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Enron, Argentine shadows over WTO services talks?

The Enron debacle and the crisis in Argentina suggest a rethink of the major industrial countries’ agenda of liberalizing and deregulating the services sector in the developing world is strongly in order.


GENEVA: Will the continuing revelations, mostly in the media, in the aftermath of the collapse of Enron Corporation, and the effects of the Argentine crisis with its heavy political and social fallout, cast their shadows over the international economic agenda, in particular the ongoing negotiations at the WTO for further liberalization of services trade?

In the United States, Senate and House oversight committees have begun to probe the Enron aftermath, and the Justice Department of the Bush administration is also starting investigations. With the principal parties taking the route of the constitutionally protected right against self-incrimination, however, it may be years before it becomes clear as to what happened and how to remedy things.

And if the past be any guide to the future, there have been several cases, stretching back to the 1930s and the Wall Street crash, when elaborate investigations were initiated after every scandal, with attendant promises of rules or tightening of law and administration, only to peter out.

This is not merely a US disease but has also been in evidence across the Atlantic. Occasionally, a culprit may have been jailed, but otherwise nothing has changed, whether it be on how companies are run and able to move funds about, or on the way their auditors and banks perform or help to hide.

Attempts to force open the banking and other financial sectors of developing countries to foreign capital ownership, along with liberalization of the sectors and cross-border capital flows - such as has brought disaster to Argentina - are now being sought to be pushed on other countries, such as India, where the US Deputy Treasury Secretary Kenneth Dam recently paid a visit, pushing the Indian government to move in this direction.

Despite public disavowals in Washington, he has also apparently been pushing the case and interests of Enron’s Indian subsidiary, the Dabhol power project, on the plea that foreign and Indian financial institutions and funds are being affected, and that the US government also has a stake because of US-funded export credit and insurance (see following article).

Sights set on services

In terms of the WTO services talks, the mandated new round of negotiations that began in January 2000 has now been made a part of and rolled into the “single undertaking” of the multilateral negotiations that were launched by the 4th WTO Ministerial Conference on Doha in November.

Though the US went along with the European Communities in setting a “comprehensive agenda” for the single undertaking (where the new agendas and rule-setting may take many years), its immediate main focus is on agriculture and services.

The agriculture talks, it is generally agreed, are, however, unlikely to make much progress over the next several months due to the upcoming French presidential and parliamentary elections. In any event, whoever wins, it seems unlikely that there will be any difference in their determination to protect French agriculture. And though France takes the spotlight in this matter, the European agriculture lobbies wield considerable power in other countries too.

In the US too, the trade promotion authority bill adopted by the House of Representatives has set a range of detailed consultation processes with the Congressional committees etc, before offers are made or agreed. These include stipulations about lowering product tariffs which are currently bound at 15% or more. While in theory the prior-consultation requirement does not prevent agreements from being clinched, knowing the legislative processes in the US, the barriers to agricultural imports will remain high.

It would also thwart the hopes of many developing countries that their major market-access barrier of tariff peaks and tariff escalation would be tackled. (Soon after the House bill was adopted and the full ramifications became apparent, the Brazilian government said that the restrictions would affect some 300 Brazilian agricultural product lines. US agricultural domestic support is also rising.)

On the services front, however, the US and the EC have a common objective of forcing more liberalization (through foreign takeovers) and market-access concessions from developing countries, and the focus is on financial services and telecommunications. There is also interest in getting WTO/GATS (General Agreement on Trade in Services) recognition for global professional standards, such as those on accountancy and auditing etc, which are set by private bodies, thus preventing national regulations.

Systemic shenanigans

However, some doubts are beginning to be cast on these agendas in the light of the various revelations about corporate sector activities following the Enron collapse.

When the scandal broke last November, the Bush administration (despite its many links with Enron, which reach right into the White House) quickly distanced itself, and promoted the view that Enron and its executives had sought help and favours but nothing had been done.

There were also efforts to suggest that this had nothing to do with the system, but was a case of a rogue corporation and its executives.

But the revelations, almost daily, show that a wide range of sectors and actors are involved:

Corporations have been able to use accounting techniques to hide business reality from investors. The problems are not unique to Enron, but apparently a range of corporations have also been guilty of using the same techniques to hide losses, with uncertain ramifications. The only clear thing (and the markets and investors are already punishing enterprises) appears to be  that their balance sheets and other published accounts do not reveal the true picture but have been dressed up to mislead investors, including institutional investors. This practice has not been unique to the US either, having also been used in Europe.

This kind of financial market ‘magic’ (of converting losses into profits)  has been made possible by resort  to financial and accounting techniques that audit firms, which also provide accountancy consulting services (in the case of Enron, Andersen earned more from the consultancy than from audit fees), have promoted, helped or connived at. Legal firms too have been involved.

The successful use of such techniques to present a false picture to raise funds on the market has also been made possible because of the collaboration of leading banks. Some of the banks, which finance and provide advice to the firms, though knowing the true situation, nevertheless repackaged the various financial instruments used, and their investment brokers and counsellors sold and pushed these dubious assets on outsiders with whom they had a fiduciary relationship (and thus responsibility and accountability).

Their market analysts also present a picture of the companies that is at variance with reality.

Such practices have led to a large volume of litigation, including even the curious spectacle of one wing of a leading Wall Street bank suing the other wing.

Many leading Wall Street banks and firms, and their counter-parties  in Europe too, appear to have been involved, and some of them are said to be in a serious position, in that they may be vulnerable to hostile bids and takeovers.

Indeed, Enron and the energy sector have not been the only beneficiaries. Others include the financial and  telecommunications sectors - the two sectors where there were accelerated efforts to liberalize ‘trade in services’ after the WTO Agreement was sealed.

The telecom enterprises have resorted to a variety of devices, including asset ‘swaps’, with the ‘sale’ or ‘lease’ being shown as revenue-earning while the counter-swap is not shown as a cost!

And while Enron and several communication companies are now being charged with presenting a false picture by hiding debts and thus showing high earnings and boosting their stock prices, there is also the reverse case under investigation of the practices of Bill Gates and Microsoft Corporation, where apparently a very high cash reserve has been used to even out the quarterly earnings report so that investors get a ‘smoothed out’ picture and the changes in earnings profiles do not affect share values.

Exposures in the media show that the financial and telecommunication sectors and their giant corporations are now in great trouble because of their past accounting techniques that presented a false picture; reality is now catching up.

The corporations have been able to enjoy such leeway as a result of close links and alliances with top policy-makers and key ministers and officials who move from government to the private sector and vice versa, as well as officials who are named to particular posts at the behest of corporations. International organizations too are not immune from this ‘virus.’

Recent revelations about the soliciting of funds from Enron by an accounting standards board show that corporations do seek to buy influence on such professional standard-setting bodies.

And former US Federal Reserve Chair Paul Volcker, head of the trustees of the International Accounting Standards Committee Foundation, has appeared before  the  US  Senate  to plead the case against further tightened rules on auditing and accounting, and for leaving it all to professional standard-setting.

Corporations have been able to buy influence in governments and legislative bodies through donations and funding for various purposes. This kind of ‘lobbying’ has now spread around the world. As a result, the corporations have been able to secure at national level deregulation and/or rewriting of regulations to suit their interests, and very lax administration or oversight of these rules and their observance.

The same policy has been promoted and pushed internationally (via the WTO, IMF, World Bank, etc). Both in the Uruguay Round agreements and beyond, the dogma of deregulation, liberalization and dismantling of the public sector (with assets sold off, often on the cheap, to foreign corporations) has been preached. There has also been a disarming of the state; often the threat of raising disputes at the WTO has been sufficient to prevent better regulations and/or enforcement.

All this has been done in the name of the free market, free trade and globalization.

Standard-setting

Both in the Uruguay Round negotiations on services and subsequently, there have been efforts to get WTO recognition and imprimatur for the professional standard-setting bodies, and for governments to use them rather than domestic or national regulations.

These efforts did not go very far at that time because of the conflicts between Washington and US practice (which believes in extensive and detailed rules and their observance) and the claims of the UK and others about the merits of professional bodies merely laying down principles and expecting the practitioners to observe the spirit of the principles and not merely the letter of the rule.

There has since been renewed effort, in terms of the new round of services negotiations, for the WTO’s Council for Trade in Services, acting under Article VI, paragraphs 4, 5 and 6 of GATS, to develop disciplines to in effect make the standards set by these professional bodies override national regulations.

The activities of the Basle-centred standard-setting body for capital standards for banks and banking enterprises (including their non-banking operations and instruments) - and use of standard vs internal-ratings-based approaches to assess risks and capital adequacy - are expected to disadvantage developing-country institutions and their vulnerability to foreign competition (see TWE #271).

When the proposed internal-ratings-based approach is used to assess asset values by the technique of marking to market (to estimate the current value of assets on the basis of expected income flows), in cases when there is no real market but only computer-generated models for ‘marking to market’, and risks are evaluated for capital standards, there will be inevitable mayhem or disadvantages.

There are also similar moves for international supervisory bodies for stock and securities markets, insurance bodies, etc to set standards, and to secure the agreement of the G-10 industrial countries to observe them.

This is being sought to be ‘promoted’ by the IMF by using its Article IV surveillance of emerging markets to make them observe such standards (rather than have detailed regulations).

These will also have a bearing on the moves in the WTO to negotiate not only the international standards rules but also emergency safeguards and balance-of-payments safeguards - where the IMF has a large say in the consultation processes, a say that has been made worse by interpretations handed down by the Appellate Body in the BOP case relating to India.

It has been suggested that in respect of BOP or emergency safeguards in the financial sector, one of the considerations to accept the justification would be how far the country concerned observes the international standards - which, in many countries after the Enron and other cases, will be viewed by legislative bodies as not worth the paper on which they will be written. (SUNS5062) 

TWE No. 274 (1-15 Feb 2002)        

 

 

 


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