|
|
|
|
International Financial Markets: Harmonization vs. Competition
American Enterprise Institute for Public Policy Research
January, 1997
This book is a volume of essays that analyze the costs and benefits of policies aimed at harmonizing the regulatory schemes of different nations as opposed to allowing national regimes to compete. The editor is a resident scholar at AEI. Excerpts from the book's introduction follow.
Just after the Uruguay Round of trade negotiations concluded, the Organization for Economic Cooperation and Development (OECD) issued a ministerial communique looking to future trade issues for the 1990s. It stated:
Looking beyond the Uruguay Round to the trade issues of the 1990s, Ministers emphasize the need to address the new dimensions of trade policy. . . . The increasingly international scope of economic activity has seen the emergence of areas in which the needs of private agents and governments have run ahead of the existing "rules of the game." There is a perceived need for better understanding of these issues and, where appropriate, convergence of policy approaches and consideration of fresh rules.
Among the goals specified by the communique was completion of financial services and telecommunications agreements from the Uruguay Round. It also addressed a group of new issues, including the trade-related aspects of investment policy, competition policy, technology policy, and the environment, as the top priorities for future multilateral trade negotiations.
Policy questions related to trade in financial services form a bridge between the issues discussed in the Uruguay Round and those that present new challenges to trade negotiators for the balance of the 1990s. Trade in financial services directly intersects both trade-related investment issues and questions related to competition policy. For instance, financial services--banking, securities markets, and insurance--provide the indispensable infrastructure for foreign investment. Negotiations leading to a more liberal international- investment environment will necessarily address the multilateral rules governing this financial-service infrastructure. For policy on competition, the corporate relations between financial services providers and other service and manufacturing concerns (such as the role of banks in corporate control and governance of German industrial firms) will pose large and complicated issues for negotiators attempting to construct a new multilateral regime in this area.
As noted above, the Uruguay Round began the process of creating new multilateral rules for financial services trade and investment. These deliberations, however, represented only the beginning of an effort to work through the issues raised by the potentially huge markets for international banking, securities, and insurance activities. The Uruguay Round negotiators failed to achieve a consensus about new rules for financial services, and negotiations were extended for several years. In the summer of 1995, the multilateral negotiations suffered an important setback when the United States withdrew its offer for liberalization, arguing that other countries--particularly East Asian nations--had failed to come up with significant market-opening plans.
The goal of this volume is to set forth criteria for a financial services multilateral regime and to make sector-specific recommendations to provide future international trade and investment rules for banking, securities, and insurance. The central question addressed by each chapter is the degree to which a future financial services regime must be harmonized, with common rules governing all participants. The OECD ministerial communique looks to a "convergence of policy approaches . . . where appropriate"; but it gives no guidance as to criteria for appropriateness.
Competing Visions of a New Multilateral System
Underlying the questions of harmonization are fundamental policy choices and competing visions of the substance and mechanics of a new multilateral system that extends to hitherto domestic regulatory systems, such as those governing financial services. On the one hand, some economists and many trade negotiators lean heavily toward substantial harmonization, citing the problem of nonlevel playing fields and the danger that increased system friction will result in substantial disruption and weakening of the new World Trade Organization (WTO). On the other hand, many economists and some trade negotiators are skeptical of the benefits of forced harmonization. They argue that competition among national regulatory systems will ultimately produce a more efficient, as well as more equitable, system.
The authors in this volume generally agree with the skeptics. The common theme is best expressed by Lawrence White in Chapter 2:
In this author's judgment, competition--whether among firms, among markets and exchanges, or among national regulatory regimes--ought to be the "default option"; that is, in the absence of a strong showing that there is a substantial market failure and that the problems of government failure can be overcome to create a reasonable likelihood that government intervention will improve outcomes, the competition outcome should prevail. For the international competition-versus-harmonization controversy, this position would imply that those who favor the international harmonization of specific national regulatory provisions should bear a substantial burden of making a convincing case. As is discussed below, there do seem to be specific instances where international harmonization may well be desirable; but the presumption should be in favor of competition, and a strong affirmative case for harmonization must be made in these specific instances.
The volume is organized as follows: Lawrence White presents an overview chapter, defining an approach to analyzing the issues of harmonization versus competition in international trade in financial services. He delineates the potential conditions of market failure that would call for public intervention, but he also carefully balances these conditions with possiblities of "government failure" and warns of the "danger that harmonization efforts could be subverted and become a vehicle for reinforcing the protectionist tendencies of many national regulatory regimes."
Using White's criteria as general guidelines, the next three chapters present detailed analyses of the current competitive structure and activities of the three main financial-service sectors: banking, by Jean Dermine of INSEAD; securities, by Ingo Walter of New York University; and insurance, by Harold Skipper of Georgia State University. For each sector, the authors present more detailed recommendations for trade liberalization.
Finally, Ross Levine of the World Bank contributes a chapter describing the particular problems faced by developing countries in overcoming barriers of financial-service liberalization. Levine also presents a more general case for the role that both domestic and foreign financial-service institutions can play in economic development. Indeed, government failure can be overcome to crhis conclusions regarding the seminal role of financial services in promoting faster economic growth hold true not only for developing countries but for developed countries as well. He describes five functions that provide the means for more efficient capital accumulation and utilization. Financial services (1) facilitate trade and allow specialization in production functions, (2) facilitate risk management, through pricing risk and allowing mechanisms for pooling and ameliorating risk, (3) mobilize resources, through channeling disparate savers into growth-enhancing investment projects, (4) obtain information, evaluate firms, and allocate capital more efficiently than individual savers can, and (5) provide a check and outside regulator of corporate governance.
Thus, as Levine points out, "financial services are not simple balance sheets, and financial markets are not simple veils for the functioning of the real sector. The financial system provides 'real' services that are crucial for economic activity and long-run growth." For these reasons, as the authors of these chapters make clear, it is imperative that future trade negotiations aimed at liberalizing financial services strike the right balance between essential central rules and free competitive play, to allow the most efficient firms and national regulatory systems to flourish.
Email this citation