Policies enunciated by the last regime (in particular by former Treasury Secretary P.B. Jayasundera) such as doubling Sri Lanka’s exports and curbing imports (at the same time) are ‘stupid’, a top economist says. Singapore based economist – Dr. Razeen Sally, speaking at the Sri Lanka Economic Summit 2015 held at Cinnamon Grand in Colombo on [...]

The Sunday Times Sri Lanka

Message to Rajapaksa regime: ‘Don’t engage in stupidonomics’, urges top economist

Proposes setting up post-election Ministry of Trade and Investment to couple imports to export strategy

Policies enunciated by the last regime (in particular by former Treasury Secretary P.B. Jayasundera) such as doubling Sri Lanka’s exports and curbing imports (at the same time) are ‘stupid’, a top economist says. Singapore based economist – Dr. Razeen Sally, speaking at the Sri Lanka Economic Summit 2015 held at Cinnamon Grand in Colombo on Monday under the title ‘Towards Exports of US$ 50 billion” said that doubling exports and limiting imports in Sri Lanka which was articulated by the former Treasury Secretary is in fact ‘stupidonomics’.

Finance Minister Ravi Karunanayake, Prime Minister Ranil Wickremesinghe and Suresh Shah at the Economic Summit. Pix by Indika Hanuwala.

“I have heard Dr. P. B. Jayasundera saying this. It doesn’t work.”
He said that this is essentially because such measures will disrupt the value chain. “Exports and imports are Siamese twins. They are two sides of the same coin. Not only does it not work, but it’s stupid to say such things,” he said, adding that slapping taxes on imports makes it costlier for domestic exports.

Answering a question in the ensuing panel discussion at the summit organised by the Ceylon Chamber of Commerce (CCC) on imports and exports, he added, “You need your imports to process exports. So how can you increase your exports while limiting your imports? There are many other competitive countries that are willing to grab these businesses. What countries should be looking now is not to do a whole value chain domestically, but to try and find niches along the value chain where you can perform specific tasks. Much of them will be intermediate products and the way public policy can help there is not to target particular firms and sectors because we can’t predict how the market is going to evolve in the future, but to provide an enabling environment. Education and skills in Sri Lanka and elsewhere needs a much bigger private sector component, with a lot more choices for ordinary Sri Lankans.”

Dr. Razeen Sally

Dr. Sally, also Associate Professor at Lee Kuan Yew School of Public Policy, National University of Singapore, reiterated that protectionism leads to retaliation so exports will decrease. “Domestic industries may become uncompetitive, because there is no incentive.”
In his address, Dr. Sally said that one important effect of import liberalisation is to channel resources into profitable export sectors, removing the bias against exports inherent in protectionist regimes.

Highlighting six points on what Sri Lanka should be aspiring to be, Dr. Sally said that it was crucial to be ambitious to double the country’s trade targets. ”Firstly, it is important to maintain trade over 100 per cent of GDP. Try to double the trade/GDP balance by 2020-2025. Secondly, Sri Lanka should focus on three key export markets, which are the US, EU and India, while maintaining healthy trade connections with ASEAN, China and Far East Asia.

Thirdly to increase FDI to 5 per cent of GDP by 2020 and fourthly, focusing on GVCs (global value chains) beyond garments that are especially in services and logistic hubs. Fifthly, Sri Lanka needs to work hard to get into the top 50 bracket in the Ease of Doing Business ranking by 2020 and to the top 25 by 2025. Lastly, continuous improvements and international benchmarking, especially with the East Asian countries and top five Indian states is necessary.”

Dr. Sally added that Sri Lanka should benchmark itself with East Asia or the top five states in India and not South Asia when considering its economy. ”Sri Lanka should think of introducing a new Ministry of Trade and Investment following the general election. Sri Lanka should have an import strategy coupled with an export strategy,” he stressed, highlighting that policies that are simple, clear, and predictable are the key for economy to move ahead rather than having many policies which will inhibit businesses.

“Simplicity is the key,” Dr. Sally said, adding that if one is to learn one general lesson from East Asian miracles, it’s that policy is not rocket science, it should not be terribly complicated and not that ministers are very intelligent people. “No. The main lesson from East Asian miracle is that simplicity is the key and imperative of getting the basis right.”

Explaining the policies under the last administration, he said that for a decade Sri Lanka had effective de- liberalisation, instead of liberalisation with the combination of much increased state intervention in the domestic economy, and increase external protection.

“Whatever the nominal rate of protection we might see from our import tariffs, has possibly doubled in the past decade according to some estimates, because of the whole host of extra tariff barriers, para tariff barriers, non tariff barriers and different kinds of CESS along with a big increase in agricultural protection and arguably more politicises environment for foreign investments particularly when it’s come to big projects.”

According to him, key economic indicators of Sri Lanka aren’t bad when compared with its South Asian counterparts, but are nowhere near East Asia (which should be the real comparison as they are growing). “The nominal average for Sri Lanka’s tariff is about 10 per cent which does not look badly when compared to south Asian countries but it compared badly with East Asian countries.” He pointed out that the East Asian average is roughly 5 per cent. He added that the CESS on tea and rubber is an ‘idiotic’ policy.”This policy quite simply doesn’t work.”

Dr. Sally added that the next government should have a programme of para tariff and non-tariff barriers in order to bring them down as close as possible to zero, on industrial goods. He advocated a uniform tariff of 5 per cent on industrial goods by 2020.

Spelling out a new global economic strategy for the country, Dr. Sally said that lower agricultural protection, longer-term target of zero tariffs (which will make Sri Lanka the Singapore of South Asia), radically simplifying customs procedures (which is automation and automaticity) stand at the topmost. According to him, typical analyses find that tariffs tend to benefit domestic producers and government at the expense of consumers, and that the net welfare effects of a tariff on the importing country are negative.

He urged policymakers to prioritise “horizontal” (economy-wide) policies to get the basics right. “Move away from ‘vertical’ policies to ‘pick winners’ in sectors and firms.”

He added that lowering agricultural protectionism needs to be done slowly as it is politically tricky. Full openness and automatic approvals along with some radical reform of BOI, which needs to be a genuine one-stop-shop and moving from an incentives culture are also important elements in a cohesive economic strategy, he said.

He urged businesses not to rely on trade pacts. “Do (canvass business) it yourself.” He added that Sri Lanka should apply to join a TPP with the US, while entering into a FTA with EU and ASEAN starting with Singapore. “Sri Lanka needs to change its game.”

On the sidelines of this summit, he told the Business Times that the Sri Lankan garments story should be replicated across all areas such as the ports, airports, infrastructure links to South Asia, etc. “The mindset needs to change and one needs to counter the opposition for this from protectionists.”

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