The Sunday Leader

Redefining The Chinese Connection

  • An  ‘All-Weather Partnership’ Beyond Sino – Lanka Ties Needed

by Wiraj Silva

Although many economists and political analysts have hailed the recent visit of Prime Minister Ranil Wickremesinghe to China as an indication of strengthening Sino – Lanka ties, many believe that Sri Lanka should think beyond its conventional thinking and capture greater opportunities available, if it were to become the Megapolis of the region.

Before Wickremesinghe concluded his four-day official visit to China, the two countries issued a joint statement to demonstrate their commitment to enhancing bilateral cooperation in various fields. During the visit, Wickremesinghe called on Chinese President Xi Jinping, his Chinese counterpart Li Keqiang and Chairman of the Standing Committee of the National People’s Congress Zhang Dejiang. The two sides shared the view that China and Sri Lanka relations have withstood the test of time and the two sides will work for an ‘all-weather friendship’.

“On pragmatic cooperation, Sri Lanka reiterated its active participation in the Belt and Road Initiative put forward by China. The two sides will use the development of a 21st-Century Maritime Silk Road as an opportunity to further advance infrastructure development, the China-Sri Lanka FTA negotiations, promote joint ventures and expand cooperation in the areas of economy, culture, science and technology, and people-to-people contacts.”

Contrary to popular thinking Sri Lanka welcomed the positive engagement of Chinese enterprises in the country’s economic development, said the statement.

“Sri Lanka also welcomes further investment from Chinese enterprises and will continue its cooperation with Chinese companies by creating a favourable investment climate and business environment for Chinese enterprises.

China will continue to encourage competitive Chinese companies to invest in Sri Lanka, to cooperate with a view to achieving mutual benefits. China will encourage its financial institutions to provide financial support to the construction of infrastructure in Sri Lanka.”

Both countries agreed to enhance their cooperation in the fields of transport, power and other infrastructure, industrial parks and manufacturing industry. Sri Lanka announced the resumption of work of the Colombo Port City Project and expressed the willingness to facilitate and support the implementation of this project and to cooperate with Chinese companies to promote other major projects.

 

Sino – Lanka FTA

“Both countries agreed to hold the third round of the China-Sri Lanka Free Trade negotiations as early as possible and work toward concluding the negotiations at an early date with a view to enhancing the bilateral trade and economic cooperation.”

According to the Department of Commerce, Sri Lanka’s overall trade with China in 2015 was at US$ four billion recording an increase of 12% from 2014. Sri Lanka’s exports to China YoY increased by 69% in 2015, whilst China’s exports to Lanka rose by nine per cent. Of Sri Lanka’s US$ four billion total trade with China in 2015, a staggering US$ 3.7 billion were imports from China!

China became Sri Lanka’s second largest product supplier in 2014. Trade with China almost doubled from 2009 volumes while Lankan exports to China almost tripled from 2009 levels, in the same year.

In 2014, China-Lanka trade amounted to US$ 3.2 billion whilst Chinese businesses invested US$ two billion in Sri Lanka. The Chinese government, through its Exim Bank and other banks, contributed more than US$ six billion to the development of this country.

When taken all these as well as other Chinese financial contributions to Sri Lanka over the last 50 years, it totals to about US$ 10 billion.

 

More than Lanka’s strategic location!

Chinese Ambassador Yi Xianliang addressing the inauguration event of the first China Product Expo in Colombo on November 20, 2015, stated that Sri Lanka being located in the middle of the Indian Ocean did not mean it possessed  a special investment advantage.

“Sri Lanka and China has long time cooperation and friendship… There are other coastal countries in this region at the same time having same advantages as Sri Lanka! Still China attaches a little more importance on China-Sri Lanka co-operation.”

“Firstly, because both countries are indeed friends. Secondly trade and economic cooperation is fundamental for economic relations…. Chinese financial contributions to Sri Lanka over the last 50 years totals to about US$ 10 billion. This means Chinese financial contributions to Sri Lanka is quite important with positive impacts on the development of this country…”

 

Lanka’s topmost global investor

China became the topmost global investor in Sri Lanka in 2013 and according to BoI data, China had 24 investment projects valued at US$ 239 million as cumulative realized investments in the same year.

Earlier Industry and Commerce Minister Rishad Bathiudeen said that China’s role in Sri Lankan value added manufacturing was vital.

“… Our exports to China in the first half of this year alone has increased by a strong 20 per cent in comparison to entire exports to China in 2014 which was only US$ 173 million,” said Minister Bathiudeen and added, “What is more important is that China also has a big role in our exports. A great amount of raw material imports from China are re-used in Sri Lanka’s exports, especially in its world-class apparel manufacturing.”

 

A great investment destination

Sri Lanka could position itself as a great investment destination for Chinese  industries, multinationals and manufacturers who want to strengthen their supply chains that extend to South and West Asia.

“… I wish to call Chinese manufacturers to Sri Lanka to partner with us. … Our special message is that Sri Lanka is not only a South Asian market for China but is a great off-shore assembly hub for Chinese and Far Eastern manufacturers who are aiming for South and West Asia.

Today we invite Chinese manufacturers and industries to invest and partner with Sri Lanka, use our strategic location, and obtain faster access to these Asian markets and increase your export revenues.”

 

Beyond the Maritime Silk Route

Many economists have pointed out that Sri Lanka had not made full use of either FTAs or FDIs opportunities opened up to the country.

“Sri Lanka has a number of advantages that provide ample opportunities for further development,” stated ‘Sri Lanka — Ending Poverty and Promoting Shared Prosperity’ report released by the World Bank Group recently.

“Notwithstanding ongoing challenges, the country boasts overall strong human capital and a reliable infrastructure base, particularly when compared to other South Asian countries. It has ended its internal armed conflict with signs of an emerging long-lasting settlement to address grievances that fed the conflict. Although it is still too early to judge their impact, governance reforms initiated should bring about more accountability and hence more responsive and effective government. Coupled with a demonstrably democratic system, this should strengthen further public confidence in government and hence stability.”

 

An enviable location

Sri Lanka enjoys an enviable location in a fast-growing region. Proximity to growing regional economies – at its closest point Sri Lanka is only 26 kilometers across the Palk Strait from India – provides major opportunities. Sri Lanka currently has bilateral trade agreements with both India (ISFTA) and Pakistan (PSFTA), the two largest economies in South Asia. It also has two regional trade agreements – one with the South Asian region (SAFTA) and the other with wider Asia (APTA), and a trade in goods agreement in negotiation with China.

Proximity to India, with its estimated 250 million middle-class consumer population by 2016 – over 20 times Sri Lanka’s own domestic market – offer a large export market for Sri Lankan producers. Already in the first 14 years of the ISFTA, exports to India have grown by 1,000 per cent, and the number of product lines exported to India has grown fivefold (increasingly in higher value products). India has become Sri Lanka’s third largest export market, behind the United Kingdom and the United States. There are also extensive opportunities for developing trade in electricity with India.

 

Regional trading hub

It is also located along a major trade route, opening opportunities to serve as a regional trading hub. Less than 20 kilometers off its shores is the main East-West Indian Ocean shipping line, connecting East Asia to West Asia, Africa, and Europe. New investments in the country’s port infrastructure – the new Colombo (South) Port extension and the Hambantota Port – have enhanced capacity for handling ship-based trade. The former has increased Sri Lanka’s container handling capacity by 50 per cent, making Colombo the 27th  busiest port in the world, handling about one-third as many containers as Dubai and one sixth as many containers as Singapore in 2013 (Containerization International Yearbook 2013). The latter has made Sri Lanka an important transshipment hub for the Indian car market, with around 15,000 vehicles being handled each month.

The Hambantota Port is being geared as an industrial port (unlike the transshipment-only port at Colombo). Meanwhile, Sri Lanka’s Katunayake airport continues to be a key passenger and cargo-handling destination in South Asia and the national airline is a leading carrier of passengers into the Indian sub-continent.

The success of the new airport at Mattala remains in doubt, but the facility affords an opportunity for investments in cargo/ air-freight handling and aircraft MRO (Maintenance Repair and Overhaul) services. The close proximity of the airport to the seaport, together with the nearby industrial park, could make Hambantota a successful trading hub for South Asia (similar to Penang Export Hub in Malaysia), with the right investment promotion strategies.

 

Promoting economic diversification and shared growth

Sri Lanka’s new policy makers will need to review and revise the country’s trade-related policies in order to promote economic diversification and shared growth. The links between growth performance and specific trade policies are ambiguous and depend on many endogenous and exogenous factors such as factor endowments, geographical location, demography, etc. Each policy comes with its own set of challenges.

For example, import substitution laid the foundation for industrialization in Brazil but at some point led the economy to collapse under the weight of accumulated inefficiencies. Some East Asian countries (e.g. Japan, South Korea) caught up with developed economies while keeping multinational corporations and FDI largely out of the country whereas others (e.g. Malaysia, Singapore, Thailand) actively sought to attract foreign investors and benefited from positive spillovers. In the case of Sri Lanka, moving from growth fueled by reconstruction and infrastructure towards growth based on a diversified and competitive economy will likely require a rethinking of the policies in place and their suitability as foundations for the economy of the future.

FDI is needed as a foundation for economic diversification, but Sri Lanka’s performance has been disappointing. In addition to boosting investment necessary for growth and providing long-term balance of payments financing, FDI can help enhance the sophistication of Sri Lankan products and exports through introduction of new technologies and production processes. It can also give rise to positive spillovers through improvement of skills and introduction of new management practices. Finally, FDI can enhance access of Sri Lankan producers to global production networks and facilitate the development of new activities within existing value chains (increasing value added in production). However, FDI in Sri Lanka has been lower than in peer countries in spite of Sri Lanka’s comparative advantages, such as its location and access to major markets.

 

Positive spillovers

Not all FDI has the same potential for positive spillovers to the economy. FDI inflows to Sri Lanka have been largely focused on infrastructure (inclusive of real estate development), with a relatively small proportion reaching sectors of the economy that are associated with global networks of production (Figure 4.7B). There are broadly three types of FDI: (i) natural-resource-seeking; (ii) market-seeking; and (iii) efficiency-seeking.

When considering investment policy, it is critical to acknowledge that the factors that motivate, dissuade and impact investors are vastly different depending on the business they are in, and the markets they target. The basic motivations of an investor provide an insight into the socio-economic impacts that the firm may have in Sri Lanka. Countries often make the mistake of designing investment policies around the type of foreign investments that they already have, rather than tailoring policies to suit the type of investment that they want to grow. In that regard, it is important for authorities to identify those types of investors that are more likely to make a positive contribution to the domestic economy. In turn, this identification should be consistent with the investment policy that is developed for the country.

 

Incentives not effective for FDIs?

Using incentives may not be an effective tool to attract efficiency-enhancing FDI to Sri Lanka. Investment incentives can be used to compete for potential investors; to encourage certain business practices; and to attract investment into priority regions and priority sectors.

However, evidence from both survey and econometric studies indicate that the key determinants affecting an investor’s decision on where to locate are often based on broad economic and investment climate factors such as market size, regulatory policies, natural resource endowments, infrastructure, and human capital availability.

Investment incentives, therefore, tend to be most relevant at the margins of investor decision-making; they are likely to be most influential when investors are wavering between similar options, and when a country already has a favorable investment climate. As Sri Lanka seeks to enhance the attraction and retention of FDI with positive transformative potential, it should analyze the effectiveness and adequacy of incentives together with the costs involved in fiscal losses and potential disruption of market dynamics (through, inter alia, the creation of an unleveled playing field).

Time and again, economists have warned policymakers the danger of placing all eggs in the same basket.

An Indian newspaper noted that a year ago, Prime Minister Ranil Wickremesinghe, who had just then returned to power after a gap of nearly 11 years, chose Guruvayur, a temple town in India’s southern State of Kerala, to make a pertinent observation on his country’s ties with two big neighbours, India and China. “Sri Lanka is neither pro-India nor pro-China,” was his crisp comment. The Hindu noted that an aide of President Maithripala Sirisena, feels that Sri Lanka has to keep in good humour its two neighbours by reviving the Port City project (on one hand) and going along with India for the Economic and Technical Cooperation Agreement – ETCA (on the other). Political analysts agree that former President Mahinda Rajapaksa committed a cardinal mistake by staying ‘committed’ to his relationship with China, antagonizing both India and the western suitors.  Now it seems that Ranil-Maithri duo has opted for a two-pronged, somewhat neutral relationship approach with both China and India. However one must not forget that in today’s geo-political context, no country can stay committed to economic bigamy, let alone monogamy, which the now-defamed Rajapaksa regime preferred. Economic polygamy is the order of the day and multilateralism is the name of the game!

 

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