Doha: WTO At your Service?
Special to Globe and Mail Update July 20, 2008
Pascal Lamy, head of the World Trade Organization, may be desperate to reach a global trade deal, but developing countries have rightly been concerned about agreeing to texts that promise illusory reductions in agricultural subsidies in the European Union and the United States while requiring them to cut their industrial tariffs proportionally more than the developed countries. They should also not allow themselves to be snookered into a bad agreement on services.
While global attention has focused on the talks on agricultural subsidies and industrial tariffs, the U.S. and EU have made it clear they will not settle for a trade package that does not include an agreement on services.
As U.S. Trade Representative Susan Schwab bluntly stated in a recent opinion piece, Washington “will not support a Doha package unless it includes an ambitious outcome on services that delivers commercially meaningful results.” While Ms. Schwab portrays the services talks as the poor cousin of the agriculture and industry negotiations, an equally possible outcome is a services agreement unaccompanied by deals in industrial tariffs and agriculture.
With the North-South polarization in agriculture and industry, salvaging Doha with a deal in services, which are said to account for 50 per cent to 60 per cent of economic activity in most developing countries, might become an increasingly attractive option to the U.S. and EU.
Media coverage of developing country concerns in services has mostly centred on the movement of “natural persons.” Much resentment has been expressed with a multilateral system that facilitates the movement of capital and goods into developing country markets but severely limits the entry into developed country markets of labour from the developing countries.
But an equal, if not greater, concern of the developing countries is their current lack of capacity to regulate transnational service providers.
Their fears have been fanned by the current troubles of the global financial system, which are traceable to the virtual absence of global regulation of developed country financial operators. While financial services are just one of many services covered by the General Agreement on Trade in Services, the U.S. and EU have made a liberalized financial sector their main demand on developing countries. The EU, for example, has demanded that some developing countries eliminate regulations that cover the activities of hedge funds, and has insisted that Mexico open up its market to trade in derivatives, the slippery financial instruments that have played such a key role in the current financial chaos.
Most developing countries welcome foreign capital, but they have learned the hard way that a strong foreign financial presence demands a strong regulatory regime tailored to a particular country’s needs and capacities. It was the indiscriminate elimination of capital controls across the region at the behest of the International Monetary Fund and the U.S. Treasury Department that brought on the devastating Asian financial crisis a decade ago. With practically all capital controls lifted and investment rules liberalized, some $100- billion flowed into the key Asian economies between 1993 and 1997, with the money gravitating toward areas of high and quick return, such as the stock market and real estate. With few controls on where the funds went, overinvestment soon swamped the stock and housing markets, causing prices to collapse and triggering follow-on dislocations in the exchange rate, the balance of payments, and the balance of trade.
Gripped by panic, speculators scampered toward the exit. With both entry and exit rules liberalized, there was no way for governments – except for Malaysia, which defied the IMF and imposed capital controls – to stop the stampede, and the $100-billion that fled the region in a few short weeks in the summer of 1997 brought economic growth to a screeching halt from Korea to Indonesia.
Capital account and financial liberalization was also a key demand pushed on Argentina in the 1990s by developed countries. Buenos Aires complied, prompting Larry Summers, then U.S. treasury secretary, to claim that the end result of foreign interests controlling 50 per cent of the banking sector and 70 per cent of private banks was a “deeper, more efficient market and external investors with a greater stake in staying put.” Mr. Summers was dead wrong.
Foreign control aggravated the financial crisis into which Argentina was plunged in 2002, with the foreign-controlled banks ceasing to lend to local governments and businesses and, instead, sending capital out of the country. With no credit, small and medium enterprises, and not a few big ones, closed down, throwing thousands out of work as the country spiralled into depression.
After all this, one would have thought that developed countries would put the emphasis on seriously regulating the activities of global financial actors. Global finance, however, resisted any move toward effective regulation.
While there were calls for controls on proliferating financial instruments such as derivatives, these got nowhere. Assessment and regulation of derivatives were to be left to market players who had access to sophisticated quantitative “risk assessment” models that were being developed.
Moreover, the so-called Basel II process focused not on disciplining financial institutions in developed countries – which had actually triggered the Asian crisis – but on standardizing developing country financial institutions and processes along the weakly regulated “Anglo-American” financial model that had already been implicated in scores of crises since the 1980s.
Having been burned by the consequences of financial deregulation, many developing countries were not surprised when “self-regulation” led to the massive housing bubble whose bursting has brought the global financial system to the edge of collapse.
A global consensus is forming around strongly regulating the financial sector. But in disregard of this emerging consensus and the financial chaos around them, developed country negotiators at the WTO continue to press developing countries for a services agreement that would drastically liberalize their financial sectors. The developing countries should steer clear of the train wreck that will certainly ensue from the American and European determination to pursue global financial liberalization at any cost. They must not agree to a services deal that would compromise their ability to effectively regulate financial and other services.
Just as they must say no to agricultural and industrial tariff agreements loaded down with inequitable conditions, they must also not be party to a services agreement that would have no other effect but to continually drag them into the terrifying maelstroms of unregulated global finance.
Walden Bello is visiting professor of international development studies at St. Mary’s University in Halifax, professor of sociology at the University of the Philippines, and senior analyst at Focus on the Global South, a research institute at Chulalongkorn University in Bangkok.