Globalisation and its impact on insurance industry in Bangladesh
A.B.M. Nurul Haq | Thursday, 14 August 2008
NOWADAYS we quite often hear the word globalization. The term 'Globalization' was first used in 1985 by Theodre Levitt in his write-up "The Globalization of Markets". Levitt used the expression to symbolise the rapid changes that have taken place during the last two decades in the arena of international economy through rapid and pervasive assimilation of production, consumption and investment in goods, services, capital and technology. The current form of globalization is characterised by neo-liberalism, free trade and open markets.
The word globalization carries different meaning to different people. We are, however, mainly concerned with economic globalization which may be defined as "the expansion of economic activities across political boundaries of national state. More important perhaps, it refers to a process of increasing economic integration and growing economic interdependence between countries in the world economy. It is associated not only with an increasing cross-border movement of goods, services, capital, technology, information and people, but also with an organisation of economic activities which straddles national boundaries. This process is driven by the lure of profit and the turret of competition in the market". (Nayyar, 1996, P-1).
Let us give a brief history of the various developments which led to the globalization concept. After the Second World War the Allies, particularly Great Britain and the USA, sat for evolving ways to shape the international economic system so as to facilitate economic and political benefit for all concerned, thus avoiding some of the problems of the post-war years, particularly those of the Great Depression of 1930s. Ultimately Allied nations agreed in the Bretton Wood Conference, New Hampshire, USA 1944 to establish three international institutions as follows:
a) International Monetary Fund (IMF)
b) International Bank for Reconstructure and Development (IBRD)
c) The International Trade Organisation (ITO)
The IMF and the IBRD (subsequently named as World Bank) were ultimately established but the ITO was never materialised.
In 1946, 23 nations, including 11 from developing nations, started trade negotiations to liberalise trade from protectionism. A General Agreement on Tariffs and Trade (GATT) came into being in January, 1948 (GATT was signed in 1947) to enforce the tariff concessions and rules they negotiated.
One of the most important factors of the whole GATT idea is the 'Most Favoured Nation' (MFN) treatment. The underlying idea of MFN is that "all contracting parties allow each other terms as favourable as they give to any other country in respect of imports and exports of products expecting that each party will take part in the reduction of trade barriers because it will expect other parties to return the favour i.e. liberalise their trade leading to global trade liberalisation through multilateral and co-operative negotiations.
Another clause which complements the MFN clause is the GATT principle of National Treatment (NT) which means equal treatment of domestic and foreign goods in respect of domestic levies and legal provisions (Article iii) so as to prevent different treatment among various foreign goods as well as between foreign goods and local goods in domestic markets. It was expected to maintain free-market competition in international trade through MFN and NT.
GATT has been operating through 38 complex Articles. These principles have in fact been both 'natchets'- devices intended to protect the current degree of trade freedom backsliding, and 'levers' - devices intended to link willingness to make concessions in such a way as to produce overall trade liberalisation over time.
In order to resolve many of the issues related to GATT, the Uruguay Round MTN was launched in 1986 following the instruction of the Ministerial Declaration held in Punta Del Este, Uruguay in 1982. Over the years, the negotiating group with participation from 104 countries have been continuing negotiations under the Uruguay Round Multilateral Trade Negations (MTN).
In December 15, 1993 a new GATT agreement, the Uruguay Round was concluded at GATT Headquarters in Geneva, Switzerland with 177 members countries. The detailed text of the Final Act of Uruguay Round was signed on April 15, 1994 at Marakkech in Morocco by the Ministers of 120 countries. The Act came into force with effect from January 01, 1995 and the World Trade Organisation (WTO) got institutional shape.
The Final Act containing the results of the Uruguay Round of Multilateral Trade Negotiations (MTN) embodies several articles which signatories were bound to follow during the subsequent period. The agreement was signed with regard to the following areas;
a) Agriculture, b) Sanitary and Phytosanitary measure, c) Textile and Clothing, d) Investment, e) Subsidy, f) Intellectual property, and g) Services.
However, a decision was adopted in favour of the least developed countries (LDCs) including Bangladesh which stipulated that the rules set out in the various instruments, agreements and the transitional provisions in the Uruguay Round (UR) would be applied in a flexible and supportive manner for the LDCs. The LDCs would be accorded substantially increased technical assistance in the development, strengthening and diversification of their export base. However, much depend on how vigorously the LDCs pursue these provisions while negotiating trade deals with other contracting parties.
Set-up of WTO : The WTO is headed by the Ministerial conference meeting at least once a general council to oversee the operations of the agreements and ministerial decisions on a regular basis. The general council itself acts as a dispute settlement body and a trade policy review mechanism. The WTO framework ensures a "single undertaking approach" to the result of the Uruguay Round. Thus membership in the WTO demands accepting all the results of the Round without exception. Each member ensures the conformity with its obligation as provided in the agreements.
We have given a brief background of globalization since the Second World War. Now we discuss challenges of globalization both for and against and other aspects affecting trade in services particularly insurance.
Challenges of globalization: There has been a lot of discussions both for and against. Some are of the opinion that globalization will open many opportunities for the developing and LDCs while others are of the view that "in fact thesis of globalization" proposed by the advocates of 'new world order' being mostly western, is leading the world to the intensification of neo-liberal offences over the poor and the vulnerable people.
Political economist, Robert J. Samuelson says: "Globalization is a double-edged sword : a powerful vehicle that raises economic growth, spreads new technology, and increases living standards in rich and poor countries alike, but also an immensely controversial process that assaults national sovereignty, erodes local culture and tradition and threatens economic and social stability". (Kegley and Wittkof 2001).
"It is quite evident that globalization of the world economy driven by forces to open national borders to trade, capital and information has benefited some, but marginalized many more and has increased inequalities within among nations. To-days' globalization is driven by new markets, new tools like internet, new actors like the World Trade Organisation (WTO) with authority over national governments and transnational corporations, and new multilateral rules in trades, services and intellectual property rights more binding for governments and reducing the scope for national policy".
The former UN Secretary General, Kofi Annan once warned at a gathering of world economic and political leaders at the World Economic Forum that unrestricted and unregulated globalization can lead to unmitigated disaster world wide. In this view, if globalization can not make work for all, in the end it will work for none.
On the other hand, the exponents of globalization are of the view that globalization has profound implications for developing counties. "It creates important new opportunities, wider markets for trade, an expanding array of tradable, larger private capital and improved access to technology.
Globalization creates through export-led expansion, the potential of rapid overall output growth, increasing national wealth and contributing to improved living standards in developing courtiers.
Another benefit of globalization is the access to a wide variety of consumption goods, new technology and knowledge. Globalization allows the access to ideas and international best practices in different fields and realms.
However, all the good things of globalization will depend on how the developing countries are able to reap the harvest but apparently it seems very difficult for them to do so. Because, the causes of underdevelopment of these countries are many, such as, poor governance, pervasive corruption at all levels, lack of democratic institutions, over-population, large scale unemployment, environmental destruction, illiteracy and insufficient public health care system etc. Much will depend on the developing countries as to how they can overcome these shortcomings and catch up the thread of globalization.
Treatment of service sector under GATTS: Since 1983, the UNCTAD has been carrying out its mandate to study the role of services in the development process, which at UNCTAD-VII, in 1987 had been expanded to address more, specifically the trade and technology aspects.
The final GATT agreement which came into force on January 01, 1995 provided all agreed framework of rules for the conduct of international trade with a view to reducing tariffs on goods, as well as liberalising trade in services and agriculture. Alongside the GATTS, a new General Agreement on Trade in Services (GATS) was established. This is done in response to the huge growth of the services economy over the past 30 years or so and the greater potential for trading services brought out by the communications revolution. Services represent the fastest growing sector of the global economy and according to an estimate account for 70 per cent of global output, 40 per cent of global employment and yearly 45 per cent of global trade.
"In an analytical terms, trade in services may be defined as international transactions in services between the residents of one country and the residents of another country irrespective of where the transactions take place". (Deepak Nayar, Professor of Economics, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi).
Service sector include banking, insurance, telecommunications, constructions, architecture, audio-visual, maritime, environment communications, hospitals etc.
The principles of Multilateral Trade Rules would be applied. to service including the Most Favoured Nation (MFN) treatment. Thismeans that all trading partners must be treated alike and obligation that measures restricting trade in services should be transparent and not discriminatory. The rules have been made flexible for the LDCs who are to open up, at least, one service sub-sector. Bangladesh has already opened up banking, telecommunications, hospitals, tourism etc., for foreign investors.
Global insurance scenario and us: It will be evident from the above discussion that insurance sector in Bangladesh still enjoys protection and there is yet no possibility to open up this sector in the immediate near future. Although one foreign life company has been operating since independence of Bangladesh which occupies a large segment of the market share, time will decide whether this protection is good or bad for the insurance industry in Bangladesh.
Before we go for a comparative study of the insurance sector, this scribe would like to give a brief, historical background of this sector for proper understanding of its position. Just after independence, the whole insurance industry of Bangladesh was nationalised in 1972. Two corporations -- Jibon Bima Corporation for life insurance and Sadharan Bima Corporation for general insurance -- were established on May 14, 1973 and continued operation in the market up to 1985 without any competitor in the market. While in the field of life insurance, postal life insurance and foreign insurance companies were kept outside nationalisation, but in the field of general insurance, Sadharan Bima Corporation got an absolute monopoly in the market.
After independence of Bangladesh and amid frequent changes and faulty process of nationalisation, the insurance market in Bangladesh experienced a serious setback. Due to top-heavy administration resulting from hasty undue promotion, salary rise etc., during the year of 1972, when the management of the insurance companies was taken over pending nationalisation, the management expenses increased abnormally and, at the same time, procurement of business fell disproportionately. On the top of these, there were shortage of fund and technical staff due to flight of capital during the erstwhile Pakistan regime and departure of non-local staff following the independence of Bangladesh.
In the wake of open market policy worldwide, the government in 1984 decided to allow private insurance companies to function by promulgating Insurance Corporation (Amendment) Act, 1984. Since then till the writing of this paper, about one and a half dozen of life insurance companies and over three and a half dozen general insurance companies are operating in the market.
The writer is Managing Director, Global Insurance Limited, Dhaka
The word globalization carries different meaning to different people. We are, however, mainly concerned with economic globalization which may be defined as "the expansion of economic activities across political boundaries of national state. More important perhaps, it refers to a process of increasing economic integration and growing economic interdependence between countries in the world economy. It is associated not only with an increasing cross-border movement of goods, services, capital, technology, information and people, but also with an organisation of economic activities which straddles national boundaries. This process is driven by the lure of profit and the turret of competition in the market". (Nayyar, 1996, P-1).
Let us give a brief history of the various developments which led to the globalization concept. After the Second World War the Allies, particularly Great Britain and the USA, sat for evolving ways to shape the international economic system so as to facilitate economic and political benefit for all concerned, thus avoiding some of the problems of the post-war years, particularly those of the Great Depression of 1930s. Ultimately Allied nations agreed in the Bretton Wood Conference, New Hampshire, USA 1944 to establish three international institutions as follows:
a) International Monetary Fund (IMF)
b) International Bank for Reconstructure and Development (IBRD)
c) The International Trade Organisation (ITO)
The IMF and the IBRD (subsequently named as World Bank) were ultimately established but the ITO was never materialised.
In 1946, 23 nations, including 11 from developing nations, started trade negotiations to liberalise trade from protectionism. A General Agreement on Tariffs and Trade (GATT) came into being in January, 1948 (GATT was signed in 1947) to enforce the tariff concessions and rules they negotiated.
One of the most important factors of the whole GATT idea is the 'Most Favoured Nation' (MFN) treatment. The underlying idea of MFN is that "all contracting parties allow each other terms as favourable as they give to any other country in respect of imports and exports of products expecting that each party will take part in the reduction of trade barriers because it will expect other parties to return the favour i.e. liberalise their trade leading to global trade liberalisation through multilateral and co-operative negotiations.
Another clause which complements the MFN clause is the GATT principle of National Treatment (NT) which means equal treatment of domestic and foreign goods in respect of domestic levies and legal provisions (Article iii) so as to prevent different treatment among various foreign goods as well as between foreign goods and local goods in domestic markets. It was expected to maintain free-market competition in international trade through MFN and NT.
GATT has been operating through 38 complex Articles. These principles have in fact been both 'natchets'- devices intended to protect the current degree of trade freedom backsliding, and 'levers' - devices intended to link willingness to make concessions in such a way as to produce overall trade liberalisation over time.
In order to resolve many of the issues related to GATT, the Uruguay Round MTN was launched in 1986 following the instruction of the Ministerial Declaration held in Punta Del Este, Uruguay in 1982. Over the years, the negotiating group with participation from 104 countries have been continuing negotiations under the Uruguay Round Multilateral Trade Negations (MTN).
In December 15, 1993 a new GATT agreement, the Uruguay Round was concluded at GATT Headquarters in Geneva, Switzerland with 177 members countries. The detailed text of the Final Act of Uruguay Round was signed on April 15, 1994 at Marakkech in Morocco by the Ministers of 120 countries. The Act came into force with effect from January 01, 1995 and the World Trade Organisation (WTO) got institutional shape.
The Final Act containing the results of the Uruguay Round of Multilateral Trade Negotiations (MTN) embodies several articles which signatories were bound to follow during the subsequent period. The agreement was signed with regard to the following areas;
a) Agriculture, b) Sanitary and Phytosanitary measure, c) Textile and Clothing, d) Investment, e) Subsidy, f) Intellectual property, and g) Services.
However, a decision was adopted in favour of the least developed countries (LDCs) including Bangladesh which stipulated that the rules set out in the various instruments, agreements and the transitional provisions in the Uruguay Round (UR) would be applied in a flexible and supportive manner for the LDCs. The LDCs would be accorded substantially increased technical assistance in the development, strengthening and diversification of their export base. However, much depend on how vigorously the LDCs pursue these provisions while negotiating trade deals with other contracting parties.
Set-up of WTO : The WTO is headed by the Ministerial conference meeting at least once a general council to oversee the operations of the agreements and ministerial decisions on a regular basis. The general council itself acts as a dispute settlement body and a trade policy review mechanism. The WTO framework ensures a "single undertaking approach" to the result of the Uruguay Round. Thus membership in the WTO demands accepting all the results of the Round without exception. Each member ensures the conformity with its obligation as provided in the agreements.
We have given a brief background of globalization since the Second World War. Now we discuss challenges of globalization both for and against and other aspects affecting trade in services particularly insurance.
Challenges of globalization: There has been a lot of discussions both for and against. Some are of the opinion that globalization will open many opportunities for the developing and LDCs while others are of the view that "in fact thesis of globalization" proposed by the advocates of 'new world order' being mostly western, is leading the world to the intensification of neo-liberal offences over the poor and the vulnerable people.
Political economist, Robert J. Samuelson says: "Globalization is a double-edged sword : a powerful vehicle that raises economic growth, spreads new technology, and increases living standards in rich and poor countries alike, but also an immensely controversial process that assaults national sovereignty, erodes local culture and tradition and threatens economic and social stability". (Kegley and Wittkof 2001).
"It is quite evident that globalization of the world economy driven by forces to open national borders to trade, capital and information has benefited some, but marginalized many more and has increased inequalities within among nations. To-days' globalization is driven by new markets, new tools like internet, new actors like the World Trade Organisation (WTO) with authority over national governments and transnational corporations, and new multilateral rules in trades, services and intellectual property rights more binding for governments and reducing the scope for national policy".
The former UN Secretary General, Kofi Annan once warned at a gathering of world economic and political leaders at the World Economic Forum that unrestricted and unregulated globalization can lead to unmitigated disaster world wide. In this view, if globalization can not make work for all, in the end it will work for none.
On the other hand, the exponents of globalization are of the view that globalization has profound implications for developing counties. "It creates important new opportunities, wider markets for trade, an expanding array of tradable, larger private capital and improved access to technology.
Globalization creates through export-led expansion, the potential of rapid overall output growth, increasing national wealth and contributing to improved living standards in developing courtiers.
Another benefit of globalization is the access to a wide variety of consumption goods, new technology and knowledge. Globalization allows the access to ideas and international best practices in different fields and realms.
However, all the good things of globalization will depend on how the developing countries are able to reap the harvest but apparently it seems very difficult for them to do so. Because, the causes of underdevelopment of these countries are many, such as, poor governance, pervasive corruption at all levels, lack of democratic institutions, over-population, large scale unemployment, environmental destruction, illiteracy and insufficient public health care system etc. Much will depend on the developing countries as to how they can overcome these shortcomings and catch up the thread of globalization.
Treatment of service sector under GATTS: Since 1983, the UNCTAD has been carrying out its mandate to study the role of services in the development process, which at UNCTAD-VII, in 1987 had been expanded to address more, specifically the trade and technology aspects.
The final GATT agreement which came into force on January 01, 1995 provided all agreed framework of rules for the conduct of international trade with a view to reducing tariffs on goods, as well as liberalising trade in services and agriculture. Alongside the GATTS, a new General Agreement on Trade in Services (GATS) was established. This is done in response to the huge growth of the services economy over the past 30 years or so and the greater potential for trading services brought out by the communications revolution. Services represent the fastest growing sector of the global economy and according to an estimate account for 70 per cent of global output, 40 per cent of global employment and yearly 45 per cent of global trade.
"In an analytical terms, trade in services may be defined as international transactions in services between the residents of one country and the residents of another country irrespective of where the transactions take place". (Deepak Nayar, Professor of Economics, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi).
Service sector include banking, insurance, telecommunications, constructions, architecture, audio-visual, maritime, environment communications, hospitals etc.
The principles of Multilateral Trade Rules would be applied. to service including the Most Favoured Nation (MFN) treatment. Thismeans that all trading partners must be treated alike and obligation that measures restricting trade in services should be transparent and not discriminatory. The rules have been made flexible for the LDCs who are to open up, at least, one service sub-sector. Bangladesh has already opened up banking, telecommunications, hospitals, tourism etc., for foreign investors.
Global insurance scenario and us: It will be evident from the above discussion that insurance sector in Bangladesh still enjoys protection and there is yet no possibility to open up this sector in the immediate near future. Although one foreign life company has been operating since independence of Bangladesh which occupies a large segment of the market share, time will decide whether this protection is good or bad for the insurance industry in Bangladesh.
Before we go for a comparative study of the insurance sector, this scribe would like to give a brief, historical background of this sector for proper understanding of its position. Just after independence, the whole insurance industry of Bangladesh was nationalised in 1972. Two corporations -- Jibon Bima Corporation for life insurance and Sadharan Bima Corporation for general insurance -- were established on May 14, 1973 and continued operation in the market up to 1985 without any competitor in the market. While in the field of life insurance, postal life insurance and foreign insurance companies were kept outside nationalisation, but in the field of general insurance, Sadharan Bima Corporation got an absolute monopoly in the market.
After independence of Bangladesh and amid frequent changes and faulty process of nationalisation, the insurance market in Bangladesh experienced a serious setback. Due to top-heavy administration resulting from hasty undue promotion, salary rise etc., during the year of 1972, when the management of the insurance companies was taken over pending nationalisation, the management expenses increased abnormally and, at the same time, procurement of business fell disproportionately. On the top of these, there were shortage of fund and technical staff due to flight of capital during the erstwhile Pakistan regime and departure of non-local staff following the independence of Bangladesh.
In the wake of open market policy worldwide, the government in 1984 decided to allow private insurance companies to function by promulgating Insurance Corporation (Amendment) Act, 1984. Since then till the writing of this paper, about one and a half dozen of life insurance companies and over three and a half dozen general insurance companies are operating in the market.
The writer is Managing Director, Global Insurance Limited, Dhaka