I’ve been asked to comment on a brewing storm in a tea cup, the supposed opening of the gates to hordes of Indian IT workers. At this time, all that the government is considering is a Framework Agreement, or an agreement to work in a time-bound manner toward a technical and economic cooperation agreement. I was involved in the early stages of negotiation but have little knowledge of current state.
Not having the time to engage with the issues in detail, I thought, I’d paste below the transcript of a talk I gave at the National Chamber of Commerce, along with the slideset.
Addressing an audience of who I took to be diehard protectionist types from the world of commodities and goods, I had highlighted how much we had benefited from unilateral but incomplete (one still had to grovel before the BoI for most permissions) liberalization that allowed us to grow the telecom and IT & ITES sectors over the past two decades. I thought that this was one sector that had the self-confidence to engage with the rest of the world on equal terms, given most of its leaders were beneficiaries of rules that allowed the free movement of professionals across borders. But to my great surprise, I see that they too want to hide behind bureaucratic discretion, talking about the numbers of Indian youth applying for clerical jobs, which is as big a red herring as I have ever seen. To the best of my knowledge, people who apply for government clerical jobs (we have thousands in this category in Sri Lanka) are not the same people who apply for software developer positions.
Speaker: Prof. Rohan Samarajiva, Chairman, LIRNEasia
Prof. Rohan Samarajiva: I want to introduce myself briefly; I was involved in CEPA (Comprehensive Economic Partnership Agreement] negotiations previously. I was a part of the joint study group on CEPA.
I am not going to spend too much time looking back at the old debates on CEPA. I would rather look ahead at the economic arrangements that would create exports and jobs for our young people. That should be at top of the agenda of this type of an economic discussion; not the protection of one or two groups.
Unfortunately, in these types of discussions we cannot really discuss the future in substantive terms, which is by definition unknowable. So we have to discuss it in terms of scenarios. Some will look at the future in terms of fear, based on all kinds of horrible things could happen to us. But I like to talk in the language of hope. Somebody can say that these things are easy to imagine and that I have no basis for my scenarios. I do not have a dog in this race. It is much easier for me to say things as an academic person and as a researcher. I would also like to say that even the opponents of CEPA are spinning the fear-based scenarios and imagining things. We should take real examples and actual information from other countries and should not go solely on the basis of imagination, mine or theirs.
This is the most heavily debated economic topic in this country ever. I was even involved in live radio talk shows on this subject conducted in Sinhala. It has drawn that level of interest.
The draft comprehensive economic partnership agreement with India includes a chapter on trading goods, a chapter on trading services, and a chapter of investment. It includes provisions on dispute resolution. There is nobody in this country who says that existing Indo-Lanka Free Trade Agreement should be rolled back or abolished. The investment chapter is not problematic. Even today many foreigners are coming and working here under the auspices of the Board of Investment. So the issue really is about the services chapter, in particular its most controversial part which is to create a legal framework for “Mode Four” movement of natural persons. I will focus on this.
Services trade is a lot more complicated than trade in goods. We talk about it in terms of four modes. Mode One is most like trade in goods: the seller is in country A and the buyer is in Country B. Trade is made possible because of the existence of telecommunication networks. An example is a doctor in country A providing diagnostic services to a patient in country B over a video link. Mode Two is where the buyer comes to the country of the seller to obtain the service. A patient who travels to Chennai to obtain medical services from a doctor located there is an example.
Mode Three is where the service supplier establishes a commercial presence in the country of the buyers of services. The example is a hospital in Chennai that decides to establish a “branch” Sri Lanka. This need not have employees from the supplier’s country, but in most cases there will be some because the supplier needs to ensure that standards are maintained and service quality is assured.
Mode Four is the most controversial. This involves the movement of “natural persons.” In the most constrained form, it can be limited to those directly connected to Mode Three. A service provider such as a hospital sends a number of senior managers to assure the service quality of its Mode 3 outpost. In the most liberal form, Mode 4 can apply to independent professionals such as consultants.
One reason why the debate focuses on Mode Four is that services trade in Modes One and Two are difficult to stop, measure or regulate. For example, it’s difficult to regulate people travelling to other countries to obtain services, other than through draconian currency controls.
Not many people talk about the investments chapter but it is connected to a controversial part, that is Mode Three trade as included in the services chapter. As you can see the real issue is about the services chapter. In the services sector Mode Three services trade takes the form of investments. It is about people coming in and investing and supplying services based in Sri Lanka. Movement of natural persons which is most controversial which is under Mode Four trading is the one that is connected closely to Mode Three.
Mode Three is about legal persons (companies) coming and investing in a country. This creates a degree of anxiety among domestic suppliers. It is tied to Mode Four which involves actual human beings. When people move around, that is where protectionists become very worried and very scared. Most of the concerns that have been raised are about a large number of Indians coming and inundating this country. So the issue is less about investments, than with the people who come along with the investments. The Chairman stated that there is no objection for foreign direct investments. We know that the country requires FDIs.
Any country which wants FDIs will do what is necessary to attract FDIs. We have been doing it under the BOI, the difference is that when it is done at the BOI you need all kinds of approvals. So, for example, my organization is not a BOI company though the consulting services we provide brings money into this country and creates employment. When I want to bring somebody to this country as a consultant or to work for my organization I have to go through all kinds of complicated procedures. If we were a BOI company it would be very simple. So we have created conditions for foreigners to come and work under the BOI frame work, but not in general.
If you have a defined legal framework, the procedures will be much clearer. But Mode Four rules do not abolish immigration rules. That is very clear and it has never done so. In the US-Canada Free Trade Agreement Mode four Rules did not abolish immigration law. In the NAFTA, the Mexicans coming to USA and US people going to work in Mexico were still subject to immigration law. Mode Four rules reduce discretion and increases certainty. If you want to take the highly liberal form you could have a situation where inter-firm mobility will be allowed for professionals so that instead of my work visa being tied to a specific company, I could change companies, for example I can work for company A or Company B. A much milder version that we would go in to (and the Director General of Commerce may have to tell us what would likely to be done) would link professionals to Commercial Presence and would exclude independent professionals and would not allow inter-firm mobility.
Figure 1 (see slideset)
This complicated figure presents all the ways by which these people can move between countries in the context of services trade. There are different ways that people can move between the countries. For example: Nayana is a beauty care company from Sri Lanka that also operates in Chennai. Their employees go from Sri Lanka to work for that company in Chennai. They are tied to that specific company and they cannot work elsewhere. I personally prefer a much more liberal form because I offer my consulting services all over the world thus would have fewer issues in getting my visas approved.
Why is trade of services important and why do we need a legal framework to govern it? I could give you all kinds of theories about it. But instead what I thought I would do is to tell you about practical issues in relation to two specific sectors.
The IT and IT enabled services sectors are those where India is extremely competitive and Sri Lanka is also somewhat competitive. Sri Lanka has unilaterally liberalized the sectors. We have not negotiated bilateral concessions with any country. We have simply said that unilaterally we liberalize IT and IT enabled services sectors. This was done because we wanted this industry to grow, to create jobs and generate exports. Software has been a dynamic industry for decades but IT enabled service such as business process outsourcing and business process management has grown over the past decade or so. I have seen the comparison of protectionist and liberal approaches because in 2007-09 I was advising the government of Bangladesh. They wanted to know how they could create service-sector jobs in Bangladesh because they have lots of young people. Our median age is around 31. There, it is around 25. That means a lot of young people coming to the job market every year. However they wanted to be protectionist about it. They did not allow captive BPOs. For example HSBC call center in Sri Lanka has no local investor. It is a 100 percent foreign-owned, captive entity where all the work is conducted for HSBC worldwide.
Bangladesh did not like this, they wanted to give licenses for BPO operations. They wanted to see that Bangladeshis had ownership stakes in these BPO companies. But I said investors will not come if you put too many conditions. I was right. They did not come. The Bangladesh government has been gradually relaxing these conditions over the last six years. What we did in Sri Lanka that was we liberalized the telecom industry to allow supply by multiple firms and adequate investments from the late 1990s. In addition we liberalized the international segment with a lot of controversy around 2002-2003. That is because the BPO companies said they want to buy these services from multiple suppliers. So a 100 percent foreign-owned company called VSNL (now Tata communications) was allowed to come and provide these services.
Our liberal approach included IT education as well when I worked for the government. There were all sorts of discussions about allowing Indians to come and provide all the relevant services. We capitalized on our niche strength in accountancy. We attracted marquee BPOs under Mode Three, HSBC being a good example. We increased our rank as a BPO supplier country. The software industry of course did it with their own strength without relying on government too much.
Below in Figure 2 are the latest statistics from SLASSCOM which indicate growth of revenues and growth of large medium and small players. But the sky has not fallen because we allowed foreign managers and foreign investors to come in. We have created jobs as per SLASSCOM documents.
Figure 2 and Figure 3 (see slideset)
We wanted to create exports, we wanted to create jobs, increase competitive and increase our productivity in the country. If we wish to, we can do unilateral liberalization without any reciprocal obligations from other countries.
I don’t see what kind of harm will be done by service liberalization. But we need to have law governed framework to reduce uncertainty to encourage investment and increase productivity in the sector. If the productivity is high you don’t have to fear. What we have seen is that exports from both Sri Lanka and India have increased outside the FTA because of productivity factors. It has nothing to do with trade agreements.
So what I believe, is that without debating about small things we should look to the future and try to get a good services strategy for our country. For that we have to identify thrust sectors. These could be:
• IT and IT enabled services
These are not very controversial. These are areas that we all have advantages in. In order succeed that we have to have enabling infrastructures and services that would serve as the foundation:
• Ports and marine services
• Airports and aviation services
• Telecom networks and services
So if we do these things properly, I think Sri Lanka can be a services hub. We can create exports, we can create employment and we can take this country forward.
So my conclusion, trade liberalization is not about exporting more and importing less. That particular economic doctrine was called “mercantilism” and is taught in only in economic history classes and not taken seriously in the practical world for many many years. Trade liberalization is about improving productivity in small economies. There is no pressure to improve productivity if protectionist barriers remain. When productivity increases, export will increase. So the focus should be on productivity rather than on protecting this or that business. We should not drive looking through the rear view mirror. We should drive looking forward by improving the productivity of all our industries by removing the barriers to obtain the best services. Now think about yourself. You are running businesses. You need to various services as inputs. Whether you are in manufacturing or not you need services. If you can obtain the best services from anywhere in the world, all our businesses will benefit. Legal frameworks are not about enabling trade as such, but is about increasing certainty. Trade is already happening; foreigners are already working here, I have been treated by Indian doctors at Apollo. There are lawyers operating here. The question is do we put these activities within a legal framework so that they can be properly regulated. Do that and you will increase certainty, induce investment, create competition and thereby increase productivity. That will be for the benefit for our country.