The WTO agreement on financial services paves the way for a handful of large, monopolistic firms in developed countries to seize control of the market in developing countries, which cannot hope to compete.JAYATI GHOSH
RENATO RUGGIERO, the Director-General of the World Trade Organisation (WTO), proclaimed himself last fortnight to be a delighted man. On the face of it, he has little to be happy about. World trade growth continues to slump; the hitherto most dynamic region of the world economy - East and South-East Asia - is in the throes of unprecedented economic crisis with no chance of immediate relief; and there is no indication that international capitalism is about to emerge from its current underemployment equilibrium by using trade as an engine of growth. The creation of the WTO has not been able to accelerate the expansion of trade-related economic activity in the world as a whole.
Nevertheless, Ruggiero finds cause for jubilation. According to him, the agreement just concluded at the WTO, bringing about a major opening of the financial services markets in developing countries for large multinational capital, is the culmination of "a golden year" for the WTO. The year has been marked by agreements to free trade in information technology products and to liberalise financial services.
The stakes involved are enormous in terms of the worldwide size of the markets concerned. World banking assets were more than $40 trillion in 1995; gross insurance premia in the member-countries of the Organisation for Economic Cooperation and Development (OECD) alone amounted to more than $2 trillion in 1995; international currency market turnover is in excess of $1.3 trillion; outstanding futures and options in interest rates, currencies and stockmarket indices are well over $10 trillion.
These are markets dominated by large firms from the OECD countries, in which developing countries cannot hope to compete at all. They are also highly concentrated markets, which have become even more concentrated in the 1990s following upon waves of mergers and acquisitions. The top four investment banking houses, for example, control nearly half of the global markets for bond, equity and medium-term notes underwriting and placement, while the top eight such banks control nearly three-fourths of the market.
These financial services sectors are also among the few that continue to generate more jobs in OECD countries, so their political significance in these societies is enormous. The United States in particular has emphasised the opening up of these sectors to more free trade by all WTO members as a key element in its own growth strategy for the coming decade. The U.S. had bemoaned the fact that the 1994 GATT agreement allowed too much flexibility to individual developing countries in terms of determining both the extent and the pace of financial services liberalisation.
This particular episode represented the second attempt by the WTO to bring about such an agreement. In 1995, the U.S. had walked away from the negotiations (and thereby halted the process), arguing that the offers of liberalisation from developing countries were "simply inadequate". This time, clearly, the offers of opening up were more to its satisfaction. In a joint statement, the U.S. Trade Representative and the Treasury Secretary were enthusiastic: they said that the agreement "would open up financial services markets to an unprecedented degree and provide lasting benefits to U.S. industry, the U.S. economy and even the world economy."
Not all reactions were so positive. The trade representatives of South-East Asian countries, who had (unwillingly) made the most concessions - or had concessions forced upon them by the financial crises that have made them dependent upon injections of supportive capital - were cautious. They argued that they had tried to do their best under the difficult circumstances in their region. Egypt's Ambassador in Geneva was more forthright, declaring what was obvious to everyone: that the agreement paved the way for one-way traffic, for large firms in developed countries to take advantage of the financial problems in Asia and elsewhere, to walk in and sweep aside or take over national firms.
THE Indian commitment at Geneva has been mercifully relatively limited, and in this the trade negotiators must have been assisted by the fluid political situation at home, which allowed them to plead relative helplessness. India has promised to give Most Favoured Nation (MFN) status to all foreign banks instead of selective preference, and has agreed to allow foreign banks to open up to 12 branches a year in India instead of the present 8. No concessions have been given to foreign insurance companies. These concessions are much less than the sweeping promises of liberalisation that the South-East Asian countries, for example, have been forced to make.
Nevertheless, the danger remains even in India that there will be strong pressures to open up financial services to foreign providers. There is even a powerful domestic lobby at work, arguing that this is in fact the best thing for the Indian economy, since it will reduce costs and increase efficiency for other producers in the economy and attract more capital into India. It is even suggested - as in the India Infrastructure Report brought out by the Finance Ministry - that sustained infrastructure investment in the country requires a complete liberalisation and overhaul of the financial sector as a prior condition. There is also a move towards opening up the insurance sector to foreign companies. In fact, the Gujral Government had tried to bring in a bill to this effect earlier this year, but was forced to withdraw it at the last moment (Frontline, September 5, 1997).
In the case of the insurance sector, the argument is frequently heard that our nationalised insurance companies are inefficient and unwieldy, that they do not provide a range of insurance services, and that foreign companies would be more able to meet the needs of the diversified economy. While it is certainly true that there are a number of problems with the nationalised insurance companies, they have achieved a very large spread, financed a whole range of infrastructure projects particularly at the municipal level, are on the whole very profitable, and have not shown evidence of major scams. A government committee appointed several years ago (under R.N. Malhotra) to look into the matter found a reasonable degree of consumer satisfaction as well.
The aim of liberalisation in this sector must presumably be to achieve the type of insurance services prevalent in the developed world. Indeed, the U.S. system is implicitly the nirvana towards which domestic insurance reform is directed. As in so many other areas, this is based on a complete misconception of how the system has actually worked in the U.S. In this context, a Report of a Sub-Committee of the U.S. House of Representatives, published in 1990, is extremely telling. The Sub-Committee found the situation in the U.S. insurance industry to "encompass scandalous mismanagement and rascality by certain persons entrusted with operating insurance companies, along with an appalling lack of regulatory controls to detect, prevent and punish such activities." It was pointed out that the business of insurance is uniquely suited to abuse by mismanagement and fraud, and that the driving force appeared to be quick profits in the short run, with no apparent concern for the long-term well-being of the company, its policyholders, its employees, its reinsurers, or the public at large.
Three large insurance companies of the U.S. that had also experienced financial failure were singled out for special criticism by the Sub-Committee. The irony is that the managers involved are now in the management of other insurance companies, also with global reach, and active among the companies eagerly seeking entry into the markets of developing countries, including India. If the Indian government does indeed succumb to pressures to open up insurance services, and if there are subsequent scams and company failures involving major hardship to the unsuspecting public, no one can say that we were not forewarned - by no less than the U.S. Congress itself.