Global value chains: Economics, politics and security concerns?

Wednesday, 6 January 2016 00:00 -     - {{hitsCtrl.values.hits}}

By Keshara Jayasinghe

In a modern economic discourse, as implied by Prof. Samarajiva, issues should be discussed in relation to already proven basic economic concepts and Sri Lanka’s strategic considerations rather than on the basis of someone being or against the CEPA with India because they are an Indophile or Indophobe. 

At the same time, linking with global value chains, including those of India, also needs to be discussed taking into account very fundamental theories such as Comparative Advantage. Connecting to global or regional value chains is not something that can be imposed by one side or the other but instead it has to be a business proposition that naturally develops over a period of time based on comparative advantage. 

Many of the professionals, including learned economists, who have promoted the idea of Sri Lanka linking to Indian value chains, have not so far witnessed their dreams coming true. This is not necessarily due to negative attitudes or anti-Indian sentiments of Sri Lankans but primarily due to the lack of comparative advantage from the point of view of businesses operating in India. 

In the current context, there is no incentive for manufacturers, Indian or MNCs based in India, to re-locate their parts and components manufacture to Sri Lanka. Why? It is a simple fact that the current cost of production in Sri Lanka, including labour, is equal or higher than many of the Indian investment locations. 

In addition, Sri Lanka is now experiencing a scarcity in unskilled and semi-skilled labour. The evidence to this effect is available from the Katunayake and Biyagama Export Processing Zones and the apparel industry in general. Therefore, Sri Lanka gaining access to Indian value chains will remain a pipe dream of arm-chair professionals for many more years to come. This can be verified by looking at poverty levels and unemployment statistics in many if not all Indian states. 

The Modi government using their comparative advantage of industrial locational factors is driving the ‘Make in India’ policy to provide employment to its people instead of encouraging their industries to relocate in neighbouring countries. That is the difference between Japan in the 1980s and China now compared with India today. I hope this simple but very fundamental concept of comparative advantage is understood by the proponents of Sri Lankan businesses plugging into Indian value chains. 

Prof. Samarajiva’s reference to CEPA with India and the need for Sri Lanka’s openness to freer trade in goods and services with that country or for that matter any other country makes very good sense. Of course, at the time of the 1977 J.R. Jayewardene economic liberalisation, Sri Lanka was willing to go ahead with unilateral trade liberalisation in goods, while many countries in South Asia, including India, were still believing in and practicing inward looking dirigiste policies. Even today, the Indian market is more protected not only by tariffs but by non-tariff barriers both at centre and state levels. 

Further liberalisation of trade with India (both in goods and services) could be very well justified, if India removes all such non-tariff barriers to ensure the existing bilateral FTA arrangement bears full benefit to the Sri Lankan exporters, as well as Indian consumers. It also proves the genuineness of India’s commitment to freer trade with Sri Lanka. 

If such steps are taken well in advance, the resistance to CEPA or any variant of such an arrangement from the business community will be reduced. The current ground situation faced by Sri Lankan exporters must be given due consideration by those who are eager to promote a more comprehensive agreement with India. 

Prof. Samarajiva’s article refers to Indophobes at the beginning and ends up emphasising that Sri Lankans should get rid of atavistic fears of being overrun by Chola invaders. My learned friend has either totally misunderstood or is misrepresenting the fears of Sri Lankans regarding India, its intentions and past behaviour. The perceptions held by most Sri Lankans about India have nothing to do with Chola, Pandya or Kerala invasions but has everything to do with much more recent experiences such as the following:

India’s creation of a monster – funding, training and arming of the LTTE, is commonly believed in Sri Lanka to be the work of India’s intelligence service RAW. The ensuing 30-year war not only saw Sri Lanka lose many of its young political leaders and innocent civilians but also deprived the country of opportunities to attract foreign investment which would have made Sri Lanka similar to countries such as Malaysia. 

When the LTTE leadership was being cornered Indian intervention such as ‘parippu bombing’ scuttled the effort of the Sri Lankan military. 

The so-called imposition of the 13th Amendment on the promise to eliminate LTTE terrorism did not become a reality. 

India’s passive attitude and non-action towards Indian poachers is depriving the helpless North and East fishers of their livelihoods. 

India’s interference in Sri Lankan politics since the 1980s is also well known. Most recently, the pressure against several development projects being implemented in Sri Lanka was visible to all. In the end, India has not become a serious investor or financier of the projects which they did not want Sri Lanka to pursue with other countries. 

Of course, some of the pro-Indian analysts always claim that all the negative policies and actions followed by the Indians was the fault of Sri Lankan leaders such as Presidents Jayewardene, Premadasa and Rajapaksa. 

The writer strongly believes in freer trade, not with only India, but with any other country. In order to avoid undue pressures and blackmail by individual countries, it may be better to proceed with plurilateral arrangements, such as TPP or ideally a multilateral approach when it comes to liberalising trade. 

At the same time, it should not be one-way traffic. It also needs to be mentioned when there are Indophobes, Sinophobes and Americanophobes, we have to make evidence based analysis to find the reasoning behind such phobias without simply resorting to vituperative remarks.