Observations from an economist

Monday, 4 July 2011 00:00 -     - {{hitsCtrl.values.hits}}

IMF Resident Representative for Sri Lanka and Maldives Dr. Koshy Mathai who was the Chief Guest at the AGM identified the local tea industry as a critical sector for the country’s economy and observed that the words ‘tea’ and ‘Sri Lanka’ seemed to go together in the world community.

Having participated in a tea auction just once, Mathai recalled his experience as a “mindboggling” one given the complexity of the sector. “I barely understood what was going on when I entered that room at the Ceylon Chamber, but I got a taste of what an important and complicated sector it is.”

 A global perspective – West vs Asia

Giving a comprehensive rundown on what’s happening in the world, Mathai declared that even though the global economy went through a soft patch, followed by issues in the US and Japan, the global recovery was still continuing.

The IMF is now projecting a world growth of 4.5% both in 2011 and 2012, with expectations for advanced economies to grow at 2.5%, (“frankly a rather pathetic rate of recovery when one considers the depth of the recession these countries have gone through”) backed by a 6.5% growth from the emerging markets. Mathai observed that the growth of 2.5% even after the fallback would mean a lot of slack in the system. “Not only is the growth in the baseline forecast quite low, but the risks around that are tilted to the down side, by which I mean it is likely the growth projection could be worse than 2.5% rather than better.” With a financial sector that has not fully healed itself, economies are trying to consolidate their fiscal position and trying to tighten government deficits and reduce the burden of debt, unemployment and other factors that drag down growth in the areas such as the earthquake in Japan and the cotangent from the European debt crisis were listed as reasons for the slow pick up. Against the rather depressing picture for the advanced economy, the IMF has painted a rosy picture for emerging markets, which are growing at 6.5%, while countries such as China and India are expected to grow even faster.

Mathai noted that according to the IMF China is to grow at 10% and India at 8%. He stated that the multi-speed recoveries seen in the world were not trends the world would see for the next year or two but ones that would continue for many decades.

“The IMF has predicted that China and India by 2030 will on a combined basis account for as much consumption as the G7 – totally amazing, absolutely dominant in their shares of world GDP. Not only will this multi-speed recovery continue for a while, but there is also a compositional shift happening in the nature of different areas. The old model of growth, where Western consumers did not save and simply consumed and provided the demand for exports from the rest of the world allowing those nations to export very strongly, has come to an end. Now we will see a situation where exporting economies in Asia and other parts of the world will have to rely more on domestic demand in order to power their growth.”

It’s not going to be the US consumer as the US consumer has seen his or her wealth absolutely hit – they are now in the mode of retrenching.

Sri Lanka: Exports have to increase

Sri Lanka, where consumption already accounts for 70% of GDP which is as high as USA or Philippines, need not look at boosting consumption but must now look at boosting the country’s exports. “Sri Lanka for the last 12-15 years has seen its export share steadily decline. Year after year exports as a share of GDP has steadily gone downhill. Sri Lanka in 1997 accounted for 0.08% of world exports, but has come down to a 0.06% – tiny numbers but substantial amounts in dollars,” Mathai said. “The IMF sees the need for a severe boost in the country’s export performance, to get back to where we were in the late 1990s.”

Tea sector: What needs to be done

 Tea, a key export product, has a role to play here, Mathai said.The IMF Mission Chief for Sri Lanka Brian Atkins is said to have made the following comment: “If the economies are going to grow and exports are going to grow, we cannot rely on just tea and garments anymore. It has to be new models.” However Mathai says: “Surprise us.

I think tea and garments and other traditional sectors can play an important role in going forward.” For the country to move forward, Sri Lanka needs to move more aggressively into regional integration and go into value addition. “Taking the economy as a whole, 20% of Sri Lanka’s exports goes to the US and 39% to the EU; 60% is going to these regions, which are growing at an absolutely pathetic rate. Only 4-5% goes to India and 1% to China, which are fast-growing markets. For an economist, these figures are amazing. Countries that are nearby tend to trade with each other a great deal more, but this is not the case in this sub continent.”  

He stated that the country should make better use of the Comprehensive Economic Partnership Agreement (CEPA) with India. Just like the apparel sector which does not produce just shoes and shorts but high-tech lingerie and so on, the tea industry should also do more in the field of value addition.

Juan Valdez vs Lakshmi Ruthnam?

Mathai, who observed that the market presence of Ceylon tea was really quite poor in USA, stated that the country needed to adopt a mechanism which would scream ‘Sri Lankan tea’ from just one glance.  Drawing an example from the very famous ‘Juan Valdez’ logo for Colombian coffee, which is today a world recognised and accepted look, Mathai went on to suggest a ‘Lakshmi Rutnam’ logo for Ceylon tea.

“Why don’t we have Lakshmi Ruthnam, a tea plucker from Ceylon who represents the industry, and create a picture in the minds of the consumer? That’s what we should have done,” he said.