Financial Times

Need for more trade between India and Sri Lanka
Lal Jayawardena was a man deeply committed to the goal of establishing free trade for Sri Lanka. In one of the papers he wrote several years ago, he made the point:

"In the long run Sri Lanka has to be a very open economy with a minimal, invisible government. I do not know if I would be far wrong if I said that it should aim to emulate many big cities in the west. After all, all these cities are economically speaking bigger than Sri Lanka. Why then should Sri Lanka be any different?

Arguably some countries are already following this model. In my view countries such as UAE, Dubai, Mauritius, Singapore, and Hong Kong are already following that model. They are all very open economies with simple no-frills administrations, reasonable clean and efficient administrations. Countries that will take advantage of the new global environment will have to be run on the principles of the above-named big cities."

These were the views he propounded to all governments and to all ministers. I first met Lal when he became the Secretary to the Ministry of Finance in 1977, in the Government of J. R. Jayawardene. Lal worked with Ronnie de Mel, the then Minister of Finance to liberalise the socialist economy of Sri Lanka. Sarath Amunugama was the Secretary to the Ministry of Information. I used to meet Lal from time to time as Secretary to the Ministry of Finance, as an Ambassador, and as the Head of WIDER.

In 1989, one of my first tasks as the Minister of Industries was to propose further economic liberalisation. At that time, Lal urged for the model of a very open economy embodying the elements of truly free trade, such as -- simple tax systems; limited government administration that does not impose undue costs on private individuals and businesses; government with balanced budgets and competing for business by providing infrastructure and a good home for commercial investment.

In 1990, after I announced the Strategy for Industrialisation, Lal met me and brought up the idea of a Free Trade Agreement with India. The question I asked Lal was, how can you have such an agreement when there is a mismatch between a liberalised economy and a non liberalised economy. He was of the view that India would have to undertake economic reforms within the next few years, and it was best to prepare for such an eventuality.

In 1991, events moved fast. The late Mr Narasimha Rao became the Prime Minister and economic reforms came to India overnight. Dr Manmohan Singh and Mr Montague Aluwalia who were spearheading the reforms process in India were known to Lal from his days at Cambridge. Lal initiated the WIDER study of the Indo-Lanka free trade. The WIDER report became the basis for the Indo-Lanka free trade discussion. On our side, we roped in a few others like A. S. Jayawardena, Secretary to my Ministry, who later became the Governor of the Central Bank, and started working on the report. In 1992, I came to India and started the preliminary discussions on the possibilities of a free trade agreement.

As Prime Minister in 1993, I travelled to India and raised the issue again with Prime Minister Rao. Progress was slow. After the elections in 1994, I went into the Opposition. President Kumaratunga made Lal the Deputy Chairman of the National Development Council. This gave Lal the opportunity to directly influence structural policy changes. India had by then had five years of economic liberalisation. The result was the Preferential Trade Agreement with India also known as the Free Trade Agreement.

Although this FTA was an important step, it was limited in scope. It covered only trade in goods and excluded services, which now comprises the largest and most dynamic sector in both of our economies and even its coverage of trade in goods was rather limited. Both countries included extensive negative lists. There were quotas limiting trade in tea and garments. Trade was restricted to specified ports of entry.

When the UNP came into power in 2001, I visited India and discussed with Prime Minister Vajpayee how to overcome the initial limitations of the FTA. Our joint action to expand the initial agreement not only increased trade between Sri Lanka and India, but also helped to increase mutual confidence. The FTA also became a building block for a more comprehensive economic integration.

Our objective at all times has been a free movement of goods, material and services between our two countries. The development of trade between our two countries has now done a virtual cycle.

The next step towards expanding trade between India and Sri Lanka was moves towards entering into a Comprehensive Economic Partnership Agreement (CEPA). In 2002, we agreed, in principle, to go in this direction. After a mutual agreement was reached on how to proceed, both countries established a Joint Study Group which began to meet intensively. The Study Group Report on CEPA Framework Agreement was completed and accepted by both Prime Ministers in October 2003.

The CEPA aims to both broaden and deepen economic relations between the two countries. The strategy is to expand the coverage of the existing Indo-Sri Lankan FTA, and at the same time, reduce the barriers to trade even further. The goal is to ensure that eventually, virtually all trade in goods is duty free.

The CEPA goes much further than the FTA; it would be truly comprehensive. It would include trade in services, investment and other areas for greater economic cooperation.

Lal closely followed the progress in the CEPA and saw it as an important next step following on from the existing FTA. As good neighbours, our two countries have much to gain from reducing the barriers that limit the free flow of goods and services. Even as both countries are now engaged in using the CEPA Framework Agreement as the basis for new formal agreements between Sri Lanka and India, we should recognize that this is only just another step in an ongoing process.

Of course, to reap the benefits of much closer trade ties between India and Sri Lanka requires that we go beyond basic trade policy reforms, and address trade facilitation impediments that restrict the movement of goods and people. Keeping these barriers in place involve costs that need not be incurred. For example, we need to look at ways to better integrate our administrative and commercial legal systems, better coordinate our health and safety standards, facilitate cross-border commercial payments, and invest to reduce the costs of transportation. And at the same time dispense with the costs of these restrictions.

Removing barriers result in building bridges on many different levels. As commercial barriers come down between our countries, businesses find more productive and innovative ways to better employ the resources in our region, building a foundation for higher rates of growth for all of us.

We need to become more ambitious in our thinking; to promote higher growth through the economic integration of our countries by creating a "Pearl River Delta" (like Hong Kong and the province of Guangdong situated on the Pearl River Delta which is the largest export manufacturing base in China) in the southern part of the Indian sub continent. This could be achieved by linking India and Sri Lanka with a land bridge, a railway, and highway system which would connect ports of Colombo, Trincomalee and Chennai with Madurai becoming a major manufacturing centre.

The idea of building an actual physical bridge connecting India and Sri Lanka is an idea that goes back - at least to the 1860s. The notion of constructing an actual bridge is also an important symbolic statement of the importance of the emerging economic, social and political ties that define this increasingly important sub-region. We have been linked by 3000 years of common culture, history and similar political experience - it is inevitable that we face common economic opportunities - that can be more effectively addressed if done together, rather than separately.

Addressing the M S Swaminathan Institute two years ago, on "Making our People Rich", I said: "It is easy to imagine a major new manufacturing area developing around Madurai and to the southern districts of Ramanathapuram, Theni, Trichy, Tirunelveli and Kanniyakumari -- an area which could eventually extend to Coimbatore and Bangalore. There is a very real opportunity for this sub regional centre to become an important global manufacturing base, on par with anything that has been developed in China. This will create millions of jobs in southern Tamil Nadu and make the whole area prosperous. Even northern Sri Lanka will benefit from this rapid economic development.

Sri Lanka's role in the sub-regional economy would tend more towards the provision of services - not only the ports and airports, but also by supplying financial, logistics and business development services.

Both, building the land bridge and the consequent economic activity specially the global marketing base will provide employment to large numbers of people and raise incomes substantially in South India as well as in Sri Lanka. A win-win development that could change the economic map of our region."

Over five decades ago the newly independent India and Sri Lanka imposed restrictions and controls on trade. This was one of the reasons why we failed to make our people rich or reach international standards of development. Today both countries are pursing a number of exciting initiatives to meet new challenges by allowing our people to take advantage of the complementary assets of this combined economic region.

This was a concept which excited Lal. A logical conclusion of the process he started over a decade and a half ago. Indo-Lanka free trade was one of Lal's most precious ideals. Making it happen would be the best tribute we could pay this extraordinary personality.

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