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31st May 1998

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Economic fall-out of nuclear explosion

The economic fallout of India's nuclear explosion remains unclear. Although the United States announced economic sanctions, these may be quite limited. They may be confined to only US government transactions including aid to India. Only time can tell whether US intentions are part of its political rhetoric or a strong commitment to hurt India.

If the United States is intent on making its economic sanctions really count, then it would have to use its control over the IMF and World Bank to make these Institutions deny India short-term and long-term facilities. If that were to happen, there is little doubt that India's economy would be seriously affected.

Japan, India's largest donor in the last decade, has suspended US$ 26 million of grant aid. The United States too has frozen its aid and the US Exim Bank will not finance US exports to India.

But the biggest impact could be through a cut in lending and grants from the World Bank and IMF. Japan and the United States could also use their power with the ADB to cut loans and aid from the Manila based Bank.

It is to the credit of the Indian statesmen that they have not reacted strongly to US pronouncements of sanctions. This may result in the US not pursuing the sanctions strategy too fiercely. But what is of greatest interest is whether the United States would be willing to alienate India.

The size and importance of India are likely to make the United States re-think its policy for both political and economic reasons. The alienation of India would imply that American political influence in South Asia could be seriously affected. It is unlikely that the United States would like to get into a position where it has no influence in the South Asian sub continent.

The other big consideration is that India's size and large market for US goods is of a magnitude that the business community in the US is looking forward to investments and trade in India. It would be in the economic interest of United States itself not to break its links with a one billion population of India. For this reason the United States is likely to find various means by which it would still continue to have considerable financial, economic and business links with India.

One can even view the fact that France and Britain refused to impose economic sanctions on India not necessarily as a disagreement between the Allies, but a well thought out strategy. In the event that the United States loses its direct influence with India owing to the economic sanctions, it could rely on its allies France and Britain to strengthen its links and indirectly have an influence in India. There is little doubt that these Western countries would like to retain a dominant influence, not only in the political scene, but also in the economy of India even though the Cold War is over. Such is the nature of international politics and economics.

There is however another important issue. If the nuclear power of India leads to a similar response from Pakistan and defence expenditures escalate, this would be to the detriment of the economies of both countries.

Even at present both countries expend far too much on defence and leave too little for essential economic and social development expenditures. This would indeed be a sad development for South Asia

In as far as Sri Lanka is concerned, if the economic fallout of the nuclear explosion is adverse to India's economy, it can only have negative impacts on Sri Lanka. The Indian economy, both owing to its largeness and proximity, will always have an important determining influence on the course of progress of the Sri Lankan economy.

If the momentum of India's economic growth is reduced, it would have its effect on Sri Lanka, both directly and indirectly. A rapidly growing Indian economy would imply that foreign investors would look to the region for their investments.A robust economic growth in India can provide economic opportunities, particularly for the service economy of Sri Lanka. A stagnant Indian economy would be a debilitating factor in Sri Lanka' s economic progress.

It is most likely that the issue of economic sanctions would be resolved in the not too distant future. Once the nuclear dust settles it is likely that both the United States and India, as well as the other international economic giants would adopt a pragmatic approach to these issues and the nuclear explosion would not be allowed to be a stumbling block to economic growth in the region. That certainly is the hope and expectation in Sri Lanka.

Poor and rich benefit from WTO

The belief which developing countries had that WTO (World Trade Organisation) would only benefit the developed countries has given way to a belief that co-operation benefits all, says Frances Williams in an article in the London 'Financial Times'.

She says that GATT, WTO's predecessor, was known as a "rich man's club", although developing nations constituted half its original membership; moreover, the "one country one vote system" gave small poor nations the same voting weight as the US which dominated world trade.

Yet, the WTO's rule of consensus meant that no decision could be taken without the consent of the main traders, the US and other industrial nations which had a powerful trading clout.

Nevertheless, says Williams, poorer nations increasingly came to recognise that "a predictable rules-based trading system that outlawed trade discrimination worked to their advantage."

Williams goes on to say that the voices of the developing countries, which constitute three-quarters of the WTO membership, backed by increased trading muscle, are being raised even more strongly in the WTO's decision making bodies.

The writer says that a veteran Uruguayan trade diplomat, Julio Lacarte-Muro, now on the WTO's appelate body, had observed that the 1986-93 Uruguay Round of global trade talks marked a watershed.

At these talks there was a change of mentality on the part of the developed and developing countries; the former realised that emerging economies were becoming important markets for their exports and the latter, many of whom were introducing economic and trade liberalisation programs unilaterally, "saw the opportunity to cement that liberalisation in the GATT/WTO and receive trade benefits in return".

Williams says the systemic benefits to poorer nations from the Uruguay Round included strengthened fair trade rules and a semi-judicial dispute settlement that has been used extensively against the big traders - for instance by Costa Rica and India against the US on textiles. Further benefits, says the writer, will emanate from the Uruguay Round decisions to restrain farm subsidies and border protection, which help richer nations undercut poor ones on world food markets and to phase out quota restrictions on textiles.

The writer refers to the WTO assessments which estimated that industrial countries cut tariffs on Industrial products of interest to developing countries by 37 per cent. In return developing countries were obliged to accept new rules on intellectual property, services and investment as well as a vast array of extra disciplines in the goods sector.

Williams says that, although ideological opposition to compliance in these areas is waning it has resulted in "an onerous burden of obligations in terms of new legislation, trade policy notifications and presence at WTO meetings, which many developing countries are struggling to cope with."

She adds that the burden of compliance has become one of the biggest issues for WTO's poorer nations and is bringing about strong opposition from some countries to the inclusion of any new subjects on the WTO's future agenda.

Williams quotes John Weekes, Canada's WTO ambassador as saying that if developing countries do not want to be marginalised in the international economy they have no choice but to make a strategic commitment to devote more resources and man-power to trade policy.

WTO Director General Renato Ruggiero is also reported to have said that poorer nations cannot simply say they want to get off the trade liberalisation bus. "Technological advance and globalisation will proceed anyway. The process could not be stopped," says Raggiero.

GST blues of the cash strapped apparel sector

Apparel exporters are facing severe cash flow problems, thanks to the introduction of the much-dreaded GST. Exporters are unable to clear goods lying in the port, as they have to dip into their working capital to pay the additional GST.

Goods lying in the port are also subject to demurrages as well, and meanwhile the banks are making a mint on the situation, exporters said.

The GST, which was introduced amidst much fanfare and protest, levies a 12.5 per cent tax on all raw material imports for the apparel export sector.

Apparel exporters are given 45 days to pay the GST component of their cleared goods. Exporters can apply for input credit at the end of each month, but the Inland Revenue requires a further month or two to process this refund.

Meanwhile, imports keep rolling in and exporters are compelled to dip into their working capital to pay GST, even before their export proceeds can be realised, apparel exporters lament. Presently, many exporters, especially the small and medium, are faced with crippling cash flow problems. "Some of us may have to close our operations if the government continues to charge us GST and not exempt us," an apparel exporter said.

"We had forecast this situation way before they implemented it. Despite our numerous appeals and lobbying the government didnot exempt apparel exports from paying GST," he said.

The apparel industry imports nearly 60 per cent of its inputs. On the basis of 1997 imports, the GST payable on such inputs would exceed Rs. 8.8 bn, Chairman Sri Lanka Apparel Exporters Association (SLAEA), Mahesh Amalean said recently. His association estimates the industry has to fork out around Rs. 450 mn each month, to maintain GST payments.

The association says many exporters are unable to clear their shipments, as they do not have adequate resources to pay GST as well as demurrages. "This is slowing down our turnaround time considerably," Chairman Creations (Pvt) Ltd., Lyn Fernando said.

The latest hiccup comes at a time when Sri Lanka is in a favourable position to capitalise on the Indonesian crisis. On the other hand, Sri Lanka has to compete with Thailand and Philippines, who have devalued their currencies making their exports cheaper.

Competition is squeezing margins that are already faced with an additional burden of paying GST and the illegal Terminal Handling Charges (THC).

"Sri Lanka is aiming for the upmarket category and it's a shame that we have to battle a monstrous situation of our own creation," Chairman Mast Lanka, Ashroff Omar said.

The industry must be relieved of this additional burden if it is to survive and the only recourse is to exempt the imported inputs for the apparel export industry from GST, Mr. Amalean said. All apparel associations have submitted a joint memorandum to the President, appealing to accede to their request before the industry takes a nosedive with disastrous socio-economic consequences.

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