By Dr. Sarala Fernando Following the Brexit referendum, various opinions are being expressed reflecting a certain confusion in Colombo’s approach to economic diplomacy. One key policy maker has suggested that Sri Lanka should enter into a free trade agreement with the UK, this then qualified by another arguing that such a project would take years [...]

Sunday Times 2

Panic diplomacy?


By Dr. Sarala Fernando
Following the Brexit referendum, various opinions are being expressed reflecting a certain confusion in Colombo’s approach to economic diplomacy. One key policy maker has suggested that Sri Lanka should enter into a free trade agreement with the UK, this then qualified by another arguing that such a project would take years given that the UK would have to make its own trade deals within the EU first. Then the public is told that the Brexit referendum makes the Economic and Technology Co-operation Agreement (ETCA) more urgent and that a Cabinet Minister is to visit Delhi soon to expedite matters. What is the connection between continuing to get our exports at a concessionary rate into the UK and concluding the controversial ETCA? India is not a substitute market at all for UK and there is already a trading arrangement in place where a plethora of Non-Tariff Barriers remain to be resolved.

The British Sterling Pound has depreciated hard on the heels of the outcome of Brexit

The confusion here is in contrast to the UK where the Prime Minister has taken decisive steps announcing he is stepping down and that a mandate for a new leader, or a fresh election, would rest with the upcoming Conservative Party convention in October. Significantly, the decision remains to be made as to when to trigger EU’s Article 50 which “would start the process of the country’s political divorce”. That process could take a minimum of two years (with provision for extension), with Leave campaigners suggesting that it should not be completed until 2020 – the date of the next scheduled general election. EU leaders have made clear that no start can be made on any negotiations for a new trade agreement with the UK before Article 50 is triggered. There is also a sense that any new agreements required with the UK will not be done easily since the EU negotiators will not want to give other member states the impression that this is something to be accomplished easily. There is also the slim margin of the Leave verdict which means that the UK will probably seek a new but close relationship with the EU especially on the single market.

Common sense therefore indicates a need to wait and see where this is all going before any knee-jerk speculation can be made on the impact for Sri Lanka. On textiles and garments, which represent the largest exports, there would be forward contracts which would have to be honoured and in any case most of the manufacturing in Sri Lanka is on behalf of UK owned business so there will be some interest there to maintain continuity of supply. Reports by economists have highlighted the financial consequences from the sudden depreciation of the sterling pound on the heels of the Brexit outcome. Will this render our goods and services such as tourism non-competitive? We are told that some 10% of our foreign reserves are in UK and the loss in value will affect our financial standing. It is however entirely possible that in due course, the pound sterling will recover and stabilize, given the strength of the UK financial sector.

On the diplomatic front, Brexit will reduce the UK’s diplomatic clout without that large voting bloc and have consequences for mobilising support for causes they want to champion as well as, for example, winning elections in the UN. So most likely the UK, even as a powerful Permanent Member of the Security Council, will have to strengthen its relations with alternate groupings like the Commonwealth. With Brexit, the UK is not obliged to continue existing EU concessions to Less Developed Countries such as EBA (Everything but Arms) covering duty free access and flexible Rules of Origin (ROO). Hence there may come an opportunity for Sri Lanka to forge a new concessionary trading relationship with the UK under the Commonwealth but this is still very much in the future.

So why the “panic” diplomacy in Colombo? – a smoke screen to cover any negative fall-out in Geneva at the Human Rights Council? Or an impetus to get ETCA signed, over and above the local protestations? Either way it is bad politics and worse public diplomacy which calls for building relationships with the people based on clarity and trust. As a result of the IMF loan and perceived conditionality of increasing VAT collections, the Sri Lanka public is enraged and has no appetite for any new trade agreements, least of all the “hundreds” of new trade agreements which our government leaders say are necessary, ignoring the evidence that a “spaghetti bowl” of such agreements is difficult for a developing country to operationalise without inordinate delays at customs entry.

The message of Brexit seems to reject the principle of economic integration while some of the blame has been cast on over-regulation by Brussels. With WTO virtually paralyzed following the impasse on the Doha Round, the golden era of free trade negotiations may be drawing to a close. Public scepticism is growing on the free movement of labour which inevitably follows the liberalising of the movement of goods.

The ILO, since about 7-8 years, has pointed to the global deficit in “decent” work opportunities and the consequent lowering of living standards as a result inter alia of changes in the means of production. This is at the heart of the opposition to CEPA and ETCA. Mega projects are becoming more mechanised and less labour intensive, visible in the high-rise construction that is rapidly taking over Colombo. It is funneling growth, yet some warn this is unsustainable, given that elsewhere in Asia, housing bubbles have grown and burst. There are both immediate and future political implications. Colombo home owners adjoining such construction are complaining that their building foundations are being shaken by the piling (some have even been paid to move out completely) and construction dust is causing untold illnesses. There is also concern about the cost to city dwellers in terms of water, electricity and sewerage diverted by a compliant municipality to these monstrous and seemingly empty new buildings.

Even in the US, assembly lines are being replaced by small business as the engine of growth, employing over 50% of labour force. Typical small business there could have one person working out of home. It may be that different approaches are required to increase “decent” work in developing countries. Take for instance the success of the Norwegian Match making programme in Sri Lanka which began during the conflict years and is still advancing investment in small joint ventures such as fisheries and boat manufacturing, ICT and BPO services, renewable energy, rubber and coir based products, gift articles, apparel, organic foods, steel and wooden products.

Some years ago, our economists had also championed the potential of the informal economy. Bangkok is a good example with its street hawkers and street markets which flourish side by side with the huge malls and high end shops. Cooperative understanding from law enforcement and municipal authorities is required to make the informal sector succeed and it certainly does put money in poor people’s pockets. Food, handicrafts, home woven textiles, flowers and vegetables are all brought to the Bangkok streets directly by producers and sold – without any tax, benefitting both the buyer and seller. Contrast this with the directives of the former government to get rid of the “untidy” spectacle of the informal sector on the streets by “herding” them into expensive shelters. No one evidently had read Hernando de Soto who argued that supporting the informal sector could bring solid benefits to developing economies – but then it seems we are now a “lower middle income” country well on the way to a prosperous future. Just watch the tv programmes hearing the opinion of the villagers on their basic needs – a true reality check from the voting public.

(The writer was a Sri Lanka Foreign Service Ambassador)

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