LIBERALISING SERVICES -- GATS OR BANK WAY

6:51 AM Jul 4, 1994

LIBERALISING SERVICES -- GATS OR BANK WAY
Geneva 4 July (Chakravarthi Raghavan) -- It was in 1982 that the United States first brought up in the GATT the idea of a new round of multilateral trade negotiations to open up Third World markets and bring services issues into the General Agreement.

The US intentions on services had been signalled even in 1981 by US Trade Representative Bill Brock, soon after President Reagan moved into the White House, in testimony before Congress and next year in February at the Davos symposium.

At the 1982 GATT Ministerial meeting, the US pushed it further by proposing a North-South Round, and spoke of the industrialized countries providing greater access to goods exports of the NICs, in return for the latter opening up their own markets to other developing countries.

But the major US thrust was to bring services, investment and intellectual property issues into the General Agreement and also focus on Europe's agricultural policies and protection.

The process then set in motion ended in April 1994 at Marrakesh with the signature of the Final Act in the Uruguay Round and the Agreement to establish the World Trade Organization (WTO) with its annexed agreements including the General Agreement on Trade in Services (GATS) -- one of the package of accords in the Uruguay Round and all of which are expected to enter into force on 1 January 1995 or as soon as may be thereafter.

And now has come a World Bank/UNCTAD publication to 'address issues relevant to the assessment, formulation and implementation of policies related to international transactions in services'.

The publication, by the World Bank and its International Trade Division and UNCTAD's Programme on TNCs and Investment (the former UN Centre for TNCs now merged in UNCTAD) is titled: Liberalizing International Transactions in Services: A Handbook.

An UNCTAD press release says "the handbook is designed to assist developing countries in elaborating and assessing policies to improve efficiency of their services sectors through the liberalization of international transactions -- encompassing both foreign direct investment and trade -- and that it is the first attempt to provide a comprehensive analysis of policy instruments that could be used to influence such decisions."

Much of the explanations and analysis in the handbook is a regurgitation of the debates of the 1980s on services issue and promotes the view that developing countries need efficient services sectors to improve productivity and efficiency of their economies and that opening up their domestic market to foreign service providers through FDI would be a major way to ensure increased efficiency in provision of services.

The publication was put together before the Uruguay Round was concluded, but a chapter has been added to briefly analyze the GATS -- a better analysis, both of GATS and the schedule of commitments attached to GATS, is provided by UNCTAD's services division in its report for a meeting next week of its Standing Committee on developing Services Sectors.

A subliminal running theme of the handbook is the advice to developing countries and their policy makers to liberalise their services sectors and open them to foreign suppliers, and use the GATS and various regional arrangements to bind these measures and thus signal to foreign investors an irreversibility of policies so as to attract foreign investments -- perhaps as an end in itself that would in due course result in development.

For much of the 1980s, the World Bank had been promoting a "free market, free trade" ideology for the developing countries, pointing to Far Easter NICs -- Hong Kong, Singapore, South Korea and Taiwan, and particularly the last two -- as examples of economies that had practised such policies and had developed successfully.

This Bank view of the policies successfully followed by Korea etc was challenged by a number of economists and studies, some of which brought out that in fact in the 60s and 70s, South Korea had more regulations and government control over the economy than even the command economy of the centrally planned countries.

The Bank came up in 1991, in its WDR 1991, with its modification of the neoclassical policies and in favour of its 'market-friendly' approach -- that acknowledged presence of various market failures, but argued against any government intervention on the ground that 'government failure dominates market failure'. It hence advocated leaving all production decisions to private agents, guided by domestic and international market forces, and concentrate public expenditure on development (volume and quality) of human capital and physical infrastructure. The 1994 WDR carries this last further by advocating development of many infrastructures to private agents, and government essentially doing a regulatory role.

But the Bank's market-friendly policy approach in WDR 1991 was challenged by an impressive number of economists, and within the Bank's Board by Japan itself.

The Bank's answer in the shape of a study about the Far Eastern Miracle to justify its own 'market-friendly' approach has now been shown up by economists like David Felix and Sanjay Lall to be full of errors and even some tendentious conclusions. UNCTAD in its forthcoming 1994 TDR is providing a different perspective, than the market-friendly theory of the Bank, on the actual policies that were pursued by the Far Eastern economies.

In 1986 and 1987, the UNCTC canvassed with developing countries the view that 'services' was not a 'trade' issue but an 'investment' issue. But developing countries did not favour multilateral rules for a foreign investment regime and the developed countries saw greater advantage for themselves in pursuing services as a 'trade' or 'trade-related' issue. As an outcome of these debates, the developing countries opted for an UNCTAD technical assistance programme for helping them in their negotiations, as had been case during the Tokyo Round.

In November 1987, more than a year after the Uruguay Round was launched, the World Bank had brought out a publication, "The Uruguay Round: A Handbook on the Multilateral Trade Negotiations" which it unveiled in Geneva before negotiators.

At that time, the EC delegate asked the Bank what was the audience for the publication, and if it was negotiators how it was going to be of use to them when it did not address the issues being negotiated.

The present handbook has dealt with several of the issues in the services negotiations, including the various modes of supply and the rules and restrictions in importing markets against those modes. But many of these had been before Third World negotiators atleast since 1989, many provided to them confidentially under the UNCTAD technical assistance programme, and the outcome is found in the GATS texts and the schedules - reflecting the balance of negotiating power and not any unawareness of negotiators on the issues.

At the time of the 1987 Bank's "Handbook", an Indian delegate wondered about the Bank's perspectives, and whether it was talking of how the Uruguay Round and the GATT system could contribute to the Development of the Third World or about the Third World's contribution to the Uruguay Round.

The same question can be posed about the Bank/UNCTAD handbook, in terms of services, Third World liberalisation and Development. The answer is still not clear.

At a press briefing to launch the "handbook", Carlos A.P.Braga who is a senior economist in the World Bank's International Trade Division, and Karl Sauvant who heads the research and policy analysis branch of UNCTAD's division on TNCs and Investment, said policy-makers in most developing countries were not aware of the services issues and the programme would help them to liberalise their international services transactions, improve economic efficiency and attract foreign direct investment.

The US move on services in 1992 met with opposition and reserve from the other industrialized countries including the European Community and developing countries, went through a period of study and exchange of information among countries interested, and a bitter North-South debate on whether or not services should be brought on to the GATT agenda.

The international debate from 1982 to now has ranged over the entire area of role of services in the economy, the promotion and rejection of the discredited theories of linear development -- liberalization, economic growth and development and the three stage theory of economies moving from primary production to industrial production and then to higher stage of services economy -- the differences between 'trade in goods' and 'trade in services', and 'transactions in services', the role of services in development and their various interconnections.

Though often misrepresented, the opposition of developing countries to the GATT services negotiations was not because of ignorance over the role of services in development or the importance of services industries, but rather on the basis that the characterstiques of services was such that it could not be brought into the GATT and its framework by the simple process of amending GATT and adding 'services' wherever the word 'product' appeared thus vesting GATT with jurisdiction.

Starting from that position, participants in the Uruguay Round negotiations, in the package of agreements concluded by them and annexed to the WTO agreement, have agreed on a framework for multilateral trade in services, the GATS.

This provides for universal coverage, but with details of market opening commitments -- in terms of sectors and subsectors opened up for foreign competition, conditions and modes of supply, and how far 'national treatment' principle would apply etc -- to be set by participants in their schedules.

The GATS recognizes the right of developing countries to open up fewer sectors and to impose conditions -- such as requiring access to technology, distribution and other networks, joint ventures for investment including shares of domestic and foreign capital (even many developed countries have done this in their schedules) -- as a condition of market access. In terms of Uruguay Round itself, negotiations are continuing in three sub-sectors (financial, basic telecommunications and maritime services) and one mode of supply (movement of natural persons).

The GATS also provides for a future framework for successive rounds of negotiations for further liberalisation, the first such to begin after five years.

By the time the services debate ended and the Uruguay Round's GATS was concluded, the United States had given up its original simplistic proposal to bring services into GATT by merely adding 'services' after products and applying MFN and national treatment principles. It did an 180 degree turn and moved away from this and adopted several of the original positions of the developing countries and is trying to put the conditional MFN and bilateralism into several of the subsectors.

The 7-1/2 years of negotiations ranged over issues of definition of 'trade in services' (rejecting the 'transactions' in services approach) and the four 'modes' of supply, the balances to be built into an international agreement to safeguard the interests of service suppliers and importers and domestic vs foreign suppliers and producers, public interest in such matters, the necessary safeguards, and the special needs and positions of developing countries etc.

One of the arguments in the handbook, emphasizing the investment mode of delivery, is that such FDI would be using 'domestic factors of production' -- such as in tourism sector -- and thus the host country gains. The argument though appears to ignore the considerable amount of other studies, in relation to tourism and the mass packaged tours, that suggest that in fact except for some low level local employment, much of the tourism incomes actually flow back to the home countries -- in the shape of hotel management, tourism agency commissions etc.

The Bank/UNCTAD handbook in a sense is based on the Bank's view of 'market-friendly' policies and the former UNCTC view that services are really an investment issue and best promoted through suitable policies for FDI.

There is thus an inherent built-in bias, because of the blind application of trade theories on goods to the services and investment questions, promoting the view that developing countries should open up their services markets on grounds of economic efficiency -- and against protection or government role to promote domestic service industries and nurturing them for international competition.

Some of the key Third World negotiators in the Uruguay Round services negotiations, after glancing through the publication, said that while the handbook may serve a purpose in informing the ordinary public who may be ignorant of the role of services, had little to contribute in helping Third World negotiators.

The publication, they said, also shows a bias in the discussion of the various modes of supply of services -- investment and commercial presence, transborder movement of services, movement of consumers, and temporary movement of natural persons as producers of services for delivery of services.

While the various regulations used to hinder or restrict investment, transborder movement and movement of consumers is dealt with on economic efficiency grounds to argue for their removal, the various restrictions on movement of natural persons is in a sense explained away as due to other social factors. It also focuses on foreign direct investment being impeded by restrictions (by developing countries) on movement of managerial or other personnel.

But the study brings out that countries yielding to the US and its family of 301 laws (as South Korea did) to undertake reciprocal liberalization measures are probably short-changing themselves since the action only creates a duopoly of domestic and US suppliers. Far better to do it on an MFN basis.