Asia Power Index 2019: What Does it Say About Sri Lanka’s Regional Position?

This article originally appears in the Daily FT of Monday 3rd June 2019, and can be accessed here.

The latest edition of the Lowy Institute’s ‘Asia Power Index’ provides an insightful picture of the power dynamics shaping the Asia-Pacific region, with many interesting takeaways for Sri Lankan political leaders, bureaucrats and businesses. One of the overarching messages contained in the 2019 Index is that China is making strides in power and influence across the region and is closing the gap with the United States, even though the latter still remains the dominant power in Asia. Yet, even as China forges ahead with its ambitious (and sometimes contentious) ‘Belt and Road Initiative’, the report argues that the country’s internal political and structural challenges will make it hard for it to establish ‘undisputed primacy in the region’. Closer to home, Sri Lanka’s performance paints an interesting picture. Drawing from the report’s co-author Bonnie Bley’s article last year, If the number of skyscrapers is an indication of a country’s ‘Prestige’ and thus, ‘Cultural projection’ as measured by the Index, then Sri Lanka ranks pretty high at 16thout of 25 countries, with three buildings above 150 meters compared to just two in New Zealand. But the Index provides a much more comprehensive picture than that of a country’s hard and soft power and influence in Asia, ranging from economic relationships to strategic ambition, which are discussed in this article. On ‘Overall Power’, Sri Lanka ranks 21stout of 25 countries, with a score of 8.5 out of 100 and listed in the ‘Minor Powers’ category. We are above Nepal, Mongolia, Laos, and Cambodia, but below Bangladesh and Myanmar. The rest of the article highlights some of the key findings of the report across a select set of influence measures, and explores their relevance for Sri Lanka.

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Africa Has Just Created the Largest FTA in the World

Despite the vast economic heterogeneity across the continent, African countries have come together to forge the world’s largest free trade agreement. Below is a quick summary of the Africa Continental Free Trade Agreement (AfCFTA) that has just come into effect yesterday (Thursday 30th May).

  • The AfCFTA is now the largest ‘free trade area’ by population that has been created. Trade is the primary focus for now, but it is expected that it will deepen and widen to cover other areas (including possibly currency union) in the future.
  • All but 3 of Africa’s 55 countries are part of this free trade area now, covering more than a billion people and a collective GDP of over $2 trillion
  • The most notable hold-out is Nigeria, whose domestic manufacturers pressurized the President to not enter the agreement for fear of competition.
  • Once the AfCFTA comes into effect, the signatories will drop 90% of their tariffs for imports from other African states.
  • Brookings estimates that with the full implementation of the AfCFTA, Africa will have a combined consumer and business spending of $6.7 trillion by 2030.
  • The AfCFTA provides new opportunities to smaller countries like Sri Lanka. We can get into African countries that we already have some presence in or dealings with like South Africa, and use that as a base to enter other countries in the continent, taking advantage of the unified tariffs, etc. that will be in effect.
  • Moreover, with greater intra-regional trade and economic opening up, African countries would see faster growth and incomes rising, thus creating new consumer market for Sri Lankan exporters and investment opportunities for Sri Lankan firms.
  • Sri Lanka must now step up our commercial counsellor presence in key African states, to start evaluating market opportunities more aggressively in the continent. Institutions like our EDB may also consider having a dedicated Africa desk to guide our exporters interested in knowing more about that market. We should also get in-depth market studies done on the export potential in key African economies.
  • At a macro level, Sri Lanka should forge a closer political-diplomatic relationship with the African Union (AU) as it is the apex organization driving this bloc.

 

Image courtesy STR/AFP/Getty Images.

Caption: African Heads of States and Governments pose during African Union (AU) Summit for the agreement to establish the African Continental Free Trade Area in Kigali, Rwanda, on March 21, 2018.

Employment Dips in 2018, Fewer People Active in the Labour Force

According to the latest Labour Force Survey Annual Bulletin for 2018, the number of those in employment in Sri Lanka declined by nearly 0.2 million last year, compared to the year before. Here’s a brief summary of the main findings from the report.

Looking Back at 2018

  • The number of people of working age employed in 2018 shrank by 193,013 to 8,015,166. The decline – the first in five years – was driven by the reduction of females in employment, by 214,166, while there was an increase in males in employment of 21,152.
  • Sri Lanka’s female labour force participation rate is just one third of the working age population. Women in the country are primarily in the categories of ‘contributing family worker’ (77.1%), ‘employees’ (33.9%), and ‘own account worker’ (26.1%).
  • The labour force participation rate in 2018 was the lowest in several years, declining to 51.8% in 2018 from 54.1% in 2017. It was also below the 53% average recorded over the last 8 years.
  • This has meant that in 2018, there was an increase of 0.53 million in what the Government statistics office calls the ‘economically inactive population’.
  • More workers also had zero working hours per week than any time since 2011. In 2018, it was 5.6%, up sharply from 4.7% the previous year.
  • The sharpest drop in the employed population was in agriculture, reflecting the sluggish performance of the agricultural sector during the year due to the impacts of adverse weather. Of the 193,013 drop in total employment in 2018, 96,487 was from the agriculture sector.
  • Meanwhile the drop in the industry sector was 92,232, and services showed the least decline of 4,294. The services sector now forms over 60% of national output and is steadily growing.
  • In terms of gender, the unemployment rate among males rose to 3.0% in 2018, from 2.9% in 2017, while the unemployment rate among females rose to 7.1% in 2018 from 6.5% in 2017. In terms of age, unemployment among 20-24 year olds and 24-29 year olds recorded the highest rate in 8 years.
  • The unemployment rate for high school/upper secondary qualified remained high at 9.1%, which is up from 8.1% and 8.3% over the past two years.
  • The labour force numbers also show sharp geographical differences, with the highest unemployment recorded in the Eastern Province of 6%, where poverty is high, there is a heavy dependence on subsistence agriculture, and little new private sector job opportunities have emerged. The East is followed by the Southern Province at 5.7%, and Northern at 5.6%, Central Province at 5.4% and Uva Province at 5.2%.

Looking Ahead

  • Looking ahead to 2019, it is likely that employment in the agricultural sector will pick up with the recovery in cultivation with more favourable weather than last year.
  • Performance of employment in the industry sector is unlikely to see substantial difference from that of last year.
  • However, the services sector is likely to be badly hit by the impacts of the Easter Sunday terrorist attacks and the consequent impact on tourism and related services.
  • Annual national budgets usually provide an impetus for employment creation, but in 2019 the budget was delayed by five months and also there was little by way of new programmes to foster job creation. ‘Enterprise Sri Lanka’ loan schemes will help spur entrepreneurship and new job creation, but will take time to ‘move the needle’ in terms of business expansion and employment creation.
  • New large projects in Hambantota in the Southern Province are likely to have positive localized employment creation effects this year. Other Provinces are unlikely to see major changes in their employment performance.

USD v. CNY: A Real Contest?

For decades now, no currency has been more widely used than the US dollar. And because of this dominance, the US has long enjoyed what former French President Valéry Giscard famously described as an “exorbitant privilege.” Benjamin Cohen, Professor at the University of California captures it nicely: “As long as foreigners are hungry for dollars, the US can spend whatever it needs to project power around the world. To pay for it all, it need only turn on the printing press”. But its fair to now ask – is the US administration’s protectionist stance putting this privileged position at risk? And is the Chinese Yuan on the rise? There is no clear cut answer – but here are some ways to think about it.

China has already convinced Russia to accept the renminbi as payment for natural gas, where once it made such purchases only in dollars. More recently, China has started preparing the way for purchases of imported crude oil in renminbi. For example, earlier this year, it launched a new oil futures market in Shanghai, which seems intended to establish a renminbi-denominated price benchmark alongside Brent and West Texas Intermediate crude. If successful, the Shanghai market could trigger a shift of payments for other traded commodities as well – all at the dollar’s expense.

Likewise, a number of countries are looking for ways to circumvent the Trump administration’s sanctions on Iranian oil producers. India, for example, pays for some Iranian oil with commodities rather than dollars. And both Russia and China have been investing heavily in gold to reduce their reliance on dollar-denominated reserves. Between them, the two countries have already bought some 10% of all the gold available on the world market. You can see in Sri Lanka too – keen to issue a so-called ‘Panda bond’ – a Chinese Yuan dominated bond, apart from the country’s US dollar bonds.

The yuan’s influence is increasingly felt. Almost as soon as the yuan was allowed to float a little more freely, the currencies of economies that do a lot of trade with China began to move in tandem with it. The euro-dollar exchange rate, for instance, has closely tracked changes in the dollar-yuan rate recently. When the yuan weakened against the dollar in 2016, the euro fell to a low of $1.05. When the yuan rallied last year, so did the euro. Many experts believe this co-movement is probably not a coincidence because the currencies of China’s other big trading partners show the same pattern. When the yuan moves up or down, other currencies follow it. This is testament to China’s “soft power” in the foreign-exchange market

But while the yuan is increasingly growing in prominence, it is still a long way from being a global currency. It has not yet made great strides as a trading or reserve currency. Of the $5trn dollars traded in currency markets each day, the dollar is on one side of the exchange in almost nine out of ten transactions. Crude oil is priced in dollars. The bonds issued by countries and by globalised firms are likely to be in dollars if they are not in their home currency. And the dollar accounts for two-thirds of foreign-exchange reserves.

Quick Insights from UNCTAD’s Latest Investment Policy Monitor

The United Nations Conference on Trade and Development (UNCTAD) has just released their latest ‘Investment Policy Monitor’ report. Here are some top-line insights relevant for Sri Lanka:

1. 35 countries have taken new national investment policy measures, of which over one-third are new restrictions or regulations. Apparently it is the highest since 2003. Overall, there is a sharp spike in restrictive measures being imposed, and a dip in liberalisation/promotion measures. This signals that more countries are getting hawkish about certain aspects of their investment policy, when approving investments (e.g. national security, as explained in point 5 below). Sri Lankan Government institutions involved in FDI and investment laws would need to be mindful of this trend.

2.Meanwhile, several countries liberalized their investment regimes, notably – Brazil, China, Qatar, India, Philippines. This was mostly related to administrative frameworks approving/governing FDI. Both Philippines and Qatar have removed ownership caps on most sectors, that existed up to now. Meanwhile, a handful of countries expanded fiscal incentives for investment – Cameroon, Peru, Poland, Guatemala.

3. While 16 countries have been highlighted for taking measures to ‘promote and facilitate’ and 5 countries highlighted for ‘improved business climate’, Sri Lanka is not featured in either of these lists even though the country did take positive measures, like the ‘SWIFT’ process for investor applications (May 2018) and the improvement in the ‘Doing Business’ rankings (October 2018). Ideally, Sri Lanka should regularly update UNCTAD and ensure that our reforms are featured in, and recorded positively, in this global report.

4.Saudi Arabia has, in January 2019, released a ‘Guiding Principles for Investment Policymaking’. It covers 7 principles, including non-discrimination clauses, enhanced transparency procedures, protection of public policy concerns (social , environmental, etc) transfer of knowledge and technology from investments, etc. This is something Sri Lanka can possibly look at and see how to adapt/adopt. The BOI already adopts many of these things, but it is not codified and published anywhere, and now would be a good time to do it.

5. A final key insight from the latest report is the rising trend among developed countries in using ’national security’ considerations in putting tighter regulations and restrictions on FDI. This I guess follows the US and Brussels, particularly with regard to Chinese investment. This comes on the back of the WTO ruling just this week that gave Russia the ‘all clear’ for them invoking ‘national security’ considerations in trade with Ukraine. This can have implications on the US’s own trade restrictions citing ’national security’ as the key reason, and embolden President Trump’s stance.

Full report is available here – https://unctad.org/en/PublicationsLibrary/diaepcbinf2019d2_en.pdf

 

‘Trade Frictions, a Re-drawing of Supply Chains and Implications for Sri Lanka’

A version of this article originally appears as a ‘Guest Column’ in the DailyFT of Tuesday 9th April 2019, available online here.

imagesThe current US-China trade frictions and the broader US stance on trade relations with its key partners could trigger a substantial redrawing of supply chains across Asia and the world. This has implications for Sri Lanka, as it aims for a more trade and investment-oriented growth path. To survive and thrive in this ‘new normal’ for trade, Sri Lanka must double down on vital domestic trade and competitiveness reforms. Continue reading

Trump’s trade twist: Linking tariffs to wages

In a forthcoming Guest Column for the DailyFT in Sri Lanka, I write about how the US-China trade tensions could trigger a fundamental re-drawing of supply chains in Asia. Yet, there is another re-drawing of supply chains that is likely to happen, and that is due to the new USMCA – the United States-Mexico-Canada Agreement – which replaced the North American Free Trade Agreement (NAFTA) which Trump bashed during his election campaign. Sure, it keeps its predecessor – NAFTA’s – most vital feature: tariff free trade in most goods among the three countries. But it could fundamentally re-draw supply chains in that region – in particular the vehicle industry. The USMCA would likely shift automobile production jobs from Mexico to America because, when the trade pact is fully implemented, cars will escape U.S. tariffs only if as much as two-fifths of their content is made by workers earning at least $16 an hour—seven times today’s average manufacturing wage in Mexico. Moreover, three-quarters of a vehicle’s value must originate inside the free-trade zone, up from about two-thirds earlier. And because the USMCA must be re-authorised at least every 16 years, firms may well be discouraged from big investments in cross-border supply chains. So this is likely to encourage firms to prefer to produce in America – exactly what President Trump wants to achieve.

First Empirical Evidence of How Trump’s Trade War Is Hurting America

It’s the first anniversary of US President Donald Trump’s trade war and two recent papers by eminent economists have provided the first real estimates of the impact of the protectionist tariffs on the American economy. Both papers find that US consumers are the worst off as a result of the protectionist tariffs, from both reduced choice and higher prices. In fact, the first study (co-authored by three economists from Columbia University, Princeton University, and the New York Fed) finds that the full incidence of the tariffs fall on American domestic consumers (complete pass-through of the U.S. tariffs into U.S. domestic prices), and that as a result American consumers’ real income has fallen by US$1.4 billion per month by the end of 2018. In total, there is a cumulative deadweight welfare cost (reduction in real income) from the U.S. tariffs of around US$6.9 billion during the first 11 months of 2018. They also found that US producers responded to reduced import competition (because of the protection afforded by import tariffs) by raising their prices – further hurting domestic consumers as well as producers who use these goods as inputs. These are classic exemplifications of the costs of import protection.

The second paper, by economists at UCLA, NBER, Yale, World Bank, and Columbia Business School, find similar results. They estimate an annual loss for the American economy of US$68.8 billion due to higher import prices. Notably, they find a horizontal supply curve for the export supply of foreign goods into the U.S., suggesting that U.S. consumers bear the incidence of the U.S. tariffs. Meanwhile, they estimate gains of US$21.6 billion from higher prices received by US producers. The redistribution from buyers of foreign goods to U.S. producers and the government nets out to a negative effect on the American economy of US$7.8 billion on an annual basis; 0.04% of GDP.

Now onto some of the very interesting distributional effects that their study found. Firstly, their finding that the protectionist tariffs protected sectors concentrated in electorally competitive counties (tight race between Republican and Democrat) is not surprising. But what it is revealing – and indeed quite significant when considering the possible political fallout of the tariffs – is that foreign retaliatory tariffs affected sectors that are concentrated in Republican counties (for instance, agricultural workers like soybean farmers). Most interestingly, their computations show that workers in tradeable sectors in heavily Republican counties experienced the largest losses. Now it would be very interesting to see, in the Presidential Election 2020, how these economic impacts play out in the polls.

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Both papers can be found here:

‘The Impact of the 2018 Trade War on U.S. Prices and Welfare’ – http://www.princeton.edu/~reddings/papers/CEPR-DP13564.pdf

‘The Return to Protectionism’ – http://www.econ.ucla.edu/pfajgelbaum/RTP1.pdf