Sri Lanka needs a rapid economic transformation, not global sympathy

If we were serious about our time, numerous hours we spend these days unnecessarily for filling our petrol tanks, which ideally should take no more than five minutes, our first task is to design a workable roadmap for the industrial revolution of Sri Lanka

It was the worst of times. The island has never faced such an economic tumult in its known history. All that has been earned in the fair-weather times have gone down the drains. Foreign currency reserves have dipped to the bottom. Unemployment has skyrocketed. The country was learning the danger of depending on a single commercial crop, the hard way. The 1880s. Ceylon.

The times of Sir William Gregory were the best for coffee plantations in Ceylon. While coffee had established itself as a major commercial crop and an export commodity in Ceylon long before Sir William, it was this Anglo-Irish writer and politician who created the ‘coffee rush’. More than one-fiftieth of the total land area of Ceylon was cleared for coffee plantations. A French traveller, Émile Deschamps, described the times as the ‘golden age’ of the Ceylonese economy. Planters were making heavy profits with coffee prices seeing a 50% increase in the late 1870s. Still, it took only a few years for an unfamiliar fungal disease Hemeleia Vastatrix (later known as ‘Devastating Emily’) to destroy it all. The crisis was so grave that out of 1,700 British planters, all except 400 returned to England empty-handed. 

How British Ceylon encountered the coffee crisis is one of the best lessons for any country to come out of a severe economic defy. IMF didn’t exist. Guess the Victorian government was not in favour of bailing out one of its tiny colonies. The country immediately started experimenting with other crops. Cinchona, cocoa, and tea were a few examples. A botanical garden at Heneratgoda was opened for experimenting with new low-country crops, rubber in particular. The country has progressively transformed from a coffee-based economy to a tea-based one, within just a decade. The economy was booming to a level that new pathways in railways were supported by the revenue of the plantation industry. 

Too many pundits, too few solutions

In the backdrop of such an illustrious history, it is unfortunate that many mainstream economists see IMF support as the last resort to current problems faced by Sri Lanka. One of the key objectives of the International Monetary Fund, they tell us, which was formed in 1945 with 29 member countries, is to play a central role in the management of balance of payments difficulties and international financial crises. (They prudently ignore the fact that one of the key influencers of its establishment has been John Maynard Keynes.) This is true. Still, that does not mean that IMF support per se solves economic issues of nations. 

IMF funding gives a much-needed monetary relief, but that itself does not make a happy ending. To quote Prof. Luxman Siriwardena, 16 previous attempts to resolve issues through IMF assistance in Sri Lanka have failed to achieve the declared objectives but only resulted in further accumulation of foreign debts. (FT, May 11, 2022) If IMF support leads to guaranteeing financial discipline, why have the previous 16 attempts failed to establish that?

If our own economic pundits take their eyes out of their textbooks and see around the world, they might notice even with our neighbours the promise of IMF assistance per se has failed to bring long-term positive outcomes. Pakistan is a classic example. Imran Khan, Pakistan’s celebrity former cricket captain, came to power in 2018 leading a populist agenda to deliver welfare to the poor and stamp out corruption failed miserably in his delivery. In 2019, IMF and Pakistan have agreed on terms for a $ 6 billion bailout package, to be disbursed over more than three years. 

It was target Pakistan’s loss-making state-owned enterprises and the country’s energy sector, long plagued by structural issues that have led to a burden of heavy subsidies on the government. After part of it has been issued, IMF has suspended its loan in 2020 after the country failed to meet the conditions. Following Khan’s resignation as Prime Minister, now Pakistan government is discussing again an extended bailout package of $ 8 billion. Without significant policy changes, it is difficult to think, that Pakistan will ever be able to utilise it. 

No development pains, no development gains

All industrialised countries at present, either have been extremely fortunate with natural resources or have taken unprecedented risks at some point in their history. Korea is my favourite example. 

President Park Chung-hee won in 1971 in a close election, defeating rival Kim Dae-jung. His mandate was 53% of the popular vote. Shortly after being sworn in, he declared a state of emergency to face ‘the dangerous realities of the international situation’. The previous constitution was scrapped and a brand new one was introduced. This turbulent political situation had very little impact on the economy. The economic initiatives continued as if nothing happened.

In January 1973, President Park introduced its Heavy-Chemical Industry Drive. This was nothing but a gamble. As a middle-income country then, it had two options: continue the same forever or attempt to move ahead, risking everything it had gained so far. Developing countries typically start their industrialisation in the light industry category, at a lower point in the value chain, using their comparative advantage in labour-intensive manufacturing (e.g. garments). Not everybody could move to higher value-added segments (e.g. machinery and equipment) in the value chain. Those require additional investments such as research and development as well as marketing. They also require significant additional commitments by both the public and private sectors. Korea, without any hesitation, took the second option.

To cut a long story short, that gamble changed Korea’s future. The outcome has been too good. Per Capita GDP that stood at $ 300 in 1971 has grown more than six times to $ 1,870 just within a decade. Growth rates were always double-digit (except in 1975 when growth fell, as a result of the global oil crisis) and legendary. In 1978 it was as high as 40%. The capacity of the steel sector was raised to 4 million tons a year in 1977, up from 1 million in 1972. Machinery production grew at an even faster rate. Between the years 1972 through 1978, this sector averaged an annual growth rate of 45%. Transport equipment output grew annually at a rate of more than 50%. 

Electronic machinery also took off in the mid-1970s, starting with the production of colour television sets and other electronic items. The sector grew at a rate of more than 50% a year. In 1972, Korea manufactured small cargo ships of only 21,000 tons of gross weight. By 1975 this has risen to 800,000 tons. In short, a country, which was perhaps the poorest in Asia, was on the way to reaching the club of the super-rich.

Unprecedented problems need unprecedented solutions

When it comes to local examples of ‘transformations-in-the-middle-of-crises’, nobody could beat the British. They colonised an island that had only two trades. Cinnamon and pearls. That was all Dutch developed. Within a decade, they found the expenditure for the new colony vastly exceeds the revenue – Edward Barnes has already started building the Colombo-Kandy highway. The administration of a divided country too was expensive. William Colebrooke and Charles Cameron were to fix those problems. On their recommendations, the first steps toward modernising the traditional economic system were taken. A uniform system of justice, education, and civil administration has commenced. 

Coffee was upgraded to a commercial crop. Ceylon was, apparently, the first country to do so. Natives had no experience in growing it commercially. When they refused to work on plantations, labour was brought from South India – at heavy costs. Clearing forests was no easy task. More than half of the labourers died because of Malaria, which was rampant at the time. Still, the transformation made a country that could economically stand on its own feet. 

While we are still on the subject of coffee, if one looks for an example from the corporate sector, what Starbucks did in the late ‘00s is an excellent one. We talk about a company as large as Sri Lanka – Its market capitalisation in 2022, at $ 87 billion is comparable with Sri Lanka’s GDP. In July 2008, following the Great Recession, Starbucks closed 600 underperforming company-owned stores and cut USA expansion plans amid growing economic uncertainty. Starbucks also cut almost 1,000 non-retail jobs with 550 layoffs.

It was also losing money in Australia and had to close 61 of its 84 stores. (YouTube has a great video titled ‘Why Starbucks failed In Australia’) In January 2009, Starbucks announced the closure of an additional 300 underperforming stores and the elimination of 7,000 positions. Altogether, within a year from February 2008 Starbucks terminated an estimated 18,400 US jobs and began closing nearly 1,000 stores worldwide.

With all that, Starbucks made the comeback in style. It rebranded its offering with the Internet. By 2013, Starbucks has begun to post calorie counts on menus for drinks and pastries in all of its US stores. Customers were given the option of selecting their favourite drinks through a mobile app. The company also launched the “Tweet-a-Coffee” promotion in October 2013. Customers could purchase a $ 5 gift card for a friend by entering both “@tweetacoffee” and the friend’s handle in a tweet. It was reported that 27,000 people had participated and $ 180,000 of purchases had been made to date. With these changes, it took only a few years to gain the lost glory. In December 2020, Starbucks announced its plans to increase its store count to about 55,000 by 2030, up from the current 33,000.

The bottom line: No matter whether it were a country or a corporate entity, there is always a path out of a crisis through a complete and meaningful transformation. 

Sri Lanka’s only transformation route is industrialisation

Sri Lanka gained its independence 74 years ago. Its first 22 years have been entirely wasted with an uncalled focus on agriculture, ignoring both industries and services. Whatever the drawbacks of their ‘socialist’ policies, the Sirima Bandaranaike-N.M. Perera coalition government should be commended for its pro-industry approach. Sri Lanka was fortunate to receive both technical capacity in terms of fully-fledged factories and technical training from socialist nations. 

The protectionist policies of the government also resulted in a boom in domestic small industries, which were largely subdued under open economic policies that followed. These approaches were all local-consumption-oriented while the need was more for an export-oriented industry – as in the case of Korea, which almost at the same time experimenting with building electronic goods by reverse engineering Japanese products. 

Following the 1978 reforms, Sri Lanka built the framework for the export-oriented industry. Katunayake free trade zone was followed by the ones at Biyagama and Koggala. The Board of Investment, Sri Lanka was established in 1978, under the name Greater Colombo Economic Commission to attract foreign direct investments. Upali Wijewardene was its first chair. The industry sector’s contribution to GDP commenced a drastic rise during this period. Wijewardene’s Colombo-bound private jet disappeared while flying over the Straits of Malacca in 1983. That was followed by the Black July, in a few months. Whatever the hopes that the country had for a transformation that would have taken us to the level of Korea was lost with the political turmoil that followed with North and East conflict and insurgence in the South.

We saw a thin window in the late ‘80s. After being elected President and successfully defeating rebels in South President Premadasa launched his ‘Two Hundred Garment Factory Program’. 

This was a part of a large scheme that introduced over 750 new commercially operated projects also in three Export Processing Zones. The short tenure of President Premadasa has seen an unprecedented creation of employment opportunities in the industry sector – by the mid-1990s nearly 250,000 were newly employed. Out of this about 60%, i.e. 150,000 were engaged in the apparel sector. Today apparels constitute a $ 5.42 billion industry and Sri Lanka’s primary foreign exchange earner accounting for 44% of the total exports and 52% of industrial products exports. The apparel industry provides direct employment opportunities to over 900,000 – largely rural women.

All this is good. No doubt. Still, this is hardly ample to make Sri Lanka a truly industrialised nation. We need to go far – too far. 

Transform from light industries to heavy/tech industries

While President Premadasa was busy with his garment sector experiment, nearby India was doing a different type of exercise. They were manufacturing and assembling electronic items for the large Indian market. True, India could not manufacture transistors and SCRs, but they could produce circuit boards with them for washing machines, televisions sets, and even, in some early cases, computers and peripherals. 

India assembles cars now – some of the largest car manufacturing plans in India are in nearby Tamil Nadu. Chennai is nicknamed ‘Detroit of Asia’ for its large number of auto component industries. That is only part of the picture. Coimbatore, known as the ‘Manchester of South India’, for its textiles, is a major industrial hub in South India and houses more than 30,000 small, medium and large industries. The world’s sixth-largest watch manufacturer produces its watches for the Indian market in a partnership with TATA. The Tamil Nadu state government owns the world’s biggest bagasse-based paper mills. This is exactly the type of industry portfolio one must look for in Sri Lanka. 

Most mainstream economists are pessimistic about developing the industry sector. They may have their own reasons. One such reason is the high cost of labour. This per se should not be a cul de sac. Opening up affordable labour from other South Asian nations through trade pacts can solve it. Political instability is another key issue. Resolving that is important and not just for this purpose. The list is long, so I may perhaps use another article to present possible hindrances and our options to tackle them. Still, one thing is clear. We talk about solving an unprecedented issue, so the solutions too may be ones we have ruled out previously for various reasons. 

Coming back to the topic, if industrialisation were our only transformation path, we must believe in it passionately. If we were not to have faith in it neither will the prospective investors. The slightest hint of our pessimism will rule out any opportunities we may have. It is a Herculean task building investor confidence given the current political and economic situation of the country. On the other hand, it is an ideal opening to make bold and blatant policy decisions we were afraid to make all the way. 

Space constraints prevent me from entering into a detailed discussion. That does not mean we shouldn’t get into that. If we were serious about our time, numerous hours we spend these days unnecessarily for filling our petrol tanks, which ideally should take no more than five minutes, our first task is to design a workable roadmap for the industrial revolution of Sri Lanka. Seriously, none of us wants to live in a low-income country. 

(The writer is a policy researcher. He can be reached at [email protected]. Ideas expressed are personal.)