Monday, May 18, 2009
Dissecting Regional Integration in Financial Services from the Competition Policy and Trade Policy Perspectives
Posted by D. Daniel Sokol
Mamiko Yokoi-Arai (OECD) and Masamichi Kono (Financial Services Agency Japan) address Dissecting Regional Integration in Financial Services from the Competition Policy and Trade Policy Perspectives.
ABSTRACT: The dynamism of regional integration is not globally uniform, and is strongly dependent on common philosophies being developed and various infrastructures being established within the region. The worldwide proliferation of customs unions, free trade areas, and eventually, common markets, indicates that regional integration efforts are being pursued widely to boost the economic capacity of the market, and gain competitive advantage through close economic alliances.
For any of these efforts to bear fruit, however, there needs to be a presumption, on behalf of the participating states, that competition policy will be actively applied and the market is being used to determine the distribution of resources. The enlargement of the market is one of the major benefits of regional integration, enabling the region to capitalise on economies of scale and of scope. Regional financial integration assumes that participating states will allow market forces to align demand for and supply of financial services in the region, providing a larger market that selects services and distributes capital according to efficiency and cost. In general, an integrated regional financial market should be better able to provide the necessary financial services and capital to those sectors and entities in need within the region, as compared to a smaller local market with a limited number of players, less investment opportunities, and a meagre savings pool.
Thus, a precondition for regional integration in financial services is that financial markets are being gradually but steadily liberalised, both de jure and de facto, vis-a-vis other economies in the region. While the importance of economies being actively engaged in financial services trade is an essential factor for meaningful integration, it is probably equally important to have economies liberalised within each jurisdiction, so as to maintain a competitive and innovative environment for financial services providers. The level of liberalisation in the financial sector will have a direct impact on the level of financial integration that can take place.
With this in mind, the paper analyses three dimensions of financial liberalisation. At the foundation is the competition law environment. The competition regime demonstrates the country's overall commitment to a liberalised and market-oriented economic structure within the jurisdiction. The second is the country's external commitment to liberalisation of financial services trade, which includes the country's schedule of commitments under the General Agreement on Trade in Services (GATS), and the commitments made in the framework of bilateral and regional free trade agreements, or economic partnership agreements (FTAs or EPAs). While there are certain exceptions, the commitments made under such trade agreements represent a minimum level of liberalisation that a country is willing to make towards a foreign counterparty. The third dimension is the actual entry requirements imposed on foreign counterparties, including procedural and enforcement mechanisms. It is likely that there will be a positive or negative deviation from competition law, or from commitments to trade agreements.