Warning against trade lockdown: Sri Lanka needs bridges not walls to prosper

ECONOMYNEXT – Sri Lanka’s sweeping trade lockdown in the wake of severe monetary instability from March 2020 will not help the country, as the country cannot make everything in an autarky especially if there is to a chance to produce more complex goods, an opposition party official warned.

Sri Lanka slapped import controls not seen since the 1970s when the Bretton Woods system collapsed, after unprecedented money printing in March and April triggered foreign currency shortages.

Though private credit has contracted in May and June, the trade controls remain in place.

Inputs and Supply Chains

“If you block imports like this, even the domestic industry will not progress,” Harsha de Silva, an economist and former minister who is seeking office Sri Lanka’s Samagi Jana Balawegaya party told a forum organized by Advocata Institute on post-election policies.

“I know a case where a factory produces goods with only about 5 percent imports,” de Silva said. “But because that 5 percent is not allowed, they cannot operate. About 300 people worked in that factory. When they went to the Treasury to get permission to import they were told nothing could be done.

“So what is this policy?”

Sri Lanka controls imports after bouts of pro-cyclical money printing in the belief that monetary instability (dollar shortages and balance of payments trouble) is something to do with trade and not money and credit.

He had heard a minister talking in television saying a hospital bed could be imported from China for 70,000 but it cost 300,000 to make it in Sri Lanka.

“The question is do we make one local bed or bring four foreign beds”, de Silva asked

Classical economists have pointed out that in true capitalism where businesses cannot exploit consumers with import protection, the buyer would be left with additional money that could be spent on other goods and services, including domestic ones, that create more jobs and boost living standards.

Seen and Unseen Jobs

A person who has an elderly sick person at home would then spend 70,000 rupees and have 270,000 left over to spend on other goods and services boosting demand for jobs and services.

A person who buys an imported product at half the price will have more money to left over to educate their children or go buy something else or enjoy a service, which will create more jobs and generate more taxes for the government while simultaneously raising their living standards.

This is why free trading countries prosper while others do not, even though some jobs in protected sector may be lost.

“Protection necessarily shrinks the spending power of countless fellow citizens,” explains economist Don Boudreax.

“Protectionism …destroys the job prospects of still other fellow citizens (for example, retail-store-management jobs that never materialize because tariffs on consumer goods reduce consumers’ demand for such goods).

It a bed is cheaper total capital expenditure of building new hospital would be down, its borrowings would be down, reducing initial expenses and borrowings as well as running costs, allowing it to offer cheaper services.

The extra capital that would have been wasted on the hospital would now be available to build a factory or other facility.

Taxing imports raised the cost of domestic goods and services, which made exports and the entire economy uncompetitive. Taxing building materials raised the cost of hotels, and Sri Lanka there would not be able to compete with East Asia, analysts have said.

Import Bans Temporary

Ranjith Bandara, an economics professor, who is with the Sri Lanka Podu Jana Party said it was not the policy of the party to follow the 1970s policies followed by the then United Front administration.

“There is no long term plan to control imports,” Bandara said. “The SLPP has clearly indentified that there will be no return to the 1970-77 controls. But as a short term solution to encourage production of items domestically we have given space.

“So this is a temporary measure to give relief to the economy, on one side to save money for essential work and the other to give opportunities for domestic production.”

The controls have already been extended once. Controls and duties are difficult to bring down once they are given because businesses that made extra profits from exploiting customers with high prices do not want to give up the profits.

Walls and Bridges

De Silva said policies should be based on evidence. He said he agreed with Bandara and others who said Sri Lanka should increase exports. One was to increase complex products.

“You cannot develop a domestic economy by building a wall,” de Silva said. “I agree with others that we need exports. One way to do is the produce more complex goods. For that we also need knowledge.

“We do this discussion with zoom. The owner is a millionaire. The post-Covid economy will be technology supported economy with complex products involving the fourth industrial revolution. We now have opportunity to do it.

“If we build walls around the country we will fall further. We need to build bridges not walls.

He said for technology sometimes a few experts were needed. But due to restrictions they cannot be done. People had objected to the Singapore free trade agreement saying people from Singapore would flood into the country. That was not so, he said.

There have been calls to reform Sri Lanka’s central bank which one of a series set up by experts from the Latin America unit of the US Federal Reserve, and all such countries have the same problems or worse.

The last administration’s free trade agenda was also torpedoed by the so-called ‘flexible exchange rate’ a highly unstable soft-peg.

Economic analysts have warned that no policy agenda could be built on a foundation of monetary instability. (SB-Colombo/July31/2020)