Trade in Financial Services, Financial Crisis and Development Implications: What is Important and What Has Changed?

Abstract

Financial Services are a key infrastructure component of trade in goods and services, crucial for economic development, with strong backward and forward linkages with the overall economy. As past financial crisis have shown, the cost of failure in the financial sector can be high. Given the importance of the sector, the impact of the financial crisis and the lessons that can be learnt, ensuring national and global financial stability to support economic stability is a global public good. This chapter attempts to give an overview of the importance of and recent developments in the FS sector, specifically as they relate to the interests of developing countries. This chapter draws on UNCTAD’s work in the FS sector including observations made by experts during UNCTAD meetings on financial and insurance services and the regulatory and institutional aspects of infrastructure services. This note considers in Part I the importance of the financial sector and its role in the national economy. In particular it weighs the arguments for and against financial liberalization including capital account liberalization. Part II provides an overview of financial markets, tracing developments prior to and subsequent to the financial crisis. It focuses on global market trends, specifically the potential of microfinance, South-South trade in financial services, outsourcing in the financial services sector and Islamic finance. Part III takes a closer look at the financial crisis in terms of its causes, costs, potential impact on developing countries and more broadly policy implications for the financial sector as a whole. Part IV considers briefly the role and importance of regulation. In particular it examines the kinds of approaches countries adopt toward regulation in the FS sector and the formulation and implications of adopting international standards. Part V looks at the post crisis development in the financial regulatory landscape specifically developments in the US, EU and Basel Committee on Banking and Supervision. It then sets out the possible implications this evolving regulatory landscape could have for global co-operation and developing countries. Part VI focuses on the trade aspects of financial services. It looks at financial services trade liberalization in the World Trade Organization and at a bilateral and regional level. It then examines possible interlinkages between financial services, trade commitments, and the bail out packages and financial sector interventions made in light of the financial crisis.