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.

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Driving Global Production Sharing In Sri Lanka

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.

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Joining producer-driven GPNs key to revive exports: Top Economist

Sri Lanka lags far behind the East-Asian countries in reaping gains in exports as it has failed to join producer-driven Global Production Networks (GPNs) despite the country being either equally or better placed than countries like Thailand and Malaysia, a top academic lamented last week.

Delivering a public lecture on FDI and Manufacturing for Export: Emerging Patterns and Opportunities for Sri Lanka, renowned-Economist Professor Premachandra Athukorala said that in the past, although the country did well in joining buyer-driven GPNs with heavy concentration in apparel exports, it fell short of potential in gaining momentum in joining the producer-driven GPNs, where FDI played a key role.

“There is strong evidence that Sri Lanka missed the opportunity of becoming an assembly centre within producer driven GPN because of political instability and uncertainty,” Athukorala said.

Producer-driven GPNs are common in vertically-integrated global industries such as electronics, electrical goods, automobiles, scientific and medical devices with the ‘Lead firm’ being the manufacturing Multinational Enterprise. The bulk of global production sharing takes place through intra-firm linkages within MNE network rather than in an arms-length manner.

“Successful integration of the manufacturing sector into production networks, in particular producer-driven GPNs, have played a key role in employment generation and poverty reduction in China and other high-performing East Asian countries,” Prof. Athukorale said.
He pointed out that based on 2013 statistics on the total share of GPN products in manufacturing exports, Sri Lanka’s producer-driven GPN stood at a low of 8.5% while buyer-driven GPNs formed a majority of 67.2%.

Meanwhile, Prof. Athukorale said Sri Lanka’s immediate policy priority should be to restore policy emphasis on export-oriented industrialisation, set up institutional safeguards to avert further backsliding from reforms, and continue with implementing the incomplete reform agenda.

“The Sri Lankan experience highlights the complementary role of investment liberalization for exploiting the potential gains from trade liberalization. Trade liberalization increased the potential returns to investment by capitalizing on a country’s comparative advantage, while liberalization of foreign investments permitted international firms to take advantage of such profit opportunities,” he highlighted.

He further emphasized that the island now needs to formulate proactive well-targetted policies to attract foreign investors and not solely rely on roadshows as attracting a big international player has ‘demonstration’ effect on others –the so-called herd-mentality in global industries.

Rationalise tariff system to liberalise trade: renowned economist

Sri Lanka’s immediate policy priority should be to restore policy emphasis on export-oriented industrialisation, set up institutional safeguards to avoid further backsliding from reforms and continue with implementing the incomplete reform agenda, senior economist Prof. Premachandra Athukorala said.

Delivering a lecture titled ‘FDI and Manufacturing for Export: Emerging Global Patterns and Opportunities for Sri Lanka’, organised by the think tank Advocta Institute, Prof. Athukorala said Sri Lanka failed to capture the full benefits of trade and investment liberalisation due to the protracted war that undermined the investment climate and macroeconomic stability and that instead of formulating a new model from scratch the Government must learn from the past.

“We have achieved a lot under a lot of constraints - particularly political instability and policy uncertainty. Now that peace is here, the Government has to try and learn from our past instead of thinking about a new model. I think we have a model that has been tested very well. It can generate more benefits to the country if the Government has a very focused plan to continue with this strategy,” he said.

Trade and investment policy reforms initiated in the late 1970s, said Prof. Athukorala, set the stage for globally integrating the Sri Lankan manufacturing sector with Foreign Direct Investments (FDIs) playing a pivotal role.

The Sri Lankan experience highlights the complementary role of investment liberalisation for exploiting the potential gains from trade liberalisation, said Prof. Athukorala, adding that trade liberalisation increased the potential returns to investment by capitalising on a country’s comparative advantage, while liberalisation of foreign investments permitted international firms to take advantage of such profit opportunities.

Responding to a question on Free Trade Agreements (FTAs) at the Q&A session that followed the lecture, moderated by Chief Economist at the Ceylon Chamber of Commerce Anushka Wijesinha, Prof. Athukorala said that though they are called FTAs they are actually not free trade.

“The term FTA is a misnomer,” he said, adding that FTAs have very low utilisation.

“I consider it a political gimmick. The admin compliance costs are too much,” he said.

He suggested that what Sri Lanka needed to focus on instead was the rationalisation of the trade tariff system in order to liberalise trade.

“What is needed is to rationalise the tariff system. People think that higher tariff means more revenue for the Government, which is not the case. There is evidence to suggest that a more uniform, lower tariff system can generate more government revenue simply because the system becomes much more transparent,” said Prof. Athukorala.

Cascading tariffs can be a breeding ground for corruption, warned Prof. Athukorala, adding that if the tariff regime was low and uniform, it competed against smuggling and could improve Government revenue.

Policy inconsistency can also be a killer, said Prof. Athukorala, pointing out that last year saw the lowest FDI levels in history.

The Board of Investment (BOI) was relegated under the last regime and investments were done on a political basis, he charged.

Prof. Athukorala suggested that Sri Lanka market itself internationally to potential FDIs by sharing its success stories and using successful entrepreneurs in proactive investment promotion campaigns.

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FDI lowest in 10 years

Political stability and policy consistency were imperative to attract foreign investments, an economist said.
Professor Prema-Chandra Athukorala, Professor of Economics, Australian National University, speaking at a function in Colombo Thursday said Sri Lanka foreign direct investments (FDI)inflows to Sri Lanka were the lowest on record last year .
Total FDI receipts last year, excluding foreign loans, amounted to US$ 681 million, down from the previous year's (2014) figure of $ 894 million (excluding foreign loans). Last year Sri Lanka held two major elections, the Presidential Election on 8 January, 2015 and the Parliamentary Election of 17 August, 2015.

Central Bank of Sri Lanka (CBSL) Governor Dr. Indrajit Coomaraswamy said earlier that FDI in the first half (1H) of the year was poor, but was looking up in the 2H of the year. According to CBSL, FDI in the first five months of the year, including foreign loans, amounted to a mere $ 164.5 million, down 52.5% year-on-year compared to last year's commensurate figure of $ 346.4 million.
The Sri Lanka's Board of Investment signed agreements for foreign direct investments worth an estimated 1.6 billion US dollars in 2015, up slightly from last year, according to the island's investment promotion agency.
When this reporter asked Athukorala whether it's possible to have policy consistency in a democracy like Sri Lanka, where the island has to go to the polls once in five years, Athukorala said that it was possible, and gave as examples the island's free trade zones (FTZs) established after 1977, as an example of bipartisanship, where no steps have been taken to dismantle FTZs despite 40 years after their establishment, by successive governments.

FTZs, with the concessions offered to investors, are conduits to attract foreign investments.
Athukorala further said that studies have shown that FTZs, and not free trade agreements (FTAs), boost exports. The 'Achilles' Heel' in FTAs is their subtle rules of origin (ROO), he said. Athukorala said that he spoke to a joss sticks manufacturer at Mawanella the other day.
This manufacturer said that he cannot export joss sticks to India by trying to avail himself of the concessions to which exporters are reportedly entitled to exporters under the existing Indo-Lanka Free Trade Agreement (ILFTA) because of India's stringent ROO. A key component in the manufacture of joss sticks disqualifies this manufacturer from exporting to India under the ILFTA duty concessionary umbrella.

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