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Countries need to have a strong regulatory system in place before they liberalize their service sectors, especially the financial sector, a United Nations Conference on Trade and Development that kicked off on Thursday July 9, 2015 advised.
Taffere Tesfachew, Director of the Division on Africa, LDCs and Special Program in UNCTAD, cautioned that if the service sectors are liberalized without a regulatory system is put in place by an independent, transparent and accountable body, the consequences could be devastating.
“By 2010, foreign banks accounted for 52 percent of all commercial banks in Africa. When you look closely at what these banks are doing, what you’ll find is that they are focusing mainly on high margin businesses leaving out smaller businesses such as Small and Medium Enterprises (SMEs) and they do not provide micro finance service. It would be disastrous to open the financial sector without forming proper regulatory mechanisms,” Taffere said.
He further stated that whether to liberalize some service sectors is a decision countries have to make according to their own national plan. “Some countries like Ethiopia don’t believe that they are ready to liberalize the financial and telecom sectors while other countries in Africa are on the way to liberalization. What matters is that there should be a strong regulatory system put in place,” he said.
Ethiopia sticks to its strong stand of keeping the financial sector closed off for foreign companies in order to give local banks time to build their capacity so that they can be able to compete when the sector is opened up.
“When you look at it from that perspective, it is a good decision to give local banks some time to muscle up. But, having regulatory system is also critical so that the local banks don’t get too comfortable, to make sure that they invest in knowledge and technology and to make them work hard and be ready to compete,” Taffere said.
The latest Economic Development in Africa Report launched by UNCTAD mainly categorically reports the need for Africa to give better attention to its service sector. The report said that the service sector in Africa is growing very fast and currently it accounts for 49 percent of the continent’s economic activity. The service sector also provides 32 percent of total employment on the continent.
“We have heard how fast Africa is growing and rising but very little is said about how services are contributing to that growth. Services are the lubricant that makes an economy work. Even if it is a structurally weak economy and one that’s dependent on commodity, people still depend on services as they need to get those commodities to the market. There need to have trade facilitation and to have transactions,” Taffere said.
As the service sector is an imperative element for the growth of an economy, the sector also needs to be strong to bring structural transformation.
“Although service has been the driver of growth, it hasn’t contributed to structural transformation in Africa. Structural transformation is not just about economic growth; it is about moving up the value ladder, improving technologies and productivities,” Taffere also said.
Globally, trade in services commands about USD 4.4 trillion, in developing countries it accounts for USD 1.3 trillion. Africa’s share in the money that is circulated in service trade is just USD 270 billion, making the continent a marginal player. According to a survey conducted in 45 African countries, at the time when the service sector was growing on the continent, manufacturing was falling in 30 of the countries. According to UNCTAD, this is due to services that are not sophisticated enough to be able to support the manufacturing sector.
“Now there is a desire in many African countries including Ethiopia, to diversify into manufacturing. That means the services sector and the level of its sophistication has to be given attention. This is because on average 25 to 30 percent of value-added manufacturing comes from services,” Taffere explained.
Every year, African countries import around USD 170 billion in services. With the right policies put in place, these services have the potential to be major exporters.
The report also proposed there should be huge investments on infrastructure such as energy, telecommunication and transport. Among the major constraints that prevented African countries from achieving structural transformation that derives economic growth is that the current state of infrastructure. Currently, around 74 percent of Africa’s population does not have access to electricity. These kinds of infrastructural challenges will make it difficult for African countries to become industrialized.
At this juncture in time when Africa stands at the developmental crossroads, investment in infrastructure is also essential to achieve the Sustainable Development Goals (SDGs) that replace the Millennium Development Goals (MDGs) starting from the coming January.
“All issue need to be looked at carefully because the SDGs are much more ambitious than the MDGs. The MDGs wanted to halve poverty but the SDG wants to eliminate it within the next 15 years, the same for the other targets. The other difference with the SDGs is that it includes trade, industrialization, employment and so on instead of focusing on social sector goals,” Taffere further underlined the crucial role the service sector plays for the success of the SDGs.