Botox and bridges: South African exports of health and construction services

Abstract

Until relatively recently, policy makers and academics directed little attention to trade in services. This has changed in recognition of the increasing role of services in economic growth, trade and investment. In World Trade Organisation (WTO) and other trade negotiations, discussions on services have become as important a. s., if not more important than, those on trade in goods. Despite the growing contribution of services to exports and economic development, trade in services remains highly regulated, especially in developing countries. This article outlines the main methodological and policy challenges facing developing countries, such as South Africa, in trying to understand the economic implications of service liberalisation. This is achieved largely by means of two case studies of the construction and health services sectors. While the findings are preliminary and the policy conclusions speculative, the article provides some examples of the key analytical difficulties that arise in services analysis. More importantly, it highlights the need for the government to develop integrated service sector strategies that recognise the contribution of trade to development policy and the impact of domestic regulations on trade.

1. Introduction

Until the late 1970s, most services were regarded as non-tradables and largely ignored by international economists. Experience has shown us otherwise. Over the last few decades, growth in trade in services has outstripped growth in trade in merchandise goods. By 1997, cross-border trade in services reached US$1,3 trillion, approximately 20 per cent of global trade. Including the sales of affiliates to multinational corporations, this figure rises to above US$2 trillion (Hoekman & Mattoo, 2000; Sauve & Stern, 2000). These trends, coupled with pressure from services practitioners, convinced governments and economists to review their approach to trade in services. But it was only after the launch of the Uruguay round of the General Agreement on Tariffs and Trade (GATT) in 1984 that trade economists began to devote significant attention to this sector.

The service sector is particularly important for middle-income developing countries, accounting on average for more than 50 per cent of GDP and employment (Sauve & Stern, 2000). In these countries, access to efficient and globally competitive service inputs is regarded as a key source of productivity gains (Grubel & Walker, 1989) and a precondition for economic growth (Stephenson, 1999). Developing countries are also becoming more active exporters of services, and their share of world service exports increased from 22 per cent in 1991 to 29 per cent in 1997 (Chadha, 2000). Critically, this trade is no longer restricted to traditional areas of comparative advantage, such as tourism. A significant number of developing countries have emerged as competitive exporters of a much wider range of services, including construction services (Korea), finance (Mauritius), computer software (India) and health (Cuba). Suppliers in some countries have also developed niche service industries in areas such as film production and advertising (Stephenson, 1999).

Despite the growing contribution of services to economic development and growth, trade in services remains highly protected. This is especially true within developing countries: Hoekman (1995) shows that high-income countries have made about half of all the possible GATS (General Agreement on Trade in Services) commitments, compared to one-sixth for developing countries. It follows that developing countries could derive significant efficiency gains from service liberalisation, and recent empirical analyses suggest that these gains could be much greater than those that might arise from further goods liberalisation (Brown, 1996). However, developing countries remain suspicious for three main reasons: they believe that most of the benefits of freer trade in services will accrue to the world's industrialised nations; that further negotiations in this area will distract from discussions on issues of importance to developing countries, such as agriculture; and that globalisation might undermine the provision of key social or infrastructure services to the poor (Bhagwati, 1995; Streeten, 1999).

These concerns are not baseless, but are in most cases overstated. This is because there is insufficient information available to assess the real costs and benefits of increased trade and competition in services. It is therefore difficult for developing countries to identify and express their interests, domestically and internationally. GATS services negotiations resumed in mid-2002 and developing countries need to respond to the vociferous demands from the North for further liberalisation. A number of bilateral and regional services agreements are also being considered. Without appropriate information and analysis, developing countries are likely to remain reluctant participants in these processes and progress will be slow.

This article outlines some of the main methodological and policy challenges facing developing countries, such as South Africa, in trying to understand the economic implications of service liberalisation. This is achieved largely by means of two case studies of the construction and health services sectors. While the findings are preliminary and the policy conclusions speculative, the article provides some examples of the key analytical difficulties that arise in services analysis. More importantly, the article highlights the need for the government to develop integrated service sector strategies that recognise the contribution of trade to development policy and the impact of domestic regulations on trade.

The article begins with a review of South African trade in services. Data are scarce and generally unreliable and this section is therefore short. Section 3 describes the main principles and problems of the GATS and EU approaches to trade in services, and in Section 4 an alternative ‘economic impact’ framework for analysing trade in services is proposed. This new approach is then applied in Sections 5 and 6 to the South African health and construction service sectors. The main conclusions from these case studies are summarised in Section 7.

2. South African trade in services

South Africa's service exports have grown strongly over the last few decades, from a low of 9 per cent of total exports in the mid-1970s to around 20 per cent today. In part, this reflects the modest performance of South African merchandise trade. However, as illustrated in Figure 1, a significant shift took place in the 1990s. In the immediate post-sanctions period (1994–8), service export volumes grew particularly fast, at an annual average rate of 13 per cent and more than twice the growth rate of exports of merchandise goods. The recent rise in the contribution of service exports to total trade can therefore be attributed to a surge in service activity, not a slowdown in merchandise trade.

Figure 1: Growth in merchandise and service exports (by volume) Data source: South African Reserve Bank.

Although South Africa remains a net importer of services, the overall deficit has declined sharply over the last few decades and there is a strong possibility that the country will become a net exporter of services in the future. Travel and transport services dominate services trade, but do not explain the rapid rise in South African service exports. Instead, South Africa's potential as a competitive exporter of services lies in a much wider range of ‘other’ services (Figure 2). The relative trade balance in this subsector has risen sharply from a deficit of 50 per cent of total trade in the mid-1980s to a small surplus over the latter half of the 1990s. It is this elusive ‘other’ category that is largely accountable for the significant improvement in South Africa's net services position over the last few decades, but the SARB is unable to provide more detailed information on what constitutes South African trade in this subsector.

Figure 2: Relative trade balance by service category Data source: South African Reserve Bank.

In the absence of more or better data, further economic analysis of trade in ‘other services’ is difficult, if not impossible. Much more can be gained from a few comprehensive case studies of some specific South African service sectors. In particular, the health and construction service industries seem deserving of further study. The former represents South African exports of professional services, and the latter technical services. Whereas the construction sector is generally open, in South Africa and abroad, trade in health services remains highly protected. Moreover, in both sectors, anecdotal evidence suggests that South Africa is already a net exporter. The main purpose of these case studies is to obtain a better understanding of South African trade in ‘other services’ and to begin to identify the country's export and import interests in these sectors.

3. Analytical issues: Understanding trade in services

Services are extremely complex, much more so than goods (Sapir & Winter, 1994). This makes it difficult to apply the conventional analytical tools that are used to study merchandise trade. Consequently, a number of unique analytical frameworks have been developed to explain how trade in services takes place.

3.1 The GATS approach to analysing trade in services

The most well-known and commonly used framework for analysing trade in services is the ‘four modes’ approach. This is based on a theoretical exposition first proposed by Sampson & Snape (1985) and forms the basis of the services schedule used in GATS negotiations. In short, it differentiates between four modes of delivery: cross border supply, consumption abroad, commercial presence and the movement of natural persons. The design and usefulness of this particular approach is illustrated below, using a number of ‘real world’ examples from South Africa.

3.1.1 Cross-border trade (GATS mode 1)

Some services can be traded across borders and do not require the close proximity of the producer to the recipient of the service. Until recently such services were rare; but advances in audio and video communications technology have had a dramatic impact on cross-border trade. This has not only facilitated international trade in a much wider range of services but also contributed towards the global outsourcing of certain business functions. A notable example is the emergence of international call centres, especially in India and the Philippines. However, South African companies have also benefited from this trend and the country already handles inquiry calls for the UK telecommunications provider BT (British Telecommunications), resource management services for the UK-based Budget Insurance, billing queries for an American media group, and a customer helpdesk for a US-based credit union. The South African Government has set a target of 100 000 call centre seats by 2008, or about US$5 billion in export revenues (‘Global players expand locally’, Business Day, 14 July 2004, p. 15).

3.1.2 Consumption abroad (GATS mode 2)

The other three modes depend on the movement of the factors of production, the receiver of the services, or both. In mode 2, this involves the movement of people (or organisations) across borders to consume a service provided in a foreign country. The most common example is tourism, and South Africa is a net exporter of tourism services. The total number of foreign tourists visiting South Africa, and consuming domestic services, was estimated at more than six million in 2003 (South Africa, 2005). More recently, Cape Town has emerged as a popular destination for film productions and attracts around R2 billion a year through the consumption of domestic film services. Exports are expected to grow further with the development of a R400 million film studio in the Cape Province and with the introduction of industry-specific tax incentives from the South African Government (‘Unglamorous Joburg seeks starring role alongside Cape in film industry’, Business Day, 2004, online).

3.1.3 Commercial presence (GATS mode 3)

Many services are delivered through purchasing or establishing operations in foreign countries. There are three main reasons for this form of trade. First, regulations may prohibit any other form of trade. This is one reason why so many South African banks have established permanent operations abroad. Secondly, it may be technically or practically difficult to trade outside of a permanent and offshore operation: Erinys International, a South African security company, was awarded a multimillion rand contract to protect oil resources in Iraq (‘SA company to protect Iraqi oil’, Sunday Times, 2003, online). This clearly cannot be conducted by distance. Finally, it may make good commercial sense to establish a dedicated facility for marketing and performing services within key markets. The South African food retailer Shoprite operates 66 supermarkets and 12 furniture stores in 13 African countries outside South Africa. Locating close to their target markets enables such retailers to ‘increase customer traffic’ and source products from producers in these markets (‘Massmart, Shoprite open stores in Ugandan capital city’, Business Day, 25 June 2004, p. 14).

3.1.4 Temporary movement of natural people (GATS mode 4)

The final mode of supply is through the temporary movement of people. Current levels of international labour movement are exceptional. There were over 50 million foreigners living in OECD (Organisation for Economic Cooperation and Development) countries in 1996 (Solimano, 2001) and 175 million people living outside their country of birth in 2000 (United Nations, 2000). The increase in the global movement of people can be attributed to several factors: skills have become increasingly interchangeable, job information more readily available, travel and communication more affordable, and international recruitment firms much more aggressive (Stern & Szalontai, 2004). Certain South African professionals are particularly mobile: in Australia, there is strong demand for South African metallurgists, mining engineers and geologists. Some settle permanently in Australia, but many are on temporary assignments and do return (‘Australia offers openings for SA mining experts’, Business Day, 2 August 2004, p. 12).

Capital flows and multinational corporations extend well beyond national borders and have also contributed to the integration of global labour markets, particularly among high skilled workers. As South African companies expand internationally and establish a direct presence in foreign markets, so too the temporary movement of South African employees to these countries has increased. One would certainly expect the foreign operations of South African banks, retailers, and telecommunication companies to be managed by South Africans.

3.2 Problems with the GATS approach

The GATS framework enables an extensive description of the ways in which services can be traded, and provides some indication of the main regulatory barriers to this trade. As such, it provides a reasonable negotiating platform for multilateral services negotiations. But it falls short as an analytical tool for two main reasons.

First, the GATS schedules of member countries are supposed to reveal the key limitations to market access and national treatment on international trade in services, but commitments are generally low, especially in developing countries, and the GATS can provide for only a basic and partial account of actual impediments to trade. The GATS framework is particularly weak in dealing with the effects of domestic regulations (Low & Mattoo, 2000). These affect not only imports but also exports. Many such regulations and standards are regarded as ‘necessary’ for public policy purposes, and do not need to be listed in GATS schedules as long as they are administered in a ‘reasonable, objective and impartial manner’ and are not ‘more burdensome than necessary to ensure the quality of the service’ (WTO, 1994). Clearly, to obtain a full account of the main constraints on South African exports of heath and construction services more information is required, and from a wider range of sources.

Secondly, the GATS framework has been designed to reveal and categorise the main barriers to trade in services. It does not try to show the differential economic effects of services trade on the home economy, and is therefore unable to provide developing countries with sufficient information to identify and prioritise national interests and liberalise services in a way that will contribute most to exports and economic development. To do this, the GATS framework must be supplemented with an array of supporting analyses. Some ideas are explored in the following section.

4. Assessing the economic impact of trade in services

Service liberalisation entails the removal or relaxation of domestic and foreign regulatory controls, rather than the simple reduction of border tariffs. To the extent that such reforms open countries to greater trade and competition, they should lead to high welfare and efficiency gains. In GATS modes 1 and 2 this seems to be the case. The gains from trade are similar to those arising from cross border trade in goods, but in GATS modes 3 and 4 the economic effects can differ and might be negative.

As with goods, changes in trade policy in one sector can have spin-off and sometimes different effects in other services and goods sectors, but because of the high degree of interdependence between services and goods, these effects are particularly important in evaluating the benefits of services trade. A common example is air traffic – liberalisation of this sector may have an adverse effect on transport receipts, but boost tourism significantly. Similarly, the spread of South African retail firms across Africa generates significant service receipts but has also contributed to a rise in goods exports to these countries (DBSA, 2003).

There are also some service-specific types of effect. Mattoo et a. l. (2001) suggest two ways in which service liberalisation can differ from that of goods liberalisation, particularly in modes 3 and 4. First, because trade in these modes requires the proximity of producer and consumer, liberalisation should lead to the movement of the factors of production (capital and labour) from one country to another. Thus, exports not only impact on the scale of production in the exporting country but can also raise the scale of economic activity in the importing country. Moreover, when capital and skills move across borders, the possibilities for knowledge and technology transfers to the importing country are much higher than those that arise from importing goods.

Secondly, whereas most barriers to trade in goods are encountered at the border and therefore discriminate against foreign producers, most barriers to trade in services arise from domestic regulations and are usually applied equally to domestic and foreign producers (i.e. limitations on market access are more prevalent and severe than those on national treatment). Restrictions on national treatment would have a similar effect to tariffs or quotas on goods, either raising the cost or effectively prohibiting foreign provision, but the benefits of liberalisation would also depend on market access conditions. Removing discriminatory restrictions on foreign providers, while maintaining severe restrictions on market access, would have little impact on domestic and foreign competition.

Thus, unlike goods liberalisation, which prioritises barriers to national treatment, the focus of service liberalisation is on the removal of barriers to both domestic and foreign competition. The net effect on domestic output and employment is therefore ambiguous and depends on the competitiveness and response of both domestic and foreign service producers. If domestic service providers are uncompetitive and are replaced by foreign firms, then some employment in the importing country may be lost to labour from the exporting country; but if the local industry is internationally competitive and its size restricted by domestic barriers to entry, then liberalisation may lead to a reallocation of resources to service activities, and national employment may rise (Mattoo et al., 2001).

4.1 The gains from exports

South Africa exports a wide range of services to both developed and developing countries. The benefits to importing countries and the exporting firm are obvious, but does the South African economy gain from exporting scarce skills and capital abroad? It is possible to derive five main criteria for assessing the benefits of service liberalisation in the two case studies: first, exports might create employment in South Africa; secondly, service exports might generate complementary exports in other service or goods sectors; thirdly, exports should generate foreign exchange; fourthly, South Africa might gain new knowledge and skills from exporting; and, finally, exports might help domestic firms achieve economies of scale. These benefits can differ markedly by sector, mode and export destination.

4.2 The gains from imports

Like tariffs on goods, regulations or restrictions on services can be expected to have adverse welfare effects. They create a ‘wedge’ between the domestic price and foreign price of the service. Empirical work supports this contention (Mattoo et al., 2001). But there are additional costs. Access to low cost and high quality services are critical determinants of international competitiveness – for goods and other services. If quality inputs cannot be obtained domestically at the international price, or are available in short supply, then the cost to the domestic economy is particularly high.

The benefits of service liberalisation can therefore be widespread: supply should increase, prices should fall, and consumer choice should be that much wider. In many service sectors new entrants inject significant new capital and infrastructure into the domestic economy. Increased competition from abroad can also have indirect benefits. Domestic companies might learn from the techniques or technology of foreign entrants and new skills may be transferred to local employees and clients. The likely extent of these gains in the health and construction sectors is described in the following two case studies.

5. South African trade in health services

Conditions in the South African private sector support exports of health services. Doctors are well-trained, highly specialised and have significant spare capacity. Similarly, there is a growing number of private sector beds available within a small and stagnant domestic market. Although geographically far from most industrialised markets, South Africa is in the same time zone as Europe and has strong cultural links, particularly to England. This has contributed to a steady in-flow of health tourists. The country is also the largest and most advanced medical centre in the region and attracts significant numbers of patients from neighbouring and other African countries.

More recently, South African hospital groups have won major tenders to provide staff and services to the UK National Health Service. Netcare, South Africa's largest hospital group, is managing a R10 million cataract facility in an NHS hospital in Lancaster and conducted 900 operations in 2002, using 45 South African personnel. It will also undertake 12 000 ear, nose and throat procedures in Middlesex, 300 hip and knee replacements in Southport and 1000 orthopaedic procedures in Gosport. In terms of these contracts Netcare sends teams of medical personnel from South Africa for fixed and short-term periods in the United Kingdom. These personnel are then prohibited from employment with the NHS for a period of two years. This helps the company to retain skilled staff in South Africa (Netcare, 2004).

At the same time, the South African public health sector suffers from serious inefficiencies, shortages of staff and financial resources and a scourge of disease. Exports may have raised the revenues of private doctors and clinics, but they have contributed little or nothing to the public sector. Moreover, the outflow of doctors and nurses from the public to private sector, and from domestic to foreign care, has not been matched by imports of health professionals and services from abroad. The government has responded to these problems with regulations that seek to retain resources in the South African public sector. These regulations will, by design, restrict private exports and constrain imports.

5.1 Economic impact

South Africa has experienced a rise in health exports and South African health-care companies are increasingly active abroad. Improved access to priority export markets should contribute to even stronger export growth, but the net effect on the economy and society is unknown and can differ significantly by mode. Is it possible to grow trade in health services without detracting from South Africa's social obligations? And, if s. o., what is the optimal mix of exports and imports for economic and social development and how can service liberalisation contribute? To answer these questions, a better understanding of the economic implications of different kinds of trade is needed, as is a comprehensive account of all domestic and international barriers to key exports and imports.

5.1.1 The gains from exports

In this section the gains from exporting services are broken down into five main types of benefits: employment, complementary exports, foreign exchange, knowledge transfers and economies of scale. In the health sector, the greatest opportunity for job creation is probably through the subcontracting of diagnostic, data or other auxiliary services to South Africa-based service centres. OECD health expenditure is immense and South African providers could also achieve significant economies of scale from servicing a small share of this market. Consider the case of Discovery Health, South Africa's largest health insurance scheme, which launched a managed health scheme in the United States (Destiny Health). In 2003 the company decided to transfer all back-office support functions from their operations in America to Discovery Health in South Africa. They are also looking to use their South Africa-based expertise and back office to enter the UK market (‘SA-style health and wellness for Britain’, Sunday Times, 8 August 2004, p. 3). The benefits of this arrangement are explained in more detail in the company's annual report:

Utilising excess capacity in Discovery's operational infrastructure, Destiny Health has been able to take advantage of the South African operations, benefiting from significant cost savings associated with its efficiencies of scale. This allows Destiny Health to operate at a fraction of the cost of its competitors. Claims and new business applications are scanned and requests for quotes are collected during the Chicago working day. The relevant files are transferred from Destiny Health's systems in time for the South African working day during the course of which the respective processing, capturing and quotes are completed, so that the completed work is ready and waiting on Chicago's systems at 08:00 the following morning. This 24-hour turnaround time translates into impressive efficiency and significant cost savings for the US-based operation. (Discovery Health, 2002)

Health tourism (consumption abroad) has proven popular and generates significant spin-off benefits for the hospitality industry. Its potential in Europe and America may be limited as there is a finite number of people willing and able to travel long distances for health care, but possibilities for further growth in Africa are immense. Private patients from Africa are likely to seek more complex elective or emergency surgery in South Africa (basic health care is readily available at home), probably paying premium rates and thereby helping to sustain economies of scale in this subsector.

South Africa's largest hospital groups have established a presence in the United Kingdom and in neighbouring countries. Individual doctors (or networks of doctors) have also established offices abroad, particularly in the United Kingdom. In all these examples, the direct employment, income and knowledge gains from establishing a foreign operation are probably moderate and a significant proportion of turnover will go towards covering the cost of administration and equipment abroad. Instead, most of the benefits emerge from delivering additional health services to foreign patients, largely through mode 4. Netcare bring teams of South African doctors and nurses its operations in the United Kingdom to deliver specific health-care services, from which it derives most of their foreign income.

South African doctors and nurses working abroad, directly or through Netcare contracts, can generate significant additional work and income for themselves. They also gain new knowledge and techniques from working in more advanced healthcare markets, such as the United Kingdom and United States. As long as this work is temporary, then South Africa also benefits when they return; but many health-care workers do not return to South Africa. Remittances are likely to be small and the net loss to South Africa relatively large.

The full range of benefits that might emerge from exporting health-care services are summarised in Table 1. This table is derived from anecdotal evidence and is highly qualitative, but it does help to show where South Africa's export interests might lie and how these can differ significantly by mode. For example, relatively more jobs are likely to be created (or sustained) through cross-border trade and the temporary movement of health professionals than through investment abroad or emigration. Similarly, foreign income is likely to be highest if services are performed in South Africa, as in modes 1 and 2.

Table 1: Gains from health-care exports

Mode of supply	Employment	Complementary exports	Foreign exchange	Knowledge and skills	Economies of scale
Cross-border trade	High	Low	High	Low	High
Consumption abroad	Medium	High	High	Low	Medium
Commercial presence	Low	High	Medium	Medium	Medium
Temporary movement of people	High	Low	Medium	High	Low
Emigration	Low	Low	Low	Low	Low

In absolute terms, prospects for job creation and economies of scale are highest in cross-border trade, where South Africa might be able to make best use of its abundant and relatively low-skilled labour. Large amounts of foreign income could be earned through health tourism, not only in the health sector but also through complementary exports of conventional tourism and other local support services. Finally, South African doctors and nurses are likely to accumulate substantial knowledge and skills from working in foreign countries. These are indicated in bold italics in Table 1.

5.1.2 The gains from imports

Many of the benefits of international trade in services arise from importing and this section identifies three main types of gains: the transfer of knowledge or skills; a better range, quality or price of products; and new investment in domestic infrastructure. Again, these are expected to differ by mode and sector.

The benefits of cross-border imports of health services are well understood. These imports enable domestic professionals to link-up with the best people and technology abroad for specialist procedures or second opinions. Telemedicine can also contribute to the outsourcing of a wide range of capital- and skills-intensive diagnostic services that cannot be provided at home. In most cases, some investment in new information technology is required, but this is relatively modest compared to the range and value of the services that can then be imported.

Fewer benefits emerge if South African patients travel abroad for treatment. The threat of distant competition may impose a ceiling on domestic prices and encourage South African doctors and hospitals to replicate some services available abroad. However, price and product competition would be that much higher if foreign hospital groups invested directly in the South African market. Foreign investment can also contribute to improved knowledge, technology and infrastructure. For example, an investment by a private German health-care company into the largest public hospital in Cape Town is expected to generate a wide range of benefits:

Research and training at Groote Schuur Hospital is set for a big boost with the opening of the state-of-the-art University of Cape Town Medical Centre, which will offer top-class treatment at cut rates to medical aid patients. The hospital is the product of a R45-million investment by Rohn-Klinikum (a private German health care company). It boasts 124 beds, and includes a medical department, surgical department, day clinic, high care unit, intensive care unit, radiology and angiography suite, an outpatient area and four fully equipped operating theatres. (Cape Argus, 18 February 2002)

Finally, South Africa would clearly benefit from in-flows of foreign health professionals, particularly if they settle permanently in the country. Not only would they bring a wider range of knowledge and skills into the industry, but they would place some downward pressure on prices in the private sector. They might also bring in some new capital.

As with exports, it is possible to summarise the gains from importing health services by different modes of supply. The South African private sector is already price-competitive, so imports are unlikely to have a major effect on domestic prices. Instead, most of the gains are likely to arise from access to international expertise. Knowledge and skills can best be transferred if foreign suppliers establish a presence in South Africa – either physically or electronically. The former is also likely to contribute most to domestic health infrastructure. Currently, a handful of hospital groups dominate the domestic market, and most have not implemented modern quality protocols or pricing models (‘Peer review will be big step in reducing health care costs’, Business Day, 4 August 2003, p. 9).

In absolute terms, prospects for knowledge gains are particularly high in cross-border trade. Once such networks are established, they can contribute to very high volumes of knowledge-intensive trade at a relatively low cost. All forms of trade should contribute to some improvement in service standards, but these are likely to become large and influential if foreign firms invest directly into the South African health-care sector. And this would require a major injection of new equipment and infrastructure. In Table 2 the highest absolute gains are once again shown in bold italics.

Table 2: Gains from health-care imports

Mode of supply	Knowledge and skills	Product		Capital and infrastructure
		Price	Quality
Cross-border trade	High	Medium	High	Medium
Consumption abroad	Low	Low	Low	Low
Commercial presence	High	Medium	High	High
Temporary movement of people	Medium	Medium	Medium	Low
Immigration	Medium	Medium	Medium	Medium

5.2 Barriers to trade

Exports of health services are likely to generate significant economic gains for South Africa, but some exports are likely to produce higher gains than others. Similarly, some imports are likely to prove more beneficial. The social effects of liberalisation also differ markedly by mode of supply. All of these factors need to be addressed in designing an appropriate strategy for South Africa, in GATS or any other service sector negotiations; but this strategy also needs to reflect and address the actual barriers to trade, both internationally and internally, which are only partially covered by the GATS.

5.2.1 Foreign barriers to trade

The level of commitment in health services is particularly low. Most countries, including South Africa, view GATS negotiations on trade in health services as a threat to domestic social objectives, rather than an opportunity to reform and increase efficiency (Adlung & Carzaniga, 2002). This may explain why just 40 per cent of WTO member countries have made some commitments in this sector (compared to 90 per cent in tourism and 70 per cent in communications and financial services). Just over a quarter of industrialised and developing countries have made commitments in hospital services, and about a third in medical and dental services. Fewer countries, mainly the industrialised ones, have scheduled trade in other health personnel (Adams & Kinnon, 1997).

There are two main external barriers to South African exports of health services. First, South African doctors and nurses sometimes encounter registration requirements to practise in foreign lands, but the large and ongoing number of health emigrants from South Africa suggests that these are not significant. ‘There are 600 South African doctors registered to practice in New Zealand, and 10 per cent of Canada's hospital-based physicians are South African graduates. In the U. K., 6 per cent of the total health work force is South African’ (Padarath et al., 2003: 14). Of much greater importance is the limited portability of health insurance in most OECD countries. This not only affects health tourism, it also severely curtails the possibility for retirees from these countries settling in developing countries to access cheaper health care.

5.2.2 Domestic regulations

South Africa has made commitments in professional health services, but has not scheduled hospital services. Cleary & Thomas (2002) take comfort in this lack of schedule, arguing ‘it seems safe to say the country has yet to undertake effective commitments to trade in health services’ (Cleary & Thomas, 2002: 11). This is not true. South Africa is the only ‘developed’ country to have made full commitments in modes 1 to 3 in its medical and dental services schedule (South Africa is classified as a developed country within the WTO). As a result, South Africa cannot impose restrictions on market access, as defined in Article XVI of the GATS, without some form of multilateral endorsement and possibly penalty. Such restrictions would include numerical restrictions on the number of doctors or on the type of services they provide. Not only is this particularly liberal, but it might raise problems for the implementation of the ‘certificate of need’ as required by the National Health Act (Department of Health, 2004).

The ‘certificate of need’ might also have unforeseen and adverse effects on exports. Upon implementation, all professionals and hospitals will require official permission to operate in a specific location. This is intended to get more doctors out of well-serviced urban centres and into more needy and largely rural areas, but most exports of health services take place from the urban centres and depend on an oversupply of health professionals and beds in these areas. Unless the certificate of need takes account of export demand, and not just domestic demographics, the implications for trade are clear. There will be fewer doctors and hospitals to service health tourists and a smaller pool of doctors and nurses available for the likes of Netcare to export abroad.

Other well-intentioned regulations have equally perverse effects. The South African government has gone to extreme lengths to counter the brain-drain of medical personnel from other developing countries, but severe restrictions have also been imposed on doctors already in the country and those from developed countries. The public sector is most vulnerable to such restrictions: ‘in 1998, a quarter of all public sector doctors were foreign, rising to 50 per cent in rural provinces’ (Cleary & Thomas, 2002: 6). At the same time, all local graduates are required to undertake two years' community service. According to Reid (2002), this programme has had no lasting effect on the number of doctors choosing to work in the public sector and has contributed to a rising number of medical emigrants. The cost of supervision and error in the public sector has also increased. The net effect of these policies is that emigration will be higher, medical immigrants, domestic production and exports lower, and public sector delivery further compromised.

6. South African trade in construction services

The last two decades have been difficult for the South African construction industry. Domestic activity has fallen constantly over this period and competition has intensified. The local economy is small and volatile compared to that of the leading construction corporations in the United States, Europe and East Asia, and finance for construction projects is limited. Moreover, South Africa is a land and labour abundant country, with extreme shortages of high skilled professionals. All this suggests that it is not well placed to find or retain the skills and finance necessary to compete against the world's large construction multinationals – even in the domestic market. Yet South Africa boasts a number of large and extremely competent construction firms and a wealth of highly skilled engineers. Existing data show that South Africa records a large trade surplus in this sector.

Most of South Africa's exports of construction services are accounted for by a handful of very large civil engineering firms. These companies began to look offshore from the 1980s for two main reasons. Initially, this was to access technology and skills from more advanced markets, and the bigger firms established representative offices in Europe, North America, Australia and even Israel for this purpose. At the same time, the consolidation of the global construction industry and contraction of the domestic market put pressure on margins and forced South African companies to refocus and export their core expertise. The opening of the region to South African construction firms in the mid-1990s proved critical to their survival and all of the major firms have now positioned themselves as key players on the African continent.

There is some quantitative evidence of the extent of South African construction exports. The South African Federation of Civil Engineering Contractors (SAFCEC) undertakes a quarterly survey of the activities of its members in South Africa and abroad. Export data are available only from 1999 and the most recent results are presented in Table 3. Over the last few years, exports have remained relatively constant at around 20 per cent of total turnover. According to SAFCEC (2000), 60 per cent of this work is accounted for by transport-related activities, mainly in Mozambique. Mining contributes an additional 27 per cent, the bulk of which takes place in Namibia.

Table 3: Turnover of South African contractors: R billion

Year	Turnover (SA)	Turnover (Ex-SA)	Ex-SA/ total
1999	8,6	2,4	22,0%
2000	9,6	3,0	23,8%
2001	13,1	3,5	20,4%
Data source: SAFCEC, 2002.

Similarly, the South African Association of Consulting Engineers (SAACE) undertakes a bi-annual survey of its members in which firms are requested to report on their total domestic and foreign activities. The results from this survey are shown in Table 4. Exports have stabilised at around 11 per cent of total turnover, with Africa accounting for about 80 per cent of total foreign business. A once-off survey of SAACE members operating offshore provides an indication of the geographic spread of South African consulting engineers. Again, the SADC (Southern African Development Community) appears to account for most of the foreign activity of South African firms.

Table 4: Fee income of South African consulting engineers: R million (1995 constant prices)

Destination	1998	1999	2000	2001
Africa	192	292	336	323
Africa/Ex-SA	69,6%	80,4%	88,4%	79,8%
International	84	71	44	82
Ex-SA	276	363	380	405
SA	3,324	2,848	3,015	3,155
Ex-SA/total	7,7%	11,3%	11,2%	11,4%
Data source: SAACE, 2002.

6.1 Economic impact

South Africa's large construction companies have clearly recognised the benefits of exporting and now depend on foreign markets for a significant percentage of total turnover. Service liberalisation would probably contribute to further export expansion and possibly draw in new imports. This, too, would seem advantageous. But services are more complicated than goods and trade can take place through different modes of supply, with different kinds of economic and social effects. This was clearly illustrated in the case study on the health sector and deserves equal attention in construction services.

6.1.1 The gains from exports

As in health services, trade in construction services takes place across all four modes, but mostly through modes 3 and 4 or through a combination of the two. The returns on exports of South African skilled labour are likely to be high, but little direct employment is created in South Africa because most unskilled workers are employed on-site in the host country. On the other hand, access to regional markets and projects has enabled large South African construction firms to achieve or at least sustain economies of scale, at a time when the domestic market has been caught in a long-term decline. On large and technologically advanced projects, such as the multibillion-dollar Mozal Aluminium smelter in Mozambique, these firms have also gained new knowledge and learned new techniques. This may prove beneficial when domestic activity picks u. p. In addition, a large proportion of turnover is accounted for by plant and machinery sourced in South Africa. SAFCEC (2000) estimates that 80 per cent of all new plant and equipment purchased in South Africa is for contracts outside of the country.

One major difference between the health and construction sectors is that prospects for trade in modes 1 and 2 are much lower in the latter. Cross-border trade is possible and design services are exported electronically to other countries, but this is a highly-skilled and high value-added service, generating good profits for the exporting firm but few jobs and complementary exports. Similarly, South Africa can and does provide maintenance services to foreign aircraft and ships and it is possible that foreign companies visit South Africa for engineering advice or training, but compared to the health sector the economic gains from cross-border trade are relatively low. Another key lesson to be learned from the construction sector is that the rationale for and benefits of service trade with developing countries are likely to differ significantly from those of more advanced nations.

The relative benefits arising from South African construction exports into Africa, by different mode of supply, are summarised in Table 5. Prospects for job creation and knowledge transfers are relatively modest, especially compared to the health sector, but work on the African continent has helped to sustain significant economies of scale and has contributed to substantial foreign exports of complementary goods. These are likely to be highest, in absolute terms, if South African companies establish a permanent presence abroad, as indicated in bold italics in Table 5. Similarly, exports of high-value engineering services can be very profitable and South African companies generate significant foreign income by locating their best staff in foreign markets. Emigration generates few benefits for the exporting country.

Table 5: Gains from construction exports to Africa

Mode of supply	Job creation	Complementary exports	Foreign exchange	Knowledge and skills	Economies of scale
Cross-border trade	Low	Low	High	Low	Low
Consumption abroad	Low	Low	High	Low	Low
Commercial presence	Medium	High	Medium	Low	High
Temporary movement of people	Medium	Medium	High	Medium	Medium
Emigration	Low	Low	Low	Low	Low

The mode of entry into more developed markets differs from that into Africa and most large South African construction firms have established a direct presence in Europe, the US or Australia. This is for three main reasons. First, South Africa has a limited skills base and, like most developing countries, depends on technology developed in the world's larger economies. It also struggles to retain existing skills at home. By investing in Europe, Australia or the U. S., South African companies are able to access new skills and technology, and in some cases offer attractive work opportunities for existing employees.

Secondly, South Africa is not only short on skills and technology, but also lacks the financial depth or level of official support necessary to compete for large construction projects. Most export credit agencies in Europe and the United States are underweight in Africa and have unlimited finance at their disposal. Companies based in these countries also have preferential access to official development finance. The easiest way for South African companies to access finance and official support from these agencies is for them to establish permanent operations in Europe and the United States.

Finally, in some cases the foreign investments of South African construction firms act as a beachhead for their expansion into other emerging markets. This is particularly true of the investments by Grinaker-LTA, Aveng and Murray and Roberts in Australia. To some extent, this gives them immediate access to the Australian market, but it also serves as the base for their business in South East Asia and enables them to access new skills from these companies. For example, Aveng anticipates that its recent purchase of McConnel Dowell in Australia (partly from Grinaker-LTA) will lead to a number of synergies: ‘SA can handle the area to the north, while the Australian arm is better placed for dealings in Asia… special skills in Australia, such as tunnelling, might be of great benefit to the SA side of Aveng's operations, while SA could have more experience in railway maintenance’ (‘Green light for Aveng takeover in Australia’, Business Day, 4 August 2003, p. 12).

For these reasons, the gains from investment in developed markets can differ significantly from those in Africa. The subsidiaries of South African firms abroad are required to use foreign materials in all projects financed by host-country export credit agencies and most profits are likely to be retained offshore. Moreover, professional staff are usually recruited in the host market, with little prospect for job creation in South Africa. Murray and Roberts, for example, has 6000 people working on project sites in Dubai, of which 130 are full-time employees of the company, and 65 South African (‘Success builds in the Gulf’, Financial Mail, 24 January 2003, p. 44). On the other hand, South African companies and engineers are able to access substantial new knowledge and expertise through their activities in more developed countries, which should spill over into the domestic market.

The possible gains from South African construction exports to Europe are summarised in Table 6. Relative to Africa, foreign investment is likely to generate more in the way of knowledge but lower complementary exports and economies of scale. In the other three modes, differences are less marked. There may, however, be better prospects for employment creation through the provision of basic design or back-office functions, cross border, to construction companies in more advanced countries. Moreover, in specific niche sectors, such as airline maintenance, mode 2 trade with Europe may help to sustain economies of scale and knowledge within South Africa for exports and domestic consumption.

Table 6: Gains from construction exports to Europe

Mode of supply	Employment	Complementary exports	Foreign exchange	Knowledge and skills	Economies of scale
Cross-border trade	Medium	Low	High	Low	Low
Consumption abroad	Low	Low	High	Medium	Medium
Commercial presence	Medium	Medium	Medium	High	Medium
Temporary movement of people	Low	Low	Medium	High	Medium
Emigration	Low	Low	Low	Low	Low

6.1.2 The gains from imports

In many specialist engineering and design fields South Africa lags behind international best practice. The gains from imports of construction services are similar to those in the health sector. Competition and knowledge transfers would be particularly high if foreign firms were to establish a permanent presences in South Africa, bringing with them new technology and machinery. Similarly, South Africa could gain significantly from the inward migration of foreign expertise – most domestic companies report a shortage of skilled engineers and many were seeking to recruit experts from abroad. Opportunities for cross-border trade are perhaps less prevalent than health and largely restricted to design services. But the benefits to South Africa in terms of knowledge, quality and skills could still be reasonable. Finally, as with health, there would be little apparent benefit to South African consumers from travelling abroad to access international construction or design services.

The relative gains from importing construction services are summarised, by mode of supply, in Table 7. Most of these gains emerge from greater access to international knowledge and expertise, through cross-border trade, commercial presence and the movement of skilled workers into South Africa. In absolute terms one would expect these gains to be greatest when foreign firms locate in South Africa, but the experience of foreign investment in this sector suggests otherwise. Foreign companies tend to invest in South Africa to access the regional market, purchasing equity in existing companies but bringing little knowledge or technology into the country. Much more could be achieved by bringing in foreign expertise, to local and international companies, to address the existing skills shortage in the country.

Table 7: Gains from construction imports

Mode of supply	Knowledge and skills	Product		Capital and infrastructure
		Price	Quality
Cross-border trade	Medium	Medium	Medium	Medium
Consumption abroad	Low	Low	Low	Low
Commercial presence	High	Low	High	High
Temporary movement of people*	High	Medium	High	Low
Immigration*	High	Medium	High	Medium
*For the purpose of this table, ‘temporary movement of people’ and ‘immigration’ refer exclusively to skilled workers. South Africa is unlikely to benefit from or consider lifting restrictions on low-skilled construction workers.

6.2 Barriers to trade

Exports contribute a sizeable share of South African construction output, but the benefits to the domestic economy are unclear. Local capacity and quality have been compromised and there has been little import response. Further trade liberalisation might exacerbate current problems, but could also contribute to a rise in high quality imports. The net effect will depend largely on the structure and pace of service liberalisation within South Africa and its main trading partners.

6.2.1 Foreign barriers to trade

The construction sector is relatively open and GATS commitments high. For construction services, between 51 per cent and 64 per cent of countries have made full commitments (no limitations) in GATS modes 1 to 3, though many continue to restrict the movements of persons. In the architectural and engineering subsector, full commitments were made by between 46 per cent and 66 per cent of countries in modes 1–3. That said, the level of commitment of African countries is poor. This does not seem to impose a serious constraint on the activities of South African firms across the continent.

Instead, the main barriers to South African exports of construction services fall outside or are exempt from the GATS. Modern construction firms are expected to offer a full service to their clients, including competitive finance. This is usually conducted through official export credit agencies. In South Africa, the state-owned Export Credit Insurance Corporation (ECIC) helps South African construction firms raise finance domestically by providing competitive insurance and subsidised credit to the buyer, but the ECIC has neither the depth nor the funding to compete with the world's larger Export Credit Agencies (ECAs), which continue to receive implicit subsidies from their home governments (Stephens, 1999). Similarly, South African firms are unable to tender for many donor-funded development projects, as aid is often tied to companies based in the donor country.

6.2.2 Domestic regulations

South Africa's GATS schedules in the construction and engineering sectors are relatively liberal. Like most industrialised countries, South Africa has left mode 1 in construction services unbound and mode 4 unbound in both subsectors. It is therefore unlikely that other member countries will demand that South Africa make commitments in these areas. In the horizontal section of its GATS schedule, South Africa allows temporary (up to three years) and unrestricted movement of professional employees of foreign companies. However, South African immigration restrictions make it extremely difficult for domestic companies to gain access to the same foreign skills. Given existing skills constraints reported by the major construction firms, this could place domestic firms at a considerable disadvantage against foreign competitors. It would seem that it is easier for South African firms to export skills and compete abroad than import the skills necessary to compete in their own market.

Domestic standards and procurement practises raise additional problems. The Department of Public Works (2002) argues that the lack of uniformity in South African procurement practices presents one of the greatest obstacles to the domestic construction industry. This is because South African buyers favour price above productivity, quality and safety. Most global tenders, on the other hand, weight technical competence and expertise at four times price. Similarly, South Africa's specification and classification systems are outdated, unconnected and largely unused. The government system was last revised in 1993 and site inspections are rare. As a result, only the biggest firms have the knowledge and expertise to satisfy international tender and standards requirements.

7. Conclusion

The above case studies and analysis provide some insights into South African trade in other services, with lessons that extend beyond these two sectors. In both health and construction, South Africa developed significant capacity and expertise under apartheid which are no longer relevant or affordable today. By exporting, the country has been able to maintain employment and economies of scale in these sectors, earn valuable foreign exchange, and access new knowledge and techniques. But exports have also exposed fragilities in the domestic market, diverting scarce skills and resources to meet foreign demand.

The South African health-care industry faces immense challenges. It is also endowed with a unique mix of world-class expertise and facilities. More must be done to roll out primary health care to the majority of poor South Africans, but this need not conflict with the economic interests of the private sector. Trade can contribute if managed correctly! Telemedicine can provide the poor with access to the best technology and treatment and at a lower public cost and provide new competition in the private sector. Health tourism can bring in valuable resources for public and private hospitals and raise the standard of domestic care. Foreign investors can be encouraged to work with the public sector and bring in new technologies and expert personnel.

The gains from exports of construction services are not as high as expected. Full (GATS) liberalisation could lead to a drain in capital and skills from South Africa at a time when they are needed most. These losses could, however, be tempered by two sets of complementary actions. First, existing barriers to imports must be removed. These are largely confined to the movement of foreign engineers into South Africa and could easily be addressed through changes to South African immigration regulations (Stern & Szalontai, 2004). Second, restrictions on the ability of South African construction firms and engineers to access international finance and projects directly from South Africa deserve priority attention.

Domestic regulations are perhaps the greatest constraint on the international competitiveness of the South African health and construction industries. Compulsory community service, the new National Health Act, restrictive immigration laws, poor construction standards and outdated procurement policies threaten to undermine domestic capacity and trade in these sectors. To deal with these kinds of barriers, developing countries need to look beyond trade policies and negotiations. In both health and construction, there are strong overlaps between trade, social and economic policies that must somehow be addressed through integrated sector policies. The formulation of such policies should take place at home, not through the GATS, and must involve different departments of government and their different constituencies.

Additional information

Notes on contributors

Matthew Stern

Director, Development Network Africa (DNA). This article is based on a PhD thesis submitted to the University of Sussex. The author is grateful to Dr Christopher Stevens for his advice and comment on this thesis, and to Marina Meyer for finding a way to get some preliminary results from this research out in this article.