Globalisation: The challenges

An important feature of the recent Sri Lanka Economic Summit, which both the Guest Speaker Gurcharan Das, Author, Columnist and Management Consultant and Keynote Speaker Dr. Kalpana Kochar, Chief Economist – South Asia of the World Bank, referred to were the opportunities presented to Sri Lanka by the ongoing process of globalisation and particularly the economic resurgence of China and India

Dr. Kochar also emphasised the sectors of Sri Lanka’s economic performance which need to be improved if the opportunities presented by global economic developments are to be effectively harvested.

The bludgeoning expansion of the State sector, which has been described by other analysts as an ‘unproductive tax eating sector’ of Sri Lanka’s economy is a matter which Dr. Kochar drew attention of the audience at the summit.

The dark days of the ‘Seven Year Curse’ of 1970 to 1977, the only time that Sri Lanka tried to be a statist closed economy, has a very clear lesson for Sri Lanka; we are a very small economy with limited domestic purchasing power and endowed with negligible natural resources. The low public and private investment, low economic growth almost amounting to virtual stagnation, high unemployment among a the young population, exacerbated by the famed ‘mismatch’ propounded by Prof. Dudley Seers of the Sussex University , Institute of Development Studies following the 1971 insurgency, the inability of the process of education and training to provide the skills mix the employment market demands, resulted in a huge black market, unending queues for consumer goods at cooperative outlets and rationing.

The myth of self reliant policies being the path to economic liberation was well and truly discredited. Sadly we still hear the empty rhetoric of ‘unplugging from the international economy’ and the option of endless subsidies to consumers of goods purchased at international markets at international prices, being uttered by empty-headed demagogues!

Policy framework for Sri Lanka

Sri Lanka can regain the dynamism of its economy and release the latent creativity of its entrepreneurs only by a policy framework which would expand what is known as the ‘trade-able sector,’ increasing exports and attracting foreign direct investment. Not by borrowing up to the point of drowning in debt and being fooled, in the style of Homer and Greek mythology, by the proverbial ‘Greeks bearing gifts’ and investing scarce resources in Greek virtual junk bonds.

Dr. Kochar in her presentation showed that Sri Lanka’s trade as a percentage of GDP has declined from over 80% in 2000 to around 44% in 2012. While the non trade-able sector, public administration – the tax eaters, who produce nothing – have expanded rapidly.

Because of concerns of old age security of a virtual poverty line pension regime and low performance culture, presenting no challenge at all – personified by the almost un- translate-able concept of ‘Shape Niyaya’ in the Sinhala language – which translated means something like ‘no work, no trouble, do everything you can to avoid work and responsibility, get a transfer to your home station until pension time comes up’ – State employment is an attraction which has no competition in Sri Lanka! Both financial and human resources have been sucked in to the low productivity public administration sector like an uncontrolled vacuum cleaner working at full capacity plus!

When too many regulatory types are sitting around with nothing much to do, underpaid and underutilised, naturally they conjure up rent seeking ploys, which in any other culture would keep the anti bribery and corruption authorities working over time.

One reason why governance standards are so poor is due to lethargy in the control of bribery and corruption. Dr. Kochar pointed out that in 2010, the reason for the economy overheating and critical external imbalances emerging, when an ill advised attempt was made to promote economic growth by an expansionary monetary policy, was due to this economic environment. For an economy to grow in real terms, a greater share of economic and human resources have to be diverted to high growth sectors like exports, not to tax eaters.

Economic reform a priority

Dr. Kochar emphasised that with Sri Lanka’s small domestic market, export growth is essential for achieving higher economic growth numbers. In the year 2000 total exports were 33% of GDP; by 2011 this had declined to 17%. This data clearly indicated that Sri Lanka’s economy has been losing competitiveness.

Dr. Kochar attributed this, in addition to an overvalued exchange rate and the shift to a more closed economy, to protectionist measures by insidious, fly by night, sudden tariff adjustments. Dr. Kochar compared Sri Lanka and Thailand; while both countries’ export structures were similar in 1980, today Thailand has achieved much greater depth and diversified its exports much more.

Dr. Kochar also noted that the Government’s target is to achieve 8% GDP. For this Sri Lanka requires an investment of 35% of GDP. Sri Lanka’s national savings only amount to 25% of GDP. The gap between savings and investments is 10%. At current rates this amounts to around US$ 6 billion. Sri Lanka has to raise this money through a mix of borrowings and investment inflows, i.e. Foreign Direct Investment (FDI).

However, as a lower, middle income country, Sri Lanka does not have access to grant aid and concessional finance from donors, the era of being a ‘Donor’s Darling’ is over. Sri Lanka’s current total FDI is around US$ 6 billion.

Dr. Kochar presented comparative numbers for Vietnam – in 2008 its total FDI stock was $ 43 billion and attracted $ 8 billion in that year alone. Malaysia had a FDI stock of $ 73 billion in 2008 and attracted $ 8 billion in that year. Clearly Sri Lanka faces a major challenge. Economic reform is a priority. Improving education, especially in science, math and English is critical. An ageing work force exacerbates the issue.

Prescription for Sri Lanka

Guest Speaker Gurcharan Das said that his prescription for Sri Lanka was just three points – rapid reform, the rule of law and accountability. These are the only requirements for a successful economy in today’s global market.

Das emphasised that there is no such myth as a Sri Lankan way of doing business – there is only a well-proven international way. The rules of business and economics are universal. Das emphasised that Sri Lanka’s future lay in linking up with the economies of China and India. These have been the fastest growing economies in the whole world in the last decade.

Das said that while in India, the economy grows notwithstanding the Government, in China the economy grows because of Government policies and investment in infrastructure. He said: “Indian business grows in the night – while the Government sleeps”!

Better governance is essential. Investors want predictability, good governance offers that. Das said that the race between India and China hinges around China democratising and overcoming the challenges of Communist Party domination in a democratic manner and India getting its governance rules right; whoever gets it right, quicker, will dominate the world economy. Otherwise both countries will be stuck in a middle income trap. Das indicated that Sri Lanka also has to engage the global economy by getting into place good governance and an open and democratic system of Government.

The near unanimity of the message delivered by both Dr. Kochar and Gurcharan Das, on the need for Sri Lanka to clear the decks to connect effectively to the globalised world economy drew a reaction the next day from the Secretary to the Ministry of Finance, the Keynote speaker, who started off by saying that he “did not expect Dr. Kochar to say what Mr. Das should have said and vice versa”!

Defining globalisation

Narayan Murthy, founder of Infosys of Bangalore, once defined globalisation as ‘sourcing quality raw material from the lowest priced place, manufacturing to international standards, at the lowest cost location, using the best talent and skill that money can buy, at the most competitive price, selling in the most profitable market, without paying any regard to national boundaries’.

The Oxford Advanced Learner’s Dictionary defines globalisation as ‘the fact that different cultures and economic systems around the world are becoming connected and similar to each other because of the influence of large multinational companies and of improved communications’.

To some people globalisation is a new concept! Nayan Chanda in his book ‘Bound Together’ (Yale University Press) identifies traders, preachers, adventurers and warriors as the main drivers of globalisation throughout the history of the world. Globalisation may be a new word to the international economic lexicon, but as a concept it is nothing new, especially to an island nation such as ours, located at the cross roads of international trade routes.

Our position, at the very end of the South Asian land mass, with nothing between us and the South Pole except the ocean, has resulted in our identity being inextricably linked with the forces of what is now called globalisation, from the very beginning. Originally, in the mists of history, we were a part of the Gondwanaland land mass, and over time as the continents drifted apart due to volcanic eruptions and movements of tectonic plates, among other things, we became isolated at the very end of the south Asian land mass.

Not a new concept

Going back in history , the exile of Prince Vijaya and his friends , the arrival of the Central Asian horse traders Thappassu and Bhalluka, with the Buddha’s hair relict to Tiriyaya, the development of the ports of Mahatittha (Mannar) of the west coast and Gokanna (Trincomalee), on the east coast, through which traders seeking spices, elephants and ivory from local suppliers as well goods brought by other traders from the Western and Eastern hemispheres to the what would have been an international trading nucleus in Anuradhapura, long years ago, with its ‘kosher’ Jewish quarter protected by Royal edict and special taxes imposed on foreign traders, which would have been an important source of revenue, which helped to maintain the expensive hydraulic civilisation on which the ancient kingdom was so dependent.

W.A. Wijewardene, delivering the Independence Day anniversary lecture at the Central Bank in 2009, referred to references in the Chulavamsa of Parakramabahu I, who reigned from Polonnaruwa from 1153 to 1186, establishing a virtual export processing zone, in present day Kalutara District, in the triangle demarcated by the sea coast, the Benthara River and the Singharaja forest.

Here value would have been added to primary products for export, such as timber, ivory, gems and spices. Parakramabahu also invaded Burma. When the Burmese imposed a protectionist 200% duty on Sri Lanka imports, the price of a Sri Lanka elephant doubled due to this tariff rise. Parakramabahu was a champion of globalised free trade. Globalisation, a new concept? That it certainly is not.

The trade route to the Indian sub continent would be through Elephant Pass (the very name derived from the fact that the Dutch colonisers exported elephants captured in the Raja Rata and Wanni forests through the Jaffna peninsula to Indian markets – it is recorded that the Mughal Emperor Akbar the Great’s favourite war tusker was of Sri Lankan origin) and Kankesanthurai.

The total dependence on monsoon wind power by the ancient mariners resulted in their being wholly landlocked in the inter monsoon period and their semi permanent presence would have a tremendous impact on the ports and the capital city.

The discovery of a Laurentian cross, Chinese ad Roman coins, Chinese porcelain and other artefacts among the excavations at Anuradhapura shows the cosmopolitan nature of the ancient capital.

The writings of the trader Ibn Batuta and the monk Fa Hsien bear out this position. The Arabs of north eastern Africa had mastered the art of navigation by the stars over the vast deserts of their homeland, soon used the same technology to navigate the seas, and held the monopoly of piloting ships to the ports of Mahatittha (Mannar) and Galle in Sri Lanka and Goa in India, until the Portuguese sailors, sailing North, hugging the African coast line, from the Cape of Good Hope, desperate to find an alternative route to the east to keep the supply chain for spices open, due the land-based silk route, through Turkey and the Caucuses being closed by Ottoman invasions, captured an Arab pilot at Oman and tortured him until he was forced to disclose the secrets of terrestrial navigation!

The rest, as they say, is history; the Portuguese and the Dutch were followed by the British and Sri Lanka’s economic integration to the world economy was strengthened.

The power of globalisation

The power of globalisation, even at that time, can be seen, by the fact that it was a change of sides by the Swiss mercenary De Meuron regiment, contracted to defend the Fort of Colombo by the Dutch, negotiated at Neufchatel in Switzerland, to the British side, which resulted in the Fort being surrendered to the British without a fight.

Today, with Victoria’s Secret, Brandix opening apparel parks in Andhra Pradesh, exports of tea and rubber, foreign employment and international tourism being the drivers of our deficit-ridden economy, together with massive international borrowings, both at concessionary and market rates, the matter of a globalised Sri Lankan economy is a fait accompli, whatever the ‘pull out the plug’ zealots may say.

Writing in 1919 in the Economic Consequences of Peace, John Maynard Keynes, said: “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could adventure his wealth in the natural resources and new enterprises on any quarter of the world.”

So globalisation is nothing new, it means crossing borders, capital, corporates, industries, people, ideas, religions, infections and even governments cross borders. What is new is the location where the cross border activities end up and the infrastructure utilised.

Historically the connections were between developed economies, later developing economies were targeted with trade and colonisation, today the location of choice is emerging markets.

John Maynard Keynes would have never dreamt that, in 2010 the telephone that the Londoner he wrote about would be a mobile phone manufactured by Samsung of South Korea, using the world wide web and that his Londoner would have been in Shanghai attending the World Trade Expo, purchasing a computer from Acer of Taiwan, the world’s second largest manufacturer of personal computers, or cement from Mexico’s CEMEX, the world’s third largest cement company, or paper tissues from Brazils Aracruz, the world’s largest producer of paper pulp and tissues, or beer from Mexico’s Corona, the world’s most recognised brand and delivered to him by DHL or FEDEX.

Rise of emerging markets

The rise of emerging markets over the last decade means that developed country markets will increasingly forfeit control over their economic destiny which under the pre existing regime, was firmly within their sphere of control.

There will be fierce competition for natural resources and the globalisation of labour markets will decrease the bargaining power of their ageing work force. The social trauma and conflict caused by migration will also prevent the developed economies from absorbing sufficient numbers of poor, low skilled immigrants who they need to keep their economies competitive.

On the other hand, countries rich in natural resources will have to take preventive measures not be engulfed by the ‘resource curse,’ which has made Sierra Leone the victim of blood diamonds.

What is the best way to distribute the revenue raised from resources that have been bestowed on some countries, by providence rather than by any productive effort? Is good governance, democracy, and transparency, a lack of corruption and enforceable property rights that has made Norway different from other crude oil producing countries, the way forward?

Instability in natural resource producing countries has immediate repercussions globally; we have seen this happen over and over again. Nations have gone to war to secure and protect their access to resources, and this is constantly a source of tension and potential conflict.

These are some of the problems thrown up by globalisation and the emergence of new economic powers all greedy for access to a diminishing pool of natural resources, for which the world has to find solutions.

The solution is not ‘unplugging’ from the global economy. The solution for Sri Lanka, given our geopolitical position, our human talent, and our history, is reforming our rules and our economy to engage with the globalised economy on the most advantageous terms to us. This calls for reforms, which would institutionalise the rule of law and good governance.

The message from the 2012 Economic Summit and our historical legacy is clearly beyond challenge. Even the more recent FutureGov SAARC Summit called on the Government to make ‘transformational changes’.

(The writer is a lawyer, who has over 30 years experience as a CEO in both government and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)