Sri Lanka: Export Powerhouse?

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Sri Lanka: Export Powerhouse?

For the country’s working and middle classes, the Hambantota port development will have important consequences.

Sri Lanka: Export Powerhouse?
Credit: REUTERS/Stringer

The Magam Rahunapura Mahinda Rajapaksa Port, a deep sea bunkering, logistics and industrial facility under construction on Sri Lanka’s southern coast, will define the trajectory of the nation’s postwar economy and the fiscal legacy of the ruling Rajapaksa family. Poised to capture a share of the lucrative shipping lanes west of Malacca and east of Suez, the port, now in its final phase of construction and scheduled for completion later this year, is the jewel in a more ambitious regeneration effort within Hambantota itself, and the country broadly.

While the building of major infrastructure projects in the district, including the Mahinda Rajapaksa National Tele-Cinema Park, the Mahinda Rajapaksa International Cricket Stadium, the Mattala Rajapaksa International Airport, as well as a foreigners-only “entertainment island,” will broaden the region’s appeal as a business and tourism hub, the opening of an extended Southern Expressway on March 15 and the completion of the Matara-Hambantota-Kataragama railway are likely to reinforce the port’s credibility as an industrial gateway for Indian Ocean trade. The success of the development, largely dependent on the viability of its port, will give shape to a Mahinda Chintana (Vision for the Future) that has promised economic growth of an increasingly rigid demeanor.

Given the figures, many remain unconvinced. Lampooned as a “white elephant” and a symptom of Rajapaksa hubris, the port in August celebrated the docking of 100 ships since its opening in 2010. Receiving just six vessels in 2011, and 18 in 2012, the government’s decision to reroute vessels carrying motor vehicles from Colombo Port appears to have bolstered the numbers in 2013. While on February 5 the port attracted a stable cruise custom of 50 ships annually, a fixed interest rate of 6.3 percent set by China’s Exim bank – which has loaned 85 percent of the 1.5 billion dollar project – has caused much anxiety.

Though growth in Sri Lanka’s postwar economy has, on paper, been stunning, much of it is predicated on massive public investment enabled through large-scale borrowing, making the profitability of the venture of vital concern to the country’s bottom line. Still, as the Sri Lanka Port Authority Chairman Priyath B. Wickrama has emphasized, long-term infrastructure projects take some time to achieve their potential: The Jaya Terminal at Colombo Port took 20 years to achieve its goals before further expansion.

Whether the port itself is able to make good on the strategic and economic vision of its backers, it is likely to have a significant impact on the country’s manufacturing sector, its largest source of export earnings. According to the Governor of the Central Bank Ajith Nivard Cabraal, the declaration in July 2013 of both Colombo and Hambantota ports as “free” for the purposes of value-adding via duty free import and export will help increase the apparel industry’s worth by “another U.S. one billion.” Export Processing Zones (EPZs) in Mirijjawela and Sooriyawewa, adjacent to the 523 hectare free port zone, are likely to bolster the ports custom while courting direct foreign investment in manufacturing industries. Totaling 660 hectares, the two developments alone are greater than the current 12 EPZs managed by the Board of Investment (BOI) combined. With ready port access and investments in vehicle, food, garment and chemical manufacturing secured, the oft-repeated mantra that “Hambantota is happening” has some merit. As Sri Lanka seeks to reposition itself as a “top level export point,” the implications for low-skill workers are of interest.

Though of a Fabian wont since independence, the officially socialist republic of Sri Lanka made peace with an export-oriented growth model with the election of the United National Party government of J R Jayawardene in 1977. EPZs were opened in Katunayake in 1978, Bijayagama in 1982, and Koggala in 1991, while between 1998 and the present nine more EPZs were established, many of which belied the industry’s reliance on the garment sector. Though pro-labor legislation was suspended within the zones and the oversight of industrial relations allocated to the independent BOI, Sri Lanka has, for the most part, avoided the egregious examples of labor exploitation found elsewhere in the region. As the country nears middle-income status, thereby diminishing its primary comparative advantage, cheap labor, increased confrontation between government, investors, and workers is quite possible.

Since the end of the Multi Fibre Arrangement in 2005 (which, though limiting the garment industry’s output, protected it from competitors), industrial unrest in Sri Lanka has been persistent. Despite marketing itself as a fair trade destination, increased costs and an inability to vertically integrate the industry via backward linkages make the maintenance of the “garments without guilt” model (however perniciously implemented) doubtful. Though attempts to attract high-end labels to its relatively educated workforce have, to date, been effective in retaining the profitability of the sector, factory closures and job losses have been unavoidable. While many workers have left the sector voluntarily, thereby creating massive labor shortages, a corresponding increase in wages is yet to manifest. As investors blame redundancies on the 2010 loss of GSP+2 concessions from the EU, many believe this to be disingenuous: with a strong history of labor activism, Sri Lankan workers are unlikely to suffer a “race to the bottom” in good humor.

As the Hambantota development demonstrates, however, low-skill manufacturing is unlikely to be phased out any time soon. While the garment industry looks to position Sri Lanka as an “apparel nation,” and capitalize on a brand-conscious Chinese middle class to replace its reliance on EU and US markets, its cache as an “ethical” producer is unlikely to position it favorably ahead of regional competitors. Bangladesh, Vietnam and Burma all have lower wages. As Sri Lanka becomes increasingly estranged from the West over human rights issues, both the Minister for Development Basil Rajapaksa and the Secretary General of the Joint Apparel Association Forum Tuli Cooray have been dogged in their pursuit of a free trade agreement with China. The advantages for both the industry and workers are, however, disputed. While Chinese companies face rising costs in their own country, fears that a bilateral agreement would simply allow Chinese investors to compete against Sri Lankan manufacturers for a slice of the U.S., EU and domestic markets have emerged. Rather than allowing Sri Lankan firms to capitalize on the economies of scale that Chinese production would provide, there is a strong possibility that the entry of Chinese firms would drive down costs, impacting conditions and wages in Sri Lanka negatively.

For other low-skill manufacturing sectors, Hambantota’s impact is similarly questionable. Though the rubber industry is uniquely positioned to take advantage of Sri Lanka’s raw produce, its workers have enjoyed little respite. Strikes at Ansell factories in Bijayagama EPZ from October 11 through November 26 2013 over increased production targets, the hiring of contract workers and reports of intimidation were defeated, with more than half the strikers returning to work while some 300 were made jobless. The strike was the longest in Sri Lanka’s history of EPZ manufacturing. While many lambasted the lack of support provided by the Free Trade Zones and General Services Employees Union, the incident underscores the disarray of organized labor as manufacturing stands on the precipice of expansion. As unions urge “mediation” and protracted negotiations with the BOI, support from the government is unlikely given its investment in manufacturing outcomes. If similar issues are present in Hambantota, the success of which is fundamental to the Rajapaksa economic vision, repression is not without precedent: in 2011 police opened fire on striking workers in Katunayake EPZ killing one, while in 2013 the military used live fire against those protesting against discharge-contaminated water from a local rubber glove factory.

Whether these scenarios do in fact play out depends largely on the caliber of investment Hambantota attracts. Plans for high-tech manufacturing are encouraging, with Australian renewable energy firm Energy Puzzle signing an agreement with the BOI in February to open a solar panel manufacturing plant in the Mirijjawela EPZ. Likewise, attempts to institute an IT manufacturing park in Sooriyewewa EPZ signal the potential for the country to retain a vibrant manufacturing sector by retraining a comparatively educated workforce. Indeed, for the manufacturing sector to expand as planned, workers will need powerful incentives to return to the industry.

As international pressure is marshaled against the Sri Lankan government for its reluctance to treat allegations of war crimes seriously, the impact of these efforts on domestic politics is likely to remain negligible. The thumping victory of the United People’s Freedom Alliance in the 2010 elections and a routing of Western and Southern Provincial Council Elections in 2014 make clear the popularity of the Rajapaksas among the Sinhalese majority. But as memories of the 30-year civil war recede, economic and social issues will necessarily surpass the existential concerns germane to conflict scenarios. To this end, developments in Hambantota will prove critical to the nation’s future, and, by extension, that of its ruling clan.

Michael Vurens van Es is an editor and Kathmandu-based journalist.