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The case for open
markets in financial services
By Victor L.L. Chu
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| Here you will
find the backbone of a nation's economy |
Hong
Kong, 28 August 2003
-- Liberalization of financial services deserves more attention than it
has been getting so far in the Doha trade round. With the World Trade
Organization's all-important ministerial conference in Cancun in September
fast approaching, it is worth recalling just why this is so.
Opening financial
services markets to international competition would stimulate economic
growth through product and market innovation, leading normally to easier
and more cost efficient access of capital, and especially foreign direct
investments.
First, a definition:
Liberalization of financial services refers to the opening of markets,
or removing restrictions on market entry, for foreign service providers
in banking, insurance, securities and funds management. It requires equal
treatment for domestic and foreign suppliers.
We are talking about
not just another economic sector, but the backbone of a country's economy.
It is through financial services that a national economy is instantly
connected to the global economy. Benefits of liberalization would be widely
spread. Businesses and governments would get lower financing costs; households
would get better returns for the money they save through the flow of more
innovative and competitive investment products.
To make Doha a development
round in more than name, WTO members must regard financial services as
no less of a political priority than lowering barriers to agricultural
trade, the highly charged issue on which the entire Doha round is said
to hinge.
Financial services
are certainly worth the exercise of that all-important political will
at the top. The record shows that open, transparent financial markets
are the most competitive, efficient and responsive to the needs of business
and domestic consumers.
Financial services
that are open to international providers encourage wealth creation through
easier and more varied access to capital. The presence of international
participants encourages local providers to improve their performance.
Local enterprises b
enefit from greater access to increased inflows of
capital and expertise.
The WTO has taken
only the first steps towards opening up markets for financial services.
True, the Financial Services Agreement (FSA) of December 1997 provided
a legal framework for cross-border trade and market access. It extended
the General Agreement on Trade in Services (GATS), covering sectors ranging
from advertising to telecommunications, to financial services.
But the OECD countries
and developing countries have so far scarcely ventured beyond the status
quo in their commitments under the agreement. Few new offers have been
submitted and many of those merely bind existing regimes.
That needs to change,
for although OECD countries are already relatively open, the developing
countries have a long way to go.
What is holding them
back? Many developing countries are reluctant to open their financial
services markets because they fear a repeat of the turmoil and instability
that culminated in the Asian financial crisis in 1997.
The remedies are for
financial services liberalization to go hand in hand with the modernization
and strengthening of regulatory architectures. There is a balance to be
struck between efficient markets and economic stability. Regulatory policy
must aim to build resilience to future crises or threats of crisis.
The WTO indeed has
a lot on its plate right now. Financial services may seem an issue too
far at this stage of the game as the trade ministers meeting in Cancun
contemplate a trail of missed deadlines. But they should bear in mind
that liberalization of trade in goods and services will never achieve
its full potential if it is not accompanied by corresponding liberalization
of financial services
It is usually the
way of international trade negotiations for apparently intractable problems
to stack up until the dramatic break-through at ministerial level. The
key to progress on financial services liberalization - as for all the
other issues confronting the Doha trade negotiators - is to secure political
commitment at the highest level. Cancun is where that should happen.
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Victor Chu is Chairman,
First Eastern Investment Group (Hong Kong, China). He wrote this article
in his capacity as Chairman of the Commission on Financial Services and
Insurance of the International Chamber of Commerce.
Commission
on Financial Services and Insurance
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