Wednesday, March 18, 2009

EU pushing for finance deregulation in third world

Phillips, Leigh (EUobserver.com, Brussels) 2009-03-13 

While talk of re-regulating the financial sector in the wake of the economic crisis continues, the European Union (EU) and other global leaders remain committed to pushing through bank deregulation in the developing world via trade accords.

Yet this strategy is undermining poverty reduction in these countries and is reproducing the same type of circumstances that led to the crisis in the first place, warns UK-based anti-poverty NGO World Development Movement (WDM).

Both through the General Agreement on Trade in Services (GATS) at the World Trade Organisation (WTO) and potential bilateral or regional trade deals between the EU and 34 countries in Latin America, Asia and the Mediterranean, the bloc continues to push for the lifting of restrictions on how Western banks operate in the developing world.

Through the GATS negotiations in 2002, the EU requested that 94 countries open up their financial industry, 20 of which were least developed countries (LDCs) and 30 were low-income countries.

A financial services component of the GATS would mean that countries will be unable to introduce new rules that are more restrictive than those already in operation, making it difficult to pass laws on risky trading such as “short-selling” or to limit the numbers of service providers or the number of transactions.

All new financial services would also have to be permitted, including the same complex financial products that have been held responsible for the creation of the toxic asset problem facing the developed world.

Full ownership by foreign banks would be allowed under the GATS, which could make it difficult for a host country’s financial supervisor to monitor the foreign bank’s activities and ensure that it acts in the interests of the country.

Even in Europe, the problem of foreign bank ownership is exacerbating the crisis in the East.

After seven years of negotiations, however, countries have still to conclude a GATS deal, and the EU has sought bilateral and regional trade deals in an attempt to bypass the impasse.

Known as “Global Europe”, the bilateral strategy seeks to remove regulations on European financial service companies along with other liberalising measures in various sectors, in case a deal at the WTO is not reached.

The EU trade deals already signed with Chile and Mexico contain substantial chapters on financial services, while the Economic Partnership Agreement (EPA) signed with the Caribbean in October 2008 contains many of the financial clauses proposed in the GATS. A similar pressure on Central American nations is being placed on their financial sectors.

The WDM report reveals that where banking liberalisation has occurred – citing India and Mexico, the latter being home to one of the most liberalised financial sectors in the world with 80 percent foreign ownership – poor people and small businesses see their access to financial services including credit and bank accounts restricted.

On Monday, British Prime Minister Gordon Brown spoke out against the “do as we say, not as we do” attitude of Western countries regarding economic policies promoted to the developing world.

During an international development conference in London, he announced that he would push the World Bank and wealthy nations to create a new fund for developing countries in order to assist them through the current financial crisis, although he did not give any indication of figures.

He also criticised the imposition of “economic orthodoxy” on the developing world. “Too often in the past our responses to such crises have been inadequate or misdirected – promoting economic orthodoxies that we ourselves have not followed and that have condemned the world’s poorest to a deepening cycle of poverty”, he said.

The World Development Movement, however, says that there is an acute contradiction between such leaders’ words and deeds in pushing for financial deregulation in the third world.

“On the one hand, Gordon Brown has developed a mantra of tough talk on the re-regulation of banks”, said Benedict Southworth, director of WDM. “On the other, together with other European leaders, he is aggressively pushing free trade deals which demand that developing countries follow a deregulated and liberalised banking model.”

“That model has clearly and spectacularly failed here and has also failed poor people in the developing countries”, she added.

The study highlights how the presence of European banks in the developing world has resulted in an overall decline in services and credit for others, notably to rural areas.

As a result, the WDM is calling for financial services liberalisation to be removed from the proposed bilateral and multilateral EU trade deals.

The European Commission is studying the report very closely, an official has said, although noting that the report’s authors had “confused liberalisation with deregulation”.

“Market access for European financial service providers in no way restrains the ability of countries to regulate financial services”, the official said. “The question is whether such moves become protectionist.”