The Impact of General Agreement
on Trade in Services (GATS)
for the Operation of Foreign
Banks in Indonesia
by
IGN Parikesit Widiatedja
Faculty of Law Udayana
University, Bali-Indonesia
Abstract
Despite being debatable, all
participants committed to establish a multilateral framework of principles and
rules for trade in services which was assumed as the proliferation of
liberalisation. It was comprehensively accepted as General Agreement on Trade
in Services (GATS) that became inseparable part of World Trade Organisation
(WTO). They had hoped if GATS that entered into force in 1 January 1995, could
remove any restrictions and internal governmental regulations in the area of services whose
impact eventually emerged trade harrasment.
According to GATS, its
substantial coverage encompassing bank as a legally binded sector in liberalisation of trade in services.
Indonesia agreed unanimously to be bound
by GATS through promulgating Act 7 of 1994. Hence, the sui generis (specific)
regulation of bank sector was revised which gradually allowed the operation of
foreign banks. This paper attempts to
identify and analyse meticulously what sort of impact arise from liberalisation of bank service
underlied by four modes of supplying services under article 1 of GATS
encompassing cross-border supply, consumption abroad, commercial presence,
and natural persons presence. In order to yield clear and objective
explanation, its impact will be divided into positive impact and negative
impact which significantly
influenced the economic
development in Indonesia.
Keywords: Impact, GATS, foreign
banks
I. BACKGROUND
In the post industry era, a
challenge ahead is convoluted which is being reflected by liberalisation in
many important sectors. It had been commenced through comprehensive
negotiations of trade in Uruguay Round when 123 nations agreed to establish the
World Trade Organization (WTO) in Marakesh, Marocco. That memorable moment could be a stepping stone
of proliferation in liberalisation because of their substantial coverages
encompassing investment, intelectual
property rights and services were an inherent part of tradable activities.
Despite
being debatable, all participants commited to establish a multilateral
framework of principles and rules for trade in services that were well-accepted
as General Agreement on Trade in Services (GATS). They had hoped if GATS with
entered into force in january 1995, could remove any restrictions and internal
governmental regulations in the area of services whose
impact eventually emerged trade harrasment.
The main document of GATS was a
framework agreement which was arranged comprehensively and integrally in the
area of services including banks, telecomunication, financial services, air
transport, maritime transport and tourism. Most Favoured Nation, National
Treatment, Transparency and Progressive Liberalization were the paramount
principles. Eventually, the enactment of GATS has becomed the new episode in
the internationalization and institutionalization of services provision.
In addition, since the last decade service
sectors have potential contribution for the world economy which were going to be
the largest and fastest growing sector. In 1999, the value of cross-border
trade in services amounted to US$ 1350 billion, or about 20% of total trade.
This understates the true size of international trade in services much of which
takes place through establishment in the export market, and was not recorded in
balance of payments statistics.[1]
Indonesia agreed to be bound by GATS through promulgating law number 7
year 1994 regarding The Ratification of Agreement of Establishing the World
Trade Organization (WTO) including GATS. The increasing performance of
development was an essential benchmark to ratify its agreement that
progressively allowed the operation of foreign services provider. Indonesia’s
government though over that GATS would be a conduit of its goal to be just and
properous of our community which was clearly mentioned in the preamble of the
Constitution of 1945.
As a sector that has been legally
binded in GATS, banking sector was
estimated to achieve sustainability of the implementation of national
development and to realize a prosperous society with Indonesia's
economy is based on a uniform, independent, reliable, fair, and
able to compete in the international economy, to be
supported bysource of financing, among others, came from the
banking sector;Whereas banking berasaskan economic
democracy with its primary function as a collector and
distributor of public funds, has a strategic role to support the
implementation of national development, in order to improve the distribution
of developmentand its results, economic growth and national stability, the
direction of increasing standard of living of many
This shows that the banking
sector is a sector which has the largest contribution in its goal of improving
the welfare and prosperity of its people. May mean that a bank's progress
in a country is positively correlated with the progress of the country
concerned. The more developed a country, may mean that the greater role of
banks contributing to economic growth and increase in welfare
Indonesia through Law
no. 7 of 1994, have ratified the Agreement Establishing the
World Trade Organization (WTO) which includes the GATS therein. Thus, Indonesia should transform the rules of international law contained
in the GATS. The banking sector had become one of the
sectors affected by the agreement whichbecame effective January
1, 1995 effective from the. In theconstruction of GATS, any bank operating
in a country can expandto other countries as a form of internationalization of
banking.Along with that, Indonesia had to open up to the operations of
foreign banks who will openly compete with banks in
Indonesia
This paper attempts to
answer a series of issues around what and how the
liberalization of regulation mechanisms of the services sector, particularly
banks in the corridors of GATS? and impactsrelated to the
presence of what caused foreign banks in Indonesia?
II. THE LIBERALISATION OF
SERVICES IN THE PERSPECTIVE OF GATS
In the preamble of GATS, it is
clearly mentioned that the purpose of establishing a multilateral framework of
principles and rules for trade in services, is to the expansion of tradable activities under
conditions of transparency and progressive liberalization. Likewise as a tool
of promoting the economic growth of all trading partners and the development of
developing countries.
In the inward looking
perspective, GATS has underscored the increasing participation of developing
countries through strengthening of their
domestic services capacity and its efficiency as well as competitiveness. Meanwhile,
in the outward looking perspective,GATS was aimed to ensure the equitable and
fair treatment which was
accompanied by overall balance of rights
and obligation among all participants.
Refering
to the article 1 of GATS, it can be
distiguished into four modes of supplying
services encompassing:
1. Cross-border supply
is defined to
provide services from the territory of one member into the territory of another member;
2. consumption
abroad refers to situations where a service consumer moves into another
member's territory to obtain a service;
3. commercial presence implies that a service
supplier of one member establishes a territorial presence, including through
ownership or lease of premises, in another member's territory to provide a
service;
4. presence
of natural persons consists of
persons of one member entering the territory of another member to supply a
service.
The definition of services is
clearly mentioned in article 1 point 3.
Services include any
kinds of services except services
supplied in exercise of governmental authority. Afterwards, a service
supplied in the exercise of governmental authority must be defined as any service, which is
supplied neither on a commercial basis, nor in competition with one or more
service suppliers.
Within GATS, there are three main
principles for al members and must be undertaken promptly and unconditionally.
The first is Most Favoured Nations Principle (MFN) which can be found in
article II GATS. It obliges that each member shall accord an equal treatment to services and service
provider from another country as well as from other countries of member.[2]
Transparency which can be found in Article III GATS is the
second principle. Each country of member must publish all the laws, rules of execution,
and all generally applicable resolutions issued both by central and local
government, which have impacts on the practices of GATS. Every change in laws
and the addition of new rules must be reported to The Council of the Trade of
Service (CTS). The countries must also comply with the demand of specific
information from other countries of member about many generally applicable
rules. Therefore, the countries have to find one information centre, or more,
to provide all the information needed and demanded.
The last principle is National
Treatment which can be found in Article
XVII. Within this principle, each member shall accord to services and service
suppliers of any other member, in respect of all measures affecting the supply
of services, treatment no less favourable than that it accords to its own like
service and service suppliers.
The establishment of schedule of
specific commitment is a part, that can be a crucial point in which each country is obliged to set up a
list of liberalized sectors accompanied by timely manner schedule. The
commitment will be an integral part of the agreement and it has also becomed an integral appendix. Refering to the
article XX, each member shall set out
in a schedule the specific commitments with respect to sectors, where such
commitments are undertaken. From each schedule shall specify:
a. Terms, limitations and
conditions on market access;
b. conditions and
qualifications on national treatment;
c. undertaking relating to
additional commitments;
d. where appropriate
the time-frame for
implementation of such commitments; and
e. the
date of entry
into force of
such commitments.
Refering to the article XXI GATS,
each member may modify or withdraw any commitment in its schedule, at any time
after 3 years have elapsed from the date on which its commitment entered into
force in accordance with the provisions of this article.
Recognizing the GATS provision
and as a part of its strong commitment, Indonesia has also drawn up a schedule
of specific commitments which is contained in the document GATS/SC/43 dated in
April 1994. Indonesia's Schedule of
Commitments covers market access and national treatment for all four modes of
supply and commits to the liberalization of telecommunications, industrial
services, transportation services (maritime transport services), tourism and
financial services.
Specifically, in the banking sector, Indonesia's
commitment in determiningthe operation of services of foreign
banks in Indonesia based onthe GATS agreement covers:
In market access, foreign service
suppliers who wish to sell orprovide services in the
territory of Indonesia must be present inIndonesia. Its
presence should be in the form of representative offices or joint
ventures in the form of Limited Liability CompanyLaw Board
In cross border supply, on
the banking sector held thatrestrictions on the number of services to
foreign service supplierscan be serviced and the location
of the establishment of branches and offices
Foreign service suppliers in the
banking sector may only have anational bank shares as
much as 49% of the shares sold through the capital market
III. THE REGULATION OF FOREIGN
BANKS IN INDONESIA
The
existence of foreign banks play an important role in
sustainingthe activity of foreign investment in Indonesia.
Eleven branches of foreign banks have been established since
1968. In general, their role is to facilitate foreign investment and export-import activitiesand
to develop the domestic industry within the framework ofeconomic
development and expansion of employment opportunities. Foreign
banks and banks operating in Indonesiamixture is a
type of commercial banks. Activity has a role andfunctions
similar to other commercial banks. that distinguishes it from Indonesia's commercial
banks is they are more specialized incertain fields and there
are some specific restrictions in connectionwith the
transaction.
Foreign bank is a branch office of a
bank outside of Indonesia arecurrently only allowed to operate in Jakarta and open sub-branches
in several provincial capitals besidesJakarta namely, Semarang,Surabaya, Bandung, Denpasar, Ujung Pandang, Medan andBatam. Since mid-1999 foreign
banks were given the opportunityto open its branch office in
compliance with the requirements ofBank Indonesia. They can
open branches only if the bank that ownsassets categorized 200 of
the world's largest and is rated at leastA from international
ratings agencies
As a follow-up participation
in the GATS Agreement, the Government of Indonesia and
then revise the banking laws through the issuance of Law
no. 10 of 1998 concerning Amendment to Law no. 7 of
1992 which has mengakomodiir general principles of GATS. In the
legislation there has been some revisions include:
The provisions of article 20
which has allowed the opening ofbranch offices, branch
offices, and a representative office of a bank domiciled abroad, which can
be done with the permission ofHead of Bank Indonesia
Provisions of article 26 in
which every citizen of Indonesia, a foreign citizen, legal
entity or Indonesia and foreign legal entitiesmay purchase shares
of commercial banks, both directly and orthrough the
stock exchange. Thus, there is no discriminationagainst the
rights of purchase of shares of a bank
Provisions of article 39 which has
declared that in carrying out its activities, each bank
can use foreign labor
Article 21 then states
that the legal form of representative officesand bank branches domiciled
outside the country following the lawsof its home office. Then in
terms of ownership provided for in article 22 which commercial
banks can be established Indonesian citizens or Indonesian
legal entities with foreign nationals or foreign legal
entities and partnerships
A more detailed explanation can
be found in Government Regulation Number 24 Year 1999 on Terms and
Procedures forOpening of Branch Office, Branch Office and Representative
Officeof a Bank Based in Foreign Affairs. Article 3 states that
the bank isdomiciled abroad who can open an office in Indonesia is
the banks that have a good ranking and reputation. Furthermore,
in givingpermission opening bank offices located overseas, BankIndonesia besides attention
to the soundness of the bank concerned, also pay attention to the
level of healthy competitionamong banks, saturation level of number of
bank offices in a particular region as well as the equitable
distribution of national economic development
In carrying out its banking activities, Article
5 requires thatgovernmental regulation of branch offices, branch
offices, office under branch offices, and representative offices of banks
domiciled abroad, to carry out activities in Indonesia, subject
to allrules and regulations laws in force in Indonesia and
meet capitalrequirements set by Bank Indonesia
As a follow-up of the GATS agreement, Bank Indonesia as
anIndonesian bank regulatory authorities will soon implement a
gradual liberalization policy in the banking industry sector. The
liberalization was meant to give wider access to the alien to
establish, own and operate a banking institution in Indonesia,according
to the demands of globalization in the financial services
sector and in the GATS.
Liberalization policies will
be directed at easing the rules. If all thisgives only
restriction that foreign banks may establish and operate
a bank here, will be extended by an opportunity
for financial institutions to also be open and operate
a bank in Indonesia. But the chances of foreign banks
to enter more widespread in thisindustry, it must
refer to the provisions or rules applicable inIndonesia, including
the requirement for all prospective operatorsto follow the
process of banking fit and proper test (fit and proper test) at
Bank Indonesia. About the extent to which liberalization will
be applied to Indonesia remain cautious with the use
of similarreference in the sector liberalization adopted the
ASEAN countries.
IV. IMPACT OF GATS FOR THE
OPERATION OF FOREIGN BANK
GATS
agreement in the tourism sector will give multifarious impact in tourism sector
which has becomed steadily the second most contributor of foreign exchange
after non oil and gas sector. Author attempts to identify what sort of impact
both positive and negative arise from liberalization of services underlied by
three inseparable perspectives encompassing: Government perspective, Business practitioners in tourism
perspective, and Indonesia’s consumer perspective.
Author
expects through combining all those perspectives will engender objective and
positive outlook, and also accommodates
interest of all stakeholders in tourism. In order to yield clear and objective
explanation, the impact of liberalization of service in Indonesia’s tourism
will be divided into positive impact and negative impact.
4.1 POSITIVE IMPACT
Basically, because of
liberalization of services, all stakeholders have the same and wide opportunity
to take part in the development of tourism. It also wil eliminate differencial
treatments in order to protect certain products both production and
distribution as well as consumption levels from person or legal entities, who
have intimate relationship with the decision maker, which tend to be deceptive
and fraud. Unfair trade and monopoly as impact of their activities are the
major argument why all those thing is prohibited to be undertaken currently. For
the consumer, they have freedom of choice to get the best services which
emanated from services provider entire the world with accompanied by achievable
price.
The emphasizment of good
corporate governance will be indespensable in the liberalization of services
era. Because it stipulates the rules-based system, transparent and accountable
management and independence as well as fair principle. If we can undertake
consistenly all those requirements, it will strengthen our domestic services
capacity, its competitiveness and efficiency to compete directly with foreign
services provider.
Further positive
implications on increasing contribution of foreign banks for
the development of banks in Indonesia. In turn they can
push the rate of movement of other service sectors that
lead toincreased economic growth in Indonesia. It is
undeniable that the presence of foreign banks that are currently a
total of 11, has contributed significantly to the development of national
banks. With operations in Indonesia, they also can increase financial
resourcesfor development efforts and spur the real sector which
is currentlystruggling with the entanglement of the global economic crisis
The increasing participation of
developing countries which was clearly ensured in the preamble of GATS will be
a huge opportunity in reducing gap between developed and developing countries.
The transfer of knowledge, technology and skills are the best way to attain its
goal. Besides, it will stimulate the enhancement of competitive value of our business practitioners to
provide creative and innovative services based on effective and efficient
principle. Otherwise, foreign services provider that have been congested here,
will dominate our market.
Contributions of other
foreign banks can be seen from the diversity of product
innovations that make it a market leader. They have been
pioneers in some derivative products such as credit linked
notes, investment linked deposits, and asset backed
securities, in which national banks are still a follower. Their
presence certainlybrought a knowledge and technologies that
benefit the interests ofbanks in Indonesia. As media technology
transfer, the banks inIndonesia will find a variety of types and tricks of
marketing, labormanagement systems, human resource development throughdiversification of
its products
Another advantage to be
gained is increasingly open economic system of a country with
the GATS agreement in the banking sectorwas deregulated and
the bureaucratization which has been abugbear for a bank in
opening overseas offices. So with this all thebank's presence will have greater
opportunities in marketingbanking products and not have to worry
about the bureaucraticrules or intricate or overlapping each
other. The existence of LawNo. 10 of 1998 is a concrete
manifestation of follow-up to the Indonesian government against
the GATS agreement
4.2 NEGATIVE IMPACT
The proliferation of
liberalization which has been committed through Uruguay Round prone to assert
developing countries have no choice to take part of its system. It was such an
excessive argument when three new isues including services, intellectual
property rights and investment, were categorized as an integral part of
tradable activities. They proned to span myriad sectors in order to find new
potential market in densely populated of developing countries which have not
been exploited yet. The tendency of exploitation can also be detected from the
market share of services. Since GATS entered into force in 1995, developed
countries whose their giant transnational companies and tycoon businessmen were
exist, have dominated the service sectors and emerged an oligopolistic market.
This situation depicts about
scepticism whether developing countries will gain an benefit on such a
liberalization of service especially to enhance their economic growth. It can
not be undertaken drastically but through
a process sustainably and gradually with five phases including a
traditional stage, a pre-condition for take off, take off, a drive to maturity,
and an age of high-mass consumption.
In the matter of national
sovereignity, it seems clearly that the sovereignty will be reduced gradually
by liberalization of services especially in sensitive issues such as
investment, telecomunication, air transport and tourism. J.G Starke uttered
that it was probably more accurate to
say that the sovereignity of a state was the residum of power which it possesed
within the confined laid down by international law.
Foreign bank ownership in
the banking industry today hasincreased to 40%. The change of
ownership is caused by the economic crisis that hit Indonesia starting in
1997 .. When compared to the time before the crisis, foreign banks control only
11%. Ownership of foreign banks that are too large can
cause anegative impact on general economic conditions due to the
presence of excessive ownership feared would happen a foreign
intervention against any banking and economic policy in
generalissued by the government of Indonesia
Another thing that can cause
a negative impact is the possible presence of foreign banks affect the
currency exchange rate of rupiah in Indonesia. This is very significant because
of the influenceof the currency provides a tremendous effect for banking regulationand policy in Indonesia. For
that Bank Indonesia must act decisively against rupiah speculation that foreign
banks do with theban on the internationalization of dollars, this will
release of rupiah from the influence of factors of
political stability.supervision
against foreign banks and ban internationalization dollars will create a stable rupiah in state politics as anything else.
against foreign banks and ban internationalization dollars will create a stable rupiah in state politics as anything else.
Some time recently that foreign banks prefer to
lend to the consumption sector by relying on technology and
the networks theyhave. Foreign banks are very heavily in
marketing their credit card, credit for automotive products, currency speculation and offerforeign
currency deposits as well as dollars with lower interest
rates than local banks in Indonesia. This situation can have
a negative impact if held continuously since ultimately can lead
to aconsumer culture for the people of Indonesia
.
.
Eventually, based on Francis
Fukuyama statement, the economics who promoted liberalizing economic reform
understood this perfectly well in theory. But the relative emphasis in this
period lay very heavily on the reduction of state activity, which could often
be confused or deliberately misconstrued as an effort to cut back state
capacity across the board. The state-building agenda,which was at least as
important as the state reducing one, was not given nearly as much thought or
emphasis. The result was that liberalizing economic reform failed to deliver on
its promise in many countries.
V. CONCLUSION
To sum up, GATS which strictly
regulated the liberalization of services in tourism, has expected a pure
commitment of all members for: actualizing fair and equitable
treatment which is comply with framework agreement; eliminating all kinds of
protectionism barriers in the international transactions; abolishing all kinds of
discrimination measures and the dichotomy between domestic and foreign services
provider upholding transparent and
accountable principle in the international transactions.
The multifarious impact in
tourism sector has emerged after the establishment of GATS. The positive impact
are the equal and fair opportunity of doing business in providing tourism
services, the actualization of good corporate governance underlied by effective
and eficient principle, the increasing opportunity both from tourism income and
transfer of technology, knowledge and skills. Meanwhile, the tendency of
exploitation through the proliferation of liberalization, the reduction of
state souvereignity and cultural degradation are the negative impact of
liberalization of services.
Author suggests that all stakeholders
in tourism must be cognizant and take equal responsibility in navigating
tourism in the liberalization of service era. Henceforth, they must work hand
in hand encouraging and nurturing each other to unleash Indonesia’s tourism
true potential. In the inward looking perspective, the stressing point of
preservation of our natural wealth, cultural heritages and human environment
must be undertaken consistently and sustainably in order to maintain our
comparative advantage. Meanwhile, in the outward looking perspective, all
measures and strategies must be aimed to build capacity and mobilize all
resources in tourism to compete directly with foreign services provider.
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