In the previous part, we discussed the historical evolution of global free trade and the circumstances that led both Sri Lanka and India to outpace other SAARC members and sign in 1998 the first ever free trade agreement in South Asia. The success of this agreement prompted the two countries to look beyond trade in goods and work toward a comprehensive economic cooperation and partnership, the logical evolution of free trade agreements into their ‘nest generation’ setting. However, just before the proposed Comprehensive Economic Partnership Agreement or CEPA was to be formally ratified by the leaders of the two countries, it ran into hot weather in Sri Lanka heated by a wave of angry protests by groups opposed to it. As a way to diffuse the situation, the government of Sri Lanka unilaterally decided to shelve CEPA and it now remains for both countries to pull it out from its resting place before it gathers dust and set the mechanism in motion for its quick implementation.
In this part, we look at CEPA more closely and the economic consequences which Sri Lanka has to bear if it is not implemented early.
CEPA: Main Components
CEPA, while improving the existing Free Trade Agreement or FTA with India, has added three more new areas of economic cooperation and partnership between the two countries. These three new areas are the free movement of approved services, greater flows of investment and economic cooperation in identified areas.
Improvement on the FTA
FTA permitted free trade between India and Sri Lanka in a large number of goods. But to address the fears of domestic producers in both countries about losing markets, a safeguard was introduced in the form of a negative list of goods which had been taken out from the free trade agreement. The objective was to permit the producers
of these negative list goods sufficient time to gain capability of competing with goods coming from the other country and eventually integrate to the larger Indo – Sri Lanka market seamlessly. Hence, it was expected to periodically review the negative list and remove the goods progressively so that both countries could equally benefit from free trade.
CEPA has proposed to remove only a small number of goods from the negative list immediately. Even then, Sri Lanka has been required to remove only 32 goods from its negative list, while India has agreed to remove a larger number amounting to 114 goods. This has facilitated Sri Lanka to be comfortable with the pace of trade liberalisation without being overly concerned about the loss of markets to India. Even with the removal of these goods from the negative lists, Sri Lanka’s negative list will remain four times bigger than that of India giving a greater protection to Sri Lankan domestic producers.
In addition, in the proposed CEPA, India has agreed to expand the trade in garments and textiles too. While expanding the quota of 8 million pieces of garments that were permitted to Sri Lanka under FTA, India has agreed to increase Sri Lanka’s textile trade too beyond the FTA levels.
This concession is extremely important to Sri Lanka currently, because it is losing garment markets both in the United States and the European Union. The former has been due to the competition from the cheaper products from Bangladesh, while the latter has been prompted by the GSP Plus issues. With the growing middle class in India which is bigger than the combined market of both the US and EU, Sri Lanka should necessarily ‘look north’ to find solutions to its trade issues.
Opening of Services
It is the proposed opening of services under CEPA which has received the fiercest protest from the Sri Lankan professionals.
This is understandable because a sudden inflow of professionals into the local market will increase supply, promote competition and reduce the high professional fees which these professionals could now earn in the relatively protected market. However, the local consumers will benefit immediately due to greater opportunities and lower fees and the Sri Lanka’s economy in the long run due to the improved quality of professionals. Even without CEPA, this has already taken place in the case of education and health services. A large number of Sri Lanka students who cannot get enough higher education places within the country proceeds to India every year; similarly, many patronise Indian hospitals for quality medical treatment for many serious ailments. This is a situation where the consumers cross the borders at great costs to buy services from another country. Under CEPA, it would be the service providers who will cross the borders making it more convenient and cheaper for the consumers in the host country.
Many have feared that CEPA would open up the services sectors of the two countries wholesale in an equal manner, but that is not the case. India has offered to make a deeper and a wider opening of its services sector to Sri Lankan professionals. Sri Lanka has been requested to do it in small measures gradually. Accordingly, India would open up 80 sub sectors upfront, while Sri Lanka would do so only in 20 sub sectors. In this manner, India will allow unlimited number of visas to executives, managers and specialists to work in India; Sri Lanka will do so only in two sectors, namely, IT and
maritime services, but thereagain, it is limited to investment projects made by Indians in the country.
Indian Investments: a Must in the Current Context
Sri Lanka’s drive toward an accelerated phase of growth requires investments in massive proportions. Given the country’s low savings and the government’s chronic dissavings in the budget, the widened savings – investment gap has to be filled with foreign resources. In view of the dwindled concessionary foreign resource flows, the country has recently tapped the costly commercial markets abroad to raise the required funds. But, this is not an advisable policy strategy in the long run because it invariably drives the country to an inescapable foreign debt trap. In these circumstances, as this column had highlighted earlier, foreign direct investments or FDIs are the country’s savior.
Sri Lanka’s past track record in attracting FDIs has been rather dismal. When comparable countries like Vietnam had been mobilising FDI flows worth of billions of dollars year after year, during the five year period from 2005 to 2009, Sri Lanka managed to attract on average only $ 461 million per annum. In 2010, though the target was modest one billion dollars, according to the performance of the first half of the year, it could at most attract only a flow of $ 600 million. In these circumstances, Indian private investments in Sri Lanka under CEPA have to be viewed as an unexpected bonus about which the country does not have to do much canvassing or lobbying.
Economic Cooperation: Sri Lanka is the Beneficiary
India is emerging as a world economic power and some analysts project that it has the potential of growing even faster than China. The reputed British journal, The Economist, in its issue of 2nd October, 2010, has expressed confidence that India could outpace China due to its still growing work force and strong and versatile private companies. When compared to Sri Lanka, India’s technological and scientific base is much improved and developed. Hence, by going into an economic cooperation pact with India, Sri Lanka always stands to benefit.
The areas of cooperation as identified by the Joint Study Group appointed by the two countries in 2002 to study on CEPA are in transport and travel, air services, ferry services, railways, ICT, ocean resource exploration, education, health, agriculture and sports. In addition, a recommendation has been made to establish a higher education institute in Sri Lanka with Indian support in the style of India’s reputed Indian Institutes of Technology.
Sri Lanka Sleeps, but India acts
While Sri Lanka has been sleeping over CEPA for over 7 years since 2003, India has been active in negotiating or signing comprehensive economic cooperation and partnership agreements with a number of countries. First, it was with ASEAN in terms of India’s ‘looking east policy’ promulgated in early 1990s. Accordingly, a comprehensive economic cooperation agreement or CECA was signed with ASEAN in general in 2003. To make it more comprehensive and tailor - made, individual CECAs are now being negotiated with Thailand, Malaysia, South Korea and Singapore and all these agreements are expected to be completed before the end of 2010. Outside ASEAN, a similar agreement is being negotiated with Japan too on the basis of a Joint Study Group Report completed in 2006. India expects to conclude this agreement shortly.
Moving further forward from its initial looking east policy, India has now been looking in all directions: looking north (EU, Pakistan and Nepal), looking west (Gulf countries, Mauritius, Americas and Chile) and looking south (South Africa). This pragmatic approach by India is due to the recognition that its future depends on its successful integration to the global economy.
Despite its huge domestic market of which Sri Lanka should be envious, India and Indian companies believe that they should build a viable export base in order to harness the economies of scale in the long run. This should be done not by offending or annoying the potential economic partners, but by cooperating with them. This is similar to the ‘leap-frogging’ policy pursued by Singapore in its initial phase of economic development. India too is leap – frogging around the globe in search of new markets and opportunities.
Many in Sri Lanka believe that India cannot do without Sri Lanka. India’s $ 1.3 trillion economy is about 43 times bigger than Sri Lanka’s $ 40 billion economy. Similarly, India’s $ 177 billion export industry is 22 times bigger than Sri Lanka’s $ 8 billion export industry. When India has accumulated $ 76 billion worth of FDIs up to end of 2009, Sri Lanka has done so only up to a woeful amount of $ 3 billion. So, without Sri Lanka, India can exist, sustain and prosper. But for Sri Lanka, Indian support is definitely a booster when it comes to realising its future economic aspirations.
Sri Lanka Should Look North, East and Everywhere
For Sri Lanka, India is an important source of economic energy. In the ancient times, Sri Lanka had immensely benefited not only from material goods that came from India, but also from various scientists, spiritual leaders, philosophers and artisans who crossed the borders without any hindrance. Hence, in the current period, Sri Lanka should first ‘look north’ to its mighty big brother for support. But, dependence on a single country is also a risk, as noted by Lee Kuan Yew when he planned Singapore’s initial development programmes. Hence, Sri Lanka should diversify its economic relationships covering as many countries as possible. In this exercise, Sri Lanka should therefore start ‘looking east’ toward, ASEAN, China and Japan. Then, Sri Lanka should look west (EU and Americas) and South East (Australia and New Zealand).
What this means is that Sri Lanka should have CEPAs not only with India but also with all other trading partners.
In the next part, we will discuss myths and realities about CEPA with India.
(W.A. Wijewardena can be reached on waw1949@gmail.com)
No comments:
Post a Comment