Services, GATS, and Key Issues in Financial Sector

Transcription

1 Services, GATS, and Key Issues in Financial Sector Dr. Yan Wang Senior Economist The World Bank Prepared for the Senior Policy Seminar on The Integrated Framework and WTO Accession Phom Penh, Cambodia May 1 st -3 rd, 2003

2 Outline Why liberalize the service sector? For export and economic growth For job creation and poverty reduction Trade in services a part of poverty reduction strategy, Cambodia and Lao PDR A brief overview of the GATS How have other countries committed / liberalized? Thailand and China Key issues in financial services Summary 2

3 I. Why do services matter? Services account for more than 50 percent of output and employment. These ratios are higher for industrial countries (see charts) Some services are low-skilled labor intensive such as tourism and personal services. Thus the expansion of these services are conducive to job creation and poverty reduction. Producer and distributive services are crucial for the competitiveness of the goods-export sector, as well as for the economic growth in general. 3

4 A classification of services Elfring(1989) divided services into 4 categories: Producer Services(business and professional services, financial services, insurance services and real estate services, etc.), Distributive Services(retail trade, wholesale trade, transport and communications, etc.), Personal Services(hotels, restaurants, tourism, recreation and amusements, etc.) and Social Services(government proper, health services, educational services and miscellaneous social services). 4

5 Characteristics of Service Sector The service sector has the ability to absorb more labor, as some subsectors are labor intensive and can employ more low- or high-skilled workers. Producer/distributive services as engine of growth: since deeper division of labor and specialization contribute to competitiveness and higher productivity Liberalization in service may generate sizable gain, from competition, better provision, lower prices, and learning-by-doing. 5

6 The Service Sector is more developed in high-income countries Percent of Service Sector in GDP in 2000 Services Value added (% of GDP) Cambodia China Panama La o P DR Turkme nist a n Ma la ysia Antigua and Barbuda Barbados Argentina Uruguay Portugal Slovenia Korea. Rep Spain UK It a ly France Singapore Belgium Ge rma ny Finland De nma rk Norwa y Source: Wang et al 2003 GDP Per Capita (Constant 1995 US$ ) 6

7 Some Services are labor intensive and thus contribute to job creation Service Sector Employment in 1998 Employment in Services (% of total employment Poland Thailand Romania Ukraine Mongolia China Bahamas HongKong Barbados US Peru Argentina Canada Australia Israel France Columbia UK Singapore Sweden Netherlands Uruguay Belgium Macao New Zealand Iceland Austria Finland Germany Korea, Rep Spain Italy Ireland Greece Czech Rep Croatia Malays ia Turkey Portugal Slovenia Norway Denmark Switzerland Japan Luxembourg GDP Per Capita (Constant 1995 US$) Source: Wang et al

8 Table 1: Service sector employment as a percentage of total employment in developed market economies, Year France Germany Japan United Kingdom United States Average (a) data, Ott, 1987; (b) data, OECD Labour Force Statistics. Source: Adapted from Illeris (1996) The Service Economy: A Geographical Approach, 3, Table 1.1, Chichester: John Wiley. 8

9 II. Liberalizing services a part of poverty reduction strategy Services account for 41% of GDP in Cambodia, 24% in Lao PDR. The National Poverty Reduction Strategy calls for the following actions related to services Expanding Job opportunities Facilitating the private sector development Expanding export (both goods and services) Expanding tourism (a part of services) Maintaining Macro Stability Deepening banking reform Improving Capacities education and health Strengthening governance, etc 9

10 Growth in Services Trade in Cambodia Trade in Service (mil. US$), Cambodia: Exports Imports Source: World Bank Global Development Finance (GDF) & World Development Indicators (WDI) Database (April, 2003) 10

11 Composition of Service Export, Cambodia Service Exports (mil. US$) & Composition, Cambodia Communications, computer, etc. Insurance and financial services Travel services Transport services Source: World Bank Global Development Finance (GDF) & World Development Indicators (WDI) Database (April, 2003) 11

12 Composition of Service Import, Cambodia Service Imports (mil. US$) & Composition, Cambodia Communications, computer, etc. Insurance and financial services Travel services Transport services Source: World Bank Global Development Finance (GDF) & World Development Indicators (WDI) Database (April, 2003) 12

13 Lao PDR exports more services than it imports Trade in Services (mil. US$), Lao PDR Exports Imports Source: World Bank Global Development Finance (GDF) & World Development Indicators (WDI) Database (April, 2003) 13

14 Composition of Service Export, Lao PDR Service Exports (mil. US$) & Composition, Lao PDR Communications, computer, etc. Insurance and financial services Travel services Transport services Source: World Bank Global Development Finance (GDF) & World Development Indicators (WDI) Database (April, 2003) 14

15 Composition of Service Import, Lao PDR Service Imports (mil. US$) & Composition, Lao PDR Communications, computer, etc. Insurance and financial services Travel services Transport Source: World Bank Global Development Finance (GDF) & World Development Indicators (WDI) Database (April, 2003) 15

16 III. GATS: Scope and definition General Agreement on Trade in Services (GATS), negotiated during the Uruguay Round ( ) Services is defined as Any services in ay sector except services supplied in the exercise of government authority Trade is defined as Cross border supply Consumption abroad Commercial presence or local establishment Temporary entry of natural persons 16

17 GATS: Scope and Definition GATS has several advantages: Negotiate reciprocal market access Strengthen credibility of domestic policies Pre-commit to future reforms Regulatory cooperation GATS list of service sectors includes: Business services Communication services Construction services Distribution services Educational services Environmental services Financial services Health-related services Tourism services Recreational & cultural serv. Transport services Other services 17

18 GATS: requirements General GATS disciplines: Transparency of policy regime (Article III) Most-favored nation treatment (nondiscrimination between trading partners) (Article II) Economic integration (Article V) Mutual recognition Agreement (Article VII) Country specific commitments: Four modes of delivery Two types of measures: limitations on market access and national treatment 18

19 IV. Commitment by other countries: Example of GATS schedule Thailand: life insurance (1) Cross-border supply (2) Consumption abroad (3) Commercial presence Limitations on Market Access None None (a) Foreign equity participation limited to 25 per cent of registered share capital. (b) New establishment is subject to license approved by the Minister with the consent of the Cabinet. Limitations on National Treatment None Life insurance premium is tax deductible up to a certain amount for holders of policies issued by local companies None (4) Movement of natural persons Only senior managerial personnel, specialists and technical assistants with the approval of the Insurance Commissioner None Source: Fink, Mattoo, Rathindran (2002) 19

20 GATS: Current Status Uruguay Round mostly locked in existing policies, little outright liberalization. Post-Uruguay Round negotiations on telecommunications and financial services led to a number of pre-commitments to liberalize. Many East Asian countries maintain limitations on foreign ownership, some restrictions on entry; GATS commitments are in some cases below status quo. Source: Fink, Mattoo, Rathindran (2002). 20

21 Commitments by China & others DC = developed country; LDC = developing country; AC = acceding countries; CHN = China 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% DC LDC AC CHN DC LDC AC CHN DC LDC AC CHN DC LDC AC CHN Mode 1 Cross-border supply Mode 2 Consumption abroad Source: Mattoo 2002, based on WTO data. Mode 3 Commercial presence Mode 4 Movement of natural persons 21

22 New negotiating agenda for East Asia and the Pacific New round of services liberalization at the WTO: Requests submitted in June 2002 Initial offers will be tabled by April 2003 WTO accession negotiations (Cambodia, Lao PDR, and Vietnam) Regional agreements in services, notably ASEAN 22

23 V. Key Issues in Financial Services Why open the financial services? Financial services include: Banking services Insurance and insurance related services Other securities, asset management, foreign exchange services, etc Does GATS compromise the ability of governments taking measures for prudential reasons? No. How to issues: the sequence of opening Competition first or privatization first? China and Russia: two approaches How to ensure the access to credit by the poor? Source: based on Wang et al

24 Why Open? International experience Financial development contributes significantly to growth, through efficient allocation of resources (King and Levine 1993, and Leving and Zervos 1998) Financial markets reduce the information cost of borrowing and lending and help allocate risks Financial assets (with attractive returns) encourage saving in financial form Financial institutions, banks, mutual/pension funds and others, play important roles in efficient resource allocation An efficient banking system requires a contestable system one that is open to entry and exit 24

25 Foreign bank presence has sharply increased in the developing countries (percent) Number of Foreign Banks in % of Total Foreign Bank Assets in % of total assets Source:World Bank staff estimates in Global Development Finance 2002; Bankscope 25

26 Benefit of banking sector openness: The presence of foreign banks is associated with higher efficiency of banking system, which would improve the allocation of resource and is growth-enhancing. It may reduce financial intermediation costs as reflected in domestic banks lower net margins, non interest income and lower overhead costs. It reduces domestic banks pre-tax profitability in high-foreign-entry market It helps enhance the capacity of domestic banks by training staff that then move to domestic banks. Source: Claessens and Lee 2001, Claessens, Demirguc-Kunt and Huizinga 1998, World Bank, GDF 2002). 26

27 Risks associated with foreign bank entry If foreign banks capture the most profitable segments of the market, leaving domestic banks more exposed to the less profitable segments, domestic banks may have an incentive to take on greater risks (Hellmann, Murdock and Stiglitz 2000). In the short or medium run, domestic banks may lose some high quality customers and suffer losses in their profit margins. In addition, domestic banks may engage in more strict credit rationing limiting the access to credit by the poor (Agénor, 2001, World Bank 2002). 27

28 China s commitment is strong in opening its banking sector China has committed to open its banking sector to foreign banks after joining WTO: Immediately open foreign currency business to foreign banks without limit; In the 2nd year, open RMB business to firms, and open four cities each year; and In the 5th year, open RMB business to all residents in all regions with no geographic limit. Open to non-bank FI on car loans, other information and financial/consulting services. See Annex 9 of China s WTO agreement. 28

29 China s geographic restrictions Foreign exchange On RMB business: 1 year after joining WTO 2 years after joining 3 years after joining 4 years after joining 5 years after joining No geographic restriction Open Shanghai, Shenzhen, Tianjin, Dalian, immediately Open Guangzhou, Zhuhai, Qingdao, Nanjin, Wuhan; Open Jinan, Fuzhou, Chengdu, Chongqing; Open Kunming, Beijing, Xiamen Open Shantou, Ningbo, Shengyang, Xi An No geographic restriction 29

30 China s State Banking Sector: Monopoly and Inefficiency China s banking sector is dominated by four State-owned banks which have been providing financing to the SOEs and running inefficiently. They have extensive branch networks and employ 1.7 million people. But they are actually bankrupt. The total amount of Nonperforming loans were estimated at 25.4% (Dai, 2002) to 40% of their total assets. In NPL, 600bn yuan was actually lost, accounting for 8% of total loans (Dai, 2002) which will wipe out the entire capital Four AMCs were established to restructure the NPLs. Fiscal revenues were injected to recapitalize the banks. However, NPLs continue to grow. This will add to the contingent liabilities of the government. 30

31 China s Sequence of Reforms: Competition first, Privatization second. China introduced competition to many monopolistic sectors but delayed privatization, unlike Russia. Banking sector: By the end- 01, over 200 foreign banks/ branches were allowed to operate only in a few cities. Total assets of foreign banks were ~2% of all assets in financial sector, but their credits accounted for 30% of foreign exchange credits. Equity market grew rapidly. By end-2001, over 1100 publicly listed companies were listed on domestic stock market (A shares). Total market capitalization reached nearly 50%of GDP. But the markets are fragmented by A shares and B shares. Insurance sector: 16 foreign companies operating in a few selected cities 31

32 Access to credit by the private sector has been a problem: The private sector is the largest employer but a small investor State Collective Private GDP Urban Employment Investment in fixed assets Source:Estimated by CICC, China. 32

33 Loans to non-state sector were low, hindering the development of SMEs: Proportion of loans to non-state sector in total(%) Proportion of loans to non-state sector in total loans by all banks (%) Proportion of loans to non-state sector in total loans by State owned Banks (%) Source: Fan Gang,

34 Challenges to China s inefficient banking sector Banks Tier-1 capital $mn Returns on assets % Profit/ employee ($) Citi-Group 54, ,930 HSBC 34, ,560 ICBC 22, ,340 AgriBC 15, * Bank of China 17, ,070 ConBC 13, ,190 Source: The Banker, no. 7, * China Financial Statistics 1999 for Agricultural Bank of China. 34

35 One year after joining WTO, What is happening in financial sector? Foreign banks have started to acquire small domestic banks, M&A deals are rising. Foreign financial institutions have purchased NPLs from the state banks at a much discounted price Domestic banks have started to lose high-quality customers and managerial talents to foreign banks State banks are engaging in credit rationing, retreating from the rural and western regions. Access to credit by the poor is a big problem. Allowing entry by smaller private banks may be the key [but not yet open]. China has implemented a new regulation: Qualified Foreign Institutional Investors (QFII) in securities sector to allow market access by high quality firms. 35

36 Comments on China s commitments in opening its service sector Aaditya Matto (2002) analyzed the pro and cons: China s GATS commitments represent the most radical services reform program negotiated in the WTO. China has promised to eliminate in a few years most restrictions on foreign entry and ownership. Initial restrictions could encourage further agglomeration in certain regions which is unlikely to be reversed later Restrictions on foreign ownership may dampen the incentives of foreign investors to improve firm performance. Improved prudential regulation and measures to deal with NPLs are necessary to deliver the benefits of liberalization in financial services. 36

37 Summary The service sector is crucial for export competitiveness, growth and job creation. Trade in services may yield large gains from competition, better service provision, lower prices, and learning by doing. Liberalizing the service sector is a part of an overall strategy for poverty reduction (see NPRS Cambodia) Making commitment in WTO negotiations is a good way to lock-in reforms Domestic regulations need to be strengthened if the gains from liberalization are to be materialized. Sequencing the reforms is crucial for poverty reduction Ensuring access to credit by the poor is a big challenge. 37