In Asia: Weekly Insight and Features from Asia

Global economic recovery in 2012 remains tenuous, with the World Bank recently downgrading its forecast for this year’s global growth from 3.6 percent to 2.5 percent. This slide in expectations and persistently high unemployment rates in many countries has sparked a resurgence of protectionist tendencies toward trade. These tendencies are couched in the language of “bringing jobs back,” while tariffs are euphemistically coined as “flexibility” needed to protect domestic producers.

In addition to significant consumer gains from increased trade in South Asia, these countries would benefit from enhanced export opportunities, more jobs, and greater competition. Photo by Kristin Kelly Colombano.

South Asia has suffered for decades from a low level of intraregional cooperation, both politically and economically. Despite efforts at regional integration through the South Asia Association for Regional Cooperation (SAARC) and the South Asia Free Trade Agreement (SAFTA), trade in the region as a percentage of global trade volume has stagnated at an estimated 5 percent since the 1950s, lagging far behind other trading blocs, like the Association of Southeast Asian Nations (ASEAN) Free Trade Area or South America’s Southern Common Market (MERCOSUR). At the SAARC Business Summit held in New Delhi recently, India’s Minister for Commerce, Industry and Textiles, Anand Sharma said: “SAFTA had a vision of creating a common market where tariff and non-tariff barriers will be revised, and we had expected that the peak tariff rates should be no more than 5 percent for most of the tradable commodities between member countries in SAARC.” Sadly, this has not been the case.

While this low level of trade among South Asian nations is often presented as a constraint to the economic competitiveness of the region, its negative impact on consumers is rarely acknowledged. Consumers are often neglected in trade analyses and debates about the benefits to trade, as the focus is primarily on producer gains (or losses).

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Since Sri Lanka’s decades-long civil war ended in 2009, we’re now witnessing the beginning of reconstruction in the country’s battered North and East. The government is rapidly investing in roads, rail, ports, and telecommunications that help connect marginalized communities with the vibrant, growing capital of Colombo. Meanwhile, the local economy is coming to life, and small businesses – typically on the margins of the private sector – are eager to take advantage of their long pent-up demand to grow their businesses. This is welcome news for people that have endured so much, but there are of course still challenges.

After a 30-year war that has rewarded Sri Lanka's banks and enterprises for playing it safe, they are hesitant to take on risk by offering loans to small businesses. Recently, however, new initiatives are reviving trust between banks and businesses owners. Photo: Karl Grobl.

“The small and medium enterprise sector is the backbone of the Sri Lankan economy – even more so in the North and East,” Anushka Wijesinha, Research Economist at Sri Lanka’s Institute of Policy Studies (IPS) who has been studying access to credit, recently said to me. “The majority of large businesses continue to take a wait-and-see approach, but it’s the small businesses that are ready to take some risks.”

Unfortunately, as ready as the smaller businesses are to take these risks, they lack the collateral needed to do so. Micro and small business owners constantly say how difficult it is for them to even get credit to expand their business, for example. Most small businesses can’t meet banks’ collateral requirements to get a loan, even though Sri Lanka’s financial system is flush with more liquidity than ever, due to lower interest rates and government policies and programs that are meant to push credit down to the grassroots.

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Colombo is shedding its image as Sri Lanka’s charming but dilapidated capital. Pulsing with new energy and growth, major investments and improvement is palpable since the end of the war. But in the North and East and bordering regions, clashes, attacks, and decades of economic neglect have left a legacy of division and hardship. The government has responded by linking these cities through improved roads, rail, and telecommunications; business owners and local leaders want to catch up with the rest of the island nation. Entrepreneurs and local officials hold the keys to growth and peace in these former conflict-affected towns. This new slideshow series shows how The Asia Foundation is working in Jaffna, Vavuniya, and Batticaloa to spark private sector growth by helping local governments and businesses work together.

While local governments are widely viewed as critical to development because they are considered citizens’ most accessible government unit, in many developing countries these local government institutions don’t live up to their potential because they suffer from inadequate capacity and resources. Nevertheless, local governments can do better despite these constraints.

Despite the relative stability in Sri Lanka following the end of the civil war, local governments are limited in their ability to work effectively due to vague and at times contradictory expectations. Photo by Karl Grobl.

This is certainly the case in Sri Lanka. For the Local Authorities (LAs) – a general term encompassing elected municipal councils, urban councils, and village-level pradeshiya sabhas – their ability to lead is hampered by vague and at times contradictory expectations, despite the relative stability following the end of the civil war in 2009. Decentralization reform in Sri Lanka is challenged by a dualistic system of de-concentrated government (secretariats at the district and town level which are agents of the central government) coupled with a weak, devolved government (provincial councils and LAs). Both tiers are involved in services and planning, which confuses the public and increases opportunities for corruption, political conflict, and wasteful duplication in service delivery.

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Internal conflicts are a widespread and enduring problem for Asia – Afghanistan, Philippines, Nepal, Sri Lanka, Pakistan, Indonesia, Thailand, and Myanmar, among others. Ten of the 18 countries in South and Southeast Asia have protracted internal conflicts, and in a few, there are several. These internal conflicts last a very long time – the average duration of active conflict by our estimation is 32 years.

As a result of long-running internal conflicts, many of Asia's turbulent corners are falling further and further behind the rest of the region in terms of economic integration and security. Above, a commander stands guard outside a Moro Islamic Liberation Front camp in Mindanao. Photo by Karl Grobl.

Conflicts in Asia are not just confined to fragile states, either. In fact, internal conflicts affect middle-income countries as much as poor or fragile countries. Several countries in Asia have moved into middle-income status in the past 20 years, but this has had very little impact on the prevalence of internal conflicts in those countries. So, while Asia has seen one of the most rapid paces of development in human history, these long-running conflicts remain an enduring problem that increased wealth and state power have not addressed. As a result, these turbulent corners of Asia are falling further and further behind the rest of the region in terms of economic integration and security.

Internal conflicts are a measurable drain on Asian economic growth and on government budgets. The recently released World Development Report 2011 provides compelling evidence that countries affected by violent conflicts are developing at a slower pace, and that regions affected by conflict may be falling permanently behind. The WDR team found evidence that in conflict-affected countries, there is a 2.7 percent lag in poverty reduction for every three years of major violent conflict. While the WDR research focused primarily on comparisons between countries, there is clear evidence that internal conflict-affected areas follow a similar trend, experiencing much higher rates of poverty and under-development compared to the rest of the country. Decades of internal conflict have also produced an enormous strain on the national budgets of Asian governments. In the Philippines, for example, half of the Armed Forces are stationed in the conflict-affected regions of Mindanao and the Sulu Archipelago. The Thai Government is spending $2.1 billion (THB 63.3 billion) over four years on special development assistance in the conflict-affected southern border provinces. This whopping sum does not include security operations or normal governance functions.

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For many first- and second-generation people of Sri Lankan heritage, Sri Lanka casts a curious spell. It may be a result of being fed a steady diet of their parents’ nostalgia pie. Other children of recent immigrants from Asia, Eastern Europe, Central America, and Africa might experience the same emotional tug, but if you’ve grown up in a Sri Lankan sub-culture, you can be excused for thinking that your situation is a little different.

From decades of civil war, Sri Lanka has lost significant economic ground and many of its most skilled and educated leaders. Photo by Karl Grobl.

The island’s exoticism has been romanticized by Western explorers, writers, and scholars for centuries, and this picture has been embraced and embellished by Sri Lankans themselves, particularly among the hundreds of thousands of diaspora sprinkled throughout the world.

Cultivating feelings of “exceptionalism” is partly an antidote to the country’s obscurity in their adopted countries, and resistance to conflating all of South Asia with India: “no, it’s that island off the tip of India” is something that easily trips off the tongue of overseas Sri Lankans.

This sense of nostalgia is likely to be familiar to anyone of Sri Lankan heritage with parents who migrated to America, England, Australia, or Canada in the 1960s and 1970s and who cling to recollections of an idyllic place they knew as Ceylon. During that time, there was no television to while away the evenings; conversation was the favorite past time. Friends and neighbors didn’t call ahead before meeting, they just dropped in. Limited social mobility generally kept people from getting above their station in life.

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After years of waiting and hoping his mother would legally transfer the portion of family land due to him, the resentment had built up. Athula, the youngest of a poor family of seven, finally decided to take his mother, Soma to court. Their relationship worsened to the point where they were no longer speaking. But when he filed the complaint with the police, they referred the dispute to a mediation board instead of the courts. Athula was beyond skeptical. When he sat down before the mediation board he said, “Don’t waste your time. Just give me a non-settlement certificate and I will take the case to court.”

As mobile phone penetration continues to climb in Sri Lanka, SMS technology is playing a more active role in delivering information. Above, a community mediator participates in an SMS training course.

But the group of mediators was determined and unwilling to let this case go to the courts – where they said it would languish, get delayed, be left unresolved, or at worst, lost. They decided to speak to Athula’s mother directly. She said the reason she had put off transferring the land was because she wanted to collect some money to get the deeds prepared, rather than let Athula pay for it. She didn’t know she had created such resentment in Athula because they’d stopped talking. There was an emotional reconciliation between the two and the dispute was settled with Athula stating that he was happy to wait until his mother was ready to transfer the land. Four months later, Athula returned to the Mediation Board to say that his mother had presented him with the deeds to his land, and to thank the mediators for their part in healing a long and painful rift.

Although Athula’s conflict may seem small, these kinds of disputes can tie up the courts, become extremely costly, and can escalate to affect the wider community. As the formal courts in Sri Lanka are weighed down by excessive case loads and limited capacity, court cases like these routinely drag on for years. High litigation costs also make access to courts prohibitive for most Sri Lankans. It was clear that a less costly, more reactive alternative mechanism for dispute resolution was needed.

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Nestled in a valley surrounded by tea plantations a few hours’ drive east of Colombo, Kandy is a UNESCO World Heritage Site famed for its natural beauty and cultural significance. In July and August during the 10-day “Esala Perahera,” Sri Lanka’s most celebrated Buddhist festival, Kandy is inundated with pilgrims and tourists.

Kandy is listed as a UNESCO World Heritage Site, famed for its natural beauty surrounded by tea plantations. Although efforts have been made to increase tourism here, the economy remains sluggish. Photo by Karl Grobl.

Kandy’s Temple of the Tooth, revered as one of the country’s most important temples as it enshrines a tooth relic of the Buddha, is the centerpiece of this celebration, which features processions of gloriously decorated and illuminated elephants, drummers, and fire-dancers.

Kandy’s business people and local government recognize tourism as the biggest opportunity in more than a generation for the city to accelerate economic growth. Like other regional towns in Sri Lanka outside the bustling Western Province, Kandy’s economy has been sluggish. Often testy relationships between and among political parties, government, business, and citizens create another major impediment to growth and prosperity.

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On July 23, Sri Lanka had the second of three rounds of local government elections planned for this year. Sixty-five councils were up for grabs but the focus of attention was on 20 councils in the Tamil majority Northern Province.

Although not much was at stake in terms of administrative power and financial resources in Sri Lanka's council elections, people still paid close attention because the elections were seen as a popularity test of the UPFA and TNA. Photo by Karl Grobl.

The first round on March 17, was for 234 councils out of a total of 335. The balance will be elected in a third round before the end of the year. In last week’s election, the opposition Tamil National Alliance (TNA) won 15 of 20 councils in the North. The Eelam People’s Democratic Party (EPDP), which ran on the ticket of the ruling coalition, the United People’s Freedom Alliance (UPFA), won three councils and the Tamil United Liberation Front won two. Combined with the eight councils they won in March, and the Vavuniya Urban Council that it won in a mini election on August 8, 2009, the TNA now controls 24 of 34 councils in the Northern Province. The ruling UPFA won all 45 councils in the Sinhalese majority provinces in the South, adding to the 205 it won on March 17, demonstrating its popularity outside the North.

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In Hong Kong on Monday, Secretary of State Hillary Clinton urged Asian business leaders to stay calm and not “overreact” to the U.S. debt-ceiling crisis. Despite such a call for calm, some say the saga is swiftly eroding American moral standing in Asia and throughout the world in the areas of governance and democracy.

The admiration that the world has had for the U.S. system of government rests not only on its elegant Jeffersonian principles, but its capacity to deliver economic prosperity and a better standard of living, or the “American dream” for each successive generation. In past political battles, deeply held ideological differences and the quest for power that drives politics in any country eventually gave way in Washington to compromise and progress for everyone’s good; the country moved forward and faith in the system was eventually restored. This time might be different. Even if a last-minute deal can be reached between Democrats and Republicans, and the White House and Congress that averts default on the United States’ $14.3 trillion debt, the spectacle of America’s leaders playing chicken on an issue of such enormous consequence for its citizens and the rest of the world – a spectacle transmitted to every corner by global media – suggests that something is broken, perhaps irrevocably. For me, this political deadlock has further sharpened what I see as inconsistencies between America’s words and deeds about “good governance.” As the United States continues to call on other countries to make difficult political choices in order to secure their economic future – a staple of U.S. policy dialogue with developing countries for years – these same leaders are not surprisingly raising questions about the United States’ ability to govern its own affairs effectively.

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