Budget 2018: Will it help realise goals and targets of Vision 2025?

If the enabling environment for investment could be drastically improved, Sri Lanka could emerge as a sought-after location for investment – Pic by Shehan Gunasekara

The Budget 2018, besides being a budget for the forthcoming year, is another declaration of policies and plans of the Government in power.

Goals 

The Sustainable Development Goals (SDG) approved by the UN have been accepted as the goals of Budget 2018 (B18); the major SDG goals are no poverty, zero hunger, good health and well-being,  quality education, clean water, sanitation, decent work and economic growth.

The objectives/targets

The medium term objectives of B18 as stated in the Vision 2015 as well are: a per capita income of $ 5,000, one million new jobs, FDI inflows of $ 5 billion and exports of $ 20 billion. 

Focusing of strategies

Achieving these need proper focusing and efficient implementation. As for proper focusing, an example could be cited. If a patient suffers from cancer, the treatment has to be correctly focused. Similarly the Sri Lankan (SL) economy suffers from severe indebtedness.

How is SL to earn the foreign exchange to pay especially the external debts? Poverty and destitution and inequality of incomes are not low in SL (those earning less than $ 2.5 per person were 32.0% of the population in 2012/13, World Bank).

For proper focusing of strategies, Key Result Areas (KRA). The KRA, which can be defined as the implementation of those 10% or 20% of strategies that could determine 90% or 80% of results desired according to the Pareto’s Principle, could be indicated possibly as follows and get the ministries and agencies concerned to stick to their implementation and monitoring efficiently without any distraction: 

1. Attracting investors especially those providing Foreign Direct Investments (FDI)

2. Upgrading the export competitiveness of the country

3. Improving the productivity of the rural agricultural while protecting the natural environment

4. Creating an effective leadership with integrity, a people centred vision and passion

(Reference: Yapa Lloyd F, Export Competitiveness and Poverty Alleviation in South Asia, with special reference to Sri Lanka, 2016).

Attracting investments 

Regarding attracting FDI, B18 says: “Our processes must be relooked at and bench marked against the best”. The B18 then lists the processes regarding import and export of goods, like setting up of a ‘one stop shop’ to speed up approvals and registrations or for improving the ease of setting up a business (Ease of Doing Business Index ranking SL 110 out of 190 countries, World Bank, 2017), a ‘national single widow’ for improving logistics (Logistics Performance Index ranking SL 90 out of 164 countries, Index Mundi 2014), etc. 

It is mainly due to a negative enabling environment that SL is unable to attract FDI and other investments for creating jobs and producing mainly for the export market. Though the title of the section concerned is ‘Enabling Environment,’ it is only the processes that have been listed, not the entire enabling environment to induce the FDI to come to SL. 

Why should we attract FDI? They could bring with them locally-scarce capital, modern technologies and access to global markets. The SL domestic market is too small to attract market-seeking FDI. Other FDI look for the least risky locations (political stability and absence of violence/terrorism, % rank, Sri Lanka 33.8, Singapore 91.9, Malaysia 56.2, World Bank, 2014) for projects and where the profitability of business could be high. 

SL could do better by differentiating its enabling environment against the best locations to avoid competition from them. Otherwise SL may be only ‘one of the beauties on the beach’.

FDIs have most probably avoided SL mainly due to the tensions arising from the ethnic conflict particularly the 30-year war. Even after the war was over in 2009 the environment has not improved. This is because most Sri Lankan politicians are not only utterly corrupt and adept at robbing the taxpayer, but also are propagators of tribalism for obtaining election victories.

Where will such mischief take Sri Lanka? Frightening the investors away will be the least of the consequences. The frequent acts of violence directed against minority communities that have occurred recently could escalate again, leading to extreme poverty and much suffering among the people. 

The extent of the suffering may be gauged by looking at what is happening elsewhere in the world, such as Yemen (where a million people are reported to be suffering from hunger and disease like cholera), due mainly to the tussle for power between the Shias and the Sunnis in the Middle East. This is the result of dividing communities/nations on ethnic, religious and caste lines.

What is needed is to develop a consensus regarding effective means such as a new constitution on the lines of that of South Africa to achieve reconciliation among the communities in SL to avoid the situations described above and to attract investment, particularly FDI. To be fair the B18 mentions reconciliation among communities in the country in Section 262 without referring to the means of realising it.

However, even that may not be sufficient to allay fears of investors; the very poor law and order situation has to be improved, rampant corruption that may affect their businesses has to be drastically reduced, the independence of the Judiciary has to be restored and many other barriers like the non- availability of dependable infrastructure and hard and soft skills, etc., have to be rectified. Some of these are dealt with in passing in the B18. 

If the enabling environment for investment could be drastically improved SL could emerge as a sought-after location for investment. An added bonus would be the gradual return of SL citizens (as it happened in India after 1991), some of whom are persons with various skills and professional qualifications as well as experience. 

The tool preferred by the B18 for increasing investment appears to be mainly entrepreneur/SME development. It may increase employment but may not help to produce competitive goods and services for the global market as they cannot realise scale economies to reduce unit costs and add value to satisfy discerning customers in the rest of the world.

The strategy resorted to for entrepreneur development is the adoption of the traditional ‘top down’ approach with tax incentives and assistance measures. Whether the numerous public sector agencies to be involved would be able to cope with the task is doubtful. (One chapter has been devoted to the subject of an Enabling Environment for Investment in the above mentioned book and another describes how Dubai attracted FDI and became the miracle economy of the Middle East.)

What else, is the next question. SL produces the best tea and cinnamon in the world and has the best quality graphite, apatite and precious stones. There should be plans for converting these to multibillion dollar industries after thorough cost benefit and feasibility analysis. 

Tea perhaps could earn as much as Coca Cola ($ 45 billion, net p.a.), Starbucks Coffee, $ 21 billion, net p.a.). Another sector that has such promise is the IT sector which appears to be a favourite of the B 18 for grant of incentives; Business Processing Outsourcing and related enterprises could earn several billion dollars for SL, as in the case of India if the skills required could be found even by resorting to importing the workers.

Improvement of competitiveness

The SL economy has been described as an open economy. This is incorrect. Import tariffs are very high and businesses are constrained by numerous regulations, making it a highly-protected economy (all products, share of tariff lines with international peaks, Sri Lanka 41.18%, Malaysia 13.03%, Singapore 0.0%, World Bank, 2013-2015); the anti-export bias in the economy is therefore quite heavy.

The abolition of para tariffs will solve the problem only partially. Reduction of import duties/tariffs will not only get rid of this bias but also promote competition among firms which is required to pressurise firms to innovate to add value to goods and services on the basis of customer needs (as the B 18 acknowledges). But reduction of tariffs will reduce the capacity of the Government to earn revenue as most of the taxes are imposed on imports; this should not prevent the Government from preparing a plan for reduction of tariffs in a controlled manner.

It should also resort to the alternative of moving strongly for improvement of productivity. Unfortunately a strategy of improving productivity has not been taken up in the B18. Another alternative is the reduction of costs by reducing Government expenditure. It is surprising that this is not detailed in the B18. 

There is a passing reference to encouraging Public-Private Partnerships. Obviously there is no political will to restructure the loss-making State-Owned Enterprises as they could be used as a dumping ground for party supporters even without the basic management skills and qualifications and as tools of robbing the taxpayer. (A detailed chapter in the book mentioned above deals with the subject of competitiveness).

Improvement of productivity

Productivity (greater outputs per unit of input) can be realised by adopting various measures for improving the efficiency of production. In SL output per employed person happens to be $31,692, whereas in Singapore it is 133,915, according to the Conference Board Data Base, 2017. Productivity could be improved by enhancing the skills of employees through education and training. 

There is a fairly detailed section on this subject in the B18. But there is a mention of improving only hard skills relating to the STEM subjects or Science, Technology, Engineering and Mathematics (not medicine). Soft skills like creativity, management and leadership ability, teamwork and communication especially in English are demanded by FDIs and local businesses alike. SL’s education system has been unable to impart such skills.

Section 249 in B18 refers refers to the inability of our bureaucratic structures to be efficient in service delivery. In other words, its productivity is low. However, no effective strategy for resolving it has been mentioned. The main required strategy for this purpose is placement and promotions of officials purely on merit by an independent public service commission. It is also heavily bloated and the numbers have to be reduced for improvement of productivity.

In fact the efficiency/productivity of all factors of production such as land, labour and capital have to improved; such reforms are referred to in passing in B18 (three chapters of the book by the writer, mentioned earlier, have been devoted to this topic). The growth rate of Total Factor Productivity in SL during 2010-2014 has been minus 1.48%. 

Agriculture, on which 17 million people in SL depend directly or indirectly, receives scan attention in the BS 18. Productivity in this sector in the form of value added per worker has been extremely low (agricultural value added per worker in Sri Lanka was $ 1,487, and in Singapore $ 76,144, World Bank, 2014/15).

There are two ways of improving this. One is developing a strong manufacturing sector for export. Investments to be attracted should be diverted to this sector. While introducing the latest technologies, it could help to absorb excess employment not only in the agricultural sector which has 27% of total employment but also in the public sector; it could also reduce those going abroad for employment for menial jobs. 

The other method is consolidation (and re-plotting) of land holdings as fragmentation has reduced these (45% of holdings less than ¼ acre in size, Agricultural Census of 2002) to loss-making enterprises. Granting of ownership to holders of leased land by the State, after careful analysis would set in a sort of revolution in increasing real (inflation adjusted) incomes and help in reducing poverty and inequality of incomes as well. 

Leadership development 

It is now no secret that the present predicament of this country is due the absence of effective leadership of the calibre for instance of Lee Kwan Yew of Singapore (dealt with in chapter 9 of the book mentioned above). Most of our leaders have in fact been engaged in robbing the State and greedily taking bribes even from investors, while engaging in divisive and dangerous tribal politics; they have also failed to develop a vision of taking the country to prosperity by making the people aware of the means involved.

The above analysis of B18 may show that it could be done by focusing on creating an enabling environment plus suitable policies for attracting mainly FDI that could set up manufacturing industries to produce goods and services for the global market. The other important strategy suggested especially for poverty alleviation is the conversion of fragmented land holdings to consolidated farms. 

Despite its shortcomings, B18 refers to all the required strategies. There is doubt, however, whether its goals and targets could be achieved. The reasons for this are that its strategies are not focused properly, while some are not worded as strategies but as mere references; the main reason is actually the inefficiency of implementation.

(The writer is a Development Economist.)