Positioning Sri Lanka in the global economy

By Cassandra Mascarenhas

Setting its sights on placing Sri Lanka in the global economy and expanding its reach in overseas markets, the Sri Lanka Economic Summit 2012, the Ceylon Chamber of Commerce’s annual flagship event, aptly themed ‘Positioning Sri Lanka in the Global Economy,’ commenced last evening at the Cinnamon Grand.

In the context of changes in the global economy, with slow recovery of the Western economies and Asia gaining ground, the Ceylon Chamber of Commerce believes that it is apt to review Sri Lanka’s positioning in the global economy, at the Sri Lanka Economic Summit for 2012.

Being held for the 13th consecutive year, the summit today and tomorrow will be composed of several technical sessions on opportunities in the emerging markets, branding, skills and productivity development, ease of doing business and so on, which are fundamental for Sri Lanka in the medium to long term and to help Sri Lanka better position itself in the global economy.

Ministers, key Government officials and private sector leaders – both local and foreign – will discuss strategies on positioning Sri Lanka in the global economy at the summit.

Opening remarks

The inauguration of the three-day summit commenced with a welcome address by Ceylon Chamber of Commerce Chairman Susantha Ratnayake.

 In his opening remarks he stated that the fact that the summit is being held for the 13th consecutive year was ample testimony to the chamber’s efforts of bringing together policymakers, implementers, the business community, academics and experts to comment, critique and provoke thought in this important phase of Sri Lanka’s history.

“With the end of the war, Sri Lanka had a tremendous opportunity to set itself on a new path of development. Whilst a lot of good work has been done, a lot more needs to be done to achieve the eight plus economic growth that is needed for the people to reap the peace dividend,” Ratnayake observed.

“It is not going to be easy, as seen from the recent setbacks, as we adapt to a normal environment. New thinking and a new mindset are needed as we cannot keep blaming everything on the conflict anymore. The bold decisions taken to arrest the trend needs to be applauded. However, we need to maintain the momentum, especially in the context of a volatile global environment.”

On these lines, he noted that it was pleasing to see the Government’s commitment to an ongoing programme with the IMF. Ratnayake went on to say that in the midst of these developments in Sri Lanka, there is lot of uncertainty to be seen in the global economy as well, which has diverted attention to Asia. With most of the emerging economies being in Asia, the world is looking to Asia to lead growth.

He observed that this ongoing shift in the centre of gravity in the global economy from West to East creates new challenges and opportunities for Sri Lanka, adding that priority needs to be given to identifying ways and means of maximising the advantages for the country’s economic geography.

“It is in this context that we felt it apt to deliberate on the theme ‘Positioning Sri Lanka in the Global Economy’ for this year’s summit. We need to respond quickly to the changes in the local and global scenarios to seize opportunities and reduce risks strategically.  In this context, it is critical that the key stakeholders – policymakers and the public and private sectors – act in a concerted and cohesive manner. However, time is of the essence, if this is not to be yet another missed opportunity,” he asserted.  

Lessons from SAARC countries

Up next was the guest speaker – author, columnist and management consultant Gurcharan Das, who spoke on the topic ‘Are There Lessons for Sri Lanka from the Experiences of the SAARC Countries?’

He commenced by stating that there was history made in the subcontinent on 29 February 2012, referring to the breakthrough between India and Pakistan to have a free trade regime.

“Going forward I think this is a very significant thing as this was what was basically stopping the future of regional free trade. History shows that these regional free trade agreements do enormous good for the prosperity of everyone,” Das said.

To drive his point home, he drew upon the example of the Free Trade Agreement made between Mexico, Canada and United States with Mexico being the country to benefit the most from it.

“Speaking from my own experiences, we shifted 47 factories form the US to Mexico. Mexico created an inviting environment for investment so we can do the same thing now with SAFTA. The one hurdle that was in the way has gone. Trade is good and free trade is even better and that is what ultimately brings prosperity to nations,” he noted.

Das added that if we play our cards right, everybody would win. The smallest countries would win more than the bigger countries as long as the smaller countries remain attractive or investment. In order to attract investment a country needs to have peace and secondly, the rule of law. He emphasised on the importance for investors to feel that nobody is above the rule of law.

“I would say that Sri Lanka is at a very fortunate period of time. It is surrounded by two big countries – India and China, countries that in the last decade have been the two fastest growing countries in the world. If you hitch along with these two countries you can go along to glory in terms of prosperity for your people.”

India has made mistakes as has Sri Lanka, Das acknowledged. India made the mistake of nationalising banks and while India has recovered from this, he pointed out that Sri Lanka is yet to recover from the nationalisation of the country’s tea trade. He stated that these are the sort of things that hurt a nation and to become attractive to investors, a country has to make sure it does not take such measures as one such step can destroy the credibility of a country.

Again going back to India, Das noted that India has had great prosperity over the last couple of decades but this has slowed down partly because of the international climate as well as internal issues. A third of India is made up of the middle class. One per cent growth rate in India means 1.5 million new jobs directly supporting 7.5 million people – a two per cent drop affects 42 million people.

“By 2020-2022, 50 per cent of India will be middle class. The thing that defines India today is that prosperity is happening, but the country has very poor governance, which is ironical. India is rising despite the Government, while China is rising because of the work of its Government and the major infrastructure built by it,” he said.

“You need essentially to have better governance to grow – both Sri Lanka and India require this. Investors want predictability and governance offers that. With a seven to eight per cent growth rate, the countries will eventually turn middle class, but the race is between which country will fix its government first. If China fixes its politics before India fixes its governance, China will win the race and vice versa. It is a very difficult race and no one knows who will win that race.”

The key lesson here, he pointed out, is the reason we are stuck right now is because we have not reformed and corruption occurs when you don’t carry out reforms. The lesson here is to get governance right, after which the private sector in Sri Lanka will just take off.

As far as China and India are concerned, they both think they will become rich one day, but unless they fix their politics and governance, they will get stuck in the middle income trap, which is what the Latin American countries fell into and stayed in for decades.

“You need to be able to move rapidly – the problem in India right now is paralysis. The second thing you need is the rule of law and the third thing is accountability – three requirements of a successful nation. The rules of business and economics are universal – there is no such thing as a Sri Lankan way of doing business,” he concluded.

Sri Lanka’s advantages

The Chief Guest, representing the President, was Senior Minister for International Monetary Co-operation and Presidential Advisor Dr. Sarath Amunugama, who started out strongly by stressing on the need for each country to make use of its competitive and comparative advantage.

Listing out Sri Lanka’s advantages, he said that the first and obvious advantage is that the country has ended a debilitating 30-year war. “We can immediately see some of those benefits, particularly in an area which is emerging as a problem – the issue of food shortage. We have a very fortunate positioning with our land reform policies and fertiliser policies.

“Our tea plantation sector is completely privatised. The State companies don’t even comprise five per cent, but as far as food security area is concerned, with the north and east agricultural sector, we are now in the comfortable position of being self-sufficient. We have a strong plus factor – strong and favourable results of our agricultural sector both domestic and commercial. What was called rice politics has been eliminated once and for all.”

Other advantages include the country’s long-term investment in education and social welfare, which must now be harnessed so that Sri Lanka can reap the benefits of this investment. This requires a radical change in curriculum and infrastructure and Amunugama assured that it was going to be done in the near future.

He then moved on to the advantages of Sri Lanka’s geographical positioning; being almost equidistant from the Middle East and Far East, two-thirds of the world’s shipping goes by Hambantota as well as a number of very strategic oil veins. “These are very important geological factors that we have to exploit and we have commenced doing so, for example, by building the harbour in Hambantota.”

Amunugama pointed out that Sri Lanka also has a great advantage in terms of having a universal education, which includes women. This has encouraged family planning and health, resulting in very manageable population growth.

“These are some of the areas we need to exploit in our future planning and we are doing so in a difficult time. The Euro zone’s problems are now affecting the BRICS countries, which were seen as a buffer. We are also going to feel that in the Asian context, we are the least likely to be badly affected – our manufacturing and exports sectors are not as strong as we would wish them to be and while this is not something to be proud of, it does reduce the risk factor,” he admitted frankly.

Remittances are generally glossed over as being a temporary phenomenon, but many Asian countries have proved this to be a very crucial and vital area, which Amunugama felt should be looked into. Tourism is an area in which the CCC has got involved, but again he stated that much more should be done, backed by policy consistency.

“There needs to be more in terms of fair play. We are small enough to think out of the box. Sri Lanka is the best destination for the new Indian middle class and we need to rethink this relationship. With the changing reality in Asia, we need to think of the new tourists who will come into the country.”

“As a small country we need to have our own strategies of growth. We cannot be emulating all the approaches of other countries, because whether we like it or not in the next couple of years there is going to be protectionism one way or the other. The CCC is the best place to think about the model we should create in this time,” he said.

He also added that the Government would give the dedicated, capable and entrepreneurial business class in Sri Lanka a lot of opportunities. “Up to now the amount of FDI to this country and the involvement of the private sector have been far lower than what it should have been and we should optimise this.”

Emerging prospects and regional cooperation

Wrapping up the evening’s procedures, the keynote address titled ‘Emerging Global and Regional Prospects and the Benefits of Regional Cooperation’ was delivered by World Bank South Asia Chief Economist Dr. Kalpana Kochhar.

First giving a broad perspective of the global outlook, Kochhar stated that the bottom line was that the world’s risks and vulnerabilities were very high, largely due to inconsistent economic policies and the lack of political will in advanced countries.

“Developing countries, including Sri Lanka, face a bumpy ride ahead and Sri Lanka’s best near-term defence is a strong offence, by implementing policies to boost investor sentiment, regaining competitiveness, attracting FDIs, diversifying exports and building a strong foundation for sustainable growth,” she suggested.  

Outlining some of the hard realities facing the Euro area, she pointed out that the Euro zone at its inception was not an optimal currency area and now desperately needs a single and united fiscal policy and fiscal authority, but is unlikely to get one anytime soon. Furthermore, the Euro area banking system is in trouble and Euro zone institutions seem to be poorly placed to deal with these problems.

“What happened was that there was very little productivity growth in the countries that are in trouble now. If their exchange rates were flexible, they would have depreciated and they wouldn’t have been in so much trouble, but this was not possible. They don’t have a lender of last resort capability, therefore central banks cannot print money, leading to a long-drawn-out crisis with no immediate solutions,” Kochhar explained.

The US is doing slightly better but in the short-term there is nothing to get excited about. Large emerging markets such Brazil, China and India and to a lesser extent Mexico, Russia and South Africa have seen their currencies experience depreciation – a combination of home grown issues and the global situation.

Moving to Sri Lanka’s positioning, Kochhar noted that in recent years, Sri Lanka has done relatively well compared to other developing countries. The peace dividend has been large, but a continuation of recent trends can’t be taken for granted, she warned.

“Sri Lanka’s best near-term defence is implementing long-term growth policies to boost investor sentiment, enhance competitiveness, diversify products and markets and build a strong foundation for growth. For Sri Lanka to meet the goal of eight per cent annual growth, it will have to meet the increasing challenges of a competitiveness global marketplace,” she stated.

Kochhar observed that while maintaining five per cent average growth throughout the conflict was good, it is still well short of the rate of the ‘elite high growth’ countries. “There is a lot of work to do in a difficult domestic and global arena.”

Unlike most countries, Sri Lanka’s demographic dividend has peaked and not having this tail-end is an issue the country has to contend with. The other set of difficult circumstances facing Sri Lanka is female labour force rates. Given the demographics of the country, there is little choice but to have a more highly skilled labour force and a higher participation of female labour.

Tertiary enrolment rates have been much lower than most countries at one per cent. “There is no doubt that it has to increase as Sri Lanka does not have the benefit of relying on labour intensive production unlike other countries and needs to address this issue immediately.” Sri Lanka is also quite heavily exposed to the Euro area and while the country was initially hailed for being the first country in the area to open up to the rest of the world, it is now losing ground and trade as a percentage of GDP dropped to 45 per cent at a time the rest of the world was integrating, therefore Sri Lanka is smaller and less integrated now.

“Despite a proliferation of incentives, FDIs have been stagnant. Net FDI has been hovering at around one per cent, which is very low in terms of international standards and is far too low to form links in global production networks. The point of all this is that it needs closer integration with its faster-growing neighbours – clearly, the share of exports with India has gone up, but the country can do more to be a more dynamic partner with China.”

Another issue is the impact of real exchange rate appreciation, which has caused a secular shift of resources from the tradable sector to the non-tradable sector. There has been a shift in the composition of production in Sri Lanka towards non-tradables and this raises the question whether this trend is sustainable in a small open economy like ours.

Pix by Daminda Harsha Perera