The Pathfinder Foundation (PF) has been organising a series of video conferences in collaboration with Harvard University. The objective of these seminars has been to expose Sri Lankan policy-makers, academics/researchers and business people to cutting edge work that has been undertaken at Harvard University, which has invariably been at the top of any international ranking of tertiary institutions. This seminar series has received the generous support of the American Centre.
The eighth and penultimate seminar was delivered by Prof. Eric Werker on ‘The New Normal for the Global Economy: A Way Forward for Countries like Sri Lanka’. The central thesis of his lecture was that there is no single formula for promoting private sector development for the whole economy. Instead, he identified four types of economic activity. A distinction was made between export-oriented businesses and those that cater for the domestic market. In addition there was also conceptual differentiation between enterprises that operate in a competitive environment and those that are in monopolistic/oligopolistic business structures.
Prof. Werker argues that business strategies in each of these four market segments are different and firms in each of them will make different demands of the state. Hence, he argues that each market segment requires a different strategy for private sector development and regulation.
On the basis of this typology, Prof. Werker identifies five archetypal economies:
1. Resource Rentier (countries with natural resource endowments that yield large rents e.g. oil and gas – Angola)
2. Entrepot (e.g. Dubai with significant onshoring)
3. Manufacturing Exporter (e.g. China)
4. Diversified Domestic (e.g. Argentina where the economy is dominated by production for the domestic market)
5. Transfer Addict (e.g. Pakistan with a large domestic economy dependent on transfers of aid and remittances)
Prof. Werker went on to emphasise that it was important to understand the political economy dynamics of the way in which enterprises in these different markets interact with the state. He concludes that policies generated by these relationships can be either “growth limiters” or sources of “growth success”.
Prof. Werker offered the following advice for promoting development in each of the four segments of the economy.
Priorities for developing exporters (Magicians) include: clusters, targeted infrastructure, development bank finance and export promotion.
Priorities for economies characterised by a large rent-yielding sector (Rentiers) include: hard headed negotiations and taxation, state-sponsored exploration and transparent management of resources.
Businesses producing for the domestic market (Work Horses) would benefit from: doing business-style reforms, reducing red tape, general infrastructure and finance, fair taxes and formalisation through incentives.
Businesses depending on state patronage (Power Brokers) would benefit from: containing political influence, anti-trust policies appropriate to the level of development of the economy and regulation of monopolies and prudent management of SOEs in the interest of promoting exports (Magicians) and competitive producers for the domestic market (Work Horses).
Prof. Werker indicated that Sri Lanka falls into the category of a “Transfer Addict” with its heavy dependence on transfers from abroad (remittances and foreign borrowing).
He concluded that Sri Lanka has the potential to transform itself from being a “transfer addict” to a “magician”. However, this can only be achieved through sound macroeconomic management, improvement in the doing business climate, reducing bureaucratic red tape, continuing with ongoing infrastructure development and implementing other economic reforms.