Liberalization of services in Poland and Turkey: A comparative analysis

FEM32-02 | June 2009


« Liberalization of services in Poland and Turkey: A comparative analysis »


Subidey Togan, Bilkent University, Centre for International Economics, Ankara, Turkey; Jan Michalek, Warsaw University, Poland.


Andżelika Kuźnar, Warsaw School of Economics, Poland; Can Şımga Mugan, Middle East Technical University, Turkey, Katarzyna Kowalska, Warsaw University, Poland; Jan Hagemejer, University of Warsaw, Poland; Tomasz Michalek, University of Warsaw, Poland;  Aleksandra Zieminska, University of Warsaw, Poland; Katarzyna Smiala, University of Warsaw, Poland; Sare Arıcanlı, Turkey

Note :

This document has been produced with the financial assistance of the European Union within the context of the FEMISE program. The contents of this document are the sole responsibility of the authors and can under no circumstances be regarded as reflecting the position of the European Union.

Summary :

The project is on liberalization of services. Although the propositions regarding the gains from freer trade apply to both goods and services, the liberalization of services is quite different from that of liberalization of merchandise trade. For goods trade, most discussion of liberalization focuses on the elimination of tariffs and non-tariff barriers. On the other hand, barriers to trade in services are typically regulatory in nature, and countries often have little interest in other country’s regulatory regimes or have little confidence in their quality. Hence, liberalization of services in a particular country requires the alignment of regulatory regimes in different service sectors.

In principle, countries can choose to liberalize the markets for services unilaterally by adopting and implementing the international norms such as the ‘Energy Charter Treaty’, ‘Basel Core Principles’, “Basic Agreement on Telecommunications”, and “International Accounting Standards”. Thereby the countries hope to derive efficiency gains. But unfortunately a country cannot on its own gain improved access to larger foreign markets such as the services market of the European Union (EU). In this context, multilateral engagement through negotiations under World Trade Organization’s (WTO) General Agreement on Trade in Services (GATS) could help. But for the multilateral negotiations to be fruitful, the different countries have to recognize mutual interests in reciprocal liberalization. Recognizing these potential mutual gains will allow reciprocal “concessions” that would benefit all. In such a case adoption of WTO rules may lead not only to efficiency gains but also to improved access to larger foreign markets.

The achievement of multilateral liberalization of services seems to be possible in the long run. But liberalization of services through regional trade agreements may in essence be feasible even in the short run. As an example of regional trade agreement consider the EU’s European Neighborhood Policy (ENP). The ENP presents an opportunity to deepen the market integration of the Southern and Eastern neighboring countries of the EU with the EU and increase their participation in global production networks. The perspective of progressively participating in the Internal Market is the most far-reaching aspect of the ENP. To have free trade in services the neighboring countries of the EU are expected to adopt and implement the European Community’s (EC) rules and regulations in the specific service sectors. Here, we note that in the EU services are generally classified into traded and non-traded services. The traded services are further divided into regulated and non-regulated traded services. Among the regulated services we have the key backbone services such as network, financial and maritime transport services. These are all sectors regulated by specific EC Directives. On the other hand professional services such as accounting, legal and engineering services are regulated but are covered by the European Commission’s Services Directive (SD) 2006/123/EC. Finally, services such as tourism and wholesale trade are non-regulated sectors also covered by the SD.

The above considerations reveal that liberalization of services in any country is a challenging task. It involves the reduction of regulatory barriers to market access and discriminatory national treatment across all four modes of supply. The focus of trade liberalization in services is to ensure that existing regulations do not discriminate against foreign participation in the markets of domestic and foreign countries. Moving to a nondiscriminatory regulatory regime can require significant changes in how some service sectors are regulated in a particular country.

To emphasize the difficulties in the liberalization of services consider the case of a Turkish trucking company intending to carry freight to the EU, and the case of a German trucking company intending to carry freight to Turkey. These services will be liberalized if (i) there are no restrictions on Turkish and German trucks to carry freight between the two countries, (ii) no restrictions on Turkish and German trucks to carry freight between any two points within the EU and Turkey respectively, (iii) no restrictions on the establishment and operation of Turkish and German trucking companies within the EU and Turkey respectively, and (iv) no restrictions on Turkish and German road freight transportation service providers or employees of the respective companies to move freely for relatively short periods (temporarily) within the EU and Turkey respectively. Thus, under liberalization both Turkey and Germany would have to adopt laws that do not differentiate between domestic (or intra-EU in the case of Germany) versus foreign (or extra-EU) companies operating in respective countries and mutually recognize all required licenses and certificates. Such situation would allow for effective competition, better exploitation of economies of scale, increase in benefits stemming from network externalities and lower consumer prices. Here we note that Germany and Turkey over time have introduced all kinds of rules and regulations on market access, competition, prices, fiscal conditions, social conditions, technical conditions and safety in their road freight transportation sectors. The German rules and regulations are in general much stricter than the corresponding rules and regulations prevailing in Turkey. Germany in general is not interested in relaxing its rules and regulations. It expects Turkish trucking companies to observe the much stricter rules and regulations prevailing in Germany. As a result liberalization of road freight transportation services between the two countries can only be achieved if Turkey would adopt the German rules and regulations prevailing in the road freight transportation sector, and would enforce these rules and regulations within Turkey.

In this study we consider five types of services, namely accounting, health, air transportation, railway, and road freight services. The study analyzes the liberalization of each service sector in a separate chapter, and each chapter begins with consideration of the basic characteristics of the particular service sector. We study how liberalization of services in those sectors can be carried out by following the unilateral approach as well as the regional approach. When considering the regional approach we concentrate on the cases of Poland, a Member State of the EU, and Turkey, a candidate country for EU accession. We hope that the experiences of Poland and Turkey and the approach to liberalization of services adopted by these countries could serve as a useful model for other neighboring countries of the EU, where liberalization of goods and services is high on the agenda.  Thus, we study in the second section of each chapter the international rules and regulations and in the third section the regulatory regime in the EU in the respective service sector. The fourth and fifth sections in each chapter analyzes the regulatory framework in Turkey and Poland respectively. Finally, after these five chapters on liberalization in different service sectors we assess the effects of liberalization of services in the final and sixth chapter of the study. In this sixth chapter we first try to determine the tariff equivalents of barriers to trade in the relevant service sectors in Poland and Turkey respectively, and thereafter using the tariff equivalents we assess whenever possible the effects of liberalization in the respective service sectors.

In the accounting sector, a comparison of the accounting standards in a large number of countries reveals that differences between standards continue to exist. As trade, investment and capital start to flow freely from country to country, differences in accounting principles impede this flow leading to sub-optimal allocation of resources since resource allocation decisions are based to a great extent on accounting information. A basic characteristic of the accountancy sector is the fact that it is among the most regulated sectors in the world. As emphasized by the literature, the main objectives of regulators of the accountancy sector has been the protection of the public and the promotion of the quality of the service, and these objectives have been pursued through increasingly detailed regulations or standards on most aspects of the accountancy profession and its practice. Since most of these regulations and standards remain national and differ significantly among countries, this variability does not create a context favorable to greater mobility of services and professionals across borders. A comparative analysis of restrictiveness indices in accounting reveals that the most liberal markets for accountancy services are Finland and the Netherlands. These economies maintain few restrictive measures affecting foreign providers of professional services. While Poland maintains an intermediate level of barriers, Turkey is among the most restricted markets for accountancy services. It imposes a number of barriers, notably comprehensive nationality and residency requirements, and barriers on form of establishment and foreign direct investment.

Health services have long been considered not to be tradable across borders. The level of liberalization of health care services within GATS is minimal. But the scope of liberalization of medical services among EU members remains very low as well. The immediate liberalization along with more homogenous regulations seem to be unlikely given the fact that medical services are excluded from Services Directive. Similarly, the scope of discrimination against foreign suppliers of medical services remains high. Given the principle of subsidiarity, the EU aims only to improve citizens’ health security, promote health as well as generate and disseminate knowledge and information on the subject. In order to compare health policies, consumer services and quality outcomes of the EU member countries we used the ‘Euro Health Consumer Index’ (EHCI). The EHCI captures properties of different health care system as seen from the consumer’s point of view, and thus representing a measurement for assessing the differences in efficiency of national systems. Poland, among EU countries, has one of the lowest EHCI score. According to our econometric analysis the main variable explaining the level of EHCI index is the level and percentage of expenditure on health in a country’s GDP. Given the fact that both Poland and Turkey spend very small fraction of their incomes (6.2 and 5.7 percent respectively, with 8.9 on average among OECD countries) on health care services, the quality of these fairly protectionist and non-tradable services remains low in both countries.

The airline sector, due to the complexity of the whole network of interrelated services for a long time, was believed to be a natural monopoly and has been heavily regulated and protected. The process of air services markets liberalization started in Europe in late 1980s with the three EU liberalization packages. The air services market in Europe has been completely reshaped to provide tighter competition, more efficient use of infrastructure and more benefits to consumers. Poland, by implementing relevant EU Directives, has significantly liberalized her air services market. According to Air Liberalization Index used in the study Poland ranked among twenty most liberal air services markets, among all 184 analyzed countries. Turkey, despite significant liberalization, is lagging behind, and was somewhere in the middle of the same ranking scale. The econometric analysis performed in the last chapter demonstrates that the first and the third EU liberalization packages caused the increase in passenger traffic by 18.7 percent and 20.6 percent respectively.

The railway industry in a large number of countries was historically in the hands of vertically integrated operators owned usually by the public sector. The declining share of rail transport of goods and passengers, at the expense of road transportation is visible, at least since the 1970s. Concern about the performance of rail in turn led to a number of railway reforms during late 1990s in the European Union (three liberalization packages till 2007). The overall progress in market access liberalization in the EU countries is measured by the LIB index elaborated jointly by Humboldt University and IBM Consulting Services. After implementing all EU Directives Poland, according to LIB index, has a fairly liberal regime of market access to rail services in terms of fees and other barriers. The empirical analysis in the last chapter shows a positive impact of the development of rail infrastructure on the level of imports of cargo rail traffic and similarly a positive correlation between the level of merchandise trade and the demand for rail services. Furthermore, the analysis indicates that two, out of the three EU rail liberalization packages, had statistically significant and positive impact on cargo services in Europe.  In Poland, however, the effects on the level of service provision are yet to be realized.

The provision of road transportation services relies heavily on the interconnectability of the national road network, the right to operate in different countries, and on uniform regulations. Such situation allows to benefit from the positive network externalities while allowing for international competition assuring effective pricing policies. Governments have realized long ago that international organizations such as the European Conference of Ministers of Transport provide regulatory framework for provision of network services. The EU has put in place EU-wide regulations providing rules to intra-EU trade in road transport services. Aiming for active convergence with the rules and regulations in the road freight sector of the EU is a must for Poland. Currently Turkey is in the process of adopting and implementing the legislative, regulatory and institutional framework of the EU road freight transport sector.  The country by changing the regulatory regime aims to increase competition in the sector, improve the infrastructure and lower the price of road freight transport services. It is shown that Turkey has a fairly competitive road transport market as compared to the EU and Poland, however the degree of foreign discrimination is on the high side.