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The perils of a doha deal on services
by Walden Bello
9 July 2008

Desperate to clinch a new global trade deal, World Trade Organization
chief Pascal Lamy is planning to convene a “mini-ministerial” meeting in
the third week of July. The aim of the meeting is to come up with
agreements on trade in agriculture, industry, and services which have
been the focus of the so-called Doha Round of WTO negotiations that have
dragged on since 2001.

Developing country governments have been rightly concerned about
agreeing to texts which promise illusory reductions in agricultural
subsidies in the European Union and United States and require 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 US and EU have made it clear that
they will not settle for a trade package that does not include services.
As US 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 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 50-60 per cent of economic activity in
most developing countries, might become an increasingly attractive
option to the EU and US.

Much media coverage of developing country concerns in services has
centered on the so-called Mode 4 of the General Agreement on Trade in
Services (GATS), which addresses 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
labor from the developed 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 GATS, the US and EU have made a liberalized
financial sector their main demand on developing countries. It has been
revealed, for instance, that the EU has demanded that some developing
countries eliminate regulations that cover the activities of hedge
funds. The EU has also demanded that Mexico open up its market to trade
in derivatives, the slippery financial instruments that have played such
as 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 US Treasury Department that brought on the devastating Asian
financial crisis. 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, like the stock market and real estate.

With few controls on where the funds went, overinvestment soon swamped
the 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 all the way
down to Indonesia.

Capital account and financial liberalization was also a key demand
pushed on Argentina in the 1990’s by developed country authorities.
Buenos Aires complied, prompting Larry Summers, then US Secretary of the
Treasury, to claim that the end result of foreign interests controlling
50 per cent of the banking sector and 70 percent of private banks was a
“deeper, more efficient market and external investors with a greater
stake in staying put.” 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 sending capital out of the country
instead. With no credit, small and medium enterprises, and not a few
big ones, closed down, throwing thousands out of work as the country
spiraled into depression.

After the Asian financial crisis, the Argentine financial collapse, and
the crash of 2000-2002, which was also caused by a speculative
bubble promoted by lack of financial regulation, one would have thought
that developed country authorities 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, despite the fact that it was developed country-based financial
institutions like hedge funds that triggered the Asian crisis, the
so-called Basel II process focused not on disciplining these actors 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 1980’s. Having
been burned by the consequences of financial deregulation, many
developing country governments 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.

One of the stock scenarios of the old western movies was that of a train
picking up speed towards a collision with another train as the lifeless
hand of the engineer, already shot dead by outlaws, remained pressed on
the accelerator. Current developments in global finance are reminiscent
of this scene. A global consensus is forming around strongly
reregulating the financial sector. But in disregard of this emerging
consensus and the financial chaos around them, developed country
negotiators at the WTO, much like the dead hand of the engineer,
continue to press developing countries for a services agreement that
would drastically liberalize their financial sectors!

The developing country governments should steer clear of the train wreck
that will certainly ensue from the US and EU’s 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 senior analyst at the Bangkok-based Focus on the Global South and the International Adjunct Professor of Sociology at the State University of New York at Binghamton.