Financial Services and the GATS in the GCC: Problems and Prospects

Abstract

AbstractOne objective of the General Agreement on Trade in Services (GATS) of the World Trade Organization is to achieve financial services liberalization in member countries. We assess the implications of such liberalization commitments in the banking sectors of the Gulf Cooperation Council (GCC) countries. After providing an overview of the GCC banking sector, we discuss the GATS provisions relevant to financial services. Liberalization commitments and exemptions of these countries under the agreement are also presented. Using the observation that spikes in oil prices are accompanied with expansion in credit availability, we develop a simple model to formally explore the consequences of opening up the banking sector. Our analysis considers the possible policy impact on the domestic banking industry as well as a non-tradable sector that is driven by local entrepreneurship. Our investigation suggests that while high oil prices facilitate credit availability, they also enable governments to more easily and better subsidize employment in the public sector. This more attractive outside option then serves as a deterrent to risk-taking entrepreneurs which could stunt the growth of the non-tradable sector. A liberalized banking sector could mitigate this outcome as well as other institutional inefficiencies in lending, but also brings with it the vulnerability to global financial crises.