Halt GATS talks until independent assessment, says NGO study

Before WTO Members accept further liberalization commitments under the General Agreement on Trade in Services, a thorough and independent assessment should be undertaken of the accord’s impacts on economic development and public welfare, a UK-based development advocacy group has proposed. This is to enable governments to make informed choices with regard to a treaty which could lock signatory countries into a single development option of questionable merit.

by Chakravarthi Raghavan

GENEVA: Further negotiations on trade in services under the WTO’s General Agreement on Trade in Services (GATS) should be halted, and there should be a thorough and independent assessment of the agreement and its implications for the development of developing countries and the poorest sections among them, a study and briefing paper by the UK-based NGO World Development Movement has advocated.

The full text of the 71-page publication, GATS: A Disservice to the Poor, is available on the WDM’s website <>. The WDM is a development advocacy group seeking “positive change” for the world’s poorest people, on the basis that “charity is not enough” and governments and companies “have to change the policies that keep people poor.”

The WDM says that GATS is “potentially more far-reaching” than other WTO agreements and “therefore even more damaging to people in developing countries, particularly the poorest.”

Three reasons are advanced as to why GATS poses particular problems for the developing world.

Firstly, it is due to the nature of services and the inclusion within it of areas like health, education and sanitation where governments have a responsibility to ensure universal access, while other service sectors include utilities essential to the development of the economy, such as telecommunications.

Secondly, through the provision for “commercial presence” (foreign investment), as well as cross-border trade, as modes of supply of sevices, GATS influences government policy towards foreign transnational corporations (TNCs) located in the domestic economy.

Thirdly, core WTO principles require governments to treat foreign firms as well as they treat their domestic counterparts (even though limitations can be put in countries’ schedules of commitments), and treat all foreign suppliers equally. “Yet the GATS rules extend beyond this, restricting government’s ability to make rules even if they apply to both domestic and foreign firms,” says the WDM.

In the debates between defenders and critics of GATS, the discourse has centred on whether governments retain the ability to regulate service providers. The WTO advances the view that governments do retain the ability to regulate.

However, points out the WDM, there are a range of regulatory objectives, from promoting development to ensuring provision of basic services, where there is a distinction between government regulation in the public interest and regulations designed to ensure smooth functioning of markets. GATS largely allows the latter, but there are problems with public-interest regulations.

In terms of GATS provisions, while governments have an “opt-in” option in scheduling commitments, where a government has committed a service sector to national treatment, it could be challenged “for requiring foreign investors to use local suppliers or hire local managers.” The market access principle, if applied in full, could be used, for example, to challenge governments on any limitations they put on the number of hotels or restaurants in a historic site.

The WTO secretariat’s “standard defences” of GATS, shared with Member governments to use against criticisms, are not reassuring when subjected  to close scrutiny, says the WDM. In particular, the claim that developing countries have substantial flexibility “is not reinforced by the facts.”

While the developing countries could limit the extent of their GATS commitments and specify the domestic rules they want to maintain, “this is highly problematic, given the level of knowledge and foresight required ... It is simply unrealistic to expect governments to know what regulations they should maintain, let alone predict what regulations they may want to apply in the future”.

Compounding this problem is “the effective irreversibility of commitments made under GATS.”

While there have been debates about the ability to regulate under GATS, “there has been much less discussion around the potential benefits to developing countries of services liberalization in general and GATS specifically.”

Though at present there is only limited evidence about the impact of GATS itself, there is a “wealth of examples of the outcomes of service liberalization, often as a result of the IMF- and World Bank-designed structural adjustment programmes; the results are at best mixed.”

Examining claims that services liberalization benefits developing countries by attracting new finance, generating employment and promoting transfer of technology, the WDM says that the gains of services liberalization for the domestic economy in developing countries appear limited.

This is partly because these countries are not major exporters of services and so gain little from the opening of potential new markets overseas. Also, the TNCs, as service suppliers, “appear to create limited linkages with their host domestic economy, while potentially undermining nascent service industries,” the WDM says, citing the experiences in a range of countries in Asia, Africa and Latin America.

Benefits to consumers have not also materialized, since the TNCs have simply taken over state monopolies, bringing no new benefits of competition. Also, the developing countries have weak national regulatory bodies - a problem likely to be exacerbated by GATS.

Why then have developing-country governments agreed to undertake services liberalization?

The reports from the recent Doha WTO Ministerial Conference, says the WDM, show that the governments of industrialized countries can exert severe pressure on developing countries. While this is well known and documented, “less well documented is the close relationship between corporations and some governments, and the influence this has over GATS.”

Some features peculiar to GATS also raise other concerns.

The extremely wide-ranging scope of GATS covers more areas of economic activity than most other trade agreements. By considering “commercial presence” as a mode of delivery, GATS affects the ability of governments to regulate foreign companies that set up business in their countries, thus making GATS in effect an investment agreement as well as a trade agreement, “influencing core government decisions.” The ability of developing countries to protect their own nascent or ‘infant’ industries or to stipulate that inward investments must benefit the national economy and society, could be open to challenge at the WTO.

GATS, more than other WTO agreements, also intrudes further into government policy-making. While the WTO secretariat, and the UK government, have taken great pains to refute concerns that GATS curtails a government’s ability to regulate the markets, the ability to regulate is understood narrowly, namely, smooth operation of the market.

GATS would need to be judged in terms of the objectives of poverty reduction, a point conceded even by the IMF and the World Bank about the liberalization policies they advocate. While few would argue in favour of full state control, many realize that governments play a key role in shaping the market. And regulations are clearly needed to bring about poverty reduction or equitable income distribution.

Governments need to retain the right to regulate if they are to govern responsibly. This right must include the ability to implement not just regulations to ensure the smooth operation of the market (which GATS allows), but also regulations to meet social, political and environnmental goals of citizens and governments.

The WTO has sought to defend GATS in its publication, GATS: Fact or Fiction (see TWE #254), and attempts to reassure critics that there is nothing in GATS to oblige governments to sacrifice any reasonable level of technical or commercial regulation, and that GATS imposes constraints only “on the use of unnecessarily restrictive or discriminatory requirements in scheduled sectors.”

Herein lies the crux of the problem, says the WDM. “Who decides what is ‘reasonable’ and what is ‘unnecessarily restrictive’? Not democratically elected representatives, but trade experts.”

The WTO is also underestimating the extent to which government regulation is not just legitimate but vital in the pursuit of poverty reduction and other social goals. And part of the problem with the WTO defence is that “it is not based in the real world, where there is imperfect knowledge and corporate lawyers are ready to use any loophole in their interests.”

The present implications of GATS, the WDM underlines, are already sufficiently worrying to suggest that new rounds of commitments and further development of rules should not be made until a proper and independent assessment of the impacts of service liberalization has been carried out.

Impacts of service liberalization

Does liberalization in GATS benefit? If so, who really benefits and do the benefits outweigh the costs?

It is clear that corporations benefit. “However, whether developing countries really stand to benefit from service liberalization, and what their ordinary citizens, particularly the poorest, will get from the process, is less clear.”

With developing countries having few domestic service providers and with limited capacity, the beneficiaries have been foreign firms with the resources and the capacity to buy newly-privatized entities.

There has been “woefully little” assessment carried out so far either of the impacts of service liberalization or of GATS itself, but there is some evidence of the effects as a result of the IMF/World Bank structural adjustment programmes, where privatization and liberalization have been the price for receiving aid or debt relief.

GATS is not the cause of privatization nor even of much of services liberalization currently taking place, the WDM concedes. However, it says, GATS potentially “locks” countries into one development option, even though the merits or otherwise of this path are still hotly debated.

GATS does not force governments to privatize services, “but it does effectively prohibit them from ever re-regulating or re-nationalizing them.” And while GATS defenders argue that privatization and liberalization processes are accompanied by regulation to ensure delivery of services and promotion of benefits for the domestic economy, “GATS does restrict government’s ability to do just that.”

In terms of service exports, the only benefit to developing countries is through movement of natural persons. However, the movement of low-skilled labour overseas to provide services - an area where developing countries have a comparative advantage - is still highly restricted.

As for the view that services liberalization brings in foreign investment, 80% of the FDI to developing countries go just to 10 countries. Investors look for economies with proper infrastructure and a consumer market, and do not aim to build them. Only a reduction in poverty would make poorer countries an attractive investment opportunity for TNCs.

Even where FDI does come, its benefits to local people and the country are frequently limited, says the WDM. Firstly, much of the FDI has come due to privatization of public utilities and is thus in the form of takeovers rather than new start-ups.

Secondly, as the Public Services International Research Unit (an NGO think-tank) has shown, TNCs tend to minimize their own outlay when investing in developing countries by turning to public sources of funding on offer from international financial institutions such as the World Bank. The new or extra money brought into countries is “very limited.”

Also, due to their dominant market standing, foreign corporations are in a strong bargaining position and are able to negotiate deals highly beneficial to themselves, severely restricting the benefits to the countries where they operate. In the energy sector, for example, they have been able to make arrangements that pass almost all the financial risks to state-owned companies distributing the power to consumers, with agreements requiring the public authorities to buy a fixed amount of power at prices denominated in foreign exchange for a set period of time, often 20 years.

In Pakistan, Indonesia and Maharashtra state in India, this has resulted in a standoff, with the TNC concerned demanding guaranteed payments and the authorities having no money to pay it.

Do these bring benefits to the local economy? Rarely so, says the WDM, citing the tourism sector where research shows that 60-90% of the price paid by tourists go to the TNCs which own the airlines and the hotels. The foreign-owned firms also have a negative effect on domestic competitors, with advertising (another service) used to differentiate between domestic and foreign products.

The claim of transfer of technology and know-how as a result of these service sector investments is also not borne out. Some US financial service suppliers in Africa and Asia have stipulated in their employees’ contracts that the staff cannot join a rival domestic firm for a fixed period, thus ensuring that there is no spillover of skills and no technology transfer.

As for consumer benefits, there are several examples of deterioration in the service provided or its costs, the WDM says, citing examples and experiences in Africa, Asia and Latin America.

Another reason why services liberalization can and does go wrong is due to the fact that market theory is applied in an imperfect market, and the preponderance of natural monopolies makes market liberalization difficult in several service sectors.

Available evidence, says the WDM, suggests that in developing countries, liberalization leads to concentration in market power among a few TNCs, rather than increased competition among many firms. And once a foreign corporate supplier has gained an effective monopoly, there is little incentive for a private company to respond to consumer demands, and there is no political pressure from the electorate such as could influence the state monopolies.

Thus, argues the WDM, benefits of services liberalization are limited and benefits to developing countries and the poorer people within them have been “at best mixed.”

“Many developing countries have little to gain ... The gains of foreign investment to the local economy are overstated, especially in the services sector where local linkages can be minimal ... Liberalization does not automatically bring in competition, and hence consumers don’t benefit ... Strong regulatory bodies will be needed if developing countries are to have any hope of benefiting, yet GATS will restrict the ability of such regulatory bodies.”

Despite these, there is strong pressure on developing countries to increase their GATS commitments, and, as Doha has shown, those doing so are not always making free and informed choices.

A major implication of the decisions at Doha, where GATS is part of the negotiations launched, is that developing countries will be persuaded to give way in services negotiations in order to get desperately wanted gains on other issues such as tariff reduction.

“However, developing countries should be getting these long-requested (and promised) improvements without having to give ground on other agreements, like   GATS,”  maintains  the WDM.

The reality of negotiations in Doha and Geneva, however, appears to reinforce the view that developed-country positions are dominating and that corporate lobbying has strongly influenced these provisions.

Why then do governments sign up to GATS? The answer lies in the fact that developing countries in effect are denied a free and informed choice, and agreements take place “in an unequal political context which influences the process.”

The rationale for GATS rests on the remarkable and unproven assumption that services liberalization benefits developing countries and the poorest people.

Even the mandate under Article XIX:3 of GATS for an assessment of trade in services prior to establishing negotiating guidelines has not been observed, complains the WDM. There is hence a need for a “thorough and useful assessment done, independent of the WTO, by a respected outside body without the ideological bias towards liberalization so apparent within the WTO.”

Such an assessment should look at the social, economic and environnmental impacts and not just the effects on trade. It should be based on existing evidence so that countries could make an informed choice now rather than wait until they have committed themselves in GATS and begin to perceive the negative effects themselves.

“The effective irreversibility of GATS commitments makes such an assessment all the more important,” says the WDM. The assessment should look at the welfare of groups within society as well as the overall impact on the economy. It should cover four main areas:

   *  clarification as to what the text actually means;

   *  assess political-sovereignty and policy-making issues, clarifying what governments will and will not be allowed to do as a result of GATS;

   *  assess potential costs and benefits, not just for economic development prospects but also for the welfare of citizens, particularly the poorest, and including the full impact of past services liberalization; and

   *  identify regulations in the public interest that might increase benefits or reduce costs of liberalization.

“Such an assessment is merely the first step in improving information available to governments and their citizens, enabling them to decide how, and whether, to liberalize their service sectors under GATS,” the WDM advocacy paper concludes. (SUNS5047)