Advocata announces Economic Freedom Summit

Advocata Institute is excited to announce the Economic Freedom Summit, a three day event on economic freedom.  Based on Fraser Institute's Economic Freedom of the World Report, the event will look at areas where Sri Lanka can improve the levels of economic freedom in the  The event is in partnership with Canada's Fraser Institute, the publishers of the report and Atlas network, an international network of free-market think tanks.

The Advocata Economic Freedom Summit summit is a series of events commencing on the 11th of October, centered around a conference: a series of roundtable discussions to bring together people from industry, academia and think tanks to identify areas to reform Sri Lanka’s economy. 

The event summit kicks off on the 11th with a discussion on the topic of whether Sri Lanka’s open economy has worked for Sri Lankans, followed the main event on the 12th of October that includes the roundtable discussion and Sri Lanka release of the Economic Freedom of the World report.

Sri Lanka ranked 94th according to the Fraser Institute’s annual Economic Freedom of the World Report an improvement from last year’s ranking of 101 the previous year.  This year the report is based on 2015 data collected in 159 countries and territories across the world.

Hong Kong and Singapore again top the index, continuing their streak as 1st and 2nd respectively. New Zealand, Switzerland, Ireland, the United Kingdom, Mauritius, Georgia, Australia and Estonia round out the top 10.

“Where people are free to pursue their own opportunities and make their own choices, they lead more prosperous, happier and healthier lives,” said Fred McMahon, Dr. Michael A. Walker Research Chair in Economic Freedom with the Fraser Institute. Mr McMahon will deliver the opening address on Advocata’s Economic Freedom Summit on the state of economic freedom in Sri Lanka.

The summit includes keynote address by Economist Anushka Wijesinha with State Minister of Finance Eran Wickramaratne also set to address a gathering on the 12th of October.  The summit will come to a close on the 13th October with an event in Sinhala titled “Economic Freedom us” where Prof Rohan Samarajiva is set to deliver the keynote address.

The conference presents an opportunity to reverse this trend by identifying the barriers to development and to kick-start the reform process. The Fraser Index identifies weaknesses in the legal system and property rights, trade restrictions, tariffs, cumbersome regulation and controls over foreign investment as the principal contributors to Sri Lanka’s low ranking. 

The Advocata Institute, which is hosting the event in collaboration with the Fraser Institute will present the final report to the Government.  

More information about the summit is on the summit website - www.efsummit.advocata.org
 

 

Advocata collaborates with Yamu to calculate tax on your cake -- it's 35%

Advocata collaborated with food media website Yamu to produce this video that calculate the tax of a butter cake. The calculations are elaborated on our interactive page

This is to highlight the high impact of import tariffs on everyday food items and how much of the import tax forms as a proportion of the sales price.

Advocata launches project to monitor tariffs on food

Article originally appeared on Daily Mirror

Advocata Institute is launching a project to monitor import tariffs on food, with weekly updated figures available on the institute’s website as a ‘Food Tax Tracker.’

Sri Lanka has high food costs. Consumer prices are 25.22 percent higher (and grocery prices 34.48 percent (higher) than in India, according to data gathered for August 2017 by Numbeo, a crowd-sourced database, Advocata Institute said.

One reason for high food prices is the high import taxes on food items. The government intervenes heavily in the trade regime for food items through para-tariffs such as a CESS and Special Commodity levy. 

The public is unaware of the extent to which food is taxed, so we have compiled a table showing the tax on basic food stuffs, items that would be on table of many families.

Import taxes add Rs.130 to a bottle of cooking oil, Rs.880 to a kg of butter, Rs.625 to a kilo of yogurt and around 141 percent to a kilo of cheese. The list and the charts give details of the taxes.

Gathering accurate data on food taxes is a slow and painful process due to frequent changes in the tax structure. The initial exercise is limited to a few basic food items but Advocata hopes to expand this scope to eventually include all major food items. 

According to available data, only 4.3 percent of government revenue is raised through the special commodity levy imposed on food items, which ironically is almost exactly equivalent to the losses incurred by the major state enterprises. 

High food taxes driving cost of living: Advocata Institute

This Article originally appeared on FT.lk

Sri Lanka has high food costs. Consumer prices are 25.22% higher (and grocery prices 34.48% higher) than in India according to data gathered for August by Numbeo, a crowd-sourced database. 

One reason for high food prices is the high import taxes on food items. The Government intervenes heavily in the trade regime for food items through para-tariffs such as a CESS and Special Commodity levy. 

The public is unaware of the extent to which food is taxed, so we have compiled a table showing the tax on basic food stuffs, items that would be on table of many families.

Import taxes add Rs. 130 to a bottle of cooking oil, Rs. 880 to a kg of butter, Rs. 625 to a kilo of yogurt and around 141% to a kilo of cheese. The list and the charts give details of the taxes.

Gathering accurate data on food taxes is a slow and painful process due to frequent changes in the tax structure. The initial exercise is limited to a few basic food items but Advocata hopes to expand this scope to eventually include all major food items. According to available data only 4.3% of Government revenue is raised through the special commodity levy imposed on food items, which ironically is almost exactly equivalent to the losses incurred by the major state enterprises. 

Given that Sri Lankans as a whole are food consumers rather than producers and Advocata urges the Government to remove para tariffs such as the Special Commodity Levy and CESS and return to a regime of low and uniform duties for all items including food. 

Advocata’s Food Tax Tracker is online at www.advocata.org/food-taxes.

Think Economics : Advocata launches Essay Competition on Economic Freedom

Advocata is launching an essay competition on the topic of "what economic freedom means to me",  open to both School and University Students.  The Essay competition is conducted in partnership with Fredrich Nauman Foundation in Sri Lanka

We believe Economic Freedom - the ability of people to make their own economic choices -- is the key ingredient to sustained prosperity. Advocata Institute wants to see the future of our country through the eyes of her youth. We hope to make this competition, a platform  understand our nation’s future leaders and what they have to say. This is your opportunity to share your insights, thoughts and feelings about what economic freedom means to you discuss whether the its core tenants are the missing ingredients in Sri Lanka achieving it's economic potential.

More information about the essay competition is on the dedicated website associated with the Essay Competition.  

Full Event Video : Should we constitutionalise Socio economic rights in Sri Lanka?

Prof Pratap Mehta, one of India's leading political scientist and public intellectuals visited Sri Lanka facilitated by Advocata Institute where he delivered a lecture on learning from India's experience when Sri Lanka thinks about constitutionalising socio-economic rights.   

A brief overview of his contribution is on Groundviews. Here's the full video of his initial remarks:

The full event included a panel discussion and public forum chaired by Advocata advisor Prof Rohan Samarajiva, in which Hon. Deputy Minister of Foreign Affairs Dr Harsha de Silva also participated.

Prof Pratap Bhanu Mehta delivers Public Lecuture on Socio Economic Rights

Advocata Institute was honored to host Prof Pratap Bhanu Mehta, an eminent political scientist and public intellectual in February.  Prof Mehta delivered a public lecture on the topic of Should Socio economic rights be included in Sri Lanka's new constitution, speaking about the Indian experience.  Prof Mehta also participated in a panel discussion that included Deputy Minister of Foreign Affairs, Dr Harsh de Silva and Prof. Rohan Samarajiva, the chair of LirneAsia and an advisor to Advocata Institute.

Speaking on a topic, which is actively debated in Sri Lanka Prof Mehta argued it's necessary to go beyond existing ideological and philosophical framing and ask the simple question of what precisely is the problem that constitutionalising socio-economic and cultural rights is meant to solve.

Prof. Mehta says that whilst we may all agree it’s good to have the best possible healthcare, education and other socio-economic factors, we may disagree on what the best institutional architecture is around the delivery of these factors to citizens. The second question, he said, is whether we as a society we’d want to trust judges and the courts over politicians and the democratic process to somehow deliver these rights.  

Empirically, according to Prof. Mehta, there is very little evidence to suggest that constitutionalising socio-economic rights make a huge difference to governance or the delivery mechanisms. Speaking about the Indian experience, Prof. Mehta explained that B.R. Ambedkar, the chief framer of the Indian constitution was skeptical about including socio-economic rights. Ambedkar felt given that there is always a wide disagreement in society around economic matters, that the constitution shouldn’t ‘pre-judge’ any of these choices and that the enjoyment of these rights should be left to the give and take of representative politics, subject to iterative learning.

However, since about the 1990’s, Indian courts have taken the provision of ‘right to life’ and broadly interpreted it to include wide socio-economic rights.  But such recognition has not resulted in significant improvements within the Indian governance architecture to actually deliver these rights. In fact, it has sometimes had the perverse effect where it has weakened property rights as a result of judicial activism being used by the state to dispossess the poor, more than it has dispossessed the rich.

If the society in Sri Lanka in fact decides that it must have economic and social rights in the constitution, Prof. Mehta noted that it is important to put in place a clear legislative framework that will sit underneath those rights. This must entail establishing the specific national laws and practices in which the rights are supposed to be exercised. It becomes then a conditional right and not an unspecified right.

Otherwise, according to Prof. Mehta, Sri Lanka might end up realising Ambedkar’s worst fears – an economy governed by courts, power taken away from the democratic process and a perverse outcome where ‘rights’ are used to protect the privileged rather than to protect the weak and the vulnerable.

The event was part of Advocata's public lecture series in partnership with Echelon Magazine.
A version of this article appeared on Groundviews. 

Prof. Mehta’s full remarks are embedded in the video below.

Advocata ranked among the top 40 new think tanks in the world

Advocata Institute, Sri Lanka's free-market think tank has been ranked in the top 40 new think tanks in the world by University of 2016 Global Go To Think tank index report.  The rankings, which has been happening annually for the last 10 years is the largest study of it's kind and ranks think tanks globally.   Here's a report from the Daily Mirror:

According to the report, 14 think tanks are in existence in Sri Lanka. Worldwide 6486 think tanks working on an array of issues of interest in environment, economy, international affairs and etc. A Sri Lankan think tank Advocata Institute has been ranked 39th in the category of ‘Best New Think Tanks’ in the world. Advocata Institute is a young think tank formed in May 2016 working on Economic Freedom & Individual Liberty in Sri Lanka.

Their report on “State of State Enterprises” was an eye opener on the losses borne by the tax payers due to mismanagement by government and officials.  Professor Rohan Samarajiva, Professor Premachandra Athukorala, Professor Suri Rathnapala and Dr. Nishan de Mel are few top academics serve in their board of advisors.  Their public lecture series on ‘What’s wrong with Sri Lankan economy ‘and Op-eds in media got immense responses.  Regional Centre for Strategic Studies (SL) ranked 32nd in the Best Think Tanks in Southeast Asian Region and Institute for Policy Studies(SL) followed them in the 33rd Ranking. 132nd position in thecategory of Top Think Tanks Worldwide was taken by Regional Centre for Strategic Studies Sri Lanka. 

Lakshman Kadirgamar Institute for International Relations and Strategic Studies ranked 127th as the Top Foreign Policy and International Affairs Think TanksChatham House in the United Kingdom rated as the Best Think Tank in the world and the Heritage Foundation of United Sates named as the best Advocacy Campaign Think Tank

Here's the full link to the report.    Advocata is listed in the best new think tanks of 2016 category, which the report classifies as "centers of excellence":

Press coverage for Dr Wignaraja's Lecture

Full text of Prof Razeen Sally's Public lecture : Three scenario's for Sri Lanka's future

I just want to make three points before I get into the hard content of my talk. The first is to reinforce the points that Advocata Institute COO Dhananath made about Advocata. 

The time is definitely right for a Think Tank forum to promote limited government, free markets in a genuinely open society here in Sri Lanka. This combination has been very weakly represented. It is a set of beliefs that scattered individuals hold, but it’s time that they were represented collectively; and also to appeal to the young, the dynamic, the aspirational, not just here in Colombo but beyond, in the second tier cities, in the small towns and in particular,  among those whose mother tongues are Sinhala and Tamil. 

I would hope as Advocata grows, that it does things genuinely differently. There are far too many organizations, including  think tanks here in Sri Lanka that are very hierarchical, very stuffy, very bureaucratic, very cautious and which seem to be unable and unwilling to communicate with the public out there in straight plain-talking language. So I’m counting on Advocata people to do things differently to be un- hierarchical, un- stuffy, un- bureaucratic, to speak in plainly and to show that collectively things can be done differently in Sri Lanka to appeal to the kind of audience that I mentioned before -- the young, dynamic and the aspirational. 

The ideas that people have been faced with in the past have clearly not worked.

 It begins with a romantic socialism which still attracts some thinking people. Sri Lanka has had its fair share of revolutionary utopias. They have been refuted by history. We now know the reality of how Russia and China really worked rather than the romantic visions of them going back a generation or two. There are still some people in Sri Lanka who eulogized Fidel  Castro when he died just a couple of weeks ago. Well we know, it is documented, that Fidel Castro was a crook, a thug and a murderer on a not  insignificant scale. Well he was a saint of course when compared to Stalin and Mao who between them and among them killed scores more than even Hitler. So we should say goodbye to those revolutionary utopians.

I have a quote here from the German poet Friedrich Holderlin who said, “What has always made the state a hell on earth has been precisely that man has tried to make it heaven” and we should not try to make heaven on earth because we may end up making a living hell out of it. 

Sri Lanka is also seduced by communal socialism of the Tamil variety, and the Sinhala variety and they have torn this country apart. It has been seduced by the crony socialism of the SLFP and who has that benefited? The Bandaranayake’s, then the Rajapaksas and their bootlickers of course. Finally, not least not least Sri Lanka has been seduced by the crony capitalism of the UNP and who has that benefited? a Colombo oligarchy of course, but not nearly enough Sri Lankans outside that circle. 

There is an alternative. Of a smaller, but effective government. Of free individuals and what Karl Popper called an Open Society. That’s what Advocata is there for. 

A second note and this is just to express my own limits, and I hope this will be a note of humility. Some people dismiss me as this “SUDDHA” that flies in from time to time to quantify what is good and what is bad in Sri Lanka. It is true my Sinhala is very basic, I don’t’ speak any Tamil; I don’t live here, I haven’t lived here since the age of 12 or 13, I clearly don’t know the detail and nuance, of all of you, or nearly all of you in this room know and there are others that can do this talk better than I can. All I could do is say it as I see it; plainly, without holding back too many punches. 

One of my great heroes is George Orwell. Orwell by the way, was a convinced democratic socialist and he denigrated capitalism. But, he was an incredibly clear writer and speaker. He spoke honestly. He wrote a very clear language, it was not a political language and there was nothing fake or stuffy about it.  So, that is the least I can do in addressing the topic I have for today.

What I’m going to do is give a very big picture talk. It is a pre-90’s presentation --one of my favorites. in other words no PowerPoint, no slides at all so, then you are not looking over there [at the screen], you looking at me. It is a talk based on three scenarios for Sri Lanka’s future. Let me briefly introduce those scenarios. 

The first one – Scenario one is of drift, which is a continuation of the present. The second on is what I call “Takeoff” that is the scenario that I hope all of us in this room want to see and what of course our politicians have promised us. The third scenario is “Relapse” – this is where we were before January 8th 2015.

So I would like to walk through my three scenarios and then come up with my conclusion but, let me give you my conclusion straight away. Another favorite writer of mine Morte said he likes a man to start with his conclusion. 

My conclusion is that we are in scenario one, we are very far away from scenario two – “Takeoff” and we are dangerously closer to scenario three in other words – “Relapse”. Scenario one – Drift is a very unstable situation. Relapse is lurking around the corner and we really have to advance to scenario two – “Takeoff” because the alternative is relapse in other words the stakes are very high. I will elaborate in due course. Let me move to the first scenario – “Drift” the obvious place to start. 

Where are we now? Let me give you my assessment for what it’s worth. Better than where we were a few years ago, but not by much and it should be much better than what it is now. What are the credits? Well the good news is that we have a bit more liberalism and democracy in Sri Lanka than we had under the Rajapaksa’s. People seem to have lost their fear for the moment. The media is freer and criticizes liberally. There is a 19th amendment in our constitution and there are restored independent commissions, public service appointments and there is a new constitution in the works. The ethnic temperature is lower than it was a couple of years ago and yes the right symbolic overtures that we’ve made to the minorities. The third good news is that foreign relationships have been balanced, so what was a very China-weighted foreign policy now has good relations for China but, restored relations with India and the West. All of that is good news. 

What’s the bad news?
 
The bad news to begin with is  of course that there is no “Yaha palanaya”. Good governance is back to where it was before the Rajapaksa’s. In other words back to mediocre governance and rife,corruption and nepotism. Of course what disappoints people most of all. 

On the ethnic relations front the fundamental issues have not yet been dealt with; land restitution, regress for human rights abuses, demilitarization and not least of course genuine devaluation of power but, the politics are clearly daunting for any government which has its’ shoulder to a Sinhala – Buddhist hatland, that is understandable. What I think has really gone wrong is the economy, and that I think is crucial because, without getting that right everything else tends to fall apart. Let me concentrate on the economic situation and then extrapolate a little to the future. 

It begins with really very bad macroeconomic policy, fiscal policy and monetary policy in the first instance. Now this is of course not new, it has always been the case almost since independence with governments spending far too much and with creating far too much money. There’s been too much public debt created, inflation, current account deficits and a weaker currency. 

This government until recently at least, made it worse starting with fiscal policy. So, we had two very bad budgets in 2015. Price controls, exchange controls chopping and changing and all sorts of ad hoc taxes. 

In other words the continuation of what was happening before. All of that led the government going with a begging bowl to the International Monetary Fund and new agreement with the fund and a new facility was negotiated. That has somewhat delivered better news and the situation has stabilized. The last budget in 2016 was not as disastrous as the previous two. If things go according to plan -- that is of course with a big “IF” Sri Lanka -- we might get closer to having a revenue closer to 15% of GDP as opposed to 10-11% of GDP. 

It’s good news, but it’s limited because the government is still not serious about tax reforms. It’s about doing the minimum to satisfy IMF requirements and preventing a full blown crisis. It is not about serious tax or fiscal reform which I will get to later. 

Monetary policy was also very bad, until a few months ago the central bank became far too politicized over a 10 year period. Interest rates were kept artificially low and there was too much money printing basically to support an unviable fiscal policy. And of course there were scandals. Particularly in the primary Bond market.

The only good appointment this government has made was the appointment of the central bank governor Indrajith Coomaraswamy. He is just the right man for the job, he has excellent credentials, he is clean and competent and he also has a very good temperament. I think in the last few months he has done his level best to restore integrity and credibility to the Central Bank. To focus monetary policy on clear objectives starting with price stability and to clean up its regulatory act and not least the regulation of the primary bond market.

I think all of those here and those outside this room who want to see Sri Lanka have genuinely good independent, competent public institutions should support the central bank governor. All the more important because there are governing politicians out there who seem to want to undermine him. 

What about other areas of public policy? The good news is that starting with the Prime Minister, the diagnosis is much better than it was under the previous government. 

The Sri Lankan economy has a competitiveness problem, it has a productivity problem. The way to raise productivity and competitiveness is to have a stronger private sector and also to have much more globalization for Sri Lanka. More trade, more exports and imports as well as more foreign investment. But, to do that policies need to change. The first set of policies that need changing would be what one would call “doing business” policies. As the business people in the room know there is a serious problem with getting approvals for various projects, going through multiple agencies, taking too long, corruption, the lack of technology, the lack of things that are online and these are simple reforms that have been done successfully abroad. The government has promised them here. It’s been promised in two prime ministerial economic statements but, so far after almost two years we have seen nothing. There begins the disappointment. 

Let’s talk about trade. Sri Lanka has a much weaker game on trade and foreign investment. For a country like this, Sri Lanka has a shockingly low trade to GDP ratio, it’s 50% or less. Exports if you include services are about 20%. These numbers should be at least double. It’s got worse over the last fifteen years. The country receives a trickle of foreign investment, less than a billion dollars in 2016 and hardly any of it is for exports, its for local projects. The export basket remains static; tea, other plantation crops and garments but, it hasn’t diversified into other exports that east Asian countries have diversified into. Sri Lanka is not in the global value chains with the exception of garments, not in ICT, not in all sorts of services . To rectify that we need significant trade and  investment liberalization. We are aware that the last government increased levels of protection significantly. Again the government in very vague terms have promised some of this but, we haven’t seen this so far after almost two years. Then there are the more difficult reforms, certainly more difficult politically like reforming state owned enterprises, land reforms, reforming labour markets, education and skills. Again, where nothing is being done. That is perhaps  understandable because they are more tricky politically and might have to wait until after the next elections for the most part. But very little to nothing has be done even on the areas where it is less politically less difficult.

One key reason why these reforms are necessary is that Sri Lanka needs much more competition. Whether that competition comes from new players who are Sri Lankan or foreign players. It is really striking what little competition there is in the Sri Lankan economy wherever one looks. Most markets are tied up by little monopolies or oligopolies and the commanding heights are occupied by the Dhammika Perera’s and the Harry Jayawardene’s  of this world with their political connections who are sitting on very comfortable rents and of course the last thing they want is competition; and there is collusion between these commanding heights and the political class. That is bad in all sorts of ways ; Sri Lanka needs ‘creative destruction’ as the economist Joseph Schumpeter put it,  whether it comes from foreigners or locals. But, they are of course blocked at every turn. It's bad for efficiency in production and of course if you excuse my french -- it screws consumers.

All of this boils down to one fact ; there is still no economic plan for reforming the economy. It is good that Sri Lanka is getting advice from Professor Ricardo Hausmann and his colleagues from Harvard. It is good perhaps, that McKinsey has been hired to set up a delivery unit for reforms. But none of these are substitutes for homegrown basic plans of action and some basic priorities, one doesn’t need the ‘white man’ coming in from abroad for that. It is not rocket science, some of it I’ve outlined and these are not original ideas of mine either, they just need some basic mechanism of implementation.

I have one final worry and that’s about foreign relations. As I said the good news is that foreign relations have been balanced and we have much better relations with India and the west. It is also good that relations have been restored with China after that initial hostility after the presidential election. The Port City project makes sense. No one else is interested in Hambantota so, why not have the Chinese? even an exclusively Chinese industrial zone that covers all those Rajapaksa vanity projects including the port in Hambantota and relieve the government's debt burden in the process. 

But, this is what worries me. Sri Lanka is now drifting back to Chinese influence but, without the appropriate countervailing balance of productive private sector investment from the West and India. That investment would be far more productive than what we would get from Chinese state owned companies. The imbalance to what we have been drifting back in the last year in relying again almost exclusively from China for large scale foreign investment, is both a worry in the economic front and the security front. It’s a worry on the economic front because, the Chinese practice a different kind of capitalism -- at least the Chinese state capitalism. Chinese private sector capitalism is extremely entrepreneurial. But the type of Chinese capitalism we have in Sri Lanka is the capitalism of the Chinese communist party state, and it’s proxies. I’m not against that in principle, as long as it's balanced by other healthier investment from the West and India. But we should know what kind of rules this Capitalism plays by. And there is evidence of how it is being played out in East-Asia -- It is about buying up political business elites. Do we really want to see that happen? It’s already happening. I would urge the media and independent reserves to scrutinize these projects including the port city project. It has security concern as well because, we need to have relationships all around. Including the relationships with Americans, Europeans and the Indians. The last thing we need is another PLA submarine slipping into a Sri Lankan port. Lets not forget the Chinese are playing the long game here, not just for commercial advantage but, for other reasons as well.  We should have no illusions about that.

Now let me ask the question why has little changed in our economics and in politics?

Let me point out three factors that occurred to me. The first one is complacency, this is really a curse in Sri Lanka. Unfortunately Sri Lanka is blessed with a natural bounty in the wet zone and with the Sinhala Buddhist culture that dovetails with that natural bounty. It’s all in Robert Knox who wrote the best book written by any “SUDDHA” about Sri Lanka about four centuries ago. There is definitely lacking here a culture of work, of striving, of self-improvement, of responsibility. There’s too much of a culture of expecting coconuts to just fall into one’s lap and the feeling that the rest of the world owes Sri Lanka a living. What that brings -- particularly among Sri Lanka’s elite -- is an introversion and parochialism. There’s saying of Argentines, that Argentinians loved to compare themselves with themselves.  To be frank that reminds me a lot of Sri Lankans who love to compare themselves with themselves, but not with better practice outside and how it can be adapted here for the benefit of all Sri Lankans. 

My second observation of the root cause is about the political class. What was striking was that even though the government has changed, the political class hasn’t. Musical chairs are being played within the political class. It’s not just the case of the wrong thinking and the wrong words and actions but, the serious vested interests of incumbents who of course don’t want the younger generation to break through and do things differently. This threatens their interests and it threatens the interest of the business cronies. It’s not just a problem with the political class but with commanding heights of business as well. I’ve come around to the conclusion that nothing fundamental is going to change unless we see a breakthrough of a younger and better generation in both politics and business.

Let me single out a quote. This is from a British journalist who visited Ceylon in the early 50’s his name is Harry Hopkins, he said this about the Burmese political class, but it applies here, and I quote “A taste for melodramatics, the juvenile striking of poses, the individualism that turns to dacoity or political privateering, the oversensitive national pride that becomes first a morbid resentment of all criticism, then xenophobia... It all added up rather disastrously to a tendency to anarchism, to a preference of the florid gesture to the dreary but effective business of getting down to the job.” That reminds you of some people here no doubt.

Now let me project all of this into the future. This scenario of drift, what does it look like? Well it looks like what is said of Brazil. You know what is said of Brazil? “Brazil is the country of the future. Always was and always will be”. There’s that golden potential out there but, it’s never achieved because Sri Lanka keeps, as my friend Thissa Jayatilaka puts it – Missing busses; or Sri Lanka never misses an opportunity to miss an opportunity. I hope that opportunity has not been squandered. It's’ late in the day but, that window is still there. If it isn’t then we will see this continuous drift. In other words ossified political and business elite, mal-governance, ethnic tensions, a creeping drift towards overweening Chinese influence and economic stagnation. 

But let me try and make that less abstract. What economic drift and not achieving that potential means that outside a narrow elite, ordinary Sri Lankans will be deprived of opportunities of livelihood and life chances that they deserve. What that means is that an under developed under class that [audience member] Elmo Jayawardena and his wife and happy band of brothers and sisters cater to. People who live hand to mouth across the country and much bigger class of Sri Lankan’s who are perhaps not in dire straits, but who are underdeveloped in every sense : uneducated, unskilled, underpaid, under productive, under worked, all of which translates into the driver of a three wheeler looking for scraps of work whose son also becomes a three wheel driver or a maid who goes to the gulf, who sometimes gets treated barbarically, sends money back to a good for nothing husband usually whose daughter becomes a maid and ends up doing the same thing. Is this going to continue into the indefinite future?  That’s my scenario two.

Scenario two, to be optimistic, is the take-off scenario. Let me run you through that. It’s about Sri Lanka taking advantage of every external opportunity to achieve its long term potential. What would that look like? Well it would look like a growth rate of about 6-8% as opposed to 4-5%. A growth rate enough to increase Real Income that would translate into tangible benefits not just for a narrow elite but, for a broad majority across the island and across the ethnicities as well. It would need to be driven by a private sector engine and a foreign engine as well, in other words a private sector investment and globalization. On the globalization front what it would look like in numbers terms is over however many years trade rising to above 100% of GDP which is what this similarly populated East Asian countries have.  In fact well above. In Malaysia and Taiwan it’s a 150-200% which have populations are roughly similar to Sri Lanka’s.   Vietnam with a population of almost a 100 million has a trade GDP ratio of about a 150%. It would look like an export basket that diversifies way beyond garments and plantation crops, which are going to be increasingly under pressure from low-cost countries. Into more manufacturing niches, above all service sectors perhaps starting with shipping and logistics.  It would look like more foreign investment. $3 to $5 billion dollars a year.  Not less than a billion.  And some foreign investment that’s meant for production for exports, not just condos and other little local things that are generally less productive.  But all of that is not going to happen without a series of reforms. 

Let me elaborate on what I spoke in Scenario one, of policy the reforms. It begins with the maxim “first do no harm” In other words simpler and more predictable policy. No more changing of taxes, no more price controls, no more announcements of exchange controls and so on. Secondly it needs a stable macro policy at long last that goes beyond with the IMF program. In other words serious tax reform where Sri Lanka moves towards taxes that are genuinely simpler, relatively low over corporate and income tax with few exemptions.  If the yardstick is simplicity,  then the revenue will come on. As it has done in many other countries. The best examples are of course places like Singapore, Dubai, Georgia and Estonia. 

On the monetary policy side it needs price stability and a genuinely independent central bank. It needs a market exchange rate which will probably depreciate further given the external conditions increasingly so with the probable further rise of the U.S interest rates and the appreciation of the dollar. Thirdly it needs those doing business reforms that have been promised for the last two years. Much more stuff online, much less discretion for the bureaucrat, fewer agencies, shorter deadlines and automatic procedures. Mr. Modi has done this in India, not very comprehensively, but quite a lot in such a complicated state. This is really a matter of political will and leadership. With the right will and with a few competent people in charge this is the sort of thing that can be done. Especially in a small country.. it’s less complicated or should be less complicated than it is like in a large diverse country like India. There’s a lot of legislation from the early independence years that needs to be got rid of not least for small scale entrepreneurs.

Trade reforms need to happen. We need the removal of a lot of additional tariffs and of course we need a big simplification and reduction of the nominal tariffs on imports. Get rid of export controls. We need a genuine one stop shop for foreign investments. We need much better trade facilitation so that customs actually does work, like it does in some east Asian countries; technology  is very much part of the answer. 

There are also structural reforms that I talked about earlier that are politically more difficult, SOEs, labour market reforms, etc. It’s not just a matter of reforming policies but, it’s also a matter of reforming institutions. It’s difficult to see these policies change with certain people in charge of these policies. In other words we need better personnel at cabinet level and below. We need fewer ministries and a smaller cabinet. We need civil service down reforms as well. Ideally a smaller, but better targeted, better trained civil service. These are medium to long-term fixes, not short-term fixes. Sri Lanka needs more institutional checks on the discretion of politicians and bureaucrats. Other countries have it, there are some set clauses on legislation on regulations.  There’s less discretion in some countries for head of government or cabinet to simply issue decrees without going through Parliament. Other countries have more rigorous judicial review. We need more modern cost-benefit analysis of regulation. All of these things, Sri Lanka doesn’t have. 

There is one aspect of policy reforms that I want to talk about, and that’s decentralization. This is a very centralized polity. Everything emanates from,  leads back to the Colombo political elite and its allied business elite. Whichever party happens to be in power. One thing that I learned from doing some work on cities for the World Economic Forum is that the successful reforms around the world are not actually done by international organizations. Far from it. Not in Brussels by the European institutions at supranational level. Not even in national capitals. The most successful reforms are done in the small regions and cities which are closer to the citizen where you can experiment more, where you can be pragmatic, where you can learn better practice from other cities and other regions. Where a mayor can fancy him or herself as a CEO. I can give you many examples of cities, these cities expand and spread bottom up. The best example is from China. The success of China is not down to omniscience and competence of the Chinese communist party --that’s of course the narrative they would like you to believe. It's’ about Deng Xiaoping choosing a small fishing village called Shenzhen in the south of China far away from Beijing politics and allowing a reform experiment to happen there. The first Special Economic Zone. Which was first successful and was copied all over China because of its success. Some of those reforms were then rolled out nationwide. Shenzhen is now a city of more than 11 million people, 4 million people more than Hong-Kong. 
So what’s the lesson there for Sri Lanka? Its that we need more decentralized politics and with it more decentralized business. I’m not talking in the first instance of dysfunctional provincial councils. I'm talking about devolving power, real powers for taxation, expenditure to municipal authorities and mayors. New rules of governance for these decentralized units to allow these experiments to happen because they will happen there more than they will happen in Colombo and at the national level. This is an issue for the megapolis. All the talk about the megapolis have been about engineering fixes. It's about urban development in  the natural sense. No one talks about the governance of the megapolis. What are going to be the rules of the megapolis? Because, if the rules are not going to change. The megapolis will fail for all the political reasons. It needs a different kind of executive authority with devolved powers which will also allow a new elite to emerge a different channel from Colombo as it were. A new political elite and a new business elite. Political decentralization is vital. 

So much for the economic contours of this second scenario. What does it mean for things that are beyond economics? Well ethnic relations to begin with. Very basic point here. If the economic pie is static, it means more political conflict and more distributional conflicts. That’s a lesson of history. If a country is not growing economically to satisfy the aspirations of the people, people will fight more over slices of the pie or cake. In Sri Lanka that translates into racial, religious and ethnic fights. If the pie is growing -- 6-8% growth rather than 4-5% -- it means that there’s more to share around. Of course ethnic relations are much more complicated than this, but the precondition is for a sustainably growing economy. To ease the passage to genuine ethnic relations. 

Similarly for foreign relations: a country that’s growing at 6-8% means that the country has investment coming in from the better businesses in India not the third or fourth division dodgy businesses who wants to do special deals. It means  big-ticket investment from Europe, U.S , Japan and elsewhere. That means genuinely balanced relations. 

The summary of scenario two is that of a prosperous and cosmopolitan society. That means a Sri Lankan Sri Lanka not just a Sinhala-Buddhist Sri Lanka and open to the east and the west as well as to our big neighbor up north. The bad news is that this is still far away. For all the talk, it is not around the corner, it is not going to take off immediately because the hard work has not been done. And without that happening it is not going to be like the proverbial coconut falling into a Sri Lankan lap. That’s the bad news. But the prize is still very much there to be had. The window is still open but, narrow because two years have lapsed in the process. 

Let me move on to the third and most worrying scenario -- relapse. This a Rajapaksa-like scenario with echoes of Mr. Premadasa and J.R Jayawardene and Mr. & Mrs. Bandaranaike.What is it? Let’s start with politics. It’s a relapse into a ‘big man’ authoritarian politics rather like Vladamir Putin’s Russia. 

So a charismatic big man comes along taking advantage of social discontent, wins the presidential election and comes in to ‘clean house’. Which means neutering opponents, individuals as well as institutions. It means someone who rides at the head of the movement rather than a political party and a movement that co-opts individuals into the tent through carrots and sticks. So we return to a illiberal democracy.

It means secondly, back to a statist economy where the state has a bigger direct role in the public sector and a very indirect role in shaping the private sector as well as the military in the economy. It means allowing foreigners  much more selectively through very specific channels provided they cut the right deals with the right people and the right clan. And that would be a recipe for stagnation. It would be dressed up in the revolutionary socialist rhetoric of the past of course. And there will be plenty of fellow travellers to justify it in the opinion pages of newspapers and online. 

Ethnic relations is perhaps going to be a worry in this scenario. This big man is invariably going to be a Sinhala Buddhist riding at the head of a Sinhala Buddhist movement. This is of course the long strand in SL history. I hope I don’t get firebombed for saying that it began with Angarika Dharmapala. It has reared it’s ugly head since independence. It particularly reared its ugly head under the Rajapaksas. It strikes a chord with some in the Sinhala Buddhist heartland and the sangha. The narrative here would be that Sri Lanka has been sold to the minorities and that Sinhala Buddhism has been sold down the mahaweli as it were. What I have noticed from my travels around Sri Lanka is the reaction of the minorities to this is rather like the Hedgehog; who put up defense mechanisms and retreat into your own shell. True particularly of the Jaffna Tamils. I see it from the community that I come from, the Muslim community here, that has put a strain on Islamic fundamentalism that wasn’t there when I grew up but, is definitely there now. It’s a kind of mimicking of what they see with Sinhala – Buddhism. That’s a recipe for a Sri Lanka of multiple solitudes,  to borrow a Canadian term, as well as a recipe for more ethnic tension as well as violence. 

The final feature of this relapse scenario is a that of acceleration to back to preponderance of Chinese Influence. Of Chinese state capitalism, the buying up of in a much more comprehensive way, political and business elites of Sri Lanka with security implications as well. 

There are those in Colombo circles who may dismiss what I say as fanciful. Who will argue that we’ve made a fundamental shift since 8th January 2015, that we are not going back to all that.
I would be very naive or stupid to think this scenario not a possibility. I’m not saying it’s going to happen, it’s not pre-programmed. It’s a plausible scenario. With rising social discontent particularly outside Colombo, I think this scenario becomes plausible by the day.   So I would take it very seriously.

We have to ask ourselves some very hard, direct questions.  One is this: Sinhala society is very hierarchical. There is historically been a yearning for the “big man” in sinhala society, a dutugamunu character.  The political conditions may be right for someone who pretends to be that kind of man. Sinhala habits of the heart as it were.  It’s not that long ago that Sinhala mobs not only burnt Tamil shops but also Tamil people.  And disgustingly mutilated other Sinhalese in coastal roads and the hill country. It is not that long ago that atrocities equally, if not more worse were committed by the LTTE and other Tamil terrorist groups.  Is that really behind us?  I’m not that persuaded. I would like to say that it is. But I think Sri Lanka’s foundations are too brittle. 

Let me now come to my conclusion.  The first scenario of drift, one that’s like the present, not a very good scenario at all. The scenario two of the take-off. The third scenario of relapse. My punch line is this – I don’t think this present scenario extrapolating from the present is a stable one. I don’t think that we can be assured that we can continue to drift. If we don’t make judicious moves toward scenario two we are going to go back into a scenario three of relapse. 

The stakes are very high and moving toward a scenario of genuine renewal starting with an economic take off.  It’s beyond the usual economist-talk of policy reforms or structural reforms.  It is also about an injection of fresh blood into Sri Lanka’s political and business elite without that things are not going to change fundamentally.   This is perhaps the most difficult question of all.  It is not in the interest of incumbents to change things fundamentally.  So how does one bring about a fundamental breakthrough for the young, the dynamic, the aspirational who have a different vision for Sri Lanka.  We need to put our thinking cap on find the avenues. 

Thank you.  
 

Dr Ganeshan Wiganaraja delivers public lecture : Is the era of export-led growth over?

Sri Lankan-born economist Dr Ganeshan Wignaraja delivered a public lecture on the question of whether the era of export-led growth is over.   Dr Wignaraja is an advisor to the Asian Development Bank with decades of experience in various development organizations, focusing on Asia. 

As Asian trade slows down and with the increase of protectionist rhetoric from the west, the model of the East Asian countries, i.e. the export-led growth has been called into question.    Dr Wignaraja says that although the returns to such models have now become less, and it is now more difficult, he does not believe the era of export-led growth is over.

For Sri Lanka, he says basic reforms in trade liberalization in the areas of 'para tariffs' is needed, as well as improving delivery, and price quality of services and products.  Sri Lanka has failed to get into global value chains with the exception of garments. It hasn't happened in the BPO/ICT sector as expected, said the ADB economist. 

Dr Wignaraja says that as China now is moving up value chains,  rising wages and a upwardly mobile middle class is making China follow the model of Japan and subsequently South Korea in higher value added production and building innovation capability.  This opens up opportunities for Sri Lanka and other ASEAN countries argues Dr Wignaraja. Sri Lanka could attract export oriented Foreign investment from China to replace some of the labour intensive activities.  

In a new more difficult trading regime,  trading in services is likely to emerge as an important avenue of trade growth says Dr Wignaraja. Sri Lanka should focus on reforming internal barriers to trade in services by addressing skill gaps, trade barriers and infrastructure requirements in the area of basic power and digital infrastructure.  

With the expected death of the US-led Trans Pacific Partnership (TPP),  the China-focused Regional Comprehensive Economic Partnership (RCEP) is likely to come to fore as the major multi-lateral trade agreement in the region says Dr Wignaraja.  

Whilst Sri Lanka should pursue free trade agreements with India, China and other Asian countries, the correct sequence is to figure out the domestic reform agenda rather first and enter into trade agreements rather than the trade agreements dictate the reforms warns Dr Wignaraja.

Commenting on the use of Industrial policy and the government picking winners and sunshine industries in a country like Sri Lanka, Dr Wignaraja said that industrial policy requires a high-level of government capability, which at the moment Sri Lanka lacks,  and in such an environment, it's better to follow the market-led approach rather than try out sophisticated industrial policy measures according to the economist.

Dr Wignaraja also urged the policy makers to look into safety-nets and pay attention to the losers of trade liberalization, as addressing their concerns are vital to build support for trade liberalization.

National Press coverage for Razeen Sally's Lecture

The Advocata-Echelon Public forum which included a public lecture by Prof Razeen Sally followed by a Q&A session, garnered attention in the local national press with article in all the major Weekend english newspapers and National English dailies, as well as online. Here's a selection of the coverage.

On EconomyNext:

 Sri Lanka is in a period of dangerous policy drift with mediocre governance which is inherently unstable with the danger of falling back to a 'big man illiberal' politics is getting nearer, a top economist and policy analyst has said.

It is two years since the Rajapaksa regime was ousted but an expected economic take-off has not happened, with no serious reforms to unleash competition and boost productivity, Razeen Sally, Associate Professor of Lee Kwan Yew University said.

"The good news is that we have a little bit more liberalism and democracy than we had under the Rajapaksa's. We seem to have lost the fear," Sally told a forum organized by Advocata Institute, a free market think tank in association with Echelon Business Magazine.

Full Article

On Sunday Times:

An infusion of fresh blood, both in politics and business, is needed if Sri Lanka is to avoid the doomsday scenario of slipping back into the sad and bad days of ‘Big Man’ illiberal democracy (read the Rajapaksa era), leading economist Prof. Razeen Sally declared.

The Sri Lankan-born associate professor at the Lee Kwan Yew University in Singapore believes the island might ‘miss the bus’ again, simply due to lack of political will amongst the ruling class who are content to let events drift without coming good on their promise of Yahapalanaya (good governance).

“It is not in the interests of the present incumbents to change things. For the country to take-off we need people with vision and dynamism and inspired to move forward in a different way. We need an injection of fresh blood in the political elite as well as business elite but even though the government has changed, the political class is still the same,” Prof. Sally said at a forum organised by Advocata Institute, a free-market think tank, in Colombo this week.

Full Article

Also on  the Island,  Island : Be Weary of Chinese Influence,  The Sunday Observer, Ceylon Today, and the Daily Mirror: Sri Lanka in danger of falling back into Rajapaksa tyranny ,  Toxic politics could undermine results expected from ETCA and Loud call to protect Govenor of the Central Bank

The Daily Mirror also carried an op-ed by social commentator Capt. Elmo Jayawardene:

The most current local newspapers carried articles covering a Sri Lankan economy analysis by Professor Razeen Sally. I too was there to listen to him speaking his piece and want to add my mite congratulating him for the well-analysed sense he spoke and to state my appreciation to the organisers for presenting such an event.  What facts I heard from the podium I understood and to those of us Sri Lankans, who are the lost sheep of the economically-bewildered category, this certainly was a wide and clear eye opener as to where the country is heading. We wonder eternally what inexplicable wrong we have collectively committed against the gods, for them to give Sri Lanka this perpetual step-motherly treatment for being glued to the  political dumps.  We are the inheritors of this beautiful land, so blessed and filled to the brim with every natural phenomenon one can wish for. Yet, as a country, we are struggling constantly, swimming upstream, not against the vast blue ocean that wraps around the island or the rivers that flow majestically from the hills, but against the incurable swirling currents of Diyawanna Oya. 

Full article

The lecture also referenced in an open letter to Deputy Minister Eran Wickramaratne by good governance activist Chandra Jayaratne. 

 

 

Razeen Sally delivers Lecture on Three scenarios for Sri Lanka's future

Prof. Razeen Sally delivered a public lecture at the Advocata Institute, last week on Sri Lanka's future.  This is the third edition on Advocata's series of public lectures.  The full lecture is now online.  The event was done in partnership with the Echelon Magazine. 

 

From Economy Next:

Sri Lanka had windows of opportunity to change direction in the past, but had 'missed the bus' several times in its post-independence history according to many commentators.

Sally recalled something that is said often about Brazil: "Brazil is the country of the future, it always was and it always will be.

"There is that golden potential out there, but it is never achieved," Sally said.

"Of course Sri Lanka never misses an opportunity to miss an opportunity. I hope that opportunity has not been squandered. It is late in the day, but it is still there."

Sri Lanka's economy did not have enough competition with 'commanding heights' of the economy controlled by oligarchs. 

The country was in the grip entrenched political and economic interests without any new blood to bring change and competition.

"Sri Lankan economy has a competitiveness problem," Sally said. "It has a productivity problem," The way to raise productivity and to raise competitiveness is to have a stronger private sector. 

"And also to have much more globalization of the Sri Lankan economy. More trade, more exports import as well as more foreign investments.

Doing business policies had to change. A combination of domestic and private sector investment was needed to transform the economy to have 6-8 percent growth.

Reforms were needed to bring 3 to 5 billion US dollars of foreign investment. 

Sri Lanka needed simple and predictable tax policies.

"No more price controls, no more announcements of exchange controls."

A stable macro-economic policy that went beyond the IMF program, including tax reforms that were genuinely simpler and relatively low without sudden changes was needed.  Institutional checks were needed including a genuinely independent central bank with better policies.

Full Article

Advocata Radio EP 2 : Ambassador Frank Lavin on Donald Trump and Asia

In our second episode of Advocata Radio, we speak to former  U.S. diplomat and  advisor Frank Lavin on Donald Trump's surprising victory and what that means for U.S. relations with Asia.  The podcast was recorded on 16th November. 

Sri Lankan Airlines - The third largest loss making state enterprise

The Sunday Leader quotes Advocata Institute's report on State of State Enterprises:

The learnings from the previous Strategic Planning Exercise of SriLankan Airlines is particularly relevant at present, considering that the airline was the country’s third-largest loss-making State-Owned Enterprise (SOE) from 2006 to 2015 (according to Advocata Institute’s report – The State of State Enterprises in Sri Lanka).

These losses accounted for over a fifth of the total losses of the country’s SOEs (categorized as strategically important by the treasury) from 2006 to 2015, based on the Advocata report.

More on the Sunday Leader

On Sunday Leader : SL has a long way to go in removing para-tariffs

The Sunday Leader quotes an Advocata Institute event on attracting Foreign Direct Investment (FDIs):

think tanks and economists lament that Sri Lanka has a long way to go in removal of para-tariffs (taxes over and above normal tariffs) and trade liberalization to make Sri Lanka a haven for investments. 

To attract Foreign Direct Investments (FDIs) for Sri Lanka, its burgeoning Indian Ocean Island economy, should cut barriers to trade and investment, top trade economist Prof. Prema-Chandra Athukorala said at a forum organized by Advocata Institute, a Colombo-based free market think tank.

“This would form a natural progression from garment manufacture, on which the country is now heavily reliant. Sri Lanka’s protectionist trade policy and erosion of confidence in the legal system are key factors that have discouraged investors resulting in a decline in Sri Lanka’s share in world manufacturing exports from around 2000,” he said.

Read entire article

Foreign investment necessary to wipe out poverty, economist says

Although fixing Sri Lanka’s economy is not easy, the model of foreign direct investment flows into the Asia Pacific region in countries such as Vietnam, Thailand, Malaysia, Singapore and other countries was worth looking, according to Economics Prof. Prema Chandra Athukorala from the the Australian National University.  Speaking on the topic “Foreign Direct Investment and Manufacturing for Export and Emerging Trends and Opportunities for Sri Lanka” in Colombo last week at a forum organised by Advocata Institute, a Colombo-based free market think tank, he said his theory was based on research done by him on FDI inflows into those countries.

He said there is no panacea for economic development but there is one avenue which had been very effective in drawing direct foreign investment for promoting manufacture for exports.  To reduce poverty it was necessary to generate employment and the use of labour as a resource is necessary as one cannot start at the top end with sophisticated machinery without training unskilled labour. “Countries such as Malaysia Thailand Singapore and now Vietnam have used labour resources to eradicate poverty. We cannot ignore globalisation if we are to emulate developed countries such as Singapore to eradicate poverty and not remain like Myanmar.

Although some ministers have voiced their opinion to bypass manufacturing and to focus on the tourism sector, manufacturing was absolutely necessary to generate employment to eradicate poverty with unskilled workers. Foreign investment is also needed to generate employment and countries like Japan relies on foreign investment and the technical know how. It comes as a package with market linkages.”  Foreign investment is an important component for a country like Sri Lanka to start big industries like MAS Holdings, Brandix, Hirdaramani and others. “We need foreign investment to link up with the global market chain.” Referring to international brands such as Nike, he said different components of the shoe were produced in five countries including Vietnam and Sri Lanka.

Read the article on Sunday Times 

Economist urges more investment protection To drive global production sharing in Lanka

Prof. Prema-Chandra Athukorala

Prof. Prema-Chandra Athukorala

Sri Lanka should cut barriers to trade and investment to attract foreign investors into electronic component manufacture, top trade economist Prema-Chandra Athukorala said at a forum organised by Advocata Institute, a Colombo-based free market think tank.

This would form a natural progression from garment manufacture, on which the country is now heavily reliant. Sri Lanka's protectionist trade policy and erosion of confidence in the legal system are key factors that have discouraged investors resulting a decline in Sri Lanka's share in world manufacturing exports from around 2000, said Athukorala, who is a Professor of Economics at the Australian National University and a top consultant on international trade to a host of international organisations. The liberalisation undertaken in the late 1970s resulted in a notable increase in manufacturing exports and a steady increase in Sri Lanka's share in world manufacturing exports.

The reforms suffered a significant setback from about the early 2000: with the imposition of para-tariffs (taxes over and above normal tariffs), and a proliferation of ad-hoc duty exemptions and case-by-case duty adjustments. Sri Lanka has a bewildering number of para-tariffs including: Ports and Airports Development Levy (PAL), the Customs Surcharge (SUR), the Commodity Export Subsidy Scheme (Cess), and the Regional Infrastructure Development Levy (RIDL).

Sri Lanka needs to continue with reforms if it is to reap the benefits of export led growth. "That is why South Asian countries have not been able to join global production sharing like East Asia. Just having cheap labour alone is not enough." The global economic environment is changing with production sharing (Global Production Networks- GPN's) becoming the prime mover of cross border production and trade. GPN's are of two types, buyer driven and producer driven.

Read the entire article on Sunday Observer 

Driving Global Production Sharing In Sri Lanka

Australian High Commissioner to Sri Lanka Bryce Hutchesson and Prof. Prema-Chandra Athukorala

Australian High Commissioner to Sri Lanka Bryce Hutchesson and Prof. Prema-Chandra Athukorala

In the light of Ministry of Development Strategies and International Trade promising to present the Agency for Development (AfD) Bill to parliament, think tanks and economists lament that Sri Lanka has a long way to go in removal of para-tariffs (taxes over and above normal tariffs) and trade liberalisation to make Sri Lanka a haven for investments.

To attract Foreign Direct Investments (FDIs) for Sri Lanka, its burgeoning Indian Ocean Island economy, should cut barriers to trade and investment, top trade economist Prof. Prema-Chandra Athukorala recently said at a forum organised by Advocata Institute, a Colombo-based free market think tank.

“This would form a natural progression from garment manufacture, on which the country is now heavily reliant. Sri Lanka’s protectionist trade policy and erosion of confidence in the legal system are key factors that have discouraged investors resulting in a decline in Sri Lanka’s share in world manufacturing exports from around 2000,” he said.

Athukorala is a Professor of Economics at Australian National University and a top consultant on international trade to a host of international organisations.

The liberalisation undertaken in the late 1970’s resulted in a notable increase in manufacturing exports and a steady increase in Sri Lanka’s share in world manufacturing exports. The reforms suffered a significant setback from about the early 2000: with the imposition of para-tariffs, and a proliferation of ad-hoc duty exemptions and case-by-case duty adjustments.

Sri Lanka has a bewildering number of para-tariffs including: Ports and Airports Development Levy (PAL), the Customs Surcharge (SUR), the Commodity Export Subsidy Scheme (Cess), and the Regional Infrastructure Development Levy (RIDL).

Sri Lanka needs to continue with reforms if it is to reap the benefits of export led growth. “That is why South Asian countries have not been able to join global production sharing like East Asia. Just having cheap labour alone is not enough.”

The global economic environment is changing with production sharing (Global Production Networks- GPN’s) becoming the prime mover of cross border production and trade. GPN’s are of two types, buyer driven and producer driven.

To date, most of the Sri Lanka’s FDI is in Buyer driven GPNs where a buyer (usually a retailer) buys finished goods. Although common in industries such as garments and footwear, globally buyer driven GPN’s formed only 12 per cent of world manufacturing trade (in 2012-13), and its share is declining.

Producer driven GPNs are where an end producer assembles the final product from components made in several locations. This takes place in vertically integrated industries such as electronics, medical devices and cars. Producer driven GPN’s accounted for 51.1 per cent of world manufacturing trade in 2012-3 and its share is growing; this is the trend Sri Lanka needs to tap into, according to Prof. Athukorala.

Successful integration of the manufacturing sector into producer driven GPN’s has played a key role in employment generation and poverty reduction in China and other high-performing East Asian countries.

The determinants of a country’s success in joining global production networks are the availability of trainable labour, proactive investment promotion and service link costs, according to the economist. He emphasised that while the importance of infrastructure and political stability to reduce link costs are often spoken about, Sri Lanka needs to focus on property rights protection, ease of enforcing contracts and a liberal trade and investment policy to attract FDI.

Read the entire article on The Sunday Leader