WTO8217;s miracle year

The financial services agreement is the third feather in the World Trade Organisation's cap this year, after the information technology and...

The financial services agreement is the third feather in the World Trade Organisation8217;s cap this year, after the information technology and telecoms agreements. Given the Asian crisis, any financial services pact is an achievement. This one also is a significant improvement over the interim agreement of 1995, but a better one could have been got in different circumstances.

Even so, Thailand has allowed 100 per cent foreign ownership of banks, the Philippines of financial institutions. And a US-Malaysian spat, on 100 per cent foreign-owned insurers having to divest some of their Malaysian stake, was prevented from scuppering the deal.

America was eager for an agreement. It had stayed away from the 1995 agreement, calling developing countries8217; offers not good enough. But this time round, the Clinton administration had other troubles. Too little opening up by other countries in response to America throwing open its own financial services market would have been resented at home.

Anti-free-trade voices have been particularly sharp in America of late. In the end, what was won was a true compromise. Perhaps this is just as well. America is already a very open economy, but countries whose starting point is a far more closed economy are bound to be nervous of opening up in one go. Responsiveness to them is crucial to the WTO8217;s credibility.

For a weak Indian government, the circumstances surrounding the agreement might have seemed propitious. It has got away with offering a lot less than it might have had to. Insurance liberalisation was always a no-no, considering that even an Insurance Regulatory Authority Bill has not been passed.

But India refused to bind in the WTO even the small degree of openness it has effected: in the health-insurance sector, in licensing foreign-bank branches, and in the extent of banking assets that foreign banks are allowed to own. Not binding health insurance liberalisation means that the government will be free to reverse it if it so chooses.

It agreed in the WTO to allow only 12 new foreign bank branches each year when in fact it gave away 15 licences for such branches last year. Such political timidity has no excuse. Further liberalisation may not have been an option in the present political environment. But there was no reason other than political cowardice 8212; not to promise to maintain the openness already achieved.

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The chief liberalisation offered by India is its commitment to offer the same market access in this sector to all WTO members. India8217;s reasoning in the financial services talks has been based on an incorrect assumption all along. It thinks that it should not throw open its market because its own financial firms, being uncompetitive, cannot take advantage of other countries8217; market openness.

This assumes that unilateral liberalisation is undesirable. Why? It would still bring much-needed capital. Insurance services would strengthen investment in the infrastructure sector. And openness would make Indian players more competitive, fortifying them to compete in the world. Yet India took the approach that it should give away no more than it had to. This time, it had its way. But in the next two years half a dozen new trade negotiations and reviews are coming up. An urgent rethink is very much in order.