B5.2.2 Product Market Regulation in Network and Professional Services Is Higher in LMICs Than in HICs—and Highest in Rail Transportation and Legal Services in Both Groups of Countries

BOX 5.2 Beyond Border Restrictions: How Domestic Regulations Affect Potential for Competitiveness and Scale (continued)

FIGURE B5.2.2 Product Market Regulation in Network and Professional Services Is Higher in LMICs Than in HICs—and Highest in Rail Transportation and Legal Services in Both Groups of Countries

6

5

Score 4

3

2

1

0

a. PMR scores in network sectors, HICs and LMICs, 2013–17a

HICs LMICs HICs LMICs HICs LMICs HICs LMICs HICs LMICs HICs LMICs HICs LMICs

Electricity Gas Telecom Post Rail Airlines Road

6

b. PMR scores in professional services, HICs and LMICs, 2013–17b

5

Sc or e 4

3

2

1

0

HICs LMICs HICs LMICs HICs LMICs HICs LMICs Legal Accounting Architecture Engineering

Source: Calculations based on data from the 2013 OECD product market regulation (PMR) database and the 2013–17 World Bank–OECD PMR database. Note: The year of data varies by country, between 2013 and 2017. The product market regulations (PMR) scores for each sector are aggregate scores ranging from 0 (the most competition-friendly regulatory regime) to 6 (the least competition-friendly). White lines across bars indicate the median. Error bars indicate the range of country scores. Low- and middle-income countries (LMICs) are classified by their 1994 income levels. High-income countries (HICs) are those whose gross national income per capita was at least US$8,955 in 1994. OECD = Organisation for Economic Co-operation and Development. a. “Network sectors” include electricity, gas, and water supply, transportation, and e-communications. b. “Professional services” include lawyers, notaries, accountants, architects, engineers, and real estate agents.

Benefits of Reforms: Variable across Sectors but Significant to LMICs Liberalizing trade is likely to bring bigger gains in some services subsectors than others, with the gains likely highest where the linkages are highest. For example, pro-competition reforms in India’s banking, transportation, insurance, and telecommunications services were found to boost the productivity of both foreign and locally owned manufacturing firms. A 1 standard deviation improvement in the aggregated index of services liberalization resulted in productivity increases of 11.7 percent and 13.2 percent for domestic and foreign enterprises, respectively. The largest impacts resulted from transportation reforms, followed by telecommunications and banking reforms (Arnold et al. 2016).

The likely benefits of deep trade agreements that liberalize domestic regulations will depend largely on the extent to which they affect key enabling services, especially transportation and logistics (Hofmann, Osnago, and Ruta 2019) and financial and business services (Borchert and Di Ubaldo, forthcoming).

The Francois and Hoekman (2010) review of services trade looks at how many LMICs stand to benefit disproportionately from reforms that would improve service delivery. Many studies look at single sectors and show how the gains from reforms (or costs of the status quo) would be higher for LMICs relative to high-income countries—for example, Clark, Dollar, and Micco (2004) in maritime shipping; Doove et al. (2001) in air transportation; and Kalirajan et al. (2000) in banking services. Other studies did not show a disproportionate benefit, but that LMICs would still gain: Kalirajan (2000) on retail food distribution and Doove et al. (2001) on telecommunication services.

Data Flow Policies: Critical for Benefiting from Lower Proximity Needs The third dimension of policies to expand services trade regard the exchange of data, particularly commercial data, across borders. This pertains most to mode 1 (crossborder) trade, with the digitalization of service delivery expanding the scope for services trade that does not need proximity of producers and consumers. It is also relevant for other modes, particularly mode 3 (foreign commercial presence), because the intangible assets and use of data to improve services are likely to be most effective if data can be shared across all units in a larger firm.

The impact of expanding access to digital technologies on trade expansion has been recognized for years. The internet contributed about 1 percentage point growth in global annual export growth from 1997 to 1999 (Freund and Weinhold 2002). Much of the earlier work focused on how the internet facilitated coordination in manufacturing global value chains (GVCs); more recently, the attention is on digitally provided services in their own right. Between 2000 and 2015, global data traffic over the internet rose by a factor of 863; far more is now possible in

terms of using digital technologies to deliver services across borders (Ferracane, Kren, and van der Marel 2020).

Dimensions of Data Flow Issues In looking at the policy issues, there are two dimensions to overseeing data flows. One concerns the approaches to data flows across borders. The other regards restrictions on which data can be collected, how they can be processed, what they can be used for, and who they can be shared with. These issues are more pressing for personal data than commercial data, although the increasing collection of data makes even commercial data increasingly identifiable and tied to personal data (Hallward-Driemeier et al. 2020).

Although countries’ approaches to the domestic and international flows of data can be aligned, it is not necessarily so. Some countries put few restrictions (in some cases, no restrictions) on internal data flows but require data localization so no data can flow out of the country—a “limited transfer model.” Other countries allow international flows as long as they meet other criteria on processing and uses of data—a “conditional transfer model.” Still others provide minimal standards on either domestic or international flows—an “open transfers model.” Outright bans on international data flows clearly limit the ability to gain from trade in services. But concerns about how other countries will respect the privacy of personal data can limit the willingness to let data flow across borders too.

Choosing Data Policies for Productivity and Trade Based on data from 64 economies between 2006 and 2015, Van der Marel and Ferracane (2021) find that the imports of services over the internet would rise on average by 5 percent across all economies if they lifted their restrictions on cross-border data flows. Using more recent data, Ferracane and van der Marel (2020) categorize 116 countries’ data policies on cross-border flows and domestic data processing to test their impacts on flows of cross-border services trade. They test whether countries sharing similar data policy approaches exhibit higher or lower digital services trade with each other than countries with different regulatory data approaches. Sharing a similar approach to domestic data flows is associated with higher international flows between partner countries in both open and conditional transfer models. However, countries with permissive sharing domestically and international localization, such as China, suffer a “double whammy,” with fewer countries willing to send their data and, of course, with data not flowing out (Ferracane and van der Marel 2020).

Using a computable general equilibrium model, Bauer et al. (2013) estimate the economic impact of the General Data Protection Regulation (GDPR) of the European Union (EU) and find a reduction of trade between the EU and the rest of the world. Ferracane, Kren, and van der Marel (2020) also show that stricter data policies have a

negative and significant impact on the performance of downstream firms in sectors reliant on electronic data. They also find that this adverse effect is stronger among countries with strong technology networks and among more servitized firms. More broadly, cross-border data flows can also contribute to the diffusion of knowledge and facilitate specialized production in GVCs that has contributed significantly to productivity growth in manufacturing (World Bank 2020).4

Technology: Improving Quality through Innovation

The Centrality of Adopting Digital Technologies Digital technologies have an especially large role to play in the services sector.5 As noted in chapter 3, the use of digital technologies is positively related to productivity gains, across the entire range of services subsectors, and is enabling new business models and new ways in which more firms can reach wider markets. These technologies include software applications, digital platforms, data analytics, and machine learning (ML) algorithms. They can be used to enable remote delivery, automate certain tasks, and raise the impact of intangible capital such that digital technologies enhance the ability and incentives of firms in the services sector to achieve scale and innovate.

Discoveries at the frontier tend to be concentrated in high-income countries, or even within certain regions or larger firms in high-income countries (Balland and Rigby 2017). For LMICs, most “innovation” entails the adoption of already existing technologies, with some possible adaptation to local conditions. There remains substantial variation in the adoption of technology not only across but also within countries. Even though new technologies reach lower-income countries sooner than before, the intensity in which these technologies are used in lower-income countries is much lower than elsewhere (Comin and Mestieri 2018). Despite the availability of newer technologies and their adoption by some frontier firms, many firms do not use them. The implication is not one of concern but rather that policies in LMICs should appropriately focus on encouraging adoption of the most-basic digital technologies. There can be tremendous gains to productivity from catching up (Cirera and Maloney 2017).

The Building Blocks: Broadband Internet, Data Regulations, and Firm Capabilities Given the relevance of digital technologies, expanding access to the internet—and particularly broadband internet—is crucial. For instance, Hjort and Poulsen (2019) show that the arrival of internet cables in Africa predominantly benefited services firms, spurring market entry and boosting productivity. The internet is particularly relevant for services, for example, to be able to sell to clients (as through e-commerce) or to use distributed computing (such as cloud services). The internet has also enabled many services that once required face-to-face interactions to be delivered more remotely, as

shown in chapter 3. The COVID-19 pandemic has shown that workers who perform certain services tasks (such as e-learning, telemedicine, and professional services) have been more able to work from home than those in the manufacturing or primary sectors (for example, Avdiu and Nayyar 2020; Bloom 2020). Internet access among the wider population has been crucial to enable such home-based work.

However, such access alone is not sufficient. Firms must make the most of the internet’s potential, using it to upgrade and innovate how they do business. For most firms in most countries, this is about adopting technology—whether software applications, digital platforms, or more-advanced ML algorithms. The extent of unexploited potential here is underscored by the low use of even the most basic digital technologies. For example, as noted in chapter 3, the share of firms that have a website or use email to communicate with suppliers or customers varies considerably but is below 20 percent in many low- and middle-income countries.

The low shares of digital technology use can reflect gaps in the availability of affordable internet service, but they also reflect gaps in the capabilities of firms (as addressed below in the “training” section). Progress is needed on both fronts. The incentives and ability to use technologies are also affected by the regulation of digital markets. The potential scale and network effects of digital platform businesses raise new challenges for competition authorities. To ensure a level playing field for firms using digital platforms, it is critical to update data and competition polices (Hallward-Driemeier et al. 2020; World Bank 2021).

Training: Expanding Skills Development

The growing role for intangible capital associated with digital technologies places the improvement of workforce skills at the forefront. This does not mean that all the needed skills are “high end.” Basic ICT skills, such as how to use email and word- processing software, relies on foundational cognitive skills, such as literacy and numeracy, as well as “soft” skills that foster adaptability, problem solving, and initiative. In addition to employee skills training, managerial and organizational practices that strengthen firm capabilities matter too.

High-End (Digital and Other) Technical Skills The ability to design and work with complex information systems, especially in global innovator services, requires advanced skills in systems design, programming, and ML algorithms. However, many workers report that their lack of ICT skills is a constraint to employment and higher earnings (figure 5.4). For example, about 40 percent of workers in Vietnam report that deficient ICT skills prevent them from finding a job or getting a better-paying job. The shortage of such skills is an important barrier to growing these more productive services subsectors that provide higher-quality jobs.