SL’s economic recovery led by trade

By Imesh Ranasinghe

The Covid-19 pandemic has revealed the real weaknesses Sri Lanka had in terms of its economy for the past four decades.

With the foreign exchange shortage worsening day by day, many fear that the country will go back to the pre-1977 era of ration cards to purchase essential food items, as the importation of such goods will be impossible in the near months.

Sri Lanka needs economic reforms that will decide the fate of the country in the next few decades to come, and many experts say that reforms should start with the country’s protectionism trade that has not really evolved over the years.

Productivity for growth

Speaking at a webinar organised by the Advocata institute, its Chair – Academic Programme Dr. Sarath Rajapathirana said that Sri Lanka has failed to make any substantial reform for the economy, particularly on trade-side reforms, for the last 20 years.

He said trade is very important as it exposes the country to competition and among other areas such as the fiscal side, the budget, and having a proper monetary policy that avoids inflation and contributes to a more stable exchange rate, trade too needs a lot of work.

“Our imports are three times the value of exports, so we have been continuing a trade deficit, which is also accompanied by a current account deficit. These have to be addressed when talking about trade reform; we have to have the macroeconomic support for it,” he said.

He said more than the aggregates of imports and exports, the encouragement to productivity from having open trade or non-restricted trade is more important.

“If you don’t have strong growth in productivity, we have to keep on increasing the factors of production. It is difficult because we need to have more savings and less consumption. So the best way to get it done is to really have a system in which our reforms are going to immediately affect the positive side of our productivity growth,” he noted.

Dr. Rajapathirana said the growth rate that Sri Lanka saw in 2009 after the end of the war wouldn’t sustain as it was not based on productivity. He said countries that have been growing fast, such as Vietnam, Bangladesh, Cambodia, and Thailand, did so because their productivity has been also growing.

“They didn’t have to keep on raising savings in order to raise the rate of investments alone. So investments on one side and productivity on other together are the necessary support you give for growth,” he added.

Things that we can do to help our recovery

Dr. Rajapathirana said that Sri Lanka needs lower tariff, low trade protection to begin with, as the country has highest trade protection when compared to our neighbours and competitors. He said the para-tariff, a tariff put on existing tariff during the war period in order to finance the war, still continues to date, even though there is no need for such a tariff today.

“It (para-tariff) hurts our competitiveness, our ability for our exports to grow faster, and our import substitution to be more widespread and more efficient. It is one of the fundamental things we have to do – reduce the protection,” he pointed out.

Moreover, he said that Sri Lanka should have a single uniform tariff, similar to Russia, as it is very easy to administer such a system and there are no distortions in the tariff system while effective rates of protection are also easy to predict in such a situation.

“My suggestion is to have a uniform tariff and for 15%, which we can reduce overtime as our economy takes off when Covid is ending, and the Government commits itself for a good reform programme,” he added.

Further, he said that Sri Lanka needs to eliminate specific tariffs and make it all based on value, which also makes it easy to administrate and easy to see the results. He also said that tariffs should be made the only form of protection, “because if you are introducing quantitative restrictions as we had in the past, then it is going to be a problem”.

What will happen to GSP+?

The Generalised System of Preferences Plus (GSP+) means that two-thirds of tariff lines get access to the European Union (EU) market with reduced or no tariff. Countries with GSP+ status are Cape Verde, Armenia, Kyrgyzstan, Mongolia, Pakistan, the Philippines, Sri Lanka, Bolivia, and Paraguay.

GSP+ was first granted to Sri Lanka in 2005, withdrawn in 2010, and reinstated in 2017, but with some conditions such as the the commitment of the government to review the Prevention of Terrorism (Temporary Provisions) Act (PTA).

Speaking at the webinar, Ambassador of the EU to Sri Lanka and the Maldives Denis Chaibi said that now people talk a lot about the European Parliament resolution on 10 June 2021 that was taken against the human rights violations in Sri Lanka, adding that he heard a lot of interpretation of said resolution over the last two months.

However, he said the resolution says, after explaining all the difficulties in terms of human rights in Sri Lanka, the European Parliament calls on the United Nations Commission on Human Rights (OHCHR) and the European Union External Action service to use the GSP+ as a leverage to push for an advancement of Sri Lanka’s human rights obligations and demand a repel or replacement of the PTA to carefully assess whether there is sufficient reason as a last resort to initiate a temporary withdrawal of Sri Lanka’s GSP+ status.

He said that it is important here to know that the Commission is the executive of the EU and has the right and competence to look at GSP+, adding that it is a last resort and a temporary withdrawal and it has to be based on the fact that there is sufficient reason.

Chaibi said that it is positive for any government seen as engaging in basic human rights and implementing the goals and values of all democracies, and that any government would take pride in this. He said through the contacts with the government, they could see there is real engagement by the government.

Speaking about the advantages GSP+ has on Sri Lanka, he said that it provides quite a lot of foreign currency to Sri Lanka, especially at a time when the country’s forex seem to be particularly precious to the country, noting that therefore, not benefiting from it certainly would have an impact on the Balance of Payment (BOP), which is already a cause for concern.

Further, he said that along with the economic benefits, GSP+ also provides a host of employment opportunities.

Speaking on the long-term impact includes, he said: “We have seen with Covid-19 that it is important to have a resilient supply chain, and trying to get into the supply chain without having preferential access to the EU is going to be more difficult for Sri Lanka.”

According to him, Sri Lanka had only increased exports to the EU between 2010 to 2019 by 60% – half of it thanks to GSP+ when it was reinstated in 2017 – whereas countries such as Vietnam and Bangladesh have increased their exports by 400% and 150%, respectively, to the EU.

“At this point, not having GSP+ would really question the competitiveness of Sri Lanka with other upcoming neighbours in the region,” he added.

He said the EU market is a competitive one and is very open, but it is also one of higher standards, higher in value, and high prices. Hence, according to him, by maintaining this focus, Sri Lanka can try to keep up with its competitors.

Role of outward orientation in sustainable economic devt.

Australian National University Arndt-Corden Department of Economics Emeritus Professor of Economics Prema-Chandra Athukorala said that there is no other way than global economy integration if Sri Lanka needs to achieve self-sustaining growth development – or, in other terms, growth in poverty reduction.

“When we listen to Sri Lankan policymakers, they give a simple answer: We need exports to earn foreign exchange. The focus is on maintaining the BOP position but is a very simplistic way of looking at the role of economic integration or export orientation in economic development,” he said.

Prof. Athukorala said that export orientation works as an engine of economic development, and in addition to meeting BOP requirements, exports could contribute economic development in three ways.

Firstly, he said that as a developing country, the comparative advantage of Sri Lanka in international trade lies in relatively labour-intensive production processes, adding: “We trade to relatively developed countries which are more capital and technology-intensive while we are relatively labour-intensive.”

Therefore, he said that export-oriented growth is the sure way to reduce poverty, as it changes  the production structure in line with the comparative advantage Sri Lanka has.

“It generates more employment. Labour is the only resource owned by the poor, so employment-generating means injecting money to the poor. No country in the world has achieved poverty reduction on a sustainable basis without global economic integration,” he added.

According to Prof. Athukorala, when China started its reforms in the 1970s, 50% of its people were below the poverty line, but now, the poverty rate in China has declined to less than 1%. This is simply because Deng Xiao Ping, then leader of China, opened up the coastal area to trade and foreign investment, which led to 15 million workers moving from the countryside to urban labour-intensive production processes every year, which was the key to poverty reduction in China.

He said it happened in a small way in India during their reform era in the 1990s, while in countries like Vietnam, there has been a dramatic reduction in the poverty rate because of the global economic integration through export-oriented growth.

Scale economies

Prof. Athukorala said that it is impossible for a country like Sri Lanka to achieve a growth rate of 6% by focusing on the domestic market.

Taking Mauritius as an example, he said that Mauritius, with a 1.2 million population, has a per capita income three times that of Sri Lanka because they embraced export-led growth well before Sri Lanka in early the 1970s. Also, because of the draconian protectionist policy, Sri Lanka had missed this type of opportunity. 

“Think about a company like MAS or Brandix employing more than 50,000 workers. Can you imagine a company like them emerging with a domestic market-oriented focus? We need scale economies – scale economies come from global economic integration,” Prof. Athukorala emphasised.

He reiterated that no country in the world has achieved productivity improvement on a sustainable basis with a close economic framework.

He said that when a country opens its economy, the producers face import competition and at the same time, exporters need to maintain quality standards; they have to emulate state-of-the-art technology, so productivity improvement is positively related with export orientation.

“These three reasons lead to the inference that trade is not simply a BOP filling device, but it is an engine of economic development,” he said.

New economic policy framework: A development disaster if followed

He said that the Government has not yet come up with a definite policy statement and the Government has appointed a Presidential Task Force in charge of Economic Revival and Poverty Eradication, which came up with a report but the only source of which is the Central Bank of Sri Lanka (CBSL) annual report.

In the CBSL report, he said, there is half a page about economic development policy, which to him is half a page full of slogans.

He said that there is no analysis of CBSL policy prescriptions. “Either our policy directions have to be guided by what is happening in other countries in the region or it has to be guided by our own economic history,” he added.

He said things such as what Sri Lanka has achieved by the limited economic opening and the  disadvantages of the closed economy are not discussed in the report. “But they say that in order to solve our issues, we need to privatise winning industries and emphasise on domestic production,” Prof. Athukorala said.

He said the report by the Presidential Task Force has come up with a list of 11 products for economic revival and poverty alleviation. “There is one product called electronic and electrical goods and another category called machinery. I can’t see the difference between the two, but whatever it is, it is an ad hoc product selection,” he added.

Moreover, he said that in the proposed strategy, the selection of products is not consistent with global production sharing, which has been the driving force behind economic globalisation over the last three to four decades.

According to him, countries such as Vietnam have gained export development by joining the global production network and no country in the world produces goods from start to the end within its geographical boundaries. “In other words, the ‘Made in X country’ label has become invalid over the last three decades.

“According to my estimate, of this 11-product list, 85-90% are traded within global production network countries specialised in parts and components and final assembly, and the old idea of a product being produced from start to end in one country and traded with other country is no longer valid for about two-thirds of the world production. The Central Bank advocacy is entirely based on that outdated concept,” Prof. Athukorala concluded.