Africa’s Unexplored Potential of Trade in Services

The World Bank

Young women practise to be hairdressers in the Centre of Hope vocational school, Nakuru, Kenya. Photo: Laura Rantanen

A burgeoning services sector is fueling economic expansion in many African nations. Services contribute substantially to GDP, absorb a large proportion of youth employment, improve gender parity, and offer promising opportunities for export diversification.

Services are also key inputs in the production of important exports and food staples. Inefficient services can be partially responsible for high prices. For instance, in Ethiopia, services embody about 80 percent of the final price of roses, one of the country’s key export products. Similarly, between 60 and 75 percent of the price of teff, Ethiopia’s staple food grain, comes from services inputs. Access to more efficient services along the whole value chain – possibly through importing them - has the potential to boost the country’s cut flower exports and help ensuring food security by lowering the price of staple foods. Importing services can also improve productivity through increased competition, better technologies, and access to foreign capital. But there are many obstacles to trading in services among African countries that make it difficult to take advantage of these opportunities.

A new World Bank Group report From Hair Stylists and Teachers to Accountants and Doctors - The Unexplored Potential of Trade in Services in Africa sheds light on uncharted opportunities for services trade in Africa and invigorates the discussion about the role of services in trade diversification and economic upgrading on the continent.

" Both formal and informal trade in services create an opportunity for growth and poverty reduction in Africa "

Nora Dihel
Senior Economist in the World Bank’s Macroeconomics and Fiscal Management Global Practice

In Kibera slums, Nairobi, Kenya. Photo: GPE/ Deepa Srikantaiah, 2012

Services Trade in a Wide Range of Sectors

Africa’s export potential in traditional services, such as tourism, is clearly recognized, but the emerging success of exports of nontraditional services, such as business services, is often overlooked. For example, according to the firm-level surveys on professional services presented in the book, more than 16 percent of the interviewed accounting, architectural, engineering and legal firms in the Common Market for Eastern and Southern Africa (COMESA) countries are already engaged in exports, mainly to neighboring countries. This contradicts official statistics, which assert that professional services exports for several countries are negligible or nonexistent. Likewise, many hospitals in Sub-Saharan African countries are treating foreign patients and are using tele-medicine; yet official statistics often do not record such trade flows in medical services.

At the other end of the spectrum, Africa witnesses widespread transactions in informal services ranging from hairdressing, construction, and housekeeping to education, health and finance. Such services trade flows seem to flourish on the African continent—despite the many barriers to the movement of services providers. Tanzanian Maasai hair braiders are in high demand in Zambia, while Congolese, Kenyan, and Ugandan hairdressers are sought after by Tanzanian women from all walks of life, from the girl next door to the wife of the minister. All these hairdressers are crossing borders—usually helped by facilitators and fixers to provide their services in a foreign country. And the earnings they receive by working in foreign countries (export earnings) often remain their main source of income, contributing to significant improvements in their livelihoods.

“This is the only way I earn an income. I have been able to take care of my family,” explains Helene, a 38 year-old Congolese hairdresser living in Zambia.

Opportunities and Challenges

While trade in services presents African countries with opportunities for growth, there are still challenges to the sector. Domestic regulatory hurdles and trade barriers continue to fragment the services markets on the continent; and the cost of trading in services is high. For instance, education and health services in East Africa are hindered by restrictions on using telemedicine or e-learning. Medical tourism remains restricted by the non-portability of insurance policies. Restrictions on the legal forms of entry to hospitals in countries such as Tanzania and Uganda or limits on the repatriation of earnings in Kenya and Uganda constrain the establishment of foreign hospitals in the region. Finally, the high cost of visa and work permits in many countries impose stringent restrictions on the movement of health and education professionals to provide services abroad.

What happens when such regulatory barriers restrict trade in services? “Trade does not stop but rather, it takes an informal route,” said Arti Grover, Senior Consultant Economist with the World Bank Group. “Nonetheless, the extent and volume of such trade is diminished. Without such burdensome regulations, the government, the suppliers and the consumers could all be better off.”

What can governments do to address these challenges? Concrete, sector-specific guidance to improving regulatory frameworks and minimizing restrictions to trade are needed to deepen regional cooperation on trade in services in Africa. The book emphasizes a few potential solutions:

• Strengthen data generation efforts on services trade flows, transaction costs and outcome indicators
• Monitor services integration, focusing on the impact of reforms on lowering trade costs
• Put informal and knowledge intensive services on the agenda of policy makers.

Some countries and economic communities are already doing this. The Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC) and the South Africa Development Community (SADC) have taken steps to reduce trade barriers and countries are beginning to discuss practical solutions to trade impediments. Knowledge platforms on professional and tourism services are good examples of tools for translating policy recommendations into action. For example, the East Africa Tourism Platform has recently shown leadership in championing a coordinated approach to enhance the region’s travel and tourism competitiveness. Such platforms were designed for practitioners, policy makers, and regulators to engage in meaningful dialogue about the critical issues that are currently transforming these services in Sub-Saharan Africa.

“Cooperation initiatives are necessary to increase the regulatory capacity that African governments need to build over time to engage in meaningful liberalization efforts,” says Alemayehu Geda (Ph.D), Associate Professor of Economics at Addis Ababa University. “Through analytical support and technical assistance, the World Bank Group can assist African countries to improve regulation, facilitate services flows, and ultimately make services in Africa more competitive.”