This article discusses a recent study conducted by the Indian Ministry of Commerce and Industry, which questions the reliability of the current method deployed by the Organisation for Economic Cooperation and Development (OECD) to rank nations based on their services trade policies. The Indian investigation suggests that the outcomes might be biased and not accurately reflective of the realities on the ground.
The Services Trade Restrictiveness Index (STRI)
Launched by the OECD in 2014, the STRI offers insights into regulations that impact trade in 22 sectors across all OECD member countries and Brazil, China, Costa Rica, India, Indonesia, Malaysia, Russia, and South Africa. These countries and sectors account for more than 80% of global services trade. The wide range of sectors includes computer services, air transport, legal services, construction, and others.
The STRI creates composite indices to calculate restrictions on foreign entry, movement of people, barriers to competition, regulatory transparency, and other discriminatory measures affecting business ease. It also provides a digital STRI (D-STRI), which identifies and quantifies obstacles affecting digitally traded services. The STRI scores range between zero and one, with one being the most restrictive. The regulatory database and indices are updated every year in December.
Why is STRI Significant?
The STRI serves as an invaluable tool for policy-makers, enabling them to outline reform options, compare them against global best practices, and evaluate potential effects. Additionally, it aids traders in understanding the regulations they must adhere to when entering foreign markets.
India’s Performance in STRI 2018
According to the 2018 STRI report, India scored above average in all sectors.
Limits with the STRI
Despite its uses, the STRI has certain critical design flaws that make it suboptimal. For instance, it portrays the Indian services sector as highly restrictive, especially in areas like foreign entry. Yet, since 1991, the area that has seen the most liberalisation in India is Foreign Direct Investment (FDI).
| Year | Foreign Direct Investment (FDI) in India |
|---|---|
| 1991 | Initial liberalisation of FDI policy |
| 2018 | Above average score in all sectors – STRI report |
There are notable theoretical and empirical inconsistencies in OECD’s methodology. Changing regulatory measures in one policy area can lead to significant shifts in the STRI in another policy area, making it less useful for policy purposes. The data seems to have been generated by relatively arbitrary procedures and appears to exhibit a developed country bias.
The Need for an Unbiased Index
India made efforts to build a consensus around a new method of measuring trade restrictiveness in services during the recently concluded World Trade Organization talks in New Delhi. There is a pressing need for a robust and unbiased index to quantify the restrictiveness of the services trade accurately.
