Opportunities in emerging markets

With the emerging economies expected to play a more dominant role in the global economy in the future the third plenary session focused on emerging market economies and Sri Lanka’s need to identify opportunities to diversify our exports to these markets and strengthening investments. The keynote address was delivered by Lee Kuan Yew School of Public Policy Association Association Professor Dr. Razeen Sally who expressed some rather controversial views.

“It strikes me that Sri Lankan policies are kind of cock-eyed. Sri Lanka should build up good relations with the West and Indian rather than starting with China. Some commentators talked about Sri Lanka’s weak and stagnating trade and FDI performance and this has a lot to do with government policy going in the wrong direction under this Government,” he stated.

“We have seen deliberalisation, the tariff structure is much more complicated and therefore we have a bigger and much more differentiated tax on imports. In addition to that there are all sorts of domestic regulations. The climate for investment has arguably got worse rather than better,” Sally observed.

The response from the Government has been that imports are too high and should be restricted and has introduced policies all in tandem in boosting exports in targeted areas which Sally said was a recipe for failure. A tax on imports is a tax on exports, he explained. “You shift your tradables to the non tradables and by association you tax your exports – it is economic nonsense and illiteracy. What will work is some liberalisation. Sri Lanka has too little economic freedom.”

Sri Lanka seems to be trending back to its wartime rate of growth that of course does not mean collapse but the main cost of it is foregone growth. While some may continue to do well the chances of most people will not improve significantly and there will not be enough people entering the middle class and a burgeoning middle class is needed to push better politics better governance and real rule of law.

“If these are Sri Lanka’s prospects, I see that while a handful of companies will continue to be world class in a few narrow industries, the vast potential that is out there will continue to be unexploited.”

Sally also shared a broad perspective on the current global economic situation, noting that with a few exceptions, the West seems to be having an anaemic recovery. In broad terms, the policy outlook remains pretty gloomy for the West and pretty optimistic for the emerging markets although we have seen an economic slowdown in the key emerging markets.

Emerging markets including those in this part of the world are suffering from a growth slowdown because of the West’s slowdown. Medium term issues which are much more structural and are more on the supply side than the demand side, he stated.

“There are continued repressed business climates across emerging markets. The really big Asian markets tend to do very badly in terms of their domestic business climates. Most Asian countries do pretty badly except for some small minorities who do much better,” he said.

In the economic freedom index noticeable that there are only two Asian countries in the top 20 – Hong Kong and Singapore which are exceptional because they are city states.

“Asia is still coupled to the West. We see an above average increase of trade among emerging markets but this is growing from a low base and in the medium term, it is not a replacement for the West. Asian emerging markets and their exports have to cope somehow with their reliance on the West despite the growth slowdown in the West,” Sally observed.

Panel discussion

The panel discussion featured the keynote speaker along with Hayleys Agriculture Holdings Managing Director Rizvi Zaheed, Department of Commerce Director General P. D. Fernando, Orange Electric Managing Director Kushan Kodituwakku, Brandix Lanka Chairman Ashroff Omar and Expolanka Holdings PLC CEO Hanif Yusoof and was moderated by Nithya Partners Precedent Partner Ariththa Wikramanayake

Q: You were dismissive about emerging markets – are you saying we should stick to our traditional markets?

Omar: I would rather focus on the EU, US and Japan in terms of apparel. In the markets in the West, our penetration is about two per cent in the States and just over one per cent in the EU so I think that there is much more that we can do there. My advice is that it’s a waste of time to focus on emerging markets where apparel is concerned. Even in plastics, the biggest markets again are the West. All the emerging markets are our competitors.

Q: Do you agree with these views?

Yusoof: My perspectives come from the retail fashion and export sectors. The customers were Western years ago and that will not change. I strongly believe is that brands are not going to disappear due to the current economic trends – they will simply divert to the emerging markets where the middle classes are growing. I also do business in Africa and sometimes I think that the risks people talk about are overstated when it comes to Africa. Africa is a place where the middle classes are expanding and there is a lot of potential there.

Q: What made you enter emerging markets and what problems did you encounter?

Kodituwakku: When we switched from Clipsal to Orange, we were primarily focusing on the Sri Lankan market but we then decided to forge partnerships with international markets. We set up joint ventures to export to countries like the US and Australia but it was not branded Orange, we were making them for someone else. We wanted to take Orange out but couldn’t penetrate the developed markets so entered the emerging markets.

We entered Singapore even though we knew we would lose money there but being there made it easier to enter other markets and from there we entered Maldives, Bangladesh, Pakistan and Nepal. Resources for this expansion were not difficult to find – it’s about finding people who share your vision and being there at the right time. We had to be in those markets for a couple of years before we began to see positive results.

Q: How important are trade agreements to penetrate emerging markets?

Sally: One issue is the strength of these trade agreements. Ideally, the default option is to go down the bilateral and regional route. If it’s an agreement often between neighbouring countries that is strong in terms of eliminating tariffs but goes beyond that in opening the doors to investment, then it could have a significant impact on intraregional trade but they are positive all around. A problem arises with most FTAs – it is done for foreign policy and a photo opportunity rather than to further trade itself and it doesn’t have a very positive impact on the overall economy

The problem with SAFTA and even the Indo-Lanka FTA, it is shot full of holes and exceptions and it is by no means a proper free trade agreement. Having a deeper FTA with India that does extend to services and promote better integration would be a good thing but it is not a substitute for unilateral liberation by the Government here.

What drives trade is what governments do on their own and not so much trade agreements. Relying on FTAs and using that as an excuse for not liberalising at home will do no good.

Q: Can explain what’s happening with CEPA?

Fernando: With CEPA, we have had a problem in 2008 when the negotiations came to a halt especially because it covered services. Lack of understanding of the liberalisation process led to these issues. We have been trying our best to clarify matters but what is currently happening is that the Cabinet appointed a committee and so far we have done the merchandise trade part and services section but the investment chapter is undergoing some work right now and the revised agreement will be submitted to Cabinet.

Q: What needs to be done by the Government to encourage moving into emerging markets?

Yusoof: Look at the Department of Exchange Control – there aren’t clear policies on how Sri Lankan businesses can go overseas.

Omar: It has already been done in the last budget but some guidelines are due which are to come soon.

Zaheed: I think it is very important to have access to information especially with emerging markets. The chambers and other institutions need to promote these information flows and need to encourage partnerships in these emerging markets.