24 September, 2020

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Trade Liberalization Or Rationalization? What Is More Desirable? 

By Laksiri Fernando –

Dr. Laksiri Fernando

Trade liberalization or free trade has come to a sharp controversy in the context of recent and ongoing rupee depreciation. However, it has been thoroughly a discussed topic internationally, both theoretically and empirically, although not conclusively.       

There is a school of thought closer to the economic decision making in Sri Lanka quite surprisingly argues that the country’s rupee depreciation and related economic ailments like the adverse balance of payment, sluggish export growth, low influx of FDI and the depressed economic growth are due to the absence or non-implementation of a full scale liberalization policy. They want to see everything in one basket. 

There are critics on the other hand who point out that the reckless free trade agreements, excessively liberal BOI conditions, non-monitoring of external trade and recent liberalization of para-tariffs are the primary reasons for the above predicaments in addition to long term and external factors. 

There is an unfortunate possibility of Sri Lanka now going from excessive liberalization to excessive protectionism, under the rupee depreciation and foreign exchange difficulties. 

From One Policy to the Oher  

‘Open economy’ was the earlier term for trade liberalization particularly in our country. Complete closed economies or complete open economies have never existed, and never will be. Since independence, Sri Lanka has experienced the economy going from one direction to the other, without forging at least a broadly agreed national policy or model by different governments and schools of thought. The reasons can be both national and international compulsions. 

Peter Watson traces the long-distance trade from circa 150,000 years ago, but the Sri Lankan chronicles talk about Thapassu and Bhalluka, two merchant brothers, who apparently traded between Bharata and Lanka, apart from their role in the spread of Buddhism, 250,000 years ago.  

At independence, Sri Lanka inherited an open export economy of peripheral nature which naturally encountered balance of payment difficulties as the time passed by. That is why when Donald Snodgrass wrote his exploration of the Sri Lankan economy in 1966, he titled it as ‘Ceylon: An Export Economy in Transition.’ Balance of payment difficulties was a major reason why the country opted to implement import substitution policies in addition to ideological preferences. Sri Lanka was pushed for extremely closed policies in early 1970s, not necessarily by choice, but rather under compelling circumstances. 

It was under an evolving new international division of labour (NIDL) that the country could open up the economy again since 1977, yet at a cautious pace. The experience in many East and East-Asian countries has also shown that when a country is ‘opened up’ for trade without neglecting the other sectors (i.e. agriculture, public sector, small business, manufacturing for the local market etc.), economic growth could take off. Another necessary element is state monitoring or intervention (not control). That is what we can call a balanced and a rational economic policy. 

What is Desirable?  

An economic opening up is not a panacea, but an opportunity that should be rationally followed up through concrete measures for export promotion. Before trade, or along with it, production should come. That has been what lacking or lagging behind in Sri Lanka. What might be best for export promotion is economic planning with market mechanisms. Two engines – public and private – can work together. The success or the failure, or their degree, should be assessed not by pure theory or ideology, but by empirical evidence. 

In this context it is pertinent to ask, whether Sri Lanka needs full trade ‘liberalization’ or trade rationalization? What is more desirable under the given circumstances? 

Trade rationalization could encompass a certain degree of liberalization, but not fully. Trade rationalization requires a clear (sophisticated) state intervention and monitoring. Apart from the balance of payment, the trade deficit has to be closely monitored and the currency rate should be kept within a reasonable range. In order to promote exports, concessions can be given, but not of exorbitant nature. 

The tariff system should be simplified by abolishing the cumbersome tariffs such as para-tariffs, and having a standard tariff rate/s, which could be increased or decreased given the circumstances (not haphazardly). Even the shipping procedures could be streamlined however with agreement of the local agencies. Shipping industry is an area that can be developed exponentially, given Sri Lanka’s favourable location.          

Lessons from the First Phase    

When trade ‘liberalization’ was introduced in 1977 in the name of an open economy, there was a rationale. People were fed up with scarcity, food controls, rice barriers (harl polu), long queues to obtain provisions etc. Foreign exchange controls affected many who wanted to pursue postgraduate studies abroad or travel overseas. The business community was fed up with import-export controls, politically/ethnically tainted import-export licence system, lack of investment goods, capital funds, etc. Therefore a major change was necessary.  

Did the open economy of 1977 succeed? Yes, to a great extent, but not fully. Perhaps what prevented a major transformation was the internal political conditions, particularly the civil wars in the North as well as in the South. On the other hand, these conditions were propelled by the open economy itself, according to some research findings (Newton Gunasinghe). 

Haphazard liberalization of external trade largely ignited ethnic frictions which led to the July 1983 riots against the Tamils. Import liberalization also affected the peasants both in the North and the South, the younger generations becoming the backbone of the insurgency movements (LTTE and JVP). When R. Premadasa was trying to strike a balance in the open economic policy with social welfare measures, it was rather too late. 

The rest is history, but the lesson is clear that major ‘liberalization’ efforts should not be undertaken unless the policies are balanced, rational, incremental, and implemented with the people’s consent, or otherwise there could be political backlashes. Even at present, the liberalized trade sector has created frictions between the Sinhalese and the Muslims. 

As I write this article, there is this news from the World Bank arrogantly announcing “Aging population makes Sri Lanka’s welfare programs unaffordable” (economynext, 16 October 2018). The apparent advice is clear. It might not be the whole World Bank who is responsible, but a small group of neoliberals who have gathered around the Sri Lanka programme to dictate terms and experiment their theories.  

No Clear Mandate for Liberalization   

When the UNFGG, led by the UNP, put forward its manifesto before the August 2015 elections, it proclaimed a strategy to ‘strengthen the economy’ but not about liberalizing it. There were 16 points in it, but none of them talked about ‘liberalization’ in that sense, apart from saying ‘strengthening Sri Lanka’s position in the international market.’ 

It is true that the UNP has always been having a more liberalized economic policy, but what they talked about at the elections was a ‘social market economy’ and not liberal market economy. Now that talk has been terminated for the sake of mere liberalization. 

The government that was formed after the August 2015 elections was not a UNP or a UNFGG government, but a coalition government with the SLFP which has a different economic perspective, right or wrong. Therefore proper consultation should have been conducted before unleashing many of the major policy initiatives. Otherwise mixed signals could be related to the prospective international partners and the investors. 

The major burden of ambiguous policies have to be finally faced by the ordinary people. It is difficult to talk about economic prospects of the country without looking at the political factors. A political-economy perspective might be the best policy approach for the country. The country’s future is too important to leave it to the neoliberal economists alone. 

Current Ambiguous Phase of the Open Economy  

The current phase of the open economic policies did not start with the new government in 2015. It started with the political change in 1994 which declared an ‘open economy with a human face.’ 

It meant the preservation and promotion of the social security and welfare framework along with the public sector initiatives. This is what continued in the country until recently, whatever the mistakes or blunders. What was dreadful during the last phase of the new phase was corruption, nepotism and waste which are unfortunately unabated under the present dispensation. 

In addition, the UNP wing of the government had unleashed a neoliberal policy quite bureaucratically in several areas, two can be highlighted as follows.  

(1) Following some of the old recommendations of the WTO and others, the government first tried to introduce a cash grant instead of fertilizer subsidy as a measure of artificial marketization of the agricultural economy. But it was a dismal failure without any pilot studies, proper preparation or people’s support. 

(2) A similar policy still in the offing is to give vouchers instead of school uniforms to school children following some American neoliberal experiments in ‘charter schools.’ Even in this policy implementation, there was no pilot study, proper research or education for the people to perhaps appreciate the market mechanisms.          

Free trade is not a bad idea if it is implemented properly and gradually. Not only the middle class but also the working people can benefit as advocated by Henry George (‘Protection or Free Trade,’ 1886). However the primary concern should be the people and their wellbeing.  

Import side of free trade is easy, but the difficult side is exports. Sloganeering per se cannot promote exports. Before exports, there should be production and industries. This is what is lagging in Sri Lanka and the present government and the previous one have not done much to improve the situation. It is insane to talk about new free trade initiatives or agreements within an unfavourable international atmosphere as at present. What should be prioritize is the consolidation of the national economy. 

Some Conclusions 

Trade liberalization has been going on in Sri Lanka well before India since 1977, of course with ups and downs. However, the country has not yet been transformed into an export oriented economy. Considering the continuing large disparity between imports and exports, it is fair to consider Sri Lanka as an ‘import economy’ than an export economy. 

Of course, if tourism is named as an export industry, the situation or the picture might improve. What is necessary however is not a cosmetic change but the promotion of tourism as a key industry in the country. Even for this purpose, certain internal conditions should improve like transport, banking facilities, tourist attractions, people’s acceptance etc. Switzerland is a country which became a developed economy mainly through tourism and banking. To develop the tourist industry to new heights, the country may need its own Belt and Road and also Air initiative (BRAI).   

The failure to transform Sri Lanka has been basically due to the mistaken priorities and the contradictions in economic fundamentals. Liberal imports can and have expanded the retail trade, but with adverse effects as we have discussed. Trade deficits are not something that a country can ignore in the long run. Vietnam also faced trade deficits when the country was opened up first, but as the national economy was on a good footing, soon the situation changed, and the exports took off. 

A fundamental defect in the economy in Sri Lanka is the neglected agricultural sector where nearly 30% of the population are dependent, but the contribution to the GDP is less than 10%. This is also one reason for the low government revenue, which is a cornerstone of budget deficits. Food industry has to be promoted, and processed and natural food exports can be a lucrative industry. Considering all these requirements of restructuring and public policy initiatives, rationalization is the correct approach instead of mere liberalization.        

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Latest comments

  • 1
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    It all depends on the current ac balance laksiri.If you are in a deficit you have to rationalize.If you are in a surplus you can liberalize.If you are in a deficit and liberalize trade,then your currency will get knocked about.This is just common sense management of trade that sri lanka has never followed.

    ps.mahathir never floated the currency.As a result he escaped the asian financial crisis,whereas indonesia floated it and paid the penalty with riots and the downfall of suharto.Mahathir is deeply suspicious of foreigners like george soros etc targeting the currency.I don’t believe we should have that phobias.We can float the currency,but should not liberalize the trade.We should have duty on goods until we have industrialists producing import substitution.that is the best way of protecting the currency and the economy.Businessman won’t risk their money trying to produce something when imports come flooding in without any stable trade policy at the whims of politicians.

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      “Peter Watson traces the long-distance trade from circa 150,000 years ago, but the Sri Lankan chronicles talk about Thapassu and Bhalluka, two merchant brothers, who apparently traded between Bharata and Lanka, apart from their role in the spread of Buddhism, 250,000 years ago. “
      Are you for real, Dr. Laksiri?

      • 1
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        Dr. Laksiri, thanks! quite right a middle path that prioritizes Sri Lanka’s national development strategy, rather than the business and strategic interest of foreign fake aid donors is important.
        But Sirisena and Lankan public is being de-stablized by RAW and Bondscam Ranil’s IMF-MCC Economic Hit men these days, with lots of Fake News to distract everyone from addressing the economic crisis in Lanka today caused mainly by foreign Fake Aid projects.
        In line with liberalized policies Sri Lanka should keep buying cheap oil from Iran and selling tea and Ignore US and Trump’s sanctions against Iran. For this Lankan govt. needs an independent non-aligned foreign policy and National Development Policy framework that benefits Sri Lankans rather than America First and the global 1 percent.
        According to the Central Bank Report, ADB and JICA, World Bank, and Japan govt are Lanka’s biggest debt holders, although the Mangala, the beautician, Minister of Finance and Media Spin, Mangala, has said that Lanka was in a ‘debt trap’ to China this is not accurate.
        Greece, Haiti and Argentina were not Crashed by China, rather the Paris Club nd IMF and western donors including Japan put these countries in the a debt trap and IMF Bailout Business.
        Sirisena’s “National Economic Council” should therefore top and review each and every foreign loan funded “development” projects to see if they are a development necessity and priority, as many fake Development projects are the reason for the massive debt trap and crash of the economy. Sri Lanka also needs an integrated development strategy rather than taking every aid or investment project offered.
        It is not enough to halt import of unnecessary luxury items to stabilize the rupee. All foreign loan funded mega infrastructure projects should be halted and reviewed since it is foreign fake aid projects in the name of development that have put Lanka in the debt trap and ABD-World Bank-IMF-Tokyo bailout business.

  • 1
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    Laksiri Fernando: Does “Trade Liberalization” and/or ” Trade Rationalization” matter in an atmosphere of the culture of corruption/nepotism/impunity?

  • 1
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    Laksiri,

    The United Front Government in 1970 launched the close economy based on the Common Programme signed by the SLFP, LSSP and CP before the 1970 General Elections.

    The Oil crisis of 1973 accelerated the process with drastic consequences for the economy and the country.

    This facilitated JR in introducing open economy with much fanfare.

    Things were rosy till July 1983.

    Globalization -the last stage of capitalism launched during the last decades of the twentieth century gave a moral justification for the open economy, but also encouraged neo-liberal polices as an inevitable panacea for all countries to follow.

    But the frequent economic crisis in the western countries led to Brexit with a hidden slogan of UK first and the election of Donald Trump with an open slogan of USA first questioned the validity of globalization for all times.

    Close economy and open economy are at the two extremes of a continuum. We must select a moving point in the middle not necessarily and dogmatically at the middle.

    A little neo- liberalism need not be a dirty word but necessary and essential for the survival of tiny economics like that of Sri Lanka..

    Self sufficiency in agriculture is a foolish policy. We must look forward to export of agriculture products. It means agriculture must be mechanized and economy of scale encouraged.

    industrialization means agro-based industries not primary agriculture products.

    • 0
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      Sri krish

      “Close economy and open economy are at the two extremes of a continuum. We must select a moving point in the middle not necessarily and dogmatically at the middle.”

      I agree with you that sirima’s and JRJ extreme policies are not suitable and we must find a middle path.I suggest to first test this by imposing a 10% minimum duty on everything,regardless of what they are,essential or non essential.

      Then as the months go by the current account balance can be monitored,whether it is improving or getting worse still.If it is getting worse the minimum duty should be increased to 20%.If the current account is improving then we can continue to keep the duty at 10%.If this principle is followed for increasing and decreasing duties business people will realize that there is some policy on trade and will take appropriate actions accordingly.Now there is no method at all in the madness and nobody can understand suddenly when duties are scrapped and then re imposed.

      Once we get a surplus in our current account we can remove duties stage by stage and checking whether it is neither a surplus or deficit.that point is the middle.

      • 0
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        Shankar and others,
        It is really a good formula that you have proposed Shankar, 10% as the base and then revising through empirical evidence without haphazardly. It could be higher for what can be called luxuries, after you objectively define them. Thanks also to Sri-Krish for very constructive suggestions. I do agree with Don Stanley on many matters and wish he moderates some of his positions for the sake of objectivity and/or diplomacy. I also make same type of harsh criticisms sometimes, but try my best to moderate!

  • 2
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    “promotion of tourism as a key industry in the country” – Well, this requires much more than just promoting.
    One side, we had been idle for decades as a tourist destination due to civil war, while our competitors went much ahead of us. So we did not improve any of these areas during this period

    Another factor we are struggling to deal with is the religion and culture being hindrances to tourism development – They often collide and former wins – What happened in the casinos, for example.

    Other one is, non availability and lack of enforcement in tourism related regulations that overall keeps tourists away from us – violence against tourists, substandard food, accommodations and infrastructure. Just imagine some local hotels advertising themselves as 5 star when they are not worth 2 star classification, for example. Just like how we lost demand for SL tea, the image of the country suffers outside SL.

    Just becasue we see more tourists coming in after the war, does not mean that we don’t lose a lots of tourists to our competitors…

    • 0
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      Fathima,

      It is difficult to dispute some of your observations. However for a country of Sri Lanka’s size, both on population and area, the present tourist arrivals, I believe around 2 million per year, is not a bad figure. I was in Sri Lanka in July-August and travelled between Colombo and Galle several times by train and bus by purpose. Talked to people. In areas where tourism is thriving i.e. between Kalutara and Galle, people are getting adjusted to the tourist reality. A lady in a train told me, “because they are benefitting!” I have seen tourists’ eating at P&S (Perera and Sons) outlets. I was surprised to see many such outlets offering reasonable short-eats.

      I think much education or propaganda is necessary. Police should nab the miscreants and offenders. Yes, conditions should be improved. Trains should be better and stations renovated. I found some express buses to be good. Cleanliness is a must even otherwise. Tourist Board should take measures to standardize services and give a better service to the tourists. Otherwise they would not turn up for the second time. However I know some Australians visit Sri Lanka again and again. They like the beaches, no much complains about hotels, and say they like the people as well, for politeness or not. Many of the tourists I have seen were Chinese and Japanese during my visit.

  • 1
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    Productivity is the main issue.
    Our productivity is very low compared to even Pakistan and India.
    .
    we have to adjust our Potato and onion prices even for Sri Lankans to buy Sri Lankan products.

    How ridicules, it is?

    All countries subsidize the agriculture including the west.

    Sri Lanka could not be an exception. in this scenario. irrigation department is exclusively for the paddy production.

    Is it not cheaper to import paddy rather than heavily subsidizing it?Primary agriculture is for food security and for prestige not for trade.self sufficiency is a discredited concept whereas trade is

    Unless we switched to agriculture based industries, agriculture has no future.

    Service sector including tourism is a way out.

    Let us concentrate on sectors we have the comparative advantage

    • 0
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      Sri-Krish,

      Thanks for your constructive thoughts on agriculture. I do learn a lot through these interactions. Why not you write on the subject? I am not sure whether the policy makers read these immediately. But some day someone might take the benefit and perhaps put them into practice. Have I said before, that I make Mung Paste (mainly green gram and cream cheese) and even tried MungMite! It comes like marmite or vegemite. I even thought of TheCola (or TeaCola), a carbonated soft drink based on tea, perhaps using coca leaves or kola nuts as well. I don’t claim any intellectual rights!

  • 0
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    Dear Author and all participants,
    This is called putting the cart before the horse.
    “What might be best for export promotion is economic planning with market mechanisms. Two engines – public and private – can work together. The success or the failure, or their degree, should be assessed not by pure theory or ideology, but by empirical evidence”.
    First of all how are u going to find private businesses/entrepreneurs opening in Sri Lanka before convincing them of a good future for their investment? Even if you are not living in Sri Lanka you should have known how Sri Lanka was let down by notorious politicians from the time of independence to date. While other Asian Countries were striving to develop showing Sri Lanka as example in the 1950s, Sri Lankan Leaders laid off all non Sinhalese from both public and private enterprises and began the notorious violence and killing of minorities all over the Country. While the politicians ulterior motive for development is to get rid of Tamils and make Sri Lanka a Sinhala Buddhist Country, how will you expect genuine development? You know very well why the concepts of neither the closed economy nor the open economy benefit the Country at any time. In Sri Lanka politicians are not prepared for any development even when help is offered because of the bad ulterior motive. The politicians are hoping to somehow amass wealth creating a power competition between the West and the East and now there is no chance for any economy taking root in Sri Lanka until they reap the fruit of their notorious play!

    • 0
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      Dear Richard,

      I cannot disagree with you on many political observations but perhaps not with the conclusions. I have visited the country recently (July-August) and my observation is that the country is facing a mixed or paradoxical situation. (1) On the political front, there is much resistance emerging against politicians who are exploiting the people and abusing their mandate. However the change the people expected in 2015 is not fulfilled. As a result there can be a reversal at the next election, but it might be difficult to repeat pre-2015 politics completely. (2) On the economic front, there are opportunities for the people to invest (locally and from overseas) but with certain risks attached. Tourism can be one area. The best might be to find local partners. Some are crooks but there is an emerging generation who are sincere and open minded. Of course, still there are so many bureaucratic barriers, but things have improved overtime. I am not saying these not because Sri Lanka is my country of origin (and still a citizen on dual basis), but it is my best objective observation.

      • 0
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        “However the change the people expected in 2015 is not fulfilled. As a result there can be a reversal at the next election, but it might be difficult to repeat pre-2015 politics completely. ”

        This is the game Lankawe Sinhala Intellectuals play. Not one criminal of last few decades are punished yet. The learned processor is bluffing that pre 2015 cannot be repeated. Extreme family interest of the Slap Party, Chinese loan, Appreciated Dollar, so firmly deep rooted corruption, nowhere in the upper echelon an efficient employee placed, extremely low productivity of lankawe labor……. these are only evidenting what is the path open for Old Royals comes back. They even already have tried subtle two military coups. Only path they will follow is Myanmar’s earlier Military Junta.

  • 0
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    America is the land of immigrants so is Singapoore.

    What is good for America and Singapoore may not be good for Japan, China South Korea and Sri Lanka.

    But Japan, China and South Korea know that they are different and found unique ways depending on their countries unique experiences.

    Ranil is surrounded by world bank experts

    Ranil +World bank=Vision 2025

    Ranil-World bank=0

    This is the tragedy for Sri Lanka

    Look at the world through Sri Lankan Prism!.

    Think Sri Lankan! Do Sri Lankan!..

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