3:24 PM May 19, 1995

US, WTO HEAD PRESSING SOUTH ON FINANCIAL SERVICES

Geneva 18 May (Chakravarthi Raghavan) -- Success in the financial services negotiations is a 'must', the United States insisted Thursday at the WTO at the multilateral meeting to assess the state of the negotiations due to conclude by end of June.

Both the US and EU negotiators said that bilateral discussions over the past week had made some headway, that "some progress" had been made, but that more is needed to be done to achieve a successful conclusion of the negotiations.

The chairman of the WTO financial services negotiating committee advised the meeting that some 14 countries and the EU had now submitted revised offers on financial services -- banking, insurance and security market services.

The US has said in Washington that its target for improved market access are Brazil, Chile, India, Indonesia, South Korea, Malaysia, Pakistan, the Philippines, Singapore, Thailand and Venezuela.

The EU while pressing developing countries to improve their offers, has however been more cautious, insisting that the US was being more unrealistic in its demands and could jeopardise the outcome.

Negotiations in this area were continued after the conclusion of the Round in an effort to head off US threats, from its Treasury, to enter MFN reservations and freeze access to its market beyond current levels, if it did not gain more from the developing countries.

Negotiations in this sector, and on movement of natural persons as a mode of delivery of services, were continued and are to end in June, with participants who have already filed their offers and schedules an option to improve or revise their own earlier offers (or enter reservations, if the US did). In effect the US was saying that it wants the developing countries, with bigger domestic markets, the socalled 'emerging markets', to do more and "offer" more market opening opportunities for the US financial services exporters and set time limitations to achieve full liberalization, to prevent the US from entering most-favoured-nation reservations in its own market.

Except for Thailand which told the meeting Thursday that it would be making some 'improved offers', none of the other developing countries targeted made any promises.

The head of the WTO, Renato Ruggiero, who is due next week to go on a trip to Asia -- Singapore, Manila, Bangkok and New Delhi - has also been trying to persuade developing countries that it is in their interest to liberalize, both for the benefits that 'liberalization' brings and to ensure that the financial services trade remains a multilateral process and not a discriminatory one between the US, EU and other industrial countries.

But developing countries haven't been so far impressed, and been refusing to 'pay' more than they have done in the overall single undertaking framework of the Uruguay Round 'offers' in goods and services and the limited concessions they have got from the US and other industrial countries in areas of interest to them -- whether in the services sector alone or in the overall goods and services trade.

But the United States, and perhaps Ruggiero, hope that by direct pressures in capitals on the finance ministries, and the 'advice' from the World Bank, there would be both better offers of immediate market access and even more commitments to achieve full liberalization within 5-10 years.

Asean diplomats at a meeting with Ruggiero this week are reported to have advised him that their countries had done the best they could taking the overall balance into account and unless the United States was willing to move in other areas of interest to the developing countries little could be done.

While all the Asean countries do not have the same interest in particular sectors, nevertheless the US position on maritime services, on movement of labour services and in goods areas like textiles and clothing where the US 'liberalization' (in terms of export value) is ten years away, has hardened the position of the developing countries.

As several of them put it privately, whatever liberalization of financial services we need to do for our benefit, we would do autonomously and without binding ourselves in the WTO.

Several independent studies have raised questions about the ideological thrust in the view that liberalization of trade in services sector, and particularly to the financial services sector benefits the developing countries.

Despite the razzle-dazzle with which the WTO and the World Bank economists, with their 'models', have been projecting the benefits of this liberalization and the billions of dollars of welfare gains in the North that is bound to be reflected in increased purchases of commodity and other exports of the South, other studies have been more cautious and even sceptic about the benefits of banking and financial services liberalization.

Most of the latter have been making the point, often buried in seldom noticed footnotes in the WTO/Bank projections, that there is not even an adequate and reliable data base on which there could be efforts at modelling and projections and that given the time and space and sequencing effects there could be significant changes from theoretical projections.

While the WTO, World Bank and other ideologically motivated models use the IMF's balance-of-payments data base, others have been raising conceptual questions about the relevance of this measurement or using the standard neo-classical Hechksher-Ohlin models for discovering and assessing comparative advantage.

Banking and several other financial services, for example, do not directly create welfare benefits for individuals in the economy. Their usefulness is in their intermediation role in trade and transaction costs -- by bringing borrowers and lenders together and facilitating trade.

But they need real resources, and models based on marginal rates of substitution of consumer preferences and resources used in facilitating trade don't provide a true cost-benefit outcome.

While the mid-1980s picture about banking services has become very much blurred in recent periods, by the activities of banks and their separate or same divisions engaging in speculation and arbitrage -- an area of activity into which the World Bank and Multilateral Development Banks are also involved by raising liquid capital and investing them to earn profits -- the models also do not seem to succeed in splitting these to enable policy-makers in capitals to make a reasoned judgement.

Mexico, for example, in terms of NAFTA and overall liberalization policy under President Salinas, thought that it would overall have advantages and benefits in financial services liberalization.

Though this line is still being asserted by the IFIs, and their followers in Mexico, very few of the independent academics and others in Mexico or those outside following its fortunes do. Quite a number of academic studies suggest that the Mexican crisis was a necessary outcome of its ill-considered liberalization in this area, and the public of that country would have to pay the price for the rest of this decade, if not more, before they can see any light at the end of the tunnel.

Some published studies and estimations (based on officially available figures of the late 70s to early 80s) for e.g. suggest that in terms of intermediation and spreads between borrowing and lending rates for depositors and borrowers, the US exports of banking services was perhaps of the order of only 3-5 billion dollars -- very miniscular for all the fuss being made -- but that the foreign source income of the US banks (from their affiliates abroad) is pretty high, about 23 billion dollars a year in 1977 (latest year of official estimations generally available).

This shows the reason for the push by the US for opening up of financial services by developing countries, and through 'right of establishment' -- an area 'of disciplines' that the European Union is also trying to pursue by resurrecting in the WTO context an investment code to provide foreign investors with a right of establishment everywhere.

The EU wants a work programme and agreement to negotiate to be made on this at the WTO's First Ministerial meeting in Singapore in December 1996.