies, Incentives and Facilities Board of Investment: September 2001.
39

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d. e. f. g. h.

Services sectors Infrastructure sector Social sector Corporate Agriculture Farming Real estate development

In addition to these sectors, Pakistan has also opened courier services, construction services and computer related services to foreign investment and foreign competition that always accompanies foreign investment. Pakistan has also provided powerful fiscal incentives in the form of substantially reduced custom duties, and, subject to some conditions, zero sales tax on plant, machinery and equipment (not manufactured locally) imported for the following service and social sectors40. Wholesale, distribution and retail trade Transport, storage and communications Telecommunications including E-mail/internet/electronic information services, data communication network services, trunk radio services, cellular mobile telephone services, audiotex services, and card pay phone services, close user group for banking operations, International satellite operators for domestic data communications, paging services. Real estate development ( Commercial buildings, apartment buildings, super market, shopping malls and urban development) Hotel and Tourism related services Technical testing facilities Audio-visual services Sporting and other recreational services Rental services relating to transport equipment and plant Environmental services Machinery equipment and tools for land development and agriculture purposes

y y y

y y y y y y y y

In these circumstances, a fruitful way of looking at future policy is not to attempt to mark of areas of protection and areas of liberalization but to determine which areas remain to be liberalized and how much additional liberalization should be undertaken in this round of negotiations under the GATS. And this can best be done by reviewing the requests Pakistan has received from WTO members for liberalization and commitment and to

40

Notification (Customs) S.R.O. 28(1)/98

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decide how far Pakistan can go in binding its policies at this stage of its development. These issues are discussed in Volume II of this report.

IV. 2 Sectors of Autonomous Liberalization

This section attempts first, to identify sectors and modes of supply in which autonomous liberalization by Pakistan has outpaced Pakistans GATS bindings and, second to determine the existence of negotiating space for the countrys representatives in Geneva. A comparison of actual practices and Specific Commitments of Pakistan shows that its policies relating to several sectors go well beyond its commitments under the GATS. These sectors are discussed below:

y Limits on Foreign Equity (Mode 3): Services sectors including Tourism, Finance, Telecommunications, Education, Technical/ Vocational Training, Hospitals, Medical and Diagnostic Services are now open to foreign investment, and there is no upper limit on the amount of foreign equity except in Energy Sector. The horizontal commitments, however, prescribe a maximum of 51 percent of foreign equity. In the case of existing insurance companies it is 25 percent. Pakistan can therefore easily raise the committed limits beyond 51%. y Limits on the number of service suppliers (Mode 3): In practice there are no limits on the number of service suppliers except in a few sectors like the Financial Sector. The State Bank has already allowed each foreignowned bank to open 25 branches.Thus this sector also has some room for negotiation. y Limitation on the legal form of foreign companies (Mode 3): There are no special limits on the form of a foreign company. The procedures for registering a company are set out clearly in a brochure published by the Board of Investment. An application by a company for opening a branch has to decide by the BOI within 6 to 8 weeks. Specific Commitments document is, however, silent on this important question of transparency and absence of discrimination. Pakistan can bring its commitment closer to its practice. y Openness to foreign commercial presence (Mode 3) A number of foreign entities are operating in several sectors including sectors like construction, courier service and education. The commitments document is however silent on about these activities. Pakistan can therefore examine request from its trading partners with an open mind.

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Distribution Sector: In practice most of Pakistans wholesale and retail sectors are open to foreign investment and foreign competition. These sectors include seed, fertilizers, pharmaceuticals, beverages (coca-cola etc). Negotiations can therefore take place in this sector as well. Financial Sector: This is one of the major sectors where Pakistans practice exceeds its commitments. Some examples are given below: y Pakistan has already increased the number branches each foreign bank can open from 5 to 25. This decision offers some space for enhancing Pakistans commitment. Present commitment stands at three branches per foreign owned bank. y The sub-sectors that remain uncovered by commitments include credit, charge and debit cards, trading for own account of derivatives products and exchange rate and interest rate instruments, trading for accounts of customers of all kinds of negotiable instruments, money broking, settlement and clearing services for certain assets etc. y Limits on foreign shareholding in new foreign banks. (49% in contrast to the legal permission of 100%) Telecommunication Sector: Pakistan has only partially committed this sector though several additional activities have been liberalized in actual practice. Examples are given below: There are no commitments in electronic mail, voice mail, Electronic Data Interchange (EDI), Enhanced/Value-added Facsimile Services and Code and Protocol Conversion. y There are no Mode 1 bindings for Voice telephone services, Packet-switched data, E-mail, Internet and Intranet services, Circuit-switched data transmission services and Private leased circuit services. y There are no bindings for Voice telephone services and Private leased circuit services. Most of these services have remained liberalized for at least five years. It should therefore be possible for the Ministry of IT and Telecommunications to evaluate its experience and make some additional bindings. y Computer and Related services: This sector also seems to have space for negotiation. For example, Pakistan can in consultation with the profession take partial commitments in respect of the following services: y y y y Consultancy services related to the installation of computer hardware Software Implementation services Data processing services, and Database service.

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These are salient examples of autonomous liberalization in Pakistan. Pakistan need not therefore feel any stress if pressures develop from its trading partners for fuller commitments. IV. 3 Definition of Potential Offers It has already been reported in Chapter III that the issue of Definition of Potential Requests is being discussed in Volume II of this study. For the same reasons that prompted the separation of the discussion of Definition of Potential Requests into Volume II, the issue of Definition of Potential Offers is also being handled in that Volume. It may however be noted in this final paragraph of the present Volume of this study that economic policies rarely affect all members of a society equally. More often than not, some sections of a society, some industries, and some firms and individuals gain as a result of a particular policy and some lose. Furthermore, some gain in the short and some in the longer term. The point in economic policy-making is therefore not that a particular course of action must benefit all immediately, but that it should serve the more enduring public interest. The participation of Pakistan in the current round of negotiations under the GATS should therefore be seen in this perspective.

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