Financial Services in the WTO: A License to Cash In?
05.09.2003: Working Paper by Isabel Lipke and Myriam Vander Stichele
Due to the stiff competition among the large financial service providers and the acute symptoms of crisis in the industry, there is strong interest on the part of the industrialised countries in opening up new markets. The EU and the USA therefore have a major interest in using the negotiations on the liberalization of financial services in the context of the GATS to open the way for an expansion offensive by their very competitive companies.
In this context, this paper will initially provide a summary of the most important segments of the financial service industry, and their economic function. Thereafter, we will outline some basic trends, such as the trend towards one-stop banking, the significance of so-called "innovative instruments" as derivatives, mergers, the high degree of concentration in the industry, the role of investment banking, and the role of pension and insurance funds.
Then, we will discuss quantitative aspects such as the share of financial services in the GDPs and the export volumes of selected national economies, with reference to the largest companies in the industry, both globally and in Europe, as well as the most important lobbying associations and networks. This will demonstrate that the financial service industry has very great influence on the formulation of policy by both national governments and the WTO.
In Chapter 2, the most important "rules of the game" of the WTO and the GATS are explained, together with an overview of the history of the financial service agreement and the current state of negotiations. The requests of the North and the EU are then analyzed. The fact that the EU is submitting opening requests involving financial services to 94 countries (out of a total of 109) demonstrates the high priority of place that the financial services have for the EU. The main emphasis of the content of these opening requests for the EU is on the opening of the pension and insurance markets, on the abolition of limitations on holdings by foreign capital, and on the liberalization of the movement of capital - all areas considered sensitive in terms of development policy. The interests of the EU are demonstrated with reference to particular countries - Malaysia, Chile, Thailand and South Africa.
Chapter 3 examines the dangers to the stability of the international financial system as well as to the national financial systems of the developing countries that would emerge if the requests of the EU were fulfilled. It is pointed out, for instance, that single GATS regulations could be used to block or to deter stability-oriented measures. Thus, the introduction of a foreign currency transaction tax might be interpreted as a trade barrier.
Flows of capital which bring with them the danger of instability and can burden the balance of payments are being generated by the increased presence of service providers from the industrialised countries in the markets of the South, as well as by certain practices, such as credits in foreign currencies or the repatriation of profits. Attempts to regulate these capital flows can easily run against of GATS regulations. In addition, the requirements upon local control and supervisory authorities who are often already overtaxed in many developing countries, is growing.
The paper identifies a contradiction between the logjam of reform of the international financial system and the high pressure for liberalization which the GATS exerts on developing countries. The increasingly oligarchic structure is also considered a problem in some market segments. The expansion of the financial service industry to the insurance and pension sectors is also viewed as a sensitive issue from a development perspective. The danger here is that poorer sections of the population will have reduced access - or none at all - to services of vital importance. It is pointed out that the foreign enterprises incline towards "cherry-picking", and therefore do not exert a positive influence on development and poverty alleviation. On the contrary, some requests for liberalization have the effect of obviating sensible development policy regulations, e.g., the obligation for all banks active in Malaysia to provide a certain quota of economical housing loans for the underprivileged. The risk of increased capital flight is also increased by the growing presence of foreign financial service providers.
Even if impulses for innovation are generated by particular aspects of the liberalization of financial services, which result in positive effects, a sufficiently efficient regulation and supervision system will be required this to ensure that effect in fact develops. The example of China is taken here to demonstrate such trends empirically.
The paper concludes that, in view of the unsolved problems of the international financial architecture and the notorious weakness of many national financial systems, the GATS tends to increase instability. There is the danger that liberalization will lead to a bottom-up redistribution of resources, and that the asymmetry which already exists in any case between the North and the South will be deepened.
Therefore, the request is that overhasty liberalization should not be carried out, but that an impact assessment first be undertaken, which should include such issues as financial stability, development policy, social and distribution risks, and problems of consumer protection. For the poorest countries, capacity-building measures must have priority. Pressure, and also the undermining of existing regulations which support the stability of the financial system and serve development policy goals, or help combat poverty, must cease. Instead, concepts must be developed for using financial services to support development and poverty alleviation. A priority must be placed on such human services as health and retirement insurance as well as on enabling access of poorer segments of society to financial resources.