As Global Economic Power Shifts, Where Will Sri Lanka Place Herself?

>

By Anushka Wijesinha – Research Officer, IPS
Part of the ‘Global Perspectives’ series

As the balance of power in the global economy shifts, Sri Lanka needs to be cognizant of the new opportunities and challenges that are emerging,
and decide where and how it wants to fit in.

The global financial crisis, and the resultant global economic downturn in 2008/09, had a debilitating impact on the strength and dynamism of many of the Western economies. Yet, this was but another crack (albeit a more discernible one) in a region that had already begun losing its edge.

The balance began to change in the late 20th century. After 25 years of growth and extreme consumerism, much of the West began to lose its competitive advantage as full employment and inflation eroded the profitability of mainstream manufacturing. East Asia slowly emerged as a manufacturing powerhouse, and the Asian tigers were unleashed. They adapted Western technology to win markets abroad. By the 1980s, China had joined the Asian tigers – Taiwan, Hong Kong, Singapore and South Korea, soon to be joined by Indonesia, Malaysia, Thailand and the Philippines. By the mid-1990s, India joined the club of high growth Asian economies.


Economic Vigour Has Shifted East. Sri Lanka Should Too.

So, the balance of economic power is shifting decidedly from West to East, with China, India, and East Asian tiger economies leading the global economic recovery. Global production hubs have, and continue to, shift to India and the East not only because of lower costs, but also increasingly because it is being complemented by improved industrial, technological, and knowledge-driven capabilities. China and India are the veritable engines of growth of the world economy, much like Germany and Japan were in the late 1970s.
For decades now, Sri Lanka has relied on Western markets for its export earnings.  For much of the last decade, the bulk of the Sri Lankan exports (60%) have been to the US and EU. However, with the weak recovery, sluggish consumer spending, depressed job market, woes due to austerity measures (mainly in Europe), and the withdrawal of the EU GSP-Plus concession, Sri Lankan exports to these markets are now under stress. In 2011 and 2012, the US is projected to grow at 2.8% and 2.9%, while the EU is projected to grow at 1.6% and 1.8%, respectively.  Meanwhile, Asian economies attain a strong post-crisis growth trajectory, and thus, an era of ‘two-speed growth’ is visibly taking root. In its latest World Economic Outlook (WEO) (April 2011), the IMF forecasts that growth of ‘advanced economies’ will languish at 2.4% in 2011, while ‘developing Asia’ will grow at 8.4%. Boasting a high level of domestic demand, Asian growth champions, China and India – ‘chindia’ – are predicted to grow at an impressive 9.6% and 8.2%, respectively.

Sri Lanka is yet to effectively ‘plug in’ to the dynamic growth centres that are emerging in its vicinity – India, East and South East Asia, and China. Sri Lanka needs to look at developing stronger linkages with these healthier economies of Asia, explore new trading opportunities, and move away from the excessive dependence on the US and EU. There appears to be some policy impetus for this, with the Export Development Board (EDB) stating that it aims to help reduce the country’s export dependence to the US and EU from the 61% at present to 50% by 2015. Critical to this effort however, will be a careful and comprehensive evaluation of what type of product categories could succeed in these new markets, what level of quality and branding is required, how to effectively to link into their supply chains, and what tariff and non-tariff barriers need to be addressed in tapping these markets.
Tighter Ties Within the Region
Intra-regional trade in South Asia is less than 5%. Although Sri Lanka is a signatory to the region’s second multilateral trade deal, the South Asian Free Trade Agreement (SAFTA), utilization of the SAFTA preferences have been  remarkably low.  However, Sri Lanka’s bilateral economic relations with India have been growing, with increased trade taking place under the India-Sri Lanka FTA (ISFTA) which has been in force for just over 10 years now.  Yet, the two countries have not been able to expand this FTA to cover services and investment by signing a Comprehensive Economic Partnership Agreement (CEPA), despite years of discussions, due to domestic resistance from certain quarters.

India is increasingly demonstrating its strong economic potential and heightened international economic standing, and is the new cynosure in the eyes of emerging markets analysts. India is growing strongly with a large domestic market as well as growing industrial and services potential, and there is a need to find ways of productively ‘piggy-backing’ on this, through a mutually-beneficial, suitably phased, comprehensive partnership. With India pursuing stronger economic relations with the wider Asian region, closer economic integration with India would open new doors of opportunity for Sri Lanka.  India has already signed Comprehensive Economic Cooperation Agreements (CECAs) with Japan, Malaysia, Singapore and South Korea, and a Trade in Goods Agreement with ASEAN (soon to be expanded to an FTA in services). India has also begun negotiations on an FTA with the Gulf Cooperation Council (GCC) and the European Union (EU).
While economists in the region have begun exploring the potential for ‘intra-industry trade’ within South Asia to strengthen regional value chains (RVCs), this has yet to feature heavily on the agenda of regional policymakers. In developing greater intra-regional trade and investment in South Asia, several issues would have to be addressed aggressively – tariff and non-tariff barriers, poor physical connectivity, burdensome behind-the-border procedures, ambiguity in terms of related trade procedures, corruption, and visa facilitation for businessmen.
Twenty five years since its establishment, the South Asian Association for Regional Cooperation (SAARC) struggles to prove itself as an effective institution in shaping the South Asian region as a formidable economic bloc. “SAARC-ists” like Dr. Rajiv Kumar, Director General of the premiere Indian private sector body FICCI, believe that while SAARC as an institution leaves much to be desired, SAARC as a concept still holds much currency. He has advocated on moving fast on issues like energy cooperation and tourism to provide some ‘quick wins’ to build confidence in the notion of closer South Asian integration, and demonstrate to SAARC’s citizens that progress is possible.
Yet, movement on SAARC agenda items proceeds unhurriedly. So, while continuing to play an active role in strengthening SAARC and advancing its goals, Sri Lanka needs to also explore ways to engage more intensively with more dynamic blocs in other nearby regions, and their economies; for example, in South East Asia through the ASEAN, and in the Middle East through the GCC.
Foreign Policy to Further Economic Goals
Sri Lanka ought to take a ‘long view’ with respect to its foreign policy. It is important to bear in mind that the implications of the country’s foreign policy are not confined to the diplomatic sphere alone, but also permeates strongly into the economic sphere as well. It has implications, directly and indirectly, on Sri Lanka’s participation in the global economy, and thus on trade, investment, and, consequently, economic growth. Sri Lanka should consider formulating a strategic foreign policy that fosters a strategic balance between her neighbours in South Asia, dynamic East Asia, and her traditional trading partners in the West. With South Asia, Sri Lanka ought to move faster on cooperating not only on intra-regional trade, but also on intra-regional connectivity, people-to-people contact, energy, tourism, etc., as well. With East Asia, Sri Lanka ought to leverage on their current and potential economic strength, and their growing clout on the global scene (the last G-20 summit in October 2010 was held, not in a Western capital, but in Seoul, South Korea). With the West, Sri Lanka must guard against her antagonism stemming from the issues surrounding the end to the armed conflict spilling over into our economic relationships. Sri Lanka still depends heavily on their exports markets, and needs cordial ties in order to attract greater FDI, and needs to foster links for technology-transfer to spur innovation as the nation aspires to faster and faster economic growth.
Latching on to the New Centres of Gravity for a Louder Economic ‘Voice’
Meanwhile, Sri Lanka must stay acutely aware of the tectonic shifts in the centre of gravity of global economic governance that are slowly taking place. The G20 – set up to ensure a coherent and concerted effort in tackling the fallout global economic crisis – was an unprecedented coming together of the richest Western economies and the most commercially important emerging economies. Although earlier touted as, potentially, the new platform for international economic co-operation in light of the stalemate in the WTO and friction in other multilateral fora, it appears to have little longevity beyond the crisis response efforts it originally mandated itself to do. Rather, what is now emerging as a key power bloc is the BRIC (Brazil, Russia, India, and China) group. The BRIC countries, which showed strong resilience during the global economic crisis, account for 45% of the world’s population, 25% of global GDP, and a whopping 60% of the world’s foreign currency reserves. In its most recent summit in April this year, South Africa was invited to join the grouping, expanding the group to ‘BRICS’, further solidifying the grouping as a powerful player on the global stage. BRICS already have a couple of impressive triumphs to boast of. They have just agreed that instead of lending to each other in the international reserve currency, the US dollar, they will lend in their own currencies. Following last year’s BRIC summit, they managed to successfully lobby for greater voting representation in supranational financial bodies like the IMF and World Bank – a long overdue reform.
This gradual emergence of the BRICS could, eventually, provide an effective platform for developing countries as a whole to rally around. They could link up productively through their own (albeit relatively weak) G-15 group, and thus find themselves a stronger voice in the global economic arena. This has direct implications for smaller developing economies like Sri Lanka. Despite being unassociated with the initial financial markets crisis, developing countries like Sri Lanka were badly hit by the global downturn that followed, and therefore have a strong desire to see the developing world gain a stronger voice in reforming global economic governance. By finding ways to strategically link up to this type of new, stronger ‘South-South’ cooperative voice, Sri Lanka could create more avenues to seek support for its economic goals internationally.

Don’t Write Off the West Just Yet
Despite the economic crisis that has threatened their entire economic model, several Western developed economies remain fundamentally strong, have developed and refined their institutions and policies over a longer time, and more importantly, posess the ingredients to adapt to the changing tides. Their hegemony cannot be dismissed too quickly, at this stage.
The population of the United States is growing with vitality, compared with every other Western industrialized country where populations are shrinking. Unlike China (which is now gradually seeing straining labour market symptoms of its ‘one child’ policy) the fertility rate in America remains high enough to sustain economic expansion for at least another generation.  America’s population strength also comes from a welcoming immigration policy that has attracted both the best minds from East Asia, and ample labour from South America, for example. America’s edge in innovation will not wane that easily, despite Asia catching up fast. The Harvard political scientist, Joseph Nye, considered the father of the concept of ‘soft power’, points out in his book The Future of Power that Chinese- or Indian-born engineers run more than a quarter of all high-tech companies in Silicon Valley. By 2005, 1 in 4 technology start-ups had been launched by immigrants. According to Nye, America’s greatest long-term strategic asset is “its ability to attract the best and brightest from the rest of the world and meld them into a diverse culture of creativity”.
Despite the continuing ‘austerity fever’ in many of the region’s countries, Europe has its own champions too. Germany emerged strongest in the region from the economic meltdown, growing at 3.5% in 2010 (compared to average EU growth of 1.7%) and forecast to grow at 2.5% in 2011 (compared to the EU-average of 1.6%). Germany, the world’s fourth largest economy, boasts of not only industry-leading firms but also one of the world’s strongest small and medium-sized enterprise sectors – the powerhouse of its economy. Products “Made in Germany” still command an unrivaled global position, re-known for their quality and cutting-edge technology. In 2008, Germany spent around 2.6% of its GDP on R&D, well above the EU average of 1.9%. In 2009, firms based in Germany registered around 11% of worldwide patents – 3rd highest in the world. Germany’s leadership in innovation and its sustained focus on developing a highly skilled workforce would undoubtedly help it adapt its economy well to the changing economic power balance.

So, while adopting a ‘look East’ policy to latch on to the emerging centres of growth and economic vitality, Sri Lanka cannot write-off the West as a complete ‘weak horse’ just yet. Finding a strategic balance, and carving a strategic place for herself in this changing global economic geography, will be the key medium- to long-term challenge for Sri Lanka.

  • Rohan Samarajiva

    >Interesting piece on a critically important subject. I hope this will be effectively disseminated in local languages through policy briefs to MPs and so on.

    One suggestion is that more weight be given to actual trade agreements and less to pious declarations.

    I am pleased that some of the ideas in my 2009 column http://lbo.lk/fullstory.php?nid=1164622060 are being moved forward.

  • Anushka Wijesinha (IPS)

    >Thank you for reading this piece and taking time to comment, Dr. Samarajiva. Will also look through your article you have linked here.

    Your comment is well noted. Actually, this article aimed to be the first in a series over time that looks at the key issues mentioned in overview in this piece. Taking a closer analytical look at relevant trade agreements will be one element in this.

  • FS/Commercial

    >Thank you for the interesting article…

    Though everybody deliberate on look east policy, I think we have been given less attention to the fundamental aspects of demand and supply status of the engaging partners. The norm of selling refrigerators to Eskimo’s is not viable option for today’s world.

    Though it be trade in goods or services, stakeholders (particularly, Sri Lankan) should have a demand for their products or services with engaging partners. Having considered the level of market diversification efforts of both government and private sector level in Sri Lanka, there is no point in aggressive east look policy, as we are not capable producing much for the current demands for those emerging economies.

    Take for an example, our current strategic export strength, apparel, our main contemplating market; India’s share of the global import is less than 1%. So how long will it take to reach a demandable level? However, one thing for sure, Westerners will not go nude at least for next five decades!

    tradepolicylka@gmail.com

  • Indrajit

    >An Excellent and timely piece. It addresses the most crucial strategic issue of our time: how should Sri Lanka position itself to take advantage of the shift in the global economic centre of gravity from West to East?
    Anushka, is to be congratulated for framing the debate so well.

  • nitya

    >One would possibly think what is Sri Lanka's stake in this shifting of global economic power? It's not a simple issue. It is indeed necessary for Sri Lanka to engage more with China and India. But deeper engagement with them will not be easy. These two countries will continue to have their own reserve armies of cheap labour for a long period despite fast growth. As a result Sri Lanka cannot engage with them on the basis of cheap labour which was important in its engagement with the West. Africa's engagement with China, for example, has been driven by the natural resources they have. Sri Lanka has already been benefitting particularly from India in the tourism sector. Sri Lanka has to find out similar areas.

  • Patrick

    >Terrific article, Anushka. Well researched, thought-provoking and oh so timely. While being encouraged to look East, it's easy to write off the Western markets but you adroitly identified the realities of US population growth and entreprenure capture. The UK's quarantine from the euro provides that country with significant leverage in recovering from the GFC too. And down South, Australia is booming along. The West ain't dead as a market yet.

    This decade has the potential to be a golden one for SL. Geo location and rapid infrastructure development combined with an educated, literate and skilled labour force – and the stability war-end has brought – offers the island a genuine "Singapore" opportunity.

    As others have rightly posited, in it's development decisions SL has to consider what market demand from the East will likely be. Recent depressing events in the Spanish motorcycle industry are a good model of the pointlessness in chasing the sort of manufacture that the Chinese do so well. Simultaneously seeing companies like Philec Solar (Philippines) moving their R&D lab to Singapore last year because of a lack of local expertise hints at the challenges developing economies face in moving into sexy industries such as photovoltaics.

    This is clearly a critical time for SL government, industry, agriculture, labour and the think-tanks to work together on developing and sustaining that equation of hard and soft industry and agriculture that will allow the nation to achieve its potential. Challenging and interesting times, eh? Picking the winners is never easy.

    Anushka, really enjoyed the article. Looking forward to others in the series.

  • Samantha

    >Excellent work….Enjoyed every bit of it.

    Sri Lanka, to reach the Asian markets will be compelled to compete with more stronger Western as well as Asian suppliers. Most of the supplies to Asian markets are branded and brand strength alone could kick our goods and services out. We are already late in developing strong brands not necessarily the most sold, but with the best quality.

    Thank You Anushka for the brilliant piece and look forward to the rest of the series.

  • deshal d

    >Good stuff as always Anushka. Just wanted to make one comment related to a point brought up by FS/Commercial. True that countries like India have similar strengths to SL in terms of products such as apparel, but this does not preclude the possibility of finding niche markets catering to the growing middle class there, whose tastes are more aligned to Western tastes. The success of Amate, the MAS brand of lingerie tailor made for South Asian women, is a case in point.

    Sri Lanka has the opportunity of building on its successes in Western markets to cater to the middle classes in India and China. But the key is not trying to compete on price, but instead focus on innovation and product differentiation to tap into unexplored niche markets in the emerging economies.

  • Sami

    >I partly agree with deshal d,

    If u try little bit harder it would be possible to find niche markets even in other countries including developed countries. Close to over 1bn population, if we are to see niche markets,specilay relativly low value items like 'ladies underwares' (with due respect to MAS efforts!)we lead to nowhere with Indian market. Let me take very recent niche approach in India,one is ferrari and other is Aston Martin V8 vantage model. Both value in $ millions. The whole point here is , no doubt India is a growing market,but… has it grown in compatible with our supply capacities, where we can think of 'look east policy' much hastely. (FSC)

  • deshal d

    >Sami, i agree that Sri Lanka's future is not in labour intensive manufacturing such as apparel on a large scale – i used that example to make the point that trade is possible even between two countries with similar comparative advantages due to intra-industry trade.

    Another dimension of look east for SL will be outward investment. Manufacturing in SL has become increasingly difficult due to bottlenecks in access to labour and access to raw materials. In the longer term SL manufacturers will have to shift bulk operations overseas to locations with more abundant natural resources and cheaper labour. This is already happening to some extent but will accelerate as Sri Lanka's economy develops further.

  • Asela Sathurusinghe

    I was searching some articles for my MBA & found that i got the right answer in this articles.

    Thank you very much guys.

    Cheers!!!