It has been found that liberalization heightens efficiency, helps to deepen and broaden financial markets, improves financial intermediation and service quality, and strengthens the incentives for governments to promote better macroeconomic policies. However, liberalization of financial service trade requires careful preparation due to the increased magnitude of financial sector difficulties. Hence, the main objective of this article is to shed some light on the policy actions that should precede such liberalization in order to maximize its advantages and to avoid the shortcomings of the policy.
Financial services have a vital role in all branches of economic activity.
However, trade is playing a growing role in the financial services sector in many countries through cross-border transactions and even more so through foreign direct investment. The combined commitments of 70 governments, which account for more than an estimated 95 percent of the world's financial services activity came into force as of the first of March 1999. The above implies that even completely free trade in financial services under the GATS does not require full capital account liberalization. However, the GATS allows members to take prudent measures to protect investors and to ensure the integrity and stability of the financial system. Thus, the benefits from participating in the multilateral negotiating process under the GATS through market access and national treatment commitments can accrue to countries without in any way compromising their ability to pursue sound macroeconomic and regulatory policies.