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| Thursday, 21 October 2004 |
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A GSP scheme to meet the development challenges of 21st century Address by Minister of Industries, Tourism and Investment Promotion Anura Bandaranaike to the Development Committee of the European Parliament, Brussels on October 12. "I am significantly honoured to address you today on the theme of "A GSP Scheme to meet the Development Challenges of the 21st Century". In selecting the subject of my address, I have been very aware that the European Union, while having the second largest economy in the world, nevertheless has the generosity of being the largest provider of preferences, amounting, as I understand, to 52 billion Euros of imports. Moreover, the forerunner of the EU, namely the European Economic Community, was the first to extend preferences, soon after the landmark Resolution No. 21 of the UNCTAD 2 Conference in 1968 in New Delhi. Today, the distinguished members of the Committee on Development of the European Parliament are engaged in the consideration of the Communication from the Commission, to shape a regime of EU Preferences that would extend well into the second decade of the 21st century. UNCTAD Resolution 21 set out the goals of GSP, namely that the developing countries should be assisted to increase their export earnings to promote their industrialisation and to accelerate their rates of economic growth. The emphasis on industrialsation that was established by imposing quite substantial levels of domestic value addition for GSP eligibility, was very much in keeping with the economic philosophy of the late 1950s and 1960s. Many developing countries were then emerging from colonial rule, which had been inimical to the establishment of strong indigenous industrial bases. The encouragement was for them to transform themselves from being suppliers of raw material, to purveyors of finished products. The philosophy was that every non-primary economic activity would induce domestic entrepreneurs to attempt to supply the inputs needed for that activity. However, as early as the 1970s, a second school of thought emerged that cast doubt on the universal applicability of such an inward focused strategy, especially in labour abandoned countries. It was pointed out that intermediate goods and in-put industries are normally more capital intensive than final goods industries. Therefore developing economies could more profitably focus on specialising in those aspects of production where they have a comparative advantage while relying on trade and import for the procurement of intermediate inputs. Natural resources Today, looking back over almost 3 1/2 decades of GSP, the perceptions of this second school of thought appear to be very valid. To be more specific, when we examine the European Union's GSP regime, we find that only around 50% of its full global potential is being accessed. Moreover, there are very significant asymmetries in the ability of the beneficiaries to utilise the preferences. A rough rule of thumb would be that it is those developing countries with a combination of the features of a relatively large domestic market, of tariff protection for indigenous industry and of appropriate natural resources, which have attained high levels of GSP utilisation. Conversely, smaller countries that have not had the benefits of the economies of the scale afforded by a large and often protected domestic market to build up a fully integrated industrial sector, have a far weaker GSP utilisation rate. My own country Sri Lanka, with its relatively small population and liberalised economy dating back to 1977, is a good illustration of this phenomenon. Despite our best endeavours, our GSP utilisation rate is only a poor 38%. This rate drops even further when it comes to our export of apparel, where only 17% of GSP is availed of. One must also note that over the last three years and half decades since GSP was introduced, further objectives for achievement via the extension of preferences have been added. Here again one sees the influence of contemporary economic philosophy, namely the trend in the 1980s and 1990s for a holistic approach, by recognising that development can be sustainable only via supportive factors such as social equity, the protection of the environment and good governance. During the 1990s therefore, the EU introduced in addition to its standard GSP, its special incentive arrangements for the protection of labour rights, for the protection of the environment, and for the combating of drug production and trafficking. While 12 countries have availed of this last special arrangement, it has also been the subject of a ruling by the WTO. No country has up to now been able to avail itself of the environmental incentive arrangement. The record with regard to the arrangement pertaining to labour rights is also perhaps somewhat disappointing, with only two developing countries, Moldova and my own, having qualified so far! Therefore it is perhaps necessary to consider whether the combination of a heavy focus on industrialisation and the resulting high domestic value addition thresholds, plus the complex qualifying criteria and limited concessions under the Special Incentive Arrangements, have not limited the contribution to development that the EU Preferences would have otherwise afforded. Let me illustrate further the question I have posed by offering as a case study my own country Sri Lanka, which is not only a small and open economy but also has a substantial dependency on apparel exports. In a Gross Domestic Product of USD 18 billion apparel accounts for USD 2.5 billion and provides over half of the country's total exports. The apparel industry moreover provides direct and indirect employment for over a million people representing 15% of the country's workforce. Remarkable pace In Sri Lanka, consequent to the liberalisation of the economy in 1977, the apparel sector grew at the remarkable pace of around 38% per year until 1995. However, despite the good growth record, the local supply of fabric remains limited. This in turn has precluded us from meeting the double transformation rule, namely of an integrated manufacturing process that covers the indigenous transformation of fabric into ready made garments, which is the criterion for apparel exports to become eligible for GSP. A number of reasons contribute to this situation. The textile industry is highly capital intensive in nature, with the cost estimates for a plant varying from between 20-40 million US dollars. There is also a considerable lead-time of 2 to 3 years, before an economic level of production can be attained. These are all serious disadvantages for an economy that does not have the cushion of a large domestic market. The special incentive preferences that we have obtained in return for our compliance with the 8 Core ILO Conventions have also had a mixed impact. It must be recognised that compliance with the Conventions brings with it certain costs. While a satisfied labour force may theoretically, in the longer term, have the potential to be more productive, given the brutal competition for foreign investment among developing countries, there is a certain price to be paid in the short term. Unfortunately, the special incentive arrangements at present provide apparel exports a reduction of only 20% more than the Standard GSP and therefore fall quite short of providing adequate compensation. It is therefore inevitable, that Sri Lanka, like several other small and vulnerable economies should have serious apprehensions concerning the implications posed to her by the forthcoming phasing out of the Multi Fibre Arrangement. Objective studies have predicted substantial retrenchments within the apparel industry. Moreover, the bulk of these retrenchments are likely to be from apparel factories in rural locations, in communities that have little recourse to alternative employment. To further emphasise the potential scale of the issue, I should mention here that 80% of Sri Lanka's Gross Domestic Product originates from the two most urbanised Provinces of the island's nine Provinces. To be continued |
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