Asian crisis underscores need to revisit GATS

The recent Asian currency crisis and the downturn in global stock markets have underscored the need to reconsider the GATS and several WTO provisions particularly, the BOP safeguard provisions. This need is all the more urgent with the WTO head pushing for a financial services accord and the IMF management advocating full capital account convertibility.

by Chakravarthi Raghavan

GENEVA: The Asian currency crisis, and the on-going downturns in the global stock markets, and the official stances of the WTO and IMF managements appear to underscore the need for a "revisit" of the General Agreement on Trade in Services (GATS) and WTO provisions, particularly the several safeguard provisions, including for balance-of-payments (BOP) problems.

While developing country governments everywhere are beginning to worry about the fragility of their economies, and the serious reverses to their development by the exchange and stock market downturns, publicly, the WTO establishment and the US and others are trying to use the crisis as an added reason for a financial services accord.

In media interviews and statements, after his recent visit to Kuala Lumpur (where he met with the G-15 Trade and Economic Ministers), the head of the World Trade Organization, Mr. Renato Ruggiero, has been quoted as saying: "A lot of people ask me if this is the right time to have negotiations on financial services, on the liberalization of financial services, when there is one very, very deep, financial turmoil in this region of the world and elsewhere... My answer is just because we have a crisis, just because there is such a difficult situation, the liberalization of financial services will be part of the solution of this crisis ... a great part of the solution." A financial services agreement would allow international banks and insurance companies to operate in foreign markets on the same footing as national institutions and "this is something that will strengthen the financial institutions," Ruggiero is reported as adding.

However, there is little concrete evidence and facts to back up these claims.

Like the earlier advices and estimations of the GATT/WTO about the billions of dollars of benefits to developing countries, the Ruggiero plea seems to be one of asking finance ministers and decision-makers to act on the basis of faith and hope.

While "advice" is not lacking, from interested quarters, that developing countries facing uncertainties should in fact liberalize to assure foreign banks and other financial service providers, it will be an imprudent policy- and decision-maker, whether at the treasury or the trade ministries in developing countries, who proceeds on this basis.

G-15 call to IMF/World Bank

At the recent meeting of the Group of 15 in Kuala Lumpur, Malaysia, which was backed by Indonesia, appears to have forcefully raised the issue of currency trading and the need for WTO rules on these matters.

But several of the Latin American participants appear to have softened the stand, and the G-15 merely asked the WTO to look at the effects on trade of currency fluctuations, and have requested the IMF and the World Bank to study the issue and formulate rules and regulations to deal with it.

Even those who differ from the editorial columns and views of the Wall Street Journal , including its support for a rigid currency board system as in Argentina would probably agree with its assessment of the IMF role in this crisis.

The WSJ linked the resignation of Thai Prime Minister Chuvalit Yongchaiyudh and the G-15 call to the IMF/World Bank, and said: "... General Chuvalit probably would not be down where he is today had he not listened to the IMF. As for the G-15 ... our advice is that they take a lesson from the General's predicament and look outside these two institutions for guidance on avoiding foreign currency instability."

Before the Uruguay Round was launched, and during the Round too, the IMF was asked at the instance of the EC, to study and report on the effects of currency fluctuations on trade.

The IMF produced two reports to the effect that there were some adverse effects, but that traders could protect themselves against fluctuations by hedging. Astonishingly, the IMF reports did not touch on the effects of currency fluctuations, and thus profit returns and expectations, on investment decisions.

In the Uruguay Round agreement, the EC however, ensured its own ability to act on agricultural import prices and tariffs (but not on other goods or services) by having a currency factor built into the agreement.

Mr. Ruggiero who went to Kuala Lumpur for the meeting with the G-15 ministers, has been quoted as saying (with reference to the G-15 call to the WTO about currency stability), that "it was not the WTO's job to focus on exchange rate stability" but that "violent swings affected trade and the world trading system could help convince governments of the need to restore currency stability."

However, the Marrakesh Ministerial decisions and declarations (a part of the Uruguay Round agreements), have mandated the WTO to work with the IMF and the World Bank "to achieve greater coherence in global economic policy-making", and for the three institutions to follow "consistent and mutually supportive policies."

The WTO head was asked to undertake a review with the heads of the IMF and World Bank on how these objectives could be achieved. But instead of pursuing measures to produce financial and monetary stability to ensure expanding world trade, and economic growth and development, the WTO head negotiated an agreement to strengthen the IMF's hands at the WTO, including its ability to intervene, indirectly, on matters before dispute panels.

But with the WTO head not believing it is the WTO's job to focus on exchange rate stability, and the Fund and its management believing in floating (and thus fluctuating and devaluing) currencies, and also pushing for capital account convertibility, which is in the interests of its single largest shareholder with a veto power on the Board, rather than the interests and priorities of its majority membership, Malaysia and other Asian countries cannot hope to get any assistance from the IMF/World Bank studies and actions, or their own studies and recommendations flowing from them which they would forward to these institutions.

The world economy may thus be set on a course of further disasters. And quite a respectable number of mainstream economists are voicing concerns and worries that the crisis is already having negative effects on global demand, and that the IMF remedies may push the world economy into a deflationary spiral, taking everyone down.

The WTO secretariat recently produced a study claiming that liberalization of financial services by the developing countries would improve the efficiency of their financial sectors and access to foreign funds, that the liberalization of trade in financial services was not the same as liberalization of capital accounts, which was being addressed by the IMF, and that developing countries faced with sudden problems had enough safeguards in the GATS and its provisions, including on BOP considerations.

But this is at best a partial truth, and quite a misleading one at that.

IMF head's move on capital account convertibility

For if the IMF has its way on capital account convertibility, the BOP provisions of GATS would be valueless, particularly on financial services commitments, and developing countries may then face the double jeopardy of IMF conditionalities and WTO dispute settlement processes, second- guessing their macro-economic policies, and getting them altered to benefit foreigners and their profits.

When developing countries negotiated and accepted the GATS, they did so on the basis that the IMF articles protected them on capital account convertibility. Hence, recourse to BOP safeguards in GATS, enabling suspension of services commitments would be sufficient, developing countries thought.

But it would be a new ball-game, if the IMF management succeeds in getting the articles amended.

Developing countries, and other observers at the recent Fund/Bank meetings at Hong Kong, viewed the Interim Committee's decisions asking the IMF to undertake further work on capital account convertibility to be very much of a muted response to the IMF head's push (since 1995).

But the IMF head and management appear to be proceeding on the basis that they have a clear mandate.

The IMF management is reported to have been giving assurances that developing countries need only move gradually towards capital account convertibility, and that the IMF is envisaging something more akin to the "OECD guidelines" of the 1960s - whereby countries committed themselves to capital account convertibility and mobility, but with leeway to individual countries to write in exceptions which they could gradually remove (or not) and thus move at their own pace towards liberalization and capital account convertibility.

However, if developing countries "buy" this approach - and many Third World country treasuries where neo-liberal economists are ensconced seem to - it would be a path on which there can be no retreat or change of course, if the experiment proves unfruitful or adverse to their development. Any adjustments would fall once again on the poor.

Even more, it would give the IMF a major handle in deciding their WTO policies, including the exercise of their rights, and in negotiations.

The latest IMF conditionality package for Indonesia, if press reports be correct, provides some indication on how far the IMF would go to further the commercial interests of its single largest shareholder, the US, and its corporations.

At the WTO, there is now a dispute between Indonesia on the one hand, and the US, EC and Japan among others on the other, over the Indonesian national car project. That issue is before a WTO panel.

While the WTO system envisages that countries would accept and implement any panel ruling, countries (which find themselves unable to implement a ruling for whatever reason) also have the option of either providing "compensation" as an alternative and/or allowing the trading partner to "retaliate" by withdrawing concessions for trade loss suffered - determined in arbitration.

Irrespective of the merits of the Indonesian car project, in economic, development and trade terms, and the role of family members of President Suharto in it, and irrespective perhaps, of differences in Jakarta among policy-makers about this project, in effect, the IMF conditionality requires Indonesia not to exercise its rights or options over a panel ruling in a particular way.

This is a dangerous precedent that would hit many more developing countries. It could turn out to be even more dangerous when it comes to the financial services sector, where as a result of actions taken by countries for BOP considerations, they face the prospect of being dragged before a WTO dispute panel.

The GATS provides latitude for several types of policy actions that a country may find necessary to undertake in various circumstances: to deal with a BOP crisis (under GATS Art. XII), to take prudential measures, as well as other actions to preserve the integrity and stability of its financial system (under the GATS annex to the Financial Services), and to protect its domestic financial sector from excessive competition on the part of foreign firms (Art. XVI and XVII).

Safeguarding BOP

Under Art. XII of the GATS, a country facing a BOP problem may impose temporary restrictions on trade in services that result in the non-fulfilment of its GATS commitments.

But any BOP actions have to be justified before the relevant BOP committee. And as the recent dispute between India and the US (and other industrial nations) over the BOP issue shows, IMF assessments of BOP justification will weigh heavily, and all industrial countries, irrespective of their mutual differences, appear to join in a common class struggle against the developing countries.

In the case of the financial services sector, the recourse to emergency actions to safeguard BOP would have particular implications.

For a crisis involving banking on the one hand, and external payments on the other - as demonstrated in many recent instances in developing countries - the necessary actions may, and perhaps would require taxation and restriction on financial activities, as an integral part of measures to safeguard BOP.

There would be implications in such cases, for distinctions to be drawn between measures to safeguard BOP and other safeguard measures to protect domestic enterprises from threats of excessive levels of competition.

While these two can generally be kept separate, in the case of the financial services sector, and particularly the banking and the securities trade sectors (which increasingly are linked, with the same enterprise involved in both), the competitiveness of a country's banks and other financial firms may be more fully exposed by the strains caused by an external payments crisis and depreciation of the currency, a rise in interest rates, and consequent collapse in the values of financial and real assets.

In many cases (as is now in Asia, starting with Thailand), weaknesses in the banking sector could contribute to contraction of financial flows leading to a BOP problem.

And as Prof. Jan Kregel has pointed out (SUNS #4090), getting fundamentals right has been no defence for a country against speculators on currency or stock markets.

Governments may have to respond by "lender-of-last-resort" operations, as well as other types of financing, to the firms affected - such as finance and mortgage companies, securities firms and commercial banks.

But if they have undertaken WTO commitments in financial services, while the BOP safeguard provisions would give them some leeway, it is not at all certain that they could discriminate between domestic and foreign firms present - by helping domestic firms with funds or subsidies and not the foreign operators, without affecting their national treatment commitments, if any.

Art. XII (3) of GATS no doubt enables countries, in determining the incidence of BOP restrictions, to give priority to the supply of services they deem essential to their economic and development programmes, but are precluded from taking measures or maintaining existing ones "for purpose of protecting a particular sector".

So when countries take action in financial sectors to meet BOP crises, they would find themselves not only dragged before the WTO and its dispute settlement machinery, with the IMF given a particular say (in the light of the IMF/IBRD/WTO secretariat agreements, endorsed by the Singapore Ministerial Conference), national authorities would be "second-guessed" and pressured in informal negotiations, as a price for endorsement of their BOP actions, on the kind of priority they should provide in allowing the supply of foreign financial services.

That the US and EC (and IMF, in its conditionality programmes) could even come up and say in BOP matters relating to goods, whether priority for phasing out restrictions should be for luxury consumption goods (cars, consumer electronics, liquor, processed agricultural products and so on) - which is the real dispute between India and US in the BOP case - shows the extent to which the WTO dispute settlement machinery could be used against the poor.

And the IMF could be depended upon to make pronouncements on these matters, favouring transnational operators and the US, to the prejudice of the developing country concerned.

Developing countries would find themselves under pressure to "liberalize" their financial services sector at the WTO, and to liberalize capital accounts, by the IMF/World Bank (through conditionality loans). All these may advance the US interests, but would be quite detrimental to the interests of developing countries and their development prospects.

The only credible way in which developing countries could deal with speculative attacks on currency and stock markets, would be to insist on rules at the WTO, and not through the advice of the IMF and the World Bank or through their instruments which have no "power" over the major countries, whereas at the WTO, home countries seeking to further the interests of their corporations could be forced to undertake obligations over their corporations as a part of the overall balance of rights and obligations. (Third World Economics No.173, 16-30 November 1997)

Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS) from which the above article first appeared.