Services are playing an ever-increasing role in economic activity. In the international economy, trade in commercial services reached US$3.3 trillion in 2009 (WTO 2010a, Table 3) with both exports and imports having grown at an average annual rate of 9 per cent over the period 2000-09 (WTO 2010b, Table 1.3). Over the same period, the average annual rate of growth in trade in goods was 8 per cent for exports and 7 per cent for imports to reach a value of US$12.2 trillion in 2009 (WTO 2010a, Table 3). Some of this growth may be explained by trade liberalization in services. In the regional context, the ASEAN countries have agreed to liberalize trade in services through the ASEAN Framework Agreement on Services (AFAS) in addition to their commitments through the General Agreement on Trade in Services (GATS) in the World Trade Organization (WTO). For this group of countries, AFAS is designed to enhance cooperation amongst members through liberalizing the services sector in both scope and depth beyond commitments in the GATS (Article 1, Subsection (c), AFAS Agreement, 1995).
AFAS was signed into being at the Fifth ASEAN Summit held in Bangkok in December 1995. The first schedule of commitments was signed in 1997 and the seventh in 2009. The schedule of commitments is based on the GATS with its four modes of supply, namely, cross-border supply (Mode 1), consumption abroad (Mode 2), commercial presence (Mode 3) and movement of natural persons (Mode 4). Under each mode, there are commitments dealing with market access and national treatment. These vary considerably across the five countries, indicating varying degrees of restrictiveness (Table 1). Further discussion of the restrictions in each mode are provided below (section III).
Liberalization in the services sector is believed to benefit a country through creating efficiency and economic growth (Walmsley and Winters 2005). The removal of barriers to entry, such as the licensing of foreign service providers, may increase competition between domestic and foreign suppliers, thereby leading to economic benefits such as higher rates of economic growth. However, quantitative measures that permit estimation of the growth effects of services liberalization are difficult to obtain because, unlike the price wedge effects that can be obtained for several measures that impede market access for goods, there is no equivalent measure available for trade in services.
The objective in this paper is to derive a quantitative measure of the effects of services liberalization on rates of economic growth in a subset of the ASEAN countries, referred to as ASEAN-5. (1) It is recognized at the outset that the existence of GATS has a confounding effect on measuring the effects of AFAS and, therefore, the liberalization of services trade is treated as stemming from both Agreements without any attempt being made to distinguish between them. Such a lack of separation is justified because, to date, there has not been much evidence of commitments in AFAS going substantially beyond those in the GATS (see, for example, Gordon et al. (2003a)). Moreover, we are unaware of unilateral liberalization of services amongst the ASEAN-5 over the period under review. Therefore, to the extent that there has been any liberalization at all, it has occurred either through regional or multilateral negotiations.
The remainder of the paper is organized as follows. The existing evidence for the relationship between openness in services trade and economic growth and the difficulties inherent in measuring that openness are reviewed (section II). The implementation of AFAS amongst the subset of ASEAN countries and its evolution are described (section iii). An openness index for services amongst these countries is constructed and used in the regression equation that relates openness to the rate of economic growth (section IV). The results and discussion are presented (section V) and some conclusions are drawn (section VI).
II. Services Trade Liberalization and Economic Growth
The effects of liberalization in services trade differ from those of liberalization in goods trade. According to Mattoo, Rathindran and Subramanian (2001), liberalization in services trade will not only increase competition amongst foreign firms but it will also do so for domestic firms. This increased competition will imply a larger scale of economic activity, which can contribute towards more growth. Baldwin and Forslid (2000) concluded that trade liberalization can promote growth through the pro-competitive effect in the R&D sector. Using Tobin's q approach, (2) they showed that under imperfect competition, trade liberalization, particularly in the financial sector, produced a pro-competitive effect by reducing the mark-up between savers' and borrowers' interest rates. This reduction in the cost of borrowings causes the firm to lower its discount of future operating profit and hence increases the value of additional new capital. With the increased value of new capital, firms will prefer to invest rather than to retain profits, thereby leading to an increase in economic growth.
Services trade liberalization is accompanied by one crucial factor that contributes to economic growth, namely, technology. Technology will create spillover effects, particularly through raising labour skills, that eventually result in stronger growth. Coe and Hoffmaister (1997) found evidence of the positive effect of the diffusion of technology on total factor productivity growth. Arnold et al. (2010), in a detailed study of services deregulation in India over the period 1993-2005, used a panel of approximately 4,000 manufacturing firms to find that deregulation of the banking, telecommunications, insurance and transport sectors had significant positive effects on the productivity of these firms. They also found, consistent with the finding by Mattoo, Rathindran and Subramanian (2001) and Walmsley and Winters (2005) noted earlier, that reforms of services benefit both foreign and locally owned manufacturing firms and that the effects were more pronounced for foreign firms than for domestic firms.
Bekaert, Harvey and Lundblad (2005) have argued that a country which experiences an increase in its financial development in terms of a strong legal system, good institutions, favourable conditions for foreign investment, and the protection of investors, will generate greater growth effects. Therefore, these accompanying changes in the improved climate for entry of foreign firms reinforce inflows of technology and FDI and thereby enhance the rate of economic growth.
III. Financial Services Liberalization in ASEAN
The services commitments under AFAS are consistent with those under GATS but they are intended to go further. For example, both Agreements use a positive list approach to commitments. This means that commitments that are listed will be liberalized either fully or to a stated extent. There are two components of commitments: one that deals directly with market access; and the other that deals with national treatment. The first requires that the importing country refrains from imposing certain kinds of quantitative restrictions, for example, on the number of foreign suppliers or on the value of the transactions conducted. The second requires that the country treats all foreign suppliers in the same way that it treats its domestic suppliers (Dee and Findlay 2009).
Within AFAS, most ASEAN countries place some restrictions on Mode 1 supply: a firm must have a presence in the country in which it provides the service. For example, at one extreme there is prohibition in Indonesia and Myanmar and, at the other, there is no restriction in Cambodia and the Philippines (Gordon et al. 2003b). For Mode 2, there is also a range of restrictions. These differ across the various elements of consumption abroad, with insurance being the least restricted (Table 2).
Of the four modes, the most restrictive is Mode 3. Each and every country requires that any financial institution operating in its territory has a licence or permission from a central financial institution, such as the Central Bank, the Ministry of Finance, or a Board of Investment. Some examples of restrictions are provided in Table 3. Indonesia, Malaysia and the Philippines are the relatively more open of the ASEAN economies in this respect.
For Mode 4 service flows, each country has various restrictions on the international movement of natural persons. These range from limits on the numbers (Indonesia, Malaysia and the Philippines) to limits on the number of positions that can be filled (Indonesia, Malaysia, the Philippines and Singapore), to the length of stay (Indonesia, Malaysia, the Philippines and Singapore), and to prohibitions on the purchase of land (Cambodia, Thailand, Vietnam). Only Brunei has minimal restrictions (Gordon et al. 2003b).
In general, most ASEAN experts view the progress of service trade liberalization of the ASEAN member countries pessimistically (see, for example, Gordon et al. (2003a) and Stephenson and Nikomborirak (2002)). (3) There has been only limited progress by each country on the schedule of commitments in AFAS and especially in financial services. The GATS "plus" feature in AFAS has not been bold and there is little difference between AFAS and GATS. In terms of coverage, the total commitments made in AFAS by ASEAN members exceed those made in GATS with sectoral coverage being 50 per cent greater: a total of 1,255 subsectors are covered in AFAS compared with 795 sectors in GATS (Thanh and Bartlett (2006)). (4) However, in terms of depth of commitments, they found that commitments in GATS have deeper liberalization effects in the financial services sector in the way in which they provide clear commitments regarding transparency. In the AFAS scheme, there is no such explicit clause that requires a member country to submit documents of existing legislation, rules and regulations, procedures and notices of administrative actions. Meanwhile, the GATS scheme, based on Article III, requires transparency by WTO member countries. This implies that commitments offered in GATS have been more thorough and clearer than those in AFAS.
In terms of commitments made by individual countries, Cambodia, Indonesia, Malaysia, Singapore, Thailand and Vietnam have already committed broad sectoral coverage in GATS and hence they only gain relatively small benefits from additional regional liberalization through AFAS. On the other hand, Myanmar and the Philippines benefit more from regional liberalization, and hence have committed more in terms of sectoral coverage than they have done in GATS. This outcome is one of the reasons why AFAS appears in general terms to go beyond GATS but, in terms of individual countries, most of the countries have committed only marginally more in AFAS than they have in GATS.
One consequence of the positive list approach used in both AFAS and GATS is that it is not altogether clear how deep or detailed are the restrictions in sectors that are not included in the list. If the country does not list any restrictive measures, it could be that all measures for a particular sector have been eliminated, but it is not necessarily so. On the other hand, if a country were to use a negative list approach, then all the non-conforming measures would be listed. With the use of the positive list, it could be the case that both Agreements have similarities in terms of the depth of the commitment. GATS only differs from AFAS in terms of its transparency clause (see GATS Article III).
A comparison of the commitments of ASEAN-5 in AFAS and in GATS is shown in Table 4 for financial services. It is clear that, for each country, there are substantial similarities and that the evolution of deregulation has been very measured.
A question emerges from this brief account of the behaviour of members of ASEAN-5 in AFAS and in GATS. Why do these countries keep participating in and use AFAS as a tool in service liberalization when GATS is probably more effective? The reason is that commitments made in AFAS are most likely due to the countries' willingness to sustain the ASEAN forum itself. As Gordon et al. (2003a) found, AFAS acts as a medium for ASEAN Ministries of Finance and Central Banks to exchange their views and to establish networks among the member countries. Through this medium, it is expected that greater policy coordination and regulation could be established for the financial sector of member countries.
The purpose of this paper is to estimate a relationship between the progress of deregulation of the services sector of ASEAN-5 and the rate of economic growth of these economies. The specification of the model is based on that used by Mattoo, Rathindran and Subramanian (2001).
The specification of the single equation is:
[G.sub.jt] = [alpha] + [gamma][x.sub.jt] + [delta][y.sub.jt] + [[epsilon].sub.j] (1)
where: [G.sub.jt] is the annual growth rate of per capita GNP for country j at time t, measured at purchasing power parity; [alpha] is the constant term; [x.sub.jt] is the vector of explanatory variables such as government consumption (as a share of GDP), investment, a dummy variable for the Asian financial crisis of 1997; an index of tariff barriers, an index of political stability, an index of institutional quality and school enrolment ratio; [y.sub.jt] is a vector of the openness to trade in services for country j at time t; and [[epsilon].sub.jt] is a random error term. The vector [y.sub.jt] is constructed from services liberalization of country j. Unlike the study by Mattoo, Rathindran. and Subramanian (2001), in which they used crosssectional data for sixty countries, here we use panel data for the ASEAN-5 for the period 1990-2008. (5)
The data were compiled from the following sources. The macroeconomic variables of annual growth rates of per capita GDP, of government consumption (as a share of GDP), of investment, and of the school enrolment ratio, were sourced from the World Development Indicators (WDI) of the World Bank (2010). The variable that acts as a proxy for political stability was taken to be the Political Stability and Absence from Violence Index from the WRI Earth Trend database. (6) An index for institutional quality was also specified and taken from the WRI Index of Regulatory Quality. (7) The purpose of this index is to reflect the conjecture that the high quality of a country's institutions is likely to be associated with high-quality regulations.
The index of reform in the services sectors of ASEAN-5 was constructed based on the method of Mattoo, Rathindran. and Subramanian (2001). This index captures two important elements that distinguish the benefits of services liberalization from the liberalization of trade in goods. These features are the degree of competition and the extent of foreign ownership permissions. The index takes the form of a ranking from 1 to 8, with 1 being most restrictive and 8 being least restrictive.
The index has three components. These are market structure, limits on foreign ownership and cross-border trade. The first component is included to represent competition policy in the banking sector. This information is obtained from the country's AFAS commitment and it is used following the method by Mattoo, Rathindran. and Subramanian (2001). They considered an entry of "unbound" or "discretionary licensing" as an uncompetitive market, while an entry of "none" is considered as a competitive market structure. We looked particularly at the banking sector in comparison with the insurance sector because the banking sector dominates the financial sector of ASEAN members (Phu Ha 2010). (8) We also looked particularly at commercial presence of the banking service in a country (Mode 3) since most of the schedule of commitments on AFAS take place on Mode 3. If there is a barrier in this mode, shown by an "unbound" or "discretionary licensing" restriction, then the country is considered to have an uncompetitive market structure. If there are no barriers in this mode, shown by a "none" restriction, then the country is considered to have a competitive market structure.
The second element is the limitation on foreign ownership in the banking sector. This information is also taken from the country's AFAS commitments which show the limitations on the foreign ownership (in Mode 3). This limitation has only two categories, greater than and smaller than 50 per cent, following Mattoo (1998).
The third element is cross-border trade. In constructing this component of the index, we again follow Mattoo (1998) by using the Dailami Index. Dailami (2000) constructed a composite index based on a coding of rules, regulations and administrative procedures, representing restrictions on the current and capital transactions of a country. This index captures cross-border trade in the sense that if a financial company wants to establish a business abroad and needs to borrow abroad from a foreign company in the destination country, there must not be a restriction on foreign borrowings and the payments for that financial service. According to Dailami, an index greater than 1.6 indicates a country with broadly open characteristics, with few restrictions on the current and capital accounts. An index smaller than 1.6 indicates the opposite condition.
These three elements are then combined, giving priority to market structure, then to foreign ownership and then to the Dailami Index. The value for each element provides a rank for the level of openness of a country. These rankings are shown in Table 5. In interpreting the table, we can see that if a country has an uncompetitive market, with a foreign ownership limitation below 50 per cent and a Dailami Index value smaller than 1.6, it has rank openness of 1. This indicates a country with a most restrictive financial sector and little progress towards liberalization. As a country shifts from restrictiveness in cross-border trade to relatively more open cross-border trade (a change in Dailami Index), the rank increases to 2, and indicates relatively more liberal services trade. This index increases even more as the country allows foreign ownership greater than 50 per cent. The process continues until the country has a competitive market structure, i.e., it provides foreign ownership participation of more than 50 per cent and has an open cross-border index of at least 1.6. In summary, the greater the rank of openness, the greater the openness of a country in its financial services trade.
The values of the openness index for the countries comprising ASEAN-5 are shown in Table 6. Apart from Singapore, each country entered AFAS (and GATS) with a value of the index of 1, meaning that the financial services sectors for these countries were highly regulated and restrictive to services trade. At the beginning of the period of implementation (1997), Singapore was already more open than the other four countries. However, unlike these countries, which became more open over the period to 2007, with values of the index attaining 2 and 3, Singapore remained on a value of 2. This suggests that little change has been made in Singapore. This is possibly due to no change in Singapore's AFAS commitment in financial services since the fourth round of negotiation, while other ASEAN countries like Thailand made progress in the fifth round of negotiation. Moreover, Singapore's commitment in the fourth round of negotiation stated that new foreign banks can only establish as offshore banks or representative offices and it cannot act as agents (AFAS 2004).
IV.3 The Distributed-Lag Model
We used a distributed-lag model that also includes lagged values of the openness index. The reason for doing so was based on two considerations. The first was to take account of the dynamics of the macroeconomic variables. These dynamics can affect current economic growth through variations in factor productivity, macroeconomic conditions and expectation (Morales 1998). The second consideration was to allow for the time-phased effects of services liberalization on growth. When this liberalization takes place, the factor input flows into the country bring to domestic producers new technology and improved labour skills. These result in more efficient production that then leads to economic growth. However, as argued by Baldwin and Forslid (2000), this outcome requires that a "learning process" be undertaken by the firm that allows it to benefit from these consequences of services liberalization. The length of lag was chosen to be two. (9) This choice was based upon consideration of the relatively small number of degrees of freedom available and the probable multicollinearity that would be introduced through having a large number of lagged values of the openness index. (10)
These considerations lead to the distributed-lag model:
[G.sub.jt] = [alpha] + [[beta].sub.1][G.sub.jt-1] + [[beta].sub.2] + [G.sub.jt-2] + [gamma][X.sub.jt], [[delta].sub.1][Y.sub.jt], [[delta].sub.2][Y.sub.jt-1] + [[delta].sub.3][Y.sub.jt-2] + [[epsilon].sub.jt] (2)
where: the variable [G.sub.jt] and the vector [x.sub.jt] were defined in equation (1); and [Y.sub.jt-1], i = 0, 1, 2 represents the openness index and its lagged values. It is assumed that the [Y.sub.jt-1], i = 0, 1, 2 is non-stochastic and, therefore, that these variables are uncorrelated with the disturbance term [[epsilon].sub.jt]. Thus, OLS can be used to estimate equation (2).
V. Results and Discussion
It is shown by the estimation results that, in general, liberalization in the services sector through AFAS and GATS together has had a significant effect on the rate of economic growth of the countries comprising ASEAN 5. The results for various modifications of the basic specification (equation 2) are presented in the Table 7.
In the first regression (I), we include all growth control variables together with the openness variable and its lags. Growth lagged two periods and education are insignificant, while growth lagged one period, government consumption and investment appear significantly to affect the rate of growth. The openness index does not have an effect on contemporaneous growth. However, the value lagged by one and two periods does have a significant, negative and positive effect on the rate of growth respectively. This lack of significance could be caused by multicollinearity. To test this possibility, we calculated the simple correlation coefficient amongst the variables [Y.sub.jt-1], i = 0, 1, 2, found that they were each larger than 0.89 and concluded that we needed to test for these variables as a group. As suggested by Gudjarati (2003), to test for the joint significance of the openness index and its lagged values as a group, these variables should be regressed on economic growth and their significance tested through the F-statistics. The result of this test is shown in Table 8. The critical value of the statistic is F(2, 156) = 2.99. With the calculated value of F being 7.83, we reject the null hypothesis that, as a group, these openness variables are not significantly different from zero. Therefore, we conclude that the openness index has a significant effect on the rate of economic growth.
We take into account the possible effect of the Asian financial crisis by including a dummy variable for the year 1997 (Table 7, II). The results are somewhat similar to the previous estimation. It is found that one-period lagged growth and government consumption significantly affect the rate of growth at the 5 per cent level of significance. Investment and education continue to have no effect on growth. The crisis dummy variable is significant in reducing the rate of growth. However, the openness index is now found to be negative and significant at the 10 per cent level of significance. The lagged variables of openness are now insignificantly different from zero.
Next, we take into account the index of political stability and the index of regulatory quality (III). The results are similar to the previous estimation where growth lagged one period, government consumption, investment, the Asian crisis dummy and the openness index in the current year (with the "wrong" sign) are all significant explanatory variables of current economic growth. Both political stability and regulatory quality index are not significant for growth. The tariff rate also appears to be insignificant.
In a further specification, we omit the variables government consumption and investment (IV). It is found that one-period lagged economic growth and the Asian crisis dummy consistently affect growth, while the openness variables remain not significantly different from zero.
We also respecified the model to exclude the Asian crisis dummy variable (V). It appeared that one-period lagged economic growth, government consumption and investment continue to affect growth. Index of political stability, the tariff rate and one-period lagged openness (despite the negative sign for openness) are now also significant at the 5 per cent level. The openness index lagged two periods also has an effect on growth at the 1 per cent level.
Finally, we include only the one-period lagged economic growth variable, the tariff rate and the openness index (VI). The one-period lagged economic growth variable has a positive effect on growth with a positive sign, while the tariff rate appears to be insignificant. The one-period and two-periods openness index continue significantly to affect the rate of growth, with negative and positive signs respectively.
It appears from the various result of the estimation that specification V is the best specification to estimate the effect of liberalization in services trade on growth for ASEAN countries. Several explanatory variables, such as one-period lag of economic growth, government consumption and investment, appeared to be consistently and significantly affecting the growth. From the results of these estimations, it is concluded that liberalization in the services sector through commitments in services trade can increase the rate of growth. The effect is at first to diminish but as the lag lengthens to two periods, openness has a positive effect on growth. Note that the value of the parameter estimate for the two-period lagged variable is larger in absolute value than that of the one-period lagged variable. A country that liberalizes its services and increases the value of its openness index by 1 unit will firstly decrease growth by 3.49 percentage points one year after liberalization, but then increase its growth rate by 4.75 percentage points two years after the liberalization takes place. The intuition behind this result is that when a country opens its services trade, the initial effect of liberalization will cause domestic service providers to compete with the foreign providers. This will at first possibly create a loss of activity in the country but as liberalization brings the so-called spillover effect, the later effect of liberalization is to increase growth.
In this study, the effects of the liberalization of services trade in five ASEAN countries on the rate of economic growth have been investigated. The main hypothesis is that services trade liberalization will increase the rate of economic growth through the freer movement of capital, technology and labour, and through greater competition between domestic and foreign firms in the domestic market. The liberalization of the services sector for ASEAN countries is facilitated through both GATS and AFAS. It is expected through the latter scheme that the services sector would become more integrated as member countries open their services sectors to other member countries and, therefore, reap the benefits through cost reduction in services trade and increased efficiency. If liberalization in services brings benefits to a country, then these should be encouraged by government through reforms of its policies. ASEAN countries are able to introduce such reforms through unilateral action or through either AFAS or GATS or both.
Using a distributed-lag model with data from ASEAN-5 countries, it has been found in this study that a country which increases its openness index by 1 unit will firstly decrease the annual growth rate by 3.49 percentage points one year after liberalization, but then increase its growth rate by 4.75 percentage points two years after the liberalization. The intuition behind this result is that the initial effect of liberalization will cause domestic service providers to compete with the foreign providers. This will at first possibly create a loss of activity in the country but as liberalization brings the so-called spillover effect, the later effect of liberalization is to increase growth.
It was the original intention that AFAS would be GATS "plus". However, in practice, the evidence suggests that the "plus" features are very limited and largely inconsequential. Therefore, the index on openness that was constructed did not distinguish between these two schemes but was based on commitments in AFAS. There are some limitations that should be recognized when considering the main finding in this paper. The market structure element is scored through a country's commitment in AFAS but where a country's domestic regulations are not committed in either AFAS or GATS, they may act as an entry barrier for foreign services providers. However, these behind-the-border measures are difficult to identify through only the positive list.
With this caveat in mind, it has been found that openness to international trade in services, as measured by the constructed index, has enhanced the rate of economic growth of the ASEAN-5 countries since the inception of AFAS and GATS. One amongst several topics that remain for further research is the effect of the GATS "plus" features of AFAS when these become significant enough to be measured and then estimated.
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The views presented in this paper are those of the authors and they do not necessarily reflect the views of the World Bank. The authors would like to thank Kalvinder Shields for helpful discussions on the specification of the model but they remain solely responsible for any errors.
(1.) The ASEAN-5 are Indonesia, Malaysia, the Philippines, Singapore and Thailand.
(2.) Tobin's q ratio is a ratio that represents the market value of a firm's share of capital with the value of a firm's replacement cost of the share capital. If q equals to 1, then market value of the firm equals to its recorded assets. If q is greater than 1, then market value of the firm is greater than its recorded assets. This implies that additional investment to the firm is encouraged because the investment is valued at more than the actual investment (Tobin 1969).
(3.) A study by Hamanaka (2009) found an opposite result for Malaysia where its commitments in AFAS in 2006 were better than its commitments in GATS in the same year.
(4.) The study was undertaken with the supplementary data and information from the ASEAN Secretariat. ASEAN countries have made commitments in 268 sub-sectors across 7 major sectors in which 26 per cent are additional sub-sectors to GATS sectoral commitments of member countries.
(5.) The choice of the period was based on the availability of continuous time series data for each country.
(6.) The index is taken from . It ranges from -2.5 (worst governance), 0 (average), to 2.5 (best governance). The Political Stability index is composed of indicators that measure political violence, prevalence of torture and kidnapping, existing or threat of insurrection, and the perceived degree to which the government is able to survive against such threats.
(7.) The index is taken from . It ranges from -2.5 (worst governance), 0 (average), to 2.5 (best governance). The Regulatory Quality index includes variables that measure government policies towards trade, foreign investment, exchange rates, and access to information regarding laws and corporate and financial regulations.
(8.) Phu Ha (2010) did a study about financial deepening and development in ASEAN-5 countries and Vietnam. It found that ASEAN-5 and Vietnam had a similar financial structure during 2000s when it was dominated by bank-based system rather than market-based system. The figures from that study showed that ratio of commercial bank liquid assets per GDP is significantly higher that both bond and stock market capitalization per GDE
(9.) The maximum length of the lag could have been determined by sequential estimation of successively lagged values of the index. However, as noted by Gujarati (2003), there is an a priori definition of the maximum length of lag that should be tested.
(10.) It can be seen in Table 6 that successive values of the index for any specific country are often the same.
Indira Hapsari was a Master of Commerce (Economics) student at the University of Melbourne and is now a Data Analyst at the World Bank Office in Jakarta.
Donald MacLaren is Director of the Asian Economics Centre in the Department of Economics at The University of Melbourne.
GATS Commitments in the Financial Services Sector, ASEAN-5
Mode 1: Cross-border Deposits received by Unbound due to lack
Supply banks operating in of technical
Indonesia (including feasibility
offices of the
Indonesian banks) are
subject to government
regulation on Foreign
for Acceptance of
funds from public.
Mode 2: Consumption None Unbound due to lack of
Abroad technical feasibility
Mode 3: Commercial * Commercial Presence * Existing foreign
Presence of the foreign bank branches of
service provider(s) commercial banks,
may be in the form of after local
joint venture and/or incorporation, are
representative permitted to be
office, unless wholly-owned by the
mentioned otherwise. existing banks.
* Joint venture * Unbound for new
should meet the licences.
requirements: * New entry is
limited to equity
(i) should be in the participation in
form of Limited existing locally
Liability Enterprise incorporated
(Perseroan Terbatas/ institutions and the
PT), setting up of
(ii) not more than offices. Aggregate
49 per cent of the foreign shareholding
capital share of the in a commercial bank
Limited Liability or a merchant bank
Enterprise (Perseroan shall not exceed 30
Terbatas/PT), may be per cent.
owned by foreign
partner(s). * Acquisition of an
aggregate of 5 per
* Bound for existing cent or more of
branches of foreign shareholding in a
banks at 100% foreign locally incorporated
ownership. Foreign commercial bank or
bank may only open merchant bank
new sub-branch requires approval.
offices in the cities
of Jakarta, Surabaya,
Medan, Ujung Pandang,
Denpasar and Batam
Island with 1 (one)
office for each
Mode 4: Movement of * Subject to * For banks, one
Natural Persons Indonesian Labour and senior None manager
Immigration Laws and for each institution.
directors, managers * For a
and technical representative
experts/advisors, office, one foreign
unless mentioned national for a
otherwise, are management post.
allowed with a
maximum stay of two * Movement of a
years subject to one manager or specialist
year extension. can be through intra-
* Manager and or otherwise.
(intra corporate * Entry shall be
transfer) are allowed limited to a maximum
based on an economic period of five years.
Mode 1: Cross-border Commercial presence Unbound
Supply is required
Mode 2: Consumption None None
Mode 3: Commercial * Foreign equity in * No new full and
Presence existing or new restricted banks.
domestic commercial Unbound for new
banks subject to a offshore banks.
maximum 30 per cent Representative
of voting stock or offices cannot
40 per cent upon conduct business or
approval by the act as agents.
President of the
Philippines. * A single/related
group of foreign
* Participation of shareholders can only
aliens in the Board hold up to 5 per cent
of Directors of of a local bank's
domestic banks is shares.
limited to one third
of the Board's total Aggregate foreign
membership. ownership of each
* Equity ownership shares has been
ceiling for domestic increased from 20 per
banks: individual 20 cent to 40 per cent.
per cent; corporation
30 per cent.
Mode 4: Movement of Temporary movement of Limitations on the
Natural Persons skilled personnel number of non-
unbound except for resident foreign
the temporary personnel per foreign
movement of intra- bank branch:
at the level of (a) 2 persons for
managers, executives banks operating as
and specialists. representative office
(b) 6 persons for
banks operating as
full licensed branch
(c) 4 persons for
banks operating as
IBF branch only
(d) 8 persons for
banks operating as
full licensed and IBF
Mode 1: Cross-border None for financial
Supply advisory and
for all other
Mode 2: Consumption None for financial
Abroad advisory and
for all other
Mode 3: Commercial For Foreign Bank
I. Bound for existing
foreign bank branches
Unbound for new
II. ATM operations
permitted under the
(i) joining ATM pools
operated by Thai
(ii) operation within
own premises or
facilities with other
commercial banks in
III. One service-
point permitted per
one foreign bank
branch. No additional
office, or service
Mode 4: Movement of
SOURCE: GATS Schedule of Specific Commitments, ASEAN-5 Countries,
Restrictions on Mode 2
Consumption abroad prohibited Indonesia and Malaysia
Limitations on capital flows Lao PDR, Myanmar and Vietnam
Permitted for trade-related Brunei, Singapore (insurance) and
Permitted for other, specified Brunei (indirect insurance) and
services Thailand (life insurance)
No restrictions Cambodia, the Philippines (except
for large outward investments
which need approval)
SOURCE: Gordon et al. (2003b).
Restrictions on Mode 3
Representatives offices only Myanmar
Foreign ownership joint ventures Malaysia (up to 30% only),
<50% and equity in local banks Singapore (take-over of local
banks not permitted) and Vietnam
Joint ventures up to 100% and Brunei, Indonesia (up to 85%),
equity in foreign ownership of the Philippines (up to 60%),
local banks Thailand (with Bank of Thailand
Foreign bank branches Brunei (Criteria apply), Malaysia
(grandfathered only), the
NBFIs Philippines (criteria apply),
Vietnam (limited functions)
Foreign ownership Indonesia (up to 100%), Singapore
(approval for large holdings
Foreign branches Brunei
Representatives office Thailand
Joint ventures <50% only and Malaysia (approval for over 5%),
equity Singapore (up to 49%)
Joint ventures up to 100% Brunei, Indonesia (through share
acquisition), Malaysia (foreign
branches to be locally
incorporated), the Philippines,
Foreign insurance branches Brunei, Indonesia (grandfathered
only), Lao PDR (5 years monopoly
Foreign owned securities firms Indonesia (up to 85%
shareholding), Malaysia (up to
SOURCE: Gordon et al. (2003b).
AFAS Commitments in the Financial Services Sector, ASEAN-5, 1997-2008
1st Round Similar to GATS Similar to GATS
(1997) (Unbound) (Unbound)
2nd Round Bound only 2 (two) sub Limited foreign capital
branches and 2 (two) allowance by 30%
auxiliary offices for
foreign bank's branch
3rd Round Bound only 2 (two) sub Similar to the previous
branches and 2 (two) commitments.
auxiliary offices for
foreign bank's branch
office. Limitation on
foreign ownership also
increased to 51%
4th Round Similar to the previous Similar to the previous
5th Round Similar to the previous Similar to the previous
6th Round Similar to the previous Unbound
1st Round Similar to GATS Similar to GATS
(1997) (Bound) (Unbound)
2nd Round Allowance of foreign All the commitments in
banks to establish a this schedule are
maximum of 6 branches subject to horizontal
Schedule of Specific
3rd Round Similar to the previous Similar to the previous
4th Round Limited foreign capital No new full and
allowance and maximum wholesale banks. New
of 6 branches of foreign foreign banks can only
branch. establish as offshore
banks or representative
offices and cannot act
5th Round Similar to the previous Similar to the previous
6th Round Similar to the previous
1st Round Similar to GAYS (Limited to new
2nd Round None for representative offices.
Market access limited to share
acquisition of existing companies
Unbound for new license
3rd Round Removal of quantitative quota on
the number of foreign personnel
allowed in the banking sector, to
become effective one year after
the third package of commitments
on financial services under the
ASEAN Framework Agreement
on Services comes into force.
Approval shall be granted based
on foreign service providers'
business plans and needs.
4th Round Similar to the previous
5th Round Maximum of foreign equity up to
100% of paid up capital. No
restriction for representative office.
No restriction on number of
6th Round Similar to the previous
SOURCE: Authors' summary.
The Openness Index for Financial Services Liberalization
Rank of Openness Market Structure Ownership
8 Competitive [greater than or equal to] 50%
7 Competitive [greater than or equal to] 50%
6 Competitive < 50%
5 Competitive < 50%
4 Not Competitive [greater than or equal to] 50%
3 Not Competitive [greater than or equal to] 50%
2 Not Competitive < 50%
1 Not Competitive < 50%
Rank of Openness Index
8 [greater than or equal to] 1.6
7 < 1.6
6 [greater than or equal to] 1.6
5 < 1.6
4 [greater than or equal to] 1.6
3 < 1.6
2 [greater than or equal to] 1.6
1 < 1.6
SOURCE: Mattoo et al. (2001).
The Openness Index for Financial Services, ASEAN-5, 1990-2008 (a)
Year Indonesia Malaysia Philippines Singapore Thailand
1997 1 1 1 2 1
1998 1 1 1 2 1
1999 1 1 3 2 1
2000 1 1 3 2 1
2001 1 1 3 2 1
2002 1 1 3 2 1
2003 1 1 3 2 1
2004 1 1 3 2 3
2005 1 1 3 2 3
2006 1 1 3 2 3
2007 2 1 3 2 3
2008 2 1 3 2 3
NOTE: (a.) For each year 1990 to 1996 inclusive and for each country,
the value of the index is 0.
SOURCE: The values of the index are from the authors' own calculations
based on the schedule of each country's commitments (see AFAS 2009).
Results for Openness Index and the Rate of Economic Growth
I II III
Growth (Lag-1) 0.291 *** 0.245 *** 0.237 ***
(2.70) (3.26) (2.97)
Growth (Lag-2) -0.029 0.012 0.001
(-0.90) (0.17) (0.02)
Government Consumption 7.239 *** -3.976 ** 8.898 ***
(% of GDP) (2.98) (2.29) (3.09)
Annual Investment (%) 2.45 ** 1.124 1.633 **
(2.53) (1.62) (2.01)
Level of Education 0.014 -0.009 0.03
(0.14) (-0.13) (0.27)
Dummy for 1997 Asian Crisis -12.903 *** -11.949 ***
Index of Political Stability -0.854
Index of Regulatory Quality -0.897
Tariff Rate (%) 0.073
Openness Index -1.033 -1.215 * -1.406 *
(-1.03) (-1.73) (-1.83)
Opennes Index (Lag-1) -3.23 ** 0.67 0.371
(-2.43) (0.65) (0.34)
Openness Index (Lag-2) 4.140 *** -0.004 0.463
(3.99) (-0.00) (0.48)
No. of Observations 76 76 72
Adjusted R Square 0.39 0.67 0.69
IV V VI
Growth (Lag-1) 0.258 *** 0.223 ** 0.347 ***
(3.42) (2.05) (3.82)
Growth (Lag-2) 0.029 -0.109
Government Consumption 14.771 ***
(% of GDP) (3.90)
Annual Investment (%) 3.442 ***
Level of Education 0.112
Dummy for 1997 Asian Crisis -13.222 ***
Index of Political Stability 0.031 -2.146 **
Index of Regulatory Quality 0.694 0.652
Tariff Rate (%) -0.004 0.203 ** -0.01
(-0.09) (2.13) (-0.19)
Openness Index -0.719 -1.065 -0.514
(-1.02) (-1.02) (-0.56)
Opennes Index (Lag-1) 0.891 -3.498 ** -3.99 ***
(0.78) (-2.66) (-3.22)
Openness Index (Lag-2) -0.561 4.751 *** 4.516 ***
(-0.57) (4.53) (4.67)
No. of Observations 90 72 90
Adjusted R Square 0.58 0.42 0.29
NOTE: ***, ** and * denote 1 per cent, 5 per cent, and 10 per cent
level significance, respectively.
Estimation Result of
Openness Variables and Growth
Openness Index -0.515
Openness Index (Lag-1) -3.848**
Openness Index (Lag-2) 3.894***
No. of observations 160
NOTE: *** and ** denote 1 per cent and 5 per cent level