TWN Info Service on WTO Issues (Feb03/2)

8 February 2003

Geneva

Dear friends and colleagues

DEVELOPING COUNTRIES SHOULD EXERCISE THEIR RIGHT TO CHOOSE WHETHER AND WHAT EXTENT TO LIBERALIZE IN SERVICES

At the recently concluded meeting of the UNCTAD Commission on Trade held in Geneva on 4-6 February, the developing countries were cautioned against committing themselves in further liberalization in the on-going services negotiations in WTO, unless they are already prepared, and the pre-conditions for successful liberalization are in place.

It was noted that WTO Members have the right to choose in which sectors and to what extent to make any commitments, and thus the developing countries should exercise this right and not be subjected to pressures to open up beyond what they are prepared to, and what they are comfortable with.

Below is a report of the UNCTAD meeting by Goh Chien Yen, a researcher with the TWN. A version of this report was published in the South-North Development Monitor (SUNS) of 7 Feb 2003.

With best regards

Martin Khor

Director

Third World Network

DEVELOPING COUNTRIES CAUTIONED AGAINST SERVICES LIBERALIZATION COMMITMENTS IN GATS/WTO

Report on the UNCTAD Commission on Trade meeting in Geneva 3-6 February

2003

By Goh Chien Yen, Third World Network, Geneva

There is no legal requirement or compulsion under the WTO and its current round of services negotiations for developing countries to commit themselves in the GATS to liberalize their services sectors. Developing countries should thus exercise their legal right to be cautious about further liberalization in the WTO, especially if they have not yet carried out an assessment of the effects or do not yet have a national services plan or strategy.

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

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

The panel on “Trade in services and development implications”, held on 4 February, comprised Uruguay’s deputy foreign minister Mr. Guillermo Calle Jaimes, South African academic Mr. James Hersh, UK trade and industry department economist Mr. P. Dodd, Singapore Ambassador V.G. Menon, the director of the WTO secretariat division on services, Mr. Abdel-Hamid Mamdouh and Mr. Martin Khor. After extensive discussions, UNCTAD trade division director Lakshmi Puri made concluding remarks.

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

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

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

In this respect, Khor said, the developing countries are facing some serious problems relating to the WTO’s General Agreement on Trade in Services (GATS) and the current negotiations.

Firstly, there is the lack of data on services trade, especially as they pertain to the WTO services framework. This is an old problem that had been highlighted before, during and after the Uruguay Round GATS negotiations, but had never been dealt with by the international organizations. As clearly analyzed by Chakravarthi Raghavan in his book “Developing countries and services trade” (TWN, Penang, 2002), the inadequacy of data makes it difficult or impossible for developing countries to assess the effects of past or future liberalization. As described in that book, this creates a negotiating situation akin to developing countries “chasing a black cat in a dark room, blindfolded”.

Khor said the lack of data also made it impossible to fulfill a GATS condition, that there be a proper evaluation of effects of services liberalization, before embarking on new negotiations. It also hinders efforts to develop safeguard mechanisms against the negative effects of liberalization on developing countries.

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

On the other hand, inappropriate and over-rapid liberalization could cause a range of problems for developing countries, such as financial instability (resulting from opening up financial markets to the vagaries of capital flows and speculation), displacement of local firms and net job losses by the entry or expansion of foreign service providers, and significant net foreign exchange outflows due to profit repatriation of foreign firms (which also mainly provide for the local markets and thus do not earn much foreign exchange for the host countries).

Khor said that the NGO community was increasingly concerned that the combination of privatization (often under loan conditionality) and liberalization was leading to higher prices of essential services, thus hampering 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 Social Watch, a NGO, show how the liberalization and privatization of essential services 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 to liberalize, when and to what extent, in reality the developing countries face tremendous commercial and political pressures to liberalize, and once they commit in the GATS they would be unable to “backtrack” unless they can afford to pay compensation.

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

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

He said that developing countries should fully exercise this right, including the right not to liberalize further unless or until the country has developed a proper plan, is already prepared to face increased competition, has in place the pre-conditions for successful liberalization, and is thus comfortable to commit itself in the GATS process.

Khor said that a cautious approach is advisable, since it would be difficult to reverse a commitment in GATS once it is made. Countries that believe it could benefit from liberalization in a particular sector could do so autonomously without necessarily committing itself in GATS, and thus be able to judge the wisdom of its action and also have an opportunity to reverse it to some extent or fully, should there be negative effects. A commitment in GATS could then be made later when the country is convinced that it would have benefits from such a commitment and that it can deal with the risks or costs.

Khor noted that in the current request-offer process, the developed countries had made very heavy demands on developing countries to open up fully or to a great extent in a wide range of services. He urged the developed countries not to put pressure on the developing countries to accede to their requests, but to leave the decisions wholly to the developing countries. The latter should feel free to make their choices fully in line with national policy objectives and not feel they are obliged to open up, simply because requests have been made. Each developing country should be able to decide for itself the extent of liberalization 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 management of data in formats relevant to assessing the effects of past and future liberalization in GATS. It should also assist developing countries in developing a national services plan and strategy and in that context the options and appropriate choices in the WTO services negotiations. UNCTAD should also conduct research on the effects of services liberalization on the economy, the balance of payments, and public access to essential services; on developing a safeguards mechanism within GATS; on a development agenda in the negotiations on new rules (domestic regulation, subsidies, government procurement), and on operationalizing the developed countries’ obligations under GATS Article IV to assist developing countries to strengthen their domestic services capacity.

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

South African academic Hersh stressed that the WTO negotiations should open up access in developed countries to professionals from developing countries as Mode 4 was the most important source of services trade for the developing countries. For a developing country an appropriate strategy would be to enter the services market of neighbouring countries first, and then the region and finally the developed countries.

Ambassadsor Menon provided an account of the successful development of the services sector in Singapore, as an example of what developing countries could do to exploit their potential.

Mr Mamdouh from the WTO secretariat said that in the decade after concluding the GATS negotiations, “we know more now about services but it is humbling as the more we know the more there is to know.” He said we understand more about the complexity of services, the attempt to achieve competitiveness but also other policy objectives, which involve a high degree of complexity.

He pointed out the difference between liberalizing services under GATS and deregulating services, and stressed that Members should exercise their right to regulate services. On the role of liberalization of services in development, he said: ‘We now understand it better. Liberalization is one ingredient of the recipe. By itself it is not a panacea and must be accompanied by regulatory and policy reform.’

The WTO, he added, had started the assessment process by realizing the deficiency of statistical data and agreed that assessment can only be qualitative and not quantitative due to data deficiency.

He said that through the technical assistance programme, “we sensed the difficulties developing countries face.” He agreed with Khor that developing countries should have a services plan. The ideal way for developing countries to approach negotiations should be by placing it in the context of the domestic reform agenda and the development strategy for sectors, and what is the useful role of liberalization. Then on this basis the country can decide what commitments to make, and what conditions it wants to impose on foreign companies, such as technology transfer.

To reach this point, he said, there must be a vision for human resources development. Agreeing with Khor, he said there was no services Ministry in developing countries, and there is a need to have a common comprehensive services policy. The negotiations should be placed in the context of this vision.

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

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

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

The Uganda delegate agreed that it is in the best interests of developing countries to exercise maximum caution in making commitments in their GATS schedules. He said: “In practice, our countries have received requests in 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 poverty trap. Commodity prices have collapsed. Due to liberalization, most LDCs ended up with deindustrialization, many local firms have closed. Due to subsidies in rich countries, even our farmers are threatened by cheap agricultural imports. In view of all these problems - the poverty trap, commodity price collapse, deindustrialization, farmers going out of business, workers retrenched - what can developing countries do so that their services sector can be boosted? Or will our service sector also go down? How can we address this problem?”

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

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

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

She added that the EC had made requests of developing countries in many sectors such as finance, telecoms, distribution, tourism, but it is open to listen whether this is to their need.

She agreed that capacity building is needed for developing countries to participate in the services trade and in the area of regulation. She said that GATS recognizes the rights of members to regulate, and especially that regulations are needed to deal with universal services. Work on domestic regulation is not intended to come up with model regulations but to help governments with best practices.

The EC stressed that governments retain the right to supply services, it is a decision for each government to make, and this is linked to the issue of universal access to services. It also agreed that labour services are a vital issue, not only for sectoral access but also transparency regarding visas, work permits and speed of delivery. She added that GATS provides for technology transfer on a commercial basis and that when market access is opened up, members can attach technology transfer as a condition.

The Brazil delegate said there appeared from the panel to be two contrasting approaches that developing countries can take to services negotiations: 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 countries have the comparative advantage such as agriculture. On topics where developing countries are on the defensive there is progress, for example services where there is the most progress. At the moment we have a constructive position, but this can swiftly change to the defensive position if there is no progress in areas of our interest.

He also called on UNCTAD to pay attention on regional negotiations. There can be a serious problem for developing countries if regionalization takes place 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 requests being made by the countries. Given the far reaching impacts of the GATS negotiations, 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 panel session and winding up the discussions, said that the indepth debate had provided a development perspective to the issue of WTO negotiations. The Secretariat was very satisfied that this was a forum where members could ventilate their concerns regarding their domestic service sector and the negotiations. She noted the constraints faced by LDCs, and that they had been asked to unilaterally liberalize under structural adjustment without proper preparation regarding regulation and capacity building. This again raised the issue of coherence between the agencies.

She said that what many panelists and participants said had reinforced the view that development is the end objective and trade is only the means, and trade liberalization is one of the aspects of trade. There is need for coherence between the policies of the international agencies. As mentioned by the LDCs, there should be an assessment of the negative impact of services liberalization, including when this is also done under adjustment programs.

To further facilitate developing countries in this area, Lakshmi Puri also suggested looking into building a positive relationship between market access and supply capacities; modalities for operationalizing Article IV of GATS; and exploring ways to bring the mode 4 issue forward. On the recurring concern of lack of data and statistics, she acknowledged the need for the Commission to tackle this, as it severely hampers developing countries’ ability to negotiate meaningfully.