## _pdp06 ## Source details **Canonical URL:** [_pdp06](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/pdp/2003/_pdp06.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/pdp/2003/_pdp06.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/pdp/2003/_pdp06.pdf.json) --- ### Box 1. Internet-Based Services — Internet effects and electronic commerce - The internet impacts three stages in market transactions: (i) the buyer’s search for product and price information, (ii) the subsequent order, and (iii) the delivery of the product. - The internet facilitates processing of market information and ordering of goods and services. - Only products that can be converted into digital form can be supplied through the internet. - “Electronic commerce” commonly refers to transactions that actually take place on the internet, that is the second and third stage of a market transaction. - Evidence from the United States suggests that online delivery is still a comparatively small segment of this market. ### Box 1. Internet-Based Services — Opportunities and constraints for developing countries - Rapid progress in telecommunications links and computer technology has contributed to a surge of services transactions based on the internet. - The internet has reduced market entry costs in many service industries and led to more intense competition. - Manufacturing firms may separate vertically-related activities that can be performed by outside service providers, creating opportunities in: - data and information processing (“back-office” functions), - software design, - maintenance. - Participation in the market for internet-based services depends on access to a modern telecommunications infrastructure. - The growth of this market offers significant potential for small developing countries but raises the risk of marginalization for countries with poor telecommunication networks. ### Box 1. Internet-Based Services — Size, geography, and diffusion - Estimates of the size of world electronic commerce range from US$218 to US$657 billion. - The majority of this market is currently located in the United States. - Diffusion to developing countries is expected to be rapid. - The number of internet users in India was estimated at over 2 million at the end of the year 2000. - Outside the United States, electronic commerce is highly likely to be export-oriented, with an increasing share of business-to-business transactions. ### Box 1. Internet-Based Services — Trade in services: four modes of supply - Trade in services covers four modes: - Cross-border supply (mode 1): consumer in residence, supplier outside (examples: transportation services or internet-based trade). - Consumption abroad (mode 2): consumer moves and consumes services in another country (examples: tourism or education overseas). - Commercial presence (mode 3): supplier establishes an enterprise in the consumer’s territory through FDI (examples: services by foreign-owned banks). - Temporary movement of natural persons (mode 4): self-employed or employed individual moves to the consumer’s territory to provide the service (examples: an on-site engineer). - Recent cooperation among international organizations has defined statistical coverage to proxy these four modes. - There are serious shortcomings in recording “other services” (other than travel and transportation) in the balance of payments; deficiencies are greater in recording sales through commercial presence. - Few investor countries record sales data of firms owned by residents but operating outside their territory; few host countries distinguish sales of foreign-owned affiliates in corporate statistics. ### Box 1. Internet-Based Services — Impediments to international services trade - Traditional trade policy instruments generally do not apply to services; restrictions arise mainly through direct controls on market access and less favorable treatment of foreign providers. - Stern (2000) classification of four kinds of barriers: - quantitative restrictions or prohibitions on provision of services by foreign residents; - price-based measures via differential taxes on transactions of foreign providers or additional regulatory charges; - additional licensing or certification requirements, particularly for business or professional services; - lack of access to distribution (retail) and communication networks, often stemming from absence or inadequate enforcement of national competition standards. ### Box 1. Internet-Based Services — Openness, measurement challenges, and the role of the GATS - Quantification of barriers to international services trade is important to gauge potential efficiency gains and complement measures for goods trade. - Regulatory measures are harder to quantify than barriers in goods trade due to judgment in weighting measures and paucity of comparable data. - The GATS discloses restrictions only where members chose to include a sector in their schedules of specific commitments. - Outcome-based measures (price-cost margins or market shares of foreign service providers) measure economic distortions more accurately but cannot always unambiguously attribute distortions to economic regulations. - Measures indicate developing and transition economies tend to have more restrictive trade regimes in services than developed countries. - Commercial presence (mode 3) appears to be the most restricted mode in developing countries; restrictions apply to legal entity type and extent of foreign capital participation. - Restrictions on national treatment affect administrative authorization and land ownership; restrictions on commercial establishment account for the bulk of investment restrictions overall. - The Uruguay Round created the GATS, covering all services sectors with multilateral rules and a forum for negotiations; specific commitments made then enhanced predictability and transparency by “binding” regimes in place at the time. ### Box 1. Internet-Based Services — Implications for policy and multilateral negotiation priorities - Substantial multilateral liberalization of services trade can be pursued in the context of the Doha Development Agenda; in early 2003, WTO members presented a first round of offers on a bilateral basis. - Key negotiation challenge: compromise between industrial country demands for further liberalization of market access in developing countries (particularly commercial presence) and developing countries’ demands for concessions on temporary movement of natural persons (mode 4). - Very few unconditional commitments have been scheduled for mode 4; political discussions often conflate mode 4 with permanent migration. - From industrial countries’ perspective mode 4 mainly concerns independent consultants and skilled personnel moving within multinational firms; for many developing countries remittances can be large (examples later note remittances in several Central American countries amount to more than five percent of GDP). - Risk: proliferating bilateral and regional trade agreements with services provisions could undermine the GATS if Art. V on regional agreements remains ill-defined and unenforced, allowing discriminatory treatment that distorts services trade and reduces efficiency gains. ### Box 4. Trade in Services in IMF Surveillance — Overview - IMF surveillance engaged in reforms in telecommunications, transportation, and finance, focusing on: - efficiency gains from services liberalization and privatization, - government revenues from privatization and concessions, - implications for reduction of state debt. - Surveillance discussions covered employment effects and balance of payments implications of developments in services trade, especially tourism. - IMF involvement included policy advice in surveillance and conditionality in IMF-supported programs, often in coordination with World Bank sectoral advice. ### Box 4. Trade in Services in IMF Surveillance — Country cases and policy analysis (selected examples) - Brazil: - Reform priorities: telecommunications, transportation, and finance. - Structural reform agenda: privatization of Banco Real, Telebras, and leasing of ports, airports, and highways. - South Africa: - Issues: balance of payments, FDI, privatization (including Telecom sale to a foreign consortium); privatization of airline Sunair and airports company. - European Union: - Surveillance discussed progress toward a single market in services and international services negotiations; GATS commitments consolidated in the EU schedule but member states retain leeway. - Recent Asian programs: - Opening financial sector to foreign participation to reduce structural weaknesses and attract foreign capital and expertise; examples include airline and airport privatizations and opening distribution services to foreign investment. - IMF involvement in financial services liberalization: examples include Ukraine and Azerbaijan. ### Box 4. Trade in Services in IMF Surveillance — IMF-supported programs: selected country experiences and measures - Ukraine (Extended Fund Facility): - Objective: attract FDI to support private sector development. - Measures: deregulation and privatization; accelerated cash sale of large enterprises in telecommunications, air transportation, and energy via transparent tenders and stock market offers. - Financial sector reforms: simplifying licensing and lifting the limit on total foreign capital participation in equity ownership of the Ukranian banking system. - Liberalization of entry for foreign service providers proceeded in parallel with upgrading regulatory frameworks. - Azerbaijan (1996 Extended Fund Facility): - Objective: enhance productivity growth for non-oil tradable goods sector survival. - Focus: bank restructuring, privatization, termination of government production/trade involvement; adoption of Bankruptcy Law, Competition Law, Petroleum Law. - Measures to improve foreign investment conditions in energy sector; seek foreign and domestic strategic investors in tender privatization of large enterprises (10 percent of enterprises to be privatized). - Financial sector: develop private banking system by creating a level playing field; free entry and exit for domestic and foreign banks. - Structural benchmark implemented: inviting foreign banks to raise their capital up to 30 percent to total banking system capital; subsequently noted this limit constrained transfer of skills and technology and limited domestic borrowers’ access to additional credit. - Privatization expected to contribute to budget financing. - Poland: - Services liberalization largely via privatization policy and banking sector efficiency; initial privatization of small retail/service businesses then focus on larger enterprises; substantial progress via foreign investment. - Recent Asian programs (Indonesia, Korea, Thailand): - Extensive opening to foreign participation in banking (Indonesia, Korea, Thailand), other financial services (Korea), telecommunications (Korea, Thailand), and distribution services (Indonesia). - Specific measures include lowering foreign ownership thresholds, lifting branching restrictions (Indonesia), and allowing foreign banks effective control to facilitate restructuring. - Kenya: - IMF and World Bank recommended foreign strategic partners in privatization of public utilities; steps to sell 49 percent of capital in Telecom and Kenya Commercial Bank to foreign strategic partners. ### Box 4. Trade in Services in IMF Surveillance — Cross-cutting findings - Privatization of public utilities combined with opening to foreign participation is a structural reform after stabilization to promote private sector development and reduce quasi-fiscal deficits; World Bank typically leads sector specifics while IMF supports through inflation and fiscal balance targets. - IMF has encouraged services trade liberalization to support export promotion strategies by ensuring high-quality, competitive services to strengthen export competitiveness and the balance of payments. - Governance and transparency concerns motivated IMF involvement in services sectors (examples: Kenya, Indonesia). ### Box 4. Trade in Services in IMF Surveillance — Issues for IMF: coherence and sequencing - Two critical issues for future IMF involvement: - Coherence with WTO obligations and World Bank advice. - Proper sequencing with macroeconomic stabilization and capital account liberalization. A. Coherence - IMF advice aims to underpin macroeconomic and financial stability via efficiency, transparency, and regulation improvements. - WTO is the forum for multilateral obligations on services; GATS general obligations and sector-specific commitments allow gradual opening while locking in market access in individual sectors. - Two difficulties: - WTO members are concerned autonomous liberalization in IMF-supported programs is not given sufficient negotiating credit in ongoing negotiations. A framework for crediting unilateral liberalization was agreed at the WTO in March 2003 but remains to be tested. - Unilateral reforms negotiated with the IMF are not “bound” in GATS schedules and could be reversed; until translated into binding commitments they lack transparency and predictability critical for service providers. - Potential implications of services trade liberalization for capital account opening raise collaboration challenges between IMF and WTO. Collaboration with WTO and IMF jurisdictional issues - IMF provides advice on financial sector policies in surveillance, assessments, technical assistance, and adjustment support, helping avoid tension in sequencing financial liberalization nationally and multilaterally. - GATS complements national reforms by promoting MFN treatment, transparency, and stability but allows exceptions for prudential, monetary, and exchange rate management. - GATS requires members to liberalize capital inflows related to establishment of commercial presence and capital flows essential for cross-border trade in financial services in line with specific commitments, while allowing capital account restrictions in case of balance of payments difficulties, for prudential reasons, and at IMF’s request. - Art. XI of the GATS defers to the IMF on matters in the IMF’s jurisdiction, particularly restrictions on payments and transfers for current international transactions and capital controls imposed at the IMF’s request. - Under GATS Article XII, WTO bases conclusions on balance-of-payments restrictions on factual input and assessments provided by the IMF. Collaboration with the World Bank - IMF–World Bank coherence procedures are longstanding. - IMF approaches from macroeconomic, financial stability, and external viability perspectives; World Bank focuses on sector-specific policy design. - IMF provides general advice on pace and sequencing and identifies prerequisites, including macroeconomic and fiscal assessments; World Bank typically leads on sector-specific regulation design. ### Box 6 (summary) — Trade in Financial Services and Capital Movements - Trade in financial services gives rise to capital movements under two modes: - (i) direct investment to establish commercial presence abroad; - (ii) when a cross-border service induces a capital movement. - Whether a service under mode 1 entails a capital flow is service-specific; some cross-border services (consulting, advisory, information) do not require capital movement, others (lending) do; many are intermediate cases. - Distinction: - Services transactions concern access of domestic consumers to services by foreign suppliers or exports of services by domestic providers and give rise to payments of service fees, charges, and commissions. - Capital account transactions reflect access to financial markets and result in payments of interest, dividends, and profits. - Example: purchasing services of a foreign asset management company is distinct from related purchases or sales of foreign securities recorded in the capital account. - National liberalization implications: - Supplying financial services through commercial presence requires liberalizing inward direct investment in the financial sector but does not generally preclude other capital controls (e.g., on repatriation). - Foreign-owned affiliates incorporated in the host country are considered residents; services transactions of such affiliates may involve capital movements but resident foreign affiliates could be subject to capital controls and engage only in services transactions permitted under host country capital account regulations. - If capital controls do not discriminate between foreign- and domestically-owned residents, they would not violate GATS national treatment. - Liberalization of cross-border trade in financial services generally requires liberalizing accompanying capital movements, except for services independent of capital movements. - Multilateral context: - Liberalization of financial services trade constrains countries’ ability to use capital controls. - GATS members agreed not to restrict capital account transactions inconsistently with their specific commitments (GATS, Article XI), even though under the IMF’s Articles of Agreement (Article VI, ...) the IMF has distinct provisions. ### Section 3) members may exercise capital account restrictions — GATS commitments and carve-outs - If a member makes specific commitments to liberalize financial services trade, GATS requires the member to also liberalize capital inflows “related” to establishment of a commercial presence and capital inflows and outflows “essential” for cross-border trade (GATS, Article XVI, footnote 8).4/ - It is possible in principle that for modes other than commercial presence and cross-border trade, members schedule to liberalize trade in a financial service but not the related capital account restrictions; this possibility appears remote given the primacy of commercial presence and cross-border trade for financial services.4/ Carve-outs and exceptions under GATS - Capital account restrictions (and restrictions on current payments and transfers) can still be imposed: - in case of balance-of-payments difficulties (GATS, Article XII); - for prudential reasons (Annex on Financial Services, Section 2); - at the IMF’s request (GATS, Article XI). - GATS defers to IMF jurisdiction concerning restrictions on payments and transfers for current international transactions and capital controls imposed at the IMF’s request (GATS, Article XI). - In determining validity of balance-of-payments restrictions, the WTO must base conclusions on IMF’s balance-of-payments analyses (GATS, Article XII). ### Section 3) members may exercise capital account restrictions — IMF’s role and authority - The IMF has a specific carve-out: the IMF’s right to ask a member using IMF resources to impose capital account restrictions under certain circumstances (Article VI, Section 1 of the IMF’s Articles of Agreement), though this provision has never been invoked. - The balance-of-payments carve-out specifies modalities for imposing restrictions; the prudential carve-out is less prescriptive. - A possible role for the IMF in evaluating the need for prudential measures is under consideration. ### Section 3) members may exercise capital account restrictions — Sequencing, complementarities, and regulatory considerations - Service sector liberalization—and IMF advice—need caution where supporting macroeconomic conditions or regulatory reform are not in place. - Key considerations: - Liberalization costs (capital reallocation and labor displacement) are larger if aggregate demand is short or budgetary imbalances exist. - External balance and exchange rate stability are key for foreign service providers seeking commercial presence. - Liberalization requires lifting exchange controls on current payments for scheduled services transactions and income repatriations (obligations under IMF’s Article VIII are now widely accepted). - Eliminating market entry barriers and ensuring nondiscriminatory treatment are only part of regulatory objectives; domestic regulators also pursue competition, health and safety standards, and social objectives such as universal service provision. - Upgrading competition, bankruptcy, and standard-setting regulations often needs to precede opening to foreign service providers, particularly in network industries, to prevent incumbent anticompetitive behavior. - Other considerations: - Commercial presence is the key mode in most sectors; liberalizing regulations affecting foreign direct investors promises early and lasting efficiency gains via skills and technology transfers. - Trade in services needs liberalization to complement privatization and goods trade liberalization; restrictions in services (particularly transport) may undermine import-competing industries and impede export-oriented firms. - Social expenditures to lower temporary adjustment burdens can strengthen political support; support measures could include active labor market policies such as retraining. - Financial sector tension: efficiency gains from increased competition and skill transfers vs short-term risks to financial stability. Safeguarding prudential standards during liberalization will be highly country-specific.7/ ### Section 3) members may exercise capital account restrictions — Sector-specific roles and institutional collaboration - World Bank assistance: design restructuring and privatization programs and draft laws for telecommunications and transportation regulation; shares responsibility with IMF in financial sector reform. - Structural measures in these areas are often part of conditionality under Bank lending operations. - IMF focus primarily in financial services, with involvement in other sectors through surveillance, programs, and technical assistance. ### Section 3) members may exercise capital account restrictions — Conclusions and policy implications - Regulation of international trade in services encompasses heterogeneous activities and sector-specific domestic laws that can impede foreign competition. - Since 1994 the GATS has established a multilateral regulatory framework for services trade; ongoing WTO negotiations may refine it further. - GATS principles—transparency of regulatory regimes and nondiscriminatory treatment of foreign service suppliers—provide incentives to attract capital, expertise, and access to international information networks. - Opening to foreign service competition requires careful sequencing with macroeconomic stabilization, capital account reforms, and upgrading domestic regulations (e.g., corporate governance, financial supervision). - The IMF has an important role through continued policy advice to help ensure members benefit from globalization of services. *Source: Box 1. Internet-Based Services; Box 4. Trade in Services in IMF Surveillance; Section 3) members may exercise capital account restrictions, _pdp06_* ### Box 1. Internet-Based Services ### Box 1. Internet-Based Services ### Internet effects on market transactions and definition of electronic commerce - The internet impacts three distinct stages in market transactions: first, the buyer’s search for product and price information in the market, second, the subsequent order of the product and, third, the delivery of the product. - The internet facilitates both the processing of market information and the ordering of goods and services. - Only products that can be converted into digital form can also be supplied through the internet. - “Electronic commerce” commonly refers to transactions that actually take place on the internet, that is the second and third stage of a market transaction. - Evidence from the United States suggests that online delivery is still a comparatively small segment of this market. ### Opportunities and constraints for developing countries - Rapid progress in telecommunications links and computer technology has contributed to a surge of services transactions based on the internet. - The emergence of the internet as a medium of transaction and delivery has reduced market entry costs in many service industries and led to more intense competition. - Manufacturing firms will be more inclined to separate vertically-related activities that can be performed by outside service providers, creating opportunities for service providers in the developing world—particularly in data and information processing (“back-office” functions), software design, and maintenance. - Participation of developing countries in the strongly growing market for internet-based services is dependent on their access to a modern telecommunications infrastructure. - The growth of this market offers significant potential for small developing countries, though it also raises the risk of marginalization for countries with poor telecommunication networks. ### Size, geography, and diffusion of electronic commerce - Estimates of the size of world electronic commerce range from US$218 to US$657 billion, though the majority of this market is currently located in the United States. - The diffusion to developing countries is expected to be rapid. - The number of internet users in India, for instance, was estimated at over 2 million at the end of the year 2000. - Outside the United States, electronic commerce is highly likely to be export-oriented, with an increasing share of business-to-business transactions. ### Trade in services: four modes of supply - Trade in services is defined to cover four modes of supply: - Cross-border supply (mode 1): the service consumer is in his country of residence, while the service supplier is outside the country of the consumer; examples are transportation services or internet-based trade. - Consumption abroad (mode 2): the service consumer moves outside his home territory and consumes services in another country; examples are tourism or education overseas. - Commercial presence (mode 3): the service supplier establishes, through foreign direct investment, an enterprise in the territory of the consumer and supplies the service to the consumer; examples are services rendered by foreign-owned banks. - Temporary movement of natural persons (mode 4): an individual who is either self-employed or working on behalf of his employer moves to the territory of the consumer to provide the service; examples include services provided by an on-site engineer. - Recent cooperation between a number of international organizations has defined the statistical coverage that would proxy these four modes of supply. - There are serious shortcomings in recording the item “other services” (other than travel and transportation) in the balance of payments; deficiencies are even greater in recording sales through commercial presence. - Few investor countries record the sales data of firms owned by residents but operating outside their territory and equally, only few host countries to FDI distinguish the sales of foreign-owned affiliates in their corporate statistics. ### Impediments to international services trade - Traditional trade policy instruments (tariffs or quantitative border restrictions) generally do not apply to services; restrictions arise mainly through direct controls on market access and less favorable treatment of foreign providers. - Stern (2000) classification of four kinds of barriers: - quantitative restrictions or prohibitions on the provision of services by foreign residents; - price-based measures applied through differential taxes on the transactions of foreign providers, or through additional charges on the regulatory processes that they engage in; - additional licensing or certification requirements, in particular on providers of business or professional services; - lack of access to distribution (retail) and communication networks; this kind of barriers often stems from the absence or the inadequate enforcement of national competition standards. ### Openness, measurement challenges, and the role of the GATS - Quantification of barriers to international services trade is important to gauge potential efficiency gains and to complement measures for goods trade. - Regulatory measures are harder to quantify than barriers in goods trade due to judgment in weighting measures and paucity of comparable data. - The GATS only discloses restrictions where members chose to include a particular sector in their schedules of specific commitments. - Outcome-based measures (price-cost margins or market shares of foreign service providers) measure economic distortions more accurately but cannot always unambiguously attribute distortions to economic regulations. - A number of measures indicate that developing and transition economies tend to have more restrictive trade regimes in services sectors than developed countries. - Commercial presence (mode 3) still appears to be the most restricted mode of market access in developing countries; restrictions apply to legal entity type and extent of foreign capital participation. - Restrictions on national treatment affect administrative authorization and land ownership; restrictions on commercial establishment account for the bulk of investment restrictions overall. - The Uruguay Round created the GATS, covering all services sectors with multilateral rules and a forum for negotiations; specific commitments made in that round enhanced predictability and transparency by “binding” regimes in place at the time. ### Implications for policy and multilateral negotiation priorities - Substantial multilateral liberalization of services trade can be pursued in the context of the Doha Development Agenda; in early 2003, WTO members presented a first round of offers on a bilateral basis. - The key challenge in ongoing negotiations is to find a compromise between industrial country demands for further liberalization of market access in developing countries (particularly commercial presence) and developing countries’ demands for concessions on the temporary movement of natural persons (mode 4). - Very few unconditional commitments have so far been scheduled for mode 4; political discussions often conflate mode 4 with permanent migration. - From industrialized countries’ perspective mode 4 mainly concerns independent consultants and skilled personnel moving within multinational firms; for many developing countries the stakes are higher—remittances can be large (examples later in the source note remittances in several Central American countries amount to more than five percent of GDP). - There is a risk that proliferating bilateral and regional trade agreements including services provisions could undermine the GATS if Art. V on regional agreements remains ill-defined and unenforced, allowing discriminatory treatment that distorts services trade and reduces efficiency gains. *Source: Box 1. Internet-Based Services, _pdp06 - Box 1. Internet-Based Services_* ### Box 4. Trade in Services in IMF Surveillance ### Box 4. Trade in Services in IMF Surveillance ### Overview - IMF surveillance has engaged with reform in key services sectors—telecommunications, transportation, and finance—focusing on efficiency gains from services liberalization and privatization, government revenues from privatization and concessions, and implications for reduction of state debt. - Surveillance discussions covered employment effects and balance of payments implications of developments in services trade, especially tourism. - IMF involvement included both policy advice in surveillance and conditionality in IMF-supported programs, often in coordination with World Bank sectoral advice. ### Country cases and policy analysis - Brazil - Reform priorities: telecommunications, transportation, and finance. - Structural reform agenda: privatization of state-owned bank Banco Real, national telephone company Telebras, and leasing of ports, airports, and highways. - Policy analysis emphasis: efficiency gains from services liberalization and privatization; government revenues from privatization and concessions; reduction of state debt; employment effects; balance of payments implications, especially tourism. - South Africa - Issues raised: impact on the balance of payments, foreign direct investment, and privatization. - Highlighted factors: services (particularly tourism) and privatization of the telephone state monopoly Telecom through its sale to a foreign consortium. - Examined implications of privatization of an airline company Sunair and the airports company; privatization of the national airline linked to rationalization of Transnet’s financial structure. - European Union - Surveillance mission discussed progress toward a single market in services and international services negotiations. - Emphasized positive interactions between internal reform and international commitments and gains for both the EU and world economy from more open and competitive services markets. - In Article IV consultations, trade in services is discussed as part of structural issues. - GATS commitments are country-specific and consolidated in the EU schedule of commitments; individual EU member states retain significant leeway in degree of liberalization in particular service sectors. - Domestic and international aspects of service trade liberalization are important for overall economic performance. - Recent Asian programs (summary) - Opening of the financial sector to foreign participation intended to reduce structural weaknesses and attract foreign capital and expertise to revive ailing financial institutions. - Examples: airline and airport service company privatizations through foreign investment; opening distribution services to foreign investment to increase competition and efficiency. - IMF involvement in financial services liberalization (examples) - Direct involvement in liberalization of trade in financial services in the context of regulatory and structural reforms aimed at promoting a sound financial sector (examples: Ukraine and Azerbaijan). ### IMF-supported programs: selected country experiences - Ukraine (Extended Fund Facility) - Objective: attract foreign direct investment to support private sector development. - Measures: deregulation and privatization of medium and large enterprises; accelerated cash sale of large enterprises in telecommunications, air transportation, and energy through transparent tender procedures and stock market offers. - Financial sector reforms: opening to foreign participation by simplifying licensing procedures and lifting the limit on total foreign capital participation in equity ownership of the Ukranian banking system. - Liberalization of entry for foreign services providers proceeded in parallel with upgrading regulatory frameworks. - Azerbaijan (1996 Extended Fund Facility) - Main objective: enhance productivity growth to enable non-oil tradable goods sector survival. - Focus: bank restructuring, privatization, termination of government involvement in production and trade; adoption of legal framework (Bankruptcy Law, Competition Law, Petroleum Law). - Measures to improve foreign investment conditions in energy sector; seeking foreign and domestic strategic investors in tender privatization of large enterprises (10 percent of enterprises to be privatized). - Financial sector: development of private banking system by creating a level playing field for private banks; free entry and exit for domestic and foreign banks. - Structural benchmark implemented: inviting foreign banks to raise their capital up to 30 percent to total banking system capital; subsequently noted that this limit constrained transfer of skills and technology and limited domestic borrowers’ access to additional credit. - Privatization expected to contribute to budget financing. - Poland - Services liberalization addressed largely via privatization policy and banking sector efficiency. - After initial privatization of small retail and service businesses, attention shifted to larger enterprises where privatization was more challenging. - Banking privatization initially hampered by ambivalent attitudes and non-market solutions (e.g., creation of holding companies); substantial progress achieved through foreign investment. - Recent Asian programs (Indonesia, Korea, Thailand) - Extensive opening to foreign participation in banking (Indonesia, Korea, Thailand), other financial services (Korea), telecommunications (Korea, Thailand), and distribution services (Indonesia). - Objectives: enhance efficiency and resilience in key services sectors; attract foreign capital and expertise. - Specific measures: - Opening distribution services in Indonesia to increase competition and efficiency by allowing freer and more transparent distribution channels. - Lowering foreign ownership thresholds in Indonesia, Korea, and Thailand to allow foreign banks to take effective control of ailing domestic institutions and facilitate restructuring. - Lifting branching restrictions (Indonesia) to create a level playing field nationwide. - Kenya - IMF and World Bank recommended participation of foreign strategic partners in privatization of public utilities for potential efficiency gains and governance improvements. - Liberalization of services trade largely motivated by privatization of public enterprises in telecommunications (Telecom) and banking (Kenya Commercial Bank). - Authorities taking steps to sell 49 percent of capital in Telecom and Kenya Commercial Bank to foreign strategic partners. ### Cross-cutting findings from IMF engagement - Privatization of public utilities combined with opening to greater foreign participation is a structural reform following stabilization to promote private sector development and reduce quasi-fiscal deficits; World Bank typically leads specifics of services liberalization while IMF supports through inflation and fiscal balance targets. - IMF has encouraged services trade liberalization to support export promotion strategies by ensuring provision of high-quality services at competitive prices to strengthen export competitiveness and balance of payments. - Governance and transparency concerns have motivated IMF involvement in services sectors (examples: Kenya, Indonesia). ### Further liberalization: issues for the IMF - Two critical issues for future IMF involvement: - Coherence with obligations entered under the WTO and advice given by the World Bank. - Proper sequencing with macroeconomic stabilization and capital account liberalization. A. Coherence - IMF policy advice in services sectors aims to underpin macroeconomic and financial stability through improvements in efficiency, transparency, and regulation. - The WTO is the forum for multilateral obligations on services sectors; GATS general obligations (e.g., nondiscriminatory treatment) and sector-specific commitments allow gradual opening while locking in market access conditions in individual sectors. - IMF advice needs to be consistent with general obligations under the GATS. - Two difficulties identified: - WTO members are concerned that autonomous liberalization undertaken in IMF-supported programs is not given sufficient negotiating credit in ongoing negotiations. A framework for crediting unilateral liberalization was agreed at the WTO in March 2003, but remains to be tested in practice. - Unilateral reforms negotiated with the IMF are not “bound” in GATS schedules and could be reversed later; until translated into binding market access commitments they lack transparency and predictability critical for service providers, especially those with local establishment. - Potential implications of services trade liberalization for capital account opening raise important collaboration challenges between the IMF and the WTO. Collaboration with WTO and IMF jurisdictional issues - In surveillance, financial sector assessments, technical assistance, and financial support for macroeconomic adjustment, the IMF provides advice on financial sector policies and could help avoid tension between sequencing of financial liberalization in national and multilateral contexts. - The GATS is designed to complement national reforms by promoting MFN treatment, transparency, and stability of the services trade regime. It also allows countries to maintain restrictions for reasons other than limiting market access and national treatment, such as prudential and monetary and exchange rate management; however, these “carve-outs” leave considerable discretion. - The GATS requires members to liberalize capital inflows related to establishment of commercial presence and capital flows essential for cross-border trade in financial services in line with their specific commitments, but allows the use of capital account restrictions in case of balance of payments difficulties, for prudential reasons, and at the IMF’s request. - According to Art. XI of the GATS, the WTO defers to the IMF on matters in the IMF’s jurisdiction, particularly regarding restrictions on payments and transfers for current international transactions and capital controls imposed at the request of the IMF (Box 6). - As set out in GATS Article XII, WTO is bound to base conclusions regarding restrictions made for balance of payments reasons on factual input and assessments of the balance of payments situation provided by the IMF. Collaboration with the World Bank - Procedures ensuring IMF–World Bank coherence have been in place longer. - IMF approaches services trade liberalization from macroeconomic, financial stability, and external viability perspectives; World Bank focuses on sector-specific policy design. - The IMF normally provides general advice on pace and sequencing of services trade liberalization and identifies prerequisites, including assessments of macroeconomic—particularly fiscal—and balance of payments implications. The World Bank typically takes the lead on sector-specific regulation design. ### Box 6: Trade in Financial Services and Capital Movements (summary) - Trade in financial services gives rise to capital movements under two modes of supply: - (i) when a service provider makes a direct investment to establish commercial presence abroad, and - (ii) when a service provided across borders induces a capital movement. - Whether a service provided under mode 1 entails a capital flow is highly specific to the nature of the service; some cross-border services (e.g., consulting, advisory, information services) do not require capital movement, while others (e.g., lending) inherently involve capital movements; many financial services are intermediate cases. - Distinction between services and capital account transactions: - Services transactions concern access of domestic consumers to services provided by foreign-owned suppliers or exports of services by domestically-owned providers and give rise to payments of service fees, charges, and commissions. - Capital account transactions reflect access to financial markets—residents’ use of foreign capital or nonresidents’ use of domestic capital—resulting in payments of interest, dividends, and profits. - Example: a resident purchasing services of a foreign asset management company is distinct from related purchases or sales of foreign securities which are recorded in the capital account. - National liberalization implications: - Supplying financial services through commercial presence requires liberalizing inward direct investment in the financial sector but does not generally preclude other capital controls (e.g., on repatriation of capital). - Foreign-owned affiliates incorporated in the host country are considered residents; services transactions of such affiliates may involve capital movements but resident foreign affiliates could be subject to capital controls and engage only in services transactions permitted under host country capital account regulations. - If capital controls do not discriminate between foreign- and domestically-owned residents, they would not violate GATS national treatment. - Liberalization of cross-border trade in financial services generally requires liberalizing accompanying capital movements, except for services independent of capital movements. - Multilateral context: - Liberalization of financial services trade constrains countries’ ability to use capital controls. - GATS members agreed not to restrict capital account transactions inconsistently with their specific commitments in services liberalization (GATS, Article XI), even though under the IMF’s Articles of Agreement (Article VI, ...). *Source: Box 4. Trade in Services in IMF Surveillance (excerpts provided).* ### Section 3) members may exercise capital account restrictions. ### _pdp06 - Section 3) members may exercise capital account restrictions. ### GATS commitments and capital account liberalization - If a member makes specific commitments to liberalize financial services trade, GATS requires the member to also liberalize capital inflows “related” to the establishment of a commercial presence and capital inflows and outflows “essential” for cross-border trade (GATS, Article XVI, footnote 8).4/ - It is possible in principle that for modes other than commercial presence and cross-border trade, members schedule to liberalize trade in a financial service but not the related capital account restrictions. However, given that commercial presence, and to a lesser extent cross border trade, are the primary modes of financial services trade, this possibility appears remote.4/ ### Carve-outs and exceptions under GATS - Capital account restrictions proscribed under GATS (and even restrictions on current payments and transfers) can still be imposed: - in case of balance-of-payments difficulties (GATS, Article XII), - for prudential reasons (Annex on Financial Services, Section 2), - and at the IMF’s request (GATS, Article XI). - GATS defers to IMF jurisdiction concerning restrictions on payments and transfers for current international transactions and capital controls imposed at the request of the IMF (GATS, Article XI). - In determining the validity of restrictions made for balance-of-payments reasons, the WTO must base its conclusions on the IMF’s balance-of-payments analyses (GATS, Article XII). ### IMF’s role and authority - The IMF has a specific carve-out: the IMF’s right to ask a member using IMF resources to impose capital account restrictions under certain circumstances (Article VI, Section 1 of the IMF’s Articles of Agreement), though this is a provision that has never been invoked. - The balance-of-payments carve-out specifies modalities for imposing restrictions; the prudential carve-out is less prescriptive: - The prudential carve-out does not specify which measures could be considered prudential or what the basis for such a determination is. - A possible role for the IMF in evaluating the need for prudential measures is currently under consideration. ### Sequencing and complementarity with other reforms - Service sector liberalization—and IMF advice—need to proceed cautiously where supporting macroeconomic conditions or regulatory reform are not in place. - Key considerations and complementarities: - Liberalization costs (capital reallocation and labor displacement) will be larger if there is a shortfall in aggregate demand or budgetary imbalances. - External balance and exchange rate stability are key for foreign service providers, especially those seeking a commercial presence. - Liberalization of trade in services requires lifting any exchange controls on current payments for scheduled services transactions, and income repatriations (though the obligations under the IMF’s Article VIII are now widely accepted). - Eliminating market entry barriers and nondiscriminatory treatment (national treatment and MFN treatment) are only a subset of regulatory objectives; domestic regulators also pursue competition, basic health and safety standards, and social objectives such as universal provision of certain services. - Upgrading domestic competition, bankruptcy, and standard-setting regulations and institutions often needs to precede opening to foreign service providers, particularly in network industries such as telecoms, to prevent incumbent anticompetitive behavior that would dilute efficiency gains. - Other considerations for regulatory reform include sector-specific prudential safeguards and the sequencing relative to privatization and goods trade liberalization: - Commercial presence is the key mode of services provision in most sectors; liberalizing regulations affecting foreign direct investors promises early and lasting efficiency gains in terms of transfers of skills and technology. - Trade in services needs to be liberalized to complement privatization and the liberalization of goods trade; continued restrictions in services (in particular in the transport sector) may undermine import-competing industries and impede export-oriented firms. - Social expenditures to lower the temporary burden of adjustment can strengthen political support and sustainability of liberalization; support measures could include active labor market policies, such as retraining of employees. - In the financial sector there is a tension between efficiency gains from increased competition and skill transfers, and short term risks to financial stability. Recommendations for safeguarding prudential standards in periods of financial liberalization will be highly country-specific.7/ ### Sector-specific roles and institutional collaboration - The Bank provides assistance in designing specific restructuring and privatization programs and in drafting new laws for regulation of telecommunications and transportation sectors; in financial sector reform it shares responsibility with the IMF. - Structural measures in these areas are often included as part of conditionality under Bank lending operations. - The IMF’s focus has been primarily in financial services, although it has been involved in other sectors through surveillance, program, and technical assistance activities. ### Conclusions and policy implications - The regulation of international trade in services encompasses a heterogeneous set of activities, types of trade, and sector-specific domestic laws and regulations that can impede foreign competition. - Since 1994 the GATS has established a multilateral regulatory framework for services trade; ongoing WTO negotiations may refine it further. - The GATS principles—transparency of regulatory regimes and nondiscriminatory treatment of foreign service suppliers—provide incentives to attract capital, expertise, and access to international information networks. - Opening to foreign service competition needs careful sequencing with macroeconomic stabilization, capital account reforms, and upgrading domestic regulations (such as corporate governance or financial supervision). - The IMF has an important role, through continued policy advice, to help ensure members benefit from globalization of services. *Source: _pdp06 - Section 3) members may exercise capital account restrictions.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/pdp/2003/_pdp06.pdf_