Bernardo M. Villegas
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Rebalancing Strategy
published: Mar 31, 2017



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Pearl of the Indian Ocean

           If there is a perfect partner for the Philippines in what is known as the strategy of "coopetition", i.e. competing and cooperating with another country in global trade and investment, it would be Sri Lanka, that is known as the Pearl of the Indian Ocean as the Philippines is the Pearl of the Orient Seas.  Actually, its shape is more like a pearl than the Philippines is.  Just consider the way it is described in a promotional material of the Sri Lanka Export Development Board:  "Arab, Portuguese, Dutch and British influences all in their own times have converged in the present day to leave a markedly distinct cultural flavour and experience; something found only in countries with colourful and impassioned pasts.  Its history--of which there is much to admire in the vast array of architecture, museums and galleries--is forged against a common background of sheer natural beauty--a landscape unerring, unfaltering and uncompromising in its ability to inspire awe...A tropical climate all year round ensures that a colourfully dense population of flora and fauna inhabit this jewel of a land.  Testament to this is the fact that Sri Lanka has the highest biodiversity per 10,000 sq. km. in the whole of Asia, with many species endemic to the land..." The description could very well also apply to the Philippines, except that the influences would read "Chinese, Spanish and Northamerican."

          Sri Lanka could very well qualify for what Ruchir Sharma calls "breakout nations" in his book with the same title.  In the vocabulary of Mr. Sharma, a breakout nation is one with an economy that is able to beat expectations in terms of growth rate, a country that is able to grow faster than other countries in the same income class per capita income.  In the list of the so-called emerging markets first identified by Jim O'Neil of Goldman Sachs, Sri Lanka is nowhere to be found.  It became notorious for a thirty-year civil war that costs a lot of lives and resources.  It has only a small population of some 21 million, hardly reaching the minimum of about 50 million to be included in the Next Eleven (N-11) after the BRIC nations.  The Philippines is always mentioned in the different lists describing the emerging markets, i.e. the Next Eleven; the VIP nations (Vietnam, Indonesia and the Philippines); and now, breakout nations TIP (Turkey, Indonesia and the Philippines).

       After a trip I made to Sri Lanka with a small group of Filipinos entrepreneurs, I am convinced that Sri Lanka deserves to be called at least a breakout nation.  Immediately after the civil war ended in 2009, its GDP started to grow at 8% or more and is expected to continue doing so for the coming years.  It already has the highest per capita income in South Asia, besting India, Pakistan and Bangladesh.  It has a higher per capita income than the Philippines and is at the same level as Indonesia.  There is a high probability that Sri Lanka can follow the footsteps of South Korea in avoiding the so-called middle income trap by maintaining macro-economic stability, improving significantly its infrastructures and investing heavily in human resources.

          In a publication of the Asian Development Bank, the government strategy is described as follows:  "The government's Development Policy Framework for 2000-2016 aims to raise GDP growth to above 8% in the medium term and to nearly double per capita income from $2,400 to $4,200 at the end of the period.  The government has therefore embarked on an ambitious plan to remove infrastructure bottlenecks.  It has already undertaken significant investments in some sectors, especially among the major infrastructure development initiatives.  The government, as seen in the framework, would like to see a greater role for the private sector through increased investment by both domestic and foreign investors, as investment is key for increasing supply capacity and bolstering growth.  The framework also seeks private investor participation (beyond the traditional areas of industry and commerce) in infrastructure.  The framework projects private investment to rise from around 21% of GDP to about 26 to 28% in the next few years."

          Filipino entrepreneurs and investors who would like to expand their operations to South Asia should consider making Sri Lanka their gateway to the large markets of India and Pakistan because Sri Lanka has a free trade agreement with these two giant economies, both considered emerging markets in the Goldman Sachs list.  In our conversations with officials of the Board of Investments, we learned about the following attractive features of the investment climate in Sri Lanka:

·    Total foreign ownership is permitted across virtually all areas of the economy (another example of a socialist country like China that is more open to FDIs than the Philippines).

·    There are no restrictions in repatriation of earnings, fees and capital, and on foreign exchange transactions relating to current account payments.

·    The safety of foreign investments is guaranteed by the Constitution (as contrasted with the way our judiciary system sometimes harasses foreign investors with confusing interpretations of the restrictive provisions of our Constitution.)

·    A sophisticated legal and regulatory framework exists, covering, for example, intellectual property, settlement of disputes through arbitration, company laws, etc.

·    Bilateral investment protection agreements with 26 countries and double tax relief agreements with 38 countries.

          For comments, my email address is bernardo.villegas@uap.asia.