ESCAP Survey of 2011 – Get connected or perish

In the previous My View titled ‘ESCAP Survey of 2011: A Roadmap for the Region,’ I presented ESCAP’s wise counsel for the countries in the region for adopting a holistic approach for economic advancement.

According to ESCAP, the holistic approach should look into two aspects: in the first place, policy strategies should strengthen each other; secondly, one policy strategy should not damage another.

The most daring deficiency relating to physical connectivity is the poor state of liner shipping connections among the countries in the region. Countries like China, Hong Kong, Singapore, Malaysia, South Korea and Taiwan have super-performed in this area. According to the Liner Shipping Connectivity Index of UN Conference on Trade and Development or UNCTAD, the countries mentioned above have scored index points of above 75, while countries like Sri Lanka have been placed below a score level of 50. This index includes five components relating to liner shipping connectivity, namely, number of ships, the container carrying capacity of those ships in Twenty-foot Equivalent Units or TEUs, the number of companies, the number of services and the maximum ship size that could be accommodated in a country’s ports

This requires countries to make a careful evaluation of a policy package with a view to identifying all its impacts and making appropriate adjustments for reaping the maximum benefits on a net basis.

This should remind us of the moral of a popular Sinhala folk-saying that ‘one should not build a chair by dismantling the barn’. This is exactly what many countries do in their haste to undertake various development projects without much thought or careful evaluation.

In a recent interview which the writer had with Central Bank’s former Director of Economic Research Nimal Sanderatne, it transpired that, at the time of the then Government’s decision to accelerate the completion of the Mahaweli Project from 25 years to six years, a special study was undertaken in the Central Bank to identify its far-reaching impact on all sectors of the economy, especially its impact on the country’s fiscal policy and price stability.

According to Sanderatne, the government of the day went into its mega project having known all the adverse consequences of the acceleration of the project (available at: http://print.dailymirror.lk/business/127-local/43303.html).

What ESCAP recommends today is that all countries desirous of undertaking mega projects of that nature should establish such a mechanism to study and identify all beneficial and adverse consequences which such projects would bring to an economy. This is, in my view, nothing but democratic consultation and practice of sound governance principles by governments.

In this article, we will look at another recommendation of the ESCAP Survey of 2011. That is, if the countries in the region are anxious of moving forward, they should necessarily get connected with each other in trade and other economic transactions.

Secrets of economic advancement

There are two secrets of economic advancement. The first is the ‘hard work’ done by people. The second is the facilities to sell the products of that hard work in the market.

In today’s context, hard work consists of both physical efforts and mental efforts made by people of a country. The hard physical work takes the form of the ability and willingness of people to work at their best in everything they do. According to the late Goh Keng Swee, the first Finance Minister of Singapore, hard work should be displayed by people ‘first in schools, then in universities or polytechnics and then on the job in work place’.

Mental hard work is a little different from physical hard work. It is nothing but the ability and willingness of people to enhance their knowledge base through hard learning, hard training and hard innovating. All these three are dependent on research, development, application and management.

In the initial phase, a country may acquire the knowledge already developed by other nations. But later when that copied knowledge can no longer give a nation a competitive edge because all other nations too have copied the same, it becomes necessary for that nation to innovate things on its own. That is where research and innovation come into the picture.

Even if the people of a country work hard and make new innovations, it still does not help a country to attain economic prosperity unless that country is able to sell what it produces in the market. Ultimately, it is the buyers who decide whether a country can convert its hard work and innovations into income.

Markets may be domestic markets where its products are all bought by the consumers of that country. Or they can be foreign markets where consumers of other countries buy its products.

If a country can sell all its products to its own consumers, then that country has no serious economic problem coming from the economic fluctuations in other countries. But that is simply a luxury which only a large economy, both in terms of population and income, can have.

Small economies like Sri Lanka, which has only a population of 20 million people and an average income of only $ 2,300 will have to look for foreign markets to sell all its products.

Take for example Sri Lanka’s tea industry. Sri Lanka produces about 330 million kg of tea every year, but it consumes only 30 million kg domestically. Unless Sri Lanka can sell the balance 300 million kg of tea to foreigners, it cannot sustain its tea industry.

Hence, foreign markets are the source of economic prosperity for small economies like Sri Lanka.

Regional markets or global markets?

Traditionally, countries in East Asia depended on the rich North America, Australia and New Zealand, Japan and Europe, commonly known as the rich West, for selling their products.

When the Asian countries were advised by economic advisors that they should build economic relations with neighbours, the original tigers of East Asia, namely, Taiwan, Hong Kong, South Korea and Singapore, dismissed such advice and built trade relations with rich countries.

Singapore’s former Prime Minister Lee Kuan Yew described it as ‘leapfrogging,’ because it required Singapore to overlook neighbouring Malaysia and Indonesia and jump over these two countries toward the rich West.

He justified this strategy on the ground that his neighbours were poor, lack of research and development and, therefore, no prospect of advancing knowledge and embroiled in disastrous ideologies like economic nationalism and economic patriotism. Hence, it was necessary for Singapore to move to places where there were rich markets. Today, China and India too have leapfrogged over the countries in the region to the rich West.

For decades, the rich West had enriched and nourished the emerging economies in Asia and Latin America. However, with the recent economic slowdown in the rich West and the slow economic recovery being experienced by those countries, the dependence on them for continued economic prosperity has become a problem for countries in Asia and the Pacific.

Hence, the ESCAP Survey of 2011 has recommended that the region should go for economic strategies that depend on the domestic economies and the economies of their neighbours.

While only big countries like China, India and Indonesia can depend to some extent on the respective domestic economies, the rest of the countries in the region will have to build relations with outsiders. The outsiders recommended by the ESCAP Survey of 2011 have been the other member countries in the region that promotes what is known as ‘intraregional trade’.

Hence, instead of wider global trade, the ESCAP Survey of 2011 has recommended regional trade.

The potential of regional markets

Asia and the Pacific Region are rising and the rising region can nourish each other if they can get connected effectively. The connectivity has been defined by ESCAP Survey of 2011 in a broader sense: facilitating all exchange activities among nations covering the exchange of goods, services, people, and knowledge. These are in turn facilitated by long distance transport, telecommunication and energy networks that are yet to be set up in the region.

This type of a broader connectivity has been planned by the Association of South East Asian Nations or ASEAN in its Master Plan on ASEAN Connectivity and by the South Asian Association for Regional Cooperation or SAARC in its 14th Summit on Connectivity.

Hence, at least at formal official levels, connectivity has been recognised as a policy strategy to be pursued by the AP Region. It has been argued that all these aspects of connectivity will help nations to realise their true economic potential and convert it to wealth creation on a sustainable basis.

However, the trade among the countries in AP Region, known as intraregional trade, has grown only very slowly during the last two decades. According to the data in the Survey, the intraregional trade out of the total trade has grown from about 48 per cent in 1993 to about 55 per cent in 2009. When intraregional trade among China, Japan, Australia and New Zealand is excluded, the performance among other nations in trading among themselves is less than 35 per cent. This is not an impressive record.

However, one may argue that the not-so-impressive record itself may offer enormous opportunities for promoting intraregional trade in the region. But the availability of an opportunity per se does not automatically promote trade. It is necessary to build ground conditions for trade such as infrastructure facilities for transportation and digital communication and willingness to enter into trade pacts bilaterally or as sub groups.

Ground conditions are not adequate yet

According to ESCAP calculations, it is only a few countries in the region with high per capita income, namely, Australia, Japan, South Korea, Singapore, New Zealand and Hong Kong, which have developed their infrastructure facilities at adequate levels. All other countries which have a per capita income level of less than $ 5,000 per annum are with poor infrastructure facilities. Hence, even if these countries are willing to get connected, they do not have physical capability of doing so at the moment.

The most daring deficiency relating to physical connectivity is the poor state of liner shipping connections among the countries in the region. While some countries like China, Hong Kong, Singapore, Malaysia, South Korea and Taiwan have super-performed in this area, the other countries in the region are yet to develop their conditions to an acceptable level.

According to the Liner Shipping Connectivity Index of UN Conference on Trade and Development or UNCTAD, the countries mentioned above have scored index points of above 75, while countries like Sri Lanka have been placed below a score level of 50.

This index includes five components relating to liner shipping connectivity, namely, number of ships, the container carrying capacity of those ships in Twenty-foot Equivalent Units or TEUs, the number of companies, the number of services and the maximum ship size that could be accommodated in a country’s ports.

Since this involves port development and port developments take time, it is necessary that these countries in the region should take early steps to develop ports to meet these requirements.

The broadband internet connectivity too is not at an adequate level in the majority of the countries in the AP region. According to calculations by ESCAP, based on the data of the International Telecommunication Union, megabits per second per 100 people in 2007 has remained at a high level in the developed country category. The bandwidth level in all other countries has been at a minuscule level. Sri Lanka has a long way to go in this connection.

According to the statistics maintained by www.speedtest.net, a private internet speed test agency, Sri Lanka’s internet download speed has been 1.27 mbps, compared with a speed of 39.13 in South Korea and 18.52 mbps in Japan.

The physical connectivity through trade relations is very wide for countries in ASEAN, North Asia and the Pacific Region, but not for countries in South Asia.

According to ESCAP Survey of 2011, there have been 78 trade agreements among 51 countries in the AP Region. These trade agreements have built up trade relations with the developed countries in the region, namely, Japan, Australia, New Zealand and South Korea, by the countries in the three regions mentioned above working as economic groups.

In South Asia, except the recently implemented South Asian Free Trade Agreement or SAFTA, the only working agreement has been the Indo-Lanka Free Trade Agreement or ILFTA. As an individual country, India has entered into trade agreements with ASEAN, Australia, New Zealand, South Korea and Singapore. It appears that South Asia, except India, is in general averse to free trade.

The official stand taken by Sri Lanka with respect to both the Comprehensive Economic Partnership or CEPA with India and Generalised System of Preferences Plus or GSP+ is a case in point.

The implications of the casual attitude shown by Sri Lanka regarding both these agreements have been discussed in this column in two previous articles (available at: http://www.ft.lk/2011/02/21/reviving-cepa-%E2%80%93-act-swiftly-and-decisively/ and http://www.ft.lk/2011/03/07/now-that-gsp-plus-is-closed-it%E2%80%99s-time-to-open-trade-everywhere/).

The Central Bank Annual Report for 2010 has downplayed the GSP+ claiming that Sri Lanka’s export sector is resilient enough to do without GSP+ and its non-availability will help the country to develop its export sector on the basis of its capability to compete in the international markets rather than protected by trade concessions given by different countries. It has praised the exporters that ‘as a result, Sri Lankan exporters were able to record higher than projected earnings from key export industries’ (p 104). However, the much praised resilience recording an export value of US 2,912 million in 2010 to EU has taken place over a low volume of exports amounting to US $ 2,727 million in 2009 and not from the peak of US 3,034 million in 2008. The learned analysts in the Central Bank appear to have overlooked the deceleration in the growth of exports to EU since GSP + was withdrawn: between 2005 and 2007, exports to EU have grown by an annual average of 20 percent; in 2010, they have declined by 5 percent from the peak of 2008 and grown only by 1 percent over 2007.  

However, the very same Central Bank Annual Report has, in the paragraph immediately following, contradicted itself when it commended Asia-Pacific Trade Agreement or APTA and ILFTA for contributing to promote trade under the two agreements in question. It has praised APTA because Sri Lanka ‘reaped expected results as trade, especially exports to China and South Korea, increased due to the preferential access it provided’.

Regarding ILFTA, the Central Bank Annual Report has reported that ‘trade with India and thus, under the Indo-Sri Lanka Free Trade Agreement (ISFTA), recovered considerably after a decline in 2009 due to the impact of the global economic slowdown’. Hence, the recovery of trade with India in 2010 was a consolation.

This is not the proper way a country should approach getting connected to the rest of the world. Trade agreements either help a country or do not help a country. It cannot be that in one instance a trade agreement is unnecessary and in another instance it is beneficial.

Get connected or perish

The experience has shown that trade agreements and common trading blocs have served countries to accelerate growth and create wealth for their people. When the domestic markets are insufficient, access to other markets help countries to produce more and create wealth for their people in the process.

Even the countries with large domestic markets such as USA, China, India and EU as a group have done their best to develop bilateral and multilateral relationships to have access for their products in seemingly impossible markets. For market access, both China and USA decided to forget about ideological differences and work for a common goal. So was the case with India which decided to keep aside the old border disputes with China and move for economic relationships. These are good lessons which small countries like Sri Lanka should learn from other big countries.

ESCAP recommends the promotion of intraregional trade as an urgent measure. In my view, depending on a particular region for trade promotion is a risk as the countries in the region have already experienced with the rich West. Hence, it is necessary to look 360 degrees in all directions to build viable trade relationships.

The message delivered by the ESCAP Survey of 2011 is that either a country should get connected and create wealth or if it is not acceptable, perish in the process. It is a serious counsel which small countries like Sri Lanka should not treat casually.

(W.A. Wijewardena can be reached at [email protected])