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close this bookThe Courier N 156 - March - April 1996 - Dossier: Trade in Services - Country Report : Madagascar (EC Courier, 1996, 96 p.)
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close this folderTrade in services
View the document(introduction...)
View the documentA trailblazing project for services in Africa
View the documentServices potential in the Caribbean
View the documentWhat do ACP nations have to win or lose from global liberalisation of services?
View the documentImplications for developing countries of liberalised financial services
View the documentTemporary movement of persons
View the documentNew realities for national shipping in Africa
View the documentState-owned airlines try to avert crash-lanclings
View the documentAir Jamaica: the bride without dowry soars to new heights
View the documentGlobal tourism
View the documentThe 'phone' phenomenon

Implications for developing countries of liberalised financial services

The increased flow of foreign direct investment (FDI) into the developing countries in recent years was a powerful enough incentive to sustain the latter's interest in the long negotiations that led to the conclusion in July 1995 of the General Agreement on Trade in Services (GATS). The United States' reticence and final withdrawal did not prevent a large number of countries from making improved offers that helped clinch the deal. They were certainly encouraged by the EU's steadfastness but equally enticed by the gains they anticipated.

According to recent data issued by UNCTAD, the flows of FDI into developing countries between 1992 and 1994 rose, on average by 24% as against 8% for the developed countries. Although down from the 40% achieved in 1993, the boom is continuing - a trend that has also been observed by international fund managers in what has been described as 'the emerging stock markets' in the developing countries. The reasons are not too far to seek. Over the past 10 years, most developing countries have pursued a liberalisation policy under structural adjustment programmes, involving the relaxation of foreign exchange controls and privatisation of state enterprises. This has opened up their economies to foreign investment in an unprecedented manner. Furthermore, it has come at a time when transnational corporations (TNCs) are, in any case, increasingly choosing to move some of their activities to the developing countries, as part of their global strategies of production, distribution and cost-cutting.

These figures have to be taken with caution though. The flows have been and remain unevenly distributed. Asia accounts for nearly 60% of the investments with China alone responsible for as much as 33%. South America accounts for 30%. Africa's share remains dismal - 6% between 1991 and 1993 as against the 12% it achieved in the early 1980s. Between 1981 and 1992, only Nigeria in sub-Saharan Africa featured high in the league of developing countries host to foreign direct investment (11th with $5.1 bn of the total of $280.5bn). It should be acknowledged, however, that some smaller countries like Seychelles, Ghana and Equatorial Guinea attracted investments mensurate with the size of their econ omies. The least developed countries as a group have continued to fare badly. Their share of total developing countries' financial flows declined from an annual average of 2.1 % in 1986-1990 to 0.6% in 1992.

Lessons learned

Two fundamental lessons have, however, been learned in recent years: first that countries with stable economic growth like China, Singapore and Mexico attract more investment and second, that liberalisation for its own sake does not necessarily produce the desired results. This was clearly illustrated by the disastrous liberalisation experiments carried out by Chile, Argentina and the Philippines in the late 1970s and early 1980s. In these countries the changes resulted in huge capital outflows, contributing in no small measure to increases in their foreign debt. Their experience underscored the pernicious effect of financial deregulation in countries where there are high levels of corruption '. In such countries, local branches and subsidiaries of large multinational banks often serve as conduits for capital flight and other evasionary activities like 'back-to- back' loans.

Monetary control and credit allocations are essential tools of economic management, the sovereignty over which no developing country would willingly relinquish. At the same time, it is recognised that market forces are superior to quantitative restrictions as instruments of management and allocation of resources. As the basic tenet of the IMF, and one which also underlies the principle of the GATT, liberalisation in financial services appeared to be fraught with difficulties at the beginning of the Uruguay Round, when the OECD countries began advocating removal of restrictions on capital transfers.

The GATS reflected not only the positions of both the developing countries and the OECD in these areas, but also the complexity of the financial services issues involved - market access and non-discrimination, protection of infant industries, application of Most Favoured Nation (MFN) treatment, prudential regulation and so on. Two annexes to the Agreement, including an Understanding on Commitments, deal with the application of the GATS principles to financial services - the latter defined to include a range of activities in insurance, banking and securities as well as consulting and broking. The annexes give considerable autonomy and flexibility to countries in interpreting the rules. It is recognised, for example, that a country may take prudential measures to protect 'investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system'. It may also 'improve, modify or withdraw' any specific commitments it made on its schedules within the framework of the Understanding on Commitments in financial Services.

The USA's reluctance to accept a multilateral track in financial services, and its preference for MFN, led to members being given a deadline within which to indicate changes to their commitment schedules - six months after the entry into force of the World Trade Organisation (WTO) - with the hope that the US would by then have changed its stance and opted for multilateralism. American adherence was seen as vital if other nations were not to downgrade their offers. Indeed, many thought the survival of the agreement depended on the United States. These fears have proved unfounded. In June 1995, less than two months after negotiations resumed under the auspices of the WTO for new improved commitments, the US announced its definitive option for MFN for the whole of the financial services sector. The EU promptly intervened. At its suggestion the deadline for negotiations was extended and talks continued without the US until the end of July 1995 when a deal was clinched.

Some 76 WTO members made commitments in the financial sectors - 30 reportedly improving their offers during the later stages of the negotiations. Commitments may vary, but together they already represent a significant degree of liberalisation. There are commitments, in some cases, 'to increase the number of licences available for the establishment of foreign financial institutions; guaranteed levels of foreign equity participation in branches, subsidiaries or affiliates of banks and insurance companies; removal or liberalisation of nationality or residence requirements for members of the boards of financial institutions; and the participation of foreign banks in cheque clearing and settlement systems,' according to a WTO press release issued after the July 1995 agreement. And although the agreement initially lasts only until 1 November 1997, thereafter, member countries can, within 60 days, modify or improve their offers. More talks are envisaged and these are expected to provide opportunities for further liberalisation.


In principle, the agreement enhances market possibilities for potential financial services exporters. In the coming years, more foreign banks, securities firms and insurance companies are expected to invest in developing countries. The advantages are obvious for those with relatively large economies. As well as increasing financial transactions, notably in the grant of loans, the presence of foreign institutions will lead to greater competition and better terms and services for customers. It will bring about new ways of doing things, for example, in popularising modern payment methods such as credit cards and cheques, and encouraging the use of the latest computer technologies. It will also create new complementary businesses for domestic banks.

The overall positive impact on international trade cannot be underestimated - not just in terms of banking but also in insurance. For one thing, it should lead to a reduction in premiums, particularly in countries where companies are currently required to take out commercial insurance from national firms. In these countries, insurance premiums are much higher than those available on the world market, and the policies are often inadequate, forcing traders to take out complementary insurance elsewhere. Indeed, national insurers themselves are sometimes forced to reinsure on the international markets to cover their own risks, thereby adding costs to goods. In the first half of the 1980s, nearly half the goods that entered and left the developing countries were insured twice, resulting in an additional cost of $3.7 billion, according to UN sources.

There is no doubt that if global liberalisation of financial services is to have its desired impact on the developing countries, and in particular on Africa, it must be accompanied by domestic policy changes - political, economic and institutional. The political environment must be right. It needs to be stable (preferably democratic) and characterised by transparency and accountability in order to avoid the kind of capital flight that was witnessed in the Philippines, Chile and Argentina in the 1980s. In this regard, the current wave of political reforms in Africa is welcome. The macro-economic indicators such as the inflation and exchange rates must also be right. A good number of African countries are, to a great extent, on the right track with their structural adjustment programmes.

An attractive fiscal regime and transparent, non-discriminatory investment codes must be adapted. These have proved inadequate in past, but a number of Africa countries are making renewed efforts with positive results. The Ghana Investments and Promotion Centre (GIPC), for example, reported recently that between January and September 1995, Ghana received foreign direct investments worth $125 million as result of a new investment code which saw the business sectors reserved for Ghanalans reduced from 22 to four and the minimum equity requirement for joint ventures between foreigners and Ghanalans fixed at only $10 000. The GIPC forecasts an annual financial inflow of $100 million. In Nigeria, similar incentives on foreign equity participation are on offer in a new investment code.

Portfolio equity investments in the developing countries as a whole, which barely existed in the 1980s, reached $14 billion in 1992. In subSaharan Africa, they are increasing appreciably as more and more companies are listed in domestic stock markets. Excluding South Africa, there are now some 14 stock exchanges in the region with a total capitalisation of $20 billion. South Africa is in a league of its own, with a stock exchange worth $236 billion. The hope is that this country could act as an investment pole for the whole of sub-Saharan Africa. It goes without saying that privatisation programmes on the continent must be pursued.

Finally governments need to improve infrastructures, particularly transport and communications, which are absolutely necessary if Africa is to be integrated effectively and profitably into the global economy.