Again and again in consultation forums, civil society groups have asked the World Development Report (WDR) team where the General Agreement on Trade in Services (GATS) fits in with their analysis of ‘making services work for the poor’. After failing to respond to the GATS question in the first draft of the WDR released 25 March, the team has now released the text of what is to be included in a ‘box on GATS‘ (see below).
Please send your comments on the text to author Aaditya Mattoo before 23 May, when the final text will be submitted to the WDR team (cc the Bretton Woods Project). We may post selected comments (with permission) on the website. For discussion of this issue and others raised in the WDR draft, Public World is moderating a multi-lingual e-conference which will run until early June.
Making Services Work for Poor People: Is the GATS a Help or Hindrance?
Aaditya Mattoo, World Bank
For a new agreement that has so far not had much impact on actual policy, the WTO‘s General Agreement on Trade in Services (GATS) is viewed with a surprising degree of both hope and trepidation. In the current Doha agenda negotiations, some look to the GATS to deliver much needed reform of services from which the poor will also benefit, while others see it as a threat to regulatory sovereignty and pro-poor policies.
In principle, multilateral negotiations can foster reform in services, as in goods, by eliminating or reducing protective barriers through mutual agreement and by lending credibility to the results achieved through legally binding commitments. The expectation is that more open markets will lead to the more efficient provision of services. That is the rationale for the GATS. We address three questions. How much market-opening has happened so far under the GATS? Secondly, does the Agreement prevent recourse to the complementary policies needed to ensure that the poor have access to essential services in liberalized markets? Finally, could the GATS process lead to liberalization before other necessary reforms, and how can this be prevented?
The GATS is certainly wide in scope. It applies to virtually all government measures affecting trade in almost all services, including educational, health and environmental services. Moreover, in recognition of the fact that many services require proximity between consumers and suppliers, trade in services is defined to include not only cross-border supply but also foreign investment and the temporary migration of service consumers and providers. The broad reach of the GATS contrasts with the flexibility of its rules. The generally applicable rules merely require of each country that its trade-affecting measures be transparent and not discriminate between its trading partners. Thus, if a country were to prohibit all foreign supply and make this fact public, then it would have met its general obligations.
The extent of market-openness guaranteed by a country depends on its sector-specific commitments. These promises to eliminate or limit barriers to foreign supply were mainly the outcome of negotiations – but some were volunteered, particularly in telecommunications. Most existing commitments entailed little liberalization beyond existing market conditions. Many countries committed on tourism, financial, business and telecommunication services, but relatively few in health, education and environmental services. Of the 145 WTO member countries, only 32 (9 developing) have made commitments in primary education, 39 (20 developing) in hospital services, and none on water distribution (which was not an explicit part of the original negotiating list of services sectors).
The most serious charge against the GATS is not its meager harvest of liberalization – after all the process has only recently begun – but that it deprives governments of the freedom to pursue pro-poor policies. It is argued that the Agreement threatens public education, health and environmental services, outlaws universal service obligations and subsidized supply, and undermines effective domestic regulation. These charges do not seem well-founded for three reasons. First, services supplied in the exercise of governmental authority are excluded from the scope of the GATS, although the definition -services that are not supplied on a commercial basis or competitively- offers scope for clarification. Secondly, even in sectors that have been opened to full competition, the Agreement does not prevent the pursuit of domestic policy objectives, including through subsidies or the imposition of universal service obligations as long as these do not discriminate against foreign suppliers. Finally, the Agreement recognizes the right of members, particularly developing countries, to regulate to meet national policy objectives, and its current rules on domestic regulations are hardly intrusive.
The real problem is that while the GATS does not prevent complementary action, it also does not – indeed cannot – ensure it. This raises a legitimate concern: in a complex area like services, trade negotiations alone could lead to partial or inappropriately sequenced reform. One possibility – already visible in some cases – is that less emphasis will be placed on introducing competition than on allowing a transfer of ownership of monopolies from national to foreign hands or protecting the position of foreign incumbents. Another is that market opening will be induced in countries that have not developed regulatory frameworks and mechanisms to achieve basic social policy objectives. These flaws could conceivably make the poor worse off.
The danger of adverse outcomes would be substantially reduced if two types of activities receive greater international support. The first is increased policy research and advice within developing countries and outside to identify the elements of successful reform – and to sift the areas where there is little reason to defer market-opening from those where there is significant uncertainty and a consequent need for tempered negotiating demands. An even greater need is for enhanced technical and financial assistance to improve the regulatory environment and pro-poor policies in developing countries. The development community is already providing such support, but a stronger link could be established between any market-opening negotiated at the WTO and assistance for the complementary reform needed to ensure successful liberalization.
I think the main issue is the one raised in the last few paragraphs: how can we ensure that countries who liberalize their service sectors have the domestic institutional capacity to manage the results? I think this because I am pessimistic about reversing the trend toward liberalization, within the WTO (as envisioned by the draft WDR text) and as a result of pressure from other institutions such as the World Bank (as not mentioned in the text, but note for example the World Bank policy refusing to grant infrastructure monies for water unless the sector is opened up), and in the many new bilateral trade agreements being negotiated by the US (where it can exert undue influence not possible in the multilateral setting). The WTO negotiations, it is true, allow countries to safeguard sectors by simply refusing to "opt in." But the negotiations are driven by power relations, and the fact is that many countries will not be able to resist opening up sectors that should be left closed (at least for now). You can bet, for example, that the EU is muscling the African Caribbean and Pacific states to open up their water services, both in the WTO talks and in the Cotonou negotiations.
So how do we ensure that there is appropriate institutional capacity to regulate and manage private sector actors before we open up? How can we link the WTO-led liberalization to these kinds of considerations? The only vehicle for anything like this kind of concern is special and differential treatment, but it has not to date been used in this way, and has typically consisted of simply longer lead-times for implementation of agreements.
Unless there is such a linkage, then pursuing liberalization ignores the very goals set out for the WTO and most other trade agreements, where the talk is of raising levels of development.
The issues in the area of investment liberalization, by the way, are strikingly similar.
Senior Project Advisor, Trade Knowledge Network
International Institute for Sustainable Development
If ths is meant to be a briefing for interested but not necessarily professionally involved people, it seems to us insufficiently clear. The main concern voiced by the religious communities and other CSOs was that the provision of services should not be privatised in such as way that it is subjected to market forces to the detriment of providing access to poor people. The eagerness of large enterprises to come under GATS rules seems to indicate that no precautionary measures to prevent this are envisaged. Insofar as we can understand the box, it does not seem to be reassuring on this point.
Wendy Tyndale, World Faiths Development Dialogue
It is disappointing that the proposed box on GATS to be included in the WDR 2004 is both outdated and selective in its treatment of the issue.
To begin with, the box seems to rely on outdated information on the extent of commitments already made under GATS. For example, while older WTO documents listed 39 countries as having made GATS commitments in hospital services, the 2002 joint report from WTO and WHO has updated this figure to 42. The WDR would do well to check its figures with the latest ones available from the WTO.
Also out of date is the perfunctory response to the charge that GATS threatens public services. The WDR box simply repeats the basic position that Article I:3 of GATS excludes services supplied in the exercise of governmental authority, conceding only that the definition of such services in GATS “offers scope for clarification”.
The debate has moved on much further than this. Senior officials from the European Commission and EU member states have confirmed that some public services do indeed fall under GATS already, and that more would do so in theEU context were it not for the horizontal limitation on public utilities which the EU registered in its GATS schedule of commitments in 1994. The WDR should acknowledge that some public services do fall under GATS as a result of the restrictive definition in Article I:3. It should also note that there has been a strong call from civil society not just to ‘clarify’ the scope of Article I:3, but to ensure that public services are properly excluded from GATS.
Similarly, on the threat of GATS to national policy objectives, the WDR box misses the point in its bizarre suggestion that “current rules on domestic regulations are hardly intrusive”. As the World Bank surely knows, the Working Party on Domestic Regulation established by the WTO‘s Council on Trade in Services is still in the process of developing rules on this issue, and the concern of civil society is with the outcome of that process. Repeating the old defence that GATS recognises the right to regulate has long since ceased to be sufficient: the issue is whether governments will retain the ability to pursue national policy objectives if disciplines on domestic regulations come into force as envisaged under Article VI:4.
Finally, the WDR box fails to mention many of the most trenchant criticisms of the impact of GATS on basic services, such as the threat of increased systems fragmentation as a result of external liberalisation, or the absence of any proper analysis as to where such liberalisation is appropriate, and where not. Such criticisms have been elaborated at length in many fora over the past three years, including in publications from Save the Children UK.
Failure to address these concerns in a balanced manner, rather than simply trying to dismiss valid criticism of the GATS for ideological purposes, will result in the WDR being dismissed as a one-sided polemic. The World Bank should revise its box on GATS substantially if it wishes to avoid this charge.
Trade Policy Adviser
Save the Children UK
Critique of draft 2004 World Development Report (WDR) GATS Box
A Synthesis of NGO Comments, by the Alliance for Democracy and Citizens’ Network on Essential Services.