Globalisation of Financial Services DOCUMENTATION

DOCUMENTATION

Globalisation of Financial Services

Political Struggles, Experiences and Alternatives

Documentation of an International Conference Bonn, Gustav Stresemann Institut December 2nd to 4th. 2005 Imprint

Globalisation of Financial Services

Political Struggles, Experiences and Alternatives

published by: World Economy, Ecology and Development e.V. (WEED) www.weed-online.org

Editor: Isabel Lipke Translation: Ann Stafford Layout: Alexander Kiehne Print: Pegasus Druck, Berlin

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This Documentation was published with the ﬁnancial support of the NRW-Foundation and the Commission of the European Union.

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Bonn, April 2006. Table of Content

INTRODUCTION 1

I ENFORCED MARKET OPENING: PLAYERS FROM THE NORTH - EXPERIENCES FROM THE SOUTH AND EAST______3

1.1 THE GLOBAL EXPANSION OF FINANCE CORPORATIONS LEADS TO 3 MORE POVERTY AND INSTABILITY IN THE SOUTH (WEED-SOMO Positionspapier)

1.2 PIONEER FOR “LIBERALIZATION”: ARGENTINA AND CHILE 8 (Lydia Krüger)

1.3 GO EAST: THE EXPANSION OF WESTERN BANKS INTO EASTERN EUROPE 11 (Hannes Hofbauer)

1.4 ENFORCED MARKET OPENING BY WAR: FOREIGN BUSINESSES AND BANKS IN IRAQ 21 (Karin Leukefeld)

1.5 FINANCIAL MARKETS LIBERALISATION AND BANK PRIVATISATION 26 IN KOREA SINCE THE ASIAN ECONOMIC CRISIS (Heykyung Cho/Thomas Kalinowski)

1.6 GLOBAL PLAYERS MADE IN CHINA: CHINA’S CHANGING 33 DEVELOPMENT STRATEGY (Simona Thomas)

1.7 RESOLUTION ADOPTED AT THE 11TH ANNUAL REGIONAL LABOUR 39 SYMPOSIUM ON “MORE TRADE – LESS JOBS” (Windhoek, Namibia, 6.-7. Dezember 2005)

II FINANCIAL MARKETS: RISKS AND EFFECTS OF LIBERALIZATION__42

2.1 THE CONSOLIDATION OF GLOBAL BANKING INDUSTRY 42 (Kavaljit Singh)

2.2 GATS NEGOTIATIONS IN FINANCIAL SERVICES: THE EU REQUESTS 50 AND THEIR IMPLICATIONS FOR DEVELOPING COUNTRIES (Myriam Vander Stichele)

2.3 INTRANSPARENT, UNCONTROLLED AND CRISIS PROMOTING: 57 TRADE WITH DERIVATIVES (Isabel Lipke)

2.4 OUT OF CONTROL - HEDGE FUND ACTIVITIES 62 (Lydia Krüger)

2.5 PRIVATIZING PENSIONS: EXPERIENCES FROM LATIN AMERICA 67 (Katja Hujo)

2.6 THE TRANSFORMATION OF THE EUROPEAN PENSION SYSTEMS 72 (Martin Beckmann) Table of Content

III LET YOUR MONEY WORK FOR DEVELOPMENT - BUT HOW?______78

3.1 CODES OF CONDUCT FOR FINANCIAL SERVICE PROVIDERS 78 (Antje Schneeweiss)

3.2 ARE CODES OF CONDUCT THE SOLUTION? 80 (Florian Butollo)

3.3 BIG BROTHER IS WATCHING YOU. RATING AGENCIES AS 86 AGENTS OF SOLVENCY (Suleika Reiners)

3.4 INTERNATIONAL TAXATION, AN INSTRUMENT FOR 93 REGULATING GLOBALIZATION (Peter Wahl/Thomas Kalinowski)

3.5 STRUCTURAL POLICY AND REGIONAL DEVELOPMENT, THE 101 SIGNIFICANCE OF THE SAVINGS BANK SECTOR (Stefan Gärtner)

3.6 SAVINGS BANKS - INDISPENSABLE FOR REGIONAL 110 ECONOMIC DEVELOPMENT (Verdi, Fachbereich Finanzdienstleistungen) Introduction 1 Introduction

In recent decades foreign trade has be- countries. To achieve this and to secu- come increasingly important to banks, re international long-term expansion, insurance companies and investment the companies have to rely on their houses. A current study by UNCTAD respective governments or on interna- shows that companies such as Allianz tional organisations such as the World achieved more than two thirds of their Trade Organisation (WTO). The US turnover abroad, and the proportion is government as well as the EU, Canada, even higher for other insurance compa- Japan, Switzerland, and Australia are nies. According to estimates by Mercer especially active within the framework Oliver Wyman1 , the trade in financial of the WTO as well as in bilateral trade services will continue to grow rapidly agreements for the liberalisation of over the next years: from currently 2 trade in financial services - they have billion US dollars to 6 billions US dol- extremely competitive banks, insuran- lars in 2020. The highest growth rates ce companies and investment houses. are expected in the emerging market The EU alone has issued requests to countries such as China, India, Brazil, 85 WTO members to liberalise the fi- Mexico or Russia. The global financial nancial sector. However, developing market sector amounted to 15% in 2005 countries predominantly disapprove of and will continue its strong growth. further financial liberalisation. Never- theless, the financial sector is among The savings in Asian emerging market those services - besides tourism – for countries are especially attractive for which developing countries have made the financial sector; although India and most “commitments” - i.e. binding ob- China are still relatively poor countries. ligations to open the market. Even if only a small percentage of the population achieves prosperity in the- The liberalisation of trade in financial se countries, these represent a great services is a relatively new phenome- amount of people in absolute numbers. non: the Financial Services Agreement Meanwhile, there are 299,500 millio- was not adopted until December, 1997 naires in China - 4.3 percent more than - three years after the conclusion of the in the year before. About 70,000 mil- general services agreement (GATS) at lionaires live in India - 14.6 percent the WTO - coming into effect in March, more than in the previous year (Han- 1999. The agreement was celebrated delsblatt, 18.07.05). In addition, the as a great success in the financial press markets in the USA and Europe are sa- because of its “broadness”: 25 develo- turated to quite a considerable extent. ped countries and 77 developing coun- This is different in China and India, tries had made commitments to libe- because these countries have only re- ralisation that covered 95 percent of cently opened their financial markets. the entire financial services business. Since the General Agreement on Trade The trade in financial services must in Services (GATS) includes enhanced be “liberalised”, that are existing rules liberalisation, negotiations on further and regulations must be removed so concessions have taken place. that big banks, insurance companies and investment companies houses can Until now, negotiations on the libera- profit from the growing wealth in other lisation of financial services have not

1 see: www. http://www.merceroliverwyman.com/en/default.xml 2 WEED Conference Documentation

drawn much attention from the scienti- these important and difficult interrela- fic side or from the global social justice tions and topics and to inspire various movement. This is all the more alar- participants to get involved in practical ming because the financial sector plays co-operation beyond the conference. In a key role in the financial stability of a conclusion, we would like to thank all country and the well-being of its popu- speakers and participants of the confe- lation. Liberalisation of this especially rence that enhanced an interesting pro- sensitive sector can have far-reaching cess of capacity building on the topic consequences. Additionally, dramatic of financial services and corporate re- changes have occurred during the last sponsibility with important steps. ten years: As a result of serious financial market crises and IMF-controlled structural adjustment programmes, many emerging market countries and developing countries have opened their markets to trans-national financial corporations, have privatised former state banks and often started to “reform” their social security systems. Conse- quently, the market share of trans-national private banks and insurances has risen rapidly – and not always with positive effects.

To focus attention on the problems caused by the global expansion of ﬁ- nancial corporations, WEED organised a conference in December 2005 at the Gustav Stresemann Institute in Bonn. The aim of this conference was, on the one hand, to increase the awareness of the great importance of a topic which only received little attention until now in circles discussing trade and development politics. Furthermore, shortly before the WTO Ministerial in Hong Kong, we wanted to attract the attention of decision makers from the respective ministries (BMWi, German Federal Ministry of Economics and Techno- logy) and international organizations (WTO, Committee on Financial Ser- vices) to the great risks involved in the liberalisation of trade in ﬁnancial services. Finally, we wanted to extend our knowledge (and that of our guests) on The Global Expansion of Finance Corporations lead to more Poverty and Instability 3

I Enforced Market Opening: Players from the North - Experiences from the South and East

1.1 The Global Expansion of Finance Corporations leads to more Poverty and Instability in the South For some time, the liberalisation of fi- financial services sector in the coun- nancial services is being negotiated at tries concerned. The majority of liber- the WTO. Prior to the WTO Ministerial alisation requests refers to market ac- in Hong Kong, a new momentum has cess and freedom of establishment for entered the debate. Nearly every week, the transnational corporations from the EU trade representative Peter Man- North. They are to guarantee that there delsohn and his US colleague Robert are no trade barriers or obstacles re- Portman are imposing pressure on the maining that impede profit-making for countries of the South: Only if they transnational corporations.2 agree to a services deal – only if they open their markets for the services cor- The development policy NGOs WEED porations of the global North – could and SOMO have been observing the they expect concessions in agriculture current processes in the financial sec- which is so important to them. tor and the GATS negotiations on financial services and analysed them Up until now, the critical public is in several studies. Their conclusion is hardly taking any notice of the WTO that the gap between the poor and the negotiations in financial services. It is rich would be increased and that fi- not easy to follow them because they nancial stability would be threatened, usually are carried out behind closed mainly in developing countries, if the doors in so-called Green Rooms. Re- EU Commission were to succeed with quests are made in secret papers that their requests. only reach the public through the in- discretion of individuals or leaks.1 De- The GATS negotiations increase the spite the fact that the liberalisation of gap between the rich and the poor financial services is connected to specific risks of instability. The advocates of a liberalisation of financial services claim that it increases From our perspective, the GATS efficiency in the financial services sec- agreement on services is a one-way tor and would lead to a larger variety street. Its principle is increased lib- in products and improved access to eralisation and not a Trial and Error capital for consumers. The experiences procedure. Liberalisation steps that so far on the liberalisation of financial have been agreed on can hardly be services in developing countries, how- reversed even if they turn out to be ever, lead to a more critical assess- harmful. The EU requests imply a fast ment: and far-reaching liberalisation of the

1 The European public was informed about the EU Commission’s extensive liberalisation requests through such a leak. We agree with (…), who commented this fact with the following words: „Democracy that works by leaks is not democracy.“ (…) 2 The EU requests can be accessed here (2003): http://www.polarisinstitute.org/gats/Main.html 4 WEED Conference Documentation

Once the access to the markets of de- is focussing on the savings in emerg- veloping countries has been opened, ing markets. These savings will only a large part of the domestic financial be available to a limited extent for sector is taken over by transnational fi- domestic investors as soon as they are nancial corporations. The key sector for controlled by transnational financial developing a national economy is then corporations. controlled by transnational actors, and their short-term interest in a fast amor- Host countries have to raise additional tisation of their investment is likely to resources to manage the transformation be higher than their long-term interest process and absorb the risks linked to in the sustainable development of the the market entry of transnational cor- host country. porations. The developing countries have to bear nearly all adjustment ef- Transnational financial corporations forts accompanying the liberalisation show little interest in poor people as of the financial sector. customers. They focus on rich customers in the host countries since they In some countries, legal measures achieve high profits with relatively oblige the financial industry to special little effort. This cherry-picking makes offers for the poor population or par- access to financial services more diffi- ticipation in development and poverty cult for the poor. reduction programmes. The GATS negotiations are also used to abolish these Even the establishment or expansion of non-market regulations. an extensive network of branches does not interest big transnational banks The GATS agreement increases the much financially. Their branches focus risk of financial crises on the large cities. The supply of financial services in rural areas decreases, The liberalisation of financial services especially in the poor areas. as such already threatens the financial stability of host countries and the entire Big transnational banks attract highly international financial system, since qualified personnel from the domes- more and more capital is dislocated at tic financial sector because they can shorter intervals. The GATS agreement pay higher wages and offer seemingly aggravates this problem. The GATS more appealing career perspectives. provisions concerning systemic risks This brain drain withdraws the national of financial services are subordinated know-how that would be so vital for to the liberalisation commitments. If the development of the domestic finan- the industrialised countries were to cial sector. succeed with their numerous and far- reaching liberalisation requests, the More money is flowing from the South monetary autonomy of governments to the North. On the one hand because and central banks in the South would the financial corporations from the be undermined once more. An inde- North are repatriating their profits. pendent development from the world On the other hand, a large variety of market as would be desirable for at investment opportunities in the North least some of the developing countries is offered to rich customers from the would then no longer be possible. South. Currently, the financial sector The Global Expansion of Finance Corporations leads to more Poverty and Instability 5

Even though the GATS supposedly nancial sector slowly and step-by-step does not aim at liberalising capital (Sequencing). Market access to trans- transactions, this would in practice be national financial services corporations the consequence of its articles and pro- should not be granted until the finan- visions on financial services. cial sector of a country is established and stable. The financial sector should Despite a lack of adequate analysis of not be exposed to international compe- the causes of financial crises, the nego- tition until it has reached an adequate tiators of the North ignore the concerns extent of international competitive- of developing countries, scientists and ness. The supervision authorities in de- Non-governmental organisations. The veloping countries should be extended GATS does contain some safety mech- and stregnthened by capacity building anisms that developing countries could first. The requests from the North for a apply to protect themselves from the fast and far-reaching liberalisation ig- effects of liberalisation. However, due nore all these experiences. to the increasing pressure during the trade negotiation rounds, developing A far-reaching reform of the interna- countries are often forced to abandon tional finance, as discussed especially them. in the years after the Asian crisis, would have partially substituted national reg- Additionally, the GATS agreement ulation. Since this has not been imple- only contains relatively imprecise in- mented so far, an effective regulation dications which measures of financial on the national level remains the most market supervision are allowed for important guarantee for financial sta- public authorities. This implies that bility, especially for the crises-prone the regulation of the financial industry economies of developing countries. is likely to be a constant issue at the WTO dispute settlement bodies. The The GATS agreement serves the abolition of stabilisation measures is interests of the financial industry in also included in the intransparent, bilat- the North eral liberalisation negotiations, as the leaked EU requests show. The intro- The financial industry lobby are ex- duction of new measures for the regu- tremely active and successful in in- lation of financial markets, for instance fluencing the GATS negotiations: The capital transaction controls or currency leaked EU requests look like a wish list transaction taxes could be interpreted made by European banks and assur- as a violation of the GATS agreement. ance corporations.3 The GATS and the This restricts political options when current liberalisation demands from dealing with financial crises. the North correspond to the interests of large financial conglomerates for ex- Lessons from recent financial crises pansion, consolidation and profit max- are being ignored imisation. The GATS only provides the weak article XI or the disputed and im- The experiences from previous finan- precise “prudential-carve-out”- clause cial crises show that developing coun- (implies the right to regulation) to deal tries should, if at all, liberalise their fi- with potential market misuse due to the

3 Several times, the EU requests contain the explicit statement: „industry raises the issue“ (…) 6 WEED Conference Documentation

sector’s increasing concentration. er income and correspondingly high monthly incoming payments. The GATS negotiations neglect the needs of the population Transparency of the financial industry and its transactions: abrupt capital As much as the GATS and the EU flight, intransparent and exorbitant Commission’s request represent the borrowing as well as excessive specu- interests of the financial industry, they lation can lead to banking and financial have little concern for the needs of the crises, and their costs are burdened on population – especially in developing the general public and entire society. countries: Additionally, offshore-banking enables tax evasion and threatens financing of Universal access to financial services public goods. in the South: developing countries need less financial innovation for the rich, Legal obligations on Corporate Social and instead need basic services for the Responsibility and the promotion of broad majority of the population. Mi- sustainable development: The GATS cro credits can promote the foundation provides a protection from state regu- and development of small-scale enter- lation under international law to the prises, micro assurances can guarantee private financial industry but it does a minimum of social security. not contain a provision for protecting society from irresponsible manage- Universal access to financial servic- ment by the financial industry. The es in the North: In the North, not all agreement neither obliges the corpora- people have access to essential finan- tions to guarantee access to essential cial services like a bank account. Since financial services nor does it provide a payments are increasingly carried out possibility to sanction financial corpo- in electronic monetary transactions, at rations that give allots loans to projects least a giro account is a necessary re- that are harmful to the environment quirement to be seen as a full member or threaten human rights or worker’s of society. rights.

Restrictions of financial services for The demands of the North and of the poorer people and small entrepreneurs. financial industry are out of place in “Cherry picking” will reduce the sup- the Development Round ply of affordable financial services for poorer people and small enterprises The current WTO negotiation round, even more. the Doha Round, was explicitly declared a Development Round. Previ- Affordable financial services: Ironi- ous rounds have liberalised trade in cally, financial services are more ex- industrial goods, this time the agricul- pensive for the poor than for the rich. tural protectionism of the North was The interest rates of micro credits are supposed to be on the agenda. It is usually much higher than those of big completely inadequate that the nego- loans. And the free salary account is tiators from the North are demanding only available to the people with high- a liberalisation of the services sector

4 US Trade Representative Robert Portman demanded that the negotiation round should enforce the opening of sectors in which US economy is most competitive. He specifically mentioned the financial sector. (…) The Global Expansion of Finance Corporations leads to more Poverty and Instability 7 in the South in exchange for opening SOMO Financial Sector Report. April their agricultural markets. They know 2005 update, Amsterdam: SOMO. very well that the services companies URL: http://www.somo.nl/html/pagi- in the South are by no means competi- nas/pdf/Financial_sector_report_05_ tive and that the markets of the South EN.pdf would be an easy bait for the global player from the North.4 Considering the current conditions, market entry by financial corporations from the North entails the risk that certain regions and parts of the population are excluded from economic development. A Devel- opment Round that deserves its name would have to be designed differently. The demands for liberalisation of financial services are misplaced in the Development Round.

Position paper by WEED and SOMO

Literature

Lipke, Isabel and Stichele, Myriam Vander (2003): Finanzdienstleistungen in der WTO: Lizenz zum Kassieren? Eine zivilgesellschaftliche Kritik der Liberalisierung von Finanzdienstleis- tungen im Rahmen der GATS-Ver- handlungen, Berlin: WEED

Krüger, Lydia and Reiners, Suleika (2005): Expansion ohne Grenzen? Der Handel mit Finanzdienstleistungen, Bonn: WEED

Krüger, Lydia (2005): Forcierte De- regulierung, Finanzkrisen und Dena- tionalisierung in Schwellenländern. Frankfurt am Main et al: Peter Lang Verlag.

Stichele, Myriam Vander (2005): Cri- tical Issues in the Financial Industry. 8 WEED Conference Documentation

1.2 Pioneer for “Liberalization”: Argentina and Chile

Argentina, Chile and Uruguay are only productive enterprises in the ag- among the countries in which radical ricultural and raw material sectors, but neo-liberal reforms of the finance mar- also infrastructure and transport com- kets and the circulation of capital trans- panies, pension insurances, as well as actions were already carried out in the the health and education system which seventies. An economic scientific dis- were largely privatised under Pinochet cussion about a detailed analysis and (Estèvez 2003 : 43). evaluation of these reforms has been largely avoided till now. No wonder: What was the result of this neo-libe- The first neo-liberal experiments were ral experiment? Even if one discounts achieved by brutal military dictator- the thousands of people murdered and ships with active support by Western disappeared who became victims of advisers and institutions such as the In- Pinochet’s brutal reign, the result is ternational Monetary Fund. anything but a success:

It was the so-called “Chicago Boys” in The proportion of Chileans living in Chile - Chilean supporters of Milton poverty has more than doubled from Friedman who were educated at Chica- 20 to 41 per cent between 1970 and go University - who led the economic 1990 (Collins/Lear 1995); policy during the Pinochet dictator- ship and carried out a radical privati- In contrast, the richest 10 per cent of sation and deregulation programme. the Chileans could increase their share Theoretically, “market liberalisation” of the national income from 37 per cent was the core piece of the neo-liberal to 47 per cent in the last decade of the programme: The labour market was Pinochet reign (Collins/Lear 1995); to be deregulated, price control was to The Chilean foreign debt increased ﬁ- be terminated, and state protection of vefold within a few years so that the key industries was to be overcome in country fell into a serious debt crisis at the course of integration into the world the beginning of the eighties, when the market. In practice, it was primarily all International Monetary Fund took the about the sell-out of productive assets opportunity to push the neo-liberal re- to trans-national companies and the structuring even further. excessive enrichment of a small agricultural and ﬁnancial oligarchy at the The development proceeded similarly expense of the population. In Chile, in Argentina. In 1976, the armed forces for example, the concession for ex- staged a coup d’état and had numerous ploiting the mineral ores - originally labour unionists as well as critical jour- one of the main sources of income of nalists, students, intellectuals as well the Chilean state - was sold cheaply as socially committed priests killed. It to foreign investors: 70 per cent of the is estimated that the Argentine armed copper reserves went to EXXON and forces murdered between 15,000 and to other buyers, and these refused to 30,000 people from 1976 to 1982, an pay taxes to the Chilean state from this enormously high number even for La- time on (Estèvez 2003: 44). It was not tin America (cf. Süddeutsche Zeitung, Pioneer for “Liberalization”: Argentina and Chile 9

August 13th, 2003). The Economic The Tablita was justified as necessary Ministry was entrusted to Martínez de to combat inflation. In reality, the arti- Hoz - a friend of Rockefeller and an ficial revaluation of the peso contribut- Eton old boy - who was President of ed to a small minority being able to use the second largest Argentinean indus- undreamed-of possibilities for making trial group ACINDAR (in which U.S. money. Whoever was able to obtain capital had 30 per cent participation) large scale loans at a comparatively as well as owner of large estates at low interest abroad could deposit this that time (Boris/Hiedl (1978): 174). capital at high interest rates in Argen- Domingo Cavallo became head of the tina and gain enormous profits by re- central bank, and a man from the In- converting to U.S. Dollars before the ternational Monetary Fund with good collapse of the exchange rate regime, contacts to U.S. financial circles (Dan- which was hardly a problem for most te Simone) was placed at his side. leading financing corporations with their close relations to the government The military regime carried out a broad (Becker/Jäger 2002: 33). reform of the finance sector from 1977 onwards, free capital movement ab- The reverse side of the economic stra- road was permitted and the local finan- tegy was the enormous growth in fo- cial sector was deregulated. In addition reign debt which multiplied within a to this, a currency policy was pursued few years from approximately U.S. $ whereby the money supply was to be 9.3 billion (1976) to almost U.S. $ 46 controlled by the influx or outflow of billion (1983). In consequence, Argen- foreign exchange (the “enfoque mone- tina also entered into a severe crisis tario del balance de payos”) - shortly at the beginning of the eighties, from afterwards, the currency was tied clo- which the country did not recover for a sely to the U.S. Dollar by the so-called long time, also thanks to the structural “Tablita” (Becker/Jäger 2002: 32 p.) readjustment programmes of the IMF.

Both, the liberalisation of interest con- If one summarizes the results of the trols which led to exorbitantly high in- first neo-liberal experiments, then the terest rates of over 50 per cent and the result is a very inglorious balance: the liberalisation of capital movements, neo-liberal reforms of the financial which allowed an unchecked inflow markets and capital movement served of foreign monetary capital to occur, the financial and agrarian oligarchs created ideal conditions for specula- in both Chile and in Argentina, who tive financial transactions. The short- were not interested in the industrial term exchange rate risk was reduced to development of the countries but only zero by the guarantee of the Argentine in enriching themselves by financial exchange rate which was devalued in speculation or by the corrupt disposal a fixed sequence of small steps (“Tab- of profitable state enterprises. While lita”), providing foreign currency spe- this elite managed to transfer their ac- culators with an extremely lucrative cumulated fortunes from corruption business opportunity based on the dif- and speculation to secure foreign bank ference between devaluation and the accounts before the collapse of the rate of inflation (Krüger 2005: 173). respective economies, the rest of the 10 WEED Conference Documentation

population carried the burden of mas- tering the debt crisis.

Lydia Krüger

Literature

Becker, Joachim; Hunter, Johannes et al. (2002): Finanzsystem und Krise in Argentinien und Chile (The Financial system and Crisis in Argentina and Chile), in: Kurswechsel. Zeitschrift für gesellschafts-, wirtschafts- und um- weltpolitische Alternativen, No. 3, p. 32-44.

Boris, Dieter; Hiedl, Peter (1978): Ar- gentinien. Geschichte und politische Gegenwart (Argentina. History and Present Politics), Cologne. Collins, Joseph; Lear, John (1995): Chile Free-Market Miracle: A Second Look. Oakland, CA: Food First Books.

Estèvez, Jorge Vergara (2003): Chile und die Chicago Boys (Chile and the Chicago Boys), in: TU International, no. 54, S.43 45.

Krüger, Lydia (2005): Forcierte De- regulierung, Finanzkrisen und Dena- tionalisierung in Schwellenländern (Forced Deregulation, Financial Cri- ses and Denationalisation in Emerging Market Countries). Frankfurt am Main, among others. . Go East: The Expansion of Western Banks into Eastern Europe 11

1.3 Go East: The Expansion of Western Banks into Eastern Europe

In mid June 2005, the supervisory bad investment. The banking sectors boards of the Italian Uni Credit and of those countries which applied for the Munich Hypo-Vereinsbank (HVB) membership with the Brussels Uni- agreed on the biggest cross-border Eu- on between 1994 (Hungary and Po- ropean bank merger ever. The Uni Cre- land) and 1996 (the Czech Republic) dit based in Milan took over the HVB were taken over by foreign institutes, as well as the Austrian Austria-Credit- the only exception being Slovenia. anstalt bank whose strong presence in To a great extent, the take-over pro- East Europe was the main reason for cess was already complete before EU the union. The merger forms the ninth membership started, so that foreign biggest bank in Europe with a stock banks control the terrain in the eight market value of about 41 billion eu- East European new member countries ros. The now Italian- controlled group since 2000 at the latest. For the end of is the biggest credit institution in East 2003, the statistics read as follows, ac- Europe. It controls the bank sectors in cording to bank balance sheet totals: In Poland, Croatia and Bulgaria and also Estonia, foreign banks control 99% of has a strong presence in Hungary, the the credit market, in the Czech Repu- Czech Republic and Slovakia. About blic and Slovakia the control is 95%, one tenth of the 125000 employees in Lithuania it is 88%, in Hungary it is working in 2500 branches will loose 82%, in Poland it is 72%, and in Latvia their jobs in the coming months. it is 53%, with Slovenia being an exception, where only 33% is controlled This mega deal is the occasion for the by foreign institutes2 . The new condi- following contribution to deal with the tions are characterised by aggressive banking sector in East Europe, a boo- market invasion and a cautious lending ming market which is forecast to have policy. fabulous profit prospects during the coming decade. Then a second wave occurred in the initial years of the 21st century, the Expansion in waves banking sector take-overs by Western European Institutes involved the coun- The second half of the first decade of tries to the East and South of the EU the 21st century is considered the most expansion countries from 2003. Ro- intensive period for take-overs and mania, Croatia and Bulgaria, as well as green field investment in the banking Bosnia-Herzegovina and Serbia Mon- sector of East Europe. “Early reforms tenegro were considered by bankers to in the banking sector led to liberal poli- be completely open markets that were cies which were marked by weak state just waiting for capital that is hungry control and shortcomings in the judi- for acquisitions. Between 2000 and cial structure”, a study by the Raiffei- 2001 alone, the influence of foreign sen Central Bank1 stated. Those on the banks rose from 38% to 82% in Croa- spot at the time could hardly make a tia, for example3.

1 RZB Group (Hg.), CEE Banking Sector Report. Wien, Oktober 2004, p. 8 2 ibid, p. 9 3 Bank Austria (Ed..), Bankenvergleich Mittel- und Osteuropa 2001. Wien 2001, p. 12 12 WEED Conference Documentation

Today, a few western banks control steel giant “Mittal Steel” is registered 91% of the Croatian market, 82% of in the Dutch Antilles for tax purposes6. the Bulgarian, 75% of the Bosnian and Companies from Germany and Austria more than 50% of the Romanian ban- occupy the second and third place for king sector, and the take-over phase has foreign direct investments in East Eu- not yet finished, especially in Serbia, rope. Significant participations or ac- Bulgaria and Romania. Western inves- quisitions by Russian companies have tors also came with the Western banks. only taken place in Belarus, the Ukrai- The biggest industrial take-overs or ne and Lithuania. industrial settlements, for instance by Volkswagen in the Czech Republic, Excursion: From the Debt Trap to Slovakia and Hungary or by US-Steel Hyperinflation in Kosice, were mainly carried out with the corporations’ own capital. 60% of We will not discuss the worldwide eco- the Western investments in the East nomic crisis of the late 1970s which have been in the services industry and forced peripheral countries in the global 40% in manufacturing industry4. At the South and East to borrow cheap credits end of 2004, the ratio of foreign direct (in US dollars) from international capi- investment was at an average 36.5% of tal markets, only to be led directly into the gross domestic product in the eight the so-called debt trap from the begin- new EU countries, even much higher in ning of the 1980s, due to the high-level Estonia with 79%, in Hungary at 55%, interest rate policy of the US. Countries and in the Czech Republic just below like Poland, Hungary, Yugoslavia and 50%5. Therefore, the dependence of Romania certainly fell into this debt these national economies on external trap. High foreign debts contributed to influence is extremely high. This con- the acceleration of the economic crisis. trol can be exactly classified by region At the end of the 1980s, this crisis led and by sector. 80% of all foreign invest- to political collapse and territorial dis- ments in the eight new EU countries integration in the three multi-ethnical originate in companies of the old EU. states of Eastern Europe - Yugoslavia, Often these are just a few banks, super- Czechoslovakia and the Soviet Union. market chains, automobile manufactur- In 1990, six countries in Eastern Euro- ers or household appliance producers pe (Czechoslovakia, Hungary, Poland, on whose vines whole national econo- Romania, Bulgaria, and Yugoslavia) mies depend. The keenest Western ca- were indebted to international creditor pital in the East, by the way, is Dutch. banks by a total of US $98 billion. The Companies like Unilever or Shell have Soviet countries owed a further US their company headquarters in the Ne- $60 billion7. The international guar- therlands and the expatriate Indian dians of capital loans, the World Bank

4 Press conference by Gabor Hunya, Wiener Institut für Internationale Wirtschaftsvergleiche (WIIW). Vienna, on June 2nd,2005 5 Wiener Institut für Internationale Wirtschaftsvergleiche (Hg.), Foreign Direct Investment in Central, East and Southeast Europe. Opportunities for Acquisition and Outsourcing. Vienna 2005, p. 28 6 In recent years, “Mittal” has bought a good proportion of East European steel works, especially in Poland (the four steel works of the old Polski Huty-Kombinats in Upper Silesia), in the Czech Republic (Nova Hut in Ostrava), in Rumania (the steel converters in Galati and Iasi) as well as the combine in Bosnian Zenica 7 Wiener Institut für Internationale Wirtschaftsvergleiche (ed.), Countries in Transition 1995. Vienna 1995, p. 60-80 Go East: The Expansion of Western Banks into Eastern Europe 13 and the International Monetary Fund, the previous six countries) had a state have a stranglehold on the individu- debt of US $335 billion8 , and this sum al national economies with respect to is 3.5 times as high as it was 15 years the repayment of these credits. The- ago. The countries of the former Sovi- se restrictive policies have been used et Union also owe US $250 billion to differently in the various countries Western banks and credit institutions. for the modernisation of the industrial In some states like Romania, debt has structure, for popular or Nomenklatu- catapulted from zero to US $21.3 billi- ra consumption. This stranglehold is on, in Croatia, it has increased ten-fold, especially visible in the case of Hun- from US $2.7 billion (1991) to US $27 gary (foreign debts in 1990 amounted billion, in Slovakia, six-fold, from US to US $21.2 billion), Poland (1990: US $2.9 billion (1992) to US $19.7 billion, $48.5 billion), and Yugoslavia. Roma- and it quintupled in the Czech Repu- nia was the only country to adopt the blic (1992) from US $7 billion to US ultra-monetarist targets of the interna- $36.5 billion, and trebled in Hungary tional finance organisations, it not only from US $21.2 billion to US $64.3 bil- repaid the debt service, i.e. the interest, lion, and more than doubled in Poland but also the capital between 1982 and from US $48.5 billion to US $111 billi- 1989, under the leadership of Nico- on. The transition philosophy, whereby lae Ceausescu. Almost US $12 billion markets were to be opened (for Wes- were pumped out of the population tern investors) and debts transferred during these years to reach a debt-free has been fully accomplished. status in April 1989. This was too late and entailed too much sacrifice for the By the way, in most East European population to be thankful to its leader. countries the reform period started with hyperinflation by which the unful- After 15 years of transformation, the filled consumer promises made by the countries of Eastern Europe are even communists to the people were simply more dependent due to foreign debts. dismissed. Countries like Poland, Bul- Restructuring measures, stability pro- garia, Romania were confronted with grammes, and the battle against inflati- triple-digit inflation rates, Croatia, the on have established dependent national Ukraine and Russia with four-digit economies, and two of them (Bulgaria inflation rates at the beginning of the and Bosnia-Herzegovina) are directly 1990s. Inflation of this magnitude is administered by so-called Currency nothing less than “the dispossession Boards. Parliaments and governments of the have-nots“9. In Eastern Europe, are by-passed and decisions on bud- governments and consultants brutally gets and financial policy are made by eliminated the disproportion between the European Central Bank and the savings and the amount of goods (none World Bank. However, the debt spiral or not enough) provided by the eco- has taken an even tighter grip on other nomy that emerged in the late stages Eastern European countries. At the end of communism to make way for IMF- of 2004, eleven countries (formed from led so-called structural adjustment

8 Wiener Institut für Internationale Wirtschaftsvergleiche (ed.), Research Report no. 314: Ac celerating GDP Growth, Improved Prospects for European Integration. Vienna, 2005, p. 22, 62, 100, 103, 106 9 See Eduard März, Österreichische Bankenpolitik in der Zeit der großen Wende 1913 bis 1923. Am Beispiel der Creditanstalt für Handel und Gewerbe, Vienna 1981 14 WEED Conference Documentation

programmes. Indeed, the economist Czechoslovakia - had a two-level bank Johann Kernbauer10, executive board system. Alongside or under the nati- member of Bank Austria’s Capital In- onal bank or central bank there were vest in Vienna, considers that some of various sector banks or mercantile these excess savings had to be skim- banks, who were given various scopes med, however, not necessarily in such for independent action, which, howe- a brutal way, leaving everything prima- ver, was limited. There was no interest rily to the market: “Hyperinflation was rate, as a regulating tool for banking permitted, alternatives such as a capi- policy and characteristic of capitalist tal levy or a partial waiving of savings conditions, a capital market was ine- were not considered”. The decision xistent. Remnants of state banks exist for market forces to regulate currency only in Poland (PKO bank). In Russia, depreciation and the subsequent shock the state-controlled “Sberbank” holds therapy cleared the market completely, the biggest market share; and in Bela- especially in Poland. New - Western - rus, state banks compete with foreign players with new money could appear private banks for deposits and the loan on a territory where the currency po- business. licy is supervised by the IMF and the World Bank. In the first phase, in order to open up the mono-bank system, Austrian banks of- The methods of acquisition ten went East with small branches, for example, the Creditanstalt (later: Bank During the market expansion of Wes- Austria) and the RZB went to Hungary. tern European bank institutions into the The appearance of the Raiffeisen cen- East, all tricks of power were brought tral bank (RZB) is considered the very into play. The repertoire of the acqui- first example of a Western bank appea- sition strategies included economic ring in the East, in Hungary, in 1986 power, political pressure, and even mi- with the opening of a branch in Buda- litary intervention. The invasion into pest. In 1990 and 1991, strategies were the previously closed markets occur- being discussed vividly in banker’s red either by means of privatisation of circles on how a highly profitable ent- existing businesses, shell companies or rance could be guaranteed with very so-called “green field investment”, i.e. low risk. Two schools evolved: those a complete new structure for the insti- pleading for “New Entry”, a new be- tution involved. ginning, and those analysts preferring “rehabilitation”, that is, a restructuring Banks in the Western bourgeois sense of the ex-communist structure. Stijn did not exist before 1989/91. The com- Claessens, in a World Bank study, de- munist leadership was content with scribed the two concepts as compatib- a single central bank whose subsec- le, nevertheless he preferred the “New tions took over various duties (export Entry“ model 11. Johann Kernbauer of / import etc.), which varied according Bank Austria agreed in delineating that to the country. This was for example mainly green field investments occur- the case in Bulgaria and Russia; and red in the first round 12. other countries - such Hungary and

10 Conversation with Johann Kernbauer on June 1, 2005 11 See Stijn Claessens, Banking Reform in Transition Countries (Background paper for the World Development Report 1996). O.O. 1996 12 Conversation with Johann Kernbauer on June 1, 2005 Go East: The Expansion of Western Banks into Eastern Europe 15

After the first tentative steps at the be- rations or struck off the balance sheet, ginning of the 1990s, a privatisation Western banks initially bought blo- wave swept over the financial institu- cking minorities of at least 25% plus tions market. In this phase, the acquisi- a vote in the stocks issued by the state, tion of an East European institute pro- before becoming majority owners in a ceeded ideal-typically as follows: the second investment wave. The mostly bank to be sold was offered by the state, well-developed branch network with mostly via the Ministry of Finance or a – at best – billions of savings deposits trust company and previously cleared in the respective national currencies, of debt, i.e. the so-called ”bad debt” was often accompanied by real estate – unrecoverable loans given to ailing that was owned by the ex-communist companies - often had to be taken by banks. Deficit companies which were the state budget where they tore deep interwoven into the banks had to be holes in the state finances over the co- previously closed down or their busi- ming years and still do to some extent ness links with the financial institution to the present day. had to be cut. Western European investment groups thus bought an entire After a public tender, the various bid- bank and credit system relatively risk- ders inspected the existing credit port- free and at a low price, and they had folios. This mainly entailed the search nothing more to do than technically for loans that were no longer being update it. serviced and had to be eliminated before the purchase. “It was important to The Beobanka case separate out bad loans. Then these had to be bought back by the state, this was The establishment of a new private among the conditions”, Lars Hofer13 banking system in Serbia was probably of the RZB recounts, who participated unique in the East European transition in acquisitions at that time, for a diffe- period. The four largest banks - Beo- rent bank. Special discounts for a high banka, Beogradska bank, Jugobanka, number of actual or supposedly bad Investbanka – were excluded with one loans were given regularly; even when blow when the liberal Djindjic govern- Czech Prime Minister Vaclav Klaus ment, under Western European influ- sold off the biggest savings bank in the ence, simply withdrew their licenses country, the Ceska sporitelna which in January 2002 by state decree and managed 70% of the national savings cleared the market for private enter- deposits14, to the Austrian bidder, the prise. Economists such as Vladimir “First Bank”. The Czech Republic Gligorov15 of the WIIW claimed that founded its own bank, by the way, the the great old Yugoslavian banks were “Konsolidacni Bank” to take care of no more than “empty shells” which no the “bad loans”. This state bank ma- longer enjoyed the confidence of the naged the budget deficit resulting from population since the freezing of foreign the privatisations of banks. currency accounts in the early1990s. This may be correct, however, it does After the losses had been socialized not explain why the state, which assu- and thus burdened onto future gene- med responsibility for the accounts,

13 Conversation with Lars Hofer on May 30, 2005 14 Conversation with Johann Kernbauer on June 1, 2005 15 Conversation with Vladimir Gligorov, Vienna, in December 2004 16 WEED Conference Documentation

later set up a lively capital market to after opening the first branch in Bel- trade in these debentures in the form of grade, his chest still swells with pride, “bonds”. The state mostly stepped in to even years later. The deputy manager pick up these open, mostly frozen bank of the Serbian RZB bank has prepared receivables and issued bonds for a to- his own Power Point speech to provide tal of US $2.8 billion for them. The- information on the paradise-like conse bonds are traded just like national ditions in a market that had previously debt and provided a good proportion been completely cleared. of the capital market in Serbia in 2002 and 2003. The banks also thrive on this The Raiffeisen central bank already business. The shells cannot have been planned to set up a branch network in that empty! Admittedly, it is difficult to Serbia three weeks after the so-called maintain confidence in these “bonds” “bulldozer revolution” of October which feed off the savings deposits 2000. In July, 2001, the bank was al- from earlier better days and thus hang ready on the spot. Soon after, on Janu- on the silk thread of the IMF, so long ary 1st, 2002, the licenses of the four as the IMF permits further debt resche- biggest Serbian banks in the country duling and thus maintains the liquidity were withdrawn by the state. The RZB of the public budget. profited from the closing down of the big banks because thousands of skilled New, globally operating companies bank employees were thrown on the from abroad have intervened in the ban- street at the same time, and the RZB king system of Serbia since the regime could select the best among them. change in 2000. The most successful The euro-changeover was carried out among them is the Austrian Raiffeisen on the same day, driving hundreds of Central Bank (RZB). The bank was thousands of Serbians into the banks already on the spot, immediately after to exchange the DM they had hoarded October 2000, and it was the first fo- under the pillow into the new Euro- reign bank to receive a state license in pean currency. Within a few months March 2001. In the beginning of 2004 the RZB controlled 20% of the private it was operating 18 branches with 500 customer market, and branches were employees in the country. Its growth is quickly established everywhere in the essentially based on three pillars: the country. This was not even a gold fe- abundantly available foreign capital, ver atmosphere, the Raiffeisen central the dissolution of potential competi- bank did not have to dig for the gold, tors by the state and the introduction the people came, stood in queues and of the euro. brought the money. Ten years of embargo combined with many bad expe- “We were extremely liquid when we riences with the state-controlled banks, arrived here, because the bank was for which every business activity was almost flooded with private customer forbidden from now on, provided Wes- money. The people stood in queues of tern banks such as the RZB with a leap up to hundred meters to change DM in of faith unequalled in the history of Euro and to open an account.” When banking. Oliver Rögl of the “Raiffeisen Central Bank” (RZB) remembers the weeks Go East: The Expansion of Western Banks into Eastern Europe 17

Bank Robbery in Mostar biggest Bosnian-Croatian bank. Just two weeks later, on April 18th, 500 The EU-colonial governor for Bos- Nato soldiers clad in SFOR uniforms, nia-Herzegovina, Wolfgang Petritsch, started out in 80 armoured vehicles resorted to the most extreme measure and 20 helicopters to break the finan- in the struggle of Western banks for in- cial backbone of the home bank of the fluence in the East. He allowed SFOR HDZ, the “Herzegovacka Banka”. Du- units to rob the most important bank ring four hours the SFOR troops blew of the Croatians in Herzegovina. The open the safes and took everything “High Commissioner” of Bosnia-Her- that looked like money or securities: zegovina sent by the EU and the US Deutschmarks, convertible marks, and had previously dismissed one of the one and a half trucks full of coins16. three elected men of the state steering “We could not carry out this action committee, the Croatian Ante Jelavic, with finesse”, the head of operations from his office and deprived him of his ruefully confessed to “Newsweek”. civil rights, as had already occurred “They broke into the steel room, blew with the Serbian state representative in the safes and drove out into the night the 3-man state steering committee of - all in the name of Nato-peace kee- Bosnia. Because the “Croatian demo- ping”, “Newsweek” sarcastically sub- cratic union” (HDZ), whose leader was titled the story on April 30th, 2001. Ante Jelavic, had at that time refused to give up its plan to set up a third na- To prevent an expected response by tional entity in Bosnia-Herzegovina, a Croatian units, one of the SFOR heli- “Herceg-Bosna”, its leader was politi- copters flew over the nearest barracks cally eliminated. Management in this and released a blanket cover. Contents: kind of colonial style was provided by approx. 750,000 dollars which poured the Dayton peace plan in which nobo- down over the hungry soldiers. A de- dy from Bosnia- Herzegovina had ta- grading action, even for colonialists. ken part except the Muslim state representatives. Bank robberies, however, The blasting of the bank led to its ruin. were not listed among the intervention “They take our bank, our money from possibilities. us”, complained General Nedjeljko Obradovic, the unrecognised Secretary In an unprecedented act of megaloma- of Defence of the Croatian self-govern- nia, a unit of SFOR soldiers attacked ment, “this is absolutely wrong. They the “Herzegovacka Banka” central of- speak with us as if we were mentally fices on April 6th, 2001 to destroy the backward”. And 65-year-old pensioner financial core of the HDZ. This first Stjepan Bakula asked in the “News- attack failed to a considerable extent, week” mentioned above, how was he and the population of Mostar threw to receive his pension now, after the stones at the SFOR soldiers. There was destruction of the bank. Possibly a an exchange of fire and twelve warriors German Protestant church somewhe- of the “community of values” needed re would install a charity fund which medical treatment after storming the would collect a few marks because of bank headquarters. Wolfgang Petritsch the miserable economic situation in called for a second battle against the Mostar and in memory of the former

16 Newsweek, 30 April 2001. 18 WEED Conference Documentation

mayor in Bremen, Hans Koschnick, the East among themselves. The Bel- one of the first colonial administrators. gian KBC controls, for example, the In 2004, the bank sector of Bosnia was biggest Czech bank, CSOB, and the controlled to 75% by foreign credit in- important Hungarian institute K&H stitutions, the Austrian RZB owns 20% as well as banks in Poland (Kredyt of market share, the Italian Uni Credito Bank). The “First Bank” has seized the owns 17%, the Hypo Alpe- Adria owns savings bank system in the Czech Re- 16% and HVB/bank Austria owns 8%. public and Slovakia (Ceska Sporitelna and Slovenska Sporitelna) and has a The Partitioning of the Bank Mar- strong presence in Hungary with the ket Postabanka. Uni Credito, on the other hand, is in charge of the banking sys- “In Eastern Europe the market is so tem in Croatia and has a strong market enormously large, the need for bank- share in Poland and Bulgaria. Bank ing services is constantly increasing. HVB/Austria is strongly based in Po- Therefore there is no rivalry between land and Bulgaria, a merger with the the competitors, there is room for ev- Uni Credito would make them market erybody”, says RZB analyst Lars Hofer, leaders in the banking system in Poland fully believing the dream of never-end- as well as in Bulgaria. Societé Genera- ing imminent growth.17 In Romania, le, on the other hand, has invested in according to the RZB representative, the Rumanian and the Slovenian cre- only 20% of the population had a bank dit market, whereas the RZB operates account at the beginning of 2005. The almost everywhere, and is the largest potential is huge. The strongest pres- Western bank in Russia, Belarus and ence in the Eastern market is shown by the Ukraine. The small Baltic markets the Belgian KBC (with a balance total are operated from Scandinavia, there of 25 billion Euro), followed by the the Swedbank and the SEB share the Austrian institutes: “First Bank” (24 fattest chunks. billion Euro in 2003) and “Bank Aus- tria”/HVB (20 billion Euro), the Italian What makes banker’s hearts beat faster Uni Credito (16 billion Euro), the RZB are the actual balance sheets. The ex- (15 billion Euro), City-Group, Banca ample of Bank Austria-Creditanstalt/ Intensa, Societé Generale, ING Bank, HVB shows what the Eastern business and Commerzbank18. Growth rates of is all about: an increase in capital of 15% per year in the loan business until about 13.6% between the first quarter 2008 and of 11% per year in the depo- in 2004 and the first quarter in 2005, sit business seem realistic19. Thus the with operating profits up by 42.1%, gold digger’s mood of the past ten ye- employee numbers down by 4.8%20. ars continues. Opening up the East, as has often been emphasized, saved the balance sheets In spite of the often quoted limitless- and profits of the mother companies ness, the Western European big play- in the West. The Raiffeisen reports re- ers have divided up the markets in veal a six-fold increase between 1998

17 Conversation with Lars Hofer, Vienna, May 30, 2005 18 See: Die Bank Austria Creditanstalt Gruppe: Marktführer in Zentral- und Osteuropa. Vienna 2005 (internal paper) 19 ibid. 20 Conversation with Lars Hofer, Vienna, May 30, 2005 Go East: The Expansion of Western Banks into Eastern Europe 19 and 2004 in the balance sheet total for German banking institutes, with the foreign business (in the East), and the exception of the Hypovereinsbank whole company (including business in HVB, are scarcely present in the East Austria) slightly more than doubled European markets, and this is becau- the balance sheet total for this period. se of German unification. “They were RZB’s Lars Hofer says: “Without the preoccupied with unification”, is the opening in the East we would certain- explanation given in banker’s circles ly not have reached today’s size. This referring to the absence of Deutsche growth is based on the Eastern expan- Bank and Dresdner Bank in Eastern sion”21. Or, as expressed by RZB boss Europe. Indeed, except for the HVB Herbert Stepic in a newspaper inter- and the Commerzbank, hardly any view: “The opening in the East was other German bank is active on the a galactic window for Austria and the East- European market. Raiffeisen central bank” 22. How Business is Done The historical knowledge with which the Western institutes operate in the The entry of Western banks into the East is conspicuous. The banking com- East was mainly accompanied by me- panies seem to link up with traditions dium-sized Western European compa- dating back 100 years and more. The nies in the first years, in search of che- historical connection is complemented ap labour and market enlargement. The by a geographic and linguistic proxi- financial institutions mainly supplied mity. Therefore, there is a compara- companies from their home countries tively extremely strong presence of with credits. The case was different Austrian banks in the Czech Repub- for the “First Bank” and the Raiffeisen lic, Slovakia and Hungary, the Italian central bank (for example in Serbia). leadership position in Croatia and the Right from the beginning of their pre- Scandinavian dominance in the Baltic sence in the East, these two banks ser- States. “The Viennese banks invaded ved as savings banks for the ordinary Eastern and South- Eastern Europe people, and the Ceska Sporitelna and with Austrian capital”, the League of Slovenska Sporsitelna, which were Nations commissioners Walter Layton taken over by the “First Bank”, had a and Charles Rist wrote in their study of considerable deposit volume. Only the the Austrian national economy after the second step was “wide ranging”, the First World War23. Italian and German institutes lunged at private customers capital soon followed, and they secu- both for the credit business as well as red the most profitable investments the deposit business. In contrast to the by acquisition of Austrian companies. old EU region, the deposit volume in Belgian and Dutch corporations arri- Eastern banks lies significantly above ved in the 21st century to cavort in the the credit volume. Whereas deposits on bank market. average amount to 44% of gross domestic product in the new EU countries,

21 Conversation with Lars Hofer, Vienna, May 30, 2005 22 Die Presse, May 28, 2005 23 Layton/Rist, The Economic Situation of Austria. Report presented to the Council of the League of Nations, Geneva 1925. See also: Alice Teichova, Banking and Industry in Central- East Europe in the ﬁrst decades of the 20th century (Festschrift der Creditanstalt). Vienna 2005 20 WEED Conference Documentation

and loans amount to 31%. In the Euro bourgeoisie is emerging in some coun- zone the ratio is the opposite: deposits tries who are serving this kind of a pe- amount to 86% of GDP, and loans are ripheral integration into the European 106%. The large difference between Union. the East and the Euro zone can be seen as an indication of growth potential. Hannes Hofbauer

Unlike the period before and after the Literature First World War, today’s banks rarely Bank Austria (ed.): Bank Comparison deal in industrial joint ventures or take in Central and Eastern Europe in 2001. overs of commercial enterprises in the Vienna, 2001. East. At the end of 19th century, for instance, the Creditanstalt-Bankverein Bank Austria Creditanstalt Group: was a machine for converting busines- Market Leader in Central and Eastern ses into share companies in which the Europe. Vienna 2005 (internal paper). bank later participated24 , the banks are mainly linked to the insurance market Claessens, Stijn: Banking Reform in nowadays. Transition Countries (background paper for the World Development Report All kinds of share funds issued by in 1996). O.O. 1996. banking corporations are rampant in the Eastern markets, depositing ex- Layton/ Rist: The Economic Situati- cess Western capital in the East. This on of Austria. Report presented to the speculation business has been highly Council of the League of Nations, Ge- profitable ever since stock exchanges neva 1925. and a capital market were established. Besides state loans, there are various März, Eduard: Österreichische Ban- funds which sometimes promise twice kenpolitik in der Zeit der großen Wen- the interest as in Western Europe. de 1913 bis 1923. Am Beispiel der Creditanstalt für Handel und Gewerbe. The biggest social problem caused by Vienna 1981. the de facto takeover of all banking businesses (and industrial as well as RZB Group (ed.): CEE Banking Sector service companies) by Western owners Report. Vienna, October 2004, p.8. is the class structure. A West- Euro- pean- capitalism, be it the “Rhenish” Teichova, Alice: Banking and Industry style or “social partnership” style, in Central-East Europe in the first de- needs a strong middle class. The deve- cades of the 20th century (Festschrift lopment of such a middle class in the der Creditanstalt). Vienna 2005. East is not exactly fostered by the dominance of west-European companies. * Recently published: Hannes Hof- The big companies need to generate bauer: »Osterweiterung. Vom Drang profits in the service sector companies nach Osten zur peripheren Integrati- as well as in the industry for the share- on«, (Eastern EU Enlargement. From holders who are based somewhere in the Rush to the East to Peripheral Inte- London, Amsterdam, Frankfurt, Milan gration), Vienna, Promedia publishers and Vienna. Instead, a kind of deputy (also available from the junge Welt shop).

24 Teichova, p. 150. Enforced Market Opening by War: Foreign Businesses and Banks in Iraq 21

1.4 Enforced Market Opening by War: Foreign Businesses and Banks in Iraq

“Dear Mr De Rato, we have done our This was not the first time that the IMF best to realize the ambitious political gave a helping hand to the new govern plans we presented in our economic ment in Baghdad. In September 2004 programme of 2004/05 despite the gre- already, an “Emergency Post-Conflict at challenge provided by the specific Assistance” (EPCA) amounting to political and security situation in our 436.3 million U.S. dollars was gran- country (…). The results were positi- ted. This was primarily assigned to the ve: The gross domestic product (GDP) reconstruction of the Iraqi administra- has in fact fallen back by almost 50% tion - which had been partly dissolved in 2004 but this development can be by the occupation administration in largely explained by the restoration of order to raise the economic reconstruc- oil production. Following increasing tion of the country to a higher level. inflation at the end of 2004 and at the To make sure nothing went wrong, the beginning of 2005, which was mainly IMF also promptly provided the appro- caused by food scarcity due to the se- priately trained experts to the country curity situation, consumer prices have who were to train the Iraqi personnel stabilized in recent months (...).” in all aspects of the international financial and banking systems. This part of The “Letter of Intent” of the Iraqi go- the task was mainly taken up by the US vernment of December 6th, 2005 to the Agency for International Development, International Monetary Fund (IMF)1 USAID2. USAID is taking care of ne- starts with these words. In this letter, arly the complete reconstruction of the government asks for a loan of 685 Iraq, i.e. economic development, agri- million U.S. dollars to be made avai- culture, questions of state governance, lable in order to complete the econo- the judiciary system, reconstruction, mic programme by March 2007. As and health care. is well known, the IMF gives nothing without demanding global economic The target the IMF set was to stabilize adjustments. The Iraqi case is all about the run down of the Iraqi economy, to opening up an economy to the inter- lay the basis for a reform programme national market which was previously and to enable Iraq to pay its foreign run by the state until Saddam Hussein’s debts. However, certain criteria needed regime was toppled. In short, the IMF to be met: a wise financial policy must kindly considered the request of the cut state expenditure, the exchange rate recent Iraqi interim government and (of the new Iraqi dinar) must be stabi- granted Baghdad’s loan request soon lized to control inflation and, finally, afterwards. key reforms have to be implemented in Iraq to transform the country into a market economy.

1 Information on the IMF and Iraq at www.imf.org 2 Information on the work of USAID in Iraq at www.usaid.gov 22 WEED Conference Documentation

Immediately after the Controlling Po- pletely weakened by 13 years of UN wers Authority (CPA) took over in sanctions, did not stand a chance April 2003, a central course was laid against the foreign investors invading out. Liberty and democracy could wait, the country. A comprehensive job was the most important issue was control done in securing business through the of the financial system which was to Iraqi merchant bank and adjusting the be newly set up for the till then state Iraqi financial system to the require- run economy. Characteristically, the ments of these corporations. troops marching into Baghdad knew which of the buildings was the oil mi- After the necessary preconditions were nistry and they immediately occupied created by Bremer’s decree no. 39, it and hermetically sealed it off. On nothing could stop them. From this the other hand, the national museum time on, Iraqi ministries could bor- was not known to them, and this was row tens of millions of dollars to buy looted unhindered for two days while all over the world all that was denied US troops were searching for alleged during 13 years of UN sanctions. The “pockets of resistance” nearby. New York JP Morgan Chase Bank provided the financial security for these Paul Bremer, the new strong man in transactions4. Iraq had to practically Iraq, issued one decree after another. mortgage its national oil revenues so On September 19th, 2003, Bremer that the Iraqi merchant bank could is- signed decree no. 39 concerning “fo- sue the required letters of credit to gu- reign investments in Iraq“3. This made arantee solvency and ease the transfer it possible for all Iraqi resources, with of funds. the exception of oil, to be taken over by foreign investors. Kamel Al-Gaila- Originally, the Iraqi merchant bank ni, the interim minister of finance ap- was responsible for the trade guaran- pointed by the US Americans, initiated tees which were introduced by the UN a comprehensive bank reform soon “oil for food” aid programme in 1995 afterwards. Foreign financial corpo- to moderate the effects of the UN sanc- rations were now allowed to own up tions on the Iraqi civilian population. to 100% of shares in Iraqi banks. For This programme enabled comprehen- the first time since the 1950s, foreign sive control of the Iraqi purchases of banks were allowed to intervene in the humanitarian goods from other coun- Iraqi financial system whose principle tries. Payment was by revenue from assets were the world’s second largest limited oil sales. The payment was oil reserves. made via an account controlled by the UN Sanction Committee 661 in New All previous Iraqi laws were thereby York. This control was to prevent Iraq cancelled, and the doors were opened from buying goods which theoretically widely for foreign corporations and could also be used for military purpo- banks. Iraqi businesses and banks, in ses (dual use). The “oil for food pro- a state controlled private sector com- gramme” had an overall turnover of

3 Extensive information on Paul Bremer’s decrees can be read at: www.cpa-iraq.org) 4 The following details are based on an article by Mitch Jeserich, written for CorpWatch in February 2004. The text, “Banking on Empire“, can be read at the highly recommended web- site: www.corpwatch.org) Enforced Market Opening by War: Foreign Businesses and Banks in Iraq 23

460 million US dollars and was termi- in those of the Iraqi people. nated in November 2003. Therefore, reconstruction contracts Soon afterwards, the management of were primarily allocated to US compa- the Iraqi merchant bank was taken over nies with links to the US administra- by a foreign banking consortium, suc- tion. At first, the Iraqi merchant bank ceeding against four other international export loans went to companies from competitors. The tender was awarded those countries involved in the bank to a consortium of thirteen banks from consortium that controlled the mer- fourteen states led by the JP Morgan chant bank, irrespective of whether the Chase Bank in New York. JP Morgan products were good quality or inex- Chase, one of the world’s largest com- pensive. mercial banks, was formed by the merger of the J.P. Morgan & Company In- For example, the US export credit investment Bank and Chase Manhattan stitution supported the Iraqi merchant Co. in December 2000. From then on, bank which, at the beginning of 2004, Iraqi merchant bank guarantees were disposed of export guarantees amoun- no longer managed by UN institutions ting to 2.4 billion US dollars. The US but by a private banking consortium Export-Import Bank approved 500 and the governments linked to these. million US dollars in letters of credit and secured the investment risks of US The occupation administration and the companies in Iraq. Thus, if Iraqi de- multinational banks began to manoeu- partments default on their payments to vre the future Iraqi government into a US companies, the US Export- Import debt trap of an unknown magnitude. Bank would step in to meet the obli- Nomi Prins, a former investment ban- gation. The US Export- Import Bank, ker and book author, criticized the fact in turn, could reimburse itself from the that the actual oil export levels and oil Iraqi development fund, that is, the real prices were kept secret. “The oil, no- Iraqi budget. 95% of the money in the body really knows about it, is used to development fund comes from Iraqi cover various items, although there is oil revenues - which, despite claims no transparency at all about the pro- that Iraq has recovered its sovereign- fits.” ty - are under control of the occupying powers. It is now possible for Iraq to do international business again even though Iraqis are not the only ones to criticize the purchasing power continues to be that the development fund is not trans- low because of the high debt level. The parently managed, and that moneys new financial system, however, was allocated by the fund cannot be cont- installed under an Iraqi government rolled or commented on publicly. The which has not in any way earned this US administration can make its own title. The country is to date ruled by rules about how it disposes of money various interim governments, the first from the sale of Iraqi oil. of which was put in place by the occupying forces (2003-2005) and also The other members of the occupation governed in their interests rather than coalition also profit from the new Iraqi 24 WEED Conference Documentation

financial system: NEXI, the Japanese of directors of JP Morgan Chase also export credit institution, has also made includes Lee R. Raymond, executive 500 million US dollars in guarantees chairman of the Exxon Mobil Corpo- available, the Italian SACE added ration. JP Morgan Chase certainly has 300 million US dollars. According to experience in the Middle East. For 30 Daniel Zelikow, a leading director of years, the bank has handled all trans- J.P. Morgan Chase, the export credit actions concerning oil and natural gas institutions of thirteen European states exports from Qatar through the natio- have also provided money. nal bank and Qatar was made one of the most prosperous countries of the The appearance of JP Morgan in Iraq region which supported the consolida- has created the preconditions for the tion of the monarchy. whole of the Iraqi bank system to be taken over by foreign banks. The Iraqi The history of JP Morgan Chase re- banks - if they wanted to stop a foreign aches back to the time when slaves take-over - had to compete with these were owned in North America. A study foreign banks and their numerous af- of Californian insurance institutions filiates with almost unlimited capital reports that the previous Chase Com- and credit possibilities. Local banks pany which now belongs to JP Mor- that were not bankrupt had to come gan Chase offered slave owners life to terms with the foreign banks in or- insurances for their slaves. According der to continue to exist. The newly to the study, when a slave died, Chase created “free market” is anything but paid a certain sum to the slave owner “free”. Rania Masri of the Institute for for the loss. The bank has never paid Southern Studies (Corporation Watch) reparations and Charlotte Gilbert Biro, criticized Bremer’s decree no. 39, “are spokeswoman for JP Morgan Chase these laws to help the Iraqis rebuild said: “We do not see that there is a ge- their country for themselves or are they nuine obligation on the part of the bank laws to open Iraq up to foreign cor- (for this).” porations so that they can profit from Iraqi raw materials?”. “This stinks of The Nazis in the 2nd World War were colonialism and has nothing to do with also happily supported by the Chase reconstruction.” National Bank as well as JP Morgan helped the Third Reich to confiscate JP Morgan Chase is not unknown to bank accounts of Jewish customers. the architects of the occupation in Iraq. After the war the deposits were retai- The bank supported Bush and Cheney ned. A US Finance Department report in their election campaign with a dona- of 1945 on USA banking transactions tion of 158,000 US dollars. In addition, during the war states: “the services it has close contacts to the corporati- performed by the Chase branch office ons which have walked off with billi- in Paris (....) for the Germans (...) were on dollar Iraqi contracts. For example, unjustified” and obviously “arose from Riley P. Bechtel, is on the bank’s board a desire to extend its influence”. of directors, president and executive chairman of the Bechtel Corporation However, JP Morgan and Chase’s dis- which has received contracts of more reputable assistance to racist govern- than 2 billion US dollars. The board ments was not only confined to the Enforced Market Opening by War: Foreign Businesses and Banks in Iraq 25

USA and Europe. The company is still for hours. The IMF is directly involved tangled up in a lawsuit because it fi- in this even though the government has nanced the build up of the police and not explained this to the population. To security apparatus of the apartheid re- secure the new IMF loan until 2007, gime of South Africa although the Uni- even against the opposition of the oil ted Nations were already pressing for minister in office at that time, the Iraqi an embargo against the racist regime government had to implement a “key (in 1964). reform” demanded by the international financial donors: the subsidies on pe- The engagement of JP Morgan Chase trol and gas prices had to be drastically in Iraq is anything but a signal for reduced. Finally, prices increased fi- the beneficial new start of the coun- vefold one day after the parliamentary try. Clearly, the money for Iraqi re- elections on December 15th, 2005. construction is being used to implement an economic policy created by Karin Leukefeld the occupation authority. The radical changes to the financial system were consciously not left to a democratical- ly elected Iraqi government who could decide on future national economic reforms. “If you really want to control an economic system, then you invade the country and put yourself in place before (the country) has a representative government”, says bank expert Nomi Prins. Up to now, almost 200 billion US dollars have been spent in different areas, allegedly to liberate and rebuild Iraq. “However, a functioning democratic Iraqi government was on no account involved.”

The missing information concerning the economic reorganization leaves the population to guess rather than know to what extent their country is being plundered. They notice that something is going tremendously wrong because food prices are increasing nearly every day. Primarily the price increases for petrol and gas has made the people suspicious. “How can it be that not only is petrol difﬁcult to obtain in Iraq when the country is swimming on oil, but prices just keep going up”, car dri- vers ask who have to repeatedly wait at the petrol stations in the Iraqi capital 26 WEED Conference Documentation

1.5 Financial Markets Liberalisation and Bank Privatisation in Ko- rea since the Asian Economic Crisis

Market reforms in the finance sector claim that it was the neo-liberal re- and the sale of the Korean banks to forms which contributed to the reco- foreign investors also result from the very in Korea. We, on the other hand, structural adjustments carried out to- maintain the thesis that the recovery gether with the IMF since the financial was a result of state intervention. crisis of 1997/98. In this brief text we would like to deal with the myths and On the outbreak of the crisis at the the consequences of neo-liberal finan- end of 1997, the Korean government cial market reforms with the example initially announced a guarantee for of Korea. In contrast to the widespread all savings deposits to prevent a bank notion that neo-liberal reforms are panic. Although the governments of connected to a “retreat of the state”, all East Asian countries affected by the reforms in Korea involved massive the crisis announced similar guaran- regulatory and financial intervention tees, it was only in Korea that deposit by the state in the interests of inves- holders trusted the government. A run tors, as we will show in the first part on the banks occurred in Indonesia of the text. In the second part of this and Thailand despite the guarantees, article we will demonstrate that neo-li- because savers wanted to exchange beral reforms and privatisation do not their local currency deposits into dol- reduce “crony capitalism”. Instead, the lars. In Korea, the deposit holders not take-overs of Korean banks by foreign only trusted the deposit guarantees, but investors merely internationalise nepo- many Koreans even converted their tism. In the third part of the text, we personal foreign currency and gold re- show some problems which arise from serves into the weak national currency. an extensive take-over of the finance Thus, many Koreans sacrificed their sector by foreign investors and the re- personal financial security in favour of sulting “market orientation”. the national foreign currency reserves. On the one hand, this behaviour can 1. The First Phase: Liberalisation be explained by the strong emotional of the Financial Markets, Nationali- nationalism in Korea, and also by the zation of Debts confidence in the government’s ability to overcome the crisis. The reform of the finance sector in Korea since 1997 is often judged po- Additionally, the restructuring of the sitively because it enabled the stabili- banking system was not primarily the sation of the finance sector and opened result of market forces but occurred it up to foreign investors. We will deal through state initiative and active state with how far this can be seen as posi- intervention. The government closed tive in parts 2 and 3. At first, the ques- and merged financial institutions in a tion arises as to how the recovery of way that the number of the banks was the finance sector and the neo-liberal reduced from 33 to 19 and the number reforms are connected to each other. of other financial institutions decreased The IMF and neo-liberal economists from 142 to 114. Consequently, con- Financial Markets Liberalisation and Bank Privatisation in Korea 27 centration in the banking sector incre- 15% of the branch offices were closed ased. In 1997, the three largest banks and the profits increased by 183%. controlled 27% of all bank deposits - Unsurprisingly, after the state carried in the year 2000 it was already 54%. out the expensive and conflict-ridden Moreover, the government nationalized stabilisation and restructuring process, insolvent banks which it had classified foreign investors showed an interest in as viable. The government took care of the take-over of Korean banks. Thus, the debt and, in addition, invested mo- foreign investors did not contribute ney in the rationalisation of the banks. to overcoming the crisis, but, in the From 1997 to the present, the govern- final result, profitted from the reform ment has invested a total of $135 bil- measures. On the other hand, the ge- lion of tax money in reconstructing neral public, the dismissed employees and rationalizing the banks. This cor- and the Korean taxpayers, were burde- responds to about 32% of the Korean ned with the costs of the stabilisation GDP. If the revenues from privatisa- and reform measures. tions are subtracted, the result is a net cost to the Korean taxpayer of 22% of 2. The Second Phase: Bank Privati- the GDP. Nevertheless, further cash in- sation and Casino Capitalism jections into the financial system will also be necessary in the future, as will The first phase of the bank reforms, be seen in the second section. immediately after the outbreak of the crisis, was characterized by ad hoc Paradoxically, the aim of the nationa- rescue measures which led to the na- lisation of the banks was their re-pri- tionalisation of the banks. This phase, vatisation and the liberalisation of the however, was only a short intermezzo financial system. Under pressure from during which new institutional basic the IMF, the government committed conditions were created for the finan- itself to opening up the financial sys- cial market. The finance market reform tem to foreign investors and carried in Korea was a central component of this out more rapidly and more exten- the more thorough structural reforms, sively than even the IMF required. The which were directed towards the U.S. government used all means available model of shareholder capitalism. to increase the banks’ profitability for private investors. The government was A radical liberalisation and deregulati- even prepared to use force against bank on of the finance market was the most employees who were on strike in order drastic measure for this, whereby the to break the resistance of the labour banking sector, insulated till now, was unions to the rationalisation measures. to be opened to foreign investors. This Thus, some of the largest and most mi- triggered a flood of foreign capital into litant labour struggles in Korea since the Korean finance market. As a con- 1997 were in the banking sector. sequence, foreign investors became central players alongside the Korean The results are impressive from the government in the Korean banking government’s point of view. The num- sector. This was also the desired po- ber of employees in the surviving banks litical effect. The Korean government was reduced by 25% from 1997 to 2000, regarded foreign investors not only as 28 WEED Conference Documentation

an emergency solution in a crisis but April 1998 which for the ﬁrst time per- as long-term reform partners in the mitted the take-over of Korean banks belief they would assist Korean banks by foreign investors. Since then, three to become internationally competitive of seven remaining commercial banks ﬁnancial institutions by providing ad- with nation-wide operations were sold vanced know-how and management. to foreign investors: Newbridge Capi-

Share of foreign capital in commercial banks operating nation-wide (No- vember 2005)

Foreign investors share Kookmin Bank 85,8%

Shinhan holding 64,0% Merger with the Chohung Bank

Hana Bank 76,6% Converted into a ﬁnance holding

Woori holding 78% of the shares still held by the sta- 11,7% te. Re-privatisation planned by March 2008 at the latest

SCB First Bank 100% Shares no longer traded on the stock exchange

Korea Exchange Bank 74,3% Lone Star (50.53%), Commerzbank (14.61%)

Korea Citibank 100% Shares no longer traded on the stock exchange

The movement of foreign investors into tal took over the Korea First Bank, the the Korean banking sector was carried eighth largest bank in 1999. In 2000, out in two ways: by shareholder par- an investment consortium under the ticipation in the banks or by complete leadership of Carlyle and JP Morgan take-over of the banks. Today, foreign took over the Koram bank, the seventh investors hold more than 66% of the largest bank. Lone Star took over the bank shares in Korea compared with Korea Exchange Bank, the fifth largest 18% in the year 1998. Worldwide, Ko- bank, in 2003. These three banks, now rea ranks third behind Hungary (89%) controlled by foreign investors, have a and Mexico (83%) in the foreign ow- market share of about 15%. nership of bank shares. The market share of foreign capital in the Korean At first, the growing significance of banking sector, including the regional foreign investors in the Korean ban- and specialist banks, rose from 8.5% in king sector was welcomed by all sides the year 1997 to 30% in the year 2004. - the Korean government, the involved The sale of Korean banks to foreign in- banks, the general public as well as vestors contributed significantly to this the international financial markets - as change. A new bank law was passed in a positive and hopeful sign for market- Financial Markets Liberalisation and Bank Privatisation in Korea 29 conform reforms. This was primarily Third Phase: The Invasion of the Glo- seen as an “impressive” interim balan- bal Player and International Crony Ca- ce for the Korean government. Toge- pitalism. ther with the IMF, the government saw “regaining the confidence of the inter- 1st case: Korea First Bank, “the national financial markets” as an im- goose that lays golden eggs” portant indicator of the government’s success. However, faith in foreign in- In the year 2000, the Korean govern- vestors as a helper and modernizer of ment sold her shares in the Korea First the Korean banking system proved to Bank to Newbridge Capital for 500 bil- be an illusion. lion Won (approx. U.S. $ 500 million). At the beginning of 2005, Newbridge The first doubts arose when it was dis- Capital resold her share in the Korea closed that the foreign investors which First Bank to the Standard Chartered bought up Korean banks were all Pri- Bank for 1.650 trillion. Won and thus vate Equity Funds (PEF), which reali- realized a profit of 1.15 trillion (ap- zed astronomical profits by the resale prox. U.S. $ 1.2 billion). However, a of their share holdings without paying state cash injection of 18 trillion Won any taxes. The fund managers justified (approx. U.S. $ 18 billion) flowed into the high profits as a well earned reward the Korea First Bank from January for making a high risk investment. But 2000 on, that is just before the take- this argument lost all credibility when over by Newbridge Capital, up until the dubious conditions under which the resale to the Standard Chartered the Korean government sold the banks Bank at the beginning of 2005. The to the funds came to light. The PEFs Korea First Bank, now called the Stan- practically undertook no financial risks dard Chartered First Bank Korea is to with the take-overs. On the contra- receive a further state financial subsidy ry, the negotiated contract conditions totalling 860 billion Won (approx. U.S. promised the PEFs risk-free and secu- $ 860 million) in the period from 2006 re profits. This was because the PEFs to 2008 as a result of the put back op- only had to take on healthy loans on tion. It is thus not surprising that next purchase. A “put back option” spared to Hong Kong, Korea has become the the investors from any risks which most important and most profitable lo- might occur after the purchase. Thus, cation for Standard Chartered Bank. the Korean government was liable for any bad loans discovered after the 2nd Case: The take-over of the Ko- take-over and not the investors. Three rea Exchange Bank by Lone Star: examples show that these contracts ex- “Project Knight” cessively favoured the investors and granted them gigantic profits, whereas Lone Star bought a 51% share in the they were extremely expensive for the Korea Exchange Bank for 1.3 trilli- Korean taxpayer and burdened the ge- on Won (approx. U.S. $ 1.3 billion) neral public with almost all the risks. in September 2003. A bank take-over Additionally, in some cases, the con- by an investment fund such as Lone tracts were made possible by corrupti- Star is not possible under Korean ban- on and crony capitalism. king law except in insolvency cases. 30 WEED Conference Documentation

To make the deal possible, Lone Star transferred by Citigroup to Citigroup designed the „Project Knight” plan. branch offices abroad or to other Citi- “Project Knight” describes the concre- group affiliates. From November 2004 te procedure for avoiding banking law until the end of June 2005, a total of restrictions. This involves the skilful 1.83 trillion Won (approx. U.S. $ 1.8 falsification and manipulation of the billion) flowed from Korea into Ci- Korea Exchange Bank balance books. tigroup branch offices abroad, from Here, the bank was suddenly trans- which Citigroup had raised the short- formed into an insolvency case with term loans to finance the take-over of a capital reserves quota of 10%. After the Koram Bank for a total amount of several meetings between Lone Star 3.1 trillion Won (U.S. $ 2.7 billion). and the relevant Korean officials from Even the Citi-Financial in Korea, at the Ministry of Finance and the bank that time an insolvent Citigroup affili- supervisory authority, the project was ate, obtained generous loans from the realized according to plan. The deal Koram Bank at an extremely favourab- was completed successfully. Lone Star le interest rate. In view of the Citibank can count on a profit of at least U.S. $ 2 credit allocation practice, the contri- billion from its share in the Korea Ex- bution of foreign banks towards finan- change Bank in the forthcoming resale cing investment in Korea is extremely of the bank. questionable.

3rd case: Citibank: How a Global 4. Results and Outlook for the Player Expands its Business and Future Makes a Profit. The myth of a neo-liberal liberalisati- Citigroup bought 98% of the shares of on and privatisation ideology can be the Koram Bank in April 2004. Carly- refuted on the basis of the Korea case le, the previous main shareholder with study. In contrast to the assertions of a 37% holding, made a profit of U.S. the IMF, the opening up of the Kore- $ 676 million from this transaction an financial markets did not lead to a alone. Considering the many dividend stabilisation of the crisis situation be- payments of the previous years, the in- cause of a foreign capital influx. It was vestors in Carlyle can enjoy a return of the state which stabilized the financial 250% on their investments. system with guarantees and tax money. The foreign investors only returned The example of Citibank also shows after this stabilisation, and even then how business practices can change had their investments secured by state when Korean banks are tied into mul- guarantees. The virtually risk-free in- tinational bank companies. After the vestments ensured gigantic profits for take-over by Citigroup, for example, the foreign investment funds, and they the credit allocation system was fun- were not even taxed. Korean “crony damentally changed. Business loans, capitalism” was not reduced through particularly loans to medium-sized and the influence of foreign investors; in- small enterprises, to which the bank stead the national crony capitalism was had previously given priority, decli- simply internationalized. Finally, as a ned massively. Instead, the money was result of the transition to shareholder Financial Markets Liberalisation and Bank Privatisation in Korea 31 capitalism, the banks appear to incre- Crisis”, in: Cheong, Young-Rok, Yang, asingly strongly orientate themselves Doo Yong, and Wang, Tongsan (ed.), towards short-term profit interests for the investors and to neglect their role Financial Market Opening in China as credit providers for industry. The and Korea, KIEP, Seoul. banks in Korea which are dominated by foreign investors and multinational Cheong, Young-Rok, Yang, Doo Yong, companies are only the forerunners and Wang, Tongsan (ed.), 2003, Finan- and the remaining Korean banks will cial Market Opening in China and Ko- join them, one after the other. rea, KIEP, Seoul.

Hyekyung Cho Coe, David T., and Kim, Se-Jik (ed.), and Thomas Kalinowski 2002, Korean Crisis and Recovery, IMF and KIEP. Literature Emery, Robert F., 2001, Korean Eco- Bank for International Settlement 2001, nomic Reform. Before and since the “The banking industry in the emerging 1997 crisis, Ashgate. market economies: competition, consolidation and systemic stability”, BIS IMF, 2000, “International Capital Mar- Papers No 4, Basel. ket: Developments, prospects, and Key Policy Issues”, Sept. 2000. Bank of Korea, Effect of foreign capital entry on the domestic banking sec- IMF, 2000, “Republic of Korea: Eco- tor, Aug.8 nomic and Policy Developments”, IMF Staff Country Report No. 00/11, Bank of Korea, 2005, Changes in the February. revenue structure of Korean Banks and their implications, Dec. 14. (in kore- IMF 2002, “Country Report 2002, Re- an) public of Korea selected Issues”, Was- hington D.C. Bayaktar, Nihal, and Wang, Yan, 2004, “Foreign Bank Entry, Performance of IMF 2003, “Republic of Korea: 2002 Domestic Banks, and the Sequence of Article IV Consultation-Staff Report”, Financial Liberalization”, WB Wor- Washington D.C. king Paper No. 3416. IMF, 2005, “Republic of Korea: 2004 Chang, Ha Joon, Palma, Gabriel, and Article IV Consultation”— Staff Re- Whittaker, Hugh D. (ed), 2001, Finan- port. cial Liberalization and the Asian Cri- sis, Palgrave. Jeong, Seung Il, 2005, “Innovation-fri- endly Corporate Governance Structu- Cheong, Young-Rok, and Yang, Doo re and Financial System – Its Korean Yong, 2003, “Foreign Exchange Mar- Form”, STEPI Policy Research Wor- ket Liberalization since the Korean king Paper (in korean). 32 WEED Conference Documentation

Kalinowski, Thomas 2005, “Der Inter- nationale Währungsfonds in Südkorea : Strukturanpassung und Reformen seit der Asienkrise”, Institut für Asienkun- de, Hamburg.

Lim, Kyung Mook, 2005, “An Analysis on Changes of Equipment Investment Patterns of Korean Firms Using Micro and Macro Data”, in: Korea Develop- mental Review, 2/2005 (in korean).

Sharma, Shalendra D., 2004, “Govern- ment intervention or market liberalization: the Korean ﬁnancial crisis as a case of market failure”, in: Progress in Development Studies, 4/1.

Woo, Jung-en, 1991, Woo Race to the Swift. State and Finance in Korean In- dustrialization, Columbia University Press. Global Players Made in China 33

1.6 Global Players Made in China: China’s Changing Development Strategy

When the “11th Five-year Plan for the population. However, the per capi- National Economic and Social Deve- ta income averaged over the whole po- lopment” was discussed and adopted pulation at U.S. $ 1.090 (real; 2003) is, at the fifth Plenary Conference of the from a global perspective, still compa- 16th Central Committee of the Com- rable to income levels in many develo- munist Party of China (CPC) in No- ping countries. Of course such average vember 2005, there was a novelty: for values have to be analysed more exact- the first time in fifty years the plan was ly. The significance of such data has not called jihua (plan) but changed to to be put into perspective considering guihua (programme). What is to be ex- the sheer size of the total population. pected from this programme direction More important is the assessment of of the PR China over the next five ye- regional disparities within the country: ars, since actual developments appear not only does China have 22 per cent to be permanently overtaking the new of the world population; but two thirds plans? of the population live in the coastal and central regions. A change in the social The Chinese economic success story structure of Chinese society has taken can be well comprehended by growth place over the last few years with the rates of an average of 9.4 per cent in formation of a mainly urban middle recent years (1978 - 2004). On announ- class. This class follows the concept of cing the figures for 2005 (GDP growth striving for “a little bit of prosperity” rate 9.8 per cent), the Gross National (Xiao Kang), with a definite increase Product of the previous year was re- in available private household income, vised upward by an additional 16.8 per and accompanied by the adoption of cent to 15.99 billion RMB (1.93 billion Western consumption norms and life- US $), since newly raised data for the styles. Not only the gap between city service sector in 2004 of 2.3 billion was and countryside, but more significant- included in the calculation. This Chi- ly, the recent report of a growing su- nese boom, which has now lasted for per-rich class of about 250,000(!) Chi- more than a quarter of a century is ge- nese Dollar millionaires illustrates the nerally characterised as being the result growing income differences among the of the so-called “reform and openness Chinese population. But these milli- policy” which has been articulated in onaires only constitute the smallest various ways: at the end of the 1970s/ fraction of the population as a whole. beginning of the 1980s it was the inter- The majority of the Chinese popula- action of a general economic reactiva- tion lives on a low to lowest income tion of agriculture, businesses and the outside the prospering urban areas: economic administration system. In ad- although only ten per cent of Chinese dition, the technological modernisation land is economically suitable for agri- of industry was to profit in the long run culture, up to 65 per cent of the popula- from the opening up to foreign capital. tion still depends directly or indirectly The objective was a general increase in on the agricultural sector. Migration the standard of living for all sectors of into cities and internal migration are 34 WEED Conference Documentation

problems which confront China with urbanisation and the general regional great challenges. One of the objectives coordination of the Chinese national formulated in the 11th Five-year Plan economy remain on the agenda. Addi- is to counter such regional disparity tionally, greater focus is to be placed

Figure: The 11th Five-Year-Plan: Most important points

Source: Author`s own compilation based on: http://news.xinhuanet.com/misc/2005- 10/07/content_3590217.htm> (accessed on november, 18th 2005).

trends within the country. As shown in on how further positive developments the ﬁgure, six points are judged to be can be achieved in coordinating the especially relevant to ensuring a “har- use of resources. The dimensions are monious social structure.” also immense in the area of consumption: the global signiﬁcance is revealed The policy is linked to the ninth and in the relationship to worldwide ener- tenth Five Year Plan. In relation to gy consumption. The west, particularly rural urbanisation, the keywords of the US and Europe, are indeed still the the “three agricultural problems” are main consumers, however there is a improvement the situation of the far- growing Chinese demand for the most mers, particularly improving living varied resources due to China’s expan- standards in rural areas, as well as far- ding economic growth and the exten- ming productivity in the rural small in- sion of its production capacities, and dustry. Thus, the complex question of this, by the way, is carried out with sig- Global Players Made in China 35

nificant participation of foreign manuf- For a long time, China’s integration acturing plants in China. For instance, into the world economy was seen in China consumed twelve per cent of pri- the framework of opening up to foreign mary energy resources, 15 per cent of capital and the control and the utilisa- freshwater, 25 per cent of aluminium tion of the resulting profits, whether it oxides, 28 per cent of rolled steel as is capital or know-how. In retrospect, well as 50 per cent of cement in 2004. the initial coordination of foreign en- The 11th five-year plan is now striving gagement, for example by clearly defi- for a so-called “green Gross National ned joint venture requirements and the Product”, and thus turning to a sustai- assignment of regional locations - at nable development concept: alongside first only a few (five) economic spe- the target of doubling the Gross Natio- cial zones and 14 coastal cities were nal Product in the period 2000 to 2010, selected in the 1980s for opening up the energy consumption per unit of to foreign investors, is in particularly Gross National Product (measured in glaring contrast to today’s practice. terms of the level at the end of the tenth With China joining the World Trade five-year plan) will be reduced by 20 Organisation (WTO) on December per cent. China’s worldwide share of 11th, 2001, China even appears to have the GDP was four per cent in the year supposedly unconditionally agreed to 2004.

Double GDP per capita from 2000-2010 through structural reforms GDP per capita and improvements in efficiency. Reduce energy consumption per unit GDP by 20% from the level at Energy use efficiency the end of the 10th Five-Year-Plan by substantially improving energy use efficiency. Corporate Competi- Nurture excellent companies that are relatively competitive in the glo- tiveness bal market based on their own brands and intellectual property. Further promote the ongoing transition to a market economy and ope- Reform and Opening ning-up policy. Seek to realize an approximate balance in the balance up of payments. Popularize nine-year compulsory education. Maintain the increase in employment opportunities in urban areas and realize a relatively well- Social Policy established social security system, thereby continuing to reduce the size of the poor population. Raise the income level and improve the quality of life on all fronts for both urban and rural dwellers, and stabilize prices. Substantially im- Quality of Life prove the situation with respect to housing, transportation, education, culture, hygiene and the environment. Seek new development in creating democratic laws and regulations Democracy and the as well as in building a moral and spiritual culture. Seek to take new rule of Law steps toward the construction of a harmonised society by improving public safety and safety at the working place.

Table: Major Goals of The 11th Five Year-plan Source: Kwan, Chi Hung (2005): The 11th Five-Year Plan as a Steppingstone to Realizing an “All-Round Well-Off Society”, in: RIETI, 24 October 2005. Online. Available http://www.rieti. go.jp/en/china/05102401.htm 18 November 2005). 36 WEED Conference Documentation

gradually opening up key industries China is at the moment holding about such as the banking sector to foreign three quarters of its foreign currency re- capital. The question then arises as to serves in Dollars. After their unofficial whether the desired global integration circulation, possible plans of the State was not purchased at the price of loss Administration for Foreign Exchange of independence. But China at present (Safe) to carry out a further shift to the holds all the aces; with the continuing disadvantage of the Dollar in the next boom, China has been able to stabilise months have led to nervous reactions of its economic power and to expand into reassurance, primarily in the American various fields: the People’s Republic financial press. These reactions imply is the top address for foreign investors that although such measures would at for direct investment, and ranks in first best have only marginal consequences place (Luxembourg is excluded in this for the U.S. economy, the danger would case) with more than U.S. $ 155 bil- lie in other countries following the ex- lion for 2004 alone (contracted; more ample of China, which, they hope, is than U.S. $ 60 billion realised). Thus, a purely hypothetical scenario. Interes- in terms of the attraction and scale of tingly enough, for a long time, Chinese direct investment, China is very diffe- foreign trade experts and scientists in rent in comparison to other countries; particular have already discussed the particularly compared to other develo- problem of the currency reserves in ping countries. Considering the gene- relation to the level of direct invest- ral dependence on foreign countries, ment and the trade balance surplus to- this is surely an indicator which should wards the US. A balanced account of not be underestimated. payments is a current objective of the reform and openness policy. In 2005, On the macro level, the People’s Repu- China’s external trade volume increa- blic otherwise extends its global scope: sed by 23.2 per cent in total compared worldwide, China’s currency reserves to the previous year, and reached the lie in second place behind Japan. It value of U.S. $ 1.400 billion. Exports recorded an increase of 34 per cent increased by 28.4 per cent to U.S. $ in 2005 and amounts to U.S. $ 819.9 762 Billion, and imports are estimated billion, a record value which would to be U.S. $ 660.12 billion. enable China to settle all its foreign debts at one blow and in addition be At the micro-economic level, the aim able to finance its imports for another is to promote competitive businesses ten months. It is assumed that China’s and the creation of “global players of currency reserves will even overtake Chinese Origin”. These are encoura- those of Japan during 2006. After years ged to establish brands of their own of refusing to do so, China devalued and especially to play a pioneering role the Chinese Yuan (RMB) in relation to in IT and the consumer goods industry. the U.S. Dollar in July 2005 by a rather Lenovo/Legend, Haier or TCL can be symbolic amount and at the same time named as well-known businesses. The- the structure of the currencies held by se new competitors have already been China was changed in favour of grea- watched closely by foreign businesses ter proportions of Euros and the British operating in China over the last few Pound Sterling. Estimates assume that years, but this development has incre- Global Players Made in China 37 asingly been noticed (in the West) in the People’s Republic China over the 2004-2005, for example, when Lenovo next five years. As the data indicates, bought IBM’s PC division or when the the Chinese development strategy has Chinese CNOOC made a much dis- to be principally seen as a re-capitali- cussed takeover bid for Unocal (which sation strategy. Apart from the discus- failed because of political resistance sion of all the indicators to increasing by U.S. Congress). All these develop- economic power, the interaction bet- ments can be seen as strategically lin- ween the structural character of this in- ked to the policy of the last ten years tegration into the world economy and of structural adjustment of industry. In- maintaining the long-term economic ternally, this meant the restructuring of independence of the local players (e.g. state-owned businesses; in the industry, in key national economic sectors such the expansion of the service sector, as as the banking sector) are of central well as the development of marketable importance. Notably, planning figures products in the sectors of information are avoided in the explicit program- and communications technologies or matic wording of the text of the 11th high-tech consumer goods. Additio- five-year plan. A mixture of sustai- nally, profound changes are likely to nable development and technological occur due to new/changed ownership modernisation has emerged, with a structures (i.e. ranging from private strong emphasis on understanding that enterprises to WFOE -Wholly Foreign the large scale problems lead to con- Owned Enterprises). Even businesses sequences for the internal development which have been protected until now, in China as well as globally. The grea- such as the banking sector, will be af- test challenge for China is and remains fected, whereby the WTO agreements balancing the adjustment process and will gradually allow foreign capital. safeguarding the living conditions of the Chinese population. At the same time, China tries to control the investment flows regionally in Simona Thomas order to counteract the regional imbalance between the coasts/central areas Literature and the industrially less developed border regions. The main regions are Kwan, Chi Hung (2005): “The 11th the (North-) West and the industrial Five-Year Plan as a Stepping Stone North-East of China which has been to Realizing an ‘All-Round Well-Off affected by the restructuring of sta- Society’,” in RIETI, 24 October 2005. te-owned enterprises. As a part of the Online. Available HTTP: are being made to guide foreign invest- (accessed 18 November 2005). ments towards these regions. Another trend is to promote the growth of re- Lam, Willy (2005): “China’s 11th search and development centres which Five-Year Plan: A roadmap for China’s will support businesses. ‘harmonious society?’,” in Asiamedia, 25 October 2005, Online. Available At first, the question arose concer- HTTP: (ac- 38 WEED Conference Documentation

cessed 18 November 2005). US-China Business Council (2005): “Foreign Investment in China “, People’s Daily (9 December 2004): in US-China Business Council, “New concept embedded in China’s 14 March 2005, online. Available next ﬁve-year vision,” in People’s HTTP: (accessed 29 November 2005). lish.peopledaily.com.cn/200412/09/ print20041209_166775.html> (ac- Xinhua News Agency (2 January 2006): cessed 23 November 2005). “China’s GDP Up 9.8% in 2005: Vice Minister,” in China Internet Informa- People’s Daily (28 September 2005): tion Center, 2 January 2006. Online. “10 Key words depicting China in Available HTTP: Daily Online, 28 September 2005. (accessed 17 February 2006). Online. Available HTTP: (ac- 2006): “Rapid Growth of Forex Re- cessed 23 November 2005). serves Tests China’s Ability to Handle Wealth,” in China View. Online. Avai- People’s Daily (10 October 2005): lable HTTP: (accessed 17 February China Center for Economic Research 2006). (CCER) at Peking University, 10 Oc- tober 2005. Online. Available HTTP: (accessed 18 November 2005).

People’s Daily (10 November 2005): “New thoughts, ideas and moves of ‘11th Five-Year-Plan’ viewed from 11 key words (1),” in People’s Daily Online, 10 Novem- ber 2005. Online. Available HTTP: (accessed 18 November 2005).

Wirtschaftswoche (2005): Sonderheft China: Partner oder Rivale?, Son- derausgabe (Special edition, China: Partner or Rival?, special issue) Wirt- schaftswoche, No.1, 27 October 2005. Resolution adopted at the 11th Annual Regional Labour Symposium 39

1.7 Resolution Adopted at the 11th Annual Regional Labour Sympo- sium on “More Trade – Less Jobs”

We, the representatives of the trade trade unions; union fraternity from Southern Afri- ca (from Angola, Botswana, Lesotho, FURTHER CONCERNED about the Mauritius, Mozambique, Namibia, unregulated globalization that is lea- South Africa, Swaziland, Tanzania, ding to increasing inequalities, the ero- Zambia, and Zimbabwe) under the sion of workers’ rights, jobless growth, auspices of the Southern African Trade increasing numbers of “working poor” Union Coordination Council (SA- particularly in the informal economy, TUCC), joined by representatives of privatizations, reduced role of the sta- ICFTU-AFRO, ITGLWF-Africa, UNI- te, devaluations; removal of subsidies, Africa, IUF-Africa and SEATINI; cost sharing in health and education; and deregulation of labour markets; CONCERNED about the levels of poverty, unemployment and social ex- AWARE that the current phase of glo- clusion in Africa; the lack of access balization is anti-worker and anti-poor, to education and training, health, pro- particularly against those in Southern neness to diseases and mainly HIV/ Africa; AIDS, tuberculosis, malaria and other related infectious diseases; protracted ALSO AWARE that the current trade conﬂicts in some countries; the risk of regime works to the disadvantage of not attaining the Millennium Develop- the poor developing countries, parti- ment Goals (MDGs); the lack of social cularly those in Southern Africa, and protection which affects particularly economic liberalization has not been women, youth, persons with disabi- accompanied by broadly shared econo- lities, the aged and children, and the mic growth and social development; exposure to poor occupational health and safety conditions of the majority REAFFIRM our commitment to the of workers, particularly in the informal Philadelphia Declaration, in particular, economy; that: i) Labour is not a commodity; ii) Freedom of expression and of associa- ALSO CONCERNED that massive tion is essential to sustained progress; unemployment has been effected due iii) Poverty anywhere constitutes a to economic liberalization, retrench- danger to prosperity everywhere; and ments, and company closures in a iv) The war against want requires to number of countries has led to high de- be carried on with unrelenting vigour pendency ratios; within each nation;

AND that the trade union movement is SUPPORT the recommendations of the under attack from governments, multi- Report of the World Commission on national corporations, and from insti- the Social Dimension of Globalization, tutions promoting a neo-liberal agen- A Fair Globalization: Creating Oppor- da, leading to informalization of our tunities for All, and the ILO’s Decent economies and falling membership of Work Agenda and its role in poverty 40 WEED Conference Documentation

alleviation and the global economy ning, forced overtime – are prevalent; through the four strategic objectives FURTHER NOTE with concern that – fundamental principles and rights at NAMA negotiations have the potential work; employment; social protection; to i) negatively affect production and and social dialogue; employment in a number of non-agricultural sectors; ii) lead to loss of jobs; REKINDLE our commitment in the iii) decrease policy space for govern- pursuit of the principles and objectives ments; iv) lead to loss of government of the African Charter for Human and revenues from tariffs; and v) increased Peoples Rights; preference erosion;

COGNISANT of the fact that trade AWARE that a poor person usually union action must not be exclusively has only their physical and intellectual aimed at the workers in companies, assets to offer and hence employment institutions and sectors, but also at im- and decent work are the best way of proving the position of the informal- fighting poverty; sector workers, the unemployed, poor migrants, women, youths, the disabled, ALSO AWARE that Africa’s ability to older people without social protection, fight poverty, unemployment and ine- the excluded in general; qualities is being undermined by the unfair and unjust trade patterns; NOTE with concern that increased trade liberalization including increased DISMAYED by certain WTO rules that exports, a number of countries are ex- pose threats to public services posed periencing food insecurity, de-indus- by the General Agreement on Trade tralization, falling employment levels in Services (GATS) and reaffirms that and low export revenues; vital public services – notably education, health, water, public transport and ALSO NOTE that preferential trade ac- other essential public utilities – must cess by developing African countries is be excluded from negotiations on trade being threatened by the agreement on liberalization under its auspices, with agriculture and NAMA; governments retaining the right to regulate and protect in the public inte- FURTHER NOTE that the deteriora- rest; ting working conditions, casualization of employment, and pressure on wages PARTICULARLY AMAZED by the in a number of countries as a result of fact that life saving drugs (for diseases laxity in enforcement of international like HIV/AIDS, TB and malaria) can- labour standards and national legislati- not be accessed by the poor due to on, among other things; developed countries’ insistence the need to safeguard « intellectual pro- ALSO NOTE that a number of coun- perty rights » in the implementation of tries have put in place export processing TRIPS; zones in which poor working conditions – low wages, long working hours, DO HEREBY RESOLVE as follows: denial of workers’ right to freedom of association and collective bargai- Resolution adopted at the 11th Annual Regional Labour Symposium 41

1) African countries should put the of agricultural workers, and enhance creation of jobs and decent work at the food security for all; center of their trade policies and development; 8) On services, in order to safeguard vital public services from further libe- 2) The Hong Kong Agenda should re- ralization and privatization, public ser- afﬁrm the unfulﬁlled promises of the vices should be excluded from further Doha Development Round that con- negotiations in Hong Kong and bey- tains provisions on development and ond; the creation of decent work for all; 9) We call on the 6th Ministerial Con- 3) Call on our governments to avo- ference of the WTO to take action to id a race to the bottom, whereby they propose a joint Ministries of Labour are compelled to compete against one and Trade Ministers’ Meeting, with another, and in the process lead to lo- full participation of the trade unions, wering of labour standards, in order to employers and the ILO; attract foreign direct investments; 10) We call for more transparency and 4) Call on our governments within the democracy in the international trading SADC framework to consult and in- agreements, including decision-ma- volve trade unions in trade negotiati- king processes at the WTO, and acces- ons and particularly in the delegations sibility of the WTO to trade unions and to the forthcoming WTO Ministerial representatives of other democratic or- Conference in Hong Kong; ganizations.

5) Developing countries should not Finally, we would like to thank the be pressured into binding their tariffs FES, SATUCC and LaRRI for the ﬁ- as well as lower their tariffs (under nancial and technical support provided NAMA). In this way our countries to the Symposium. would be able to use industrial policies for development given the policy adopted in Windhoek (Namibia), space, and would not lose trade reve- December 7th 2005. nues from tariffs;

6) With regard to Mode IV (temporary cross border movement of natural persons), support migration that are order- ly, incorporate migrant workers’ rights, encourage full integration and prevent all forms of discrimination;

7) On agriculture, we call on developed countries to eliminate all forms of tariff and non-tariff barriers to products from the South, and that the Agreement on Agriculture should ensure the respect 42 WEED Conference Documentation

II Financial Markets: Risks and Effects of Liberalization

2.1 The Consolidation of Global Banking Industry

The global banking industry has und- mania in the global banking industry ergone rapid consolidation and restruc- has intensified. In the fierce competiti- turing since the 1990s. Mergers and ve environment created by the mergers acquisitions (M&As), privatization of and acquisitions, big banks are swal- state-owned banks, removal of rest- lowing each other to dominate global rictions on the entry of foreign banks banking industry. Thanks to M&As, and deregulation of banking industry Citigroup became the largest bank in are part of this process. In order to en- the world with assets of $1.09 trillion hance financial competition, regulatory in 2002. Despite suffering huge los- measures such as interest rate ceilings ses for the past several years, Japane- and credit controls have been remo- se banks have again bounced back to ved. Apart from domestic pressures to top global positions that they enjoy- liberalize the banking industry, several ed in the 1980s, largely on account regional and international agreements of M&As. Mizuho Group of Japan (a have also given impetus to market-dri- holding company formed by merger ven consolidation of the global ban- of three large banks — Fuji, Dai-Ichi king industry. For instance, removal of Kangyo and Industrial Bank of Japan) the restrictions on the entry of foreign holds the second position in the world banks is an integral component of the with assets of $1.08 trillion in 2002. WTO and NAFTA as well as a precon- dition of membership of the OECD and The impact of allowing foreign banks EU. In addition, several banking crises to acquire stakes in the domestic ban- during the 1990s have also hastened the king market has been more dramatic process. In Central and Eastern Europe in CEE region where most domestic (CEE) and Latin America, the domestic banks have already become or are li- banking system has been rapidly trans- kely to become subsidiaries of large formed largely due to privatization of foreign banks. In the wake of massive state-owned banks. According to the privatization programs in these coun- proponents of financial liberalization, tries, foreign banks have rapidly taken increased consolidation and competi- control over the domestic banking in- tion in the banking industry improves dustry. In the nine CEE states, foreign the efficiency of domestic banks and bank holdings have risen from 20 per results in greater access to credit. The cent of assets in 1997 to over 60 per market driven consolidation of the glo- cent by the end of 2001. In the Baltic bal banking industry raises a number of states of Estonia, Latvia and Lithua- important policy issues, some of which nia, foreign banks (particularly from are discussed here. the Scandinavian countries) captured the domestic banking market within a As more and more developing countries short span of time. In Estonia, for in- are easing restrictions on the entry of stance, foreign-owned banks increased foreign banks, the cross border M&A their market share from 2.3 per cent in The Consolidation of Global Banking Industry 43

1997 to over 97 per cent in 2000. The within a few years, particularly after top three banks of Estonia — Hansa- the 1994 currency crisis. In Brazil, fo- pank, Uhipank and Optiva — are all reign banks controlled 70 of country’s foreign-owned. In Latvia, Poland and 181 banking institutions at the end of Slovak Republic, foreign-owned banks 2001. In Peru, Venezuela and Chile, accounted for more than 65 per cent of foreign banks have also acquired sub- total market shares in 2000 (see Table stantial stakes in the domestic banking 1.1). In terms of assets, over 90 per markets. cent of Czech Republic banking sector has come under the control of foreign In Asia, rapid consolidation of the ban- banks1. Out of a total of 41 banks in king industry has taken place in the Romania, 31 were majority or fully fo- aftermath of the Southeast Asian finan- reign-owned in 2001. cial crisis. In several crisis-hit Asian economies, bank mergers have been In Latin America, similar trends are carried out to make them financially vi- also visible. For instance, all three top able and large enough to compete with banks of Mexico (Bancomer, Serfin foreign banks in the domestic markets. and Banamex) have come under the In Malaysia, for instance, Danamodal, control of foreign banks through M&A a specialized institution was set up to deals. With the takeover of Bital by a facilitate consolidation in the banking transnational bank, HSBC, the total system. By urging banks to merge foreign ownership in Mexican ban- voluntarily, 54 financial institutions king industry has touched 90 per cent were merged into 10 ‘anchor’ banks of total banking assets. Since foreign in Malaysia in 1999. In South Korea, banks had no presence in the domestic Thailand and Indonesia, similar mer- markets in the 1990, such a rapid take- gers have taken place after injecting over of Mexican banking industry by large amounts of public funds in the foreign banks has been accomplished banking system. The other important

Tabel 1.1: Market shares of foreign Banks* in CEE countries (in percentage)

Country 1996 1997 1998 1999 2000 Estonia 2,6 2,3 90,2 89,8 97,4 Latvia k.A. k.A. k.A. k.A. 69,8 Poland 16,0 18,6 27,9 65,5 65,7 Slowakia 13,6 26,0 25,9 31,1 65,4 Hungary 58,0 55,4 59,4 53,9 61,9 Lithuania n.s. n.s. n.s. n.s. 59,9

*Banks that are in foreign possession of at least 50 percent n.s.= not speciﬁed Source: Bank Austria Kreditanstalt, Wirtschaftsabteilung

1 Colin Jones (2001): „Foreign Banks Move In”, The Banker, September 2001, p. 130 44 WEED Conference Documentation

consequence of the Southeast Asian fi- five banks in Estonia and Lithuania ac- nancial crisis has been changes in the count for more than 90 per cent of total ownership of banks in the region. In bank assets. In the Czech and Slovak almost every crisis-hit Asian country, Republics, the top five banks command a number of banks were nationalized more than 60 per cent of total assets, (and subsequently reverted to private while in Hungary and Poland the ratio ownership) and restrictions were remo- is more than 50 per cent. It must be ved on the ownership of foreign banks noted here that despite owning bulk of in the domestic markets. In the case of banking assets in the CEE and other re- Indonesia, South Korea and Thailand, gions, transnational banks have not be- the foreign equity participation in local come truly ‘global.’ The geographical banks has been raised to 100 per cent. spread of top 1000 banks has remained With the result, a dramatic increase in stable over the recent years. The triad the presence of foreign banks in these — European Union, Japan and the US countries since the mid-1990s has ta- — accounts for nearly 60 per cent of ken place. top 1000 global banks3. In terms of assets, 78 per cent of the top 1000 banks Due to rapid consolidation, the total belong to the triad3. Further, most of number of banks has significantly dec- the top global banks are rooted in their lined throughout the world. In the case domestic markets4. Even Citigroup, of US, the M&A activity in the banking considered to be a truly global bank sector received a major boost when re- having presence in over 100 countries, gulations on interstate banking were holds bulk of its assets in the US. With lifted. With the result, the total number only 34 per cent of assets held outside of banks has decreased drastically from the US, Citigroup is essentially a do- 18000 to less than 8000. In Estonia, mestic US bank. the total number of banks has reduced from 42 in 1992 to just 7 in 2002. One The Market Driven Global Banking of the negative consequences of M&A versus Imperatives of Development activity in the banking industry is the massive layoff of workers. On an ave- The rapid market driven consolidation rage, between 10 and 20 per cent of in the global banking industry has im- workforce has been laid off in the wake portant implications for the allocation of M&A deals. In Europe alone, M&A of credit, which in turn affects econo- deals led to nearly 300000 job losses in mic growth. Rampant competition in the financial sector in the 1990s. The the domestic financial sector due to ent- other consequence is the sharp increa- ry of foreign banks could enhance the se in the market share of the top banks. risks. Fearing erosion of the franchise According to The Banker, the assets value because of increased competition, of top 25 global banks accounted for banks and financial institutions have a $14.6 trillion (37 per cent) out of the natural tendency to lend more money top 1000 holding $39 trillion in 20012. to risky projects. Fierce competition in In the CEE states too, the market share the banking sector has given rise to a of the top banks has increased. The top situation where banks are increasingly

2 Stephen Timewell, “Top 1000 World Banks,” The Banker, July 2002, p. 172 3 Ibid., p. 203 4 Ibid., p. 200 The Consolidation of Global Banking Industry 45 resorting to speculative and risky ac- better access to credit. Analysts have tivities (e.g., foreign exchange specu- reported that in several countries the lation) to reap higher profits. A study amount of real credit has actually dec- by Andrew Sheng of the World Bank lined in the wake of increased presence found that increased competition was of foreign banks. Based on the study responsible for bank failures in Chile, of two of the earliest transition econo- Argentina, Spain and Kenya5. Under a mies, Hungary and Poland, Christian liberalized financial regime, the failure Weller established that there is a link of a large bank can lead to collapse of between greater international finan- other banks — which may be other- cial competition and less real credit6. wise fundamentally sound — that in Christian found that while the number turn, could trigger a larger systemic of financial intermediaries, particular- risk. This risk in the banking industry ly foreign-owned ones, grew in both is much greater than any other markets economies, the amounts of real loans precisely due to inter-bank payment declined7. The decrease in total cre- and settlement system. International dit was more pronounced in Hungry. banks are exposed to large amounts of While real loans decreased by 5.2 per cross border settlement risk because cent in Poland from 1990 to 1995, and settlement of transactions takes place by 47.5 per cent in Hungary between in different time zones. Since two nati- 1989 and 1994, the number of multina- onal payment systems (for instance, of tional banks increased from 0 to 14 in Japan and Switzerland) are never open Poland and from 9 to 20 in Hungary8. at the same time, it poses the risk in 7These economies experienced consi- the sense that if the first counterparty derable deterioration in their growth has delivered one side of the transac- rates during this period. tion, the other counterparty may go bankrupt and fail to honor the contract. While the entry of foreign banks is ge- This kind of risk is popularly known as nerally considered beneficial as they ‘Herstatt risk.’ In June 1974, the Bun- offer better quality services and so- desbank closed down Herstatt Bank phisticated products and have ‘deep after business hours when it suffered pockets’ to support losses, they can put huge foreign exchange losses. Seve- domestic banks — whose long-term ral banks, which had paid out Deut- interests are aligned with the local eco- sche Marks to Herstatt, suffered losses nomy — at a competitive disadvantage. because its closure at this time of the It has been observed in some instances day prevented them from receiving US that rapid entry of foreign banks could dollars in return. It has been calculated stall the development of the local ban- that losses in the global currency mar- king sector, as witnessed in Australia kets due to settlement system amount in the 1980s. By neglecting small and to $300 million a year. Moreover, the medium-sized enterprises (SMEs), fo- entry of foreign banks in the domestic reign banks can even jeopardize the market does not necessarily lead to prospects of economic growth. If re-

5 Andrew Sheng (1996), Bank Restructuring: Lessons from the 1980s, Worldbank, Washington, 1996 6 Christian Weller (1999), The Connection Between More Multinational Banks and Less Real Credit in Transaction Economies 7 Ibid., p. 8 8 Ibid., p. 2 46 WEED Conference Documentation

cent experiences are any guide, foreign enterprises and the informal sector. banks have a tendency to serve the Notwithstanding widespread corrup- needs of less risky segments such as tion and red-tapism, the nationalized transnational corporations and ‘cher- banks significantly contributed towards ry-picked’ host country corporations. the expansion of the country’s agricul- Consequently, domestic banks are left tural and industrial base and regional with less creditworthy segments of the development. Even the proponents of banking market such as farmers, SMEs financial liberalization cannot deny the and traders. Its consequences for the fact that the financial system was sub- real economy could be disastrous not servient to the needs of the real econo- only for the developing economies but my under the nationalized regime. also developed economies like the US, Germany and Japan where small and Since the priorities of the banks in India medium-sized enterprises constitute are now geared towards earning profits, the backbone of manufacturing and substantial economic and social gains services. Since bank credit is a vital achieved during the nationalization pe- input for investment and growth, the riod are fading. Since the 1990s, when liberalization of banking sector could the authorities initiated banking sector also negatively affect the growth pro- liberalization in India, a large number spects, particularly of those countries of bank branches, particularly in the which have bank-based financial sys- rural areas, have been closed down. tems. Increased competition could lead There is ample evidence to show that to cost cutting measures such as closu- rural and agricultural credit and len- re of bank branches, particularly in the ding to small-scale industries and in- rural and remote areas. In this context, formal sector have suffered negatively the experience of India is worth illus- under the liberalized regime. The po- trating. tential costs to the liberalized regime such as reduced saving and investment, India nationalized the banking sector particularly in rural areas, cannot be in 1969 with an objective to trans- underestimated. Even the new thrust form class banking into mass banking. on microfinance programs in the rural Banks were given targets for lending areas of the country is unlikely to ex- in priority sectors (such as agriculture) pand institutional credit if the current and were directed to offer banking ser- policy of large-scale closures of bank vices to the poor and weaker sections branches is not reversed. of the society who were neglected by the private banks. Under the nationa- The consequences of the domestic lization drive, bank branches increa- banking reforms on growth could also sed exponentially, from 8200 to over be disastrous for the developed econo- 62000. Most of the new bank branches mies. In Germany, for instance, 540 were opened in the rural areas, which Sparkassen (saving banks) along with where not provided with banks. This 12 Landesbanken (state banks) are policy regime not only helped in in- the main financiers of the Mittelstand creasing household savings but also (small and medium-sized enterprises), provided substantial investments in which constitutes over 95 per cent of agriculture, small and medium-sized German companies and employs nearly The Consolidation of Global Banking Industry 47

70 per cent of the country’s workforce. pital requirements would encourage However, under the directives of EU, pro-cyclical lending behavior, it can the Sparkassen would lose state gua- give rise to negative macroeconomic rantees in 2005. The removal of state consequences in the form of increased guarantees would not only lead to clo- amplitude of business cycles. Besides, sure of several Sparkassen but also je- the Basel II would strengthen the com- opardize growth and employment pro- petitive advantage of big transnational spects, as Mittelstand would encounter banks with lower levels of regulatory serious credit crunch. South Korea and capital requirements. It has been esti- Japan enjoyed rapid economic growth mated that big transnational banks are and financial stability under a regime likely to save more than 20 per cent of of tight credit and banking controls. In regulatory capital which could provide the case of South Korea, the authorities greater impetus to the M&A activity promoted their long-term industrial on a global scale. The local and smal- policy of export oriented industries by ler banks in both the developed and the targeting financial resources towards developing world would be the worst industrial projects and providing cre- sufferers under Basel II Accord as they dits at preferential rates of interest. The would be saddled with more stringent policy of ‘strategic planning’ in Japan regulatory capital requirements. was supported by credit controls which ensured that sufficient credit was avai- China’s Banking Sector and the lable for priority areas. However, when WTO Regime South Korea and Japan introduced reforms in the banking sectors, not only Historically, China’s financial system, their economic performance deteriora- essentially a bank-based system, was ted but their financial systems also be- structured to serve the needs of the came much more fragile. planned economy. Even when liberalization program was initiated in 1978, The consolidation in the global ban- China took special measures to protect king industry would get a major fillip the financial sector. The Chinese au- with the implementation of New Ba- thorities put severe restrictions on the sel Capital Accord (Basel II) in 2006. entry and operations of both domestic The Basel II replaces the 1988 Basel and foreign banks. The public sector Accord which was initially an agree- banks in China have played a central ment between the G-10 countries but role in mobilizing savings from public was later adopted by over 100 coun- and making it available to state-owned tries. The 1988 Accord required banks enterprises (SOEs) and others. Alt- to maintain 8 per cent of their risk-ad- hough recently, the Chinese authorities justed assets as capital. The Basel II is have granted operational autonomy to ostensibly meant to encourage banks the banks, the bulk of China’s banking to align their capital more closely with system is still owned by the govern- underlying risk. However, the Basel ment. The top four state-owned banks II Accord could also have undesirable account for nearly 80 per cent of total macroeconomic consequences and may assets. prove counterproductive under present circumstances. Since risk-based ca- 48 WEED Conference Documentation

Till now, the operations of foreign and medium-sized commercial banks banks have been very limited with in China. These banks provide credit stringent geographical and business to small and medium-sized companies restrictions placed on them. Foreign in China who are the engines of eco- banks in China were confined to fo- nomic growth in China. Therefore, it reign currency business, that too with seems likely that less credit would be foreign corporations. The earlier stra- available to small and medium-sized tegy of limited financial liberalization companies in future which, in turn, has been turned upside down by WTO would have negative repercussions dictated timetables for rapid liberali- on the economic growth. Further, by zation in the banking, securities and allowing foreign banks to offer ban- insurance sectors. Several major con- king services to residents, elites may cessions have been granted by China be induced to move their savings from to foreign banks under the WTO deal. state-owned banks to foreign banks Foreign banks have been allowed to that can offer efficient services and conduct all types of foreign exchange new products. It has been estimated transactions with foreign clients imme- that about 10 to 15 per cent of savings diately upon accession to the WTO in in state banks would move to foreign 2001 while there would be no geogra- banks. Given the fact that the survival phical and client restrictions on foreign of many SOEs depends on getting lo- banks to operate in China by the year ans from the state banks, such a shift 2006. This would give a major boost of savings could pose a severe threat to to the foreign banks as they have been the entire economy. If such a massive waiting to capture the banking markets shift in banking occurs within a short of China, which have almost a trillion period, the state banks won’t be able to dollars in personal savings. In particu- support the SOEs, and as a result many lar, foreign banks are going to capture SOEs may go bankrupt. markets in those regions (e.g., coastal regions and cities) where bulk of ban- Undeniably, WTO agreement also king business is concentrated. Given offers opportunities for the Chinese the fact that foreign banks have consi- banks to compete in the international derable international exposure and can financial markets. But this is unlikely launch new products (e.g., ATM, cre- to happen for two reasons. Firstly, Chi- dit card, etc) besides providing better nese banks do not have any exposure services, they are in an advantageous to international markets. Secondly, the position to capture China’s banking real challenge for the Chinese banks businesses. Foreign banks are also go- would be to retain hold on their dome- ing to dominate the highly lucrative stic markets, rather than looking for trade-related businesses. opportunities in international markets. Under liberalized financial system, the The opening up of the banking sector Chinese authorities may not be able would pose no immediate threat to the to sustain economic growth because big four state-owned banks because finance capital makes it difficult for they have vast branch networks in both countries to pursue independent policy urban and rural areas. But the worst making. Since the Chinese authorities sufferers of opening up would be small are determined to go ahead with ban- The Consolidation of Global Banking Industry 49 king sector liberalization program, it remains to be seen how China would adjust to one-size-fits-all strategy.

Kavaljit Singh

Literature

Jones, Colin (2001): Foreign Banks Move In, in: The Banker, September 2001.

Sheng, Andrew (1996): Bank Restruc- turing: Lessons from the 1980s, World Bank, Washington, 1996.

Timewell, Stephen (2002): Top 1000 World Banks, in: The Banker, July 2002.

Weller, Christian (1999): The Con- nection Between More Multinational Banks and Less Real Credit in Tran- sition Economies, Working Paper B8, Center for European Integration Stu- dies, Bonn, 1999.

Source: Singh, Kavaljit (2005): Ques- tioning Globalization, Zed Books (London) and Madhyam Books (Del- hi), 2005. 50 WEED Conference Documentation

2.2 GATS negotiations in ﬁnancial services: The EU requests and their implications for developing countries

In the process of the GATS negotia- including on financial services which tions, the EU has been making requests were submitted on on 28th February to many developing countries to liber- 2006. alise its financial services sectors. Lib- eralisation under GATS means more The first GATS requests made by the than market opening for services by EU in 2002 included the requests to foreign financial firms (banks, insur- 94 countries to open up their financial ance companies, pension fund man- industry. Of these countries, 20 were agement, mutual funds, etc.). GATS least developed countries and 30 low is mainly about giving foreign service income countries. The EU requests providers, including the financial in- to developing countries made a dif- dustry, more freedom to invest so that ference between the more developed foreign services can be provided. This developing countries and the least means that GATS is more than trade developed countries (LLDCs, called in financial services and that GATS is ‘vulnerable economies’). The revised also an investment agreement! requests made by the EU in January 2005 remained largely unchanged re- The EU requests described below do garding financial services. not mean that developing countries will make immediate market opening Note that the EC has also been negoti- commitments. Developing countries ating financial services liberalisation in have the right to ignore any of these regional trade agreements such as with requests. The following article how- Chile and Mexico (10 pages!), and cur- ever, gives an insight in the kind of rently in negotiations with Mercosur. requests made by the EU and what the consequences might be for developing When asking for liberalisation of the countries who positively respond to financial industry of a country, the EU those requests. is doing it in the following ways.

GATS negotiation process is very 1. Swift liberalisation much geared towards market opening of services through a process of “re- The EU requests have aimed at achiev- quests” and “offers”. The EU always ing very quick and broad liberalisation mentions financial services as one of in the financial industry of many coun- its (five) key sectors in which it wants tries, because the EU financial indus- to see liberalisation under GATS, for try was successfully lobbying the EU instance in the EU’s renewed requests negotiators. in order to have “improved offers” by May 2005. The additional negotiation * According to the GATS “Under- methods sought by the EC during 2005 standing on Commitments in Financial has resulted in new “plurilateral” re- Services” quests, agreed in December 2005 at the Hong Kong Ministerial Conference, GATS negotiations in financial services 51

The EU is requesting many “emerging ership of banks, insurance companies market” countries such as Argentina, and certain other sub-sectors in finan- Brazil, Chile, China, India, Indonesia, cial services. This request has been Korea, Malaysia, Mexico, Philippines, made to many countries and means South Africa, Uruguay to liberalise in that foreign financial services compa- the way as is prescribed in the “Under- nies should be able to fully take over standing on Commitments in Financial the domestic financial industry. Services” of the GATS agreement. * The EU has made a request to India The Understanding provides a set of and the Philippines to eliminate a ceil- full market openings to be applied by ing of up to 15% (India) or 30% (Phil- WTO members that implement the ippines) of total assets of the banking Understanding1. Such broad market system which may be in hands of (to- opening relates to almost all sectors tally owned) foreign banks. and all definitions of “trade in financial services” and to many sectors that * The EU has requested the elimina- have not yet been liberalised by many tion of the requirement that (Advisory) countries e.g. pension fund manage- Boards consist of a percentage of na- ment, all forms of insurance including tionals, and not foreigners, e.g. in India social security (e.g. in Chile). Moreo- and many other countries. ver, governments may not introduce new conditions that are more restric- * The EU has requested to remove the tive than those already existing. The limited number of licenses for branch- Understanding erodes the exemption es of commercial banks e.g. in Philip- public financial services have under pines. the rules in the GATS agreement. The most far reaching condition under the * The EU has requested to privatize Understanding is the requirement that and liberalize the state monopoly on WTO members remove any obstacle to reinsurance and retrocession services, foreign financial services that remains in Brazil. The EU has also requested even if all the provisions of the GATS access to insurance services in privati- agreement have been respected! Fol- sation projects e.g. Philippines. lowing on, the Understanding provides guarantees that foreign financial ser- * Government procurement liberali- vice suppliers are permitted to intro- sation is requested by the EU e.g. to duce any new financial service. allow foreign financial companies to provide certain financial services to The wish of the EU for swift liberalisa- state or municipal agencies, in Brazil tion of financial services by other coun- and Argentina. However, government tries is also reflected in the following procurement liberalisation has been leaked EU requests of 2002: resisted by developing countries in the GATS negotiations because it should * The EU has made requests to take only be about “transparency”. away measures that limit foreign own-

1 See for more explanation chapter 6 of the SOMO Report: M. Vander Stichele, Critical Issues in the Financial Industry, 2005 (update), which can be downloaded at http://www.somo. nl/html/paginas/pdf/Financial_sector_report_05_NL.pdf 52 WEED Conference Documentation

The impact of these EU requests can 2. Trying to get rid of regulatory be derived from experience that has measures shown that as soon as developing country are opening their markets, In the EU requests for market open- foreign financial firms often rapidly ing in financial services, the EU has take over a large part of the domestic been asking many countries to remove financial industry. For instance, the a whole list of various governmental foreign financial industry increased its measures which are in place in the presence, through acquisitions etc., by requested countries because the EU 364 % in Latin America in four years considers them as trade barriers (read: (1996-2000). As a consequence, local measures that undermine the expan- banks have little chance to survive in sion and profit making of foreign fi- poor developing countries although nancial firms). The different kind of some of them are much better in serv- measures that the EU is requesting to ing local small companies and poorer be removed are discussed below. clients. The problem is that foreign banks and insurance companies focus 2.1. Financial stability measures on rich clients and rich regions (‘cherry picking’): this results in lack of lend- The following measures which have ing to small and medium enterprises, been put in place by governments to farmers, the poor e.g. Mexico and Ar- promote the stability of their financial gentina. Lack of lending by foreign system, and to avoid a financial crisis banks has lead to lack of finances to that has many negative consequences, stimulate the industry and economy of have been targeted in the EU requests. those countries. The focus on the rich clients has stimulated the gap between Stability measures of Chile: rich and poor. The EU has requested to eliminate the Because local banks want to survive measure that prior authorisation by the the competition from foreign financial Central Bank is needed before trans- services, local banks might take too ferring dividends from Chile abroad. much risks, which can result in destabi- The EU sees this as a restriction on lisation of a country’s banking system. payments and financial transfers which Also, in order to operate well in new is forbidden under Article XI. markets, foreign banks attract the best The EU requests to eliminate what it managers from local banks to the for- sees as a restriction, namely that in- eign banks. The result is that expertise vested foreign capital can only be re- goes from local to foreign banks. Why mitted abroad after 2 years, in practice does the EU argue that more expertise 1 year, that is has been invested in and efficiency will be transferred to lo- Chile. This is called the “Chile tax” cal banks by liberalisation of financial because investments that are remitted services? before 1 or 2 years has to pay a tax.

These requests indicate how the EU is not respecting the policy by a country to avoid a financial crisis. These Chil- GATS negotiations in financial services 53 ean measures were effective because ents was a major problem whereby de- Chile was hardly affected by Argen- fault in repaying loans by one or a few tinean crisis and have been praised customers lead to serious problems or by the international community of be- bankruptcy of a bank; ing good examples of measures that are needed for financial stability. The eliminate regulations that limit the reason why the EU has making these operations of hedge funds (Invest- requests to Chile is because the US ment Trust Management companies), has been able to more or less negoti- although hedge funds have been iden- ate this Chile tax away in its bilateral tified as one of the investors that can trade agreement with Chile and the EU contribute to a financial crisis; wanted the same freedom of capital movement for the European financial The EU has also requested that foreign industry. In other words, this is not at banks can get offshore banking licenc- all negotiating from a development es which is forbidden in India. The EU perspective. has requested to Thailand to take away its limitation that foreign banks with * Lessons learned by Asian and other an offshore license cannot get access countries in crisis to the Thai market through full branch The EU requests have been targeting licence. This contradicts the EU policy the following measures to be removed, against uncontrolled money transfers even though some of them have been and money laundering that often hap- put in place after countries have expe- pens through offshore banking where rienced a financial crisis that was dis- there are less stringent monitoring ruptive for their economies and socie- measures and where less taxes need to ties. The EU is requesting to: be paid. eliminate a prohibition in Korea for in- *Capital requirements surance companies to invest more than The EU wants to take away measures 15% of their total assets in real estate. by which governments require mon- Remember, one of causes of the Asian ey reserves to be located by foreign financial crisis was too much and irra- owned bank branches in the country tional investment in real estate; itself. The EU has been requesting to replace existing measures as follows: “specify” limitations in Korea for lending by credit card members. Note that Allow branches to use the parent banks’ Korea has been having a major credit capital to meet prudential money re- card crisis for some time in the begin- serve requirements, e.g. in India. ning of century; Take into account the guarantee ex- remove the limitation on credits (loans, tended by the branch’s head office or guarantees) provided by foreign by another foreign bank for additional branches to single customers, and take lending volume, e.g. in India. account of capital in the head office of the bank. Remember that during the Allow borrower limits to take into ac- crisis too high exposure to a few cli- count the foreign banks global capital, 54 WEED Conference Documentation

e.g. in India. derivative products can lead to a financial crisis. In other words, the EU made requests that money reserves do not need to sit in The EU wants the elimination of re- countries and that capital of a bank sit- strictions (on foreign banks) to pro- ting abroad can be used for prudential vide different kind of services (‘allfi- reserves. However, as the experience nanz’, ‘universal banks’). For instance of several financial crises in Argentina the EU has asked South Korea to re- has shown, there is no guarantee that move the rule that financial institu- the parent company/bank will trans- tions are prohibited from operating at fer the necessary financial reserves in the same time in different sub-sectors. times of a financial crisis in a country However, even the US has only since in which it did not hold reserves. The 1999 allowed financial firms to oper- EU is requesting to eliminate these lo- ate in different sub-sectors at the same cal capital requirements because the time, such as banking and insurance. international banks, and other financial In many Western countries, the super- firms, want to use their capital around vision of the allfinanz firms is still in the world to make as much profit as evolution because previously, the su- possible. This is far from taking con- pervisors of banks, insurance compa- cerns of developing countries into ac- nies and pension funds were separate count. institutions with too little communication between them. Asking countries * Prudential regulations to allow allfinanz or universal banks The EU has been requesting many means that these countries first need countries to remove measures that gov- to put in place costly complex super- ernments have put in place to ensure visory institutions and the appropriate the integrity or quality of the financial legislation. industry sector and avoid problems of financial instability. Examples of such 2.2. Economic development under- requests have been made to the follow- mined ing countries: Brazil is requested to eliminate the case by case authorisa- The EU has been asking that countries tion for the establishment of all kind of take away measures that are in place financial institutions. for stimulating economic development South Korea is requested to remove re- and fighting poverty, as follows: strictions on recruitment and employment of professionals in life insurance, EU has been asking to remove the re- non life insurance and reinsurance. quirement of mandatory lending to Mexico is requested to make commit- small and medium enterprises (SMEs) ments so that foreign financial compa- e.g in South Korea. However, the ex- nies can trade (for their own account or perience has shown that foreign banks that of customers) in derivative prod- avoid lending to SMEs, small farmers ucts; note that derivative products are and the poor in countries like Mexico non-transparent and not so much regu- and Argentina, which has stifled eco- lated so that too much wrong assess- nomic development in those countries. ments made by those buying or selling The EU considers that special require- GATS negotiations in financial services 55 ments by the government for lending ily. The problem is that the GATS rules to SMEs and agro-business need to be are designed to take away discrimi- mentioned as exemptions of the com- nation between foreign and national mitments made e.g. by the Philippines. banks once a country makes a com- This means that such governmental mitment, mostly through the GATS measures are not considered to be ex- article XVII obliging a country to give empt of GATS rules nor belonging to “national treatment” to a foreign sup- the right to regulate. plier of a service sector whose market opening has been committed under the EU raises questions about the require- GATS. Consequently, it becomes much ment applied to all banks in Malaysia harder to support the domestic finan- to provide (lending) quotas for low- cial industry, e.g. to allow it to fairly cost housing. This means that EU con- compete against foreign banks. siders this as a limitation that should be mentioned in the GATS schedules. 3. Trade negotiators ignore lessons Again, these measures to provide poor- from financial crises er families with the financial resources needed for housing are not considered The EU acknowledges that regulation falling under the GATS “right to regu- is necessary but makes little links dur- late”, but rather as a trade barrier (read: ing the negotiations whether countries profit making restriction) that must be to which requests are made to have the exempted from the GATS agreement necessary regulations in place. The EU (Art. XVI), and ultimately eliminated. mainly argues that opening up financial services increases efficiency but These EU requests raise a serious ignores the growing evidence that only problem: Who will decide during the the richer segments of society benefit negotiations which regulations are pru- from these improved services. dential and which ones are not? Will bullying tactics during the negotiations What is worrying is that Western nego- undermine domestic regulation during tiators brush aside concerns raised by the negotiations? So far, some devel- developing countries while the risks of oping countries have been reluctant financial instability are not fully ana- to open up under GATS, or have the lysed or discussed. This undermines Ministry of Finance or Central bank the use of GATS exemption clauses by following negotiations e.g. by Chile. developing countries.

They have also been EU asking for The GATS agreement has three ways “clarifications” about restrictions and by which is increases the risk of finan- discriminatory measures against for- cial instability2: eign banks, e.g. in India and the Phil- ippines. This assumes that local banks risks of financial instability when (de- have the same behaviour as foreign veloping) countries open up to foreign banks that can move abroad their in- service providers who have unexpect- vestments and capital much more eased or risky behaviour

2 See for more explanation chapter 6 of the SOMO Report: M. Vander Stichele, Critical Issues in the Financial Industry, 2005 (update) 56 WEED Conference Documentation

foreign financial services are often negotiations need to be stopped and linked to a high level of cross border another approach is needed. So far, EU capital movement which leads to high officials have not been willing to listen foreign exchange movements that puts to this message. pressure on the exchange rate; this can undermine the value and stability of Myriam Vander Stichele the national currency GATS rules can increases the risks of financial instability and financial crisis because they have an impact on government regulation!

Western GATS negotiators ignore the experience of previous financial crisis that liberalization needs to be gradual and well sequenced, underpinned by costly capacity building of financial authorities in developing countries. When the necessary national financial safeguards are not in place, trade negotiations should not push for financial sector liberalisation since the global financial architecture is not reformed and financial firms increase poverty and unsustainable development. EU trade negotiators hardly consult with their Central Banks and those responsible for financial stability in their own countries.

Host countries must spend additional resources for regulatory and supervisory measures to handle changes and risks by new foreign ﬁnancial ﬁrms.

The EU requests should raise a debate about what development perspectives are lacking in the EU negotiation position on financial services. Also, the debate should challenge the EU’s position which is fully influenced by the financial sector lobby, and not by civil society. In order to have balanced GATS negotiations that ensure that globalisation becomes more equitable and sustainable, the direction of the Intransparent, Uncontrolled and Crisis Promoting: Trade with Derivates 57

2.3 Intransparent, Uncontrolled and Crisis Promoting: Trade with Derivatives

Derivatives or financial futures (which as an “abuse” or “misuse” in the lite- are quite similar in their nature) are fi- rature. Added to this, the most impor- nancial contracts between two parties tant motive for dealing in derivatives and concern agreements to be redee- is seen in the possibility of making med in the future. Their value depends enormous profits with relatively low on the value development of the basic means (leverage effect). This specu- objects underlying them, such as goods, lative motive can be seen in the expo- securities, indices or even real events nential growth in trading. More than (Latin: derivare = derive). Derivative 95% of the worldwide derivative trade markets are the fastest growing finan- has nothing to do with hedging trading cial market segment. They serve as deals (hedging or protecting against infrastructure and function as the dri- risks). Thus the claim that the neces- ving force for the expansion of world- sity to hedge is the reason for the ra- wide financial means and of financial pid increase in the derivative business market deregulation. In other words, does not appear to be credible. they are the products of deregulation, which for their part, drive deregulati- Trends in the Derivatives Trade on (Hafner 2002). Since these derive from other businesses, tradable securi- After a decline in the daily worldwide ties additionally let derivatives blur the trade in derivatives and foreign curren- boundaries between credits, securities cy in the 1998 to 2001 period, a new and the foreign exchange market. They increase could again be recorded in the therefore contribute to greater interde- trade from 2001 to 2004 which far ex- pendence on the financial markets. ceeded the previous decrease. Meanti- me, the daily trade in OTC derivatives By far the largest part of the derivati- amounts to more than 2.3 trillion US $ ve trade occurs off-market (over-the- - this mainly covers interest and fo- counter, OTC), which means that this reign currency contracts according to trade is completely opaque and is not a BIS survey - and this corresponds to regulated. The most important impulse a 73 per cent increase. In these figures, for this financial innovation (derivati- double counting resulting from buying ves) was the idea of by-passing state and selling has already been calculated regulations and conditions1. But there out and survey gaps (reporting gaps) are additional reasons for the popula are not included (BIS, 2005). A definite rity of derivatives and the permanent- increase in the worldwide daily foreign ly new and further development of the currency trading (on and off market) basic objects underlying these instru- can also be observed. These have also ments. Derivatives assist money-laun increased from 1.2 US $ billion to al- dering, balance sheet manipulation most 1.9 US $ billion after a decline in and tax avoidance, activities described the 1998 - 2001 period. These numbers

1 The derivative trade has developed from the basic motive for hedging (protection) to an expo- nential increase in trading (speculation). Originally derivatives were used in the 17th century, primarily in agriculture. For security, farmers and dealers hedged against price collapse and harvest loss risks before harvest time by (tradable) price agreements (the fruits of the ﬁeld were already sold before the harvest). 58 WEED Conference Documentation

which can be found in the previous tri- amount to 204 US $ trillion of 270 US ennial study of the Bank for Internatio- $ trillion for the whole OTC area (cf. nal Settlements (BIS, Triennial Central figure 1). The turnovers in interest de- Bank Survey) are based on voluntary rivatives themselves have more than reports of the respective countries (if doubled in the three year period and the trading can even be nationally assi- have increased to more than 1 US $ gned) or of the finance market players trillion (cf. figure 2). The outstanding involved in the trade. In any case, this amounts of foreign currency contracts is the problem with opaque, off market (Outright Forwards and Currency trading: there aren’t any reliable figu- Swaps, Options) were “only” 31 US $ res, they are always (cautious) estima- trillion (BIS: 103). However, the tur- tes. Clear trends can nevertheless be novers of foreign currency derivatives recognized: there is a general and stea- at the daily trade are always above the dy growth in derivatives and foreign turnovers of interest contracts (only exchange markets2 and credit and com- OTC, see Table). modity derivatives especially enjoy increasing popularity. The latter has to Individual Players do with price fluctuations in the most important commodity markets, and the A large part of the global off-market de- increase in credit derivatives (among rivative trade is dealt with by financial others Credit Default Swaps) has to do institutions working in the US market. with the general trend towards securiti- About two years ago, there were still zation, which has for some years emer- seven banks responsible for more than ged on the financial markets. Only two 90% of the turnover on this market (cf. years ago it was said that the nominal Lipke 2003). In the meantime, there are value of credit derivatives for 2004 only five banks which dominate more would rise to more than 5 US $ billion. than 95% of this market: these include This forecast was more than exceeded, JPMorgan Chase Bank, Bank of Ame- already in the first six months of 2005 rica, Citibank, the Wachovia Bank and the outstanding amounts for Credit De- HSBC. The remaining almost 5% of fault Swaps (CDS) stood at more than the market segment is shared by ano- 10 US $ trillion (BIS, Dec.2005). ther 750 banks (OCC 2005). As can be seen with the US example, the off mar- Basically, the trade between banks and ket derivative business is increasingly other financial market players has in- concentrated in the hands of a few big creased considerably: in turn this can banks or funds. This inter-bank trade for example be based on the expansi- promotes the concentration of finances on in hedge funds and their dealings, and opacity. This makes the urgently but the activities of asset managers needed regulation almost impossible. and futures traders have also increased considerably (BIS, March 2005). The Derivatives as a Stability Risk highest turnovers are concluded in the interest contracts sector (FRA, Interest Financial derivatives can be used for Swaps and Options). The outstanding the purposes of arbitrage, protection amounts of interest contracts alone against price fluctuation risk, and for

2 The daily turnover is especially impressive here. Intransparent, Uncontrolled and Crisis Promoting: Trade with Derivates 59

Development in the global, daily foreign currency and OTC derivative trade in billion US $

Year/turnover 1989 1992 1995 1998 2001 2004 OTC-derivatives 739 1224 1342 2317 OTC-foreign-exchange 688 959 853 1292 OTC-interest rates 151 265 489 1025 total 590 820 1190 1490 1200 1880

turnover

OTC-derivates OTC-foreign-exchange OTC-interest rates total

Source: BIS March 2005, Triennial Central Bank Survey. Foreign exchange and derivative market activity in 2004 speculation. Speculation is the case if down on the other hand, derivative a derivative is purchased when there transactions result in far larger volumes is no risk to be secured - that is, a risk (of the underlying nominal values!) is bought. Generally, the rapid buying being moved on the markets than would and selling of derivatives has become appear at first sight. The real economic an end in itself with excessive dyna- results of these movements are just as mics, the buyer hopes for short-term difficult to recognize. The stakes in profit and the seller for fees and com- derivatives can lead to interest and fo- missions. reign currency exchange rate changes, which can have undesirable develop- On the one hand, leverage provides the ments from the viewpoint of the world possibility of larger profits for laying economy (Filc 1998). Because of the in- limited financial resources, but, terdependences (de-segmentation) of 60 WEED Conference Documentation

Notional outstanding amounts of derivatives 1998-2005 in trillion US-$

Year 1998 1999 2000 2001 2002 2003 2004 2005 OTC 80,3 88,2 99,2 111,2 141,7 197,2 251,8 270,1 stock-exchange- 13,9 13,5 14,3 23,8 23,8 36,7 46,6 56,3 traded Source: BIS, Quarterly Review, Juni 2001-2004, Dec.2005

outstanding amount of derivates

Year

OTC stock exchange traded

individual markets (money, credit, Since the derivative trade is almost ex- foreign exchange markets etc.) there is clusively characterized by speculation, obviously a multiplier effect from one the developments on these markets can market to the next. For example, insig- also be considered a result of specula- nificant changes in the futures markets tion. The increased uncertainty and vo- can have far stronger effects on the latility this creates incites the need for cash markets (Filc, ibid). Thus, mone- protection with derivative instruments. tary policy control efforts by central The derivative trade is a zero-sum banks are undermined by - formally game in the sense that risks are indeed insignificant - interest changes becau- shifted, but they are not eliminated and se of possible effects on long-term int- therefore, every gain must be balanced erest rates. by a loss. Derivatives are products of the so-called developed countries but Intransparent, Uncontrolled and Crisis Promoting: Trade with Derivates 61 due to chain reactions they frequently problem with financial derivatives: cause real economic and social dama- Leverage for undesirable speculative ge in developing countries. Frequent- developments]. International Politics ly, forced overhasty deregulation in the and Society. finance market area leaves comparatively fragile financial systems behind, and these are vulnerable to external shocks. Thus economies which are inadequately equipped should not be exposed to this global gambling game. Thus, derivatives contribute considerably to the crisis vulnerability of deregulated financial markets, and even- more: this trade is a systemic risk.

At the moment, there does not seem to be a trend at the supranational level to proceed with the necessary measures against crises due to unregulated financial markets - the profit prospects for a few market participants are too high. Basically, only one measure will help: states which do not want to be sucked into this system must regulate capital transactions, tax speculative capital flows and close their capital accounts if necessary; this measure could definitely be implemented unilaterally.

Isabel Lipke (WEED)

Literature

BIS (2005): Triennial Central Bank Survey. Foreign exchange and derivative market activity in 2004.

BIS (2001 - 2006): Quarterly Reviews, June 2001-2004, Dec.2005.

Dodd, Randall (2003): Consequences of Liberalizing Derivatives Markets. Financial Policy Forum, Washington D.C.

Filc, Wolfgang (1998): Das Problem der Finanzderivate: Hebelwirkung für spekulative Fehlentwicklungen [The 62 WEED Conference Documentation

2.4 Out of Control - Hedge Fund Activities

“Hedge funds are the black holes of the international ﬁnancial system” Baﬁn president Jochen Sanio, May 19th, 2005

Hedge funds are among the most noto- end of 2002, their value would have rious players on the financial markets. shrunk to only 166 billion euro - main- Their business is speculation, i.e. they ly caused by the enormous decreases bet on the market movements of shares, in share prices (Die Bank, 8/ 2003). raw materials, bonds as well as derivatives (finance instruments derived from Ironically, the current boom in hedge these). The name is deduced from the funds was partially caused by the dis- English (“to hedge = to protect”) and satisfaction of numerous investors with means that their business partly con- share price losses - after all, hedge sists in protecting other players on the funds promised high yields indepen- financial markets against the risk of pri- dent of stock market developments ce collapses in the securities markets or (FAZ, 31.10.05). For example, unlike exchange rate fluctuations. But hedge traditional investment funds, short sa- funds are anything but secure, because les are permitted, whereby high profits in contrast to traditional investments in can be achieved even when share pri- share funds or property funds, they are ces are falling. In short selling, com- not covered by investment regulations pany shares are borrowed from an in- and their activities are scarcely super- vestor and sold on the stock exchange vised. at the current share price. If the share price then falls, as for example hap- This, at the same time provides the at- pens when sufficient imitators can be tractiveness of hedge funds: they profound to follow this procedure with the mise an above average return since they same shares, then these shares can be take high risks and engage in deals that bought back at a lower share price. The are forbidden to other financial market difference remains as profit. players. The promise may or may not be kept. Hedge Fund Assets: Increased It should be clear that the risk with Twenty-fold in Twelve Years hedge funds increases to the extent where “simple investors” also invest It is estimated that the assets managed their money in these funds - a phe- by hedge funds has doubled to US $ nomenon that is only too well known 1.1 trillion since 2000 (FAZ, Jan. 10, from the last stock exchange boom and 2006). Over a longer time period, the crash. Thus, the stock exchange crisis growth turns out to be even more spec- of 2000 was a bitter lesson for many tacular: hedge funds exhibited an annu- small investors who were also tempted al increase of 16% in the nineties, com- by advertising to purchase Telekom, In- pared with 7.5 per cent from 2000 to fineon and other shares amounting to a 2005 (FAZ, Jan.10, 2006). According total of 439 billion euro. If these private to information provided by the Federal investors still held these shares at the Reserve, the assets managed by hedge Out of Control - Hedge Fund and Activities 63 funds has increased from around US $ business besides the Cayman Islands, 50 billion by about twenty- fold since which alone houses about 70 per cent 1993. The assets will swell to two tril- of all offshore hedge funds. lion dollars by 2009 and to six trillion dollars by 2015 if this continues ac- The Risk Grows with Size cording to the expectations or wishes of the fund managers (FAZ, 31 Oct. There are about 8000-10,000 hedge 2005). Here, in the opinion of experts funds in existence worldwide, with an in the business, it is primarily Europe average asset value of only US $ 120 which has some kind of “backlog”: million. But to assume from this that according to the ECB, “only” 188 bil- hedge funds present no danger to the lion euros were invested in European stability of the international financial hedge funds at the end of 2005 which system would be a mistake. After all, corresponds to a share of 27.4 per cent the 200 largest hedge funds share about of a total volume of 685 billion euros. three quarters of the market among (ECB 2005, p.6). themselves. Thus, the196 largest funds together manage about US $ 743 billi- Not only is the asset capital deposi- on - this is already an average of US $ ted in hedge funds increasing rapidly 7.8 billion per fund (CNN, September - as “Manager Magazin” reported - but 8th, 2005). Since the majority of the hedge fund managers could enjoy ear- funds active in this branch of business nings which the head of the Deutsche further expand the assets managed by Bank can only dream of: the 17 most loans, this does indeed constitute a sys- successful hedge fund managers have temic risk which no one can estimate each gained more than 100 million dol- exactly. lars in 2003. The average income of the top 25 came to US $ 207 million; the It is known that bad speculation by a number one, George Soros alone, had single hedge fund can be enough to earnings of 750 million dollars (Grimm, destabilize the world financial sys- Harald (2004): Hedgefondsmanager. tem. Thus, the “Long-Term Capital Finanzmagier mit goldenen Händen, Management” (LTCM) hedge fund [Hedge Fund Manager. Financial ma- incurred such heavy losses through gician with golden hands] in: Manager currency speculations in 1998 that Magazin, August 24th, 2004). It can be it had to be rescued by an injection assumed that the taxman will scarcely of capital to the amount of US $ 3.6 profit from these ballooning assets. Af- billion. LTCM had capital resources ter all, almost all hedge funds are set of about US $ 5 billion, but at times up in tax havens or offshore financial entered into contracts with securities centres; the setting up of the 10,000th to the value of more than a trillion (!) hedge fund was recently celebrated in dollars (Verdi 2005, p.7). Meanwhile, the Cayman Islands (cf. Hedgeweek the largest hedge funds have assets of 12/2005). Dublin, the British Virgin 12 to 18 billion US $ at their disposal Islands, the Bahamas, Bermuda and (cf. table), the danger to the stability of the Channel Islands count among the the world financial system emanating preferred locations for this branch of from hedge funds has probably grown

1 Von ca. 50 Mrd. US$ 1993 auf ca. 1 Billion US$ 2005. Vgl. Federal Reserve: Remarks by Vice Chairman Roger W. Ferguson, Jr. to the Banco de Mexico International Conference, Mexico City, Mexico, November 15, 2005. URL: http://www.federalreserve.gov/boarddocs/speech- es/2005/200511152/default.htm 64 WEED Conference Documentation

The Assets of the Largest US-Hedge Funds in US $ Billions

August 2005 2004 Bridgewater Associates 17,7 12,4 D.E. Shaw 17,1 11,4 Goldman Saschs Asset Management 15,3 11,2 Farallon Capital Management 13,8 12,5 Caxton Associates 12,3 11,9

Source: Absolute Return Magazine, cited by CNN Money.com, September 8th, 2005.

correspondingly. It is estimated that at present about 30 hedge funds have gained influence However, the LTCM case shows that over the strategy of German companies in the end the big banks were respon- by purchasing larger blocks of shares sible for the crisis since they ignored (Die Zeit, Nr. 20, May 11, 2005). Dif- the risks in awarding the LTCM ex- ferent strategies are pursued here. So- cessive credit in anticipation of above called “vulture funds” have concentra- average profits. And it appears that all ted especially on bankrupt businesses, banks have not learned from the 1998 by buying debt and then enforcing a crisis. The Swiss big bank UBS re- radical reconstruction: an example of cently boasted of investing more than this is Rinol, a floor manufacturer in US $100 billion in “alternative invest- Southern Germany, which in the me- ments”, which mainly included hedge antime is controlled by Highbridge/ funds (Hedgeweek, 12/2005). Zwirn, an American investor (F.A.Z., May 2, 2005). However, hedge funds Growing Pressure - on Managers, are increasingly turning their attention Small and Medium- Sized Busines- to even big DAX-quoted businesses; it ses (SMBs), Tenants, etc. is suspected that they have large share- holdings in at least 16 out of 30 DAX Hedge fund activities constitute risks businesses (FTD, June 13, 2005). not only to global financial market stability. Since hedge funds are incre- DAX businesses are desirable objects asingly acquiring shares in businesses from the finance investor perspective and property, they are creating gro- since their share values are on average wing pressures on managers, emplo- lower than their US or British public yees and tenants. Since the funds are companies due to the different struc- primarily interested in the short term tures of the financial markets (bank- increase in the value of the business, centred financial markets in conti- the shareholder value; they take over nental Europe versus stock exchange the business to have the reserves dis- centred financial markets in the Ang- tributed and enforce higher dividends, lo-Saxon region). However, from the whereby they do not hesitate to apply viewpoint of the hedge funds, lower such aggressive measures as dismant- stock exchange capitalisation can be ling companies and liquidating whole attributed to poor management which areas of business. Out of Control - Hedge Fund and Activities 65 they correspondingly put under pres- - A ban on lending shares for only a sure. This pressure is then transferred few days in order to manipulate gene to the employees for short-term profit ral meetings or share prices; maximisation in the form of wage cuts, - A double voting right for sharehol- longer working hours, increased psy- derswho have held their shares for at chological stress, threatened and ac- least two years; tual job losses. On the other hand, the - An obligation to report the loaning management generally are involved as of shares; share holders, for example, a part of - A duty to disclose current business; the management income is linked to - Disclosure of ownership structures; developments in the share price, and if - Introduction of a report threshold for it is necessary to sell off segments of the acquisition of substantial share- the company, the revenue from this is holdings paid out to the share holders and thus - Stock exchange listed businesses; increases the share price. - Introduction of an obligatory code of conduct; Control is Necessary - Reinforced supervision obligations with regard to risks for investors. At least in Germany, hedge fund regulation is increasingly under discussion (Verdi 2005, p.11) ever since hedge funds such as TCI and Atticus managed to foil the take-over All of this will not be sufficient to of the British stock exchange by the correct the numerous undesirable de- German stock exchange in the spring velopments which are linked to the of 2005. But it is more than doubtful imbalances in the financial markets. that action will follow words. The go- The main causes of these undesirable vernment did indeed complain loudly developments on the financial markets about “financial investors” who “fall come from the rapidly expanding pri- upon a business like a swarm of lo- vate fortunes which face the growing custs” and “show no consideration for accumulation of debt in private and the people whose jobs they destroy” public budgets. More radical steps are (Franz Müntefering in “Bild am Sonn- necessary to deal with this fundamen- tag”, May 17, 2005). tal problem: higher taxation of profits and asset income with simultaneous But at the same the government also relief for those relying on paid emplo- enacted the Investment Modernisation yment, a wage policy that corresponds Law which actually made it possible for to productivity gains instead of lagging private investors in Germany to invest behind those gains, a reversal of priva- in the highly speculative funds from Ja- tisation in the pensions sector as well nuary 2004. Even if it were desirable: a as democratic control of large financial ban on hedge funds does not appear to institutions or their transfer to public be on the agenda at present. However, ownership. the supervisors of international finance have requested more transparency in Lydia Krüger hedge fund dealings at a conference in October 2005, where the following suggestions were discussed: 66 WEED Conference Documentation

Literature

ECB (2005): Green Paper on the en- hancement of the EU framework for investment funds. Eurosystem Cont- ribution to the Commission’s Public Consultation, November 17th, 2005

Federal Reserve: Remarks by Vice Chairman Roger W. Ferguson, Jr. to the Banco de Mexico International Conference, Mexico City, Mexico, No- vember 15, 2005th URL: http://www. federalreserve.gov/boarddocs/spee- ches/2005/200511152/default.htm

Grimm, Harald (2004): Hedgefonds- manager. Finanzmagier mit goldenen Händen, in: Manager Magazin, August 24th, 2004.

Hedgeweek: Cayman Hedge Fund Ser- vices. Special Report, December 2005. URL: http://www.hedgeweek.com/ SourceDocuments/Reports/98C74F98- 3C10-4FDA-89F1-676E8C5B66C3. pdf

o.V. (2005): Hedge Fonds [Hedge Funds]. In: DIE ZEIT,, No. 20, May 11th, 2005. URL: http://www.zeit. de/2005/20/Finanzinvestoren_Hedge

ver.di federal board (2005): Hedge- und Private Equity-Fonds. Die Turbos im Kapitalismus [German public services trade union: Hedge and Private Equity Funds. The Turbos in Capitalism], in: Wirtschaftspolitische Informationen No. 8/2005, ver.di Bundesvorstand Berlin - Bereich, October 2005. . Privatizing Pensions: Experiences from Latin America 67

2.5 Privatizing Pensions: Experiences from Latin America

Introduction minican Republic, and Nicaragua, the old state system was replaced com- In many countries, thoughts are being pletely, as in Chile, whereas Peru and made about reforms of the public con- Colombia have two parallel systems, tribution-financed pension systems a pay-as-you-go financed state sys- which reach far beyond adapting sin- tem and a private fully-funded system. gle variables like contribution rates Both elements are mixed in Argentina, or retirement age. The transition to an Uruguay, Costa Rica, and Ecuador. individual capitalization, i.e. saving Only a few countries like Brazil, Ve- obligatory pension contributions on in- nezuela and Paraguay have rejected an dividual accounts and investing these obligatory pillar based on individual funds at the capital market is frequent- capitalization coverage and opted for ly represented as a simple solution for reforms of the existing public systems complex problems. However, every (cf. Crabbe 2005, Mesa-Lago 2004). country that believes structural pension reforms would lead to a relief of the Two questions arise analysing the La- national budget, a reduction in ancil- tin American experiences: What were lary wage costs, perhaps even higher the motives for this extremely compre- pensions and a revival of the finance hensive privatisation wave? And: Were sector, should study the effects of pen- the promises of the reformers and their sion reforms in Latin America first: this consultants fulfilled? region leads the field worldwide concerning privatisation of state pensions The background of the reforms and is once again a “laboratory of mo- dernity”, an experimentation field for A pension system should provide suffi- radical political recipes which would cient benefits for the highest proporti- not be possible in most countries of the on possible of pensioners of a country so-called first world. in a sustainable way. Both targets were not fulfilled in most Latin American Since Chile introduced private pensi- countries in the past. The state pension on accounts managed by profit-orien- insurance usually only included emplo- ted finance enterprises under dictator yees of the formal sector and therefore Pinochet in 1981, nine other Latin excluded a considerable share of the American countries have switched population. Nevertheless, the financial from public to private administration, situation of the pension programmes switched from the inter-generation was devastating due to increasing de- contract to the individual savings ac- pendency rates (the ratio of pensioners count. The Chilean model - obligatory to contributors), generous allotments private pension funds plus the guaran- to privileged employee groups, and be- tee of an additional state pension incre- cause of common evasion of contribu- ase if the savings are not sufficient to tions and tax evasion. Since pensions avoid poverty - has been implemented reforms were unpopular politically, differently in the various countries: In there were some illegal measures, for Bolivia, Mexico, El Salvador, the Do- instance in Argentina in the eighties, 68 WEED Conference Documentation

where the pension payments were not nal budget, and reduction of ancillary adjusted to the high rates of inflation, wage costs as well as positive growth leading to savings for the state, howe- effects by establishing a capital stock ver, the majority of pensioners fell to- and expansion of the financial sector. wards the poverty line (Hujo 2004). This positive scenario was even more convincing for many Latin American So there were enough reasons for a re- countries since Chile was considered a form. Standardised and just rules for model after its transition to democra- all those insured as well as a broader cy and due to its economic successes. coverage, protection from old-age po- Moreover, the influence of the global verty and stable financing were to be financial markets on political decisions attained. Due to the global changes at increased since foreign capital was im- the beginning of the nineties, many La- portant for economic dynamics. Addi- tin American politicians were optimi- tionally, market- orientated reforms of stic, capital flowed back to the region social security promised the support again after the very difficult years of of multilateral lenders and a positive the lost decade and many markets were echo from private investors. Internal booming. The new decade was also factors also suggested a privatisation characterised by a huge backlog: after of the state systems: the population’s years of stagnation due to stabilisation confidence in the state had diminished and structural adjustment programmes, due to several crises. The prospect of there was an aim for economic growth purchasing private property in pension and second generation reforms were to contributions appeared to be attractive, be undertaken. This included settling and therefore even cuts, such as a hig- the deuda social, the social debt, since her retirement age, more contribution the interests of the financial creditors payment years or a more unfavourable had primarily determined the direction pension formula were accepted (cf. on of politics in the past. the political economy of the pension reforms Müller 2003). A well-timed World Bank policy report appeared, which discussed the Pension privatisation, balance reform of the global public pension sheets after 25 years systems and supposedly had found a model that would both solve the pen- The evaluation of the new pension sion problem and also boost economic fund systems in Latin America has growth (World Bank 1994). The advo- been analysed extensively during the cated model of three pillars strongly last few years. This may be caused by imitated the Chilean pension system. increased interest from industrialised It combined a public basic income and transition countries in private so- (pillar 1) with a private pension fund cial security systems (Müller 2003, (pillar 2) and the possibility of increa- Holzmann et al. 2004). On the other sing the compulsory contributions with hand, reform opponents and supporters voluntary savings (pillar 3). According tried to consult the Argentinean case to to the World Bank, the three pillars prove their arguments. The country would promise a distribution of risks, was declared the model student of the efficiency gains, relief of the natio- Washington Consensus in the nineties Privatizing Pensions: Experiences from Latin America 69 and fell into the deepest economic cri- the tax system, like in Chile, seems to sis of its history in 2001 when the state be illusory for most developing coun- announced its insolvency. The private tries. pension system which had been implemented on recommendation of the Pension privatisation, however, is not World Bank in 1994 had in no way only expensive for the state, the insu- contributed to growth or as a consoli- red also must pay between 30 and 50 dation instrument and had not led to a percent of their contribution for admi- diversification of risks in the pension nistration and insurance costs. These system. On the contrary, the costs of costs are primarily caused by expen- the reform intensified the Argentinean sive advertising. Additionally, ten- fiscal crisis and increased public debt. dencies toward market concentration As a result of the national bankruptcy, and the mostly insufficient diversifi- both welfare benefits were cut and the cation of the investment portfolio are pension fund assets, which had mainly important points of criticism referring been invested in public securities, were to the private insurance model in La- devalued, (though this was only visible tin America. However, the failure of in the market valuation that is not im- the new pension systems concerning plemented for the majority of assets). their social impact is even more dras- Additionally, 80 percent of the pensi- tic: in all countries, the proportion of on savings were denominated in US the population which can expect pen- dollar and they lost two thirds of their sion payments is decreasing steadily; hard currency value due to a forced there still is no definite solution for conversion to the local currency, the the integration of self-employed peo- peso (Hujo 2004, Rofmann 2005). ple from the growing informal sector, and frequently low income-earners and The Argentinean example has clearly women or families are disadvantaged shown the problems which arise in the in a private model if there is no social transition of a public pay-as-you-go compensation and redistribution (cf. model to a private fully-funded model. Mesa-Lago 2004). The disadvantages of such a structural reform, however, are not only limited The World Bank published a subse- to cases of extreme crises. The costs quent report entitled “Keeping Promi- for the national budget arise for all ses” (Gill et al. 2004), a decade after its countries which channel the pension influential Policy Report and still de- contributions to the financial sector but scribed the path as correct if a few cor- still remain responsible for the regular rections were applied (concerning effi- pension payments. In most cases, these ciency, regulation, poverty avoidance, fiscal transition need to be financed via coverage), an incomprehensible con- public bonds that are bought by pensi- clusion considering the previous deve- on fund societies. In view of the Argen- lopments and future challenges in La- tinean disaster, even the World Bank tin America. The reforms were indeed stated that this kind of pseudo funding successful in overcoming reform barri- contained risks (Holzmann et al. 2004, ers and have contributed to a simplifi- p. 89). Their recommendation, howe- cation of the social security systems as ver, to finance the reform costs through well as a more appropriate equivalence 70 WEED Conference Documentation

of contribution vs. benefits. In the long come Security in Latin America: A Re- run, the latter is supposed to reduce the gional Study on Social Security Pen- pension deficit and improve fairness in sion Reforms. Washington D.C.: The the system since some unjustified privi- World Bank. leges were abolished. Whether a transition to a private system was necessary Goldberg, Laura and Rubén Lo Vuolo to achieve this goal, however, is dou- (2005): La reforma de la reforma: un btful. Except for the argument of over- nuevo sistema previsional para la Ar- coming political reform barriers, these gentina. CIEPP Documento de Trabajo results could have also been achieved No. 45, Buenos Aires, July 2005. within the public systems. Holzmann, Robert et al. (2004): Old Although the argument is slightly wea- Age Income Support in the 21st Cen- kened, the so-called secondary reform tury: The World Bank’s Perspective aims, i.e. increase in national saving, on Pension Systems and Reform. Was- promotion of the financial sector and hington D.C.: The World Bank. the capital market as well as the positive reaction of the international lenders, Hujo, Katja (2004): Soziale Sicherung were pivotal to the decision to imple- im Kontext von Stabilisierung und ment a multi-pillar model. Indeed, the Strukturanpassung: Die Reform der private pension fund corporations (e.g. Rentenversicherung in Argentinien. in Argentina 70% of these funds are Frankfurt am Main: Peter Lang (Rei- owned by transnational financial corpo- he Finanzierung und Entwicklung, Bd. rations) have earned substantial profits 15). from the secure contributions, whereas risks and costs were primarily financed Katharina Müller (2003): Privatising by the state (Cf. for the Argentinean Old-Age Security. Latin America and example Golbert/Lo Vuolo 2005, Hujo Eastern Europe Compared. Chelten- 2004). ham, Northampton: Edward Elgar.

Katja Hujo Mesa-Lago, Carmelo (2004): An app- raisal of a quarter century of structural pension reforms in Latin America, Literature in: Cepal Review No. 84, December 2004, p. 57-81. Crabbe, Carolin and Juan Giral (2005): Lessons Learned from Pension Reform Rofman, Rafael (2005): The Impact in Latin America and the Caribbean, in: of Argentina’s Economic Crisis on its Crabbe, Carolin (ed.): A Quarter Cen- Pension System, in: Crabbe, C. (ed.) tury of Pension Reform in Latin Ameri- 2005, p. 277-304. ca and the Caribbean: Lessons Learned and Next Steps. Washington D.C.: In- World Bank (1994): Averting the Old- ter-American Development Bank. Age Crisis. Policies to protect the old and promote growth. Washington D.C.: Gill, I./ T. Packard/ J. Yermo (2004): The World Bank. Keeping the Promise of Old-Age In- Privatizing Pensions: Experiences from Latin America 71

Chart: The new pension systems in Latin America 8 2,0 yes 2003 no data no data substitute Republic Dominican 4,0 yes 8,33 2004 mixed no data no data Ecuador - 7,5 2,5 yes gua 2004 no data no data Nicara substitute (a) yes 100 74,2 4,25 Rica 2001 Costa mixed - 3 91 no 10 dor 45,0 1998 substitute El Salva

no 10 100 44,5 2,50 1997 Bolivia substitute no 100 40,5 4,48 1997 12,07 Mexico substitute 51 yes 52,7 2,68 1996 12,27 mixed Uruguay - 80 yes tina 33,5 7,72 3,28 1994 mixed Argen - 45 no 10 bia 47,7 3,49 1994 parallel Colom 8 96 no 39,2 3,73 1993 Peru parallel 98 10 yes 49,1 2,31 1981 Chile substitute - - - tisation: Share tisation: Share Reform year Reform type (% of total) private insured system Coverage de active gree:% contributors private system (2003) Social security pensions avail able? Membership rate ﬁxed-interest fund (% wage) Administration and insurance costs (% wage) Degree of priva Degree Source: Mesa-Lago 2004, Holzmann et al. 2004 n.d.: no data as % of investment yield with upper limit (a) administration charges 72 WEED Conference Documentation

2.6 The Transformation of the European Pension Systems

Introduction fallen since the eighties because of the price stability oriented monetary and The European welfare states are in a fiscal policies and lower wage settle- crisis. Low economic growth and mass ments, and this has consequently led to unemployment has allowed the costs losses in pensions. In Great Britain, for of social security to rise. At the same example, the basic pension has fallen time, mobile trans-national capital from 20% to 14% of the average salary makes tax evasion easier. Far reaching in the seventeen years since the transi- restructuring and reduction of welfa- tion towards linkage to inflation by the re state payments are the order of the Thatcher government in 1980 (Black- day under the dominating conditions burn in 2002). of neo-liberal political concepts. Pu- blic pension systems are also strongly The second class of reforms which affected by the market liberalisation were carried out in Sweden, Italy and restructuring of the welfare state, and some East European countries such as in the end, they carry a large part of Poland were directed at structural re- the costs of social security. On average forms in which so-called notional defi- the pension payments in the EU of 15 ned contribution plans (public pensions countries corresponded to 12.6% of with a fictive contribution point of re- the GDP in 2002, or was about 47.1% ference) were introduced. Here the le- of the total social expenditure (Euros- vel of the future pension to be received tat 2005: 2 ff) depended on the individual contributi- The different restructuring and redu- on payments and their fictive interest cing measures can be classified accor- payments depends on an adjustment ding to the extent of the changes. An for annual wage increases, inflation, or important form of the reduction in pu- another criterion. To calculate the pen- blic pension payments is in parametric sion, the total amount of contributions reforms whereby the claim criteria for paid is divided by the life expectancy of obtaining a full pension are made stric- the appropriate age group. The central ter or the level of pension payments aim of these reforms was to produce a are simply reduced, without the struc- strong financial incentive to remaining ture of the pension system itself being longer in paid employment. changed. Here, there are various possible measures by which the time for Finally, the pension systems were receiving a pension is shifted to a later partially privatised in most countries. date, a higher number of contributing Here, the central point of the argumen- years is required to qualify for a full tation was for a well-balanced relati- pension or early retirement program- onship between the three columns of mes for those leaving working life old age security. A report of the World earlier are dismantled or the penalties Bank (1994) was used to popularize are increased. Additionally the annual this viewpoint worldwide. The public, adjustment of pensions for cost of li- contribution-financed pension provi- ving increases has been restructured in des the first column, and should mere- most EU countries. Inflation rates have ly prevent old age poverty. The second The Transformation of the European Pension System 73 and third column should be covered by me (SERPS)) which was only intro- capital resources and be the responsi- duced during the late seventies by the bility of the private individual or the Labour government. To compensate employer, whereby the second column for these pension cuts, the government is obligatory and the third column is increased state subsidies for private voluntary. The proposals were immedi- pensions and expanded the principle of ately effective where the international contracting out. Contracting out meant financial institutions such as the World that the SERPS system could be left Bank or the IMF acted as consultant, as and the social security contributions for example in several Latin American paid into it would instead be transfer- and East European states. But the EU red into an employer-operated scheme commission and the governments of or into a private pension savings plan. west European states also took advan- The Thatcher government did not in- tage of this three columns rhetoric to troduced this system, but has extended legitimize (part-) privatisations of the it alongside company-based pension pension systems. schemes, as well as private pension systems and contribution-based pensi- Privatisation in Europe: The examp- on systems where the employee carries les Great Britain and Germany the risk. The government incentives and advertising campaigns, as well Great Britain is the country with the as those of financial institutions, led longest tradition of capital-covered to the fact that more than 70% of 20 private pensions within Western Euro- to 59 year-olds were no longer in the pe. This is because the national basic SERPS system in 1997 (Devetzi in state pension only provides a very low 2003: 393). income. During the fifties and sixties, capital covered pensions were particu- This privatisation logic was not ques- larly provided by collective company- tioned by the Blair government. The based pension schemes which supple- Blair government limited itself to im- mented the low state pensions for many proving the situation of the poorest employees. But the real privatisation pensioners with the Minimum Income and individualisation of the pension Guarantee and tried to introduce a pri- system began in the eighties under the vate pension scheme with contributi- Thatcher government. Her central ob- ons covered by the state, so that people jective was individualizing social risks. of low to middle income could private- Here, the trade unions and the welfare ly secure their old age. In the green pa- state were to be weakened, since these per “Partnership in Pensions” (Depart- were, in the eyes of the neoconservati- ment of Social Security in 1998), the ves, the representatives of collectivism new Labour government formulated and the most important opponents of the objective of changing the ratio of the Thatcher government. Firstly, the state to private components of the pen- remuneration from the basic state pension income from 60% to 40% then to sion was strongly reduced in line with a new ration of 40% to 60% by 2050. the GDP, as also was especially the Germany is among those countries in second state pension based on income which a large pension reform during (State Earnings Related pension Sche- the last years has shifted the emphasis 74 WEED Conference Documentation

in favour of the private old age pensi- particularly economically motivated on. The German conservative corpo- integration projects of recent decades. ratist welfare state linked the income Here, the restrictive fiscal policy which entitlement predominantly toward the underpins the growth and stability pact employment status. The income from and which the euro-zone states in the the pension system is financed mainly economic union and monetary union by means of parity social security con- are obliged to follow is important. tributions. The state pension has been income-based and adapted annually to The state pension systems are a central overall wage changes since the state cost factor in the public households and pension reform of 1957, and this has thereby a potential danger for the EU lead to a significantly higher state pen- policy directed towards monetary sta- sion level than in Great Britain. Never- bility, as was first emphasised for the theless, a policy of social cuts began first time in 1999 by a study of the EU in the 1980s against the background of commission (European Commission lower economic growth rates and hig- in 1999). At the EU summit in Stock- her unemployment. Even though this holm in 2001 it was decided that the policy continued for a long time along so-called open method of coordination the path of the old system, neverthe- (OMK) which was already applied in less, a pension reform followed with European employment policy should the red-and-green Federal Government be extended to pension policy to pre- in 2000/2001 that initiated a paradigm vent budget deficits and to achieve cost change. The central objective of the reductions for businesses. The objecti- pension reform was the long-term sta- ve consists in particular in supervising bilization of the contribution level to the reform of national systems for the the pension system and was linked to a provision for old age, especially with long-term lowering of the legal pension regard “financial sustainability”. level coupled with an extended private old age security component. To com- Those states which lag behind in the pensate for the lowering of the net pen- reduction and privatisation of their sion level, the private old age pension social security systems should be ex- system was to be assisted by the state. posed and be put publicly under pres- In 2008, when this assistance reaches sure by means of this new supervision its highest level, the old age pension mechanism with the aid of the “soft” system supplement will be subsidised instruments consisting of guidelines, to the extent of Euro12.7 billion (the best practice and the formulation of German Bundestag in 2002: 4). benchmarks which have also been applied in the European employment The European Dimension policy. In the end, a connection exists between the EU pension policy and the Although the pension reforms of the efforts to create an integrated European recent years are indeed essentially na- financial market, a central objective of tional political decisions, they must the EU Lisbon strategy. Here, a pivotal also be placed within the context of target of financial market integration European integration, or to be more is the development of a domestic mar- concrete, within centrally directed, ket for the old age pension system for The Transformation of the European Pension System 75 the employed. The EU sees the signi- is higher than the state transfer of cur- ficance of setting up old age pension rent contributions which are dependent systems for the employed whereby in on wage developments, as for examp- pension funds and employee mutual le the General Association of German benefit pension funds are especially Insurance Economists argues (GDV important, in the fact that “these sys- 2003: 13 ff). In addition, aging societies tems involve large financial institutions could profit from capital exports from which have to play a key role in the the dynamic development of other eco- integration, efficiency and liquidity of nomies. The whole economy should the financial markets.“ (The European also profit from the fact that more ca- Union in 2003: 10) pital in the form of savings flows into the financial markets, raising the liqui- The Privatisation Discussion and its dity of the markets and making capital Proponents available on more favourable terms for financing external businesses and for The public discussion about the sup- venture capital investments. Then this posed necessity to reduce state pensi- would finally also lead to more growth on systems and to partially privatize and employment, which is for example them is dominated by two interlinked the concept of the EU Lisbon strategy. arguments. The first argument refers to In other words: The partial privatisa- the demographic changes. In view of tion of the European pension systems a growing number of pensioners and is a central foundation stone in the es- less people of working age, the costs of tablishment of financial market capita- the “demographic time bomb” would lism. This reorganization of European rise exorbitantly. The second argument capitalism is politically borne by a refers to the question of the financial coalition of political and economic ac- competitiveness of the economy. Then tivists and in particular was supported the contributions for old age securi- by the big trans-national financial and ty would increase strongly if the state industrial companies. The banks, insu- pension expenditure is not reduced, and rance and investment companies hope this would weaken European company for huge influxes of resources from the competitiveness and finally prevent in- privatisation of the pensions and lobby vestment, economic growth and the re- for this at national and European le- duction of unemployment. vels. But big industrial companies also support the trend because, among other Beside this continual questioning of reasons, their financial burden is eased state pensions with respect to financial by the privatisation and also because sustainability, the advocates of privati- they are themselves active in various sation speak of the advantages that pri- ways on the financial markets. vate pensions would bring for the individual as well as on a macroeconomic Conclusions level. The individual pension savers would be better off financially because Overall, the European pension systems the income return for a capital-covered have gone through an extensive trans- pension system which depends on inte- formation process in which private old rest payments from the capital markets age security has been upwardly reva- 76 WEED Conference Documentation

lued. But the dismantling of the state lism would achieve positive overall pension systems and the privatisation economic effects. Deception scandals create more problems than they solve. as a result of reorientation towards As a component of a general neo-libe- shareholder value, as for example ral cost reduction strategy which also at the US Enron enterprise, the short includes low wage increases, social term interests and extremely high yield cuts in other areas such as the health demands of many financial investors system and a restrictive fiscal policy, it with respect to businesses, or the fi- also contributes to a fall in consumer nancial problems of companies such as demand and thus, in the end, damages General Motors whose pension funds the whole of economic development. are massively under-covered because of low capital market yields resul- Also, demographic change does not ting from the end of the stock market necessitate extended privatisation and boom, make the advantages of this capital cover. Firstly, higher employ- model seem very questionable. And, ment levels and increases in produc- finally, the social gap and the risk of tivity can compensate for the shifts age poverty grow with privatisation of towards an older population. Secondly the pension systems. In Great Britain, capital cover and the export of capital about 25% of the 11 million pensioners do not provide a demography resistant live in poverty, i.e., after paying their solution. Many of the fast growing housing costs, they have less than 112 economies of the south, as for examp- pounds per week at their disposal (The le China, are also confronted with de- Guardian, 13th September, 2004). mographic problems and the massive Therefore, social opposition is neces- influx of financial capital into these sary against further privatisation of the relatively weakly developed markets pension system and we need to present could rapidly lead to instabilities as alternatives for a solidarity pension were observed in the Asia crisis of the system. late nineties. The alleged “natural” advantages of income return from capi- Martin Beckmann tal-covered pension systems compared with the reallocation of current contributions procedure - if they are actual- Literature ly achieved and are not consumed, as in many countries, by the horrendous Blackburn, Robin (2002): Banking on fees charged by the financial compa- Death. Or, Investing in Life: The His- nies offering them - are a consequence tory and Future of Pensions, London / of a transfer of relative social strengths New York: Verso. towards capital which has led in recent decades to a continual decline in wage Department of Social Security (1998): rates (DIW 1998: 838). Hence, higher Government’s Green Paper on Pen- wage settlements would also increase sions: A New Contract for Welfare - the level of state pensions. Partnership in Pensions, London.

Also it is more than questionable whe- The German Bundestag (2002): Natio- ther ﬁnancial market driven capita- naler Strategiebericht Alterssicherung. The Transformation of the European Pension System 77

Unterrichtung durch die Bundesre- cations of Ageing Populations, Euro- gierung, Pamphlet 14/9503 (National pean Economy, No. 69. Strategy Report on Pension Security, Information Provided by the Federal Eurostat (2005): Renten in Euro- Government, Pamphlet 14/9503). pa 2002: Leistungen und Empfän- ger, Brüssel. (Pensions in Europe in Devetzi, Stamatia (2003): Grossbri- 2002: Remuneration and Recipients, tannien; in: VDR (Ed.), Rentenversi- Brussels.) cherung im internationalen Vergleich, DRV-Schriften Band 45, Bad Hom- GDV (2003): Altersvorsorge und de- burg: WDV-Wirtschaftsdienst, p. 391- mograﬁscher Wandel: Kein Vorteil für 417. (Great Britain, in VDR (Ed.), An das Kapitaldeckungsverfahren?, GDV International Comparison of Pension Volkswirtschaft, Themen & Analysen, Security, DRV-Schriften Band 45, Bad Nr. 1, Berlin. Homburg: WDV-Wirtschaftsdienst, p. 391-417). World Bank (1994): Averting the Old- Age Crisis, Washington D.C. DIW (1998): Kapitaldeckung: Kein Wundermittel für die Altersvorsorge, Wochenbericht 46/98, Berlin: Deut- sches Institut für Wirtschaftsforschung. (Capital Cover: Not a Miracle Cure for Pensions, Weekly Report 46/98, Berlin: Deutsches Institut für Wirtschaftsfor- schung).

The European Union (2003): Richt- linie 2003/41/EG des Europäischen Parlaments und des Rates vom 3. Juni 2003 über die Tätigkeiten und die Be- aufsichtigung von Einrichtungen zur betrieblichen Altersversorgung, Amts- blatt Nr. L 235 der Europäischen Uni- on vom 23. September 2003, S. 10-21. (Guideline in 2003 / 41 / the EC of the European Parliament and the Council from the 3rd June, 2003 Concerning the Activities and Supervision of Com- pany-based Old Age Pension Schemes, Ofﬁcial Bulletin No. l 235 European Union from the 23rd September, 2003, page 10-21).

European Commission (1999): Long Term Economic and Budgetary Impli- 78 WEED Conference Documentation III Let your money work for development - but how?

3.1. Codes of Conduct for Financial Service Providers

Banks have repeatedly been attacked - Speculating on the state “bailing by non-governmental organisations out” the economy in case of bad spe- (NGOs) in the past years because they culation financed projects that led to reckless - Inflating the volume of government environmental degradation and vio- bonds from developing countries and lation of human rights. A prominent emerging market countries example is the campaign against the financing of the OCP pipeline in Ecu- - Ignoring necessity for debt relief, ador by West LB (Landesbank). preferably without complications, for insolvent developing countries NGOs in Germany and other coun- - Dealing in shares of companies that tries have realised that campaigns on exploit bonded labour banks attack the centres of economic activity. Projects that are not financed At the same time, banks should: by banks cannot be implemented and what banks consider profitable receives 1. Invest in environmentally sound sufficient capital. If banks were forced technology to include social and ecological crite- 2. Invest in forms of renewable ener- ria in their allocation of loans, many gy projects would not be able to proceed. An extensive study of banks reveals, 3. Allocate loans mainly to small and however, that they, as centres of eco- medium- sized companies nomic power, have many possibilities 4. Allocate investment and loans par- to influence the economy that can have ticularly to companies with good positive or negative effects. working conditions NGOs criticise different areas, such as If banks react to these extensive de- the following offences: mands they usually reply that they are - Financing environmentally detri- obliged to achieve profits. Inquiries mental projects on the banks’ business quickly face restrictions. Banking secrecy makes it - Financing projects that violate hu- more difficult than in other industries man rights, e.g. by forced resettle to obtain information on customers, ment partners and business deals of banks. - Financing corrupt regimes Codes of conduct have to consider this - Speculation against currencies specific situation in the banking sector. - Money laundering - Assistance for tax evasion Codes of Conduct for Financial Service Providers 79

- Codes of Conduct have to be very comprehensive considering the power that banks have in the economy

- They also need to be monitored in ternally by a powerful body, for instance by a sustainability department that is directly subordinated to the management.

Of course, internal monitoring does not substitute the internal independent supervision.

In future, the following issues should be discussed: 1. How detailed and how comprehensive should codes of conduct for banks be? 2. Is it possible and desirable to build selective alliances between NGOs and progressive banks?

Antje Schneeweiss 80 WEED Conference Documentation

3.2 Are Codes of Conduct the Solution?

According to the declared intentions the WestLB loans for a pipeline proof transnational corporations, a bright ject in Ecuador that caused massive future lies before us. In any case, there environmental damage and harm to have been numerous codes of conduct the indigenous population1. To escape for various business branches since from public criticism, the bank set up the 1990s, whereby transnational cor- a sustainability division and signed porations have committed themselves the Equator Principles2. to meet minimum social and ecological standards. Codes of conduct for fi- The Equator Principles formulate nancial service providers have been in claims to carry out exact studies regar- existence since 2003 with the “Equa- ding possible harmful effects on the tor Principles”, and many big banks environment and the indigenous popu- and insurance companies have also lation and, where necessary, to refuse signed up to these. Can codes of con- to finance questionable projects. The duct contribute to a clear realignment signatories of the Equator Principles of these businesses towards sustaina- meanwhile include 41 banks, among bility? these the Dresdner Bank, the Hypo Vereinsbank Group and the WestLB3. Equator Principles Basic Problems with the Codes of High flying hopes have partly been Conduct and the Equator Princip- attached to the demand for guidelines les for banks. By controlling the allocation of credit, banks can have a far-re- The Equator Principles show many of aching influence on which economic the basic problems that NGOs have initiatives can be implemented. If it criticized for years concerning initia- were possible to have influence on the tives for voluntary commitments. guidelines for credit allocation, then this would constitute indirect control The most conspicuous is that indivi- of investment activity. dual case investigations of projects are under the sole control of the cor- Demands for codes of conduct, ho- poration itself. Consultation with in- wever, were also a reaction to the di- habitants of the region where the fi- sastrous environmental and develop- nanced project is to be placed is not ment policy consequences of many provided. Cooperation with civilian projects which were sponsored with social activists is also left to the disc- the help of big financial institutes. The retion of the banks4. WestLB signed the Equator Principles in reaction to civilian social pressure But most serious are the deliberate re- after various NGOs had scandalised jection of any external control of the

1 Cf. Graf, Thomas, Die West-Öl-B-Pipeline, Menschenrechtsverletzungen und Regenwald- zerstörung in Ecuador [The West-Oil-B Pipeline, Human Rights Abuse and Rain Forest De- struction in Ecuador], Münster (2004) 2 WestLB, New Thinking. Sustainability Report 2005, p. 2 3 See : http://www.equator-principles.com 4 Shaping the Future for Sustainable Finance. Moving from Paper Promises to Performance, ed. by WWF and Banktrack (2006), p. 79 Are Codes of Conduct the Solution? 81 codices as well as the lack of punitive the results of growing deregulation, measures for the case of non-compli- (reducing controls on cross-border ca- ance. The Equator Principles therefore pital movements) as well as bank se- are none other than an uncontrollable crecy make the financial community a declaration of intent by the corporati- very opaque field. Meticulous enqui- on5. ries would be necessary, for example, to get an idea of the engagement of Thus, unsurprisingly there are many banks in developing countries. Criti- cases where the corporations have not cal activists from civil society seldom kept to their own codes of conduct. have the resources at their disposal The example of Shell is probably the that these enquiries would require. best known. After years of negotiations, NGOs managed to get Shell to The Equator Principles vehemently introduce a company code of conduct. insist on the voluntary nature of the This, however, has not prevented the guidelines and self-control by the cor- corporation from carrying out oil pro- porations. Every outside interference duction at the expense of the environ- is declined. This restriction is no ac- ment and human rights in Nigeria6. cident, but deliberately intended. This is because the voluntary self commit- The control possibilities that have been ment by corporations is also to pre- deficiently set up represents a problem empt and replace demands for more especially since those affected or civi- extensive demands for legal regula- lian social groups can seldom find the tion of the corporations and external means to check the behaviour of cor- code of conduct control. Thus, at the porations. Environmental damage, for UN summit in Johannesburg in 2002, example, is often difficult to measure a comprehensive programme was and since corporations are scarcely presented by civilian social organisa- obliged to disclose their project plans, tions which called for a far-reaching individual case investigations can corporate accountability for their eco- only be carried out with considerable nomic activities and state control of effort. It is often even more difficult codes of conduct. On the other hand, to provide evidence of environmental there was a publicity offensive on the damage done or violation of human part of the corporations for voluntary rights in the case of corporations from self commitment as an alternative to the financial community. On the one “command and control” initiatives7. hand, it is generally considerably more The economic lobbying associations, difficult to establish the consequences such as the German BDI, pursued the of speculation and securities trading tactics of praising initiatives for vo- than, for example, definite violations luntary self commitment and at the of labour laws in the production of same time preventing the introduc- material goods. On the other hand, tion of outside control by all possib-

5 See: Unproven Equator Principles. A BankTrack Statement, Utrecht (2005) 6 Kerkow, Uwe; Martens, Jens und Schmitt, Tobias. Die Grenzen der Freiwilligkeit. Hand- lungsmöglichkeiten und Erfahrungen von NGOs und Gewerkschaften bei der Anwendung freiwilliger Selbstverpﬂichtungen der Wirtschaft (WEED Arbeitspapier), [The Limits of Voluntary Principles. The Possibilities for Action and the Experiences of NGOs and Labour Unions in the Application of Voluntary Commitments by Business (WEED working paper)] Bonn und Berlin 2003, p. 11 7 Kerkow et al. (2003), p. 5 82 WEED Conference Documentation

le means8. The Equator Principles the confidence of customers and con- are derived from this spirit and are a sensus with civil society, should cost defensive reaction to the criticism of as little as possible in terms of money corporations who nevertheless want and accountability. to maintain complete freedom to pursue their business activities. In consequence the unaccountability logic corresponds to the efforts of the But why is there such big resistance to International Finance Corporation, measures that are obligatory instead which is the World Bank’s private cre- of based on trust if the intentions of dit agency, to weaken the minimum the corporations are supposed to be standards of the Equator Principles9. in such harmony with the demands of What never was a binding regulation civil society, as the Equator Principles can also be retracted again without too suggest? Why is there an enormous much difficulty. Civil society should resistance to public control if finan- consider this effort to soften alrea- cial service providers, as their repre- dy insufficient codes of conduct as a sentatives claim, are on the brink of scandal and use it as an opportunity carrying out their business in a sustai- to demand more binding regulations nable way and even appear to be final- to control the business activities of ly convinced that sustainability would banks and insurance corporations. also serve their turnover? Equator Principles and the Dere- The fine sounding words mostly used gulation of Financial Services to wrap up the respective codes of conduct conceal a conflict of interest For the above mentioned reasons, it is between short-term economic and advisable to look very critically into long-term social objectives. The glo- the new preference of corporations for balized, competitive pressure and the sustainability. Codes of conduct scar- growing power of institutional inves- cely signify a change in the direction tors make it imperative for corporati- of corporate policies but are good for ons to keep the costs for sustainability public relations and are an attempt to low. Additionally, it is necessary not ward off criticism. Attention should to thoughtlessly abandon potential especially be paid to the fact that co- areas of business to competitors and des of conduct contain norms which to eliminate possible liability and concern the complete corporate busi- accountability risks to corporations. ness activity in a given line of busi- Thus, unaccountability is the credo ness, and not just a single sector. for all corporate code of conduct in- Otherwise there is a great risk that itiatives, including the Equator Prin- a corporation establishes a green or ciples. The maximum image gain, social image through very praisewor- whereby the corporation seeks to win thy promises in one line of business

8 Thus, the BDI declared “The environmental organizations caused the failure to make an envi ronmental declaration by attempting to include an additional clause into the agreed text . Thus the principles can only be considered to be an intermediate step towards the necessary more comprehensive inter-state regulations for transnationally active corporations. The environmen tal associations have unilaterally violated the spirit of voluntaryness of the agreement […]”.: quoted in Kerkow et al, p. 9 9 See: http://urgewald.de/index.php?page=3-64-156&artid=212&stwauswahl= Are Codes of Conduct the Solution? 83 whereas the activities of other lines of for the financial service providers who businesses with potentially damaging commit themselves to observing the consequences are completely ignored. new codices and the daily damage ari- This is particularly relevant with re- sing from the foreign business activi- spect to the consequences of financial ties of the banks. It is thus questionable services deregulation. as to what extent the codes of conduct can assess the consequences of libera- Expansion in developing countries is lisation of the financial services sector. a lucrative growth market for banks Therefore, the discussion concerning and insurance companies; the savings the far-reaching effects of the globa- of the upper and middle classes has lisation of the financial service sector primarily aroused the greed of the fi- also shows the limits of this approach. nancial community. This is linked to Conduct guidelines and voluntary self structural consequences for the finan- commitments certainly cannot replace cial sector in the respective countries political regulation of the financial since foreign banks and insurance markets. companies hardly acknowledge social imperatives, for example, easy access A Step in the Right Direction? to financial services such as loans for the poorer sections of the population. Codes of conduct could at least pave Additionally, deregulation is linked to the way for more comprehensive ini- far-reaching reduction in capital mo- tiatives, which is a hope often formu- vements control and state regulation in lated by civil society. Starting-points general. This will more strongly expo- could at least be standards for criticism se the whole financial sector in develo- and demands concerning corporate ac- ping countries to finance market fluc- tivities. The absence of accountability tuations, and the risk of financial crises in codes of conduct should be compen- will increase considerably. Political sated by civil society engagement. control of the economy is to a great extent made more difficult by liberali- The voluntary self-commitment ac- sation, developing country economies tually offers starting points “to pin will be increasingly dependent on the down” certain corporations and to de- decisions of international investors10. monstrate the inconsistency between words and deeds. Damage to public Possible consequences of the deregu- reputation can sometimes constitute a lation of financial services continue to risk and force the corporation to aban- be ignored by codes of conduct such don obviously ecologically and social- as the Equator Principles, since they ly damaging projects. But this possible only relate to credit allocation guide- advantage is accompanied by many lines of financial services providers questions and disadvantages. for large-scale projects. Their potential damage to environment and people • The most publicly effective criticism in the developing countries are none often depends more on concrete proof the less serious. Therefore, there is an of the consequences of corporate acti- inconsistency between the image gain vity rather than on whether it followed

10 Krüger, Lydia und Reiners, Suleika, Expansion ohne Grenzen? Der Handel mit Finanzdienst- leistungen, Bonn 2005, S. 44-50 84 WEED Conference Documentation

certain codes of conduct. The sinking • Seen from the perspective of corpo- of the Brent Spar oil rig, for examp- rations, voluntary self commitment is le, became a scandal because the di- not complementary to or a step towards sastrous effects on the environment binding conditions or state regulation were publicized. Possible Shell codes but is a substitute for these. A positive of conduct played a subordinate role in reference to non-binding codes of con- this. duct can steal the thunder from those calling for more comprehensive regu- • Codes of conduct and sustainabili- lations. ty campaigns pursue the objective of improving the public reputation of a • The danger for civil society is to set corporation. There is the danger of extravagant hopes for a dialogue with “Greenwashing” if individual fields of corporations. Taking part in discus- business are excluded as, for examp- sions on the composition of codes of le, was the case in the financial sec- conduct soon turn into a participation tor. NGOs should try to prevent this, trap if public criticism and more com- as seen in the example of Hypover- prehensive demands are forfeited for einsbank, which is held up as a good tactical reasons. example and described as Germany’s most sustainability-conscious bank Thus, it remains a matter of doubt whe- in a current rating11, since this shows ther the present voluntary self commit- spectacular ignorance of the overall ment of financial service providers can consequences of the business activities lead to fundamental changes in their of this big bank. NGOs must insist on conduct or that they are productive a more extended concept of sustainabi- starting-points for civil society initia- lity and should not contribute to con- tives. In any case, they should not con- firming the impression that financial ceal that far-reaching consequences of service providers are making definite neo-liberal globalisation of financial progress in conduct. markets can only be controlled by binding regulations. • This is because qualitative changes with respect to sustainability are alto- Florian Butollo gether absent. 60% of the 500 largest corporations in Great Britain have al- Literature ready signed codes of conduct12. But it is questionable whether the British Banktrack (2006): Shaping the Future economy has made a clear step in the for Sustainable Finance. Moving from direction of sustainability and that the- Paper Promises to Performance. Hrsg. re has been any substantial progress von WWF und Banktrack, Utrecht towards the Millenium Development Goals. BankTrack (2005): Unproven Equator Principles. A Banktrack Statement, Ut- recht

11 See: http://www.umweltdialog.de/umweltdialog/ﬁnanzen/2006-03-23_HVB_Deutschlands_ nachhaltigste_Bank.php 12 Kerkow et al, p.7 Are Codes of Conduct the Solution? 85

Graf, Thomas (2004): Die West-Öl- B-Pipeline, Menschenrechtsverlet- zungen und Regelnwaldzerstörung in Ecuador, Münster

Kerkow, Uwe (2003): Martens, Jens und Schmitt, Tobias. Die Grenzen der Freiwilligkeit. Handlungsmöglichkei- ten und Erfahrungen von NGOs und Gewerkschaften bei der Anwendung freiwilliger Selbstverpﬂichtungen der Wirtschaft, Bonn, Berlin

(2005): Expansion ohne Grenzen? Der Handel mit Finanzdienstleistun- gen, Bonn

WestLB (2005): New Thinking. Sus- tainability Report. http://www.equator-principles.com http://urgewald.de/index.php?page= 3-64-156&artid=212&stwauswahl= http://www.umweltdialog.de/umweltdialog/finanzen/2006-03-23_HVB_ Deutschlands_nachhaltigste_Bank. php 86 WEED Conference Documentation

3.3 Big Brother is watching you. Rating Agencies as Agents of Sol- vency

“The ability people value most is the ability to pay.” Oskar Blumenthal (1852-1917)

“There are two superpowers in the world today in my opinion. There’s the United States and there’s Moody’s Bond Rating Service. The United States can destroy you by dropping bombs, and Moody’s can destroy you by downgrading your bonds. And believe me, it’s not clear sometimes who’s more powerful.” Thomas Friedman (1996)

Rating agencies judge the creditwort- ly those in foreign currency, since the hiness (credit standing) of businesses debt burden to be repaid would massi- and states: They judge the extent to vely increase if the national currency which a complete and punctual servi- were to be devalued and this can bring cing of interest and repayment obliga- a state to the brink of insolvency, as for tions of credit-related securities such example happened in Brazil during the as loans (bonds) is to be expected th- run-up to the presidential elections in rough their rating codes which stretch 2002. from AAA (the highest quality) to D (insolvency)1. The threshold between the two main categories Investment Grade (AAA to Through their assessments, rating BBB-) and Speculative Grade2 (BB+ agencies exert a tremendous influence to D) is an explosive issue; this is be- on whether investors are prepared to cause legal supervisory regulations hold the securities and if so, then which require institutional investors such as price the businesses and states have to pension funds and insurance compa- pay creditors: the lower the rating - the nies or even banks to invest large parts higher the risk assessment - the higher of their funds in securities that have an the interest. The rating of a new emis- investment-grade-rating3. If the rating sion is followed by continuous updates falls below the threshold of speculati- in which downgradings or upgradings ve grade, this inevitably means the loss can accompany sudden capital with- of immense amounts of capital for the drawals (notice of credit withdrawal) debtor. Rating agencies started up by or capital influxes or credit condition rating bonds to finance the railway net- changes. Following Brazil and Mexi- work in the USA and to date have con- co, Venezuela has now also announced tinuously grown in influence, parallel it will buy back some of its govern- to the expansion in finance markets. ment bonds (FTD, 2-27-6) - especial-

1 Unlike a bank credit where a banking institute carries out an internal solvency examination and uses the data solely for its own business purposes, the results of the rating of credit-related securities are broadly published for private and institutional investors 2 Also known as “junk bonds” or “higher yield bonds” 3 Additionally, bonds in investment-grade-securities enjoy a lower requirement for capital stock as a guarantee Big Brother is watching you. Rating Agencies as Agents of Solvency 87

On the Way to Power by Train power to investors: Whoever wants to raise capital via bonds must have a cre- When the US railroads started to stretch dit rating and pay for it5. across the whole continent in the mid 19th century, the capital requirements Deregulated finance markets are ac- exceeded the ability and readiness of companied by increasing intransparen- banks to provide the credit. There- cy, and this also leads to an increase in fore, the railroad industry - as well as the power of the rating agencies which other business enterprises - began is- virtually take over the supervisory role suing business bonds. The growing from democratic states. Additionally, variety of bonds led to an increasing financial supervisory institutes increa- demand for information among inves- singly rely on the results of the agen- tors, and Henry Varnum Poor published cies. Recently, the European Central the “Manual of The Railroads of The Bank (ECB) announced it would only United States” in 1868, a publication accept those government bonds as se- containing statistics on the various rail- curities for banking business refinan- road corporations. John Moody went a cing that were rated at least once with step further and founded the first rating the note A. This could signify increa- agency called Moody’s in 1909 (Setty sed pressure on budgetary policy for 2003: 1). John Fitch entered the ra- Italy, Portugal and Greece to maintain ting business in 1924, which followed the existing government bond rating the “Fitch Publishing Company” of (Die Zeit, 17.11.05): rating agencies 1913. Standard & Poor’s was founded gain power over parliaments. in 1941 after the merger of “Standard Statistics Company” and “Poor’s Pub- Developing countries are also depen- lishing Company”(Reder 2004: 178). dent on rating agencies - since the To this day, these three agencies - with nineties, international loans have be- Fitch slightly behind - dominate the come an essential component of their global rating market with their interna- external financing. The proportion of tional reputation4. Their fields of busi- international loans in foreign debt is ness and their influence have increased considerable, particularly for emerging continuously. market countries (cf. Fig. 1): in South America almost 40%, in Eastern Euro- At first the agencies were self-financing pe almost 20%, and in Asia and Africa with the ratings they sold to investors. almost 10% of the complete stock of In the 1970’s they started levying char- foreign debt is in international bonds. ges to the bond issuers (Reder 2004: 171f.) - a significant step in transferring

4 All three agencies are operating as subsidiaries: Moody’s is owned by Moody’s Corporation, partially a consultancy firm; Fitch is part of the consultancy firm Fimalac and Standard & Poor’s is part of the media corporation McGraw-Hill 5 In addition to solicited analyses, the agencies occasionally carry out unsolicited ratings. They need to be identified as unsolicited and can only be based on public data. Their purpose could be an overall comparison – for instance of all enterprises that issue Euro Bonds with a certain validity. However, these ratings that are carried out without internal information often lead to inferior results; recently, Fitch was discredited because they tried to force enterprises into a contract for paid solvency assessments 88 WEED Conference Documentation

New emissions of international bonds to bank loans, share prices or even co- in developing countries are approa- operation with business partners. ching the volume of the bank loans allocated each year (cf. Fig. 2). Addi- With public development ﬁnancing tionally, the bond ratings have a consi- declining, the United Nations Deve- derable effect on the conditions applied lopment Programme (UNDP) started

Proposition of international bonds in the total foreign debt stock of developing countries 2003

Source: World Bank, Global Development Finance 2005.

New emissions of international bonds in developing countries 1995-2001

Source: World Bank, Global Development Finance 2005, 2004. Big Brother is watching you. Rating Agencies as Agents of Solvency 89 a rating initiative for African states the labour market, the pension obliga- with Standard & Poor (UNDP News tions as well as the rate of public ex- Bulletin 26.2.04) (www.undp.org/dpa/ penditure and state debt, besides eco- pressrelease/releases/2004/february/ nomic growth (Standard & Poor 2004 pr26Feb04.html). Even Least Develo- : 3 ff)6. An “inflexible labour market” ped Countries (LDCs) such as Benin, including protection against arbitrary Burkina Faso and Mali were subjuga- dismissal, a minimum wage, collec- ted to the private economic reign of in- tive wage agreements, strong labour vestors and rating agencies. unions, and high pension entitlements, can have a negative effect on country Additionally, the rating agencies have ratings. And Standard & Poor have just extended their lines of business. Besi- reduced the credit standing estimate of des the rating of corporate and govern- Hungary because of doubts about the ment bonds, and the rating of banks reduction of the national debt which and insurance companies, so-called not only negatively affected bonds, but structured financing has also advanced also had a deflating effect on the Hun- to important business sections. Due to garian currency, the Forint (FTD, Jan. their huge balances, banks and insu- 27, 2006). rance companies are the biggest sector world-wide, considering the amount On principle, developing countries pay of securities emissions, and the banks’ higher interest than industrial coun- daily refinancing business on the mo- tries because the country rating risks ney market. The rating of very com- are set so high. Due to the privatisation plex structured financing - such as the of capital flow, rating agencies are of- booming licensing of various debts to ten more important to these countries asset backed securities or the inclusion than the World Bank and the Internati- of derivatives - earn the agencies three onal Monetary Fund (Hillebrand 2001: times the fees as the assessment of nor- 159). The economic consequences mal bonds (FTD, 6.2.06). of this principle that solvency alone counts in terms of creditor protection The growing power of rating agencies were particularly drastic in the Asian means that besides businesses, whole crisis in 1997: To obtain a better rating states are also subordinated to the rule and consequently lower interest rates, of financial solvency; since this is all Korea, Indonesia and other countries that rating criteria assess. For example, consented to have their bonds tied e.g. this is the reason why externalisation to puts to provide creditors with a lo- of costs is rewarded with better credit wer investment risk due to premature rating. Large banks such as Citibank, cancellation possibilities. When the Union Bank of Switzerland (UBS) and creditors actually did call in the money Deutsche Bank, for instance, receive a the money earlier, the countries were rating bonus because it is expected that thrust even deeper into crisis - liqui- the state will intervene in case of im- dity was reduced when it was most pending insolvency and the cost burden needed (Dodd 2003). Additionally, the is then shifted to the taxpayers (Rime subordination of development interests 2005). The rating assessment of sove- to the interests of private creditors or reign states includes the flexibility of Bondholder Values is visible in the

6 The country rating is also an important criterion for the rating of businesses in the same country since this is a practically insurmountable maximum limit 90 WEED Conference Documentation

high volatility of private capital flows in 2004 to examine the necessity for (cf. Fig. 2). Strengthening controls on legislative measures to regulate ra- capital transfers as an effective pro- ting agencies. In its communication tection against financial crises, on the on rating agencies on December 23rd other hand, would have a negative ef- 2005, the commission concludes that fect on the rating. Yet another incident no further legislation is required. On actually led to calls for regulation of the one hand, the commission refer- the rating agencies: the scandals sur- red to three guidelines of the Financial rounding the Enron energy corporati- Services Action Plan (FSAP), that are on (2001), the WorldCom telephone just as relevant to rating agencies: the corporation (2001) and the Parmalat market abuse directive; the capital re- dairy product corporation (2003) - all quirements directive (Basel II) which three corporations received an invest- also includes recognition requirements ment degree rating shortly before go- to the responsible rating agencies; and ing bankrupt. the directive on markets for financial instruments which is supposed to pre- From the Call for Regulating to the De- vent conflicts of interest. On the other cision in Favour of a Code of Conduct hand, the combination of these direc- In the year 2004, the International Or- tives with the voluntary principles of ganisation of Securities Commissions the IOSCO codex is considered to be (IOSCO) presented a framework for sufficient. a code of conduct for rating agencies - the Code of Conduct Fundamentals The codex is not likely to lead to any for Credit Rating Agencies. The codex change in behaviour since the agen- refers to: cies consider all requirements fulfilled (Everling 2005: 20). And whoever 1. the quality and integrity of the rating wishes to complain about a violation process of principles must contact the agency 2. the independence and avoidance of itself7. The principles of the codex, conflicts of interest however, do not restrict the power of 3. the responsibilities towards the in- the agencies as agents of solvency and vestors and issuers their pressure on the economic decisi- (transparency and confidentiality). ons of democratic states. Only measures to control and stabilize capital flows The framework is meant to be a global- such as capital transfer controls or the ly applicable proposal - as a possible taxation of international capital flows basis for implementation in national could prevent this instead of replacing law or for voluntary adoption by ra- the deregulation of financial markets ting agencies in their own code of con- with the self-regulation of rating agen- duct. While the latter largely occurred, cies. The discussion about regulation there is a problem with legal liability. which has started could be a point of Based on a report by its Committee reference. Besides the dominant rating on Economic and Monetary Affairs agencies of Moody, Standard & Poor, (ECON), the European Parliament and Fitch, other agencies have been requested the European Commission founded that include social and eco-

7 A further voluntary PR measure was agreed by Moody’s and Standard & Poor’s together with the Committee of European Securities Regulators (CESR): The publication of an annual letter describing compliance with the IOCSO codex (FTD, Dec. 15, 2005) Big Brother is watching you. Rating Agencies as Agents of Solvency 91 logical sustainability criteria in their star for those who would like to invest ratings. their money in the socially and ecologically most sustainable way possible Sustainability Rating, a Shooting or who feel compelled to rely on pri- Star or a Wallflower? vate retirement provisions because of cuts in state pensions. They are not a Sustainability rating agencies such as substitute for a democratic regulation Oekom research, founded in 1993, and of the global financial economy, nor Vigeo (since 2002), in Europe, or In- has such a claim been made. novest (since 1995) in the USA, assess corporations and countries according Suleika Reiners to social and ecological criteria, such as human rights and employment stan- Literature dards and climate policy or ecological issues such as pollution emissions, Dodd, Randall (2003): Consequences consumption of resources and busi- of Liberalizing Derivatives Markets, ness flights8. Unlike Moody, Standard Financial Policy forum, Washington & Poor and Fitch with their solvency D.C. ratings from AAA to D, the assessment results of the sustainability rating agen- European Commission (2005): Com- cies are far less standardized. Because munication of the Commission on Cre- of the lack of interest among bond issu- dit Rating Agencies. ers, the assessments are mostly not paid by them. Instead, the ratings are orde- Everling, Oliver (2005): Regulierung red by banks setting up sustainability von Ratingagenturen (Regulation of funds or by institutional investors such Rating Agencies), in: Kredit & Rating as foundations and churches. Of the Praxis, no. 4, p. 20-22. total U.S. $ 44 billion invested in the USA in 2003, U.S. $ 2.2 trillion went Hillebrand, Ernst (2001): Schlüsselstel- to what are called sustainable funds. In lung im globalisierten Kapitalismus: Europe, the amount was U.S. $ 0.4 tril- Der Einfluss privater Rating-Agentu- lion out of a total of U.S. $ 37 trillion. ren auf Finanzmärkte und Politik, in: This corresponds to about 5% of the fi- Die Privatisierung der Weltpolitik: nancial stock in the USA and about 1% Entstaatlichung und Kommerzialisie- in Europe (source: McKinsey 2005, rung im Globalisierungsprozess (The $118 Trillion and Counting; Social In- Privatization of World Politics: Dena- vestment Forum 2005, Report on So- tionalisation and Commercialisation in cially Responsible Investment Trends the Globalisation Process), Tanja Brühl in the United States, (see socialinvest. and others (eds.) ., Bonn, p. 150-171. org); Corporate Social Responsibility Europe 2005, Investing in Responsib- IOSCO (2004): Code of Conduct Fun- le Business, (see csreurope.org). These damentals for Credit Rating Agencies. investments can be a pragmatic guiding Kräussl, Roman (2003): Sovereign

8 These agencies rate bonds or shares. The Best in Class approach is favoured most, it includes less exclusion criteria, for instance of the nuclear or arms industry, and mainly calculates the rating within one sector 92 WEED Conference Documentation

Risk, Credit Ratings and the Recent of Financial Crisis in Emerging Markets, Frankfurt/M.

Reder, Dirk (2004): Zur Geschichte der internationalen Rating-Agenturen (On the History of the International Rating Agencies), in: Rating von Ver- sicherungsunternehmen (Rating Insu- rance Companies), Stefan Hirschmann (ed.)., Cologne, p. 167-179.

Rime, Bertrand (2005): Do “Too Big to Fail” Expectations Boost Large Banks Issuer Ratings?, Swiss National Bank, Zurich.

Setty, Gautam/Randall Dodd (2003): Credit Rating Agencies: Their Impact on Capital Flows to Developing Coun- tries, Financial Policy Forum, Was- hington D.C.

Standard & Poor (2004): Sovereign Credit Ratings: A Primer. International Taxation, an Instrument for Regulating Globalization 93

3.4 International Taxation, an Instrument for Regulating Globaliza- tion

The French government organised an state until now. As with national ta international meeting from February xation, international taxation can be 28th to March 1st on International Ta- used, depending on how it is set up, for xation in Paris. The government seeks economic, environmental and control support from other governments for a purposes. Therefore, politics would tax on air tickets that France has already obtain an instrument which can cont- adopted and wants to introduce on July ribute to the regulation of globalisation 1st, 2006. On the agenda were the pro- processes. Additionally, a considerable spects for other forms of international structuring potential is acquired with taxation, for instance a foreign curren- the second fundamental function of ta- cy transaction tax (Tobin Tax). Some xation, i.e. the generation of financial governments, such as Norway and resources2. Chile have already signalled their support. A few months before its end, the The decision of the French government Schröder government also announced is a breakthrough even though the ti- it would participate in the introduction cket tax, as it is conceived so far, will of an airline ticket tax. It cannot yet yield only modest returns and its con- be seen if the succeeding government trol effect will be at zero. The chances will pursue this project. The coalition that the process will continue are quite contract only refers to the tax vague- high, since the topic has appeared on ly: “Internationally, we will actively the agenda of other governments and collaborate further and in a results- powerful players. The Belgian parli- oriented manner in the introduction of ament, for example, has passed a law innovative financing instruments for concerning a foreign currency transac- the promotion of globally sustainab- tion tax, which however will only be- le development, especially within the come effective when other EU coun- EU, the G8 and in the context of the tries have followed suit. The Canadian so-called Lula group (Action against parliament has also advocated such a Hunger and Poverty)”1. tax. The UN General Assembly passed a resolution in 2004 with the votes of The Rise of an Innovative Paradigm 115 countries to examine international taxation as an instrument for financing The seemingly rather inconspicuous development. In particular, the pro- event in Paris is the preliminary blems with the financing of the Millen- highlight of a ten- year- process for nium Development Goals (MDGs) are enforcing international taxation. His- a strong argument in the search for new torically, international taxation is a and innovative financial sources. An new paradigm since taxation has only interim assessment of the implemen- existed within the context of a nation tation of MDGs shows that the goals

1 Gemeinsam für Deutschland – mit Mut und Menschlichkeit. Koalitionsvertrag zwischen CDU, CSU und SPD p. 140. www.cdu.de/doc/pdf/05_11_11/Koalitionsvertrag.pdf 2 Cf. Wahl, Peter (2005). International Taxation: Regulating Globalisation, Financing Develop ment. Berlin. 3 Sachs, Jeffrey (2005): Investing in Development. A Practical Plan to Achieve the Millennium Development Goals, Report to the UN Secretary General, Washington. 94 WEED Conference Documentation

will not be achieved with conventional counterproductive if it were to control development financing instruments3. every long-term vision of the future. In Therefore, the ticket tax could be used the long term, the political framework to combat AIDS and for a WHO vacci- can change, and take on a new shape. nation programme in developing coun- The best strategy is therefore not to ex- tries. The extent of scientific studies clude the great designs but to approach concerning international taxes has also them gradually“5. grown in recent years. Two reports were of special significance, the Spahn What are International Taxes? report on behalf of the Federal Minist- ry for Economic Cooperation which When we speak of international taxes, examined the feasibility of the Tobin we are referring to the international- tax, and the Landau report ordered ly agreed or internationally organised by the French President Chirac which taxation of cross- border exchange or analyzed the whole variety of different transaction of goods, services and per- concepts for international taxation stra- sons, in the broadest sense as well as tegies4. Both studies came to the con- the use of such taxation for internatio- clusion that international taxes are not nal purposes, e.g. global public goods. only technically feasible and economi- International taxes need not necessarily cally reasonable but are also politically be introduced globally. Initially a “coa- desirable. The IMF and World Bank lition of the willing” could assume the also discussed the topic at their Spring leadership just as with the Kyoto pro- meeting in 2005. The only significant tocol, and hesitant countries can join in objection was that international taxa- later. Therefore, we do not refer to the tion would encounter problems of po- frequently used concept of “global ta- litical acceptance. The US, especially, xes”. According to this definition inter- strongly defy the strategy. Washington national taxation does not necessarily successfully demanded that the term need an international institution for its international taxation should disappear collection, although this far-reaching from the General Assembly Declarati- option is not excluded. Rather, it is all on in 2005. The UN development pro- about international cooperation, as al- gramme, UNDP, which uncovered the ready practiced in many other fields of Tobin tax in 1996, was threatened with politics, for example, climate politics. withdrawal of finances if international In this respect, international taxation is taxation was propagated in its name. also a means to influence and control Nevertheless, the Landau report con- international processes by political co- cludes: “It is true that the success of operation and not by market forces. campaigns for opinion leadership often depends on far-reaching and new International Taxation and Globa- visions. Remembering this is simul- lization taneously a call not to give up great fiscal ambitions for the sake of short- The emergence of the concept of in- term political realism. This would be ternational taxation is a logical conse-

4 Spahn, Paul Bernd (2002): Zur Durchführbarkeit einer Devisentransaktionssteuer, Gutachten im Auftrag des Bundesministeriums für Wirtschaftliche Zusammenarbeit und Entwicklung, Frankfurt/M. http://www.wiwi.uni-frankfurt.de/professoren/spahn/tobintax 5 Landau, Jean Pierre (2004): Les nouvelles contributions financières internationales, Rapport au Président de la République, Paris International Taxation, an Instrument for Regulating Globalization 95 quence of globalisation. Several fac- large financial centre to the next within tors are intertwined. 24 hours. Financial transfers can be carried out in real time and at any in- Firstly: internationalisation that is ac- stant merely by the click of a mouse. A celerated by neo-liberal policies in the transnational area has been set up, and interest of trans-national businesses returns can be made in a new way in and institutional investors has drasti- a cyber-economy to which the nation cally changed the conditions of nation state hardly has any access. To skim state politics. In addition to the mono- off a part of the profits from these and poly on power, the ability to raise taxes other activities resulting from globa- is the second foundation on which mo- lisation and to redistribute this to the dern statehood is based. The tax sys- losers of globalisation is only logical. tems which emerged in the 19th and Thirdly, the new technological possi- 20th centuries were conceived for the bilities also provide the means to very nation state and its relatively closed efficiently control and tax financial national economy. Capital and labour flows with little effort. For instance, a were similarly confined within the ter- small electronic tag could be attached ritory of the nation state. The national to each transaction, like the bar code tax legislation had a relatively unprob- on every product in the supermarket, lematic access to its tax base and could and this could ensure complete registe- tax businesses and the prosperous. ring by the central banks. Today, a fiscal policy confined to the nation state faces increasing limitations The Use of the Tax Revenue due to capital mobility and trans-national businesses. This leads to an incre- The introduction of international taxes asing erosion of the national tax base achieves a high legitimacy if the reve- lacking corporate, capital and property nues are used to finance global public taxes, and there is a much higher tax goods and especially for development burden on wage incomes. International for the poorest countries in the world. taxes provide an opportunity to coun- The politically most influential project ter the impoverishment of the public is the objective of reducing absolute budget and the resulting trend towards poverty6 by half by 2015, as stated in denationalisation and privatisation. the Millennium Development Goals (MDG) of the United Nations in 2000. Secondly: besides the new possibilities 2.8 billion people, which is almost half for avoiding taxes, globalisation opens of the world population, must live on up new opportunities for global players less than 2 dollars per day. At the same to make profits. Today, for example, time, the GDP of the industrialised digitalisation and satellite communica- OECD countries has increased by 63% tions, along with the liberalisation of to $ 29 trillion since 1991. In Germany, financial goods and services markets, the GDP increased by 40% to $ 2.1 tril- allow U.S. $ 1.9 billion in foreign ex- lion in the same period7. The 697 bil- change dealings per stock exchange lionaires in the world own a fortune of day to chase around the globe from one $ 2.2 trillion. The previous struggle of

6 deﬁned as income poverty with a poverty level of one dollar per day 7 nominal GDP according to purchasing power parities. Data from 2002 in the OECD Fact book 2005, http://hermia.sourceoecd.org/vl=4864117/cl=23/nw=1/rpsv/factbook/ 96 WEED Conference Documentation

development politics against poverty a low tax rate. The revenues are expec- is a history of complete failure. More ted to be 210 million euros per year for than 30 years ago, the industrial coun- France. If the scheme was introduced tries committed themselves to spend in the entire EU, revenues could total- 0.7% of their GDP on the development ly amount to 2 billion euros8. Airline of the poor regions of this world. Af- ticket charges require no additional ter reaching its highest level of 0.33% administrative effort since charges are in 1992, this proportion decreased in already levied on each ticket (e.g. air- the following years to 0.23% today port taxes). The ticket tax has compa- (2004). ratively large political support. As an introduction to international taxation, Which Kinds of Tax Are Being Dis- it is interesting. However, it is only a cussed? beginning. Therefore, it should not be used to suppress suggestions which are There have been a considerable num- more far-reaching9. ber of suggestions for international taxation. However, we will restrict The CO2 tax to control the consumpti- ourselves to the best known concepts on of resources is such a more far-re- in this text. In principle, the usefulness aching proposal. An advantage of the and effectiveness of international taxes CO2 tax is the possibility of high reve- can be determined applying four para- nues. The Landau report estimates that meters. Firstly, through the controlling a tax of $100 per ton of coal equivalent effect of the taxes, by influencing cer- would raise $ 100 billion U.S. dollars tain types of behaviour which cannot worldwide. The CO2 was discussed for easily be regulated at the nation state a long time in connection with the Ky- level, such as the excessive consump- oto Protocol for the reduction of green- tion of natural resources or speculation house gases. However, preference was on the financial markets. Secondly, the finally given to a new mechanism of question is whether the revenues are “tradable pollution certificates”. The large enough that they can make a sub- reason was of mainly political and ide- stantial contribution to financing glo- ological nature since tradable certifi- bal public goods or to the alleviation of cates are market regulated after being poverty. Thirdly, there is the administ- issued by the state, whereas taxes re- rative effort to levy and collect the tax, quire a more active role from the state. and fourthly, the political feasibility. Since the certificates are simply dona- ted to CO2 producers at present, they The airline ticket charge of one euro do not create any additional income for for the economy class and ten euros for the state but represent a re-distribution business flights within Europe and four from excessive energy consumers to euros or 40 euros for intercontinental energy savers that are in line with the flights decided in France will be intro- market. It remains to be seen how far duced on July 1st, 2006. A controlling such a means of internalising energy effect is hardly to be expected for such costs into market prices is an improve-

8 EU Commission (2005). A possible contribution based on airline tickets as a new source of financing development: technical reflections in the run up to the UN High Level Event. SEC (2005) 1065. Brussels. http://europa.eu.int/comm/taxation_customs/index_en.htm 9 When Chancellor Schröder mentioned the Tobin Tax as a possibility at the World Economic Forum in Davos 2005, his Finance Minister hurried to approve the airline ticket tax so that the Tobin Tax would appear superfluous International Taxation, an Instrument for Regulating Globalization 97 ment on regulation by taxation which tax rate because of the large tax base. has been implemented for centuries. If A tax of 0.01% on all foreign curren- this strategy for reducing energy con- cy transactions would raise up to $ 38 sumption fails, the discussion concer- billion in the euro zone. Introduced ning a CO2 tax will probably grow in worldwide, it could even raise up to significance again. 125 billion U.S. dollars11.

The Scientific Council for Global En- In the meantime, the classic Tobin tax vironmental Change of the German has been advanced by the concept of Federal Government (WGBU), esta- Paul Bernd Spahn, financial economist blished when Töpfer was the CDU and former IMF consultant. The Spahn Minister for the Environment, recom- tax is a two-stage tax which, besides mends an emissions tax for air traffic. the low tax rate of the classic Tobin tax, The Council expected this to encoura- provides for a second, very high tax ge the construction of low-emission jet rate of up to 100% if the exchange ra- engines. Other suggestions on taxation tes move above or below a fixed band. with an ecological controlling effect are The central bank fixes the band by ex- toll charges10 for passing through inter- trapolating the recent currency move- nationally used straits, e.g. the Straits ments. In this way, not only daily spe- of Singapore or the English Channel culation is reduced but also large scale between Dover and Calais or the taxa- speculative attacks such as during the tion of air corridors, and the taxation on Asian financial crisis of 1997/98 could the transports of dangerous goods. be prevented. Speculation profits are taxed away by the Spahn tax, which The Currency Transaction Tax (Tobin therefore renders speculative attacks tax – CTT) or its Spahn version (see senseless. This variant of the Tobin below) is the most well-known sug- tax has meantime gained widespread gestion and meanwhile most mature agreement among the supporters of fo- proposal in all technical details among reign currency taxation. the taxes with an economic controlling effect. The CTT provides for a very low The CTT would be ideal in terms of tax rate of one or several base points its controlling and distribution effect, (one base point = 0.01%) on all foreign since it collects the money where it is currency transactions. Speculative fo- available in abundance. In contrast to reign currency transactions which al- a widely held belief, there is also no ready make use of small exchange rate problem in levying the tax. Technolo- fluctuations for profit would become gical progress in the electronic proces- more expensive by this measure. The sing of financial transactions is so far estimates for revenue from a transac- advanced that an integrated computer tion tax vary widely; however, they are program can identify foreign currency likely to be substantial despite the low transactions and ensures that the tax

10 The distinction between taxes and charges is not always easy. Normally, charges are to be earmarked to a clearly defined purpose. An airport tax directly contributes to financing an airport. However, taxes are increasingly being attributed to specific purposes. The German ecology tax is a well-known example; it is used to co-finance social needs 11 Denys, Lieven/Jetin, Bruno (2005): Ready for implementation . Technical and Legal Aspects of a Currency Transaction Tax and its Implementation in the EU. WEED Working Paper. Berlin, p. 137 and p. 140 12 Denys/Jetin (2005), p. 61 ff. 98 WEED Conference Documentation

is levied12. Although it is theoretical- Ambivalences and Risks ly possible to bypass or evade the tax, these evasive measures will neverthe- Even if international taxes are a strat- less cost money so that currency tra- egy with a promising future, they ne- ders or their customers will have to vertheless entail some risks and ambi- decide whether or not it is cheaper to valences. On the one hand, there is the pay the low tax rate. danger that the political mainstream may also agree to them but then pro- Further kinds of tax with economic mote the strategy especially for taxes effects are the taxation of bank secre- that have a problematic distribution cy, of financial transfers to tax havens, policy. For instance, the proposal to foreign investments, portfolio invest- consider a European or international- ments, e-commerce or the secondary ly co-ordinated increase of the value trade in shares. The latter would be added tax has recently appeared more an intervention in the functioning of often. On the other hand, there is the shareholder capitalism. A shareholder’s risk of not exhausting the scope for a objective is no longer the possession more socially just fiscal policy which of shares to receive dividends, but to still would definitely exist at the nati- speculate on an increase in the share on- state level. Additionally, new fi- price and then reselling shares at a pro- nancing sources for development will fit. This has far-reaching consequences increase the temptation for further cuts for corporate culture, employment, and in development aid. Furthermore, by even the functioning of the entire na- the time international taxes start to tional economy, etc.13 The function of gain approval, institutions such as the financing businesses by issuing shares World Bank will try to influence them would not be affected by a taxation of or control them completely. During secondary trade. At the same time, this the debate concerning the Tobin tax, would create an instrument to start re- World Bank functionaries have alrea- gulating the shareholder system. dy brought the bank into play. Thus, efforts concerning international taxati- Suggestions for taxing the use of space on should also always be linked to the around the Earth’s orbit or the electric democratisation of international relati- magnetic spectrum might appear exotic ons and institutions. This also applies at first. However, it is the well-known to the UN, since most supporters of the idea of managing the public sphere like concept assign an outstanding role to every parking meter does. Even today, the UN concerning the use and distri- geostationary satellites must register bution of tax revenues. with the International Telecommunica- tion Union (ITU), an UN sub-organiza- Of course, all these considerations do tion, for a small fee. The details of all not argue against the concept itself. these suggestions have been elaborated They merely emphasise the fact that to various extents. This still remains a instruments to regulate globalisati- challenge for the future. on are politically disputed and that

13 See the excellent overview by Windolf, Paul (2005): Was ist Finanzmarktkapitalismus?. In: Windolf, Paul (ed. 2005). Finanzmarktkapitalismus. Analysen zum Wandel von Produktions- regimen. Kölner Zeitschrift für Soziologie und Sozialpsychologie. Sonderheft 45/2005 (Wiesbaden) International Taxation, an Instrument for Regulating Globalization 99 emancipatory approaches cannot be Financial Market Opening in China enforced without political pressure. and Korea, KIEP, Seoul. Schopenhauer once said that a good idea always passes through three pha- Cheong, Young-Rok, Yang, Doo Yong, ses. In the ﬁrst it is declared to be non- and Wang, Tongsan (ed.), (2003): Fi sense, in the second it is most intensely nancial Market Opening in China and fought against, and in the third it is re- Korea, KIEP, Seoul. alised. With the international taxation concept, we are between phases two Coe, David T., and Kim, Se-Jik (ed.), and three. (2002): Korean Crisis and Recovery, IMF and KIEP. Thomas Kalinowski/ Peter Wahl Emery, Robert F. (2001): Korean Eco- nomic Reform. Before and since the Literature 1997 crisis, Ashgate.

Bank for International Settlement IMF (2000): International Capital (2001): The banking industry in the Market: Developments, prospects, and emerging market economies: competi- Key Policy Issues”, Sept. 2000. tion, consolidation and systemic stability, BIS Papers No 4, Basel. IMF (2000): Republic of Korea: Eco- nomic and Policy Developments”, Bank of Korea (2005): Effect of fo- IMF Staff Country Report No. 00/11, reign capital entry on the domestic February. banking sector, Aug.8 (Korean) IMF (2002): Country Report 2002, Re- Bank of Korea (2005): Changes in the public of Korea selected Issues”, Was- revenue structure of Korean Banks and hington D.C. their implications, Dec. 14. (Korean) IMF (2003): Republic of Korea: 2002 Bayaktar, Nihal, and Wang, Yan, Article IV Consultation-Staff Report”, (2004): “Foreign Bank Entry, Perfor- Washington D.C. mance of Domestic Banks, and the Sequence of Financial Liberalization”, IMF (2005): Republic of Korea: 2004 WB Working Paper No. 3416. Article IV Consultation”— Staff Re- port. Chang, Ha Joon, Palma, Gabriel, and Whittaker, Hugh D. (ed), (2001): Fi- Jeong, Seung Il, 2005, “Innovation-fri- nancial Liberalization and the Asian endly Corporate Governance Structu- Crisis, Palgrave. re and Financial System – Its Korean Form”, STEPI Policy Research Wor- Cheong, Young-Rok, and Yang, Doo king Paper (Korean). Yong (2003): “Foreign Exchange Mar- ket Liberalization since the Korean Kalinowski, Thomas 2005, “Der Crisis”, in: Cheong, Young-Rok, Yang, Internationale Währungsfonds in Doo Yong, and Wang, Tongsan (ed.), Südkorea : Strukturanpassung und 100 WEED Conference Documentation

Reformen seit der Asienkrise”, In- stitut für Asienkunde, Hamburg

Lim, Kyung Mook, 2005, “An Analysis on Changes of Equipment Investment Patterns of Korean Firms Using Mic- ro and Macro Data”, in: Korea Deve- lopmental Review, 2/2005 (Korean).

Sharma, Shalendra D., 2004, “Go- vernment intervention or market liberalization: the Korean ﬁnancial crisis as a case of market failure”, in: Pro- gress in Development Studies, 4/1.

Woo, Jung-en, 1991, Woo Race to the Swift. State and Finance in Korean In- dustrialization, Columbia University Press. Structural Policy and Regional Development 101

3.5 Structural Policy and Regional Development, the Signiﬁcance of the Savings Bank Sector

Germany, a highly developed natio- or municipal authorities or specific nal economy, has a system of savings purpose boards. They fulfil a variety of banks (Sparkassen) with a market tasks which can be included under the share of about 40%, although there is concept: “public duty”. The regional a focus on liberalisation, deregulation principle is a fundamental principle in- and privatisation within the context tended to ensure the public duty is met. of international financial policy (cf. Loans may be allocated only to insti- other contributions in this documen- tutions, businesses and private persons tation). In Germany, savings banks in the region and also, branch offices are mainly owned and/or guaranteed may only be opened in the region. The by a local authority and governed by objective is money saved in the region the Savings Bank Law). They work for should primarily be invested to promo- profit, although this is not their main te the local economy and local popu- purpose. The profits are for public lation. The specific characteristics are benefit and are paid directly or in the summarised in the following box. form of dividends to the local authority. Every savings bank operates as an Although savings banks are indeed lo- independent unit and is legally bound cally independent, however, at the same to its region. Savings banks are seen time they are linked together as a kind by private banks as the cause of the of local system supplier in a complex profit misery on the German banking financial trust based on the voluntary market, neo-classicists perceive them principle, interconnected assets, eco- as trouble makers in a liberal market nomic calculation and idealism. The and for some time now they are under savings bank financial group enables constant fire by the EU Competition the savings banks to act in a flexible Commission. The question is: what be- and individual way as locally indepen- nefits do savings banks provide for the dent institutes and at the same time to general public and is their existence offer cost-effective general banking justified. The present article deals with services. The savings bank financial this question in terms of the science of group efficiently provides specialized financial markets and structural policy skills in the back office areas on the aspects. economy of scale principle (Gärtner 2003: 19 ff). The savings bank financial The Structure of Savings Banks group consists of savings banks, regional and federal associations, regional Savings banks are legal public institu- banks, public insurance groups etc., tes with a long tradition and have de- and amounts to about 670 businesses veloped from the philanthropic neces- and approximately 390,000 employees sity to promote the concept of saving with a turnover of 3.3 billion Euro and, within the poorer population into regi- in its own estimation, is the largest fi- onally oriented general banks. As legal nancial group in the world. public institutes they are bound to their promoters, which are generally local 102 WEED Conference Documentation

A Summary of the German Savings Bank System

Beginnings: At the start of the 19th century, they began to provide the poorer population with the possibility to save and earn interest and they supplied traders with capital means.

Structure: Savings banks are linked to the communities, local or municipal authorities (responsible bodies) with almost 480 independent savings banks in a decentralized system.

Legal form: Public corporation (Anstalt des öffentlichen Rechts).

Public duty: Savings banks have a public duty which is regulated at the provincial level by the savings bank laws and their statutes, therefore they cannot focus exclusively on making a proﬁt.

EU Competition Control proceedings: In the year 2005, the legal provisions of institutional burden (local authority liability of the municipality in an internal relationship, that is to the savings bank management) and guarantor liability (external liability to third party contractors) were to be terminated.

Regional principle: Conduct of business is concentrated in the guarantor region. In principle, this prevents ﬁnancial means ﬂowing exclusively to growth regions which can offer better prospects for the savings.

Vertical division of labour: The division of labour between savings banks, regional and federal associations, regional banks, public insurances, etc., makes it possible for the savings banks, although small institutions, to act ﬂexibly and independently at the local level, and at the same time to offer a cost-effective general banking service.

Three column system: Banking system based on three columns (private commercial banks, and the co-operative and savings bank sector).

Area of conflict: Public duty and the orientation towards benefiting the community prevent a profit maximization strategy and enable the business policy to be directed towards the region, and at the same time the savings banks must operate in a very competitive banking market. In addition, those critical of a public banking sector keep calling for the privatisation of savings banks.

(Gärtner 2003: 24 ff) Structural Policy and Regional Development 103

The Significance of the Savings This article focuses on the application Banks of the last mentioned service of savings banks, since their specific legal form Liberalisation, which is understood can be justified with respect to alloca- as freedom of establishment, does not tion in the cases of the market failure threaten savings banks. Savings banks and with respect to the precautionary do not represent a monopoly but are in principle of public goods. The other competition with private commercial three benefits previously mentioned banks, as well as with private direct are positive side-effects which alone, banks, internet banks, co-operative however, would not justify public au- banks, and niche banks. On the con- thority activity in the banking sector. trary, savings banks have to fear the A privatisation and a deregulation of attacks of private banks, the EU Com- the savings bank law in whatever form petition Commission and also, someti- would eliminate or limit these benefits. mes, provincial and communal politi- The advantages of savings banks as fi- cians. The essence of the criticism is nancial intermediaries in terms of ban- that savings banks are not for sale and king market and structural policy will so prevent consolidation in the German now be more extensively elaborated. banking market, the name “Savings Bank” is incorrectly protected and that Savings Banks and the Banking the regional principle represents a regi- Market onal cartel (e.g. Federal Association of German Banks 2004: 20). The German banking market is characterised by a strict separation into The benefits provided by savings banks three columns (private banks, public are diverse and can be roughly divi- authority institutes and co-operative ded up into the following four groups. banks). The legal reorganization and Firstly, savings banks generate high (partial) privatisation of the banking local tax revenue. Secondly, they have market that was extensively carried out considerable significance in providing in other European countries has not oc- employment and training. Thirdly, they curred in Germany (Engerer/Schroo- provide important service by suppor- ten 2004: 74). The German financial ting cultural and social activities in the system is strongly bank-based, that is, region through sponsorships, donations businesses are predominantly financed and payment of foundation dividends. by bank loans and not - as is usual in The distribution of profits to local au- Anglo-Saxon countries - by equity or thorities and councils should not be ig- share capital. nored. Fourthly, and this is really their purpose: they perform an important In theory, banking and financial sys- function as financial intermediaries. tems can be divided into regionally They provide access to financial ser- neutral and non-neutral systems (e.g. vices for all sectors of the population Klagge/Martin 2005: 392). Neutral and all businesses in all regions. Being banking and financing systems can be nearby and knowing the customer and derived from neo-classical theory. Ac- the market are especially important for cording to this, and considered from a the commercial allocation of smaller model perspective, high competition loans. ensures that every profitable invest- 104 WEED Conference Documentation

ment receives financing independent Federal Bank 2005, Klagge/Martin of its location. Thus, all market partici- 2005, Fischer/Pfeil 2004, Engerer/ pants know whether an investment will Schrooten 2004.) be profitable. Capital moves to the location offering the best possible interest In connection with this, more recent return. Banking systems are efficient theoretical approaches assume that if the business sector concentration is markets with lower competition in- low, that is, many banks compete with tensity and stable customer-bank re- each other and competition intensity is lationships (typical house bank relati- high. “This is exactly why indices of onships) can lead to improved credit market concentration (…) play such an means availability at lower prices. important role in almost all recent as- This particularly applies to smaller sessments of US and European banking credit engagements because usually markets. They are widely used in empi- the checking effort and costs do not rical work” (Fischer/Pfeil 2004: 308). correlate with the size of the loan. The allocation of credit to SMBs (small But weaknesses in the classical finan- and medium- sized businesses) is on cial market theories can be seen in re- average not profitable because of the lation to allocation efficiency, availa- lower credit volumes, as long as long- bility of credit means and the stability term customer relationships and local of financial systems. The international knowledge do not reduce the checking developments in recent years and their effort costs and risks. Loans to start- significant number of financial market up companies bearing more risk are crises (cf. other contributions in this usually only worthwhile if a long-term book) have shown that privatisation, customer relationship can be anticipa- liberalisation and high competition ted (German Federal Bank 2005: 106). intensity did not necessarily contribu- Starting out from a banking system te to high stability in the banking and which is not regionally neutral, the key financial markets. Studies also show to credit allocation to small and medi- that “perfect competition does not in- um- sized businesses consequently lies evitably provide the best results for the in the proximity. Therefore, regional economy as a whole. At least in parts development is important to an effi- of their business, banks appear to ope- cient banking environment. However, rate in less than ideal-typical markets” proximity to borrowers is also of cen- (German Federal Bank 2005: 107). tral importance to banks engaged in According to newer financial theories, credit dealings with SMBs to enable banking markets should, in principle, them to operate successfully. be distinguished from other markets because, firstly, information is asyn- If these theoretical model-based ap- chronously distributed between depo- proaches and findings are now related sitors and investors and is only incom- to the specific German banking market pletely available. Secondly, it is a loan structure, the following scenario re- business, the amount of credit, interest sults: Germany exhibits a high com- payments and repayments take place petition intensity at the national level inter-temporally and, thirdly, it is based which can primarily be explained by on confidence (for example, German the non-saleability of co-operative Structural Policy and Regional Development 105 banks and savings banks. Probably, regional level. Further research in this the concentration in the German bank area is needed, however. market will increase if savings banks are privatised. However, the compe- Savings Banks as Structure-Politi- tition intensity and the distribution of cal Institutions banks can differ regionally within a nation state, as is also the case for Ger- Without state intervention, a regional- many. All private commercial banks, ly dissimilar development with poorer co-operative banks and savings banks economic credit supply, i.e. an alloca- have branches in some regions, whe- tive market failure, can be anticipated reas only the latter two have any signi- in some regions, as is shown by the re- ficant representation in other regions. ality in many regions and can also be Overall, a higher concentration and shown theoretically. Thus, positive ex- lower competition intensity can also ternal effects occur in agglomerations be seen at the regional level, since co- that produce self-reinforcing growth operative banks and savings banks as a at the expense of weaker peripheral rule do not compete with each other. regions. This can lead to a regional imbalance if there is no state steering If one confronts reality with the new mechanism. This can be established in and traditional financial theories, the the context of polarisation theory, for picture is even more complex: on the instance (Myrdal 1969), or New Eco- one hand, there is the thesis that higher nomic Geography (Krugmann 1991), competition leads to higher allocation and, particularly in regard to savings efficiency. If the concentration indices banks, Wengler 2002: 109 ff.). Nume- at the national level and the reasonable rous empirical and theoretical studies bank service prices in comparison to also recognise that innovations prima- international charges, then this relati- rily occur in conurbations, especially onship is comprehensible for Germa- in regions where the spread of know- ny. At the same time, derivations from ledge encounters favourable conditi- the more recent financial and banking ons (Frey/ Zimmermann 2005: 7 ff). market science lead to the thesis that the disadvantages resulting from lower As already mentioned in the intro- competition in the supply of credit to duction, the regional principle is an smaller and medium- sized businesses essential characteristic of savings and particularly to founders of new banks which curtails capital mobility, businesses can be (more than) com- promotes an interest in the economic pensated by the advantages of proxi- development of the region and there- mity and stable customer-bank relati- by contributes to a balanced regional onships. This is also comprehensible development. Savings banks can there- considering the favourable conditions fore be justified in the political order. with respect to lower competition intensity at the regional level. From the However, neo-classical economists as- viewpoint of the savings banks, it can sume that more effective free market be claimed that they ensure high com- forces and unrestricted production fac- petition intensity at the national level tor mobility will finally produce a dis- and stable bank relationships at the tribution optimum. According to this, a 106 WEED Conference Documentation

balance between the regions will then complete coverage of the distribution occur in the mid to long-term if the of means definitely makes sense (...). state does not intervene. The existence If, however, certain growth centres or of local authority banks - which limit poles are to be promoted, the means capital mobility - is difficult to justify should be (supra-regionally) concen- according to this concept. Thus, for ex- trated” (Wengler 2001, p. 299). In the ample, Nürk, author of a study of the context of a structural policy traditio- Deutsche Bank, states that “(savings) nally directed towards balancing, new- means will always be brought to its er structure-political strategies such as most productive use and not artificially the cluster approach (see box) also aim kept in a given region by the neglect of for the concentration of economic acti- efficiency considerations, so to speak” vities in a region and thus accept local (Nürk 1995, p. 22). imbalances.

Therefore, the justiﬁcation of savings Does this then mean that savings banks is a question of the theoretical banks are counterproductive against economic viewpoint: “if the aim is the background of newer skill-based a policy of balance in the context of approaches? Not at all, from a theo- regional development, a nationwide retical point of view. This is because

Skill Based Approaches in Structural Policy: Growth versus Balance

More recent structure-political approaches, namely the cluster approach, are directed towards locally available skills: everyone knows about the local concentration of businesses or small workshops in the old town parts of European or Middle Eastern cities. The spice markets in Istanbul, the textile markets in Montmartre or the skilled crafts shops in the old town of Bucharest can be mentioned here, for example. Thus, these represent local concentrations of economic activities, which is a “geographical cluster” in the area. The essential advantage is that customers find a comprehensive, geographically concentrated choice, a place frequented by specific suppliers, where a corresponding infrastructure exists, where the businesses are bound by a certain knowledge network and so possess specific information. The basic principles of such so-called clusters (e.g. Rehfeld 1999) are of course founded on these advantages and the system has been further developed. Such an approach can most sensibly be implemented in terms of structural policy where internationally competitive potential has reached a critical mass and components of a corresponding value-creating chain are located. Inevitably, this is accompanied by a withdrawal from the legally based fundamental equivalence principle of regional development. A new orientation towards a structural policy directed more strongly towards growth is taking place both in the EU and in Germany at the federal and regional levels. Since, politically, the concentration of promoting subsidies in growth regions can only be sustained with difficulty, “cluster Structural Policy and Regional Development 107

instruments” are in reality also partly implemented in a widespread fash- ion, and are still distributed according to the “everyone gets a slice of the cake” principle. Thus in the future, on the one hand, growth potentials will be promoted where they exist and, on the other hand, education and culture will be developed or maintained with specific instruments in weaker regions, towns and city districts in order to enable the participation in and the fostering of economic development. the new approaches can only be suc- efficiency and low price structure of cessful when they develop growth po- the German bank market (KfW Bank tential and at the same time are orien- Group of 2005). ted towards balance, as local players require. Thus, savings banks are also If private banks had access to savings acceptable from the regulatory view- banks and could get rid of this compe- point, if a growth- oriented structural tition, their return on capital would su- policy is stipulation since on the one rely be higher, which probably would hand they can recognize local growth have a positive effect on the stock potential and play a part in its develop- market quotation. Thus, finally, the ment, on the other hand, they are able existence of savings banks is a politi- to contribute to a regional policy that is cal question. I believe this article has directed towards balance. Thus, in the provided sufficient arguments for the context of the savings banks, it is not a reader to form his own opinion. question of “either or”, but “both”. The fact that there is a potential for im- Conclusion provement of savings banks should under no circumstances be ignored. Thus, By international comparison, the re- for example, they could more strongly turn on investment of German credit adapt new financing instruments com- institutions is indeed rather low. But mon in other countries, such as parti- this is not necessarily because the bank cipation and venture capital, and also market is too fragmented and the credit high risk small loan instruments (Mic- institutions are inefficient because of ro Lending) to the German market with the high proportion of local authority widespread supply. In this way, they public law banks and the rigid three co- would play the pioneering role they lumn system, as many critics repeatedly have so often assumed in the past. claim. Low returns on capital can also result from a high level of competition, Perhaps the listing of the advantages of which leads to low cost bank services the German savings bank system pro- or they can also be the consequence of vides inspiration for bank systems in bad business decisions and depreciati- other countries, just as German savings on adjustments. A current study of the banks and other banks in turn have KFW Bank Group (Kreditanstalt für learned from experiences from abroad. Wiederaufbau, Reconstruction Loan It would actually be a platitude to note Corporation) demonstrates the high that a one-to-one transfer would not 108 WEED Conference Documentation

make sense because of different con- Financial System. Oxford, p. 291-349. ditions and cultures. But this occurs Frey, René L./Zimmermann, Horst repeatedly in the reverse direction: the (2005): Neue Rahmenbedingungen development in Germany is frequently für die Raumordnung als Chance für discussed in relation to the deregulati- marktwirtschaftliche Instrumente. [A on of banks and privatisation of nati- New Environment for regional Order onal banks world-wide, and that other as Opportunity for Market Economy countries have done their “homework” Instruments], in: disp 2/2005. unlike Germany. Here, the fact that savings banks are not national banks and Gärtner, Stefan (2003): Sparkassen do not enjoy a monopoly in any line of als Akteure einer integrierten Regio- business is overlooked. A bank under nalenwicklung: Potential für die Zu- public law also means something com- kunft oder Illusion? [Savings Banks as pletely different in other nation states, Players in an Integrated Regional De- therefore, no internationally valid pro- velopment: Potential for the Future or cedure can be created and certainly not an Illusion?] Graue Reihe des Instituts be applied to the very speciﬁc German Arbeit und Technik 2003-05. bank market. KFW Bankengruppe (2005): Das deut- Stefan Gärtner sche Kreditgewerbe im internationalen Vergleich: Betriebswirtschaftlich we- Literature: nig rentabel, volkswirtschaftlich hoch produktiv. [The German Credit Busi- Federal Association of German Banks ness, an International Comparison: (2004): Banken 2004. Fakten, Meinun- Low Proﬁt Business, Highly Produc- gen, Perspektiven [Banks 2004, Facts, tive for the National Economy]. KfW Opinions, Prospects] research, no. 17, July 2005.

German Federal Bank (2005): Finanz- Klagge, Britta/Martin, Ron (2005): stabilitätsbericht [Finance Stability Decentralized Versus Centralized Fi- Report] nancial Systems: Is There a Case for Local Capital Markets? In: Journal of Engerer, Hella/Schrooten, Mechthild Economics Geography, H. 5, p. 387- (2004): “Untersuchung der Grundla- 421. gen und Entwicklungsperspektiven des Bankensektors in Deutschland Myrdal, Gunnar (1969): Economic (Dreisäulensystem)” [Investigation of Theory and Under-Developed Regi- the Basic Principles and Development ons, London. First published 1957, p. Prospects of the German Banking Sec- 146. tor (Three Column System)] for the Federal Finance Ministry. German Ins- Krugman, Paul, 1991: Geography and titute for Economic Research Trade. London.

Fischer, Karl-Heinz/Pfeil, Christian Nürk, Bettina (1995): Privatisierung (2004): Regulation and Competition von Sparkassen und Landesbanken – in German Banking. In: Krahnnen, Jan überzeugende Gegenargumente fehlen Pieter/Schmidt, Reinhard: The German [Privatization of Savings Banks and Structural Policy and Regional Development 109

Provincial Banks: There Are No Con- vincing Counter-Arguments] In: Deut- sche Bank Bulletin 17.March 1995, p. 20-24.

Rehfeld, Dieter (1999): Produktions- cluster. Konzeption, Analyse und Stra- tegien für eine Neuorientierung der regionalen Strukturpolitik [Production Clusters. Conception, Analysis and Strategies for a Reorientation of Regi- onal Structural Policy]

Wengler, Martin O. (2002): Externe Effekte von öffentlichen Unternehmen: Die Geschäftstätigkeit der kommuna- len Sparkassen [External Effects of Public Businesses: The Business Acti- vities of the Local Authority Savings Banks]. In: Heinrich, C./Kujath, H.- J. (ed.): Die Bedeutung von externen Effekten und Kollektivgütern für die regionale Entwicklung [The Signiﬁ- cance of External Effects and Collecti- ve Goods for Regional Development]. [p. 109-127. 110 WEED Conference Documentation

3.6 Savings Banks - Indispensable for Regional Economic Develop- ment

If savings banks did not exist - they especially the four major banks (Com- would have to be invented. This be- merzbank, Deutsche Bank, Dresdner came especially obvious during recent Bank, HypoVereinsbank), are globally years when the major private banks in operating institutions. They have no Germany led themselves into econo- interest in certain customers or regi- mic crisis. However, instead of lear- ons, but are purely profit-oriented. ning from their mistakes, the private banks look for the cause of their bad The “banking crisis” of recent years results in the German banking system, was not a crisis of the financial sys- in particular in the savings banks (pu- tem, but basically a crisis of the major blic banks). The Federation of German banks. The profits of loan banks and Banks (BDB) has done some very suc- savings banks did indeed also fall back cessful lobbying in order to achieve slightly in comparison to the 1990s, its goal, the privatisation of the public because of the weak economic deve- banks. However, privatisation of the lopment. Nevertheless, balance sheets public banks would be a great political in the red and billions in losses were mistake with expensive costs for many to be found especially with the major local authorities and communities. banks. Luckily for the German national economy, the four major banks The German Financial System - One have “only” a market share of about of the Most Stable in the World 16% in Germany! If these banks had a market share comparable to that of the No serious crisis has occurred in the four market-leading credit institutes in financial system in Germany since the Great Britain or Sweden, where four foundation of the Federal Republic, to five banking institutes dominate the which is in contrast to many industrial market – their problems would have countries of the western world. led the entire national economy into There are various reasons for this, for considerable difficulties. The result: example a very effective supervision the state would have had to intervene and control system. However, a sig- with financial support for the private nificant reason is also the structure of banks. The trigger for the crisis was the the Federal German credit system. The desire of executive boards and share- banking environment in this country is holders for short-term maximization of characterised by the so-called 3 column returns. The major banks changed their system. In addition to the private banks, business policy. They neglected the today there are about 1300 loan banks traditional banking transactions with and just fewer than 500 savings banks private customers and medium-sized and provincial banks in Germany. Sa- companies. They closed down many vings banks and cooperative banks are branches throughout the country and regional banks. They are involved in the considerably reduced staff. The “best region and earn their bread from local bet” included investment banking and businesses and customers in the region. the bond business. The most important private banks, Savings Banks - Indispensable for Regional Economic Development 111

The consequences of the wrong busi- administrations and are governed by ness policy have to be carried by the the regional principle. This means that employees with job reductions and the money the savings bank receives wage losses and public finances have from the customers and businesses of lower tax revenues. However, instead the region is also made available to the of acknowledging their mistakes, some people and businesses in the region. The major bank managers who belong, money remains in the region. Whereas by the way, to the top earners of the the private banks have withdrawn from branch, even by international compa- many regions, the savings banks are rison, seek the blame in politics. The represented all over the country. They savings banks and provincial banks are have more than around 17,000 bran- the reason why German bank profits ches in Germany. The Deutsche Bank lie far below the average. It is neces- has closed 34% and the Dresdner Bank sary to privatise the savings banks and 29% of their branches in the 1999 to thus provide the private banks with 2003 period. The Deutsche Bank still the possibility to take over the savings had more than 1576 branches in 2003, banks to consolidate the market. It is the Dresdner Bank more than 1035 quite interesting that the private banks, branches. While the private banks of- the advocates of the free market, de- ten refuse to provide an account to tho- plore the intensive competition in the se on social security, the savings bank German bank market, and at the same here fulfils its public duty (80% of the time insist on extending oligopolies on social security receivers have an ac- the market, as has occurred in Great count with a savings bank). Britain. Besides, the example of Gre- at Britain clarifies the negative social Whereas the major banks have also results of the returns mania of British withdrawn from the company loan banks. The British government and the business for manufacturers and broad British consumer’s organizations now sections of the middle class, this is a regret the power of the British banks. business nucleus for the savings banks This power leads to high prices and to – since they can only do business with extremely high profits for the British local customers. The credit market banking groups. The consequences: 3 share of the savings banks with small to 4 million people have no bank ac- and medium-sized companies, as well count and many business people can- as independents, has risen steadily over not obtain credit from the banks. Some recent years because of the business self-help organizations have already policy of the major banks. Meantime, been formed. it is more than 42% compared with just 34% 10 years ago. With manufacturers, the market share is even 66%. Savings Banks Protect the Credit Several medium-sized companies only Supply and Provide Competition exist today because a savings bank was prepared to take over the financing British conditions are not possible to- from another bank. In the new federal day in Germany. This is due to the pu- states without a savings bank, there is blic-law savings banks. They belong to no bank at all in some regions. the local authorities or the provincial 112 WEED Conference Documentation

Savings Banks Create Employment demand a change in the savings bank and Pay Taxes laws which would allow the possibility of converting savings banks into pu- The regional savings bank is often one blic companies and, finally, privatisati- of the biggest employers in a local on. The present legal position prevents community. All together about 335,000 the sale of municipal savings banks. people were employed by savings This regulation is reasonable since im- banks and provincial banks in 2003. Of portant savings banks could no longer these 23,700 were trainees – a teaching participate in the savings bank group rate which lies significantly above the as a whole if they were privatised to rate of private banks. Savings banks are alleviate the financial difficulties of frequently also the largest tax payer in municipal budgets. It is only the sha- the municipality. Because of their regi- ring of the work load between large and onal structure savings banks also pay small savings banks, provincial banks, tax on their profits locally, (the tax bur- building-society savings banks, IT-ser- den of the savings banks lies conside- vices, and fund societies that allows a rably above the level of private banks), comprehensive country-wide cover for private banks use their possibilities to financial services. Only the present le- evade tax payments. The Frankfurt city gal structure protects the regional prin- treasurer has especially little to smile ciple and the public obligations of the about concerning the present situation savings bank. Instead of allowing for with the major banks. In addition to the conversion of savings banks into direct tax payments the municipal ow- public companies by privatisation dis- ners of the savings banks profit from cussions, it would certainly be more the social and cultural commitment of helpful for politicians to be thinking the savings banks to their region. To- about how savings banks could fulfil day there are 570 savings bank foun- their public obligations even better. A dations. These have paid out about 46 savings bank in the form of a public million Euro for projects benefiting the share company is subject to company community in 2003. What are often law – its commitment is to the share- forgotten in political discussions, are holder. Even if the local authority re- the positive indirect effects of a regi- mains the majority shareholder of the onal savings bank. Savings banks not savings bank, the savings bank must only secure qualified banking jobs in also commit itself to the profit interests the region. They secure a large num- of the minority shareholders. Sooner ber of other local jobs by ensuring that or later, the obligation to the public credit is available to the local middle will suffer. Often the conversion to a business class - and thereby secure ad- public company is only the first step ditional tax revenue from companies - the privatisation experience with pu- and private individuals. blic assets over recent years shows this to be the case. Privatisation of Savings Banks is Damaging to the Public And if the regional savings bank is finally owned by another bank, then this Private bank lobbyists use the diffi- decision cannot be reversed, with the cult economic position of many mu- corresponding consequences: nicipalities to benefit themselves and Structural Policy and Regional Development 113

• for jobs in the savings bank private and public property is express- • for jobs in local medium-sized com- ly regulated for in the EU treaties, the panies EU competition commission has deci- • for the supply of financial services ded that a public owner may no longer • for the tax revenues of the munici- unrestrictedly guarantee companies pality from July, 2005 (which of course a private owner may undoubtedly do), Indeed, up to now, the policy being fol- and that the house-building promotion lowed has prevented a possible privati- funds provided by the provincial go- sation of savings banks. However, the vernments to the regional banks are to advocates of privatisation have already return an interest of almost 7%. Thus, achieved their first successes. the EU has prescribed the lowest level of interest payment the owner of the Discontinuation of the Municipal Lia- regional bank has to receive for inves- bility Guarantee Increases the Pressure ted capital, - even if it is not required! to Produce Profits Private Banks claim Both Brussels decisions raise the pres- public law banks have a competitive sure on savings banks and provincial advantage, because the local district banks towards profit return and restrict authority or the provincial government them when fulfilling their public obli- provides an unlimited guarantee to the gations. The pressure towards a close bank, thereby permitting a better credit co-operation between savings banks, rating. However, this ostensible advan- provincial banks and the other savings tage quickly turns into a disadvantage. bank group institutes has clearly incre- Public banks must generate their own ased. The distribution of labour within capital resources from their annual sur- the savings bank group must be orga- pluses, whereas private banks can easi- nised more efficiently. ly acquire additional capital by the issue of new shares (combined with high Ver.di: Maintain Regional Focus issue surcharges). Increasing capital and Public Obligations resources is the necessary condition for additional banking business. The The strength of the savings banks lies second disadvantage can be the restric- in their being rooted in the region and tion in the line of business, since this of being bound into the savings banks course limits the profit possibilities. group organization. The German services trade union, Ver.di, is strongly Nevertheless, the savings banks are committed to these two aspects as a financially among the most successful means of protecting interests of the pu- credit institutes in Germany. The dis- blic bank employees and those of many pleasure concerning better competi- citizens in the local authority commu- tiveness led to complaints by the BDB nity. Privatising the savings banks da- to the EU in Brussels. The BDB has mages economic development in the already been successful twice (BDB regions concerned. representatives have declared that they will continue to proceed against However, the creation of a savings the public law banks until they have bank group would also be detrimental. achieved their purpose, which is priva- Some executive boards and organizati- tisation). Although the coexistence of on representatives try to use the com- 114 WEED Conference Documentation

pulsion to closer cooperation within Besides, additional mergers would de- the group to form a savings bank cor- stroy the local identity and cut the links poration. According to this concept, the to the provincial and regional savings savings banks would then be reduced bank organizations. The borders of the to distributing the products which are savings banks areas of activity should created centrally for the whole organi- as a rule mirror those of the local po- zation. A locally autonomous customer litical borders. Also smaller savings policy, product policy, price policy or banks can also survive in the savings marketing policy would no longer be bank group. Often the small instituti- possible. Many local jobs would be ons even generate the highest income centralized, and therefore disappear returns. Of course there may be situ- from the region. The public obligation ations in which mergers are necessary to support the local economy would to provide the region with an effective become more difficult. The direction savings bank. It may also be sensible of this policy is clearly shown by the to combine certain tasks of several sa- Austrian development which previous- vings banks. Unfortunately, the execu- ly had a savings bank system very sitive boards of public banks often forget milar to the German system. their public obligations when considering this step. As a public company it Today most savings banks in Austria should be natural to ensure that a new are bound by contract and often also savings bank subsidiary is not abused by capital to the First Bank. The First for wage dumping. The new compa- Bank is the leading institution of the nies often do not want to be still bound Austrian savings banks. The individual by pay agreements and intend to sig- savings banks are obliged to sell certain nificantly change the terms of emplo- products according to certain conditi- yment for the employees in a negative ons. Important tasks are dealt with by way. In such cases Ver.di requests more the First Bank. The savings banks are active support from politics, especially indeed formally independent, but they by representatives on the boards of go- hardly have any commercial freedom. vernors of the savings banks. If public Additionally, the First Bank is quoted companies do not make an effort for a on the stock exchange and is obliged socially fair development of the social to be primarily concerned with earning climate and terms of employment of income for the shareholders. Here, as their citizens, who will? well, the very first step was the conversion of the public law bank into a public corporation. Jörg Reinbrecht

Thus, Ver.di supports a clearer and more binding division of work between savings banks and provincial banks. Masses of mergers between savings banks or provincial banks however are not necessary. The present regional bank structure does not need any further mergers for economic reasons. WEED is an independent Non-Governmental Organisation that was founded in 1990 to raise awareness in Germany for the roots of global poverty and international environmental problems. weed campaigns for a change in international economic and development policies that would put social justice and environmental sustainability in the centre of international policy-making. Our aim is to create more awareness in this respect and develop and implement concrete political alternatives. weed systematically analyses global economic, environmental and socio-political issues, linking the vision of a socially equitable and environmentally sustainable society to action and policy reform.

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Financial Services in the WTO: License to Cash In? A Civil-Society Critique of the Liberalization of Financial Services in the GATS Negotiations Authors: Isabel Lipke, Miriam Vander Stichele

The EU Corporate Trade Agenda The role and the interests of corporations and their lobby groups in Trade Policy-Making in the European Union Author: Christina Deckwirth

Documentation of the International Conference: Making Financial Markets Work for Development Options for Reducing Instability & Financing Development published by WEED

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