At a time when calls for more Free Trade Agreements (FTAs) are echoing from all corners, a recent study by a top academic says that bilateral trade pacts are not the answer for the country’s ailing exports, and attempts towards such is a waste of time and resources for nothing in return.
Prof. Prema-chandra Athukorala, Professor of Economics at the Australian National University based on his study says the problem with Sri Lanka’s declining exports in the world market lies in the supply side and thus trying to address the demand side is an unnecessary waste of human resources.
“Should signing more FTAs be a policy priority for Sri Lanka? My answer is no. It’s like the Sinhala adage,‘paya barawayata pitikara beheth bandinewa wage,’or treating one’s neck for stiff ankle.
He is of the opinion that Sri Lanka’s declining share of exports in the world market is a result of the country’s failure to keep up with what’s happening in the world economy.
Prof. Athukorala’s view is thus far the sharpest denial to the widely held belief that having more FTAs is the panacea to prop up the ailing exports, which have seen a sharp decline during the last two decades.
Sri Lanka’s coalition regime mulls to deepen its trade relations with India through an extension to the existing Indo-Lanka FTA. Also, the government is currently pursuing an economic cooperation pact with Singapore and an FTA with China.
But Prof. Athukorala said FTAs with these countries do not make sense as they don’t consume Sri Lankan manufactured exports.
“To make matters worse, we are going to sign FTAs not with countries which absorb our manufacturing exports.
We do not have trade complementarity with India because our comparative advantage and India’s comparative advantage is virtually the same”, the trade policy academic said, adding that the same holds true for China.
It was only last week the Institute of Policy Studies (IPS) Chairman, Dr. Razeen Sally termed arguments against deeper bi-lateral trade with India as, “economically illiterate” and stressed that trade deficit with India, “is not a big deal”.
“We need to improve our exports to India but at the same time, imports from India are a good thing for Sri Lankan consumers”, Dr. Sally added.
Prof. Athukorala speaking at the recently concluded Sri Lanka Economic Association Annual Sessions said Sri Lanka’s manufacturing exports are not produced for the Indian consumer and it was misleading to say 80 percent of Sri Lanka’s exports to India happen under the Indo-Lanka FTA.
“That’s a pretty misleading figure. The real issue is what is our exports share to India? It is very low and about 5.0 percent and it has not grown simply because of the types of products we export are not the type of products needed by the Indians”, said Prof. Athukorala who has conducted a great deal of trade policy research on East and South Asian economies.
However, he acknowledged that due to political reasons trade pacts with India and Sri Lanka may go ahead despite such deals will do little to address Sri Lanka’s trade worries.
“Of course I agree that for political reasons these agreements are needed. But one should not deceive the people in politics and say that FTAs are going to address the problems in the supply side of our exports”, he said, adding that policy advisors should not mislead the politicians.
The coalition government’s United National Party-led economic policy wants to follow the manufacturing-led export growth model discovered and mastered by East Asia.
However, according to renowned economist Joseph Stiglitz, who visited Sri Lanka early last year, the East Asian economic transformation which was called “East Asian miracle” cannot be repeated in South Asia, Africa or elsewhere.
“New strategies will have to achieve what manufacturing-led growth achieved but through a multi-pronged strategy involving all major sectors.
The government will need to play an important role in this new structural transformation. But the future will be based not on manufacturing economy but a modern services sector economy”, Stiglitz was quoted telling a recent forum.
Meanwhile, Prof. Athukorala, drawing examples from the East Asian growth story said that what is important is the industries and not the FTAs.
“Before these East Asian countries started signing FTAs, these countries had been thriving with manufacturing FTAs. FTAs came in the 1990s. Singapore became an electronic hub in the early 1970s”, he said.
However he said there are instances where FTAs could work like in the case of The North American Free Trade Agreement (NAFTA) for Mexico and FTA between Australia and China where China is the biggest consumer of Australian processed food.
Hence, he urged the policy makers to ask the question whether Sri Lanka has trade complementarities with its trading partners before getting into FTAs because a FTA itself is a misnomer which has in-built controls on the rules of origins.