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Created: May 22, 2003
Latest Update: May 22, 2003
jeannecurran@habermas.org
takata@uwp.edu

Making Services Work for Poor People: Is the GATS a Help or Hindrance?

Aaditya Mattoo

Site Copyright: Jeanne Curran and Susan R. Takata and Individual Authors, May 2003.
"Fair use" encouraged.

January 2003

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.