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Economy at a crossroads: The way out for Sri Lanka


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Prof. H.A. de S. Gunasekara Memorial Oration 2018: Part 3


  • The Professor H.A. de S. Gunasekara Memorial Oration 2018 was delivered by Dr. W.A. Wijewardena on 4 December at the Senate Room of the University of Peradeniya. Today, Daily FT carries Part 3 of a revised and abridged version of the oration

 

The analysis so far

In the previous part, we noted that Professor H.A. de S. Gunasekara, the first Ceylonese professor of economics at the University of Ceylon, was a legend in economics teaching in Sri Lanka. His doctoral thesis to the University of London, ‘From Dependent Currency to Central Banking in Ceylon,’ was a seminal contribution on the development of banking, finance and central banking in colonial Ceylon. 

The Five-Year Plan of 1972-76 that was produced under his direction when he was the Secretary to the Ministry of Planning and Employment sought to convert Ceylon, following the policy of the government in power, to a socialist economy. Yet, the diagnosis of economic ailments which Ceylon had been suffering at that time and the prescriptions recommended by him have not been different from what we experience in Sri Lanka today. 

Thus, it was a proof that when it comes to economic analysis, both socialist economics and free market economics follow the same path. The difference is only in the end objectives. The main ailments suffered by Ceylon in the entirety of the post independence period have been the low economic growth coupled with imbalances in the budget, savings-investments and the external sector. The external sector crisis has been compounded by the low priority given to the export sector in national economic policy making.

With the introduction of the open economy policy in late 1977, Sri Lanka was able to transform its exports from the three-tree crops to manufacturing which was dominated by apparels. This was facilitated by the transfer of production facilities by the Western nations to labour abundant developing countries, a process known as off-shoring. However, the advancements in science and technology in the new millennium have enabled those nations to shift those production facilities to their own lands, known as on-shoring, and countries close to their markets, known as near-shoring. It is estimated that by 2025 about a two-third of apparel supplies to North American and European markets will be sourced from on-shored or near-shored factories. Sri Lanka’s apparel sector faces a potential risk and the country has to find a way out. 

Now let’s look at the way out available for Sri Lanka.

 

National Export Strategy

Taking into account the above-mentioned global developments today, Sri Lanka has released a new National Export Strategy (NES) in April, 2018. The strategic vision of the document has been to develop Sri Lanka as an export hub, driven by innovation and investment. The hub component of the vision has no practical value since Sri Lanka produces only a limited number of exportable products. NES also has identified four strategic objectives to pursue in order to attain its goal of setting up an export hub in the country. 

1.To have a business enabling, predictable and transparent policy and regulatory framework that supports exports;

2.To strengthen Sri Lankan exporters’ market-entry and compliance capacities;

3.To become an efficient trade and logistics hub to facilitate exports; and

4.To drive export diversification through innovation and by strengthening emerging sectors.

Six focus sectors for development

According to NES, an enabling business environment will be created by improved logistics, trade information and promotion, developing a national quality infrastructure and inculcating a culture of innovation and entrepreneurship. Given Sri Lanka’s present endowments and comparative advantages, six main focus sectors have been identified for development during the strategy period. 

1.Information Technology (IT) and Business Process Management (BPM);

2.Development of a wellness tourism sector;

3.Boat building;

4.Manufacture of electrical and electronic components;

5.Manufacture of processed food and beverages; and

6.Spices and concentrates.

NES has attempted to break away from Sri Lanka’s reliance on the three tree crops and apparels as the main source of export earnings and develop 6 new areas that include the export of services as well. This vision was expressed by the Prime Minister in November 2015 when he presented the first economic policy statement of the government to Parliament. It was reiterated in subsequent statements as well as the policy document titled Vision 2025 released in June 2017. However, it is after three years that this vision was codified and presented as an export development strategy document by the bureaucracy. 

 

Sri Lanka is at a crossroads today because it is snared in what is known as the middle income trap. It was easy for Sri Lanka to move up from a low income country to a lower middle income country by using its abundantly available cheap labour resources. However, moving up further to an upper middle income country was challenging since the country had to spend about 24 years in the lower middle income country category before making a breakout. Unless it attains an economic growth rate of about 9% per annum in the next 15-year period, it is unlikely that it will be able to beat the middle income trap. The way to do so is to produce for a market bigger than the market in Sri Lanka and supply goods that are demanded by that market. It requires the country to convert its production system from a simple technology based one to a complex technology one and join the global production sharing network to keep its presence in the market

 

Managing disruptions

Exports will not happen automatically simply because a government body has made a pronouncement. To change the structure of exports of a country within a short period, it is necessary to disrupt the whole economy from top to bottom and across all the sectors. The government machineries which are usually moving at a snail’s pace should be accelerated to the maximum speed possible to provide support services. Labour markets which are rigid and ruled by uncompromising trade unions should be made flexible with respect to entry, exit, on the job training and new skill and talent acquisition. 

The biggest disruption to be effected to the labour market is the conversion from the present ‘seniority and fixed salary based system’ to a ‘merit and output-based system’. When a society has lived hundreds of generations in a seniority and elders-worshipping society, it is normally embedded irrevocably in the genes of its members. Thus, the introduction of a merit based system to such a society, however much it is desired, will be a painful exercise. It requires the disruptors to inflict mental violence on the subjects who are to be changed; but the reaction of the subjects too is characterised by a similar response making it difficult to introduce the disruption without social costs. 

This may appear to be difficult but not impossible to attain at all. It involves the change of the mindset of people through a back and forth consultative process removing fears and providing assurance. It is quite a challenge and Sri Lanka’s NES will also be subject to this challenge.

Technological advancement is a disruption

Technological advancements are disruptive and therefore painful. Those who are able to predict and adapt to the disruption will be winners, while others will be destined to be losers. Human history has often taught this painful lesson to mankind. 

When the motorised vehicles emerged, the horse-driven carts were driven out of the road; when the spinning machines were invented, handlooms had to give in. They made thousands of people around the globe jobless but created new jobs for people who could train themselves to adopt the new technologies. However, a concern for many societies today has been that disruptive technologies are emerging at an exponential rate. It is just like that a person wakes up every morning today to be surprised by the next big thing that has hit the world. It is happening so fast, that it is difficult even to keep pace of them let alone getting trained to adopt them. 

Yet, this frightening pessimism has also given rise to hopeful optimism as opined by Peter Diamandis in a TED lecture in 2012. What Diamandis said was that the fear of scarcity is unfounded. The emerging technology can make this world a place of abundance. One has to create a need for it and wait patiently until the next big thing happens in the scientific world. The global community is creating this need for technology creators to meet that need. Then, technology adopters have been able to supply the same in collaboration with the technology creators. 

In this manner, the four famous technology adopters in the initial pace, Singapore, South Korea, Taiwan and Hong Kong, were able to beat the middle income trap successfully in 1990s. Today, they have been upgraded from the status of technology adopter to that of technology creator in competition with the rich Western nations.

New technologies to capture the world 

According to McKinsey Global Institute (MGI), there are 12 miracle technologies that are disrupting the world today. The list is not exhaustive but provides a guideline for nations to follow.

1.Mobile internet: Increasingly inexpensive and capable mobile computing devices and Internet connectivity; If you are with a smart phone with internet connection today, you have the entire world at your finger tips. A comparison has been made by MGI on this count with computers of yesteryear: It has said that the most powerful computer in 1975 costing $ 5 million had the same performance of an iPhone today costing only $ 400. 

2.Automation of knowledge work: Intelligent software systems that can perform knowledge work tasks involving unstructured commands and subtle judgments. The distributed intelligence now being developed in USA and elsewhere in Europe seeks to replicate human brain and pretty soon most of the brainy work handled by humans will be outsourced to these smart and intelligent computers. 

3.The Internet of Things: Networks of low-cost sensors and actuators for data collection, monitoring, decision making, and process optimization; software applications are now being developed in the Western world at a rate that it is practically possible to beat the limitation created by time and space when it comes to human interaction.  

4.Cloud technology: Use of computer hardware and software resources delivered over a network or the internet, often as a service; This system of data protection and storage will help people to use only a fraction of the installed capacity in their computers and travel abroad just with a bag of clothes but still access to their data files from any place in the globe. The only requirement is that they should remember their password, but today with new apps, even password management has become possible. 

5.Advanced robotics: Increasingly capable robots with enhanced senses, dexterity, and intelligence used to automate tasks or augment humans; These robots will not only handle monotonous routine jobs but also are capable of making decisions faster than humans having processed all the necessary information. Thus, the concept of bounded rationalist which Herbert Simon came up with in 1955 to propose that people are not rational because they cannot access to all the information and even if they have access, they are constrained by a lack of time and ability will be just a thing in the past. 

6.Autonomous and near-autonomous vehicles: Vehicles that can navigate and operate with reduced or no human intervention; These are smart vehicles and already vehicle manufacturers have started to fix their products with all types of software packages that help drivers to better control their vehicles while avoiding fatal accidents or crashes. 

 

With the introduction of the open economy policy in late 1977, Sri Lanka was able to transform its exports from the three-tree crops to manufacturing which was dominated by apparels. This was facilitated by the transfer of production facilities by the Western nations to labour abundant developing countries, a process known as off-shoring. However, the advancements in science and technology in the new millennium have enabled those nations to shift those production facilities to their own lands, known as on-shoring, and countries close to their markets, known as near-shoring. It is estimated that by 2025 about a two-third of apparel supplies to North American and European markets will be sourced from on-shored or near-shored factories. Sri Lanka’s apparel sector faces a potential risk and the country has to find a way out

 

7.Next-generation genomics: Fast, low-cost gene sequencing advanced big data analytics, and synthetic biology (“writing” DNA); this is the most disruptive of the new technologies because sequencing one’s genome will not only be cheaper but also be quicker. This will help the diagnosis of ailments more accurately and find treatments by simply changing the copy of the genome just like we write computer software programs today to handle processing problems.  

8.Energy storage: Devices or systems that store energy for later use, including batteries; this is a real contributor to energy saving because it will help the world to develop more energy efficient machines and thereby conserve energy. 

9.3D printing manufacturing: Additive manufacturing techniques to create objects by printing layers of material based on digital models; The invention of 3D printers from around early 1980s and reaching its adulthood in early 2010s has been termed as the second industrial revolution because it has enabled producers to use 3D printers to produce practically anything from precise parts of airplanes to cars to body parts.   

10.Advanced materials: Materials designed to have superior characteristics (e.g., strength, weight, conductivity) or functionality; Nano carbons and other strong materials are to replace steel as the main input in producing machines and constructing buildings. 

11.Advanced oil and gas exploration and recovery: Exploration and recovery techniques that make extraction of unconventional oil and gas economical; USA and Canada have been able to come up with hydraulic fracturing and octopus horizontal drilling for tapping what was hitherto inaccessible as shale oils and natural gas that lie in shale rocks about five miles deep down in the interior of the earth. USA is to be self-sufficient in natural gas and fossil fuel by 2025 by tapping its vast shale oil fields the northern parts of the country. 

12.Renewable energy: Generation of electricity from renewable sources with reduced harmful climate impact; the development of new nano solar photovoltaic solar power harvesters will revolutionise the world’s new renewable energy production methods.  

Sri Lanka should orient its education, research and development systems to be a partner of this changing technological base in the world. For this purpose, the resources that are presently directed toward consumption in the budget should be pruned and rationalised to enable the government to divert them to research, development and promote innovative practices.

 


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Go for global production sharing networks

In conclusion, Sri Lanka is at a crossroads today because it is snared in what is known as the middle income trap. It was easy for Sri Lanka to move up from a low income country to a lower middle income country by using its abundantly available cheap labour resources. However, moving up further to an upper middle income country was challenging since the country had to spend about 24 years in the lower middle income country category before making a breakout. 

Unless it attains an economic growth rate of about 9% per annum in the next 15-year period, it is unlikely that it will be able to beat the middle income trap. The way to do so is to produce for a market bigger than the market in Sri Lanka and supply goods that are demanded by that market. It requires the country to convert its production system from a simple technology based one to a complex technology one and join the global production sharing network to keep its presence in the market. 

The flipside is that these are challenging targets but not impossible since there are many countries that have done so with appropriate investment in science and technology leading to research, development and marketing.

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com.)


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