US pushes services liberalisation with Indian study

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Arun Kumar | 18 Feb, 2012
Suggesting that US services imports faced discrimination in important emerging markets such as India, China and Indonesia, Washington has cited an Indian case study to make a plea for services liberalisation.

"Recent scholarship demonstrates that services liberalisation is in the interest of countries that are importing services as well as those that are exporting services," said a report released by President Barack Obama's Council of Economic Advisers Friday.

"Better access to world-class services raises productivity and living standards in emerging-market economies," it asserted saying "Interesting evidence on this point comes from a randomized experiment in India (Bloom et al. 2011)."

"Researchers based at Stanford University and the World Bank randomly selected a set of Indian textile factories to receive a complimentary five-month programme of consulting services from a leading international firm," the report said.

Upon arriving in these factories, the researchers and consultants found that productivity was hampered by poor management practices. Over the next five months, the consultants worked with the firms to implement standard management practices proven to have enhanced productivity, output, and profitability in the West.

"When the project ended, the 'treated' factories had cut defects roughly in half, substantially reduced inventories, and increased output, while the control factories saw little change."

The authors, according to the report, calculate that these performance improvements increased profits by about $350,000 a year. "These are sufficiently large increases that the firms would have made enough money from the consulting projects to be able to pay the consultants commercial rates for their engagement in the projects."

"Given the magnitude of the improvement, why had the firms not adopted these practices earlier?" the report asked and concluded, "The researchers' results suggest that informational barriers were the primary factor explaining the lack of adoption."

"What is true for India is likely to be true throughout the developing world. By reducing barriers to trade in services, developing countries can help their own firms move toward the productivity frontier achieved in the West," the report said.

The United States has a strong comparative advantage in services, the report said. The global market for services trade, however, remains far more closed than the global market for manufactured goods.

Citing a study by Hufbauer, Schott, and Wong (2010), it said their findings suggest that the aggregate level of discrimination against services imports in important emerging markets such as China, India, and Indonesia is equivalent to a tariff on these imports of more than 60 percent.