Ethiopia's WTO Accession and Financial Services Liberalization: Striking the Balance between Trade Liberalization and Domestic Policy Space

Author:Tilahun Esmael Kassahun
Position:LL.M (Business Law) Addis Ababa University, LL.M (International Economic Law and Policy, IELPO) University of Barcelona
Pages:200-240
SUMMARY

This article examines some of the main provisions of the General Agreement on Trade in Services (GATS) and the Annex on Financial Services to evaluate its impact on domestic financial regulation and macroeconomic policy. In particular, it analyzes whether Ethiopia can - upon accession and within the WTO’s GATS framework - achieve the objective of liberalizing international trade in financial... (see full summary)

 
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E
THIOPIA
S
WTO
A
CCESSION AND
F
INANCIAL
S
ERVICES
L
IBERALIZATION
:
S
TRIKING THE
B
ALANCE BETWEEN
T
RADE
L
IBERALIZATION AND
D
OMESTIC
P
OLICY
S
PACE
Tilahun Esmael Kassahun
Abstract
This article examines some of the main provisions of the General Agreement on
Trade in Services (GATS) and the Annex on Financial Services to evaluate its
impact on domestic financial regulation and macroeconomic policy. In
particular, it analyzes whether Ethiopia can – upon accession and within the
WTO’s GATS framework – achieve the objective of liberalizing international
trade in financial services while maintaining adequate domestic regulatory
institutions and the normative framework needed in this regard. The article
investigates whether GATS provides a flexible framework for Ethiopia to
negotiate liberalization commitments while at the same time preserving a
sufficient level of domestic regulatory space to achieve financial and economic
stability.
Key words
WTO accession, GATS, financial liberalization, domestic policy
space, trade liberalization, Ethiopia
DOI http://dx.doi.org/10.4314/mlr.v6i2.2
Acronyms and Abbreviations
BOP
GATS Balance of Payments
General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
IMF International Monetary Fund
MFTR
MFI Memorandum of Foreign Trade Regime
Micro Finance Institution
NBE
WTO National Bank of Ethiopia
World Trade Organization
LL.M (Business Law) Addis Ababa University, LL.M (International Economic Law
and Policy, IELPO) University of Barcelona; the author teaches at Haramaya
University College of Law and is currently on study leave. He would like to give his
sincere gratitude to the editorial team at Mizan Law Review and the two anonymous
reviewers for their valuable comments, remarks, and suggestions. He can be reached
at <tekassahun@ielpo.org>.
E
THIOPIA
S
WTO
A
CCESSION AND
F
INANCIAL
S
ERVICES
L
IBERALIZATION
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Introduction
The WTO was established as a successor of the General Agreement on Tariffs
and Trade (GATT).
1
Built upon a broader legal and political base than the
GATT, it can correctly be described as the mutated GATT.
2
The WTO covers
numerous trade agreements, one of the most important being the WTO General
Agreement on Trade in Services (GATS).
3
This accord which came into force in
January 1995 is the first and only set of multilateral rules that cover trade in
services, with a broad scope and coverage of all traded services including
financial services.
4
Ethiopia has applied to accede to this system in 2003 and is
now deeply involved in the multi-stage accession process whereby negotiations
on trade in financial services will be one of the key issues that determine
Ethiopia's WTO accession. This is due to both the role of financial services for
the economy at large, the closed nature of the service against foreign investment
and the nature of WTO negotiating trade in financial services considering
potential market failures and regulatory issues in these services.
5
This article
addresses these issues.
However, the article does not address broad questions on the economic and
social benefits of financial market reform and liberalization. Nor does it deal
with the benefits and positive externalities of financial market and trade policy
reform for broader financial sector development, growth, income distribution
1 World Trade Organization (1999), The Legal Texts, The Results of The Uruguay
Round Of Multilateral Trade Negotiations, Marrakesh Agreement Establishing The
World Trade Organization.
2 Michael J. Trebilcock and Robert Howse (1999), The Regulation of International
Trade, Second Edition, Routledge, See Chapter 1; An Intellectual History of
International Trade Theory And Policy, pp. 1-24.
3 GATS, supra note 1.
4 The word “trade in services” has earlier history since 1973 under the OECD
framework. See OECD (1973), Report by the High Level Group on Trade and Related
Problems, Paris: OECD.
5 All this can be seen from various official and non official statements. See for instance
the views of the Minister of Foreign Affairs who stated his belief that “existing
differences on the telecom and financial sectors should not be impediments to the
ongoing accession process as Ethiopia had expressed its readiness to work on these
issues on a short-to-medium term basis.”
<
http://www.mfa.gov.et/weekHornAfrica/morewha.php?wi=789>.
Also see Venture
Africa which stated that “[k]ey issues pertaining to Ethiopia joining the WTO have
surrounded the opening up of currently state-monopolised sectors, such as the
telecommunications and finance sectors, while the country has also been called upon
to allow investment by foreign entities.”
<http://www.ventures-africa.com/2013/01/ethiopia-set-to-join-wto-by-2014/> .
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Vol. 6 No.2, December 2012
and poverty.
6
Without denying the importance of these questions, the study
assumes that sufficient literature exists in this realm.
7
Rather, this article focuses
on GATS commitments (of WTO Members) in financial services and its impact
on national policy objectives. The central inquiry will be whether there exists
any reason for Members to hold back on GATS commitments in order to retain
the freedom to pursue certain macroeconomic and regulatory policy objectives
of their internal economy.
Accordingly, the evaluation of the system below shows that commitments
under GATS need not compromise the ability of governments to pursue sound
regulatory and macroeconomic policies and hence still leaves them with
considerable freedom to achieve other domestic policy targets. Based on the
examination of the possible commitment scenarios which Ethiopia can possibly
commit to, the author argues that there exists no reason why GATS
commitments on financial services will have to compromise Ethiopia’s ability to
pursue sound regulatory and macro-economic policies.
8
6 On all these issues generally see John Williamson and Zdenek Drabek (1999),
Whether and When to Liberalize Capital Account and Financial Services, World
Trade Organization Economic Research and Analysis Division, Staff Working Paper
ERAD-99-03; Gerard Caprio (2001), Financial Liberalization, How Far, How Fast?,
Cambridge University Press; Stiglitz, J. E. (2000), Capital Market Liberalization,
Economic Growth, and Instability, World Development, Vol. 28, 1075-1086; World
Trade Organization, WTO (1997), Newsletter , Liberalizing Trade in Financial
Services: Why It Matters? Focus No. 22; Agénor, Pierre-Richard (2001), Benefits and
Costs of International Financial Integration: Theory and Facts, Policy Research
working paper, 2699, the World Bank; Jonse Bane (2002), Merits and Demerits of
Allowing Entry of Foreign Banks into the Ethiopian Banking Sector Banking Sector:
Lessons From Selected Countries, Paper Prepared for the First International
Conference on the Ethiopian Economy organized by EEA (January 3-5, 2002 Addis
Ababa, Ethiopia)
7 See Kiyota, K., Peitsch, B., and M Stern, R. (2007), The Case for Financial Sector
Liberalization in Ethiopia, Research Seminar in International Economics, Discussion
Paper No. 565, University of Michigan and Yokohama National University; Robert
M. Stern et al., (2007), Assessment of the Impact of the General Agreement on Trade
in Services (GATS) on the Ethiopian Financial Services Sector, Ministry of Trade and
Industry, Addis Ababa; Gebrehiwot Ageba and Derk Bienen (2008), Ethiopia's
Accession to The WTO and the Financial Services Sector, Munich;, Also see,
Solomon Abay Yimer (2011), Financial Market Development, Policy and Regulation;
The International Experience and Ethiopia’s Need for Further Reform, Academisch
Proefschrift, ter verkrijging van de graad van doctor aan de Universiteit van
Amsterdam.
8 Financial services fall into two broad categories: insurance and banking, both of which
cover a range of activities.

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