Trade in Services: Economic Determinantsand Development-Related Issues

SWP480World Bank Staff Working Paper No. 480

August 1981

Prepared by: Andre Sapir [Consultant]Emst LutzIntemational Trade and Capital Flows DivisionEconomic Analysis and Projections DepartmentDevelopment Policy Staff

Copyright ®) 1981The MMl Bank tL COPY1818 H Street, N.W.rWashington, D.C. 20433, U.S.A.

The views and interpretations in this document are those of the authorsand should not be attributed to the World Bank, to its affiliatedorganizations, or to any individual acting in their behalf.

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The views and interpretations in this document are those of the aubthors andshould not be attributed to the World Bank, to its affiliated organizations,or to any individual acting in their behalf.

WORLD BANK

Staff Working Paper No. 480

August 1981

TRADE IN SERVICES: ECONOMIC DETERMINANTS AND DEVELOPMENT-RELATED ISSUES

A Background Study for World Development Report 1981

This paper represents the second stage oE a research project ontrade in services. The results are preliminary; further work may be done toimprove or expand the analysis.

One of the main conclusions is that trade theories can indeed, to alarge extent, explain the patterns of trade in services in spite of varyingand often substantial degrees of protectionism. Comparative advantage infreight services appears to be related to capital intensity, scale,composition of trade, and distance from trading partners. Performance inpassenger services depends in part on capital abundance and the flow ofpassengers. In trade in insurance services the availability of human capitaland economies of scale seem to be important determinants.

In addition to their role as exports or imports, some tradedservices such as consultant and engineering services, licensing, and technicalassistance are means of transfer of technology and are thereby important inthe development process.

Prepared by: Andre Sapir [Consultant] and Ernst LutzInternational Trade and Capital Flows DivisionEconomic Analysis and Projections DepartmentDevelopment Policy Staff

Copyright D 1981The World Bank1818 H Street, N.W.Washington, D.C. 20433U.S.A.

We are indebted to several of our colleagues for valuable commentsand discussions. Among others, we particularly would like to thank Francis X.Colafo, Harald Hansen, Oli Havrylyshyn, James Riedel, Jo Saxe, Gurushri Swamy,Martin Wolf, John Zerby, and the participants of a World Bank workshop ininternational trade and finance. We would also like to express our gratitudeto Millie Kim for providing excellent research assistance and to May-O Kuo forthe efficient typing.

Contents

Page

I. INTRODUCTION..............................................

II. THE DETERMINANTS OF COMPARATIVE ADVANTAGE IN SERVICES ..... 5

A. Theory ............................................... 5B. Empirical Results .................................... 10

1. Freight Services ................................ . 102. Passenger Services . . ..... . ....... 143. Insurance Services . . ............................. 17

C. Conclusions ..................................... ..... 21

III. THE ROLE OF SERVICES IN THE DEVELOPMENT PROCESS . . 23

A. Services, Infrastructure, and Technology Transfer.... 23B. Trade in Capital Goods . .. . ...... 27

IV. SUMMARY OF FINDINGS . . . ................................... 31

APPENDIX: INPUT DATA FOR THE EMPIRICAL ANALYSIS AND FOR THEDEFINITION OF CAPITAL GOODS ..................... ... 32

REFERENCES .................................................. .. 36

Tables

2.1 Regression Equations for Freight Services ............... 12

2.2 Regression Equations for Passenger Services ............. 16

2.3 Regression Equations for Insurance Services ............. 20

3.1 Trade in Capital Goods, 1975 ............................ 29

A.1 First Set of Input Data Usedfor Econometric Analysis, 1977 ....................... 33

A.2 Second Set of Input Data Usedfor Econometric Analysis, 1977 ....................... 34

A.3 Definition of Capital Goods ............................. 35

I. INTRODUCTION

Not a week in recent months seems to have gone by without the

meeting of a national or international study group composed of business or

government representatives who seek to shape the future of international

transactions in services.L/ There are several reasons for this sudden

interest in services. First is the recognition - mostly in the United States -

that services constitute a large and important component of international

transactions. Second is the fact that services have been left relatively

untouched by international negotiations and, at the same time, that the

achievements of the Tokyo Round in goods trade allow the international

community to attack a new problem. Third is the slowdown in the

industrialized economies and the repercussions of this slowdown on the

international scene. Indeed, the lack of effective demand at home has forced

the producers of services in the industrialized economies to reinforce their

efforts in outside markets in order to sustain their activity level.

Simultaneously, the developing economies are seeking to diversify their

exports away from labor-intensive goods, in which they enjoy a strong

comparative advantage but face a new protectionist attitude in the markets of

the industrialized world.

So far, the meetings have attempted to provide a framework for

further research in this new area of interest. The research agenda agreed

upon by the participants at the Conference on Research Possibilities in

/ An excellent way to follow the activity is to consult the InternationalServices Newsletter published quarterly by the Office of the U.S. TradeRepresentative.

2

Services held at Wye, Maryland, on March 29, 1980, offers a good summary of

the directions that.are being proposed in the various meetings. This agenda

includes the following:

a. Compilation of data on international flows of services and the

analysis of such data

b. Development of economic models that would help explain

international flows of services

C. Research on individual service sectors to provide more detailed

information about each sector's worldwide activity

d. Analysis of alternative negotiating solutions

e. Research on the applicability of domestic trade legislation to

international flows of services.

A previous study has already compiled and analyzed much of the

existing data.I/ At this stage more conceptual research is required,

including research on economic models of the international flows of services.

The purpose of this paper is to analyze the pattern of trade in services by

means of the tools provided by trade theories. Moreover, an attempt is made

to use this analysis to place services in a light appropriate for further

work, both theoretical and policy-oriented.

The remainder of the introduction will be devoted to clarifying some

of the concepts used in this paper. Chapter II presents an analysis of the

determinants of comparative advantage in trade in services. Chapter III

examines the role of services in the development process. A fourth chapter

summarizes the main findings, and an appendix presents the input data used in

the analysis.

2! See-Sapir and Lutz (1980).

3

The object of this paper is the study of services within the context

of the international economy. Services constitute activities producing an

intangible output. In terms of the International Standard Industrial

Classification (ISIC), services correspond to the heterogeneous set of

activities classified under the following major divisions:

6 Wholesale and retail trade, restaurants and hotels

7 Transport, storage, and communication

8 Financing, insurance, real estate, and business services

9 Community, social, and personal services.

Within the framework of the international economy, one must

distinguish between international service transactions and international

service activities. The former refers exclusively to exports and imports and

corresponds therefore to international trade. The latter, on the other hand,

includes foreign sales and purchases by affiliates or branches established

abroad and therefore implies international investment. Although this

distinction concerns not only services but also goods,-/ it is undoubtedly

more important for services. This is because, by their very nature, services

often are non-tradeables. In the present study, we will devote most of our

attention to international service trade, making only brief references to

international investment.

Among the services that give rise to international transactions,

some are actually traded and some are not. Those not traded are services

being sold within the domestic economy to foreign individuals or firms

residing abroad. They consist mostly of tourism and port services and will be

t See Baldwin (1979), which analyzes the determinants of trade and foreigninvestment for goods.

4

ignored in this work.i' Therefore, international service transactions are

defined as comprising the following categories.2/

a. Transport (of goods, services, persons by air, sea, road, etc.)

b. Communications (transport of information)

c. Financial services (banking, insurance, brokerage)

d. Professional and technical services (accounting, advertising,

construction and engineering, consulting and management, data

processing, legal services, etc.).

/ Besides, tourism constitutes what can be called a "Ricardo service"; thatis, a service whose comparative advantage is largely determined by naturalendowments.

2/ The concept used here is therefore narrower than that utilized by Sapirand Lutz (1980), where services were defined as "non-factor services."Compared with the previous concept, the present one excludes the followingitems: port services, travel, the labor income and property incomecomponents of other private services, and other government services.

5

II. THE DETERMINANTS OF COMPARATIVE ADVANTAGEIN TRADE IN SERVICES

This chapter analyzes the pattern of comparative advantage in trade

in services. It deals with net exports, which are thought to be a better

index of trade performance than either exports or imports alone. The chapter

is divided into three sections. Section A describes various trade theories

and the variables selected to represent them. Section B reports and analyzes

the empirical findings. Comparisons with other studies and policy

implications are discussed in section C.

A. Theory

In the introduction to his recent survey of empirical research on

trade theories, Stern (1975) writes: "International trade theory is mainly

concerned with determining what goods and services countries will buy and sell

in foreign trade" (p. 3). Despite this opening statement, no mention of

services is made in the remainder of Stern's excellent paper. Yet, no one

could argue that the absence of references to services reflects the author's

bias in favor of goods. There simply has been no empirical work on the

determinants of comparative advantage in services.

The reasons for this state of affairs are threefold. First,

economists have long failed to appreciate the role played by services in the

balance of trade. Second, the lack of adequate data has proved to be a

formidable hinderance to our understanding of services trade. Finally, there

seems to be widespread a priori opinion among researchers that the

determinants of trade in services either are not economic in nature or are

essentially the same as the factors that determine trade in goods. Thus no

special study of services seemed warranted. This study will examine the

6

extent to which trade theories, which have been tested with respect to goods,

can explain the pattern of trade in services.

As formulated by Ricardo, the theory of comparative advantage

suggests that trade patterns are determined by variations in comparative costs

among economies. However, it was not until the days of Heckscher and Ohlin

that it was hypothesized that variations in comparative costs among economies

derive from variations in factor endowments. Following Leontief's (1953)

work, attempts have been made to go beyond the simple two-factor (capital and

labor) Heckscher-Ohlin-Samuelson (H-O-S) model of compatative advantage.

Essentially, these attempts can be grouped under four theories:

a. The extended H-O-S theory, which accounts for variation in

national resources and human capital among economiesl/

b. The neo-technology theory2

c. The scale economy theory3/

d. The market-imperfection theory, which accounts particularly for

tariff and non-tariff barriers.

The five trade theories listed above (including the simple H-O-S

model) have recently been subjected to empirical test. Most authors seek to

4/explain the inter-industry trade composition of a particular economy .

However, following the work of other economists,-5/ Leamer (1974) has argued

/ The original contributors are Diab (1956), Vanek (1963), Kravis (1956),Kenen (1965), and Keesing (1965).

2/ See Hufbauer (1965) and Vernon (1966).

See Dreze (1960).

See Baldwin (1971, 1979), Branson and Monoyios (1977), Harkness and Kyle(1975), Hufbauer (1970), and Stern (1976).

See Chenery (1960) and Keesing (1968).

7

that trade theories have to be tested against the trade variations among

economies of a particular commodity.1i The latter approach will be used to

investigate the determinants of comparative advantage in services.

Ideally, one might want to test all the various competing theories

simultaneously. In practice, however, this is not feasible-because of the

difficulty in quantifying some of these theories. Also, problems of sample

size and multicollinearity typically restrict the simultaneous inclusion of

many explanatory variables in the regression,equations 2/ The solution

adopted here is a two-step approach to the problem. The first step consists

of regressing trade patterns on a limited number of explanatory variables.

The second step analyzes the residuals from the previous stage and uses

qualitative information to draw inferences about the unobservables.

The dependent variable that was selected to reflect the pattern of

comparative advantage across economies is the ratio of exports to imports of a

particular service, a variant of the usual net trade balance variable. The

independent variables serve as proxies for the trade theories we intend to

test. They can be classified into five categories corresponding to the five

theories discussed earlier.

First, the simple H-0-S model is represented by the capital-labor

ratio. Following the procedure employed by Hufbauer (1970) and Balassa

(1979), we have approximated the capital stock by the sum of gross fixed

investment over the period 1960-75, measured at constant prices and converted

into U.S. dollars using a weighted average of 1968 and 1973 exchange

/, For an interesting combination of the two approaches, see Balassa (1979).

21 Leamer (1974) partially solved these problems by using the Bayesianapproach.

8

rates The data have been divided by the corresponding labor force

figures2./ to obtain an estimate of the capital-labor ratio (KL).

Second, we have experimented with various proxies for human capital

endowment:

a. A modification of Hufbauer's (1970) measure, consisting of the

ratio of professional, technical, and related workers3/ to the

labor force (PTR)

b. The percentage of the labor force with secondary-school

education, approximated by the ratio of secondary-school

enrollment to the entire population (EDS)

c. The percentage of the labor force with third-level education,

approximated by the ratio of third-level enrollment to the

entire population (EDT).4/

The proxies EDS and EDT are adapted from Baldwin (1971), who used variables

indicating the percentage of the labor force with various years of education.

Third, technological factors are proxied, as in Leamer (1974), by

S5/national research and development expenditures5 relative to GDP (RD).

Fourth, economies of scale are reflected by the gross domestic product

(GDP). Finally, market imperfections are considered as unobservables and are,

therefore, absent from the regression equations. Nevertheless, they will be

I' Investment data are from the World Bank's national accounts file.

2/ Labor-force figures are from the International Labor Office, ILO Yearbookof Labor Statistics 1979 (Geneva: ILO, 1979).

3/ Also from the ILO Yearbook.

4/ Secondary-school and third-level enrollment figures are from the UnitedNations Educational, Scientific and Cultural Organization, UNESCOStatistical Yearbook 1978/79. (Paris: UNESCO, 1980)

Also from the UNESCO Yearbook.

9

the object of qualitative comments in connection with the regression

residuals.

The data base for the dependent variable consists of 1977 figures

reported by the International Monetary Fund (IMF) for the following service

categories:

a. Freight (FR)

b. Passenger services (PS)

c. Insurance

1. Total (INT)

2. Non-merchandise (INN)

3. Merchandise (INM)

d. Other services, including non-merchandise insurance (OS).!'

The data collection was undertaken for a sample of 52 economies including 35

developing and 17 industrialized ones (the data are shown in Tables A.1 and

A.2 of the appendix). There was no category for which the data were available

and reliable for all 52 economies,!/ so that the actual sample that was used

varied from one category to another. The sample size ranged from 35 for

freight to 13 for total insurance. However, because it was not possible to

obtain estimates for each explanatory variable for all the 52 economies, the

actual sample size had to be further reduced, ranging finally from 32 for

freight to 13 for total insurance.

I/ Other services include communications, financial services, andprofessional and technical services.

2/ Special care was taken to leave aside unreliable figures. This task wasaccomplished by scrutinizing the data together with the IMF's balance-of-payments specialists, the World Bank's country economists, as well asother economists.

10

The model can now be written in general form:

"(x/M) ~+~ aS + S E (2.1)ik ok lk ik j jk ijk

where i = economy index

j = relative endowment index

k = service category index

X = exports

M = imports

E = relative endowment (KL, PTR, EDS, EDT, RD)

S = scale (GDP).

The model was estimated over a cross-section of economies both in linear and

log-linear forms.

B. Empirical Results

1. Freight Services

In dealing with freight services, one is first confronted with a

data problem because a substantial proportion of the world's maritime fleet is

registered under open-registry flags, the so-called flags of convenience. As

a result, the available figures on freight service trade are unreliable,

particularly as far as credits are concerned. The problem is thought to be

rather less severe for debits. Presumably, there is a better chance of

knowing whether an economy is importing shipping services than of knowing

which economy actually earns the counterpart payment. Therefore the solution

adopted here consists of using debit figures exclusively and redefining the

dependent variable as the ratio of freight debit to total merchandise import.

11

Shipping is generally thought to be a capital-intensive activity.

Therefore, we hypothesize that comparative advantage in freight services is

related to an economy's capital-labor ratio.'/ It seems possible that there

are economies of scale with respect to operating a maritime fleet. Indeed,

there might be a threshold in merchandise imports below which it is

uneconomical to own carriers and produce freight services. In this case, all

freight services would have to be imported. Therefore, we postulate a

relationship between merchandise imports (M) and our dependent variable.

Another possibility would be to include GDP as a scale variable.

In addition, two other hypotheses are formulated. First, we

recognize that freight costs per unit of imported merchandise vary according

to the type of merchandise. And, indeed, different types of cargo move in

different carriers. Therefore, we hypothesize a relationship between the

share of manufactures in total imports (MM) and the dependent variable.

Second, we account for the fact that, other things being equal, location is

likely to have an effect on freight costs: a dummy variable (DIS), which

takes the value of 1 if the location is exceptionally far from major suppliers

and 0 otherwise, is introduced to that effect.

We expect to find a negative impact of KL and M and a positive

impact of MM and DIS on the dependent variable (FR). The regression equation

was estimated for a total sample of 32 economies as well as for two sub-

samples of 20 developing and 12 industrialized economies, respectively.

Estimates of the regression coefficients are reported in Table 2.1.

1/ Freight refers to air, overland, and maritime operations. Generally,available data do not provide a breakdown. However, it would appear thatmaritime freight is the dominant item which we, therefore, use toformulate our hypotheses. It is assumed that they also apply broadly tothe other two items.

12

Table 2.1:REGRESSION EQUATIONS FOR FREIGHT SERVICES

Equation Dependent Independent Variables a/ 2 SampleNumber Variable KL M MM DIS R Size

1 FR -3471 -0.05 1.01 32.15 0.62 324.91** 0.15 2.42* 2.40* 11.23**

2 FR -3222 -5.66 1.02 12.05 0.69 203.38** 3.20** 2.07* 0.74 8.40**

3 FR -3746 0.07 0.97 45.36 0.61 122.09* 0.20 1.58 2.63* 2.78

4 log(FR) -0.31 -0.04 0.26 0.31 0.58 323.61** 0.39 0.86 1.32 9.23**

5 log(FR) -0.35 -0.22 0.96 -0.04 0.78 204.66** 2.40* 3.14** 0.18 13.59**

6 log(FR) -1.31 0.11 0.79 0.93 0.48 121.95* 0.40 1.13 1.77 1.60

Note: The equations were estimated with a constant which is not reported. A* and a ** indicate 95 and 99 percent significance levels,respectively, for the t-values (shown below the correspondingregression coefficients) and for the F-ratio (shown below the squaredmultiple correlation coefficient).

a! The logarithm of the independent variables (except DIS) is used for theequations in the lower panel.

13

Rather remarkably, the results strongly indicate that economies

relatively well-endowed with physical capital have a comparative advantage in

freight services. While this result holds for both sub-samples, no similar

finding was made for the scale effect. This would suggest that there are

economies of scale in the freight industry, but also that industrialized

economies operate in a range free of this effect. This might be due either to

the size of their imports or to the fact that they engage extensively in

cross-trades.

We also observe that the distance only affects the sub-sample of

industrialized economies. This result can be attributed to the fact, on the

one hand, that developing economies import mostly from industrialized

economies and are all located far away from them. On the other hand, among

industrialized economies, there is a strong dichotomy of trade partners'

location between the European economies compared with Japan, Australia, and

New Zealand.L/ Finally, the effect of trade composition on freight costs

appears somewhat more pronounced for the developing economies than for the

rich ones. This is probably the consequence of more varied industrialization

levels and trade strategies among the former group.

To conclude our analysis of the freight equations, we examine the

residuals of equations 2 and 3. They indicate that the predicted value of the

dependent variable is substantially above its actual value for Brazil, Greece,

Korea, Norway, and Taiwan. The opposite holds for Spain. These results

invite several observations. First, there are historical factors at play

which make shipping a major activity in Greece and Norway. Second, shipping

is an area of heavy protectionism affecting many economies. There is evidence

1/ The United States and Canada occupy an intermediate position.

14

that both Brazil and Korea severely discriminate in favor of their fleets./

Third, a number of developing economies prefer to time-charter or lease

vessiels rather than to import shipping services. This has the effect of

artificially reducing freight figures, because chartering operations are

recorded under the item "other transportation" by the IMF. It is known that

Brazil and Korea have widely adopted this practice.2/ Finally, the mode of

transportation (by air, land, or sea) affects freight costs. Everything else

being the same, use of modes other than sea transportation incurs higher

costs. In our sub-sample of developing economies, Spain is the most likely to

do so since it is rather close to its main suppliers and is connected to them

by land. Despite these various unobservables, our regressions perform

surprisingly well. There is little doubt that the pattern of trade in freight

services is to a considerable extent shaped by the economic factors identified

by trade theories.

2. Passenger Services

Like the transportation of goods, the transportation of passengers

is likely to be a capital-intensive activity. Thus, we postulate that

comparative advantage in passenger services is related to an economy's

capital-labor ratio. International transportation of passengers can be either

by air, by ship, or by ground transportation. However, the airline industry

dominates the business. A given economy exports passenger services only to

the extent that foreign nationals travel on its carriers and purchase their

1/ See Sapir and Lutz (1980).

2/ Recent data show that about 40 percent of Brazil's foreign trade iscarried by chartered vessels.

15

transportation titles abroad.L/ Similarly, it imports passenger services when

its nationals travel on foreign carriers. Because international arrangements

generally grant landing privileges on a reciprocal basis, airlines are

severely limited in the volume of cross-trades they can pick up2/

Consequently, domestic carriers will tend to transport passengers to and from

their home. Therefore, an economy where many foreigners come will be more

likely to export passenger services, and an economy where many nationals go

abroad will be more likely to import passenger services. For simplicity, we

proxy flows of passengers with flows of travel credits and debits and

hypothesize the existence of a relationship between the ratio of travel

credits to travel debits (TR) and comparative advantage in passenger services.

We expect to find a positive impact of KL and TR on the dependent

variable (PS) defined as the ratio of passenger services credit to passenger

services debit. The regression equation was estimated for a total sample of

31 economies and two sub-samples of 22 developing and 9 industrialized

economies, respectively. Estimates of the coefficients are reported in Table 2.2.

For the entire sample, the relative endowment in physical capital

and the travel balance appear to be two of the determinants of comparative

advantage in passenger services. For the developing economy sub-sample, the

same basic result prevails.1 / However, for the sub-sample of 9

Titles purchased in the country are classified by the IMF under the"travel" item.

2/ Thus, even though a route between countries A and B might be attractive,only rarely will carriers from C be allowed to fly it.

3/ The coefficient of the TR variable in equation 2 is significant at the94.5 percent level (one-tail test).

16

Table 2.2REGRESSION EQUATIONS FOR PASSENGER SERVICES

quation Department Independent Variable a/ 2 SampleNumber Variable KL TR R Size

1 PS 44.90 0.20 0.25 311.92* 2.82** 4.72*

2 PS 82.24 0.13 0.30 222.29* 1.66 4.17*

3 PS 23.05 0.58 0.78 90.39 3.54** 10.76*

4 log(PS) 0.22 0.35 0.21 311.57 2.49** 3.67*

5 log(PS) 0.17 0.32 0.16 220.70 1.69 1.86

6 log(PS) -0.10 0.52 0.51 90.10 1.70 3.09

Note: The equations were estimated with a constant which is not reported. A* and a ** indicate 95 and 99 percent significance levels,respectively, for the t-values (shown below the correspondingregression coefficients) and for the F ratio (shown below the squaredmultiple correlation coefficient).

a! The logarithm of the independent variables is used for the equations inthe lower panel.

17

industrialized economies, the coefficient of KL is not significant and that of

TR is highly so. This might indicate that the impact of (restrictive)

international airlines arrangements affects the industrialized economies more

than the developing ones.

Turning now to the residuals of equations 2 and 3, we attempt to add

some insight to our results. The main observation concerns the fact that TR

is an imperfect proxy for the phenomenon it is intended to capture --

essentially because it ignores a location factor. Indeed, a problem arises:

there is not a one-to-one correspondence between tourists' expenditures in an

economy and their transportation costs to that economy. Thus, Australia,

Japan, and the United States have predicted values of the dependent variable

substantially above the actual values because their nationals usually spend

more on transportation when going abroad than do Europeans (who form the rest

of the sub-sample). Economies that attract tourists from relatively far away

have predicted values below the actual values. This is the case of Korea,

Malaysia, Portugal, and Turkey. In addition, protectionism constitutes a

distorting element that might account for some of the important gaps between

predicted and actual values of PS. Again, despite several factors that are

left unaccounted for, it is surprising (and reassuring) to find that our

theories perform so well.

3. Insurance Services

Insurance companies usually engage in two types of activity:

insurance and reinsurance. The first type is a retail activity that often

requires the company to maintain a service branch near its customers.1/

Therefore, except in the case of large and special types of risks, there is

/ See Carter and Dickinson (1979) for other reasons branches are required todo insurance business.

18

relatively little direct insurance placed internationally; that is, there are

few actual imports and exports of insurance services. On the contrary,

reinsurance is essentially a wholesale activity that enables insurance

companies to spread their risks and share them with other insurance firms.

Efficient operation of the reinsurance market involves substantial

international transactions.

What determines comparative advantage in (re)insurance services?

The essential element seems to be "a well-educated labor force, including a

whole range of professional expertise in financial, legal, and technical

subjects.'' 1/ Large amounts of financial capital constitute a necessary

condition for entry into the (re)insurance business, but very little physical

capital is needed. Comparative advantage is therefore linked to the

availability of human capital and the existence of a well-functioning

financial market. In addition, the volume of business constitutes an

important element of comparative advantage. Indeed, if the level of premium

receipts within a economy is small, there will be a relative lack of

opportunities to spread the risk, and insurers will be forced to reinsure

abroad most of the business they write. This phenomenon is frequent in

developing economies where the volume of business is typically low. We use

GDP to capture this size factor.

We expect both the human capital (PTR, EDS, or EDT) and the size

(GDP) variables to be positively related to the dependent variable defined as

the ratio of insurance services credit to insurance services debit. Separate

regression equations were estimated for merchandise insurance (INM),

non-merchandise insurance (INN), and total insurance (INT). All equations

I/ See Carter and Dickinson (1979), pp. 44-45.

19

were fitted over a total sample including both developing and industrialized

economies. The size was too small to regress over sub-samples. Estimates of

the coefficients are reported in Table 2.3.

Equations 6, 11, and 18 indicate that human capital and scale i/ are

indeed among the factors that determine comparative advantage in insurance

services. Total and non-merchandise insurance seem to be relatively intensive

in the use of third-level graduates, while merchandise insurance appears to

require relatively more second-level graduates. Unexpectedly, these two

indexes of human capital performed much better than the measure of

professional, technical, and related workers in the labor force.

Protectionist measures will boost the export-import ratios, either

by reducing imports or increasing exports. Foreign firms might be allowed to

do business in an economy if they agree to "reciprocate good conduct" and to

reinsure some of their foreign business in that economy. Alternatively, an

economy might operate a state-owned reinsurance company, which takes enough

business on the international reinsurance market to command "reciprocal

favors." And, indeed, most economies listed by Carter and Dickinson (1979,

Table 4, pp. 72-73) as having state-owned insurance companies exhibit

predicted values of the dependent variable greater than actual ones in

equations 6, 11, and 18. This is the case for Algeria, India, Italy, Morocco,

New Zealand, Peru, and the Philippines.

/ The coefficient of log (GDP) in equation 6 is significant at the 91percent level (one-tail test).

20

Table 2.3REGRESSION EQUATIONS FOR INSURANCE SERVICES

Equation Dependent Independent Variables at SampleNumber Variable CDP PTR EDS EDT R Size

1 INT 0.75 8.38 - - 0.28 131.90* 0.69 - - 1.99

2 INT 0.37 - - 22.96 0.46 130.95 - - 1.97* 4.25*

3 INT 0.58 - 3.25 - 0.33 101.55 - 1.06 - 1.74

4 JUT 0.54 - 3.19 3.26 0.33 100.98 - 0.96 0.13 1.00

5 log(INT) 0.28 0.21 - - 0.59 133.36** 1.17 - - 7.16*

6 log(INT) 0.13 - - 0.42 0.72 131.46 - - 2.55* 12.66**

7 log(INT) 0.25 - 0.17 - 0.42 102.22* - 0.75 - 2.56

8 log(INT) 0.34 - 0.23 -0.38 0.45 101.59 - 0.86 0.50 1.61

9 INM 0.90 15.98 - - 0.24 232.10* 1.17 - - 3.21

10 INM 0.36 - - 27.63 0.37 240.80 - - 2.51** 6.23**

11 INM 0.74 - 5.54 - 0.38 201.73* - 2.18* - 5.23*

12 INN 0.66 - 4.81 5.20 0.38 201.17 - 1.21 0.24 3.31*

13 log(INM) 0.92 -2.57 - - 0.12. 231.19 1.52 - - -

14 log(INM) 0.82 - - -0.81 0.04 240.90 - - 0.66 0.41

15 log(INM) 0.67 - -0.92 - 0.04 200.73 - 0.50 - 0.31

16 log(INM) 1.37 - 1.23 -2.07 0.07 201.03 - 0.35 0.73 -

17 INN 0.68 6.94 - - 0.24 232.36* 0.80 - - 3.23

18 INN 0.48 - - 13.11 0.40 231.76* - - 2.44** 6.63**

19 INN 0.60 - 2.30 - 0.31 202.12* - 1.35, - 3.91*

20 INN 0.50 - 1.40 7.99 0.36 201.72* - 0.74 1.09 3.03

21 log(INN) 0.10 0.14 - - 0.25 232.02* 1.08 - - 3.27

22 log(INN) 0.07 - - 0.17 0.29 231.35 - - 1.58 4.11*

23 log(INN) 0.13 - 0.05 - 0.28 202.40* - 0.32 - 3.37

24 log(INN) 0.11 - 0.01 0.12 0.30 201.91* - 0.09 0.67 2.33

Note: The equations were estimated with a constant which is not reported. A* and a ** indicate 95 and 99 percent significance levels, respectively, forthe t-values (shown below the corresponding regression coefficients) and forthe F ratio (shown below the squared multiple correlation coefficient).

The logarithm of the independent variables is used for the equations in the

lower panel.

21

C. Conclusions

The results from the regressions clearly indicate that conventional

trade theories can go a long way in explaining trade patterns in services.

Despite the protectionism from which trade in services suffers, a number of

economic factors do, indeed, emerge as determinants of comparative

advantage. On the one hand, performance in transportation services (freight

and passenger services) appears to be related to capital abundance. For

insurance services, performance seems, on the other hand, to hinge upon the

availability of human capital.i/ Location and economies of scale are also

important in certain instances. These findings indicate that economies that

are abundant in physical and human capital have a comparative advantage in

services.

The fact that differences in trade patterns among economies reflect

differences in factor endowments lends support to the "stages approach" to

comparative advantage recently put forward by Balassa (1979) for manufactured

goods. Indeed, it would suggest that, as developing economies accumulate

human and physical capital, they will gain comparative advantage in certain

types of services. However, one suspects that industrialized economies will

generally retain their prominence in services trade thanks to their

technological lead and their abundance of physical and human capital.

I/ Human capital also seems to be the main determinant for trade in totalprivate services (including non-merchandise insurance services). However,since they represent such a heterogeneous collection of services, theempirical results are not presented here. The lack of detailed dataprevents an estimation of determinants for the various sub-categories oftotal private services such as consultant/engineering services,construction services, banking services, management services, etc.

22

Comparative advantage need not be the same in multilateral and

bilateral trades.-/ Thus, developing economies at the upper end of the

spectrum -- that is, the newly industrializing economies (NICs) -- can at the

same time be net importers of services overall and net exporters of services

to other developing economies. Indeed, this group seems to have a dualistic

export structure: exporting (physical) capital and skill intensively to less

developed economies (LDCs) and products that have been produced by unskilled

labor intensively to more developed economies.2/

See Yoo (1978).

2/ This structure is readily observable for manufactured goods.

23

III. THE ROLE OF SERVICES IN THE DEVELOPMENT PROCESS

In the previous chapter, we found that abundance in physical and

human capital determines comparative advantage in services trade. This result

may in part explain why the United States has taken the lead in recent efforts

to liberalize trade (as well as foreign investment) in services, a lead that

the other members of the Organisation for Economic Co-operation and

Development (OECD) are following with great care. 'Among the developing

economies, only a few, those relatively well-endowed with capital, have shown

signs of interest in the service issue.

The purpose of this chapter is to show that, quite apart from the

comparative advantage question, services play a vital role in the growth

process and should, therefore, be of concern for the developing economies. In

section A, we will argue that a strong relationship exists between services

and the concepts of infrastructure and technology transfer, which give to

services their major importance. In section B, we analyze the pattern of

trade in capital goods and hypothesize a complementarity between trade in

technology-related services and trade in capital goods.

A. Services, Infrastructure, and Technology Transfer

The services that give rise to international transactions are, for

the most part, producer rather than consumer services. Indeed, with some

limited exceptions, services are traded in response to an intermediate rather

than to a final demand. Viewed in this fashion, services can be seen as

providing an essential link among economic agents, both domestically and

internationally, that enables the interdependent functioning of domestic and

world markets. In other words, many services (banking, communications,

transportation, etc.) are in fact services of infrastructure industries.

24

Nearly four decades ago, Rosenstein-Rodan (1943) stated that

infrastructure industries must be given priority during the early phase of

industrialization. His strategy thus called for a "big push" toward "balanced

growth" among various sectors of an economy .1 Although the discussion of

infrastructure by Rosenstein-Rodan was essentially limited to the closed-

economy case, the same theme was recently put forward in contributions to the

open-economy development literature. Thus, Little et al. (1970) and Baldwin

(1978) emphasize that the level and quality of the services of infrastructure

industries are among the main factors that determine the degree of success of

trade and development policies. They insist that, in some economies, the

development of various sectors has been handicapped by underprovision of

services.

Among the infrastructure industries, an important distinction can be

made according to the nature of investment they require. At one end of the

spectrum, the investment is essentially in physical capital (communications

and transportation). At the other end, the investment is mostly in human

capital (financial, professional, and technical services).Z! Although both

types of service industries require capital in their operation, only the first

one calls for social overhead capital.-' Except for the services of overhead

capital industries, which are characterized by externalities, economies of

scale, and immobility, the provision of serviees can be obtained either from

/ For a discussion, see Datta-Chaudhuri (1980).

2/ Although it would be convenient to deal only with the two polar cases,there are, obviously, cases of infrastructure industries located in themiddle of the spectrum (e.g., education and health).

3/ Transportation requires not only trucks and ships but also roads or ports.

25

domestic or foreign firms. In the case of services requiring human capital,

acquisition from abroad often represents a form of technology transfer.

According to Stewart (1979), "technology is knowledge - knowledge of

how to do and make useful things" (p. 1). Technology is transferred in

various forms, which can be classified as either direct or indirect

mechanisms. The former type (also sometimes referred to as "united" or

"unpackaged") includes:

a. Services of consultants

b. Services of construction and engineering firms

c. Training of manpower abroad

d. Capital goods.

The later type of transfer (also called "tied" or "packaged") consists of:

a. Foreign direct investments

b. License and patent agreements.

Thus, a number of services represent direct mechanisms of technology

transfer. Therefore, although the type of transfer mechanism itself depends

upon the industry and economy involved,i/ international transactions in these

services can probably be explained by the theories of foreign direct

investment recently put forward.2/

A number of economic and non-economic arguments can be made in favor

of indigenous production of infrastructure and technology services:

externalities, the need for suitable products and services and for appropriate

technology, and independence. It is easy to share these arguments, but harder

1/ See Stewart (1979), pp. 11-19.

2/ A recent survey of these theories is Dunning (1979).

26

to agree on a strategy to achieve the goal of local production. The solution

recommended here consists of two elements:

a. An economy-wide effort aimed at raising the level and quality of

infrastructure and technical skill

b. A selective policy toward import of services.

These two elements should be put into action simultaneously to reinforce each

other.

The above prescription follows the successful Japanese example,

which has also been adopted by Korea. Recently, Pursell and Rhee (1978) have

used a firm-level survey in order to analyze the role played by technology in

the export-oriented Korean development strategy.L/ Some of their findings are

worth summarizing here:

a. The economy has made a large effort to train its labor force,

both by setting up institutes at home and by sending nationals

to study or work abroad.

b. For the most part, the acquisition of foreign technology has

taken place through direct transfer mechanisms. Moreover,

Korea has concentrated its research and development effort in

industries for which it has a comparative advantage.

c. The previous two characteristics have allowed for rapid rates

of technological learning. In the field of services, the major

example of technological learning consists of construction and

engineering services which Korea has been exporting on a large

scale to the Middle East since 1973.!' Part of this learning

1/ See also Westphal, Rhee, and Pursell (1980).

2/ Asian Finance of July 15, 1980, reports that Korea has won 9.3% of MiddleEast construction/engineering contracts in 1979-80.

27

process was acquired through involvement in United States

military construction projects.

It is not surprising that developing economies are generally running

a deficit on services trade. Nor is this deficit necessarily a cause for

alarm. Rather it might be an encouraging sign that other sectors are being

expanded, requiring infrastructure and technology services. For instance, the

role of services in developing infrastructure and transferring technology is

seen in the large imports of services by economies in their early stage of

natural resource exploitation. Indeed, it is very much the same phenomenon

that caused the companies of the early British and Dutch colonial period to

engage in activities such as banking, trade, and transport, and which has

induced Norway to increase sharply its imports of various consultant services

associated with oil and gas activities.

However, developing economies should be able to compete effectively

in world markets as providers of services for which the progressive import-

substituting development strategy outlined above has been followed. In view

of the remarks made above, this possibility should essentially apply to

exports from the NICs to other developing economies. In this respect, Stewart

(1979) indicates that the process of technology transfer among developing

economies (often via services trade) is well engaged for a handful of them

(for example, Argentina, India, Korea, and Taiwan).

B. Trade in Capital Goods

As we have noted earlier, the category "other services" used in

chapter II constitutes a heterogeneous collection of items. Some of these

items are technology-related services, which the available data do not permit

us to isolate from unrelated services.

However, international transactions in technology-related services

are likely to be related to trade in capital goods, since both constitute

28

However, international transactions in technology-related services

are likely to be related to trade in capital goods, since both constitute

direct mechanisms of technology transfer. Thus, one can hope to learn

something about trade in these services by examining readily available data on

capital-goods trade. Using the definition of capital goods shown in Table A.3

of the appendix, United Nations data for 1975 were assembled to form the trade

matrix in Table 3.1 11 Some interesting findings that emerge from the table

are:

a. Trade among developed economies accounts for 45.7 percent of

world trade; trade among developing economies accounts for 2.4

percent; and trade between the two groups for 31.0.

b. Although developing economies as a whole acquire 6.7 percent of

their imports of capital goods from other developing economies,

this proportion is 3.6 percent for the NICs and 8.1 percent for

the other developing economies.

c. Although the NICs have an overall deficit in capital goods,

they have a surplus with their partners in the developing

world.

d. The developing-economy markets account for about 50 percent of

the NICs' exports of capital goods to the world.

In summary, the industrialized economies dominate the world exports

of capital goods, with the developing economies providing a large import

market. Also, developing economies acquire their capital-goods imports mostly

from the industrialized world, but low-income developing economies import a

sizable share of capital goods from their partners in the developing world --

essentially the NICs.

j/ Generous help was provided by Oli Havrylyshyn in this process.

29

Table 3.1

TRADE IN CAPITAL GOODS, 1975

(in billions of US$)

Value of Imports from Source to:

Source of Other All All LDCs & OtherExports NICs a/ LDCs LDCs DCs DCs Economies World

NICs 0.5 2.1 2.6 1.9 4.5 0.8 5.3

Other LDCs 0.2 1.1 1.3 0.9 2.2 0.2 2.4

All LDCs 0.7 3.2 3.9 2.8 6.7 1.0 7.7

All DevelopedEconomies (DCs) 17.8 33.3 51.1 75.4 126.5 23.8 150.3

LDCs and DCs 18.5 36.5 55.0 78.2 133.2 24.8 158.0

Other Economies 0.8 3.2 4.0 1.2 5.2 1.8 7.0

World 19.3 39.7 59.0 79.4 138.4 26.6 165.0

a The NICs include Argentina, Brazil, Greece, Hong Kong, Israel, Korea, Mexico,Portugal, Singapore, Spain, and Yugoslavia. Taiwan is not included in the table.

30

Moreover, additional data indicate that capital goods have become an

important export item for the NICs. Indeed, in 1975, capital goods

represented about 40 percent of their manufactured exports to developing-

economy partners and 13 percent of equivalent exports to industrialized

partners.-/

Clearly both high- and low-income developing economies acquire most

of their capital goods from the industrialized world. In exchange for these

(physical and human) capital-intensive goods, developing economies export

mostly labor-intensive manufactures to the rich economies. However, the NICs

also export large amounts of capital goods to low-income developing

economies. This indicates again that, besides the transfer of technology that

takes place from the North to the South, there is some degree of transfer from

the rich South to the poor South, presumably resulting, in part, from the

adoption of technology previously acquired from the North.

/ Obviously, the type of capital goods may differ in each case. For further andinsightful remarks on capital goods trade, see Havrylyshyn and Wolf (1981).

31

IV. SUMMARY OF FINDINGS

1. Conventional trade theory applies not only to goods but also to services.

Despite protectionism, from which trade in services suffers, a number of

economic factors do, indeed, emerge as determinants of comparative

advantage.

2. The main factors shaping comparative advantage in services trade are the

availability of physical and human capital.

3. Although the industrialized economies, with their abundance of physical

and human capital, usually enjoy a strong competitive edge in services

trades, developing economies that are successful in accumulating capital

have good prospects for exporting services. Nevertheless, for most

developing economies, emphasizing the export of services does not appear

to be a realistic prospect.

4. Because many services depend on the development of infrastructure or

technological capacities, the acquisition of such services will often be a

precondition for economic growth. This acquisition will have a dynamic

impact on trade by changing capital availability. Acquisition of services

can be done either through imports or local production. Presumably,

imports will generally be necessary, but several arguments favor

progressive import substitution.

32

APPENDIX: INPUT DATA FOR THE EMPIRICAL ANALYSIS

AND FOR THE DEFINITION OF CAPITAL GOODS

33

Table A.1:FIRST SET OF INPUT DATA USED FOR ECONOMETRIC ANALYSIS, 1977

ECONOMY DIS EDS EDT FR GDP INM INN INT

Algeria 0 38.2 3.2 104.5 19554 0.19 n.a. n.a.Ivory Coast 0 17.6 1.3 n.a. 6265 n.a. n.a. n.a.Kenya 0 44.6 1.7 144.9 4590 0.63 n.a. n.a.Morocco 0 30.8 2.6 133.4 10397 0.09 n.a. n.a.Nigeria 0 7.6 0.4 121.6 40104 0.04 n.a. n.a.Senegal 0 n.a. 1.6 n.a. 1944 n.a. n.a. n.a.Sudan 0 20.4 1.3 135.3 6005 0.20 n.a. n.a.Tunisia 0 41.2 4.1 n.a. 5007 n.a. 0.50 n.a.Israel 0 n.a. 22.1 27.3 14703 0.91 0.74 0.75Egypt 0 58.4 12.6 102.5 13245 n.a. n.a. n.a.

Sri Lanka 0 n.a. 1.1 116.7 2691 0.08 0.47 0.14Taiwan 0 n.a. n.a. 48.3 21497 0.45 n.a. 0.33India 1 n.a. 5.3 109.0 104110 0.55 0.34 0.47Indonesia 0 29.8 2.2 138.3 45175 n.a. n.a. n.a.Korea 0 102.3 9.4 37.7 35377 0.81 0.93 0.91Malaysia 1 n.a. 3.2 n.a. 13108 n.a. n.a. n.a.Pakistan 1 28.9 1.6 107.9 15096 0.17 n.a. n.a.Philippines 0 55.6 18.1 102.7 20985 n.a. n.a. n.a.Singapore 0 84.4 10.2 68.3 6542 0.35 n.a. n.a.Thailand 1 30.4 3.2 131.4 19265 0.15 n.a. n.a.

Argentina 0 52.2 24.4 n.a. 52121 n.a. n.a. n.a.Bolivia 0 26.2 10.6 122.8 3442 n.a. 0.62 n.a.Brazil 0 15.3 12.0 37.9 164163 0.62 0.73 0.71Chile 0 47.7 12.9 n.a. n.a. n.a. n.a. n.a.Colombia 0 68.5 7.9 n.a. 19459 n.a. 0.67 n.a.Ecuador 0 62.5 24.7 n.a. 6456 n.a. 0.77 n.a.Mexico 0 54.7 9.1 n.a. 74191 n.a. 0.86 n.a.Peru 0 62.6 15.0 n.a. 12554 n.a. 0.39 n.a.Uruguay 0 n.a. 11.6 n.a. 4194 n.a. n.a. n.a.Venezuela 0 49.9 19.6 n.a. 35596 n.a. 0.87 n.a.

United States 0 95.3 52.4 n.a. 1878880 n.a. n.a. n.a.United Kingdom 0 89.2 12.6 n.a. 244500 n.a. n.a. n.a.Austria 0 102.5 14.0 35.9 47952 1.00 0.84 0.85Belgium 0 86.8 16.3 40.6 79205 0.51 0.92 0.87Denmark 0 57.9 21.7 n.a. 46016 n.a. n.a. n.a.France 0 93.7 19.7 42.4 380653 1.74 0.95 1.15Germany 0 63.3 13.5 35.2 516194 0.48 n.a. n.a.Italy 0 90.6 17.5 63.1 194045 0.74 0.68 0.70Netherlands 0 97.5 21.1 61.3 102585 n.a. n.a. n.a.Norway 0 82.4 16.7 9.9 35592 n.a. n.a. n.a.

Sweden 0 64.9 19.9 45.7 78266 0.41 0.49 0.46Switzerland 0 69.3 10.1 21.5 60591 n.a. n.a. n.a.Canada 0 113.1 35.8 n.a. 200244 n.a. 1.16 n.a.Japan 1 82.9 21.1 45.9 691140 0.65 0.98 0.91Finland 0 91.6 16.4 59.8 30167 n.a. n.a. n.a.Greece 0 75.0 12.3 47.5 26239 n.a. 0.29 n.a.Portugal 0 80.0 8.4 72.6 16255 0.15 0.46 0.25Spain 0 89.6 15.2 39.0 116249 0.51 0.91 0.73Turkey 0 n.a. 8.1 127.3 47789 0.28 n.a. n.a.Yugoslavia 0 108.3 18.5 n.a. 45524 n.a. n.a. n.a.

Australia 1 82.5 20.4 115.5 100063 n.a. n.a. n.a.New Zealand 1 116.9 .24.4 101.8 14212 n.a. 0.63 n.a.

n.a. Not available.

34

Table A.2SECOND SET OF INPUT DATA USED FOR ECONOMETRIC ANALYSIS, 1977

ECONOMY KL M MM OS PS PTR RD TR

Algeria 49.1 5.31 77.3 n.a. 0.22 3.4 0.81 0.18Ivory Coast 24.9 1.30 72.2 0.14 n.a. n.a. 0.81 n.a.Kenya 16.9 0.96 67.6 n.a 1.23 n.a. 3.14 6.44Morocco 8.9 2.40 63.8 n.a. 1.09 4.0 n.a. 3.49Nigeria 6.7 8.28 83.4 n.a. 0.16 n.a. 0.84 0.15Senegal 8.4 0.60 n.a. n.a. n.a. n.a. n.a. n.a.Sudan 10.4 0.55 n.a. n.a. n.a. 2.5 1.73 n.a.Tunisia 20.0 1.37 68.3 n.a. 1.29 4.4 n.a. 5.31Israel 282.8 4.74 65.2 0.83 3.12 19.1 10.11 2.49Egypt 10.5 3.52 64.8 n.a. n.a. 4.4 5.70 n.a.

Sri Lanka 4.8 0.55 33.0 n.a. 1.15 4.0 2.37 9.33Taiwan 19.3 7.11 57.4 0.87 n.a. *5.5 n.a. n.a.India 4.0 5.30 43.3 1.48 n.a. 2.7 4.31 n.a.Indonesia 8.4 6.40 66.9 n.a. n.a. 2.1 n.a. n.a.Korea 32.3 9.01 52.4 n.a. 3.29 3.1 6.32 3.60Malaysia 18.7 3.82 63.7 n.a. 1.44 4.5 n.a. 0.59Pakistan 4.5 2.13 59.6 n.a. n.a. 3.0 0.99 n.a.Philippines 16.2 3.35 59.2 0.74 0.11 5.3 1.54 4.13Singapore 54.1 8.29 53.5 n.a. n.a. 9.5 0.32 n.a.Thailand 10.8 3.63 63.4 1.14 0.55 2.6 n.a. 1.44

Argentina 5.9 3.25 68.8 n.a. 0.88 7.5 2.97 1.21Bolivia 8.4 0.55 n.a. 0.48 0.69 5.9 n.a. 0.78Brazil 27.9 10.30 52.2 0.57 0.22 4.8 1.06 0.24Chile 0.4 1.68 n.a. n.a. n.a. 7.1 n.a. n.a.Colombia 14.6 1.69 73.6 n.a. 1.57 4.5 0.54 1.25Ecuador 11.4 1.65 87.1 n.a. 0.64 5.2 1.60 0.70Mexico 35.4 4.49 79.6 n.a. 0.84 6.2 n.a. 1.79Peru 10.7 1.85 64.4 n.a. 0.44 7.4 2.03 3.10Uruguay 0.5 0.58 50.7 n.a. n.a. 7.2 0.85 n.a.Venezuela 64.8 8.86 83.6 n.a. n.a. 8.6 0.64 n.a.

United States 193.9 129.90 52.3 n.a. 0.50 14.7 n.a. 0.83United Kingdom 96.0 50.64 56.5 n.a. 1.97 11.1 3.92 1.98Austria 134.3 11.7 73.3 n.a. n.a. 9.5 2.13 n.a.Belgium 142.1 29.41 62.7 1.81 0.91 11.1 8.11 0.62Denmark 173.5 10.90 64.0 n.a. n.a. 12.2 5.94 n.a.France 168.8 54.73 55.0 1.61 n.a. 11.4 16.06 n.a.Germany 171.6 80.94 56.2 0.83 0.90 9.8 18.08 0.35Italy 78.4 37.70 42.4 1.24 3.43 7.3 8.29 5.33Netherlands 137.7 34.15 58.1 1.35 n.a. 13.4 18.30 n.a.Norway 206.7 11.36 76.1 0.58 n.a. 15.8 12.14 n.a.

Sweden 217.0 15.98 67.6 0.89 1.61 22.9 15.80 0.35Switzerland 233.2 15.15 72.1 n.a. n.a. 12.1 22.20 n.a.Canada 184.2 34.46 76.9 n.a. n.a. 14.0 8.50 n.a.Japan 124.7 53.12 18.8 0.66 0.41 7.1 16.20 0.20Finland 147.8 6.07 60.4 1.08 1.70 16.9 10.69 0.99Greece 62.2 4.87 68.2 n.a. 0.11 5.7 1.81 5.99Portugal 23.5 3.88 54.0 1.03 2.21 3.6 2.61 2.97Spain 60.4 14.18 43.0 0.70 4.07 5.5 2.32 7.78Turkey 15.6 4.42 67.1 n.a. 1.58 4.0 7.52 0.77Yugoslavia 57.0 7.03 66.1 n.a. n.a. 7.6 7.47 n.a.

Australia 165.8 10.44 78.7 n.a. 0.41 10.1 9.34 0.61New Zealand n.a. 2.42 71.5 n.a. n.a. 14.4 8.55 n.a.

n.a. Not available.

35

Table A.3: DEFINITION OF CAPITAL GOODS

Standard International Trade Classification

(SITC) Rev. 1 Codes

692

695 minus 695.24

698.2

71 minus 717.3, 719.4

722

723

724.91

724.92

726

731

732 minus 732.1, 723.8, 732.9

733 minus 733.1, 733.4

812.1

821.02

861.3 minus 861.31

861.7

861.8

861.9

864.2

894.5

895.11

36

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Datta-Chaudhuri, M. 1980. "Infrastructure and Location," in Policies forIndustrial Progress in Developing Countries, ed. J. Cody et al. Oxford:Oxford University Press.

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Dreze, J. 1960. "Quelques Reflexions Sereines sur l'Adaptation de l'IndustrieBelge au Marche Commun," Comptes Rendus des Travaux de la Societe Royaled'Economie Politique de Belgigue (December).

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Havrylyshyn, O., and M. Wolf. 1981. "Trade among Developing Countries: Theory,Policy Issues, and Principal Trends." World Bank Staff Working Paperno.479. Washington, D.C.: World Bank (August).

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COMPANION PAPERS IN THIS SERIES

No. TITLE OF PAPER AUTHOR

449 Policy Experience in Twelve Less Developed Countries B. Balassa

470 Industrial Country Policy and Adjustment to Imports J.M. Fingerfrom Developing Countries

471 The Political Structure of the New Protectionism D. Nelson (consultant)

472 Adjustment to External Shocks in Developing Countries B. Balassa

473 Food Policy Issues in Low-Income Countries E. Clay (consultant)

474 Energy, International Trade, and Economic Growth A. Manne (consultant)

475 Capital-Importing Oil Exporters: Adjustment Issues A.H. Gelband Policy Choices

476 Notes on the Analysis of Capital Flows to Developing R.C. Bryant (consultant)Nations and the 'Recycling' Problem

477 Adjustment Experience and Growth Prospects of the F. JaspersenSemi-Industrial Countries

478 Trade Policy Issues for the Developing Countries I. Frank (consultant)in the 1980s

479 Trade among Developing Countries: Theory, Policy 0. HavrylyshynIssues, and Principal Trends (consultant)

M. Wolf

480 Trade in Services: Economic Determinants and A. Sapir (consultant)Development-Related Issues E. Lutz

481 International Migrant Workers' Remittances: Issues G. Swamyand Prospects

482 Private Bank Lending to Developing Countries R. O'Brien (consultant)

483 Development Prospects of the Capital Surplus R. HablutzelOil-Exporting Countries

484 Private Capital Flows to Developing Countries and A. FlemingTheir Determination

485 International Adjustment in the 1980s V. Joshi (consultant)

- 2-

No. TITLE OF PAPER AUTHOR

486 Adjustment in Low-Income Africa R. Liebenthal

487 A Comparative Analysis of Developing Country C. WallichAdjustment Experiences in the 1970s: Low-IncomeSouth Asia

488 Developments in and Prospects for the External N. HopeDebt of the Developing Countries: 1970-80 andBeyond

489 Global Energy Prospects B.J. ChoeA. LambertiniP. Pollak

I 1

r 7 HG3881.5 .W57 W67 no.480 c.3I Sapir, Andrel'.I Trade in services : economic

determinants and j