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Management of Economic Policy 3: Sri Lanka should tap global unbundling opportunities of services un


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The need for wide public consultation when trade agreements are signed

The first article in this series warned against the secrecy surrounding the Economic and Technology Cooperation Agreement, now Untitled-1known as ETCA, which the Government says that it would enter into with India shortly (available at: http://www.ft.lk/article/525181/Sri-Lanka-faces-crucial-tests-ahead-with-growing-opposition-to-ETCA). 

The article noted that all those who are concerned about ETCA – both supporters and opponents – have been kept in the dark as to what it constitutes and what benefits it would bring to the country. Darkness breeds fear and fear leads to suspicion. That suspicion has caused the country’s professionals, now loosely formed into a United Professionals’ Movement or UPM, to launch a massive protest campaign against ETCA. 

The fear harboured by these protesting professionals has been, the article noted, that if ETCA is implemented, there would be a massive inflow of Indian professionals to Sri Lanka displacing the country’s professionals from their jobs. Such fears need be allayed through full disclosure of facts about ETCA. 

Since no economic policy could be implemented with protesting professionals all around, the article concluded that the Government should break its information-silence in the name of good economic policy governance and generate wide consultation among all parties. 

ETCA is not CEPA, but fears should be allayed

The second article in the series dealt with the long-drawn process involved in finalising bilateral trade agreements between countries (available at: http://www.ft.lk/article/526676/ETCA-is-not-CEPA-in-all-respects--but-it-should-be-made-public-to-allay-fears). 

The article noted that ETCA was not CEPA since it has been proposed, as the latest draft reveals, to exclude the provisions relating to the ‘migration of natural persons’. Thus, there is no free entry of Indian professionals to Sri Lanka’s job market through ETCA, though they still could provide services to Sri Lanka without crossing the borders under normal conditions. 

Hence, it stressed that the objections to ETCA were still premature on the ground that it would lead Indian professionals to flood the Sri Lanka’s job markets. However, it highlighted the need for developing a mechanism to generate effective consultation with all the stakeholders in order to allay the fears which the professionals have harboured among themselves. It, therefore, suggested that the government run an interactive web – known as 2.0 webs – or use popular social media to explain its position and get feedbacks from the critics. 

It warned against resorting to bring people to the street, as announced by the Government, to fight with the rebellious professional groups since it would simply lead to an escalation of unproductive street protests by both sides. 

Benefits of opening the services sector need be examined

Today’s article analyses the criticisms for and against opening the services sector in Sri Lanka for preferential trade with India and the validity of fears expressed by a section of professionals that such an opening would pave the way for Indian professionals to flood Sri Lanka’s limited job markets especially in the ICT and engineering sectors.

Along with development, the services sector too expands

Economic history of countries which have transformed themselves from poor to rich has shown one unique development. That is, the share of wealth created by traditional agriculture and manufacturing has declined along with economic prosperity, while that of services has increased. 

This trend has been predominantly observable in developed countries. For instance, in the UK, in 1960, services accounted for 53% of GDP. But in 2014, it has increased to 78%. In USA, the two comparable figures were 58% and 78% and in Japan, 42% and 72%. In the case of India, it has increased from 30% in 1960 to 52% in 2014. 

A dramatic change has recorded in the case of Sri Lanka where services sector’s contribution to GDP has increased from 48% in 1960 to 62% in 2014. However, a country which has lagged behind has been China. In its case, services sector contributed only a puny 20% to GDP in 1960. Even as late as 2014, the comparable share was just 48%, pretty much below its independent territory, Hong Kong, which had a share of 93%. 

Unfair criticism against services

The triumph of the services over the hardcore agriculture and manufacturing that produce a visible good in this manner has led many to question the wisdom of promoting services over agriculture and manufacturing as a sustainable economic strategy. 

The argument presented by them is simple: agriculture and industry produce a real good which people can enjoy by consuming; services do not produce such a ‘final consumption good’, but only facilitate the consumption of real goods. Hence, services derive their income out of visible goods and if services grow overly, they become a burden to both the producers and consumers of visible goods. 

This criticism is levelled against only one aspect of services such as when they function as middlemen as in the case of trade and commerce. There again, without the service of the hated middleman, both producers and consumers have to reach each other at great costs and inconveniences. 

But many services such as healthcare, education, banking, shipping, transport, telecommunication etc, produce a ‘final consumption good’ and without them, the life of people will simply become less joyful. Hence, services are also an integral part of human consumption and, therefore, when income increases, the demand for such services too grows. 

Services have to be produced in larger volumes within the economy for use by people inside as well as for sale to those outside the economy who are willing to pay for them. Hence, international trade in services has become an integral part of the global economy today. Thus, countries that sell their services to the rest of the world enjoy a higher welfare and prosperity as the countries that sell their visible goods in the form of exports to other countries. 

Services are essential for visible goods too

Services are also important for economies that produce visible goods for use by their own citizens as well as by those outside. This could be easily gauged by breaking a manufactured product into its different stages as given in the table. 

Untitled-2Nine out of ten stages of a visible product constitute services

A manufactured product first starts as an ‘idea’ in the mind of a visionary called fundamental or basic research. Sir Arthur C. Clarke’s visionary prediction in 1946 that a satellite shot into the orbit can function as an antenna receiving and transmitting radio signals is such an idea. 

These basic ideas are then carried forward by scientists and engineers through what is known as ‘applied research’. Once such applied research produces a visible product, it is tested for reliability and allowed to go through an incubation period. Then, it is commercially developed, financing arranged and manufactured in a factory that comes into being through an entrepreneurial arrangement. 

It then requires working capital financing, warehousing, marketing, distributing, and making available to final consumers through sales. Once it is sold, the consumers have to be looked after through ‘after-sale services’ for maintenance and trouble-shooting. 

Since a particular manufactured product can become obsolete pretty soon, it is necessary to engage in research and development for producing the next generation products. Every manufactured product has to go through these different stages and, of them, all represent services except the actual manufacturing of the product in a factory arrangement.

Though services are discounted by anti-services groups, they are essential components of producing visible goods. In today’s globalised economy, fast and rapid transportation, advancements in information and communication technology and collaboration among services personnel located in far away different countries have enabled the global economy to ‘unbundle’ these different stages and get the best services from the best experts in the field living throughout the globe. 

Importance of joining the global supply chains 

Hence, in today’s globalised economy where production stages have been unbundled, no nation or a producer can claim ownership to a product, though they may carry the tag that they have been manufactured in a certain country. 

A good example is iPhone or iPad of which research has come from California and Israel, sub components from South Korea, Taiwan, Japan, Malaysia, Singapore and Thailand and final assembly done in the Foxconn Factory owned by Taiwanese and located in China. Hence, the production tag that it is made in China is a misnomer. Economists call the logistics involved in this type of global production ‘the supply chain’. 

In this connection, a very powerful supply chain has already been established in the Asian region called the Asian Supply Chain. Hence, no country today can remain isolated from the rest of the world as mere ‘islands of production’. Unless they jump onto the bandwagon of the supply chain already developed in the region, they cannot think of expanding their economies on a sustainable basis creating wealth and prosperity for their citizens.

India has signed CEPAs or CECAs with important members of Asian supply chain 

India, having realised this important requirement, has signed a number of Comprehensive Economic Partnership Agreements or CEPAs and Comprehensive Economic Cooperation Agreements or CECAs with all the important countries in the Asian supply chain. 

It has signed CEPAs with South Korea, Japan and Singapore and CECA with Malaysia. It is now in the process of negotiating a CEPA with Thailand. The objective of India to do so is to get market access for visible goods and invisible services and join the Asian Supply Chain. 

It is important to note here that though India is a big economy, it has successfully signed CEPAs or CECAs with small economies like Singapore and Malaysia. No professionals in those countries have made any protests against such an asymmetrical marriage. 

Sri Lanka’s Colombo Dockyard has used unbundled services

A good example of the use of unbundled supply chain in the recent past has been provided by Sri Lanka’s flagship shipbuilder, the Colombo Dockyard. As reported in its website (available at: http://www.cdl.lk/latest/colombo-dockyard-delivers-mv-corals-the-biggest-vessel-ever-built-in-sri-lanka/ ; http://www.cdl.lk/latest/colombo-dockyard-delivers-the-largest-passenger-ship-mv-lagoons/ ), Colombo Dockyard has built two customised craft for India’s Lakshadweep Administration named ‘MV Corals’ and ‘MV Lagoons’. The vessels have been designed by Norway’s Global Maritime Brevik AS; the detailed engineering of the vessels has been designed by India’s Neilsoft Limited. 

For Dockyard to perform this marvel, technology has come from Japan, inputs from both Japan and South Korea and marketing by both Indian and Sri Lankan marketers. That arrangement has helped Sri Lanka’s professionals to acquire experience, skills and competence. 

This is a classic example of producing an engineering marvel by a creative and innovative Sri Lankan firm by using the facilities available in the unbundled global supply chain. Hence, if a Sri Lankan company is creative enough, it can always earn big dividends by jumping onto the bandwagon of India’s fledgling supply chain.

Sri Lanka’s professionals are migrating in numbers for greener pastures 

There has been a fear expressed by many that signing a cooperation agreement such as ETCA with India will allow low quality unemployed Indian professionals produced in numbers by equally substandard Indian professional and educational institutions to invade Sri Lanka’s job markets. This argument has a fundamental flaw with respect to international migration of professionals.

Professionals will move from one country to another in search of greener pastures; Sri Lanka by any standard is not such a ‘greener pasture’ and as such, migration of professionals is not into Sri Lanka but out of Sri Lanka.  

This has been demonstrated by the migration of engineers, accountants, IT specialists, physicians, scientists and academics in large numbers practically to all the countries in the world. Their destinations include the rich countries in North America, Europe and Australia and New Zealand; not so rich countries like the Middle East and poor countries in Africa and Oceania like Fiji Islands. There has not been a reverse migration from these countries to Sri Lanka. 

At present, about 100 Sri Lankan students graduate in engineering subjects from the Asian Institute of Technology or AIT in Thailand every year. After graduation, all these budding Sri Lankan engineers start looking for job opportunities in Thailand and, if they fail to secure jobs there, in the neighbouring countries. They have no wish to return to Sri Lanka upon graduation. The reason? Remunerations are several times higher in those greener pastures than in Sri Lanka. 

Hence, the fear that Indian IT specialists and similar professionals will flood Sri Lanka’s job markets is not in line with accepted economic laws. It is not the country that would hire such specialists; it is the business firms that would do so. A simple question which a probing mind should ask is why should a profit maximising business firm hire a substandard specialist from India knowing the low productivity of the hired specialist concerned? There is no reason unless there is stupidity in the decision making in such business firms.

Professionals should improve their standards or face extinction

Hence, even if migration of natural persons is included in the proposed ETCA, there is no threat to Sri Lanka’s professionals from India. But there is a threat to Sri Lankan professionals in all the fields including those in the medical field if they do not upgrade their standards in a continuing learning program. 

For anyone to provide his professional service to another country, he need not locate himself in that country today. Advanced ICT has enabled him to do so from wherever he is located in the globe. 

This opportunity has already been exploited in a big way by Indians who have started giving tuition to students in North America over the internet, as reported by Thomas L Friedman in his ‘The World is Flat’. 

Sri Lanka’s professionals who do not improve themselves in line with the changing global environment are likely to lose their privileges and facilities in an unbundled global economy whether there is ETCA or not.

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com)    

 


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