Limping merchandise exports: Gota should not make the same mistakes as the previous governments

As at today, Sri Lanka’s exports to the rest of the world are being dominated by two product categories, apparels and ‘the three tree crops’ – tea, raw rubber and coconut – Pic by Shehan Gunasekara

Sri Lanka’s sluggish export performance

Sri Lanka’s merchandise exports have been limping from around 2011. Exports which amounted to $ 10.6 billion in 2011 have changed at a very slow rate since then. During 2011-18, the average annual merchandise exports amounted to $ 10.75. During the first 11 months of 2019, exports had grown by 1.7% to $ 10.7 billion. A prorated estimate will reveal that Sri Lanka could reach an export level of $ 11.7 billion in 2019. However, due to the high export performance in December 2018, this estimated annual performance records a decline of close to 2% in 2019.

The inactivity of previous governments

I have in previous articles in this series, drawn the attention of both the Mahinda Rajapaksa government and the Ranil Wickremesinghe government to the peril of an unwarranted slow-down in export earnings. Exports for centuries have been the main source of Sri Lanka’s import financing, wealth creation, employment generation, poverty alleviation, exchange rate stability and servicing the external debt obligations. The non-recognition of these vital roles played by exports and remaining inactive in the midst of a major economic crisis by both governments have driven the country to a critical level today. Hence, Gota’s challenge has been to break loose from the past fetters and implement an immediate action program to reverse the ominous trend. 

Sri Lanka’s sluggish export performance during 2011-14 was known to RW administration. It was evident in the first economic policy statement which RW presented in Parliament in November 2015. The issues relating to exports and strategies to be adopted to resolve them had not been presented in the statement under one heading. Hence, one has to undertake the laborious task of piecing together the numerous references made in different places to exports to gauge his government’s strategy on the issue. 

Recognising the importance of exports in increasing the welfare of people, RW had emphasised that Sri Lanka should produce for a market larger than that in the country. For that purpose, the country should find space in the world market. That space would be harnessed by entering into formal trade agreements with India and China which will offer a market as large as 2.5 billion people to Sri Lanka’s exporters. The strategy to be adopted by his government, according to the policy statement, was to link Sri Lanka to the global value chain. This requires empowering the country with high technology. To acquire high technology, 11 business and technology development areas will be established throughout the island. This would be kicked off by establishing such areas in Hambantota, Ragama, Trincomalee and Mahaoya in 2016. The local and foreign investors who are to invest in Sri Lanka under the government’s incentive schemes will be linked to this value chain.

Export targets should not be mere wishes

None of these promises were delivered and as a result, they just remained a mere wish-list. But, in the next economic policy statement presented to Parliament in October 2016 the government made further revelations about the planned export growth. It had correctly identified that to have a high growth in exports, Sri Lanka needed to have a major capital infusion and greater investments. To attain better results, Sri Lanka should go for new technological innovations, better management of data systems and up to date market information systems, the policy statement opined.

Lamenting over Sri Lanka’s lagging behind both Bangladesh and Vietnam which were pretty much below the country in export performance a few decades earlier, the second policy statement promised to create a suitable climate for investments to take place in the export sector in the country. While foreign investors were to be used as a vehicle to join the value chain, the government promised to help local investors too to join the same. In this manner, the proclaimed goal of the government, as pronounced in both policy statements, was to direct all investments toward achieving a higher export growth.

But the promises made in the second economic policy statement too remained mere wishes with no practical application. Consequently, exports continued to show a sluggish performance in the first three years of the new administration. The annual average export level during 2015-17 amounted to just $ 10.7 billion marking almost the same level recorded during 2012-14.  

Exports for centuries have been the main source of Sri Lanka’s import financing, wealth creation, employment generation, poverty alleviation, exchange rate stability and servicing the external debt obligations. The non-recognition of these vital roles played by exports and remaining inactive in the midst of a major economic crisis by both governments have driven the country to a critical level today. Hence, Gota’s challenge has been to break loose from the past fetters and implement an immediate action program to reverse the ominous trend

The fate of the defunct Vision 2025

Towards the middle of 2017, the Government came up with a new medium-term policy statement titled Vision 2025. This vision did not have a detailed vision for the export sector except making some passing references. It had promised to put a stop to the anti-export bias that had dominated the economic policy making in the past. According to the vision, this anti-export bias had prevented Sri Lanka from entering the global production networks, which had been referred to as the entry into value chains in the previous policy statements. It had also envisaged to double the export earnings from $ 10 billion in 2017 to $ 20 billion by 2020. But there was no policy framework proposed in the Vision 2025 to attain this highly ambitious goal. 

The new export strategy was no better

In April 2018, the Government came up with a new export strategy that had provided a detailed plan to boost the country’s exports. However, the New Export Strategy had been silent on the main strategy proposed in the Prime Minister’s economic policy statements, namely, Sri Lanka’s joining the value chain or the global production networks. Instead, it had proposed to develop six selected areas of exports – two already mature, two emerging and two visionary sectors – which the designers of the strategy had considered as important for Sri Lanka to increase its export earnings quickly. 

The two mature sectors are the development of the country’s Information Technology plus Business Process Management and Spices and Concentrates. The two emerging sectors are the Wellness Tourism and Processed Foods and Beverages. The two visionary sectors are Building Boats and Electrical and Electronic Components. Though the designers of the new export strategy had been working on a set of internal physical targets for merchandise exports over the planned period, they had not been revealed in the document containing the national export strategy. These internal targets had envisaged Sri Lanka to increase its earnings from merchandise exports at an exponential rate of 11% during 2017 to 2025.

The ambitious targets in the strategy 

This strategy was also not implemented by the Government like the previous economic policy statements and the Vision 2025. As a result, the actual export performance fell far below the targets. In 2018, the plan had envisaged to earn $ 13.1 billion through merchandise exports. But the actual realisation was $ 11.9 billion only. Similarly, in 2019, the target of export earnings was $ 15.1 billion. But the developments so far in the export sector shows that the country would not be able to earn more than $ 11.7 billion. 

It is inevitable that the same fate would befall on the targets for the rest of the period too. The exponentially growing exports are to reach, according to the internal targets, $ 17.4 billion in 2020, $ 19.1 in 2021, $ 21 billion in 2022, $ 23.1 in 2023, $ 25.4 billion in 2024 and $ 27 billion in 2025. As it is, the installed capacity – technological as well as managerial – would not permit Sri Lanka to reach these targets.

This is the position which Gota is facing today. Even a modest growth in export earnings in the next six-year period would require Sri Lanka to adopt a special policy package relating to the export sector. The problem can be summarised as follows. 

He should not make the mistakes made by the two previous governments. Instead of coming up with a mere wish list, he should present a comprehensive action plan, with time bound targets, to diversify the country’s merchandise exports and link them to global markets by activating all the possible global production networks

Sri Lanka’s saturated export structure

As at today, Sri Lanka’s exports to the rest of the world are being dominated by two product categories, apparels and ‘the three tree crops’ – tea, raw rubber and coconut. In 2017 in which its exports figures were the highest in the recent years, the former accounted for 44%, while the latter ‘three tree crops’ had a share of 17% of total export of goods. A brand-new category that had been added in the recent decades had been manufactured rubber products – mainly solid tyres – that had acquired a share of 7%. 

This has been the country’s export structure in the last four decades and it had been happily savouring marginal improvements in these categories whenever such improvements occurred as if Sri Lanka had hit the ‘next big thing’ in its exports. That complacency had sowed the risk viruses that have stunted its growth as a mature growth sector. 

On the one hand, they had already reached the saturated point given the country’s limited resource base. On the other, there were no new products added to the list, and worse, no concerted action had been taken to charter the unchartered territory of ‘services’. With proper logistics in place and elimination of unfriendly policies, services offer a good opportunity for Sri Lanka to bring its own next big thing in expanding the earnings base in foreign exchange.

Sri Lanka’s main manufactured export – textiles and garments – face a major challenge due to two related developments. The textiles and garments sector benefitted from the wave of globalisation that took place in the global economy in 1980s. Accordingly, the rich countries in the world taking advantage of the low wage costs in low income countries began to set up their mass consumption product factories in the latter category of countries. This process was known as off-shoring. 

However, an unintended consequence of this process was the development of the bazaar effect, as first revealed by German economist H.W. Sinn, in which the rich countries simply became trading nations – bazaars in a traditional sense – with manufacturing off-shored to low income countries. With the consequential decline in manufacturing jobs in rich countries, there was a wide public outcry against off-shoring which became a political weapon for leaders to gain popularity among the masses. 

Hence, the production model was changed to locate the mass production consumption goods industries near the final markets – called near-shoring – or on the land itself – called on-shoring – through product automation. The textile and garments industry has been the first industry to exploit these new production models.

New production model to replace off-shoring by on-shoring and near-shoring 

A recent survey conducted by McKinsey and Company on the apparel sectors in North America and Europe has revealed that both near-shoring and on-shoring have become the most popular production model adopted by a large segment in the final consumer countries. According to the survey, about 67% of the US apparel executives and 80% of the global chief procurement officers have indicated that the top-most priorities in the apparel sector have been the speed at which the final products should be delivered to the market and how the goods could be procured within the season. 

In the past, fashions developed by apparel companies had been forced on consumers. But, that trend is fast changing and instead, a bottom-up consumer preference system in which the consumers will inform garment manufacturers to produce the fashions they desire is developing in the apparel sector. To gain capacity to produce and supply these products, apparel trading companies need to have manufacturing facilities near the markets. That is the reason for near-shoring and on-shoring to get established in the apparel sector value chain. On-shoring has been facilitated by automation of apparel manufacturing brought in by such technological advancements as 3D print manufacturing, gluing and bonding instead of stitching and robotic employment. 

Already, a Sri Lanka-born start-up entrepreneur Gihan Amarasiriwardena, together with partner Aman Advani, both of whom are MIT alumni, has begun a global enterprise in garments using 3D print manufacturing processes. The new enterprise called Ministry of Supply is to change the landscape of apparel production in the globe in the coming years. All business giants today have started their empires from humble beginnings and Gihan and Aman are set to creating such an empire in the coming years (For details see: https://medium.com/authority-magazine/empathetic-invention-the-process-of-inventing-new-products-services-and-experiences-but-b137ee71617d). As a result, the cost advantage enjoyed by low income countries like Sri Lanka with respect to garment manufacturing is fast eroding.

Apparel sector is to return home 

McKinsey Survey has predicted that by 2025, a large segment of both the North American and European markets will be supplied by both on-shoring and near shoring. Table 1 presents the countries that are located around North America and Europe standing to benefit by adopting the new value chain model.

Will Sri Lanka lose its markets?

Both North America and Europe are Sri Lanka’s established markets for apparel products. During the five-year period from 2013 to 2017, European Union absorbed 43% of Sri Lanka’s apparel exports, while North America absorbed 46%. Thus, these two markets had accounted for 89% of the country’s apparel exports. Accordingly, if they are to near-shore and on-shore apparel supplies, Sri Lanka’s traditional apparel industry will face a serious risk of maintaining sustainability. It is therefore necessary for Sri Lanka to change the focus of its production to new export commodities to avert possible downside development of its export sector.

This is the challenge faced by Gota in rescuing the country’s merchandise export sector. He should not make the mistakes made by the two previous governments. Instead of coming up with a mere wish list, he should present a comprehensive action plan, with time bound targets, to diversify the country’s merchandise exports and link them to global markets by activating all the possible global production networks. 

(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)