30 October, 2020

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Sri Lanka’s Economic Hotchpotch

By Kath Noble

Kath Noble

The Government’s economic policy is quite a mystery. It combines elements of what economists regard as completely contradictory ideas, unencumbered as it is by any clear ideology or even vaguely worked out plan of action.

Consider its approach to international trade.

Last week, the Indian media reported that India’s largest car maker Maruti Suzuki is to decide on whether to set up an assembly unit in Sri Lanka by the end of this financial year. It would be its first overseas venture.

Its chairman was quoted as saying that the initiative is being considered in the wake of significant increases in tariffs by the Sri Lankan authorities. Maruti Suzuki exported 15,000 vehicles to Sri Lanka in 2011/12, accounting for half of the 29,000 new cars sold in the country – preowned vehicles made up the remainder of the total market of 59,000 vehicles. But sales have dropped sharply.

Import duty on cars has been increased from 120-291% to 200-350%, while import duty on threewheelers and twowheelers has been increased from 51-61% to 100%. Excise duty has also been increased.

Sri Lanka is the largest export market for Indian cars, earning them $800 million in 2011/12, so manufacturers have responded with considerable concern.

Typically, it has been portrayed as a move to undermine India in favour of China. The story in the Business Standard referred to a $20 million investment by a Chinese company in an assembly unit in Sri Lanka, suggesting that the changes in the Sri Lankan tariff regime were part of the Mahinda Rajapaksa administration’s enthusiasm for all things Chinese.

That Sri Lanka has moved closer to China in recent years is undeniable.

China has become Sri Lanka’s biggest donor. As Saman Kelegama of the Institute of Policy Studies noted in a recent speech, China provided 25% of the Government’s foreign assistance in 2010, up from virtually zero a decade ago. The major donors in 2000 were the Asian Development Bank with 27% and Japan with 20%, which now account for only 11% and 13% respectively.

He repeated the long list of projects in which China has been involved – from the not so appreciated Norochcholai coal power station to the as yet unproven Hambantota port and airport via the Southern and the Colombo-Katunayake expressways, the Moragahakanda hydro power and water supply project and the surely purely decorative Nelum Pokuna theatre.

India is extremely keen for people to draw attention to the potential dangers of depending on Chinese aid, and Saman Kelegama referred to a couple. He said that the interest rate is generally high, while China usually insists on the use of Chinese workers.

He also claimed that technology transfer was relatively limited, compared to Indian assistance.

These may indeed be problems, but at least as I have argued in previous columns the Chinese don’t have grand ideas about how the Sri Lankan economy should be run, as is still the case with the West and Western influenced multilateral institutions like the Asian Development Bank.

One problem that he didn’t note is the lack of transparency, with the details of projects undisclosed and thus opportunities for corruption multiplied.

Really there are no great deals to be had with aid. All countries give while expecting to receive – now or later – which is why trade and investment is so crucial.

We’ll come to that shortly.

But it is not only China that has been providing more funds to Sri Lanka of late. India is now the second biggest donor, accounting for 15% of foreign assistance in 2010, again up from very little a decade earlier. Indeed, the increase in Indian finance to the Government may very well be a direct result of the increase in Chinese finance, since India is trying hard to avoid any erosion of its influence.

Sri Lanka’s links with India have been growing too.

If there is a competition between India and China in Sri Lanka, both are winning when it comes to economics.

And the changes in tariffs on vehicles play no part in it.

They are actually elements of a surprisingly positive yet completely unpublicised effort to promote local industry that has seen four assembly units being set up since 2006, not just involving Chinese firms but involving Indians and Koreans as well, according to a paper on economic policy under Mahinda Rajapaksa by Australia based economists Premachandra Athukorala and Sisira Jayasuriya.

The authors would appear to be gung-ho neoliberals, so they are not very keen on either the policy or Mahinda Rajapaksa, but they do suggest that it has had an impact.

It certainly shows that there is an alternative to the Government’s most common practice of offering investors a whole lot of freebies if they deign to come and do business in Sri Lanka, as I discussed a couple of weeks ago with regard to its plans for higher education.

This is what I mean when I say that its economic policy is a hotchpotch.

And one can’t even rely on the mess to remain the same over time – its shape and dynamics are constantly changing.

Last week, as Maruti Suzuki was talking about setting up an assembly unit in Sri Lanka to get around the increased vehicle tariffs, the Government announced that it was pursuing a Free Trade Agreement with China. According to a statement by senior Communist Party member Liu Yunshan on the occasion of his visit to Sri Lanka, negotiations have been going on for six months already, although this is the first the public have been told about it.

Without a proper plan for the economy – dreaming of making Sri Lanka the centre of the world as in the now infamous five hubs strategy doesn’t count – it will be extremely difficult for the Sri Lankan side to do a good job.

Since China thinks much further ahead and a lot more seriously about literally everything, there are plenty of reasons to be worried by this news.

The Free Trade Agreement with India did not turn out to be very helpful in securing for Sri Lankan businesses access to its huge market, despite the hype put about by the Government and its ever willing supporters in the media. As I have discussed in other articles, its major success was in helping Indian manufacturers of a couple of products using raw materials from Southeast Asia to circumvent high tariffs in India by temporarily basing part of their processes in Sri Lanka – trade which slightly improved Sri Lanka’s balance of payments while it lasted, but came to an abrupt end when India changed its tariff regime.

China’s huge market is likely to be at least as difficult to crack.

Meanwhile, with a Free Trade Agreement, Chinese goods that Sri Lankans are already buying in bulk would enter the country without tariffs, making them cheaper and thus more attractive for consumers, but also reducing the already very limited revenue of the Government and using up even more valuable foreign exchange.

Of course, the Government may not actually sign – this may end up like the Comprehensive Economic Partnership Agreement with India, which has been negotiated for almost ten years and finally appears to have been dropped.

It’s not generally considered a good omen when not getting around to or not being able to decide on a course of action is regarded as the best possible outcome.

*Kath Noble’s column may be accessed online at http://kathnoble.wordpress.com/. She may be contacted at kathnoble99@gmail.com

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Latest comments

  • 0
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    I dont see how raising tariffs on imported vehicles can be beneficial China vs India specifically .Also I see a Govt that bends over backwards to make sure big companies are investing in the counrty . Its a I dont see what else they should be doing

    • 0
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      Great stuff – keep it coming Kath!
      Indeed there is nothing to chose between the so-called AID/ loan givers! They are all it it for the ride and benefiting the Rajapassa military dictatorship – but China is the worst when it comes to actively supporting the military dictators in Asia and Africa.
      Of the neo-libearal loan givers the WORLD BANK is the WORST – funding the Ministry of Defense and the bloated armed forces via the UDA.. AID LOANS as we know are FUNGIBLE.
      The principle of “DO NO HARM’ and “conflict-sensitive aid” is out of the window it seems in post-war Debacle of Asia. There is no donor talk about demobilizing or decommissioning, down sizing and right sizing the bloated military. Or the frigging Knowledge Bank (WB) and IMF pointing out the that MILITARY BUSINESS is detrimental to the economy. The World Bank should be SHUT DOWN!

  • 0
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    Wowee! A Chinese free trade agreement that would allow us to flood the Chinese market with our tea. Now that would be something.

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      So then, before long, there will be hatred against chinese in the country.

    • 0
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      They drink green tea not black. They use outer cinnamon bark not the sap. They use large cinnamon variety not the green. As their minister of trade informed his counterpart in SL their interest is natural rubber as from Mao days.

  • 0
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    .
    Not just Tea, stray dogs as well.

    :-)

  • 0
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    China is racking up Trillion USD plus surplus.year after year.

    And no sign of any letup in the forseable fututure.

    What is a few Billion to write off as bad debt, when they have a balance sheet like that.

    And we have valuable tangible assets for them to use in the future.

    Besides ,even Cathy’s relos are after the Renminbi to keep their Economies afloat.

    Plus, if they give something to our poor inhabitants they not only have the loan interst agreements, but they want caveats on behalf of third parties.

    Why would Maruti want to assemble cars in Trinco when the market is in India?.

    Don’t they have enough workers among the 600 Million poor soul some of whom are very close to Trinco in Vaiko land.

    Even the one hundred thousand LTTE refugees in Madras may be a valuble source for labor, if they can be skill trained with some of Ms Pillai’s Humanitarian Budget.

    As our per capita increases. the Govt sould look at importing food items, that the inhabitants consume from more hygenic parts of the world although we have a FTA with our neighbor.

  • 0
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    In practice according to the Chinese the Brits and Americans have many restrictions for Chinese investment even in low tech infrastructure so they purchase outright and take it all away like the MG automobile. However in Germany China has purchased “brands” “products” eg. The world’s best pneumatic pumps and are retaining the total workforce (Germans pride in the work they do) while elsewhere they have to bring in their own labour for a win/win contract. No doubt the Chinese don’t socialise as for them there are no friends but mutual interests. So aren’t we between the devil and the deep blue sea. Rather than keep all its eggs in one basket and external tariffs China has invested most of its earnings worldwide and SL is only a drop in the ocean.

  • 0
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    Dear Miss Kathy Noble,

    “The Government’s economic policy is quite a mystery. It combines elements of what economists regard as completely contradictory ideas, unencumbered as it is by any clear ideology or even vaguely worked out plan of action.”

    Answers.

    1. The economic policy is tribal policy or gang policy. It is called the family. It’s primary gal is to benefit the inner tribal members, and secondary policy is to benefit the greater tribal members like the ministers and their goons.

    Look at the kith and kin of Rajapaksa in the economy.

    The crumbs are picked up the populace who fall outside these two categories.

    2. “He also claimed that technology transfer was relatively limited, compared to Indian assistance.”

    There is a lot of truth to this, plus the language and cultural barrier. Assembly locally, will lead to diffusion of skills and knowledge among the local labor force, and it is good, as compared to just importing and selling.

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    Not just Sri Lanka, but more advanced countries (ie Australia, Canada) too seem to think that mega infrastructre projects are the way forward. Development projects in Sri Lanka are complicated by geopolitics, and justifiable concerns emanating from past and not so past unfriendly actions and unwelcome overtures by India, and being forced to recaliberate the positions w.r.t to India/China. Revenues from projects such as freeways, airports offer attractive, stable, long term income streams to investors as they (mainly institutions) are partial to risk aversion post GFC. However, in Sri Lanka, there is a sense that the focus on mega projects are taking place at the expense of smaller projects, that if encouraged (smaller projects) will benefit the small business(men/women) and the larger populace. Assuming the author is also suggesting investment/development should be more inclusive, I am all for it. The geo-political dilema Sri Lanka is faced with in attracting investment from India and China, is not a creation of Sri Lanka, but is largely responsible for the “Economic Hotchpotch” the author has highlighted.

  • 0
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    This article is another hotchpotch!

  • 0
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    /*Without a proper plan for the economy – dreaming of making Sri Lanka the centre of the world as in the now infamous five hubs strategy doesn’t count – it will be extremely difficult for the Sri Lankan side to do a good job.*/
    The country economy is managed in a village Kopi kade style.
    Our leaders think if they builds the roads, ports, airports the country will develop by itself in auto-pilot mode.

    Think how Lee Kuan Yew planned the Singapore economy and how our leaders messing up.

    Kath Noble just give up. useless in giving any advise to the leaders.

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    I think rasing tariifs on Indan car makers was a good move. Sri Lanka is already their biggest overseas market. This will force them to build/assemble vehicles in SL if they want to continue. It will increase business at Hambanthota port as well.

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    Sri Lank should be more concerned with Indian investment and not Chinese investment. We already have enough of Indian involvement in the country.

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      What have you got to give the Chinese for a “Win Win”? Just natural rubber to make French leather to stop the Chinese baby but there is a 97 million single woman site started by a college girl.
      50% of Indian imports is from China and there is nothing the government can do about it. At least the Indians were honest enough for once to admit that they fail in delivery on time where the Chinese excel but not the British; never. All over the world the Chinese have the balance of trade in their favour and are only interested in high tech at present that SL can keep dreaming.
      India supplies China the software while the hardware is supplied by China.
      The Russians and Chinese buy the Range Rover manufactured by Indian small giant TATA in England- you cannot escape 200 years of commonwealth for a Mao relationship when it’s trade interests NO.

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    Why not? If it is in the interest of both countries a Sri Lanka-China Agreement is a welcome thing. Why should we worry about India in the matter. After all, we have right to make our own independent choices.

    ADJP

  • 0
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    Why or why does ANYONE observing Sri Lanka today PRETEND there is an economic policy of any description in operation?
    The only “policy” is simply one for the Rajapassas and their friends to rob every cent they can from our country.
    THAT IS THE SIMPLE TRUTH AND TO PRETEND OTHERWISE IS SIMPLY NOTHING SHORT OF TERMINAL BLINDNESS.

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