Is globalisation the way forward for Sri Lanka?
During the long war, the Government was preoccupied with financing and fighting it. The Private pector was burdened with uncertainty about the future. Now with the war behind us, we must examine and debate strategic options for developing our country.
One of the key options is pursuing a globalisation strategy. CEPAs and FTAs are variations on the globalisation theme.
Globalisation is a buzz word created by the developed Western economists and embraced by their politicians. It has acquired an aura which makes people reluctant or even afraid to challenge it.
A nice little theory
The origins of globalisation go far back in history. It was a concept developed by the classical economists, in the early 20th century. The classical economists developed many very logical theoretical models and this was one of them.
The theory is that the world will be a better place if every country specialised in doing what it could do best and then exported the surplus, and bought what they did not make from those countries that were best at making those goods.
This would provide the best input-output relationship. Everything would be made by the country that would maximise output from a given input of resources. On this basis, the world’s resources would generate a greater output than if everybody made everything they wanted to consume. A nice little theory, but quite impossible to implement.
Karl Marx also had a nice theory: Means of production should be owned by the state, then the state would make the optimum use of resources. In the Stalinist era they created Gosplan that would plan the use of resources. Trotsky then took it close to the theory of the classical economists and said to get the best use of resources you must make the whole world communist and then plan the global use of resources. Unfortunately, for other reasons, they murdered Trotsky.
Trotsky’s vision was the only way that the classical economists’ theory would have worked.
Globalisation
The Western economists’ new model of the old concept was christened globalisation. In essence what they said was that the world would be a better place with the most efficient use of resources, if all countries removed tariffs and permitted the free movement of goods.
To enable goods to be made in the country best equipped, there should be a free movement of capital. If this meant that what country X was making stopped and production moved to country Y, there should also be a free movement of people as well so that they could then go to country Y and get employment. Globalisation in essence is no tariffs and free movement of goods, capital and people.
Is globalisation suitable for Sri Lanka?
To answer this question, we must examine the best way forward for Sri Lanka.
Sri Lanka is a private sector owned economy. In addition to the major public quoted companies, there is a vast private sector. The whole of agriculture, tea, rubber, coconut, fisheries, the gem industry, the retail and wholesale network, the transport and building trade, etc., are all private sector. This private sector is largely based in the rural areas (Sri Lanka is about 75%).
The key economic drivers are agriculture and its raft of related economic activities and a mix of relatively small industries, ranging from apparel to manufacture of consumer goods of varying types.
Will globalisation give a boost to our agriculture and industry?
Will globalisation take us down the path to alleviate poverty?
As a country we need both growth and an alleviation of poverty. The reality is that globalisation is unlikely to do either. If we remove tariffs, a large part of our agriculture will be killed. If we remove tariffs, most of our domestic industry will get killed.
What will our people do? Will there be a large influx of capital to create new industries? Most unlikely. We have no unique advantage that will suck in this capital Do we need globalisation to develop tourism or gems? The answer is no.
We do not need to kill our agriculture to get investment in tourism or gems.
Globalisation is not the way forward
The conclusion has to be that globalisation is not the way forward. It is not the way forward for developing countries in general. If they kill their agriculture and domestic industries, what will all the developing countries make that the rest of the world will buy? The proponents of the global theory have never answered this question.
The argument that has to be considered is the view that globalisation will enable the consumers to have the cheapest products, both agricultural and consumer. That is correct. But consumers will not have any money to buy them. That’s the trade off – cheap goods and unemployment or more expensive goods and employment and the alleviation of poverty.
Another argument is that tariffs protect inefficient industry and agriculture. You don’t need to abandon tariffs to address this. Selective use of tariffs can ensure that there is pressure to create efficient industry.
As globalisation also means free movement of capital, it is argued that inflows will create new economic activities in Sri Lanka. You do not need globalisation to achieve this. Capital inflows can be permitted with whatever checks and balances are considered necessary; e.g. Male and Malaysia both require a percentage of local capital.
The other argument is that it opens the doors for our products in the world market. The problem is that due to the lack of economies of scale, we will never be competitive globally in a number of industries. We can be competitive where we have some key advantage in the supply chain – e.g. availability of materials, tea, rubber, fibre, gems, etc. There is a trade off here. To protect the larger part of our economic activities, we may have to suffer some disadvantage in a smaller part.
CEPAs and FTAs
This can range from facilities for a specific range of goods to a sort of globalisation pact between two countries. Such trading arrangements bring into focus the same issues. Removing tariffs, free movement of capital and the free movement of people…
Say we apply these principles to India and Sri Lanka. It is not an equal match. Everything we make can be made cheaper in India because they have such a large market. Our industry will get killed. So will large pieces of our agriculture in the course of time. We will have cheaper goods, but no money to buy them.
Access to Indian market
Access to the Indian market is a fairytale. What can we make that they cannot make better and cheaper? The barriers to entry will prevent even a meaningful attempt with consumer products.
The cost of entry with any branded consumer good is such that we will never penetrate the market. I cannot picture a scenario where we will have a competitive edge with agricultural products either.
What about capital? If unrestricted, all our companies could be bought by India. Does this matter? Many developing countries think it matters and place restrictions on the percentage that can be foreign owned.
We can be Indian owned and buy only Indian goods which are cheaper. Does that matter? In an economic sense that’s good, but if the price to pay is mass unemployment from a country perspective, the price to pay is too high.
When you play a match with one player who is much larger with more resources, where are the areas where we can win? If such are identified and trading arrangements are restricted to that, it would be an acceptable solution.
A most favoured nation trading arrangement may provide mileage, where we have to import in any case we can give our selected partner preferential duties and in return get the same preferential treatment.
It’s a game of chess, negotiating bilateral trade agreements. It must be handled with great skill. But full-blooded globalisation with the world or the same with India does not make good sense.
(The writer has a Master of Arts Degree from Cambridge University, UK, and the AMP of Harvard Business School USA. He counts over 40 years of board experience having served as a Director of several companies in Sri Lanka and abroad. He was a Director on the main Board at Reckitt Benckiser PLC, UK, where he worked most of his career and at the time of his retirement was Global Director – Pharmaceuticals. He has served as the Chairman of the Board of Investment and Sri Lanka Telecom Limited and was a Senior Advisor to the Ministry of Finance. Currently, he serves as Chairman of Hemas Holdings PLC and First Capital PLC.)
