Preparing the Domestic Private Sector for Trade Liberalization
17 February 2017
At a meeting of private sector chambers on 4th April 2016, the Minister of Development Strategies and International Trade together with senior officials of the Ministry, indicated that the Government of Sri Lanka plans to embark on an ambitious trade liberalization effort during 2016 and 2017 and is seeking ideas from the private sector on what measures can be put in place to help domestic businesses adjust to meet the challenges and opportunities of this process.
While specific proposals on support measures could only be indicated once the specific scope of the liberalization exercise was informed, the Chambers were asked to submit initial ideas. To this end, the Ceylon Chamber of Commerce submitted a note on the overarching framework for consideration, as well as recommendations on specific support measures. This note is now being updated and published for wider dissemination, and to stimulate discussion, and action, on next steps.
Notwithstanding the obvious caveat that these findings were for the case of India (and noting the peculiarities of India’s large domestic market), they provide a useful reference point. The methodologies used in these analyses could provide useful guidance in conducting simulations for the Sri Lankan case.
In designing possible policy approaches to help with firms’ adjustment to liberalization, the government can consider the following 11 recommendations:
1. Formulate and articulate an adjustment strategy
The government, in consultation with the private sector, must proactively chart out an adjustment strategy to help firms cope with liberalization and help firms take advantage of new opportunities. Such a strategy must be announced early, it must clearly articulate what the state will and will not do, and provide a rationale or framework for how the state will decide on support measures. The strategy needs to also build confidence (among private sector stakeholders) in the capacity of the state to deliver the promised support programmes, including demonstrating the allocated resources and ensuring all agencies are on-board from day one.
2. Institutional streamlining and pro-business orientation
Prior to the liberalization, all line ministries and agencies that deal with businesses (either in a promotion/facilitation or regulatory capacity) and across functional areas of labour, taxation, environmental standards, quality standards, licensing, etc. should be reoriented to be more ‘industry facing’ and business friendly. In an atmosphere of flux during the liberalization process, adjustment will be tricky for firms. They may need to deal with many different government agencies and regulatory bodies. Minimizing the friction and inefficiencies in this interaction is key to avoid frustration on the part of firms, and ensure better support for firms’ survival and growth.
3. Tackle trade facilitation, non-tariff, and regulatory barriers early
Relevant government agencies need to quickly address well-known pain-points in trade facilitation, including non-tariff barriers, customs delays, testing and standards issues, and regulatory gaps. This can help reduce transactions costs for firms, which is particularly important during an adjustment phase. For a useful overview of these issues, refer the CCC’s note released in February 2017 titled ‘Tackl ing Constraints Closer to Home: An Overview of Regulatory and Administrative Barriers faced by Sri Lankan Export and Import Traders’ .
4. Re-calibrate export promotion schemes
Government funding and other support lines for export promotion need to be recalibrated, to ensure that they are meeting the envisaged objectives, reaching the right firms, and making the desired impact. For instance, EDB support on trade fairs and exhibitions can be reoriented to provide grants for SMEs to go to self-selected fairs/exhibitions. Export promotion funds can be allocated better or streamlined to support foreign market development/market exploration.
5. Special financing facilities
Make available specialised and dedicated funding lines/loans schemes from the banking sector to support the adjustment. This means that, for firms impacted by the liberalization, special lines of credit be available to help with restructuring. This also applies for firms able to take advantage of liberalization, to enable special loan schemes to help them re-invest, embark on new projects, access technology, and expand their business.
6. Industrial estate utilization
Make better utilization of existing (and underutilized) industrial parks and estates to help affected firms (small, import-substitution firms) relocate to better facilities. This can be coupled with assistance on technology upgrading as well as modernizing of facilities in existing industrial estates based on a priority needs assessment.
7. Enable technology upgrading
Improving access to technology and technology absorption can help firms become resilient and also take advantage of new opportunities brought on by liberalization. Initiatives like a technology voucher scheme, collaborative grants programme, and technology linking scheme (linking businesses to technology solutions in universities and public research institutes), can be introduced to help firms upgrade and invest in product and process innovation to both face new competition (from lower-tariff imports) and also expand overseas with new competitive products.
8. Bridge market information gaps
Firms can gain from knowing more about new market opportunities at home or abroad - they can be helped by reducing the cost of market information and intelligence The EDB, Department of Commerce, and Sri Lankan diplomatic missions abroad, can help bridge foreign market information gaps, which are often a quasi-public good and costly for individual firms to bear, as well as partially or fully fund market exploratory studies.
9. Help firms go digital
Assisting more firms to get online (to find buyers and suppliers), and leverage on digital technologies like e-commerce, can substantially cut search costs and grow new businesses. The ICTA can launch a special programme that builds capabilities among entrepreneurs to use these tools.
10. Reform labour market constraints
Introduce measures to make labour markets more flexible to allow workers to adjust to structural and sectoral changes in the economy that would come alongside trade liberalization.
11. Provide specialised SME support
There would need to be a special scheme catering to smaller firms, as their needs and capabilities may be different. Given that 93% of all industrial establishments are ‘microenterprises’ (fewer than 5 employees) and over 61% of export firms have less than 25 employees (albeit contributing less than 1% of export value), it is important to consider these groups for targeted programmes, given the catalytic impacts SMEs have on poverty, employment and inclusive growth.