Lanka ideal as an electronic hub:

India benefits more from FTAs

by Lalin Fernandopulle

When it comes to creating an electronic hub there is no other place such as Sri Lanka due to its distinct advantage of having a skilled workforce compared to many regional countries, said Prof. Premachandra Athukorala of the Arndt-Corden Department of Economics, Crawford School of Public Policy, Australian National University.

He was addressing a seminar on ‘Global Production Sharing and Trade Patterns: Implications for Trade and Investment Policy’ organised by the Institute of Policy Studies (IPS) last week.

Sri Lanka lost opportunities in the late 1970s by failing to retain two large multinational entities (MNEs) such as Motorola and Harris Corporation which planned to set up operations and provide a large number of employment opportunities, Prof. Athukorala said.

Motorola incorporated a fully-owned subsidiary company with an assembly plant initially employing around 2,624 workers and the Harris Corporation in the same year incorporated a fully-owned subsidiary company and commenced building an assembly plant employing 1,850 people.

But both MNEs left Sri Lanka within a few years as political instability and ethnic conflict set in, shattering Sri Lanka’s hopes of becoming an electronic export hub. However, a number of medium-size joint-venture firms set up in the 1990s to assemble parts and component primarily in automobile, electronics and electrical goods industries still operate successfully.

Esjay Electro Mag, a Japan-Sri Lanka venture on electronic components, auto wire harnesses and LED and CFL lighting provided jobs to 250 workers for over 34 years, FDK Lanka, another Japan-SL venture manufacturing magnetic head, printed circuits, optical isolators provided employment to 686, Aerosense, a USA-Sweden-UK entity manufacturing sensors for Airbus provided employment to 2,000 workers and Cable Solutions, an EU-India venture specialising in customised cables are some of the parts and components assembly firms in Sri Lanka.

Prof. Athukorala said Sri Lanka should market itself with proactive and targeted policies to attract foreign direct investments. It should have strategies to woo investors to investment promotional campaigns as in other countries. Sri Lanka lacks such investment promotion campaigns.

He said Sri Lanka needs to improve its business and investment environment focusing on a liberal regime for the services sector. We should not get obsessed with value addition. Large volumes will make up for value addition.

He said 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 transformation of world trade - the dramatic shift in manufacturing exports from developed to developing countries. Sri Lanka’s export problem is home grown. We shouldn’t be blaming the markets.“Free Trade Agreements (FTAs) is not a complete solution to increase global production networks (GPN) which accounts for around half of the global manufacturing trade. Sri Lanka has not gained much from FTAs it had entered into with its regional partners.

The role of FTAs are exaggerated. Its rules of origin are draconian. The FTA mania came after many big countries in Asia entered into such agreements. Sri Lanka should think globally to gain from multilateral trade,” he said.

Trade experts said given the size and capacity, Sri Lanka should not go for FTAs with large countries such as India and China which will be the ultimate beneficiaries. They said India benefits more from the FTA with Sri Lanka.

Sri Lanka had an FTA with India for the past 15 years but still a large quantity of trade is done outside the agreement.

Prof. Athukolra said Sri Lanka should focus on increasing its GPN which has been around 6.2 percent compared to China which is around 20.5 percent in the parts and components and 36.8 percent in final assembly.

He said Sri Lanka should specialise in small components such as car assembling as it hopes to create one million jobs within the next few years. Global production sharing opens opportunities for countries to participate in a finer international division of labour, to specialise in different slices (tasks) of the production process in line with their relative cost advantage.

“In a labour abundant economy, assembly activities within global production networks are relatively more labour intensive and (hence ‘pro poor’) compared to ‘conventional manufacturing’ (production from start to finish in just one country) of the given final product. “Successful integration of the manufacturing sector into production networks has played a key role in employment generation and poverty reduction in China and other high-performing East Asian countries,” Prof. Athukorala said.