Poor countries cautioned against services liberalization

Goh Chien Yen

The Social Watch report 2003 was quoted as evidence of the risks of unplanned service liberalization during an expertpanel discussion organized by UNCTAD in Geneva. Since there is no legal requirement under the WTO to liberalise the services sectors, developingcountries should be cautious aboutfurther liberalization, especially if they have not yet carriedout an assessment of the effects.
There is no legal requirement or compulsion under the WTO and its currentround of services negotiations for developing countries to committhemselves in the GATS to liberalise their services sectors. Developingcountries should thus exercise their legal right to be cautious aboutfurther liberalization in the WTO, especially if they have not yet carriedout an assessment of the effects or do not yet have a national servicesplan or strategy.

This caution and advice was given to developing countries during an expertpanel discussion at the UNCTAD Commission on trade in goods, services andcommodities, by a panellist, Mr. Martin Khor, director of the Third WorldNetwork. The Commission met in Geneva on 3-6 February.

Several other panellists and participants agreed that it was importantthat developing countries develop a national services plan and strategy,which could then be the reference point for their decisions on what tooffer and request in the WTO services negotiations. Without such a plan,it would be difficult or impossible for developing countries to make theright decisions.

The panel on "Trade in services and development implications", held on 4February, comprised Uruguay's deputy foreign minister Mr. Guillermo CalleJaimes, South African academic Mr. James Hersh, UK trade and industrydepartment economist Mr. P. Dodd, Singapore Ambassador V.G. Menon, thedirector of the WTO secretariat division on services, Mr. Abdel-HamidMamdouh and Mr. Martin Khor. After extensive discussions, UNCTAD tradedivision director Lakshmi Puri made concluding remarks.

All the panellists agreed that services comprise an increasingly importantsector in developing countries, constituting a high proportion of GDP(about 50% for developing countries in 2001 and higher in some of them, 66percent in Singapore and Uruguay).

Khor said that in addition to the contribution to GDP and jobs, theservices sector also had to be well managed as it provided for publicneeds such as health care and water and had a major effect on financialstability and the balance of payments. What is of importance todeveloping countries is that the services sector contribute to output,growth, employment and provision for basic needs.

Trade in services should only be a means and not an end, and should beproperly managed if negative effects are to be avoided. Discussion andnegotiations on services trade should thus be located in the largercontext of development.

In this respect, Khor said, the developing countries are facing someserious problems relating to the WTO's General Agreement on Trade inServices (GATS) and the current negotiations.

Firstly, there is the lack of data on services trade, especially as theypertain to the WTO services framework. This is an old problem that hadbeen highlighted before, during and after the Uruguay Round GATSnegotiations, but had never been dealt with by the internationalorganizations. As clearly analysed by Chakravarthi Raghavan in his book"Developing countries and services trade" (TWN, Penang, 2002), theinadequacy of data makes it difficult or impossible for developingcountries to assess the effects of past or future liberalization. Asdescribed in that book, this creates a negotiating situation akin todeveloping countries "chasing a black cat in a dark room, blindfolded".

Khor said the lack of data also made it impossible to fulfil a GATScondition, that there be a proper evaluation of effects of servicesliberalization, before embarking on new negotiations. It also hindersefforts to develop safeguard mechanisms against the negative effects ofliberalization on developing countries.

Khor pointed out that GATS is inherently imbalanced as developingcountries have far less capacity for services production than thedeveloped countries. Even if market access was increased, most developingcountries could only benefit little due to supply constraints as well asanti-competitive and monopolistic structures that act as barriers to entryto the developed countries' services markets - a point brought out in theUNCTAD secretariat documents before the Commission.

On the other hand, inappropriate and over-rapid liberalization could causea range of problems for developing countries, such as financialinstability (resulting from opening up financial markets to the vagariesof capital flows and speculation), displacement of local firms and net joblosses by the entry or expansion of foreign service providers, andsignificant net foreign exchange outflows due to profit repatriation offoreign firms (which also mainly provide for the local markets and thus donot earn much foreign exchange for the host countries).

Khor said that the NGO community was increasingly concerned that thecombination of privatization (often under loan conditionality) andliberalization was leading to higher prices of essential services, thushampering the people's access to water, electricity, health care, etc.There have been protests in many developing countries against this trend.Empirical studies involving more than 30 countries conducted by SocialWatch, a NGO, show how the liberalization and privatization of essentialservices have left consumers worse off.

The GATS architecture is often said to be 'development-friendly'. However, whilst each WTO Member can choose to commit which sectors toliberalise, when and to what extent, in reality the developing countriesface tremendous commercial and political pressures to liberalise, and oncethey commit in the GATS they would be unable to "backtrack" unless theycan afford to pay compensation.

Typically, developing countries do not have a comprehensive servicesdevelopment plan or strategy, nor a coordinating Services Ministry, andthus they are unable to make informed decisions such as on offers andrequests in the WTO negotiations. Khor urged UNCTAD to assist developingcountries in developing such plans and strategies, as well as in thenegotiations.

Developing countries, he stressed, have the legal right to decide whetheror not to commit themselves to further liberalization in any sector, andto what extent. This right is further strengthened by provisions such asArticles IV and XIX of GATS and reaffirmed in the Guidelines andprocedures for services negotiations of 28 March 2001.

He said that developing countries should fully exercise this right,including the right not to liberalise further unless or until the countryhas developed a proper plan, is already prepared to face increasedcompetition, has in place the pre-conditions for successfulliberalization, and is thus comfortable to commit itself in the GATSprocess.

Khor said that a cautious approach is advisable, since it would bedifficult to reverse a commitment in GATS once it is made. Countries thatbelieve it could benefit from liberalization in a particular sector coulddo so autonomously without necessarily committing itself in GATS, and thusbe able to judge the wisdom of its action and also have an opportunity toreverse it to some extent or fully, should there be negative effects. Acommitment in GATS could then be made later when the country is convincedthat it would have benefits from such a commitment and that it can dealwith the risks or costs.

Khor noted that in the current request-offer process, the developedcountries had made very heavy demands on developing countries to open upfully or to a great extent in a wide range of services. He urged thedeveloped countries not to put pressure on the developing countries toaccede to their requests, but to leave the decisions wholly to thedeveloping countries. The latter should feel free to make their choicesfully in line with national policy objectives and not feel they areobliged to open up, simply because requests have been made. Eachdeveloping country should be able to decide for itself the extent ofliberalization in each sector, and whether or not to bind this in GATS.This flexibility in GATS should be fully respected.

Khor urged UNCTAD to embark on a scheme for the collection and managementof data in formats relevant to assessing the effects of past and futureliberalization in GATS. It should also assist developing countries indeveloping a national services plan and strategy and in that context theoptions and appropriate choices in the WTO services negotiations. UNCTADshould also conduct research on the effects of services liberalization onthe economy, the balance of payments, and public access to essentialservices; on developing a safeguards mechanism within GATS; on adevelopment agenda in the negotiations on new rules (domestic regulation,subsidies, government procurement), and on operationalising the developedcountries' obligations under GATS Article IV to assist developingcountries to strengthen their domestic services capacity.

The Uruguayan deputy foreign minister Guillermo Calle Jaimes said thatdeveloping countries should not only be defensive in the servicesnegotiations but take a new pro-active approach in submitting requests. He noted, however, that developing countries face problems such as lack ofanalytical capacity, and scant statistics. The data produced by agenciesincluding the IMF are not adequate, he added.

South African academic Hersh stressed that the WTO negotiations shouldopen up access in developed countries to professionals from developingcountries as Mode 4 was the most important source of services trade forthe developing countries. For a developing country an appropriatestrategy would be to enter the services market of neighbouring countriesfirst, and then the region and finally the developed countries.

Ambassadsor Menon provided an account of the successful development of theservices sector in Singapore, as an example of what developing countriescould do to exploit their potential.Mr Mamdouh from the WTO secretariat said that in the decade afterconcluding the GATS negotiations, "we know more now about services but itis humbling as the more we know the more there is to know." He said weunderstand more about the complexity of services, the attempt to achievecompetitiveness but also other policy objectives, which involve a highdegree of complexity.

He pointed out the difference between liberalizing services under GATS andderegulating services, and stressed that Members should exercise theirright to regulate services. On the role of liberalization of services indevelopment, he said: 'We now understand it better. Liberalisation isone ingredient of the recipe. By itself it is not a panacea and must beaccompanied by regulatory and policy reform.'

The WTO, he added, had started the assessment process by realising thedeficiency of statistical data and agreed that assessment can only bequalitative and not quantitative due to data deficiency.He said that through the technical assistance programme, "we sensed thedifficulties developing countries face." He agreed with Khor thatdeveloping countries should have a services plan. The ideal way fordeveloping countries to approach negotiations should be by placing it inthe context of the domestic reform agenda and the development strategy forsectors, and what is the useful role of liberalization. Then on thisbasis the country can decide what commitments to make, and what conditionsit wants to impose on foreign companies, such as technology transfer.

To reach this point, he said, there must be a vision for human resourcesdevelopment. Agreeing with Khor, he said there was no services Ministryin developing countries, and there is a need to have a commoncomprehensive services policy. The negotiations should be placed in thecontext of this vision.

Several comments and queries were made by participants. Mr Roman from theCommonwealth Secretariat said liberalization of movement of naturalpersons would bring the most benefit to poor people in developingcountries, citing a study showing that if the OECD countries allowed a 3percent quota of its labour force to foreigners, the benefits would be 150percent more than all liberalization of goods combined. The best way totransform the lives of the poor is to send their children to work in therich countries.

The Indian delegate agreed that movement of natural persons is of utmostimportance to developing countries but they face many problems of accessand regulations. UNCTAD should undertake work on this as well as on thelack of statistics to measure the services trade flow, and how themonopolistic practices of TNCs hinder market access.

The Morocco delegate referred to Khor's emphasis that developing countrieshave the flexibility to choose the extent of liberalization commitmentsand said since Doha the African countries face many problems. It was acomplex task to identify national interests especially in the absence of aservices plan and a Ministry of Services. So it is no surprise thatAfrican countries are unable to fulfil the negotiating datelines. Headded that there has to be an assessment first before the negotiations,and that the GATS Council must make continuous assessment and to makeadjustments accordingly, as stated in the negotiating guidelines.

The Uganda delegate agreed that it is in the best interests of developingcountries to exercise maximum caution in making commitments in their GATSschedules. He said: "In practice, our countries have received requestsin areas where we have already liberalized and we are asked to commit. There will be enormous pressure put on developing countries."Another delegate from Uganda added: "The LDCs are caught in a povertytrap. Commodity prices have collapsed. Due to liberalisation, most LDCsended up with deindustrialisation, many local firms have closed. Due tosubsidies in rich countries, even our farmers are threatened by cheapagricultural imports. In view of all these problems - the poverty trap,commodity price collapse, deindustrialisation, farmers going out ofbusiness, workers retrenched - what can developing countries do so thattheir services sector can be boosted? Or will our service sector also godown? How can we address this problem?"

The Bangladesh delegate said LDCs had little chance to benefit from marketaccess in most services such as banking, and thus had little prospect fromtrade in services. He agreed that the best benefit could come frommovement of labour. If this is to benefit developing countries, then whyis this being blocked?

The Iranian delegate agreed with Khor that developing countries lack aServices Ministry as well as facing structural weaknesses. He called onUNCTAD to draft a model services plan and also study the social impact ofservices liberalization on developing countries.

The European Commission delegate thanked UNCTAD for its very valuabledocument on services. She said that that the points made by Khor on theimportance of having a development policy need to be stressed. Thenegotiations must not be conducted as an aim in itself but should fit intodevelopment policy, including with regard to the benefits and timing ofthat liberalization.

She added that the EC had made requests of developing countries in manysectors such as finance, telecoms, distribution, tourism, but it is opento listen whether this is to their need.She agreed that capacity building is needed for developing countries toparticipate in the services trade and in the area of regulation. She saidthat GATS recognizes the rights of members to regulate, and especiallythat regulations are needed to deal with universal services. Work ondomestic regulation is not intended to come up with model regulations butto help governments with best practices.

The EC stressed that governments retain the right to supply services, itis a decision for each government to make, and this is linked to the issueof universal access to services. It also agreed that labour services area vital issue, not only for sectoral access but also transparencyregarding visas, work permits and speed of delivery. She added that GATSprovides for technology transfer on a commercial basis and that whenmarket access is opened up, members can attach technology transfer as acondition.

The Brazil delegate said there appeared from the panel to be twocontrasting approaches that developing countries can take to servicesnegotiations: a "constructive position" of being willing to negotiate,and a "defensive position" vis-à-vis the requests of the major countries. For the agenda to progress there should be a constructive position first. But there is no progress now on the areas where the developing countrieshave the comparative advantage such as agriculture. On topics wheredeveloping countries are on the defensive there is progress, for exampleservices where there is the most progress. At the moment we have aconstructive position, but this can swiftly change to the defensiveposition if there is no progress in areas of our interest.He also called on UNCTAD tp pay attention on regional negotiations. Therecan be a serious problem for developing countries if regionalisation takesplace in an imbalanced and uncontrolled way.

The representative of ICFTU (the international trade unions confederation)criticized the complete lack of transparency in the offers and requestsbeing made by the countries. Given the far reaching impacts of the GATSnegotiations, this has to be addressed immediately.

UNCTAD's Director of the Division on International Trade in Goods,Services and Commodities, Mrs. Lakshmi Puri, in concluding the panelsession and winding up the discussions, said that the indepth debate hadprovided a development perspective to the issue of WTO negotiations. TheSecretariat was very satisfied that this was a forum where members couldventilate their concerns regarding their domestic service sector and thenegotiations. She noted the constraints faced by LDCs, and that they hadbeen asked to unilaterally liberalise under structural adjustment withoutproper preparation regarding regulation and capacity building. This againraised the issue of coherence between the agencies.

She said that what many panelists and participants said had reinforced theview that development is the end objective and trade is only the means,and trade liberalization is one of the aspects of trade. There is needfor coherence between the policies of the international agencies. Asmentioned by the LDCs, there should be an assessment of the negativeimpact of services liberalization, including when this is also done underadjustment programs.

To further facilitate developing countries in this area, Lakshmi Puri alsosuggested looking into building a positive relationship between marketaccess and supply capacities; modalities for operationalising Article IVof GATS; and exploring ways to bring the mode 4 issue forward. On therecurring concern of lack of data and statistics, she acknowledged theneed for the Commission to tackle this, as it severely hampers developingcountries' ability to negotiate meaningfully.