Sri Lanka must make the FTA work and improve knowledge
Economy before signing

At the Indo-Lanka Comprehensive Economic Partnership Agreement (CEPA) seminar in Sri Lanka, the Commerce Secretary of India Gopal K. Pillai stated that the agreement will not have Indians swamping Sri Lanka and it is an attractive opportunity that Sri Lanka must exploit. However one wonders whether he was aware of the ‘reality’ behind the trade numbers between the two countries where it is seen that India has much to honour in regard to the current Indo-Lanka FTA. As such, the private sector revolting against CEPA is totally Justifiable.

Pillai quite rightly identified the discomfort that Sri Lanka feels on the CEPA and re assured that this concern is valid given that when India was to sign a similar CEPA agreement with Singapore, some Indians felt the same. But the difference that India needs to understand is the experience that Sri Lankans have had with India on trade, has not been that positive. The Export data from Sri Lanka to India during the last 3 years clearly explains the discomfort among Sri Lankans, as exports to India in 2007 was up by just five percent above 2006, and was below the 2005 revenue by 78% to 514 million dollars. Quota utilization of the strategic products of Sri Lanka viz. Tea and Garments is below 6% for the second year running. Sri Lankan exporters have been up against non tariff barriers placed by Indian authorities like tariff rate quotas (TRQs), delays in custom clearance of cargo, port restrictions, necessity for several tests to be carried out in India even though exports are accompanied certificates issued by the relevant authorities, which justifies the revolt by the Chamber heads and top local businessmen last week in Colombo. After all bilateral agreements are essentially designed to promote fair competition and equitable benefits. However when Sri Lanka has not experienced such benefits from the Indian end, how could any logically thinking Sri Lankan entrepreneur support CEPA. The revolt by the local companies is totally justifiable given the issues that companies like Ceylon Biscuits have experienced by trying to do business with India.

The thoughts that crossed the writer’s mind when getting ready to address the Indo- Lanka CEPA forum on the topic "Progress and Prospects’ was, what are the experiences related to the current agreement with India on the Indo-Lanka FTA, and what lessons can one learn so that Sri Lanka will not walk into another catch 22 situations due to political pressure. Sri Lanka has seen a number of companies that commenced business due to the Indo Lanka FTA in Sri Lanka, to be precise from 34 at one time to 105 by the end of 2006. However most of them have been forced to close down due to issues in entering the Indian market. This- has actually off set the benefits of international trade and in this instance the concept of free trade. Many Sri Lankans have lost their employment in the companies that operated in sectors such as bakery shortenings, energy saving bulbs and plastic products as explained by the Chambers last week.

South Asia boasts of a 900 billion dollar CDP However inter regional trade is at a low ebb of 5.3%, and opening up of the services sector will certainly drive ‘ trade between the two countries given that both countries are dominated by the services sector. CEPA, if and when it becomes operational will see trade barriers being removed in a selective manner. The first being, cross border service like Energy

International Telephony and BPO, then in mode 2, it will extend to Tourism and Education and in mode 3 it will include Foreign Bank operations, and finally sensitive areas such as the temporary movement of expertise like foreign doctors. In essence it is an agreement that will reduce the discrimination against foreign suppliers by providing market access. A highlight of the agreement that invites attention is that commitments can be altered after 3 years subject to compensation, which provides insulation to a country in the event there is an over supply issue. However, the key concern of the private sector is that they have not seen the Indian authorities taking Sri Lanka seriously in regard to issues in the current Indo - Sri Lanka FTA. The Pepper issue, Vanaspathy debacle, copper exports, apart from individual business issues like the Tic Tac business of Ceylon biscuits are some of the ‘specifics’ that India needs to address before convincing Sri Lanka of the benefits of CEPA. Sri Lanka must have the strength to enforce domestic legislation given that India uses multi prong initiatives at times to get trade deals through with Sri Lanka.

A key question that is being asked by local companies is whether -they can compete with the giant companies of India?. Sri Lanka has the business capability not only to just survive, but thrive, provided the policy makers also become aggressive with the required legislation and promotional support. The best case in point is the 8000 billion rupee Export Industry of Sri Lanka that faces global competition in open markets like the US and the EU, giving a lesson to the top organizations in the world on how to do business.

What Sri Lanka requires is a change of attitude by the business community to face the challenges, aggressively. Sri Lanka needs to see the Jayasooriya’s, Murali’s and now Ajantha Mendis’s of business emerge in the Indo. Lanka trade arena. The policy makers on the other hand must give confidence to Sri Lankan business that protectionist measures will be exercised, in the event things get rough. However, this is a difficult proposition to sell to the private sector given the fall outs of the Indo Lanka FTA where the private sector has been desperately seeking redress at times.

Latest research reveals that in order to compete with Indian companies under the CEPA agreement, it is necessary to strengthen the Knowledge Economy of Sri Lanka which is a key pivot to make an Economy competitive. Logically if the Knowledge Economy is strengthened an enabling environment can be created for Sri Lankan companies to link with the University system. This will initiate a cyclic reaction with innovations being churned out by academics to meet the changing consumer requirements of tomorrow. Sri Lanka must also introduce the concept of ‘New Product Development Houses’, ably equipped with the required technology, so that the innovations conceptualized by the university system could be transformed to commercial products and services. The best case’ in point is Dialog Telecom. The tri party link between the university of Moratuwa, Dialog and the in-house product developers made this company the No 1 company in Sri Lanka with the brand value at a staggering 12.5 billion rupees as at end 2007.

However, with the current investment on technology at a low ebb of 0.14%, which is negligible when compared to countries like Korea that are on high gear at 4% of GDP, Sri Lanka will head for disaster by signing the CEPA, as it will enable Indian’s to swamp Sri Lanka.

The remedy is for policy makers to invest on infrastructure and the academic reforms required, as per the 2007 World Bank report, to develop the knowledge Economy and make it the engine of growth. If this is done, just like Dialog, the rest of the business world can very confidently meet the Indian challenge under the CEPA. If not, the enabling environment will not be provided for the ‘Murali’s’ and’ jayasuriya’s’ of the business world to emerge in this war of ideas, which is the heart of the services sector. Hence the possibility of Indians swamping Sri Lanka., it should be pointed out that the Knowledge economy is not about being high tech, but it is about how a country is, strong in creating and disseminating knowledge to the users to enhance growth and development in a country. Which .means that it is not only how a country uses Knowledge to achieve a competitive advantage, but the speed at which this Knowledge is turned into commercial opportunities and thereby being the first to market, is the real essence of a Knowledge Economy.

The danger of CEPA is that it focuses on the liberalization of the services sector which is very dynamic. Hence, if Sri Lanka does not keep the cycle of innovation linked to the business world, there is a good chance that Sri Lanka, could get swamped by strong Indian companies that are well webbed to the University system and product development houses which are actually in-house in many instances. Recent reports emerging out of India reveal that corporate India is on the cutting edge of technology with innovations flooding the market daily, wooing a typical Indian house wife to be more modern, more efficient, and more confident to face the challenges of day to day life. The launch of the first Nano car in the world and the first refrigerator with PN technology are some classic examples. The latest report of the World Bank where it rightly states that there" has been very little improvement during the last ten years in Sri Lanka’s Knowledge Economy, is alarming, which means that Sri Lanka must do her home work and prepare the structural template at ground level, before opening up her doors to competitors, purely on the basis of comparative advantage, or in economic terms related to the asymmetry that exists between the two countries.

As mentioned at the Indo Lanka seminar on CEPA, it is strongly suggested that Sri Lanka agrees on a set of targets at the time of signing of the CEPA. At the end of three years Sri Lanka must make sure that a 10 billion dollars of trade will happen. In 2007 it was 3.2 billion dollars. If this robustness is not prevalent there is no point in entering into Free-Trade Agreements due to the social ramifications that they create.

It is also important to state that arriving at the target should be a bottom up exercise, so that it forces the private and public sectors to work together, with the trade chambers facilitating the process. This is an important process where social ramifications are taken into account when suggesting domestic legislation for the protection of a given industry The current agitation that the CEPA agreement had not been passed through the chambers’ is justifiable, given that it is the private sector that will drive business, and not the policy makers.

An entrepreneurial spirit must be fostered in the country where the launch of this controversial CEPA agreement is one of them. However, one must understand that it is an extension of the existing FTA between the two countries. It is important to accept the issues that Sri Lankan entrepreneurs have faced during the last 7 years of trading and take corrective action, so that the confidence of the different actors in the system could be sustained. It is necessary to set up a pro active Indo-Lanka Trade secretariat, so that all issues could be solved as a matter of urgency, than having to be made a political, issue where higher authorities need to get involved as it is time consuming and sometimes ineffective when it comes to implementation at the ground level. Driving for deeper tariff cuts like the one introduced to increase the TOR from 3 million pieces of garments to 6 million pieces of garments need not have happened, as Sri Lanka needs do get access to India on the current 3 million ‘pieces in the first place, and thereafter move to deepen trade with India based on its success.. If not free trade arrangements with India will remains a rhetoric than a means for the actual increase of trade.

The culture of business in Sri Lanka or for that matter, life in general is different to India. The quality of life-in Sri Lanka is way above India. One cannot say grow up in Sri Lanka and face the crude world of business as the culture in Sri Lanka is unique and deep rooted to the family values that exist. As mentioned at the Indo-Lanka ‘seminar last week, when Indians come to do business in Sri Lanka it is best that a proper orientation is given before coming over to our beautiful island than creating social issues due to the domineering nature that has been talked and written by many on ‘Doing business with Indians’. The policy makers must take into account the issues that Sri Lankan multinational companies have had when Indians started heading operations. Policy makers in Sri Lanka also need to .be sensitive to this fact given the comments from extremist political parties which are nationalistic in nature, that Indians will swamp Sri Lanka. If one is not sensitive to this issue there is a good chance that the success of the CEPA will limited. It must be not forgotten that the whole of South Asia is governed by Political Economies and it is on this fabric that Sri Lanka needs to design her trading arrangements if the country is to be successful.

Sri Lanka must sign the CEPA agreement when the ground conditions are right. This needs to be agreed between the trade chambers and the policy makers of the country. It is necessary to make this happen -even with resistance as the benefits will outweigh the social and local business issues that can crop up. However, it may be called the Comprehensive Economic Cooperation Agreement (CECA) so that the spirit of free trade prevails. All Stakeholders should come together this time around and out smart the Indians with effective domestic legislation and by improving the knowledge economy, "so that Sri Lanka can be the roaring lion of South Asia when the civil war is over, in the North of the country India can be the fat Giant Elephant.