ASEAN – Single market like EU?

Sri Lanka registered a strong 8.6% GDP growth in quarter four of last year, whilst in the first two months of 2011 exports increased by 52%, which augurs well for the country. However, the issue is that policy makers have been challenged once again to focus on an activity away from the economic agenda due to global complexities.

What’s important to note is that whilst Sri Lanka is strategising the way forward on this new challenge, our neighbouring nations – ASEAN, are making plans by 2015 to have a European style single market economy.

This may include a single currency that can result in a further surge to the current foreign direct investment of $ 38 billion recorded in the recent past so that member countries can drive towards stronger export growth and economic resurgence that can drive double digit growth being achieved in the near future.

The power of ASEAN is so strong that already India has had discussions for a probable trade pact with ASEAN so that the key country in South Asia can outsmart its arch rival China on trade and overall quality of life of its population.

2011 – Flying start

Focusing on Sri Lanka once again, it is commendable that Sri Lanka has registered an 8.1 per cent growth in the first full year post the war in 2010, with all sectors performing extremely well with an eight per cent plus GDP growth, which indicates to the world the potential talent that the country can unleash.

The 144% increase in profit private sector performance further justifies the strength of the economy apart from the buoyant stock market hype. Given that over 75 per cent of the economy is private sector-driven, the profit numbers flashed in the private sector annual reports mirror the strong macroeconomic performance that is being announced by the State.

One key issue highlighted is that Sri Lanka’s exports account for only 17% of GDP, which can be argued by some as a weakness, given that in the 1990s the exports were 33% of GDP. But in my view this is a strength given that in the 1990s the GDP of the country was only US$ 20 billion whilst today it is at almost $ 42 billion plus, meaning that the economy has doubled even though the export sector contribution has halved. This gives us an indication of the sheer power of the rest of the economy.  Apparently in the 1990s the service sector contributed a mere 20 per cent to the total economy, but today this is almost 60 per cent, which tells us of the new growth agenda that has taken shape in the country. I guess the 41% growth in the Hotels and Restaurants sub sector in 2010 tells us of the continuity of this segment that will further drive the service economy of Sri Lanka.

Another way of analysing this point is that only 17% of the economy is dependent on the external environment, namely the global consumer. Hence in the event another global crisis happens like the recent financial meltdown or the commodity bubble bursts, there will a lesser impact on Sri Lanka.

But whilst being positive about the status quo, it is important that we make the export industry 20 billion dollars by 2020. The good news is that Sri Lanka is on track to reach this objective with sharp private sector-led strategies supported by the relevant Government agency.

Now the challenge is to not lose focus or allow unforeseen events hinder this progress purely from an economic perspective.

South Asia – Growing at 9%

If we analyse the performance of South Asia, India leads the way with a nine per cent plus growth with a strong non-agricultural sector performance in excess of 10 per cent whilst Pakistan has rebounded to deliver a five per cent growth.

Bangladesh has expanding to six per cent mainly due to high remittances and its vibrant service sector but is faced with many industrial labour issues that work for Sri Lanka positively. Nepal is staggering at two per cent due to the intense conflicts in country but is sure to rebound strongly as it has done in the past as the Government is linking with global infrastructure development organisations and driving towards improving road access and connectivity, which stimulate livelihood development.

Sri Lanka, which recorded 8.1% GDP growth and export revenue touching 17.3% growth, has continued the positive trend in the first two months of 2011 with a 52% increase in value.

Apparel earnings have grown by 21.9% to $ 385 million with cutting-edge innovation and marketing initiatives whilst the overall industrial sector performance in January has continued to demonstrate strong growth.

The rubber sector has grown by 18.7% with solid tyres and tubes leading this growth but we need to watch the implications post the Japanese tsunami, which has impacted the output vehicles from Japan.

Agricultural products have continued to perform with a 28.9% growth agenda, which means that Sri Lanka will be within the $ 10 billion dollar export earnings mark for 2011.

What is ASEAN?

Whilst there has been a lot of media spotlight on ASEAN, let me give more insights on this development. ASEAN consists of 10 members – Malaysia, Indonesia, Singapore, Brunei, Vietnam, Laos, Myanmar, Philippines, Thailand and Cambodia. This common market houses 560 million people but accounts for only eight per cent of global exports, which is interesting. Intra-regional trade makes up of only about a quarter of the bloc’s total trade volume, compared to more than 70 per cent in Europe. Exports from Sri Lanka are below six per cent but have the potential to increase.

After years of cleaning the first hurdle in cutting tariffs on merchandise, the 10-member ASEAN is now focusing on intense discussions on tearing down protectionist policies, whilst resolving domestic political stability issues like in Thailand.

The goal does not call for a single currency system as at now but has the potential in the near future, which Sri Lanka must carefully monitor given that Sri Lanka’s rupee is managed.

ASEAN strategy and Sri Lanka

The bloc after having secured a pact with the United States is now working towards a free trade zone with Australia and New Zealand as well as China, South Korea and India. This is in spite of the differences in human rights of Myanmar, which demonstrates the respect the bloc is earning in the economic muscle of the world. This presents an opportunity for Sri Lanka to drive exports indirectly by way of value addition. As most of the countries are into the manufacture of automobiles, we can focus on developing products like rubber beading, rubber bushes and tyres to name a few.

However, we need to be cognisant that, whilst there is a strong cohesiveness by the counterparts, there is a nationalistic spirit that leads to non-tariff barriers between members.

A recent study by PricewaterhouseCoopers revealed that unless the nationalistic tendencies are shed, cross-border trade will suffer significantly. Sri Lanka needs to take a cue from this spirit as the country has a unique identity and should not become a mini India.

Whist we should get the benefits of lower-priced automobiles and transfer of human capital, the Sri Lankan identity should be preserved with non-tariff barriers and policy restrictions.

The best case in point is Malaysia, which stipulates that in any investment from its regional counterparts, Malays must own 30 per cent. Thailand has banned all imports of rice into the country.

In the South Asian region we saw how India curtailed Sri Lanka’s export of tea into India, where less than ten per cent of the quota utilisation has happened in the last few years. However, it must be noted that some of the non-tariff barriers in force have been relaxed.

Implications for Sri Lanka

Sri Lanka needs to identify the industries which are vulnerable to international competition and build safety nets with non-tariff barriers, the logic being that no government in the world is a free trader that ignores its own constituents back home and one can lose elections in no time. Hence, it is time that Sri Lanka wakes up and drives home competitive advantage with non-tariff barriers so that we can also claim an identity in the economic stage whilst being part of organisations like SAFTA and CEPA.

However, it must be said that the best non-tariff barrier is to make one’s product so competitive that it can outsmart a competitive product at the consumer end. But sometimes the private sector requires breathing space and hence to some degree non-tariff barriers are a useful tool to practice. The second strategy to initiate is to identify the key products so that we have a comparative advantage and strengthen these products in the supply chain so that we are ready to capture the looming new opportunity. This can be with new technology and introducing branding/marketing initiatives.

The third strategy is to venture into these markets and develop business linkages so that when the market opens out on a common front (post the signing of the trade arrangement), Sri Lankan exporters are one up and have already made inroads into these markets.

Conclusion

Whilst arming ourselves with strong and sharp strategies, I strongly feel there is nothing called 100 per cent free trade. We must have a built-in flexibility to exploit opportunities, but we should be sensitive to the realities of the domestic market and lay down our rules very clearly. My view is, let’s be proactive at least this time around.

(The author is a doctoral candidate at a top university in Asia. He has a double degree in marketing and an MBA and has twice won the ‘Best Marketer’ title in Sri Lanka and a ‘Business Achiever’ award from PIM, University of Sri Jayewardenepura. He currently serves the international public sector for South Asia, based in Sri Lanka.)