Free trade will benefit ordinary Sri Lankans, not elites: Razeen Sally

ECONOMYNEXT – Free trade benefits ordinary people of Sri Lanka and not just elites, but for more than half a century Mercantilist and collectivist myths had triumphed in the island, a top international economist and trade specialist said.

"Sri Lanka needs a decisive departure from collectivism – which means politics intruding far too much in individual people’s lives," Razeen Sally, a former London School of Economists professor, who is now with the National University of Singapore, told an economic forum organized by the Ceylon Chamber of Commerce in Colombo.

"It is ok for the elites – including many here – because you can make your own deals. But it is not good for ordinary Sri Lankans.

"The answer to that is freedom. Freedom is not just about politics and elections it is very much about the economic freedom of the individual out there."

Sally said that he had seen two Mercantilist fallacies often articulated in Sri Lanka.

One was that an export strategy was needed but imports must be curtailed, through taxes or import substitution.

Sally recalled that the former Treasury Secretary P. B. Jayasundera had often repeated the idea that exports must be doubled and imports reduced.

"That is not just counterproductive but stupid," Sally said.

Crony Mercantilism

Mercantilism was the driving economic ideology of the time before the foundations for ‘economics’ proper was laid by Adam Smith.

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His ‘Wealth of Nations‘, was a treatise against Mercantilism, which was practised by imperialist slave trading firms like the British East India Company as well as landowners.

Some businesses (known in the present day as crony capitalists – but act just like classical Mercantilists did several centuries ago) will always try to lobby politicians and restrict trade, because it was not a concept easily understood by the public, Smith warned.

"The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public," wrote Smith.

"To widen the market and to narrow the competition is always the interest of the dealers.

"To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.

"The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention."

He said the ‘country gentlemen could easily be duped by Mercantilists not necessarily because the public was stupid but because seekers of protection could articulate their arguments and lobby politicians more effectively.

"Their superiority over the country gentleman is not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his," Smith wrote.

"It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction that their interest, and not his, was the interest of the public."

British economist and philosopher John Stuart Mill described protectionism as "an organised system of pillage of the many by the few."

Siamese Twins

Meanwhile Sally said imports and exports went hand in hand.

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"They are two sides of the same coin or to switch my metaphors, they are Siamese twins," he said.

"Why? When you put a tax on imports, you are taxing the tradable sectors of the economy domestically including exports.

"A tax on imports is a tax on exports. You remove the tax on imports and you remove the tax on exports because you make the domestic economy more competitive."

Sally said the 21st century international trade was based on global supply chains, where parts of a final product was manufactured in several countries, put together in a third, and then sold worldwide. An Apple iPhone today was made in multiple countries.

"You have an ever tighter linkage between exports and imports," Sally said. "And that is exactly the kind of businesses Sri Lanka needs to get involved in when you have efficient and best cost imports to feed into your exports. That is one simple and important point that needs to be made."

While East Asia had perfected the system of global supply chains, South Asia was left out, except in the case of apparel, he said.

Analysts say imports taxes makes an entire economy uncompetitive driving capital and labour into sectors that produce goods at higher than world prices, where wages also had to be higher simply for workers to survive without raising their living standards real terms.

Like the principle of comparative advantage, Mercantilists usually find the concept difficult to grasp, they say.

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Many developing countries, including Sri Lanka, also slapped taxes on some exporters in a bid to ‘increase value addition’ by force.

"One of the most idiotic policies that I can come across in Sri Lanka is the cess on tea and rubber, where you have export taxes in order to promote value addition at home. Some of that revenue is supposed to go to promoting exports abroad."

"The answer is that this kind of policy did not work anywhere it has been tried."

Sally said if trade taxes had to be low and simple, not a complicated system where different stages of production was interfered.

Analysts had also pointed out that export taxes on tea and rubber denied world market prices to tea and rubber farmers, while giving artificial profits to producers of manufactured goods.

Analysts say in addition to Mercantilists, nationalists also embrace the concept and took it further, putting forward the idea of self-sufficiency.

German economic philosophers of the ‘historical school’ took these ideas forward, eventually driving the country into national-socialism.

European philosophers had pointed out that autarky, which leads to discrimination against foreign goods automatically and inevitably leads to discrimination against minorities as happened in Germany.

Even Karl Marx, a collectivist, did not support protectionism, which gave artificial profits to crony businessmen and landowners, while free trade was clearly to benefit of working classes, despite it being an idea backed to the hilt by so-called ‘capitalists’.

Instead, he opted to attack both ideas in different ways, claiming his support for to free trade was simply because it helped destroy an oppressive older order.

"To burden foreign corn with protective duties is infamous, it is to speculate on the hunger of the people," Marx said in 1848 in Brussels after the repeal of Corn Law brought food prices down in Britain propelling the country further on the path of an industrial powerhouse.

"In a word, the free trade system hastens the Social Revolution. In this revolutionary sense alone, gentlemen, I am in favour of free trade. (Colombo/Aug05/2015 – Update III)