Tuesday Nov 26, 2024
Tuesday Nov 26, 2024
Thursday, 11 July 2013 01:53 - - {{hitsCtrl.values.hits}}
Re-thinking SL’s basket of exports
The keynote was delivered by Australian National University Professor of Economics Dr. Premachandra Athukorala, who stressed on the need for Sri Lanka to improve its productivity and its basket of exports.
He noted that world over, export oriented forms are much more productive because they have to go by the market discipline. The real message is that if firms want to create growth dynamism import, they need to think about becoming export oriented.
“World demand is an important determinant of exports in the short-run, but in the medium to long-term, supply-related factors play the dominant role in determining a country’s relative export performance. It must be kept in mind that world demand is not an engine, but simply a handmaiden of export growth of a given country,” he said. “In this country, there is a tendency to think of different policies in isolation. There is a need for an analytical framework.”
Analysing supply side factors, he observed that exchange rate and interest rates are the key determinant, therefore, the macro policy house has to be kept in good order to ensure export competitiveness and a stable enabling business environment for the private sector. This is particularly important for attracting export oriented foreign investment which is important for export oriented countries.
Athukorala emphasised on the need to have trust embedded in institutions, with law and order, property-right protection, political stability, policy certainty, openness to trade etc.
In identifying an appropriate product mix, he pointed out that private enterprises would be able to do this better than policymakers. New export lines can emerge de novo if the macroeconomic house and the domestic investment environment are in good shape.
“The Government’s identification of products and providing an enabling environment can play a supporting role if the supply side prerequisites are made, and policies have to be designed taking into account the country’s comparative advantage in international markets and the changing international landscape,” he said.
He added: “There has been a precipitous fall in Sri Lanka’s share in exports from developing countries and the country has failed to share in the great transformation of world trade – the dramatic shift in manufacturing exports from developed to developing countries. So, Sri Lanka’s export problem is fundamentally home grown, we shouldn’t be blaming the markets.”
There has been deterioration in the country’s investment climate as well, he observed. On the topic of labour, Athukorala pointed out that the country’s unemployment is a misguided indicator as the Government has become the major employment generator and there has also been a rapid increase in overseas employment.
“When you take these figures and adjust the unemployment rate, it is very high. Sending your people to work in other countries is a reflection of a failed state. We are heading towards the situation of the Philippines where no one has trust in the Government,” he stated. Malaysia, Japan and Thailand are now net labour importers and this can happen in any country, he added.
Sri Lanka’s two options
As per the East Asian experience, Sri Lanka can try and fit into global production sharing within vertically integrated global industries, mostly in machinery and transport equipment. The developing countries’ share in this category is 46% in the world trading sector.
“Global production sharing is breaking up the production process into geographically separated stages. The iPhone for example, China only contributes 3.6% to its production – the other contributions come from other countries. Production sharing is not only limited to electronics, it has expanded to many other areas,” he explained.
Sri Lanka is a very minor participant in this with the share of export related to global production sharing at just 3.5%. It requires the availability 
of middle level technical managers and the lowering of services linked costs.
The second option is processed food, a product area that goes nicely with the Government’s recent emphasis with developing the north and east, Athukorala said. One of the striking features of world trade is that the processed food component in food has been expanding significantly. This is not a passing phenomenon and is driven by two factors – the internationalisation of food habits and the development of food production, transport, etc.
“The new export opportunities are important for growth and poverty implications of agricultural trade in agricultural resource-rich and labour abundant developing countries.”
Trade agreements to access markets
Institute of Policy Studies Executive Director Dr. Saman Kelegama outlined Sri Lanka’s current position with trade agreements and how they could be used as a tool to access markets as they are an important component of the incentive framework to promote exports and is crucial to Sri Lanka in the face of dwindling exports.
Since 2000, Sri Lanka’s export share as a percentage of GDP has been going down. Bilateral and regional agreements have been proliferating in Asia, with 100 regional agreements and many FTAs and preferential trade agreements signed as well, he said, although there are many that have been signed but are yet to come into effect. Sri Lanka does not feature prominently here however, with even countries like Myanmar and Cambodia signing more trade agreements.
Sri Lanka only has four fully effective agreements – ISFTA, PSFTA, APTA and SAFTA – and the utilisation of these is also low as it only covers 21% of Sri Lanka’s overall trade which is far below the global average of 35% of trade happening under regional trade agreements.
SATIS was signed in 2010 and is yet to come into effect, like the Sri Lanka-Iran preferential trade agreement which was signed in 2004. A Sri Lanka-Singapore agreement was contemplated in 2003 but consultations are still going on in regard to this as is the case with the US-Sri Lanka FTA discussed in 2002.
Two of the most important trade agreements for Sri Lanka so far have been the Indo-Sri Lanka FTA and the EU GSP+. Exports to India increased from 1% in 1999 to 9% in 2005 but dropped to 5.8% in 2012. Imports from India on the other hand have increased from 9% in 1999 to 19% in 2012. When Sri Lanka qualified for the GSP+, exports picked up but losing the GSP+ contributed to the decline of exports to the EU market.
Sri Lanka’s other FTAs, namely those with Pakistan, Bangladesh, SAARC minus India and Pakistan, Korea and South Korea, have been much less successful in improving market access for Sri Lankan exports. Exports to China however, have increased.
“Looking at APTA, you think that because of the ISFTA, there is no point looking at the other two agreements but some products that are not covered under ISFTA are covered under APTA, for instance the export of natural rubber to India,” he pointed out.
“The reason for the low impact of trade agreements here is due to low coverage and limited concessions, the fact that they are restricted to trade in goods whereas recent trade agreements in Asia go beyond goods to cover services, investment, competition and IPR, and non-tariff barriers such as high utility costs, stringent labour regulations, infrastructure problems, inefficiency of customs and other border agencies and corruption at Customs,” he listed out.
On this note, he added: “Non-tariff barriers should not be over-dramatised. Trade between India and China went from US$ 1.5 billion in 2000 to US$ 50 billion in 2011 without any FTA, while facing the same non-tariff barriers and the fact that it increased by such a huge amount clearly indicates that one cannot just use non-tariff barriers as an excuse if one cannot penetrate a particular market and it not be used as an excuse to halt ongoing trade negotiations.”
On the contemplated FTA with China, Kelegama pointed out that there are protectionist lobbies about cheap imports coming into Sri Lanka and inability to compete. How the negative list will be designed by Sri Lanka will be an extremely cumbersome exercise especially in the context of domestic concerns about Chinese competition, he noted. “We must pursue trade agreements and strengthen the existing ones with better utilisation and deepening and broadening them and the existing non-tariff barrier problems should be addressed simultaneously. Just catering to few protectionist lobbies will not take us anywhere.”
Outlining the way forward, he stated that behind the border/at the border barriers in Sri Lanka hindering exports need to be addressed, that it must be ensured that new trade agreements have provisions to address beyond the border barriers that go beyond reducing import duties, there needs to be a move beyond trade in goods to cover other areas such as services, investment, IPR, etc. and ensure a high level of skill and sound grasp of international trade norms and political concerns in negotiating future trade agreements.
Pix by Upul Abayasekara
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Panel discussion In addition to Australian National University Professor of Economics Dr. Premachandra Athukorala and Institute of Policy Studies Executive Director Dr. Saman Kelegama, the panel discussion that followed the presentation consisted of Tea Exporters Association Secretary General Niraj de Mel, hSenid Software International CEO Dinesh Saparamadu, Joint Apparel Association Forum Secretary General Tuli Cooray and Hayleys Senior Economist/Strategic Business Development Deshal de Mel, and was moderated by Ceylon Chamber of Commerce Past Chairman Dr. Anura Ekanayake Q: It was said that declining or lack of world demand should not be taken as an excuse and that non-tariff barriers should not be taken as an excuse. There is an interesting parallel in the two statements – could you comment on this? Athukorala: My statement is entirely based on experience. Think about export takeoff in Taiwan and Korea during the worst period in the global market. It is a supply side issue – Chinese products are more tradeable and India has grown in trade liberalisation as well. Naturally, FTAs are the second best alternative, the first is unilateral liberalisation. In 2006, the WTO came up with IT agreements – the biggest WTO achievement because electronic trade, which is about 30% of world trade, is covered and it is virtually duty free. If you want to get into electronics, you have to be a signatory to this agreement. The next point is that the impact of an IT agreement is product specific because there are draconian rules of origin. FTA is a misnomer because there are rules of origin attached to it – it’s not free. When it comes to import dependent industries, FTAs have done no good to world trade expansion. Q:It was said that a lot can be learned from value added agri food exports – what are your thoughts on promoting and deepening the share of value added food exports? Niraj de Mel: In the Budget of 2010, the President with a view to encouraging value added exports, increased the duty on bulk exports. In 2011 and 2012, value addition of tea exports has stagnated. We are still struggling at 33% to 36%. Ceylon Tea is about the most expensive in world. Internationalisation of food habits has resulted in multi origin packs around the world – Lipton Teas are a blend of teas because there is a price that a consumer can pay. Today, there are new producers producing tea whereas we are an aging producer with the highest cost of production. Deshal de Mel: It is necessary to move up in the value chain in everything that we do. With tea, we have been doing tea in a similar way for about a century. Sri Lanka is not a low cost manufacturing source – therefore, we cannot compete in low margin products with limited barriers to entry. We will have to manufacture products that are not easily replaceable and are harder to compete with. In the highest ends of the value chain of tea, you get flavours, essences and aromas that require far more levels of processing and these need to apply in lots of things that we do. If you take cinnamon, we still produce a fairly basic product and we need to amp this up but this requires investment. We can learn it ourselves and do it on a home-grown basis and that will take several decades, or go into partnership with countries that have the necessary linkages and technology and build from there. We talk about Sri Lankan exports, about tea, rubber and so on but we are also the world’s largest producers of fishing flies for instance. In both manufacturing and services, our location is our oldest advantage but that’s not enough. We need to ensure that value additions in transport and logistics are at the highest end of capability by looking at ports in Dubai and Singapore – we need to move to a high level area because we can’t compete in lower level exports. Q: Will import substitution industries reduce export sector growth? If so, how can Sri Lanka achieve export growth? Kelegama: We have basically debated this issue over the last five decades. The import substitution industry saves a dollar of foreign exchange and export industries earn a dollar of foreign exchange which is of far greater value than the import substitution industry saving a dollar, especially in a small industry. Fine, we can focus on certain import substitution industries but it should come automatically from the private sector and should not be forced by the Government. Ceylon Biscuits Ltd. started as an import substitution industry and is now exporting, reaping economies of scale. Import substitution should come from the incentive regime and should come from the private sector. Cooray: I think there are certain deviations to this. In the 1990s, we had 150 companies that were heavily protected through import substitution policies but the export orientation was disturbed and as a result exports couldn’t grow so the government took a bold decision to close the import substitution industry. The other side of the coin is that as a result of the expansion of the apparel sector, there were very sophisticated and proper quality conscious textile factories set up in this country which created import substitution. There were other sectors that engaged in import substitution for export inputs. Present import substitution is exploring the possibility of curtailing imports that are required for the export sector and are trying to create a quality conscious exporter. Q: What is your perspective on the growth of IT and software exports? Saparamadu: We are being called the silent revolution. The IT/BPO sector is the fifth largest exporter in the country, growing at double digit growth in employment and export growth. How do we go to the next level? How do we export services and more software products to different markets, not traditional markets like US and EU? hSenid exports 50% to Africa and the rest is to Asia and Asia Pacific including Australia. We see a lot of export statistics showing a dip but this industry has been growing. A lot of companies in Sri Lanka have been exporting to these countries without an FTA – the lack of FTA has not had a big impact on the IT sector. Cooray: We as an industry apparel started inventing the way forward through a strategic plan and the current plan dictates that organic growth for apparel production which will be US$ 4 billion, with an additional US$ 1 billion from the new business model which we are trying to create based on the hub concept enshrined in the Government’s policy agenda. The Finance Act No. 12 of 2013 will offer an opportunity for the exploitation of all the logistics strengths we have in this country which is the main element of business activity that has been undertaken in Singapore. Today, what we are trying to do is enter into a new era of business model, elevating the traditional model. Front end services provide the biggest amount of money in the apparel trade and we want to take it on along with transhipment consolidation, which was restricted to the apparel trade, can be undertaken and other sectors will also be able to enjoy move into a new era of business while maintaining the traditional manufacturing model. The FTA with India was a big fight but we got it but for the apparel industry it was merely a confidence building exercise because that quota will give us only a US$ 40 million turnover which is nothing. We took it up with the Indian authorities in order to create synergy between the region and export US$ 100 billion from the South Asian market. We want to expand the FTA more and without that, there is no business sense in focusing on India. Q: Sri Lanka’s currency appeared to be managed under a political agenda and is overvalued leading to non-competitive export pricing – what are your views? Should it be undervalued deliberately to stimulate exports? Athukorala: There is empirical evidence that undervaluation is better than overvaluation and naturally, there is cost involved. Sri Lanka’s ideal situation would be to avoid overvaluation – Thailand, Korea and China all use undervaluation as an export promotion device. |
