Prerequisites for attracting foreign direct Investment

Despite the importance of foreign direct investment (FDI) for sustained economic development discussed last week, the country has failed to attract an adequate amount of the right type of FDI over many years. All forms of FDI have not reached US$ 1 billion.

The flow of FDI has been inadequate and not of the types that would develop the country's industry and export earnings. In contrast, many Asian countries, especially in South East Asia, have propelled their economic growth with FDI. More recently India too has attracted enormous amounts of FDI. Why has Sri Lanka failed to attract FDI?

Historical perspective

Until 1977, the political and economic environments were not conducive to attracting FDI. Regular changes in government, parties and governments espousing nationalization of private enterprises and hostile to foreign investment were disincentives to foreign investment. This was especially so from 1956 to 65 and again from 197077. Many private enterprises were nationalised during these two periods. These sent clear signals to foreign investors not to invest in Sri Lanka.

This was an era when other South East Asian countries attracted much FDI to lay a foundation for rapid industrial growth based on outward oriented economic policies that favoured exports. Sri Lanka, on the other hand, adopted inward oriented policies favouring import substitution that discouraged export industries. These economic policies deterred FDI that is a base to create a fast growing export growth led economy all over the world.

Policies conducive to FDI

The liberalisation of the economy in 1977 and the outward oriented economic policies seeking foreign investments and adopting policies that were friendly to foreign investors was a break from the past. Various economic incentives, guarantees of security of foreign investments and institutional devices to attract FDI were introduced. Some were even in excess of the needs to attract FDI.

Foreign investment 1978-83

In 1978-83, several foreign investors established manufacturing plants on their own or in collaboration with local partners. At this time there were prospects of large international companies establishing industrial complexes in Sri Lanka for exports. Motorola, Harris and several other international giants were considering establishing industries in Sri Lanka. The July 1983 ethnic violence put an end to their interest in Sri Lanka.

What Sri Lanka lost went to other countries in South East Asia like Malaysia, Singapore, Thailand and Indonesia that had already attracted much foreign investments since the 1960s. Sri Lanka was left behind owing to the subsequent spread of terrorism, the prolonged war and the consequent insecurity.

New expectations

The end of the war in 2009 raised hopes of a revival in FDI. Foreign investors signalled intentions to invest in Sri Lanka. However the initial expectations of such investments have not been realised. The pertinent question is why Sri Lanka failed to attract large foreign investors into the country after peace conditions.

The answer to this question is complex. Economic policies that neglect economic fundamentals, new security concerns, deterioration in law and order and the rule of law, are among the causes for the inability to attract FDI.

Positive features

There have been positive features that could attract FDI. The improvement in infrastructure is a clear example. The development of roads and transport facilities as well as the attractiveness of the metropolis and its suburbs are positive developments even though all such investments do not necessarily support private sector investment. On the other hand, social infrastructure of relevance to foreign investors, such as improved private hospitals with state of the art technology, international schools teaching in foreign languages and frequent flights from Sri Lanka to other cities are distinct improvements.

The labour force is literate and easily trained though no longer considered cheap. There are fairly stable electricity supplies though the costs of power are high.

Disincentives

Despite these improvements, the negative features of the country's economic policies appear to be disincentives for foreign investors. In the past few years, economic policies have been hostile to private investors. Several enterprises that had been privatised or partially privatised were re-nationalised. An act to take over 29 private companies including some owned by foreign interests was a distinct disincentive to attracting FDI. There was once again an overhang of a threat to take over private enterprises.

There has also been an expansion of state ownership in commanding heights of the economy. Several commercial banks are now under state control and are directed to lend to loss making state enterprises and finance state expenditure. Consequently there is a crowding out effect of bank credit to private enterprises. The banking and financial sector shows cracks with high rates of non-performing loans.

The lack of law and order and weak macroeconomic conditions have resulted in the instability of the currency and increased cost of production. Sri Lanka's loss of GSP+ status and its decline in international competitiveness, clearly evident in the downward trend in exports, are indicators that discourage FDI. Conversely, low FDI is a significant reason for slow and declining export growth.

The UN assessment that the country's democratic system of government has deteriorated and law and order undermined is not a good advertisement for large multi-national companies to invest in Sri Lanka. Conclusion

International competition for FDI is intense. Being a small country with limited natural resources and a small domestic market, it is vital that the attractiveness for FDI is better than those of comparable competitors for FDI.

To attract a much larger amount of foreign investment there must be much more stability in macroeconomic fundamentals, certainty in economic policies, a strong commitment to encourage private enterprise and lesser state control of business and the commanding heights of the economy. Law and order and human rights too play a vital role in decision to setup enterprises in the country.

Is the country on the right path to make it attractive for FDI?

Wednesday's oral update on Sri Lanka by the UN High Commissioner for Human Rights Navi Pillay to the 24th session of the Human Rights Council in Geneva seems to confirm the view that the rights body is using the Sri Lankan case to test the still-debated concept of 'Responsibility to Protect' or R2P, as it is commonly known. In this regard the most relevant section of the speech, delivered on her behalf by her deputy, says: "The High Commissioner encourages the Government to use the time between now and March 2014 to show a credible national process with tangible results, including the successful prosecution of individual perpetrators, in the absence of which she believes the international community will have a duty to establish its own inquiry mechanisms."

This would seem to mean that the 'international community' (read, a 'coalition of the willing' working through the HRC?) gives itself the right to intervene using whatever means it thinks necessary, to see what it considers to be justice done, if the state party itself does not take measures to that end. The US-led HRC Resolutions against Sri Lanka in 2012 and 2013 laid the groundwork for this process in Sri Lanka.

The three steps in the R2P process are that 1) the state concerned is responsible to protect its citizens; 2) If a state is seen to be failing in this duty the 'international community' should assist it to do so; and 3) If the state concerned still fails to act, the 'international community' has a responsibility to intervene in order to 'protect' them. The HRC's path in relation to Sri Lanka may be seen to be following this trajectory, under the US's watchful eye.

Sri Lanka's former UN ambassador Tamara Kunanayakam has shredded the R2P concept which she said "Washington is forcing upon the UN so as to provide legitimacy for its increasingly aggressive unilateral interventions, and domination of peoples and their wealth and resources in countries of strategic interest to Washington!"

Kunanayakam is not alone in her criticism. Former Indian ambassador to the UN Nirupam Sen described R2P as "a Trojan Horse for a refurbished imperialism." America's leading public intellectual Noam Chomsky in an address to the UN General Assembly in 2009 called it a "weapon of imperialist intervention at will."

Certainly it appears that Sri Lanka is under very close scrutiny by the HRC in general and the US in particular, and is unlikely to go off their radar any time soon. Nowadays it would appear the US issues statements even if there is a fight over a jak fruit in Sri Lanka. It has made no less than four statements on the recent Provincial Council elections which, by all accounts were relatively peaceful. The most recent was on Thursday by US ambassador Eileen Donahoe at the UN General Assembly. After a peremptory reference to the elections (which made no special mention of the historic one in the North) she went on to list allegations of rights violations, and drew attention to Pillay's call for an international inquiry in the absence of ' meaningful progress' on accountability.

Sri Lanka also figured in the High Commissioner's opening remarks to the HRC on 9th Sept and in UN Secretary General Ban Ki Moon's opening statement to the general debate in New York on Tuesday. Isn't this a disproportionate lot of attention? It's not that Sri Lankans are unconcerned about their country's human rights situation. But who wants to be an imperial guineapig?

At a side event of the UN General Assembly to "Ensure peaceful, just and resilient societies in the post 2015 development agenda" on Thursday, Erik Solheim, chair, OECD Development Assistance Committee, made some observations on Sri Lanka. Norwegian Solheim who was closely associated with Sri Lanka's peace process at one time, admitted that "global involvement in Sri Lanka exacerbated the problem. It made the problem worse." He noted that after the 2004 tsunami no less than 50 different presidents, prime ministers and foreign ministers visited the country, all with their own development programmes, humanitarian programmes, NGOs and TV crews. "There was a strong element of politicians wanting to be seen 'back home' doing something," he said. Under what he called the 'New Deal' principles he said "the nation being discussed had to be in the lead," and there had to be a "compact between political forces in that nation and global forces so that governments spend their money wisely."

It's unlikely that the US will look kindly on Solheim's remarks. To states in the global South where most of the world's conflict situations are located, the comments are important because they acknowledge the need to respect their sovereignty and independence.

At this same side event, Guatamala's Planning Secretary Ekatarina Parilla said that the 17 years since that country's 36-year civil war ended "might seem like a long time, but it is very little to create solid institutions in a post-conflict society." Yet Navi Pillay's March 2014 deadline, after which she says establishing an international inquiry would become a duty of the 'international community,' allows barely four years for Sri Lanka's reconciliation process to work.

It's interesting that with regard to LTTE detainees, the High Commissioner's oral update said, "She has always stressed the importance of the LTTE being held accountable for its crimes" and "urged the Government to expedite such cases, either by bringing charges, releasing them, or sending them for rehabilitation." Thus the High Commissioner locates the task of bringing the LTTE to justice, entirely within the purview of the state (although the remaining members of that organisation considered to be any threat have mostly found safe havens in the West). But the LTTE, which she herself has described as a 'murderous organisation,' does not seem to be bound by her call for "an independent and credible investigation into allegations of violations of international human rights law and international humanitarian law, as applicable." International scrutiny is applicable, apparently, only to the state party. How fair is this?