Behind the hyperbole of a borderless global economy and the liberating potential of the internet are the stark realities of power. Those who control the infrastructure of finance capital and information flows wield determinative power over the evolving international services/knowledge economy.
The financial system can be likened to the ‘brain’ of the international economy, because it is the allocator of capital resources. Hardt and Negri observe how the denationalisation of financial markets has been accompanied by a monetary re-territorialisation, which is concentrated at the political and financial centres of Empire, the global cities, from whence the globalised networks of finance and production are managed (Hardt and Negri, 2000, p 297). In similar vein, they quote an adviser to the US Federal Communications Commission (FCC) who depicted the new IT highway as establishing ‘the conditions and terms of global production and government just as road construction did for the Roman Empire’ (quoted in Hardt and Negri, 2000, p 298).
The role of trade in services agreements is to construct a normative and disciplinary regime of meta-regulation for this rapidly evolving infrastructure, in the image and interests of ‘empire’. Paradoxically, the artifice of a ‘trade’
treaty, with its sclerotic classifications and architecture, has frustrated those ambitions. The mega-corporations demand the right to extend their operations in ways that the new technologies make possible, but the GATS text cannot deliver. The new generation of bilateral treaties provides an opportunity to rewrite the script and compounds the legal complexities.
As with other sectors, the techniques of commodification and fettishisation erase the social relations and normalise the structural inequalities that are intrinsic to contemporary financial and telecommunications markets.
Equally, the combination of liberalisation and pro-market regulation that is demanded by trade in services agreements is de-linked from the systemic instabilities in the global financial system that re-surfaced so vividly in the wake of the subprime mortgage crisis in late 2007. Case study 9 uses Antigua’s challenge to the US ban on internet gambling to challenge the claim that trade in services agreements empower small and poor countries 1111
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to harness new technologies and compete as equals in the international services economy. Case study 10 examines the social implications when pension policy falls captive to the pension industry supply chain and trade in services rules, especially in such a turbulent environment.
This chapter also sets the platform for the subsequent examination of downstream services that rely on the financial and IT infrastructure, such as globally integrated food chains (Chapter 8), e-education (Case study 13), cultural exchanges (Chapter 7) and call centres (Case study 11). The potential for a foreign company to turn of the economic lifeblood of an entire economy at the flick of a switch and foment political chaos, as occurred in Venezuela in 2002, is the subject of Case study 17.
Infrastructure as a social phenomenon
It seems perverse that trade in services agreements aim to provide long- term political stability to corporations, not to societies or even economies.
It seems perverse that trade in services agreements aim to provide long- term political stability to corporations, not to societies or even economies.
The domino effects of the subprime mortgage crisis confirmed the fragility of an integrated global financial system whose regulation is designed largely by and for the financial services industry. The latest turmoil was utterly predictable. The East Asian financial crisis showed the systemic risks of the neoliberal ‘orthodoxy’ that was advanced by the IMF, World Bank and OECD in the 1980s and 1990s (see Kapstein, 1994; Krugman, 1994; Wade, 2007) and how rapidly contagion can spread from country to region and beyond, leaving devastation in its wake (Bullard et al., 1998; Stiglitz, 2002).
Malaysia’s ‘unorthodox’ imposition of currency controls in 1997 reinforced the importance of governments retaining their full regulatory autonomy and exercising it prudently, despite the condemnation of the institutionalized
‘voices of capital’. A study of Thailand’s experience of the financial crisis, conducted in 2002 as one of the few assessments of the GATS pursuant to Article XIX, described how
the rapidly growing banking system and the influx of short-term foreign capital proved to be too much and too fast for the authorities to catch- up on [the] regulatory front. The problems were further aggravated by new technologies that enabled transfer of capital to be as easy as ‘a click away’. New financial and debt instruments were created that made surveillance and devising appropriate regulation almost impossible. The result was that a lot of short-term capitals [sic] that came to Thailand ended up in sectors like construction and real estate developments, contributing very little in real term[s]. And in the end, they became the major source of non-performing loans that are currently besetting the whole banking system. Perhaps the regulatory, supervisory and prudential regimes were somewhat lax but they were never intended to be so.1 1111
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The authors concluded that ‘the global economic environment coupled with new technological development has greater tendency to unravel many economies than before’. Developing countries face particular difficulties in devising a regulatory framework that can ‘catch up with globalisation’.
While the study endorsed liberalisation, it advised caution: ‘If [devising a regulatory framework] is too difficult to achieve, then perhaps the pace of liberalization that a country plans to implement may have to be adjusted so that its supervisory and regulatory capability will not be compromised’.2 However, once a government has made commitments on financial services through the trade in services agreements they may have no ‘policy space’
to address these challenges, and no GATS-compliant alternatives. Further, members who take a mode 1 commitment automatically guarantee a free inflow and outflow of capital that is an ‘essential part’ of that service, while a mode 3 commitment prevents them from restricting incoming capital flows related to the investment. Parties to US free trade agreements, such as Chile and Singapore, have even abandoned their right to suspend commitments temporarily in balance of payments emergencies.
The systemic implications of the GATS for telecommunications are seen more in the concentration of corporate power. There are valid arguments that many old state-owned telecommunications monopolies failed to provide adequate quality and access, and that they lacked the capital and incentives to meet the challenges of the IT revolution. Privatisation and unbundling were promoted as solutions that would generate competition, improve efficiency, lower prices and broaden coverage. However, privatisation has often simply transformed old state monopolies into dominant price gouging private monopolies and oligopolies.
Corporate power over telecommunications is concentrated overwhelmingly in US and European ‘telcos’, who have established this dominance through a century of monopoly control over the telecommunications networks of the world’s largest industrialised economies. Those traditional public monopolies, or in the case of the US a private oligopoly, were formally dismantled during the 1980s and 1990s, but their power remains intact. The US government broke up the Bell Telephone System in 1984. The Telecommunications Act 1996 further promoted competition by unbundling the local networks. Despite these measures, AT&T has re-established its dominance through a series of mergers and acquisitions (Braithwaite and Drahos, 2000, pp 322–6). In Europe a more neoliberal model of privatisation and competition slowly spread from the UK in the 1980s. A pro-competitive regime was harmonised through the EU directive on competition in 1990 and other regulations. Instead of enhanced competition, a continuous cycle of acquisitions and mergers across Europe has generated oligopolies that dominate the integrated networks of telephone, radio, television, computing and information services that are enabled by satellite and cable.
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The GATS expands the international dominance of these telcos as governments privatise, deregulate and liberalise their domestic telecommunications systems.
A report for the World Bank observed, approvingly, in 2005 that:
The GATS can be viewed as a multilateral investment agreement, granting rights to the service suppliers of other WTO members, and allowing foreign ownership and control in telecommunications, a sector of the economy often seen as having particular political and strategic importance. For developing countries, this investment agreement often results in foreign ownership and/or the transfer of control of the incumbent carrier due to lack of domestic capital.
(Bressie et al., 2005, p 5) The authors of that report hailed the potential for binding commitments by developing countries to anchor their far-reaching telecommunications reforms and to reassure investors by providing safeguards against policy reversal (Bressie et al., 2005). They applauded 11 countries that they said had ‘voluntarily’ made telecommunications commitments during their accession process and sent a signal to investors by locking in their domestic reforms.
The global reach of foreign telcos feeds the risk of a growing digital apartheid. The commercialisation and mass expansion of the internet from 1991 transformed the IT environment. C Edwin Baker rightly warns against overstating the potential for the internet and worldwide web to displace other forms of social communication (Baker, 2002, p 298). However, access to the telecommunications infrastructure does determine which countries, and which segments of their economies and societies, can choose to interact through this form of communications. It also determines which of them can participate in IT-enabled services and electronic commerce (the production, advertising, sale and distribution of products via electronic networks), such as financial transactions, tourism, e-education or call centres.
These globally integrated financial and telecommunications markets have direct social impacts. The report for the World Bank cited above implied a positive relationship between the GATS commitments of selected low- income countries and regions and the penetration of fixed-lines and mobile phones. However, it chose not to examine other, more socially relevant, statistics, such as levels of reinvestment by foreign firms or the social distribution of the services in terms of access and affordability. Nor did it address the fate of universal service obligations.
By contrast, Hardt and Negri argue that: ‘The new communications technologies, which hold out the promise of a new democracy and a new social equality, have in fact created new lines of inequality and exclusion, both within the dominant countries and especially outside them’ (Hardt and Negri, 2000, p 300). Even in richer countries, cost remains the most 1111
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significant barrier to access for lower-income, older and minority households (Cooper, 2000; Reddick et al., 2000; EKOS Research Associates Inc, 2001).
A growing digital divide within and between countries would have ‘profound impacts not just on economies, but on politics, societies and cultures’ with potential for political backlash (Taylor and Jussawalla 1998, p 2). Yet, as explained below, social regulation to mitigate that risk is treated as a trade barrier in the GATS.
Financial services liberalisation has comparable impacts on local communities and small businesses. Transnational banks generally enter countries through mergers and acquisitions (under mode 3) that concentrate market power in fewer, foreign hands. Recent history shows a high level of foreign ownership once state banks are privatised and foreign investment in financial markets is liberalised: 90 per cent of banks in Mexico in 2002 were foreign controlled, up from 19 per cent in 1999; Eastern Europe is similar, with 97 per cent foreign ownership in Estonia in 2004; in Tanzania foreign banks had about 70 per cent of market share (vander Stichele, 2006).
The ability of transnational banks to offer higher quality services and technology allows them to skim off the profitable commercial operations and shed the custom of higher cost, low-value rural communities, small businesses and the poor. As a result, local businesses, small farmers and households face a credit squeeze that can disable the local economy and employment (Chapter 8). The wealthy frequently respond to domestic instability by shifting money into offshore accounts, which further depletes the national investment base.
Second-tier, third-tier and underground markets in high-risk lending may emerge, within minimal protections for borrowers or investors. Banks that remain locally owned are often expected to maintain universal services, and may take unwise risks simply to survive. When they close or are taken over the market becomes even more concentrated. There is nothing to stop foreign firms from maximising their returns and moving on to greener pastures, leaving the local financial services sector depleted and destabilised. These risks are greatest where domestic regulations are weak and governments have fully lifted their capital controls (as required under mode 1).
These dimensions of trade in services agreements often go unremarked.
Few people, including politicians, know if their governments have signed away the autonomy to regulate the infrastructure that drives their economies.
Fewer still know that this might extend to their right to exercise capital controls. The areas of financial services, telecommunications and e-commerce have attracted equally little attention from the GATS critics (vander Stichele, 2005). The services themselves and the related trade rules are complex, specialised and technology-centred. For campaigners, the real world impacts often seem less obvious than in education, health or water and are harder to mobilise around. Yet it is small businesses, workers and communities in the real economy that ultimately bear the consequences of financial market failure and technological exclusion.
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Uruguay round negotiations
These systemic and social considerations were far from the minds of US negotiators when they demanded the inclusion of services in the Uruguay round. They had two primary targets. The first was to secure guaranteed rights to access and consolidate control over the world’s emerging financial and telecommunications markets. The less obvious long-term objective was to pre-empt the regulation of new technologies through which capital and data would flow. As Case study 3 recounts, the corporate activists who pushed for the GATS came from AMEX, AIG, Citicorp and later AT&T, with support from the British financial services lobby LOTIS. Geza Feketekuty explains their motivation:
More than anything what drove [the GATS] was telecom, both telecom deregulation and the shift in the market structure in telecom. The two are so inter-related, the regulatory stuff and the technology on the other side. . . . The key people from the industry came to me and said:
‘look, what we really want out of this, bottom line, is to stop any pressure within governments to establish restrictive regulations on the information transfer side. Yes, we’re interested in liberalised access in some of the traditional regulated areas, but we know that’s going to take a long time.’ None of the people who were really driving the liberalization of services were really that gung ho on deregulation globally, with the partial exception of telecom. What they were really interested in was what they called the ‘new services’, from consulting to data processing to information services. That’s what they were wanting, and they were keen to make sure that governments didn’t look at this and say ‘gee, here’s a new service, this new thing called international data processing, international value-added telecom services.
It needs to be regulated just like all the other services that we regulate’
. . . out of gut reaction without thinking why it needs to be regulated.
[They said . . .] ‘That’s what we want you to do. We want you to come up with a regime that stops governments from just willy-nilly coming in and regulating things and building up new restrictions in what is potentially a tremendous growth area’.3
The financial services corporations recognised a clear synergy between their interests and the regime governing of telecommunications. AMEX and Bank of America orchestrated the creation of a powerful International Telecommunications Users Group in Europe in 1974 as the voice of corporate consumers (Braithwaite and Drahos, 2000, p 342). The group’s membership expanded internationally by sponsorship of national bodies and the recruitment of major corporations and influential individuals.
Feketekuty says the financial services firms were primarily concerned to 1111
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secure cheap and reliable access to basic telecommunications networks, especially the use of leased lines for intra-firm communications:
Even the insurance people said ‘what we’re openly interested in is the insurance transactions that could easily take place over the net’. The financial services people were [also] more interested in the information transfers and data. They had their banks abroad and, yes, it would be nice to get some more branches, but that wasn’t what they really wanted.
They wanted to be able to do business globally. . . . As they said ‘when we provide cash management services for some of the big companies we’ve got to be able to move cash around’. That’s what was driving it. Or the insurance companies saying the same thing, ‘we’ve got to be able to manage our cash flow so we’ve got to be able to move information, we’ve got to be able to move the money’.4
The power of the US services lobby explains the inclusion of trade in telecommunications as a US negotiating priority in the Omnibus Trade Act 1988, Part 4 of which was the Telecommunications Trade Act 1988.
Indeed, the US refused to sign off on either the financial services or telecommunications negotiations until it had pushed the boundaries as far as possible, several years beyond the end of the Uruguay round. Both negotiations ran in parallel, with similar specific goals: to maximise commitments to binding liberalisation in members’ schedules; to achieve international adherence to a common pro-corporate regulatory regime; and to recover some of the procedural ground conceded to the South during the Uruguay round. The demandeurs attacked a similar raft of ‘barriers’ – restrictions on foreign investment, economic needs tests, limits on the range of services provided, restrictions on foreign exchange movements, local monopolies, tax concessions and licensing processes. However, the outcome in each sector reflected its unique characteristics and regulatory history.
Meta-regulation of financial services
The GATS 1994 contains several special provisions on financial services.
The first is an Annex on Financial Services, which drew heavily on the landmark chapter on financial services in the CUSFTA (Raworth, 2005, pp 196–216). This Annex contains defensive and offensive elements. The defensive provisions were crucial to securing the support of sceptical financial regulators. A broad prudential carve-out allows governments to use non- conforming measures to safeguard the integrity of their financial system or protect consumers. Such measures must not be used to avoid commitments or obligations – a matter that can be subject to a dispute, although the panel hearing the complaint must include relevant financial expertise.
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The Annex also contains a special definition of ‘services supplied in the exercise of governmental authority’ that parallels Article I:3. Activities conducted in pursuit of monetary and exchange rate policies are totally exempt, whether they are carried out by a central bank, monetary authority or public entity authorised to do so. The exclusion also covers a country’s statutory system of social security or public retirement plans, and the activities of a public entity that is backed by a government guarantee or uses public finance. However, these activities are subject to full GATS disciplines if they are conducted in competition with a public entity or a private financial service supplier (Case study 9).
The Annex has a second, offensive aspect. It expands the definition of financial services beyond W/120 to cover ‘any service of a financial nature offered by a financial service supplier’ (paragraph 5:1). This opens the way for market access, national treatment and additional commitments across a vast spectrum of insurance and banking activities, trade in foreign exchange and derivatives, trade in all kinds of securities, securities underwriting, money broking, asset management, settlement and clearing services, provision and transfer of financial information, and advisory and other auxiliary financial services. Sauvé and Gillespie suggest this breadth was partly a strategy to avoid capture of the negotiations by any part of the financial services industry that was opposed to foreign competition (Sauvé and Gillespie, 2000, p 432).
The Annex was accompanied by a model schedule entitled the Understanding on Commitments in Financial Services. Governments adopting the Understanding must specify, and later endeavour to reduce or eliminate, existing monopoly rights; this includes monopoly financial services that are supplied in the exercise of governmental authority, except those relating to monetary and exchange rate policy or statutory systems of social security and public pensions. Foreign financial services suppliers have a right to establish and expand their commercial presence, including by acquiring existing enterprises, and entry for their senior management and specialists, subject to specified terms and conditions. National treatment and MFN apply to the procurement of financial services. Governments must not prevent data transfer and processing that is necessary for the conduct of ordinary business, except to protect privacy and confidentiality. Any new financial service that is not already supplied in the member’s territory would automatically be allowed, whatever the means of delivery. The Understanding only has legal force when it is incorporated within a member’s schedule. A government that adopts the Understanding binds itself to a standstill of its existing non- conforming measures. It can qualify any other commitments.
The aim of the Understanding was to secure a critical mass of commitments (a forerunner to the plurilaterals of the GATS 2000 negotiations). It is a wish list of commitments designed by a select group of OECD governments to achieve deep liberalization of financial services. The fact that it became a 1111
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