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Indo-Sri Lanka Free Trade Agreement - I
By Kanes
Sri Lanka and India signed what is described as a Free Trade Agreement designed to create free trade between the two countries on December 23, 1998. It has been hailed as a momentous measure which will expand the trade and consolidate the friendship between the two countries and at the same time strengthen SAPTA and accelerate the formation of SAFTA - the South Asian Free Trade Area. It is the purpose of this article to analyse this Agreement to find out whether it will actually achieve its declared objectives.Essential Features
The essence of the Agreement is that India will eliminate import tariffs on all goods except those on a negative list in three years. It will begin by removing tariff or introducing zero duty this year on about 1000 items and then reducing tariff on others by 50 per cent this year, by 75 per cent in the second year and 100 per cent in the third year. The reduction of tariff on textile items, however, will be limited to 25 per cent. Sri Lanka in turn will eliminate tariff or have zero duty on all goods other than those on its negative list within eight years. It will begin by eliminating import tariff on about 300 items and then reducing tariff by 50 percent on about 600 items this year, by 75 percent in the second year and by 100 percent in the third year. As regards the balance items, import tariff will be reduced by 35 percent in the third year, by 70 percent in the sixth year and by 100 percent in the eighth year.The agreement does not specify the goods on which tariffs will be eliminated or reduced and the goods which will not enjoy tariff preferences (negative list). The lists of these goods will be finalized within 60 days. The Agreement, however, indicates that the negative list of India would comprise about 400 items "including garments, petrochemicals, alcoholic spirits and coconuts and coconut oil". No such indication is given by Sri Lanka in the Agreement but the official communique states that the negative list would include agricultural products.
Goods can be eligible for tariff preferences (zero or lower duty) only if the minimum domestic value addition is 35 per cent. If, however, the input/raw materials are sourced from each other's country, this proportion is reduced to 25 per cent within the overall limit of 35 per cent. This is specified in the Rules of Origin which are a part of the Agreement. A Joint Committee at ministerial level will meet at least once a year to review the progress made on the implementation of the Agreement.
The Agreement incorporates the standard features of all trade agreements based on the Articles of GATT: general exceptions to the Agreement, national treatment, state trading enterprises, safeguard measures when excessive imports cause injury to the economy, balance of payments measures like suspension of tariff preferences during balance of payments difficulties, consultations and settlement of disputes. There is nothing new in them as they are considered normal provisions in trade agreements and they have been also incorporated in other trade agreements signed by the two countries such as the Bangkok Agreement and SAPTA.
Effect on SAPTA
The first question which arises is whether the Agreement strengthens or weakens SAPTA. Sri Lanka as a member of SMRC is already negotiating a third round of trade liberalization under SAPTA; SMRC further envisages SAPTA to be transformed into SAFTA or South Asian Free Trade Area by 2001. Sri Lanka and India signed this Free Trade Agreement because they perceived the pace of trade liberalization under SAPTA to be too slow; the objective of the Agreement is to accelerate trade liberalization and trade expansion. The Agreement therefore is clearly an expression of dissatisfaction with SAPTA's regional trade liberalization and a unmistakable shift from regional to bilateral trade negotiations. If the other five members of SMRC see this Agreement as something done behind their back, no amount of exhortation for them to follow suit is likely to allay their suspicions.A regional organization can be effective only if there is frank exchange of views and mutual trust. If Sri Lanka and India perceived SAPTA to be too slow, then the right thing for them was to have discussed it at the SMRC forum to find ways and means of accelerating regional trade expansion. A regional fast track trade liberalization would be far more effective in expanding trade than a bilateral one as each member would have greater access to everyone's market. If the majority was not in favour of fast track trade liberalization, India and Sri Lanka should have presented their proposal for bilateral trade to seek the views of other members, for its is contrary to the spirit of regional cooperation for two countries to do something bilaterally without informing the others. Did the two countries consult the other members? Did they inform them of their intention to negotiate a free trade agreement?
Sri Lanka's position here is more vulnerable than India's, for it is the current Chairman of SMRC and therefore has an obligation to set a good example to others and win their confidence. It may now be difficult to prevent the other member countries from thinking that Sri Lanka has stolen a march on them by trying to grab a bigger share of the Indian market by bilateral means. A SAPTA regional fast track liberalization would have given every member an equal opportunity of access to the large Indian market (as well as the smaller Sri Lankan market) but this is now denied to them by Sri Lanka's bilateral move. No one is likely to accept Sri Lanka's argument that the bilateral agreement strengthens SAPTA as it benefits only the two countries at the expense of the others. The Agreement therefore is likely to erode the mutual trust built up in recent years and weaken the cohesiveness of SAPTA while lowering the prestige of Sri Lanka in the eyes of the other members. Now that Sri Lanka has managed to gain greater access to the Indian market) by an agreement it may be tempted to give priority to bilateral trade negotiations over regional ones. If this were to happen, it would tend to weaken SAPTA further and slow the pace of regional trade liberalization.
Signing A Blank Cheque
The bilateral Agreement is a very important document for it was signed by the heads of state of the two counties. It has, however, been signed without specifying the goods which would be given zero or lower tariff as well as those which will not be given tariff preference (negative list). As mentioned earlier, the numbers involved are large: India to grant zero tariff to about 1000 items and 50 per cent preferential margin to others at the beginning and Sri Lanka to extend zero duty concession to about 300 items and 50 per cent preferential margin to about 600 items in return; the negative list of India consists of about 400 items while Sri Lanka has not revealed the size of its list. All these blanks are to be filled within 60 days presumably by officials. So no one knows what goods will receive preference and what goods will not until these lists are finalized. The final lists may or may not correspond with what the signatories originally had in mind as they are subject to negotiation. Whether the Agreement should have been signed with blanks left to be filled later is a question which has arisen in the minds of many people. Is it not like signing a blank cheque?Is it a Free Trade Agreement?
The Free Trade Agreement has a large negative list; in addition zero tariff will not be extended by India on textile items and Sri Lanka too may have similar exceptions. Thus, the Free Trade Agreement ensures only partial free trade.The Agreement further envisages free trade only in terms of elimination of import tariffs. Article III states "The contracting Parties hereby agree to establish a Free Trade Area for the purpose of free movement of goods between their countries through elimination of tariffs on the movement of goods in accordance with the provisions of Annexes A & B which shall form an integral part of this agreement". There is no reference to the removal of non-tariff restrictions (import controls, licences, quotas, prohibitions, etc.,) anywhere in the Agreement. In these circumstances, India/Sri Lanka may eliminate import tariff on goods while retaining non-tariff restrictions making zero tariff a farce. The impact of zero tariff on trade will be zero, if for instance, the import of the product is prohibited. It may be that both countries have no intention of doing such a thing, but then that should have been made clear in the Agreement. For example, it should have included a clause to the effect that goods eligible for tariff preference would be free of any quantitative restriction. If such was the intention of the parties concerned, it is difficult to understand why such a clause was not included. As it appears now, it may not usher free trade as elimination of tariffs can be rendered ineffective by imposing import restriction.
That is not all. Under Article III - Definitions - in the Agreement, tariffs means "basic customs duties included in the national schedules of the Contracting Parties". In Sri Lanka there is only one customs duty or tariff on imports but not in India. Beside the normal customs duty or tariff it has auxiliary customs duties. Apparently these may not be treated as basic import duties. It appears that even if the basic import duty is removed, the auxiliary and other import taxes will remain. If that will be the case, then there will be no free trade even in terms of zero tariff on imports.
Reciprocity
The Free Trade Agreement is based on reciprocity. India is eliminating import duties and Sri Lanka reciprocates by eliminating its import duties. Thus, Sri Lanka is not getting free access to the Indian market for nothing. In fact, the Agreement states in Article II 'In the implementation of this Agreement the Contracting Parties shall pay due regard to the principle of reciprocity". This is significant as it is a departure from the earlier Gujral doctrine that India does not ask for reciprocity from her neighbours but gives and accommodates what it can in good faith and trust. In fact, it was at a meeting of the Indo-Lanka Joint Commission that Gujral undertook to remove quantitative restrictions and reduce import tariff on 70 to 80 items of export interest to Sri Lanka unilaterally - that is without any reciprocity from Sri Lanka. He also indicated that this was only the beginning and further liberalization would follow. This exercise was undertaken within the framework of SAPTA. The Gujral approach was continued by Vajpayee when he unilaterally lifted import restrictions on over 2000 products in favour of SMRC countries at the last SMRC meeting in Colombo in 1998. No reciprocity was demanded from the other members of SAARC. There is, however, no trace of the Gujral doctrine of non-reciprocity in the present Free Trade Agreement.
How can we solve the graduate unemployment problem?
By Analyst
There are said to be about 35,000 graduates who are unemployed. They are no longer content to wait patiently for jobs to be created for them. They have organised themselves and now demand that the government should provide them jobs.The usual reaction of the government is to absorb them into the public service which is already over-staffed. They used to be absorbed into the teachers service of the government. But there is a surplus of teachers, too.
In the past governments used to create special schemes called graduate trainee scheme and pay them an allowance. But these schemes merely created ghettoes where the graduates felt trapped. They could not be absorbed into permanent jobs in the establishments they were attached to. They faced hostility from other groups in the public service.
Training
It is the view of the private sector entrepreneurs that the graduates are unemployable. Their university education has been inadequate. They have not received the general liberal education enjoyed by a previous generation of graduates who were educated in the English language. Their education is more akin to that provided by a tutory rather than a university.Our liberal democratic tradition is basically derived from the west. Most of the knowledge imparted in our universities is based on the western intellectual tradition. The established bodies of literature in the various academic disciplines, economies, sociology, politics, etc. are all drawn from the west. Our swabasha educated graduates have not had access to this body of literature. But having said that, it must be pointed out these youth are the victims of political populists and cultural fanatics who hoodwinked the people.
University education is necessarily for the elite - an intellectual elite, not an elite based on wealth or nobility. It was not an insuperable problem for those eligible for university education to acquire a knowledge of English. All along with district quotas, standardisation, etc. the government gave the wrong signal to the youth. So a false concept of equality, led the authorities to change over the medium of instruction in the universities to swabasha without adequate translations of the textbooks and the body of literature in the various disciplines.
In any case, with the explosive growth in knowledge that has taken place in the last fifty years, this would have been an impossible task in any case. But we did not even make the effort inspite of our feelings of rationalism. So our youth all the victims. But we cannot shrug our shoulders and fold our arms, doing nothing to solve the problem.
Our politicians were elected to solve pressing problems of the people. The problem has become complicated with the globalisation trend which has taken hold in the world economy. Our industries both export oriented and import substitution, our agriculture, all need to be competitive, with the products turned out in the rest of the world.
Our economy has to be outward looking, competitive and efficient. We require firms that are cost conscious and efficient. So we cannot take on these graduates to the private sector competitive firms unless they make a value addition. They can't be mere additions to costs without an equally rewarding addition to revenue.
How other countries have fared
Countries like Japan and the Scandinavian countries have tackled the problem of unemployment successfully. In Sweden the government acted as a second economy and expanded employment in the 1960s and 1970s, to absorb those displaced from manufacturing. In Japan the second economy has been in agriculture and the services both of which are heavily protected, highly labour intensive and relatively inefficient.How were they financed? Those in the first economy paid for those in the second economy. In Sweden they paid through taxes while in Japan they paid through higher prices for good and services. In Korea, the Chaebols (conglomerates) not the government, took the responsibility for retraining and re-deploying their employees.
These examples show that the problem of unemployment can be solved. The scale of our problem of graduate unemployment is small. But if we continue to churn out more and more graduates and increase the number of universities, we will be adding to our problems and burdens.
There is no such thing as a free lunch. Somebody has to foot the bill to employ these graduates. Whether those in the open competitive sector of the economy and those working in it are willing to make sacrifices to support those in the more protector sector of work remains to be seen.
If the government had the financial resources to do so, it could create the jobs. But our government is cash strapped. Our levels of taxation, both direct and indirect, are too high, mainly due to the war and the free welfare services.
The barrier to job creation by the state, is the level of taxation required to pay for it. There is also large scale evasion of taxes which increases the burden of those who pay taxes so if taxation is to be used to finance job creation, it will have to be through higher indirect taxes.
But our level of indirect taxes is already inordinately high and is damaging the open competitive sector. So any job creation for these graduates will have to come from the private sector. Within the private sector it must come from the localised services sector which doesn't face competition from globalisation. This services sector includes banks, insurance, tourism, financial institutions and construction.
The development of this sector to absorb the unemployed graduates is perhaps the only avenue and it should become an explicit aim of government policy. The attempts so far by the private sector to tackle this problem through the Tharuna Aruna project has not met with much success. We need committed and dedicated personnel with vision and imagination and empathy for the unemployed graduates, many of whom are from rural areas.
Training schemes
The training schemes introduced by the government for unemployed graduates have been failures. They became ghettoes in which the unemployed graduates got trapped. So similar schemes in the public sector are unlikely to succeed in providing productive jobs for them and upgrading their knowledge and skills to take up those jobs.Similar schemes will only postpone their misery and lead to continued agitation by them. The fault lies with the bureaucracy which did not take these schemes seriously. They were treated like some unemployment relief scheme - a way to pay them without paying much attention to their production or productivity. We need instead a scheme to make them employable in jobs that meet with their aspirations.
They should enter the elite class in society - the managerial and professional elite. We cannot wait for macro-economic policy to create the jobs required for them. The prospects for economic growth given the continuing war are bleak. In any case, there is no simple correlation between growth and unemployment and no guarantee that demand expansion creats sustainable jobs.
On the other hand, if we allow the economy to lapse into recession jobs will be lost and jobs once lost are difficult to get back again. But our politicians in charge of policy making don't seem to understand. It is necessary to de-regulate labour laws and allow the firms to re-structure and carry on rather than drive them to closure through regulation.
It is necessary therefore to look to micro-economic policy measures. It is better to utilise the private sector to carry out the necessary training to make these graduates employable. They must be given the best possible training to equip them for managerial jobs. The training must be rigorous and they should be tested to see if they have acquired the skills and knowledge.
What then should such training involve? Firstly, the firms must accept that these young people have potentials having gone through highly competitive selection procedures to enter the universities.
The firms must have a commitment to employ them after the training to fill existing slots. They should be provided ample learning opportunities, at work, encouraged to sit for examinations in banking, insurance, marketing, accounting, computer science, etc.
They should be attached to senior managers who should adopt them like foster fathers. They should be given work experiences by rotating them. They should be trained with the firm's network of suppliers, large corporate customers, venture capital partners and any others who could provide them useful training. They will be generalists although those who want to be specialists after the training period should be allowed to do so.
Finance
The question is how to finance the costs of such training? Perhaps, part of the cost must be borne by the government (which created the problem in the first place) by allowing a double deduction of wages paid graduates under training. Whatever tax revenue the government loses could be recovered by imposing a cess on all firms in the industry.But only the large firms who have a well formulated scheme of training should be allowed to take on these graduates for training and allowed the benefit of double deduction for tax. There must be tax incentives to employ graduates in preference to non-graduates in managerial and executive jobs.
Perhaps one could go further and remove the tax deductibility of the salaries of non-graduates holding executive and managerial jobs.
As for the cess or special tax, it will not be too burdensome to banks, insurance companies, travel agents, hotels, etc. Foreign travel could be taxed to provide another source of money to finance the training.
Micro-economic policy
In the USA policies to deregulate the labour market have helped to generate jobs, whereas in Europe unemployment continues to be a serious problem because of the highly inflamable labour market, strong trade unions and the heavy social security costs which add to the labour cost.In the 1950s we were carried away by socialist policies. A leftist minister as Minister of Labour introduced highly protective laws for the job security of workers. He also introduced the compulsory Employees Provident Fund without any understanding of the rationale for such a fund as a mechanism to generate compulsory savings.
So the long term savings of the employees have gone to fund the budget deficits. In the 1970s another leftist coalition government introduced the Termination of Employees Act which made it practically impossible to such workers or retrench them without closing down the firm. So the benefits of the open economy introduced in 1977 have not led to any significant increase in jobs, significant in relation to the annual increase in this number entering the job market. The government has yet to understand that. The prevailing high level of protection for those with jobs mean fewer jobs all round. We have more or less an aristocracy of workers in the organised private sector and the state corporations like the C.E.B., the Petroleum Corporation, the banks and the conglomerates.
The employees in these companies must now learn to share with the unemployed and the less fortunate. They cannot strike for higher wages unless there is a commensurate increase in their productivity like the Japanese workers in the years after her defeat in the second world war, and the Korean workers in the previous decades they must work long hours and increase productivity.
The rediculous system of holidays must be changed. We can't sacrifice the economy and the people in the name of religion. The Sabbath was made for man, not man for the Sabbath. The variable full moon holidays coming in the middle of the week, disrupts the rhythm and routine of work.
If we must give a monthly holiday for Buddhist worship. Can the full moon holiday be given on the Monday or Friday to combine with the week-end. As it is when the full moon holiday occurs in the middle of the week employees take extended holidays and disrupt work patterns as well.
It is because of the vagaries of the movement of the moon the modern man adopted the present calender based on the movement of the sun. The lunar calendar was adequate for the agricultural economy. No other country in the world follows this lunar holiday. In Britain even the May Day holiday is given not on the first of May but on the week-end.
Because of the inflexible labour market, the excessive protection for employees and the strength of trade unions our company managements have chosen the easy way when confronted with wage demands. They have conceded them and added the higher costs to the prices of their products.
Where the firms are really pressed and unable to pass or the higher wage costs, they have no option but to sack the workers or close down their firm. It is wages, not jobs that ought to flex. A flexible labour market reduces the economy's wage bill with a mixture of slower wage growth and relatively stable employment, rather than with the alternative mixture of steady wage growth and higher unemployment all round.
Higher wage costs squeeze profits and deprive companies of the funds for investment. Actually we need a total wage freeze, even if there are improvements in productivity, there should be no increases in wages. Improvements in productivity will then lead to lower prices or an increase in profits which could be ploughed back for investment.
Despite the advantages for the workers and managers concerned wage rises even if financed through higher productivity has a drawback for the economy as a whole: they raise costs and prices higher all round leading to higher inflation.
Labour market reforms, of course, are necessary in the first place to achieve any significant improvements in productivity. The right of the management to manage and increase productivity is seriously hamstrung by the over-protective labour laws. The public sector is reeking with corruption and inefficiency. Public employees do not work or work badly but their bosses are unable or unwilling to enforce discipline. The same malady has spread to the organised private secctor with the introduction of the complex domestic inquiry procedures and rules to this secctor as well. They are buttressed by the laws enforced through the labour tribunals.
What is required is to ensure the rules of natural justice are followed before the ultimate punishment of dismissal is imposed. As it is, management in the private sector is weak and productivity improvements are negligible.
Trade union power must be weakened. Strikes should not be allowed unless adequate notice is given and a secret ballot to strike is taken. Union leaders must be held responsible for any damage to private or public property. Trade union funds must be seized if union leaders cause third party damage or violate the law.
The centralised collective bargaining has pushed up wages through trade union strength. But the public have to pay the price. Consider the banks which regularly increase the salaries of their employees, although they are already highly paid. They have no particular qualifications or skills to justify them drawing much higher salaries than clerks and supervisors with similar qualifications elsewhere. In the 1950s they were not all that well paid, not even being entitled to overtime in the early fifties.
Non-wage labour costs such as Provident Fund contributions, employees trust fund contributions have increased the cost of labour at the expense of employment. Minimum Wages laws are also a hindrance although the adverse effects are dampered by such minimum being below market levels.
We need a highly flexible labour market where firms can hire and fire quickly in response to short term changes in demand for the product. The demand for labour is a derived demand.
Since the unions are very powerful in the organised sector, the government should at least have a two-tier labour market. This would protect the unionised few but make it easier to give low wages and minimal protection to the rest.
It is too costly for a third world country like ours, to give all workers first world type protection. It is similarly necessary to exempt from the Employees Provident Fund contributions the small business, say employing below 25 workers. The level of taxes on small businesses should also be brought down.
The G.S.T. exempts from its scope small businesses but G.S.T. has to be paid at the point of import along with Customs Duty. Then there are municipal rates, trade licence fees and the extortionate fees and charges levied by the Customs and Port Authority.
There is also a paucity of information with regard to the availability of jobs, about training and vocational education and likely career opportunities in the future. There are far more television programmes devoted to food, drink, clothes, fashions, etc. than to jobs and work.
Finally, we have to change education particularly university education. Like India we should re-orient university education to produce mathematicians, computer programmers, scientists, economists, statisticians, engineers, etc. and stop turning out arts graduates educated in swabasha.
The economic base of our economy is not only the physical assets. Alongside physical capital, the most important assets in the modern economy are knowledge and skills, underpinned by culture and values.
The skills and knowledge base of our economy needs to be improved. Rate learning as practised in our schools and universities is not accumulation of knowledge but an accumulation of information. Our schools and universities need to compete with the best in the world if we are to benefit from the Information Revolution.
600 point all share barrier holds in New Year
The Colombo stock market closed the year with the all share index a shade under the 600 point mark at 597.30, the Colombo Stock Exchange (CSE) said in its monthly market report for December 1998.
The market has been unable to breach the 600 point barrier in the first two weeks of the New Year.
The CSE noted that the price indices had continued on an upward trend during the month with the all share index and the Sensitive Price Index (SPI), now replaced by the Milanka Price Index (MPI), appreciating by 22 points (3.8%) and 41.6 points (4.7%). The SPI closed at 923 points at the end of the year.
CSE said that the market remained dull during December with an average daily turnover of Rs.33.1 million. 23,656 transactions were completed during this month, down from 25,507 in November and 21,852 a year earlier.
The new MPI which was launched on January 4 in place of the old SPI has a base index of 1000 points as at December 31, 1998.
The CSE monthly market report said that December saw 9 sectors recording gains while 6 sectors declined. Noteworthy gains were posted by stores and supplies (21%), investment trust (19%), banks, finance and insurance (8%), trading (6%) and services (4%).
The decline was most significant in motors (3%) and footwear & textiles (3%).
Foreign investors were net sellers during December with sales totaling Rs.83.1 million. CSE said that foreign purchases during the month accounted for 22% of the total turnover while sales accounted for 34%.
There was a mixed performance in Asian stock markets in December with the NIKKEI in Japan tumbling 7% during the month. Analysts said that the Tokyo government's tax reform plans and Bank of Japan's quarterly survey on business sentiments may have been influenced the decline.
The Hang Seng Index in Hong Kong shed 3% while Kuala Lumpur moved up by 16%. In South Asia, Bombay appreciated by 8% while Karachi lost 10%. The ASPI in Colombo appreciated by nearly 4% during the month.
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