Economist urges more investment protection

To drive global production sharing in Lanka

Sri Lanka should cut barriers to trade and investment to attract foreign investors into electronic component manufacture, top trade economist Prema-Chandra Athukorala 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 a decline in Sri Lanka's share in world manufacturing exports from around 2000, said Athukorala, who is a Professor of Economics at the Australian National University and a top consultant on international trade to a host of international organisations. The liberalisation undertaken in the late 1970s 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 (taxes over and above normal 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 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% 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% of world manufacturing trade in 2012-3 and its share 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 emphasized 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 Foreign Direct Investment.

The BOI was at one time a one-stop-shop for approvals. Now various ministries have passed legislation diluting the powers of the BOI leaving investors with little choice but to approach ministries and line agencies.

Sri Lanka Tourism has taken over the approval of industry specific projects and large scale strategic development projects are handled by the Treasury and cabinet review committee. Moreover, there is a high degree of variability in incentives offered across various products/sectors and among firms with ample room for the discretion of BOI officials over actual viability and national economic gains. This creates unnecessary hassle and uncertainty for investors.

As the country is integrating into a global production network it is necessary to import as well export therefore trade liberalisation; the free import of intermediate products and components; must go hand in hand with investment liberalisation.

Prof. Athukorala is an Advisor to the Advocata Institute. The talk was part of a series of lectures on improving Sri Lanka's economy hosted by Advocata.