Trade Policy Note Final-rev08 - Development

Annex 5C: Financial services
Stability in the financial sector is essential for the achievement of the MDGs.
Financial crises have plunged millions of people into poverty and set development
efforts back decades. The burden of adjustment in such crises is inevitably borne by
the poor. Nevertheless, developing countries are again confronted with requests to
further liberalize their financial service regimes.
Differing Commitments to Financial Reform
Enhanced competition in the financial services sector was expected to result in lower
fees; improved quality and choice of services; access to new products and
technologies; and access to new sources of capital. Liberalization measures have
included the withdrawal of government intervention by privatizing state -owned
financial entities; freeing interest rates and leaving credit allocation to be determined
by the market; the removal of regulations, either quantitative or qualitative that
discriminate against foreign financial entities; and the removal of restrictions on intrasectoral
activities by financial entities. The approach of developing countries to
financial reform has varied including (a) deregulation of domestic markets with
restrictions on new entrants, either general or only to foreign providers, (b) reform has
been accompanied by the liberalization of the capital account, while in other cases
regulations restricting movement of capital were maintained, (c) withdrawal of all
state ownership of financial entities was terminated, or the maintenance of state
participation in development banks, (d) full liberalization of commercial presence
combined with restric tions on cross-border trade, (e) different approaches to the speed
of the reform and in the sequenc ing between financial sector liberalization and
regulatory upgrading.
The liberalization of financial services has been given specific focus in the WTO, as a
result of acute pressure by developed countries, to the extent that additional
negotiations (concluding in 1998) were held in this sector, after the Uruguay Round,
to obtain further liberalization. The GATS commitments reflect the policy tools that
developing country governments have retained to manage the financial sector. T hese
include limitations on the opening of new banks, restrictions on foreign ownership,
nationality requirements for directors, no commitments regarding “new financial
services” etc. Some have been aimed at reserving segments of the financial sector for
disadvantaged segments of the population. 149 Despite the experience of financial
crises over recent years, some FTAs have pushed financial liberalization even further.
Impact of Liberalization
Countries undertaking liberalization of the financial sector have experienced a fast
increase in the participation of foreign financial entities in the market at the expense
of domestic firms. Domestic financial entities have been bought by foreign firms or
have left the market, not being able to compete any longer. Concentration in the
domestic market has taken place since, increasingly, a smaller number of financial
entities control a larger share of the financial market. Financial liberalization ha s not
always contributed to increasing lending to the private sector as a percentage of GDP.
149 The concluding meting of the financial services negotiations was held up to the early hours of the
morning as Malaysia successfully resisted attempts to dilute its pro -Bumiputera policy in the financial
sector.
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