Abstract
Trade liberalization is necessary but not sufficient to get the full return to trade reforms in the absence of liberalization of non-tradable goods through competition policy. Even if resources to augment factor growth are readily available, that too could fizzle out because of diminishing returns. Sri Lanka has made only limited progress on trade liberalization in the post-conflict era and at present has no competition policy to speak of. Sustained growth has to be based on total factor productivity (TFP) growth. Otherwise, Sri Lanka will have to keep raising savings to increase capital, assuming that labor growth sees a steady increase. However, as living standard increases, population growth declines, and labor supply does not grow fast. In fact, Sri Lanka is now past the demographic dividend phase and already in a situation where there is a steady decline in population. In this context, low average TFP growth means that the country has to keep on increasing saving and borrowing from abroad to raise GDP growth, based on factor augmentation. This leads to a difficult macroeconomic situation as excessive foreign borrowing is needed to augment domestic savings that Sri Lanka cannot afford to service in view of the fact that access to capital is more costlier than before. The study finds TFP growth in Sri Lanka to be low. It finds that trade and competition policies that would have raised TFP growth were not sustained after their initial introductions.
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Notes
- 1.
This is owed to the Lerner theorem which holds that under a set of plausible assumptions, a tax on imports is a tax on exports, and in parallel terms, a reduction of tariffs on imports leads to a reduction of taxes on exports. In more general terms, one can interpret it as a symmetry in incentives.
- 2.
The interaction of trade and competition policies is depicted in Appendix I.
- 3.
Such problems led to the eschewing of an econometric approach in this chapter. Given that situation, the paper uses a more heuristic approach to explore the link between trade and competition policies and TFP growth.
- 4.
Based on models built on the Solow growth model with extensions and different basic assumptions. See Appendix 1.
- 5.
Dutz and Hayri (1999) show that strong competitiveness-promoting policies raise TFP.
- 6.
SOEs include public corporations, statutory boards, companies registered under the Companies Act which carry out both commercial and non-commercial activities and regulatory agencies, promotional institutions, research and development agencies and educational institutions set up by an Act of Parliament. Contingent liabilities of SOEs amount to 11% of GDP without counting non-financial SOEs.
- 7.
Contingent liabilities of SOEs amount to 11% of GDP without counting non-financial SOEs.
- 8.
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Acknowledgements
The author is grateful to Dr. Ravi Yatawara for his outstanding help with the paper from the initial discussions to the final product, Profs. Premachandra Athukorala and Jayatilleke Bandara for sharing their views generously and assistance for analytics, and Dr. Eteri Kvinzadze who helped with the TFP data and discussed the aspects of the topic.
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Appendix I
Appendix I
1.1 Trade and Competition Policies, Four Cases
In the standard neoclassical model of trade with two goods (X1 X2), a small country assumption and community utility functions (Salter 1959), four cases are possible for the interaction of trade and competition policy. These are: Case 1, free trade with competition policy; Case 2, free trade with no competition policy; Case 3, restricted trade with competition policy; and Case 4, restricted trade with no competition policy. Case 1, which gives the highest utility, is free trade combined with competition policy. This is seen in Fig. 3 which shows free trade with and without competition policy. The values for utility shown by U1 are superior to the other possibilities. The case of free trade with no competition policy is shown with U2 which is Case 2 (Guasch and Rajapatirana 1994).
Free trade
Figure 4 shows the two cases with restricted trade with and without competition policies. Case 3 is one that has restricted trade with competition policies. Case 4 is restricted trade with no competition policies.
Restricted trade
Given the standard assumptions of this model, it is possible to rank the order of combinations of trade and competition policies as 1 > 2 > 3 > 4 >. When the assumptions do not hold, due to increasing returns to scale and the presence of externalities, this ranking could change in less predictable ways. In the first instance, the ranking between 2 and 3 could lead to a reverse order—i.e., when protection is pursued for strategic trade theory purposes. However, this situation is not viable in the presence of less than altruistic public officials who may be tempted to extract their own rents so that societal welfare is reduced.
The present case of Sri Lanka is closer to Case 3, restricted trade with no competition policy to speak of.
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Rajapatirana, S. (2019). Trade and Competition Policies: Implications for Productivity Growth in Sri Lanka. In: Weerakoon, D., Jayasuriya, S. (eds) Managing Domestic and International Challenges and Opportunities in Post-conflict Development . South Asia Economic and Policy Studies. Springer, Singapore. https://doi.org/10.1007/978-981-13-1864-1_2
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