Sri Lanka needs a mandate to implement a pro-market, pro-globalization economic policy if the country wished to make a major positive turnaround on the economic front, a top international economist said last week.
Addressing the Sri Lanka Economic Summit 2015, Dr. Razeen Sally who is expected to head the Institute of Policy Studies soon, said that under the previous administration for a decade, Sri Lanka had an effective de-liberalization policy not liberalization policy with a combination of much increased intervention in the domestic economy and increased external protection.
“So whatever the nominal rate of protection we might see from our import tariffs, according to some estimates, import protection has possibly doubled in the past decade because of whole host of extra-tariff barriers and non-tariff barriers, big increase in agricultural protection coupled with arguably a politicized environment for foreign investment particularly for investment into large projects when considering tax concessions and approvals,” Sally, who is the Associate Professor at Lee Kuan Yew School of Public Policy at the National University of Singapore said.
Pointing out to the World Bank’s Ease of Doing Business Report for example, Sally said though Sri Lanka stood at 99th position and did not compare badly in comparison with South Asian countries, its indicators were however very bad both in the individual indicators and the main one when compared with East Asian countries particularly the more advanced nations such as Malaysia and Thailand.
“Nominal average rate for tariffs for Sri Lanka is around 10% which doesn’t compare badly with South Asian countries but badly with East Asian countries which had an average of roughly 5%,” Sally said suggesting that the country should benchmark itself with East Asia or the top five states in India and not South Asia when comparing economic performance indicators.
Hence he said that if the country is to think of a new global economic strategy, it has to be in the context of an overall strategy of national economic reforms with a flanking domestic component.
“This encompasses all sorts of things. Like bringing about macroeconomic stability, bonfire of deregulation of domestic activity to animate the animal spirits of the private sector, land and education reforms etc,” Sally said noting that in addition to concrete measures, what Sri Lanka needed was a strong case for increased trade where the open economy will benefit ordinary citizens and not just the elite.
Exports and imports, Siamese twins
Highlighting the point that both imports and exports are two sides of the same coin, he said that protectionist measures on imports would not boost exports.
“We have seen this in many countries. When imports rise, exports rise. When
imports fall, exports fall,” he said alluding to them as like Siamese twins
He said that this is because imports bring in newer technologies and cheaper goods, which would motivate dynamic local manufacturers to adapt to such changes through entrepreneurship, increasing productivity and competitiveness.
This would automatically boost exports as the Sri Lankan domestic market is too small to cater to manufacturers.
“A tax on imports is a tax on exports in a world of global supply chains. How can Sri Lanka become more competitive? Simplicity. Don’t overcomplicate tariffs. The government shouldn’t interfere,” he said recommending Sri Lanka to draw an import strategy coupled with an export strategy.
Meanwhile, the renowned economist further suggested that Sri Lanka should think of introducing a new Ministry of Trade and Investment following the general election, apply to be part of an evolving Trans-Pacific Partnership (TPP), pursue a Free Trade Agreement with the US, and start to think of trade and investment as a single issue.
“Sri Lanka should assess the TPP very carefully, the costs and benefits once the agreement becomes public, and then make a strategic decision whether it should apply to join the TPP,” Sally said.
“It would be a great branding exercise because it would be the first South Asian country to join 40 percent of the world economy in a new so-called deep integration free trade agreement,” Sally said.
FTA with US
Speaking at the Summit held at Cinnamon Grand in Colombo, Sally said the ‘big prize’ of any trade negotiations would be an FTA with the United States.
“Why? Not just because of the export market. The United States remains the future in terms of being the most innovative economy in the world,” Sally said.
“But also because when we have an agreement with the United States, unlike with India and the others it is a really hard agreement, it is not a soft agreement. And that means more domestic reforms and that is the real prize,” the Lankan-born British citizen said adding that Sri Lanka should get into global value chains, leveraging competencies and advantages in logistical services.