By Chandeepa Wettasinghe
World Bank recently classified Sri Lanka as one of the most protected economies in the world, indicating how far Sri Lanka would have to travel to reach its ambitions of becoming regional hubs across various industries.
“Sri Lanka is one of the most protected countries in the world,” the World Bank said at the launch of its recent poverty assessment report on Sri Lanka.
Economists point out that Sri Lanka was one of the most trade liberal economies in the world during and after the liberalization process in 1977, which was further built upon during the early 1990s.
However, the average customs tariffs and paratariffs which stood at around 12.5 percent in November 2002 increased to around 23.7 percent by January 2011, Australian National University Economics Professor Prema-chandra Athukorale recently pointed out.
Fulfilling requests from specific lobbyists, the previous government hiked up import tariffs in certain sectors to as much as 80-100 percent, going against the global trend of reduced tariffs to improve trading.
Many industrialists are attempting to continue their ways, using the new regime’s Ease of Doing Business Forum set up under the Finance Ministry as a platform to request for greater protectionist taxes.
Experts have pointed out that the Sri Lankan consumers are the losers in the import driven economy, as the protected industries spurn out products which cost much more than the global competitors, with protectionism perpetuating a low-productivity mindset instead of competition.
Further, protectionism will continue to leave Sri Lanka stranded in non-competitive industries, instead of shedding them and transitioning to export industries with a competitive edge. “Sri Lanka has to diversify into new products like Malaysia did... It’s difficult to rely on these industries when going forward,” World Bank Senior Governance Specialist Charles Undeland advised.
He said that while there are a number of innovative companies in Sri Lanka, the government taking over private companies over the past few years had undermined competitiveness.
While the new government during the course of the past year had emphasized the need to shatter protectionist policies, the recent budget took little strides towards that path. Customs duties as well as the Ports and Airports Development Levy were increased, striking a blow at the apparel industry—the country’s leading export product which relies on imported raw materials.
Further, the budget increased tariffs of goods sold on the local market by export-oriented companies.
The current tariff structure also inhibits integration into global value chains, while motivating traders to attempt to find loopholes in customs regulations, Prof. Athukorale said.
A sizable portion of Sri Lankans are also adamantly opposed to the influx of foreign labour.
“If you’re good enough, why worry? If you have the skills, if you’re entrepreneurial enough, you make it,” Foreign Affairs Deputy Minister Dr. Harsha de Silva, who was a career economist, had said yesterday to a gathering of architects concerned about the proposed agreement with India. Prof. Athukorale said that developing countries cannot insulate themselves from the world in such a way, as countries such as Dubai, Singapore and Malaysia opened up their borders for foreigners to come and develop the countries, while the locals focused on becoming entrepreneurs.