By Ruvan Weerasinghe –

Dr. Ruvan Weerasinghe

The metamorphosed version of CEPA, the Economic and Technical Cooperation Agreement (ETCA) has sparked off various segments of our industry, and our politicians to respond in diverse ways. Much of this has been either of a knee-jerk type or of text-book economic theory. The former reaction is connected with the general dislike of our neighboring big brother, while the latter harps on the size of the market that will open up to us. In this article I want to show why both these reactions are flawed.

Market liberalization

In order to bring some logic into the argument, we first need to take the India factor out of our discussion owing to various, mostly negative connotations that are evoked. In order to do that, we can ask ourselves, is it good to liberalize our service industry to Country X? In order to give some context, we may need to also consider at least two parameters of Country X: its size in terms of population and its political/economic status. In order to focus our debate, we should set both these parameters at higher values than ours.

The rather simplistic argument of many of the politicians has been that it is advantageous for a small country like Sri Lanka to enter into a large market. This assumes that there is an absolutely equal playing field. This assumption is flawed owing to the second parameter: which country on earth that is stronger in terms of its political and economic status than us, would sign an agreement that is more advantageous to us than to them[1]? However, we should avoid throwing the baby with the bathwater. There are many examples of larger, more powerful countries benefiting neighboring smaller countries owing to liberalization, such as possibly Bhutan and recently Myanmar in our region and Vietnam and Cambodia not far from us.

The human resource factor

What we need to then ask is, when is it mutually beneficial for a smaller, less powerful country to open its market to a larger country which most probably will stand to benefit more? Many of the examples that have been proposed as success stories in terms of increased foreign direct investment and exports, have not brought the social costs into their calculations. Even if we leave that aside for the sake of this argument (though we probably shouldn’t), the countries in these examples were mostly not just smaller in size and political/economic status, but also impoverished in terms of the quality of their human resource: something that usually is rarely considered. In our situation, this is clearly not the case for the industries that have been linked with the CEPA/ETCA discussion: medical, engineering and IT professionals. In our case, arguably, the per capita human resource quality is higher than most countries in the region[2].

As such, even if we reject the justification of protectionism for fledgling industries (brought originally by no less than Adam Smith) by pointing to modern experience, we need to re-examine the conditions under which a particular industry is ready for liberalization. This indeed is what the developed countries do: strengthen their relevant industries to a level after which liberalization doesn’t hurt, but benefits that industry.

For a change, how about looking at countries such as Ireland, Switzerland and Israel as models rather than Myanmar or Vietnam? These were small countries with highly skilled human resources – not too unlike us. Their models of liberalization may shed some light on how to get this right.

Industry = IT

After we have cleared our minds about the timing, benefits and issues we need to be prepared for when liberalizing a particular industry, we need to come to the current focus in the debate we are faced with.

Let’s look at the industry first: IT. The IT industry is asking the government, if ETCA is the answer, what is the question? This is a first alert sign: didn’t the government seek the views of the industry before singling out that industry? Neither SLASSCOM nor FITIS had been involved in any consultation until more recently they demanded an audience. It is a body of IT professionals, the CSSL, that has been trying to alert the industry with little success[3]. The even more worrying fact was that even the state entity for top level policy in that industry, the ICTA, were mostly oblivious about the plans of the government! This is an ideal situation for any country to benefit from a free-trade agreement with another: an industry that has not got its act together.

Of course the IT industry as a whole does not only consist of the companies that sell software products and services, there are at least two other sectors of the industry: the education providers and the hardware manufacturers. These three interlinked sectors of the industry are at very different stages of evolution in the Sri Lankan context: the products/services sector is arguably the most mature and organized, the education providers sector is highly polarized between an over-regulated state sector and an unregulated private sector, and the hardware sector is in a fledgling state.

Liberalizing the IT industry without careful thought therefore would have unexpected effects on the industry as a whole. For instance, those that provide IT services could benefit by cheap labour which could potentially raise the bar on efficiency while also resulting in much larger attrition rates for instance. On the other hand, IT product companies which have penetrated niche markets globally could suffer by being forced to cut costs and having to enter non-niche areas. The hardware manufacturing sector could potentially benefit by larger companies setting up operations here[4]. These are but over-simplified caricatures of the complexities of the IT industry, but I claim are way more sophisticated than those being talked about by the government!

Country X = India

Lest this article be accused of being irrelevant, we finally need to consider if the country under consideration is India. Firstly, the Indian IT industry is in a completely different ball game. They are primarily in the IT services space and have little investment in the open source eco-system for precisely that reason. Indian IT graduates are also not a uniform breed: at the top level, they are produced in relatively small numbers by the elite IIT’s, but at the (large) bottom end, they are unemployed, and arguably unemployable. The best IT graduates, not unlike ours, seek greener pastures in the developed world, and would hardly consider Sri Lanka as a destination to realize their ambitions. Sri Lanka’s unregulated private tertiary education system would allow even the lowest quality Indian degrees (some as short as 2 years) to be offered in Sri Lanka and compromise the quality of university education available in Sri Lanka. This could potentially wipe out the relatively high quality degrees franchised from UK and Australia currently in Sri Lanka.

Liberalization also has different implications in the two countries. As experienced already by the products sector (under GATT[5]), tariff barriers removed at the country level do not bind individual states from removing theirs. As such, an IT product may enter India without tax, but would be slapped a significant tax when it tries to enter a particular State. In contrast, once the Sri Lankan government signs an agreement, the entire country is open to the counterpart.

Way forward?

So, what is the way forward then? Consultation is the primary need of the hour. Consultation with the real representatives of the industry, and not just reports, here say or anecdotal evidence. As outlined before, the services industry in IT actually consists of two sectors: software products and software services. More and more companies in this space have realized that the way forward for the Sri Lankan software industry is through products, owing to the niche areas we need to play in, given our human resource skills and availability.

These companies however do however have problems of retention owing to the world-class human capital they posses. They are constantly being lured by overseas giants, or simply ‘greener pastures’ particularly in terms of housing, schooling for children and ownership of what they perceive as basic necessities. They also would not in general be averse to accepting high level professionals with quality degrees and 5 to 10 years of experience.

And then we have an extremely talented pool of Sri Lankan diaspora who aren’t being attracted to fill these gaps in our talent pool. Before opening the IT services sector to other countries, what if Sri Lanka made it easier for those who were citizens and have taken up residence and citizenship in other countries? The reintroduction of the dual-citizenship scheme is a welcome step in the right direction. However, more incentives could be given to lure these individuals back the way India itself has been able to.

Parallel to these incentives, there also needs to be some level of responsibility given to Sri Lankans benefiting from free education at least at the secondary and tertiary levels needing to serve and obligatory period before seeking migration, or paying the state a relevant fee in lieu of such service.

Ultimately, we need to make our decision: do we want the Sri Lankan IT industry to give up its niche and become little subsidiaries of Tata Consultancy Services, Infosys or Wipro in the global IT services industry, or to remain focused on its niche product trajectory and emulating small but agile countries such as Ireland, Switzerland and Israel?

There are many and significant other ways in which the government can help the Sri Lankan IT industry move from being the 5^th highest export earner to the top most spot. Signing the ETCA without paying attention to the peculiar nature of that industry in Sri Lanka has the potential to bring disastrous consequences for that industry and the country in general.

[1]    If we for a brief moment set X to India, the export figures in either direction after the signing of the last free trade agreement (ISLFTA) between our two countries shows us clearly that Sri Lankan exports remained mostly flat, while those of India have steadily risen.

[2]    One source claimed that Sri Lanka has the highest per capita employees at NASA; we also have the highest per capita committers in one of the worlds’ largest software code-bases, Apache.

[3]    Was this the reason that the government felt it could use that industry as a ‘soft target’ (as was the case in liberalizing tertiary education)?

[4]    Arguably, if we really want the top tier hardware manufacturers to setup here, we should open up to countries such as Taiwan and South Korea.

[5]    Not to be confused with the GATS we are now working under.