Sri Lanka Foreign Policy and Economic Diplomacy Dialogue 2018: Summary

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At the time of independence from British rule in 1948, Sri Lanka was blessed with a number of advantages that laid the foundations for an independent foreign policy. Democratic institutions were already well rooted as universal franchise had been granted in 1931, making Sri Lanka one of the oldest democracies in Asia. A peaceful transfer of power from colonial rule to national leadership also ensured that economic and political structures remained intact. A favourable geographical location along the East-West Sea routes meant that the economy naturally gravitated towards becoming an economic hub in the Indian Ocean, and a prosperous three crop export sector provided foreign exchange to finance a welfare state. Meanwhile, a nascent but capable Foreign Service built on the foundations of an independent and competent Civil Service provided the human capital to chart a course for the country’s foreign policy.

In line with the prevailing winds in the developing world, Sri Lanka was an early proponent of multilateralism in Asia and beyond, becoming a founding member of the Colombo Plan in 1951 and an early member of the Non-Aligned Movement (NAM) during the Cold War. In subsequent decades, NAM membership has allowed Sri Lanka to successfully navigate the complex challenges facing a small country in a world dominated by major powers. In later years Sri Lanka also took several pivotal steps towards regional diplomacy, especially through the South Asian Association for Regional Cooperation (SAARC), and more recently through institutions like the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) and the Indian Ocean Rim Association (IORA).

However, the separatist conflict that prevailed for three decades from the early 1980s until 2009 hampered these efforts. Foreign policy imperatives were influenced by the international dimensions of the internal upheaval and the existential threat posed to the State by terrorism.

Since the end of the internal conflict, the focus of Sri Lanka’s diplomacy has gradually moved towards the aim of supporting the country’s economic development. Economic diplomacy as an important pillar in the country’s foreign policy was to follow. This reflects an acceptance that Sri Lanka can rapidly grow its own economy by closely engaging with other nations, helping it to achieve the goal of becoming a high-income country. It is also a pragmatic response to the shift in the world economy towards Asia, particularly the economic rise of China, India, and ASEAN. Sri Lanka’s trade has long been concentrated in Europe and North America, but the rapid growth of Asian markets presents significant opportunities to grow and diversify exports by linking to the region’s Global Value Chains (GVCs) and expanding trade in services. Tourism and ICT are also important growth areas. The development of the rural economy can benefit from technology transfers and sharing of good practices, including South-South transfers.

In the multilateral economic sphere, especially at fora such as the World Trade Organization and the UN Conference on Trade and Development (UNCTAD), Sri Lanka stands to benefit through mutually beneficial cooperation with like-minded countries. It is, therefore, necessary to enhance capacities and competencies in the multilateral arena, as well as in bilateral economic diplomacy. To successfully engage in economic diplomacy, Sri Lanka requires a comprehensive and crossgovernment approach to promoting trade, investment, tourism and people-to-people links.

Domestic reforms in Sri Lanka have helped to ensure macroeconomic stability, spur the development of new sectors, enhance trade facilitation, and streamline foreign investment procedures. These developments are supported by the development of new infrastructure, including world-class ports in Colombo, Hambantota and Trincomalee, as well as highways to ensure that these ports are well connected to the rest of the country. Other new investments like the Colombo International Financial City are ensuring that Colombo can fulfil its ambition of becoming a hub for the rapidly growing global trade in services. At the same time, Sri Lanka’s growing network of investment and trade agreements is helping to lower external barriers to trade while making the country a more attractive investment destination.

This is coupled with a concerted effort to convey Sri Lanka’s key strength as an investment destination more effectively to potential investors. Most notably the country’s high human development indicators, strategic location close to major shipping lines, and high-quality logistics services. Sri Lanka’s efforts to ensure regional security in the Indian Ocean play an important role. A vibrant tourism sector and a successful diaspora also give Sri Lanka a strong base to address cultural barriers and build closer economic links with countries around the world.

Sri Lanka’s international brands play an important role in showcasing this economic vibrancy globally and supporting diplomatic efforts. Sri Lankan tea has successfully built an international reputation for quality and has expanded into growing markets in Asia, while Sri Lanka’s apparel companies are at the top of their sector. These positive experiences are now being leveraged to support burgeoning Information Technology (IT), Business Process Outsourcing (BPO), and manufacturing industries.

This strategy is not without challenges. Trade liberalisation and greater foreign investments will disrupt existing sectors and must be managed carefully. At the same time, the development of new sectors will create new obstacles, such as the threat that cybercrime and money laundering poses to the digital economy. Capacity building is another issue. Therefore, the strategy must be coupled with strong domestic support for education and environmental standards to ensure that everyone can benefit in a sustainable manner.