Will FTAs help build a ‘powerful’ Sri Lanka? THE IMF IN SRI LANKA – Part III
Posted on March 16th, 2017
by C. R. de Silva, C.C.S. (Retd.) (The writer who was a member of the former C.C.S., was later a senior professional at World Bank Headquarters for over 30 years).
March 13, 2017, 8:21 pm
The economic philosophy propagated by the International Monetary Fund (IMF) to any and all developing countries which are unfortunate enough to require its financial bail-outs due to governments living on ‘maxing the credit card’, and ending up in Balance of Payments (BOP) crises, or near ‘bankruptcy’ in plain language, is to comply with its wide-ranging neo-liberal ‘conditionality’. These assurances principally include, inter alia, liberalization of markets, largely through free trade, expressed in this day and age, mostly by Free Trade Agreements (FTAs), bilaterally or regionally. This policy, is being assiduously followed by Sri Lanka now for some time – but very compellingly now, since the IMF made an EFF commitment of a grossly inadequate $ 1.5 Billion in mid-2016 – a rescue operation, then expected to catalyze huge amounts of additional foreign exchange and FDI. However, these salutary external inflows have certainly not materialized, leading to a questionable IMF-forecast of transformative “take-off” of our economy. Contrary to IMF and Government expectations, a worsening economic situation has followed instead, which is updated in the concluding sections of this essay.
Meanwhile, fundamental tenets of IMF’s basic philosophy, on which Sri Lanka’s economic reform program is based, have also come into serious question both internally within the IMF, and among distinguished economic thinkers and at least one Nobel Laureate in Economics. (See the writer’s “IMF-directed Slow Development Strategy”, The Island, 10 February 2017 et seq). However, the fact is that Sri Lanka came under the IMF’s “intensive surveillance” once again in mid-2016, and is being subjected to the standard economic and financial policies of the IMF; given the country’s serious foreign exchange crisis and current export slowdown, is targeted free trade under FTAs the correct antidote to rush into before a viable industrial base able to export competitive manufactured products is established in Sri Lanka?
This essay reviews the wisdom of the free trade path this country has now committed itself to follow in the waning days of the Western adherence to globalization and free markets, which has spread universally, resulting in a few haves and many more have-nots, both in the prosperous, highly developed countries as well as in the developing world, including Sri Lanka, which is the particular focus of the commentary that follows.
Global Order at Historic Cross Roads.
There is abundant evidence now that history repeats itself and that the politico-economic world order, conceived and established by the Western nations who won WWII in 1945 is clearly collapsing. One significant, enduring outcome of the Western adherence to a neo-colonial and neo-liberal global policy architecture, is the ensuing, long-standing and stark division of the post-colonial world into the highly industrialized and rich countries, essentially of North America and Europe, a club later joined by Japan and Australia on the one hand, and on the other, the developing countries of the so-called Third World. These two diverging groups, are divided by their glaring disparity in income differentials and living standards; this global dichotomy is breaking down with the centre of economic progress shifting to another continent in this Asian Century, and the decline in western economic power, after following the above-mentioned policy prescriptions, principally incorporated in IMF theory and its application, leading them into the sunset years of capitalism, now being questioned as an ideology..
A global system, of substantially unregulated capitalism as an economic dogma, later reinforced by globalization and the denial of a level playing field to the post-colonial developing world, is decreed and perpetuated by an entire panoply of globally enforced policies and disciplined by a set of multilateral institutions. They were established and are controlled by these same WWII victors, who set themselves up as the veto-wielding U.N. Security Council, in a system now breaking down in the wake of the severe financial depression of 2007-08, caused by a runaway capitalism in the U.S.; and has contributed to the phenomenal rise of populism, nationalism, trade protectionism and greater economic and financial direction through activist State intervention in economic policies, in the wake of globalization’s creation of a small class of haves and a huge class of have-nots, through the selective and unjust enrichment of a small elite at the expense of the vast majority.
A highly regulated world order based on unethical premises and enforced by military power, but lacking in moral authority, was destined to fracture in the wake of the big players perpetuating a universally unfair and unevenly competitive economic and commercial trading system; this disadvantaged hundreds of millions of people in the earlier subjugated, colonized countries of the Third World – in a globalized neo-liberal, economic system lacking equality of opportunity, both domestically with ruling elites, and internationally, facing exploitation and even moral ‘intimidation’ applying human rights colonialism, at the hands of the rich west and its superficially multilateral institutional architecture.
The philosophical and multilateral institutional control of the world order, enforced through the application of neo-liberal dogma based on open markets, free trade, fiscal conservatism or austerity, free exchange regimes (without controls), privatization of state assets and minimal regulation of financial markets, continued to impoverish the former colonies and create a global underclass, enforced by the pervasive, sometimes ‘intimidatory’ UN system, including the IMF in economic policy. This system is clearly disintegrating with the rise of Asia, Latin America and even large African economies, symbolized by the emergence in the last several decades by the establishment of numerous regional politico-economic groupings like APEC in Asia, CAEU among Arab and African members, CARICOM in the Caribbean, ECOWAS in West and SADC in South Africa and ASEAN in East Asia ; the BRICS five, IOZ regional grouping, BIMSTEC in South Asia, regional banks such as ADB and Inter-American Development Bank; and AIIB recently formed by China.
Also, we have witnessed the phenomenal and quick development of China and India as regional powers, and the ‘miracle’ economies of seven East Asian tiger economies, which spurned neo-liberalism and followed the successful precedent of fast-rising Japan to pioneer a different, speedy, sustainable and inclusive, and therefore unique, development strategy, to challenge the IMF’s neo-liberal, strategy of slow-motion economic development. The prospective failure of TPP, an American initiative to elbow out China from global and regional trade, was another decisive blow, simultaneous with the rising prospect of China-led multi-country, RCEP trade grouping, from its ashes.
China, forecast soon to emerge as the largest and dominant economy in the world, established the earlier mentioned Asian Infrastructure Investment Bank (AIIB), with the membership and capital participation of 56 other countries, in the face of fierce and vocal American opposition, challenging the Bretton Woods international development twins (still dominated by the decision-making power of the WWII victor-shareholders), and China’s proposed formation of the Regional Comprehensive Economic Partnership (RCEP), linking up with several Asian members, signals the arrival on the fast changing, now Asia-centric, global stage of a new power player. These developments mirror the global overreach of an economically declining super power, which dominated the world stage since 1945. The Chinese President of the AIIB declared at its mid-2015 inaugural meeting: “History has never set any precedent that an Empire is capable of governing the world forever”.
The convulsions caused in the Islamic societies of Afghanistan, the Middle East and Libya by unsuccessful and destabilising Anglo-American invasions, occupation and destruction, followed by the continuing Syrian massacre, causing anarchy and civilian distress in those ancient Islamic civilizations, has triggered close to a two million exodus and continuing flight of homeless refugees to Western Europe, causing socio-economic distress and dislocation of stable, prosperous, near-homogenous societies. A wave of resulting defensive anti-immigrant backlashes follosed, and strains to the very concept of European Confederation, causing instability to the Euro as a competing world currency; a consequent anti-globalization backlash, nationalism, populism, border closures, Brexit and regime change in the U.S. in a popular electoral revolt against the status quo; and most significantly, for the purposes of this essay, the widespread rise of trade protectionism in the West, which will trigger reciprocal reactions elsewhere, quite adverse to developing country export trade, may be a dominating feature of future international commerce.
Global Disruptions Impact International Trade
The data shows that as the growth of international trade plateaued about 2007-08 with the major global depression, (originating in the U.S), which slowed trade progression, free trade agreements (FTAs) also ceased being popular, and free trade intensity regressed to the 1983 level by 2015. For reasons already articulated, free trade as one ingredient of globalization, also had an unfavourable 2016 in the wake of a trend towards widespread, defensive nationalism-motivated protectionism, and the signs are that 2017 and the coming years may prove to be even worse. The main reason is that globalization is interpreted today to symbolize the victimization by the affluent elite, of the economic interests of the middle and working classes, which has now been in vogue for several decades now.
Following this anti-globalization tsunami, this current phenomenon has sought expression in about 350 protectionist measures, passed by the members of the club of G-20 rich countries, mainly through changes in trade regulations and new anti-dumping procedures. Meanwhile, the collapse of the Trans-Pacific Partnership (TPP), President Obama’s brain wave for stopping China emerging as a major force in inter-Asian trade, and the imminent Trump emasculation of the North American Free Trade Agreement (NAFTA), in operation since the Clinton era of the 1990s, will doubtless lead to a reinvigorated wave of serious new barriers to liberalised international trade, business and migration. These are important pillars of globalization and neo-liberal thought, at the foundation of IMF dogma, which Sri Lanka has been practicing for some time now, with very little economic progress to show for it.
In addition, since Brexiit’s ‘hard’ exit from the EU has been followed by UK’s withdrawal from EU’s single trading market, the possible re-imposition of tariffs and like barriers on EU-UK mutual movement of goods is very likely. All these Western developments will send a very negative signal to developing countries like Sri Lanka, whose leading policy makers and bureaucrats are unable to foresee the imminent future, meaning in plain language that, even well-established free trade pacts are collapsing in the wake of the rising anti-globalisation wave, unrecognized by the IMF and local leaders, who are jointly still pushing extensive trade liberalization in Sri Lanka. (See Anti-Globalisation on the March, Free Trade Under Fire, ‘The Economist’, which convened a meeting in late-2016 on the subject in Hong Kong, which the Prime Minister attended).
Despite a ‘bewildering array’ of 137 bilateral free trade agreements now in force in Asia region alone (‘from the perspective of trade theory, described as sub-optimal, a jumbled overlapping mess’, according to ‘The Economist’ cited above), the World Trade Organization (WTO), forecasts a miniscule 0.3% growth in regional export volumes in 2017.
Developing global antipathy towards free trade is motivated by the outsourcing of jobs from the rich industrialized world to other countries, and fast-spreading automation, and resulting greater efficiency leading to higher productivity, which is creating multitudes of losers from another technological revolution now in full swing. The consequent lack of growth in household incomes throughout the U.S, Japan and Western Europe, compounded by the slowing Chinese export economy, and political issues and economic stagnation in the Eurozone, have together given rise to the above-described decline in world trade since the financial crisis of 2007-08. Becoming the longest period of trade stagnation since the end of WWII, most countries are moving to insulate local industry, imposing tariffs and other trade restrictions, intensifying resort recently to trade distortions, offering government export subsidies to stimulate local industry, and introducing import barriers through the imposition of new local standards for imports. All these measures, are together masquerading as revised industrial policy, not protectionism in many countries, except in Sri Lanka, which is more and more becoming heavily committed to free trade, as advised by the IMF. Before the U.S. even formally enacts feared protectionist measures, the expectation is that international trade will continue to flat-line even in 2017, unless governments rev-up their economies with substantial fiscal stimulus, and accelerate global economic growth.
Sri Lanka: Conditions Precedent To FTAs
Structural Issues. “The average annual growth of exports in developing Asia has also declined sharply from 11+% to under 5% in 2000-2015, reflecting a fragile post-global financial crisis environment of weak import demand in advanced economies, moderating growth, re-balancing the economy in China and the rise of protectionism. Meanwhile, Sri Lanka’s average annual growth rate of exports is at half the average growth for other developing Asian countries” – a direct reflection of the poorly developed domestic industrial base, to manufacture exportable products.” Several measures are needed in Sri Lanka to promote the Small and Medium Enterprises (SME) to exploit their potential role in the current migration of Chinese labour-intensive global value chain (GVC) stages to other countries, as China automates its technology, e.g. prioritizing the financing of SMEs by improving financial literacy; removing language barriers to ensure SME access to GVCs; and forming SME ‘clusters’ stimulated by the necessary incentives and infrastructure facilities”.
Before further liberalizing trade through FTAs, “Sri Lanka should improve job productivity through labour market reforms; prioritize the upgrading of tertiary-level engineering skills; invest in digital as well as physical infrastructure; enhance surveillance of non-tariff imports; and improve the investment climate for domestic investment and FDI…Also, ratify the WTO’s Trade Facilitation Agreement, which promotes investment in trade infrastructure, to reduce trading costs and improve competitiveness; engage with mega regional FTAs like the proposed RCEP, (a multi-country trade agreement, referred to earlier, and led by China) to explore new markets; and promote good regulatory practices” (Excerpts extracted from a speech by Dr G.Wignaraja, Advisor, Chief Economist’s Office, ADB, Manila, at L.Kadirgamar Institute, February 2017). The writer’s understanding of the bottom line the ADB expert is conveying successfully is that it is premature for Sri Lanka to so feverishly and speedily enter into various bilateral FTAs with more industrialized countries, without developing a viable industrial base enabling competitive export product manufactures, enabled by first eliminating structural problems detailed above.
Inadequate Trade & National Infrastructure. An important issue that arises is whether Sri Lanka has prioritized sector investments, and already put in place adequate international trade infrastructure, e.g. smoothly functioning customs clearance, port facilities consistent with peak demand and similar export/import logistics support, well before entering into numerous FTAs to help boost export trade?. Has Sri Lanka benefited from the World Bank’s Trade Facilitation Support Program and the WTO’s Trade Facilitation Agreement, to help lower trading costs and improve export competitiveness? Studies have proved that investment in such trade infrastructure has a strong and positive impact on trade flows, which are clearly an engine of economic growth and also revenue enhancement, when international trade balances are positive, which has proven not to be the case with Sri Lanka at this time or in the recent past.
Admittedly, infrastructure constraints in Sri Lanka are not only experienced at the border, but in the capital city at most hours now, since many thousands of vehicles compete for road space designed possibly one hundred or so years ago, when there were hardly any vehicles on the road, compared to the present days’ huge numbers resulting in constant congestion, which may soon resemble a slow-motion parking lot, like in Bangkok at one time. Adequate energy generation especially at times of drought are no better; together indicating that domestic infrastructure is clearly lagging behind international trade infrastructure – a mismatch described by experts as hurting a country’s development prospects, undermining its potential to enhance domestic commerce and also export/import trade. The above circumstances in Sri Lanka additionally results in a reallocation of FDI away from such countries as ours with relatively poor domestic infrastructure, since investors explore locations where it is cheaper to effectively manufacture goods as well as provide services.
Obviously, these issues involve a range of possible trade-offs on what investments to prioritize – these include quality versus quantity, enhanced maintenance or new investments, financing infrastructure with user fees versus public subsidies or universality of services compared to cost efficiency. Another open issue which may not have been addressed in Sri Lanka is the impact of imminent trade reforms through FTAs on domestic labour markets, mostly in the SME sector, especially since employment of the largest number is always a hot economic issue with foreseeable public disturbances and social unrest. (Marcelo Olarreaga, Professor of Economics at University of Geneva, “Why poor countries should invest first in national trade infrastructure”).
Trademark Registration Delays. Researchers have identified a “laborious process, which takes nearly five years to complete, in facilitating trademark registration in Sri Lanka, and has resulted in fewer local brands; these bureaucratic delays are reported to have cost billions of rupees to the export community. This combined with the current, long delay in the local ‘road-block’ (despite Cabinet approval and an authorised Rs100 million budget), towards Sri Lanka joining an international club of 114 countries known as The Madrid Protocol – a centralized global mechanism established in 1989 for registering domestic trademarks internationally – was the main reason why Sri Lanka had few famous international brands, like Ceylon Cinnamon, Damro and some garment brands”.
Research investigations have discovered that the National International Property Office (NIPO) takes 3-5 years to register trademark applications, significantly limiting Sri Lanka’s ability to benefit from The Madrid Protocol, which our country has still to join, and therefore, faring poorly at 14% (of applications registered), compared to other middle-income countries like Vietnam, Philippines and Turkey at 50% of such registered applications. Consequently, local exporters have to register trademarks individually in every single destination of export at considerable cost and in ’nightmare circumstances’, persuading the Export Development Board (EDB) to now bear the exporters’ high cost of legal fees and other expenditures attendant on the foreign registration process. Quantifiable export losses are in the billions of rupees, but unquantifiable losses from other countries competing with their own brands are much greater. (Extracted directly from Verite Research conclusions at a Colombo seminar on 2 February 2017). Needless to repeat, none of these constraints have mitigated the political rush to conclude FTAs with several such trade-competing countries. as quickly as possible, with more unquantifiable and widespread adverse consequences.
Technology Constraints. Major reasons why Sri Lanka has experienced an export slowdown in recent years compared to its Asian peers is due to the latter, now fast growing economies, diligently developing new lines of business and thereby diversifying their export base; becoming technologically more advanced and graduating, for example, from production of garments, brand name apparel, rubber and leather goods to first electronics, and then machinery production. While low-end tourism is domestically a success, It is essential, therefore, that Sri Lanka advance in its technology and compete first even with lower GDP economies in primary manufactured products for export.
The technological complexity of many modern, capital-intensive, sophisticated end-products (like airliners) requires the production and procurement of parts and components across national borders through global value chains, open to participation by developing countries which have achieved a higher quantum of technical know-how and a greater production complexity, like India and Singapore, potential FTA partners of Sri Lanka. Professor Ricardo Hausman of Harvard University’s Kennedy School, from whose speech at BMICH in late-January,2017 these arguments are summarized, went to the extent of making the point that “a country is in fact a collection of technologies, which determine the extent to which economic development takes place”.
The Asian examples of Vietnam and Thailand (another future FTA partner of Sri Lanka), are noteworthy. While Sri Lanka still exports apparel, manpower, tea and rubber, Vietnam has considerably diversified its export range, while Thailand manufactures electronics and vehicles for export. Like in Korea earlier, overseas Chinese returned home, bringing skills and know how that jump-started the newly liberalized Chinese economy. There is no recent historical evidence yet to suggest that a similar reverse brain-drain can play out in this country any time soon, for many reasons outside the purview of this essay. While FDI is critical for technology absorption, at barely one half of one percent of Sri Lanka’s GDP in 2016, it contrasts with Singapore at a ‘staggering’ 15% of GDP – another proposed FTA partner of our country – signifying a strong correlation between level of technology and FDI, eventually a chicken and egg conundrum!
Research and Development (R&D): No National Plan & Vision.
Sri Lanka’s desirable shift to export and investment-led growth, also requires the establishment of a robust R&D mechanism, led by a national policy, including specific strategies for targeting and assisting promising start-ups, an early initiative in Korea’s development program. Today, universities, public research agencies and businesses have disconnected R&D initiatives, not driven to achieve economically viable goals nor targeting an economically measured output, in the absence of a national R&D vision. Sri Lanka’s expenditure on R&D is also the lowest in this Region at a meagre 0.16% of GDP in 2010, with no appreciable rise until now, mostly targeted at academic goals.
Universities in Sri Lanka are not empowered to earn patents from publicly funded R&D, are inhibited by absence of required lab facilities and a lack of coordination resulting in low collaboration with industry. Also, industry leaders believe lack of entrepreneurial spirit among academics and low commercialization potential of University research are key deterrents to private sector R&D investment in academia. This view holds that our Universities ‘have calcified’ into teaching shops, which only either do consultancy work for industry or offer promising students for employment.
A World Bank study also found that unlike industrialized countries like Korea or even India, Sri Lankan companies “lack the critical mass to invest in research”, with less than 100 local businesses having the required capability. The same World Bank report has estimated that less than 50% of local university academics have doctorates, with only one-third of them in management sciences. Therefore, a Government policy establishing a national platform is essential for industrial start-ups to become viable business enterprises, and “will be at the core of Sri Lanka’s growth prospects” (Rooting for R&D, Recent FT Editorial).
Comment. The foregoing conveys the message that “the strategic aspects for developing a national system, which supports innovation and entrepreneurship”, (which go hand in hand with technology development), to “commercialise high-value products for export” at a competitive level, should be put well in place before the liberalisation of trade. The stimulation of innovation and entrepreneurship takes long lead times to mature and succeed, and should be originated years earlier, well ahead of trade policy liberalization. During that transformational process, with the aim of becoming a member of ‘global value chains’, the creation of a modern digital economy is a key aspect. In Korea, at this early stage, promising industrial innovation and entrepreneurship was actively encouraged by the government establishing dedicated financing agencies with repeated World Bank loans, in the drive for a viable export economy. Unfortunately, “the nascent digital industry with great export potential” in Sri Lanka, has been seriously hampered by recently increased VAT applicable to telecom services (including Broad Band), which will effectively slow down that industry’s quest as a business process outsourcing (BPO) destination, already hurting the growth of rising ICT export revenues. In summary, to access the 3 billion China and India market, first Sri Lanka’s exports must be competitive, high value, sophisticated manufactures, the end-product of successful technology development, innovation and entrepreneurship – these transformative changes cannot happen overnight and simultaneously with trade liberalization, both efforts starting in the same year. (“Strategic Brainstorming on Innovation & Entrepreneurship”, Daily FT news report,3.3.2017).
In the global context of rising nationalism, populism, and near economic stagnation, a worldwide trend has started from the western industrialized economies, towards increasing protectionist measures being adopted by their governments. Their objective is to safeguard the profitability of local industries, against progressively strong import competition from other countries, and also to safeguard domestic labour from losing their conventional role in local industry as a result of offshoring industries to locales with cheaper labour; as well as from the onslaught of robotics and artificial intelligence now contributing to higher industrial productivity – trends sweeping the fast growing economies of the world. As a result, greater protectionism and all manner of barriers to free trade have become the new norm, characterizing largely stagnating international trade. Given these developments, many local stakeholders, academics and think tanks have become critical of Sri Lanka’s current policy of negotiating free trade agreements with more advanced industrial economies, starting with Singapore, China and India, with all of whom we already have adverse trade balances, and continuing with plans for doing so with half a dozen other more advanced countries, before Sri Lanka establishes a viable industrial export base, to compete equally with them..
Economists’ Collective Observations
Sri Lanka’s Economists’ Association (SLAPE) has been quite critical of the undue haste with which the Government is currently negotiating a series of supra-national, preferential trade agreements, without wide discussion and debate with major stakeholders and civil society representatives, almost secretively pushed under IMF conditionality. A pre-condition is first developing a national manufacturing capacity and a reasonable degree of industrial competitiveness – which are “essential ingredients and predominant components of a successful, sustainable export drive”, sorely needed to first arrest Sri Lanka’s still declining export volumes and progressively increasing import intensity, before deriving economic benefits from a free trade policy.
The major reasons given by the SLAPE, which militate against the current FTA-centered trade policy Sri Lanka is pursuing, are as follows
A well established and executed industrial policy, emphasizing the role of technological innovation and adaptation, should be a condition precedent to a national export trade policy. A vibrant and globally competitive industrial export base has been lacking in Sri Lanka since the economy was liberalized in 1977.
The positive role that import substitution should play in the formative stages of a nascent industrial base being established, as was conceived and implemented in the East Asian ‘tiger’ economies before they became leading export power houses competing with the western industrial economies successfully, has not even been investigated in Sri Lanka, leave alone having been established. This first stage is an essential prerequisite given the small size of local consumer demand, and also given the already high import intensity of our exports. A globally competitive national production capacity, is therefore, essential for a successful and sustainable export drive; in its absence, it is a futile forecast that any meaningful advantage can be generated from any number of FTAs with more industrialized economies, with whom Sri Lanka already has substantial, adverse trade balances.
Free trade policies per se have never led countries directly to economic development, leading to the absolute necessity to find an alternative – as was pioneered successfully by the above-mentioned ‘tiger’ economies – to the failed neo-liberal orthodoxy trotted out by the IMF, as now realized even by the new regime in the U.S. itself as well as other advanced countries. In fact, free market economic policies embraced by Sri Lanka since the 1977 liberalization itself are a main cause of Sri Lanka’s current economic malaise, (though still unrealized by the authorities), centered on galloping imports and a still lowering poor export volume, primarily because setting up a manufacturing and industrialization base has been largely ignored. Consequently, further increased free trade outcomes through FTAs will certainly lead to catastrophic consequences, as the economy is already teetering on the brink of a precipice.
For all the above reasons, SLAPE has suggested that in FTAs being now negotiated by the Government, clauses should be incorporated to protect, groom, promote and develop competitive nascent local industries, not only in the state-owned enterprise and private sectors, but very importantly in the large small and medium enterprise (SME) sector – to make this country less vulnerable to BOP crises, for which the IMF is eagerly waiting, given the current, unlimited and rising import regime, leading to massive trade imbalances. On this issue, the free trade policy has failed to consequently address the negative implications of resulting reduced import tariffs on government revenue, already at a very low web.
In the above respect, the Government has failed to also review, and have corrected in actual practice, the continuing non-trade barriers inhibiting progress under the ongoing Indo-Lanka Free Trade Agreement, before seeking to even discuss the concept of a far more comprehensive ETCA, which the Indian Government is constantly pushing on the Sri Lankan authorities, under the feigned guise of neighbourly concern for Sri Lanka’s development, which was effectively scuttled and derailed for some thirty years by India actively funding, equipping, training, and supporting a virulent terrorist insurgency destabilizing this entire country. This is a fitting reaction to the renewed initiatives being now taken by the new Indian Ambassador in Colombo, and should be realized by Sri Lankan policymakers before it is too late, and local opposition balloons.
Finally, none of the country’s professional economic bodies nor other stakeholders, have been explicitly involved in a transparent, active consultative process with government functionaries in trade policy discussions; nor has emerging free trade policies been guided by a solid national development vision of where Sri Lanka is going in the context of the future prosperity and welfare of the Sri Lankan people, national sovereignty and autonomy (now being seriously otherwise eroded); as well as geo-political imperatives of regional countries, like India, in inducing Sri Lanka’s rush into supra-national international commitments, inimical to its economic future, for reasons detailed by SLAPE (and extracted above in summary, from its own published commentary on this subject).
Sri Lanka Exporters’ Association (EASL) Concerns
The Exporter’s Association of Sri Lanka has also raised several significant concerns about the last budget’s provisions, regarded as very favourable by both the IMF and World Bank, that result in creating an unfavourable taxation environment for Sri Lanka’s exports, e.g. first, the increase in taxes for exports from 12 to 14%; second, the withdrawal of SVAT exemption; and third, the imposition of the Trade in Services Tax of 14% – all measures resulting in discouragement of exports and reduction in export volumes, which is a phenomenon already occurring according to recent export data.
EASL has further complained, with reference to specific industries, that the Cess on rubber exports has increased from Rs 4.- to Rs 15,- which makes this important commodity, uncompetitive in the world market; and that budgetary incentives offered for the branding of tea, should have been extended by the Government to lines of non-traditional agricultural exports, where exporters with dynamic and innovative plans, are attempting to diversify the country’s hitherto neglected new varieties of agricultural exports, in order to stimulate the viability and vitality of a sector on which a vast majority of the rural communities depend for their livelihood; and where the lack of markets, both locally and overseas, have depressed these sectors of activity; and transformed a large proportion of the Sri Lankan population’s 40%, reputed to be in classical poor conditions, destined to live on less than $ 2 per day, which is the globally recognized poverty standard.
Ceylon Chamber of Commerce (CCC) Guidance : Trade Liberalization Support Needed
Since the International Trade Minister sought ideas in 2016 on measures to put in place, to assist domestic businesses to meet the challenges of the Government’s FTA plans (without to date announcing the specific scope or substance of the liberalization exercise), although they are now in the final phase of active negotiation in the cases of China, Singapore and India, and in a conceptual stage with several others including Thailand, Malaysia, Indonesia etc, (all ‘tiger’ economies), this Chamber has recently formulated the following proposals for the Government to consider, in order to help businesses cope with FTAs’ challenges:
First, the Government must proactively chart and formulate an adjustment strategy with clearly identified and adequately resourced support measures for business enterprises;
Second, responsible Ministries, regulatory bodies and related agencies must be reoriented to be more ‘industry facing’ and business friendly, to support firms’ survival and growth;
Third, relevant agencies should address “well known pain-points” in trade facilitation, including non-tariff barriers, customs delays, testing and standards issues, (including quarantining and technical barriers), and regulatory gaps, in order to reduce enterprise transaction costs;
Fourth, government funding and other support to target SMEs and other beneficiaries, to help them target foreign market exploration and development;
Fifth, specialized banking support, including credit lines, for businesses impacted by trade liberalization, and also to exploit its advantages, e.g. access technology, diversify and expand export product lines;
Sixth, improve utilization of industrial parks by small, adversely affected import-substitution businesses to upgrade technology and modernize facilities;
Seventh, Improve access to technology upgrading and absorption to make businesses more competitive through subsidy schemes, linking them with academia, as well as upgrade and invest in process and product innovation, to enhance export market competitiveness;
Eighth, intensify extension by government agencies to liaise with firms, to help bridge export market information gaps and subsidize market exploratory studies;
Ninth, assist export enterprises to find online buyers and suppliers, leveraging ICTA’s e-commerce expertise;
Tenth, assist greater labour market flexibility, by re-training workers for new sectors and improve efficient re-allocation of labour, including establishing satisfactory safety-nets; and
Lastly, cater with specially targeted programs to assist the vulnerable among micro-enterprises in the huge (93%) SME sector, of which 61% of export-oriented enterprises have less than 25 employees, given the catalytic impact SMEs have on employment, inclusive growth, and poverty alleviation. (A section which follows, covers the special issues faced by SMEs facing the coming liberalized trade competition).
Comment. The critical observation is pertinent that while every one of the above long list of eleven C.C.C. recommendations is salutary and exceedingly well conceived in every aspect, implicit in the Chamber’s ‘Guidance’ is the judgement that the planned trade liberalization is premature, without preparing the industrial, especially SME, sector to withstand and survive foreign competition. Therefore, given the long lead time needed to formulate details of the above-suggested initiatives and execute programs at standard public sector slow motion, is the Government’s feverish and almost unseemly rush to enter into at least three FTAs in 2017, in the country’s interests? It is possibly motivated by political expediency, without doing the necessary preparations on the ground to moderate and minimize the adverse FTA impact. Speedy planned execution of Government’s trade liberalization policy can be disastrous for local industry, particularly for the vulnerable SME sector, as it will wipe out jobs of a large cross-section of employees, among them principally women and youth, already facing difficulties in securing gainful employment. Have these consequences been evaluated?
(To be continued)