Diversity of expanding exports of services and goods
Tuesday, 24 December 2013 00:01
By Shabiya Ali Ahlam
While experts have acknowledged that exports play a vital role in the development of any country, Sri Lanka’s performance in this regard has been poor in the recent past. This has raised concerns on the progress of the nation as it hopes to graduate to a middle income status in the near future.
Although the country has witnessed immense improvement in economic development, its poor exports performance across diverse sectors continues to be a worry.
To educate the public on the reality of the nation’s export situation, Pathfinder Foundation facilitated a public seminar in Colombo recently featuring top experts in the subject to present their views.
Titled ‘Diversity of Expanding Exports of Services and Goods: Beyond Conventional Thinking’, the seminar for which Hayleys Group Senior Economist Deshal De Mel was moderator, presented Verité Research Senior Economic Analyst Subhashini Abeysinghe as keynote speaker while Colombo Dockyard Managing Director/CEO Mangala Yapa, and Heritage Tea Group Director Marketing & Finance Mohan Mendis spoke from an industry perspective.
Industrial exports not picking up
With Agriculture currently leading exports, Verité’s Senior Economic Analyst Abeysinghe expressed this is worrying since in general economic theory industry services should be leading exports in countries moving from low income to middle income status.
Noting that a significant shift is yet to take place, Abeysinghe highlighted that the share of industrial exports has been declining in the composition while agriculture share is noted to be increasing. The slow growth in exports is attributed to the decline in industrial exports.
Although services were declining, following the end of the war it has been picking up mainly due to the revival of the travel and tourism sector. Despite this progress, agriculture has sustained its share, she said.
“Observed is the link between the industrials sector decline and the apparel exports. Apparel accounts for nearly 70% of total industrial exports. A different sector not taking its (apparel) place leads to the decline of exports in the industrial sector,” explained Abeysinghe.
The fact that the agriculture growth is price driven she said is more worry since the volume has not been growing as it should be.
Need for diversity
To overcome the current situation it is necessary for the country to diversify its products. Sri Lanka’s product concentration in the last seven years has increased instead of declining with the top ten products being largely driven by apparel, tea, and precious stones.
Although a similar situation prevails with regard to the market concentration, it has declined but is still noted to be very high since only five countries account for 50% of the nation’s exports according to Abeysinghe.
“This means exporters are vulnerable since they are dependent on only few countries and any negative development can affect the export growth in the country,” she said while stressing the need for diversity in both, the product and market base.
Elaborating further, she said the reason why Sri Lanka has not managed to diversify its products is due to nation growing at an intensive margin, which is selling same products to same markets.
While restructuring is observed to have taken place within product categories, shares of sectors such as food processing, which has potential, remains low.
In terms of markets the trend remains the same. However, a dramatic decline is observed in the USA market despite it being the biggest export destination for Sri Lanka. Abeysinghe pointed out there is a tendency for Asian markets since it is gaining momentum, but said the growth is still very slow.
Why is Sri Lanka performing poorly?
When looking at exports, a country is not alone as it is about dealing with international markets. “It is important to have an understanding of global developments and complement it with local developments that affect the performance,” asserted Abeysinghe.
Although Sri Lanka’s exports have been performing poorly, the world average exports have seen exponential growth from 2003 to 2008. World exports doubled from US$ 8 trillion to US$ 16 trillion in just six years. Previously it took 16 years for the world exports to double. Regardless of the fact that in 2009 there was a dip in world exports, it recovered and has been doing well in the recent past.
So why was Sri Lanka unable to be a part of this growth story? Abeysinghe said it is because the nation has not been able to successfully trade intermediate products. “Sadly, Sri Lanka is still heavily involved in exporting primary products. We are still not part of this trade. There is a need to be open to other types of international trade. Sri Lanka is still thinking of exports promotion in terms of increasing local content and backward integration. This is becoming out-dated in the industrial sector with increasing fragmentation,” she said.
With service intensity of manufacturing being the other reason for poor performance, the actual value transformation in the country is becoming increasingly insignificant, 5% to 10% of the entire product value.
“In Sri Lanka when we talk of export promotion, manufacturing is defined in terms of physical transformation. Hence the feeling that we don’t give enough importance to the service component that goes into manufacturing. But of course there are exceptions, and the exception always stands out is the apparel sector,” she noted.
According to Abeysinghe, the apparel sector has done well in this regard since it has shifted from merely stitching garments to creating designs and brands, and with the country gearing to position itself as a commercial hub, the sector is keen on getting into supply chain management as well.
Issues for SL exports
In terms of international trade rule framework, this has evolved greatly in the recent past. When looking at the emergence of trade agreements, it is no more about agreements only but now is also about scope. In the current context, trade agreements are increasingly about services, intellectual property, Government procurement, and others that cover a range of subjects. While the world is moving in a different direction in terms of trade agreements, Sri Lanka has yet to change its course since it has only few agreements and their impacts on exports have been relatively low.
“Compared to where the world is moving Sri Lanka is still lagging behind. One can blame it on conflict or other matters but when you look at it from today, the country definitely needs to change its direction,” she stressed.
While export growth of East Asian nations are driven by FDIs, the conflicts and few other reasons have resulted in Sri Lanka to perform poorly in this arena and has done worse in attracting export oriented FDIs, said Abeysinghe. Although following the end of the war, tourism, real estate, and infrastructure managed to attract such FDIs, other sectors have not been able to attract as much.
The nation has also been left out in areas where international trade has shown growth. It is imperative for Sri Lanka to understand its level of capacity and competitiveness to be a part of this growth, she noted.
Furthermore, exporters are faced with policy induced barriers in addition to natural barriers. Abeysinghe stated that when a country is going through a demographic or an economic transition, it will face a situation where it would no longer enjoy a comparative advantage it had. It is important for the country to understand and formulate ways in which it is going to face the competition without comparative advantage it earlier had. “Looking at industries such as tea and spices, for over hundred years we have been cultivating but have not taken care of our plantations as we should. These sectors have a problem in dealing with the declining comparative advantage, sustaining the same kind of growth, and contributing to the economy,” added Abeysinghe.
Despite having such a large institutional base to support the export sector, she pointed out that it hasn’t done too well in helping to achieve export performance. “There is so much debate and disagreement within the institutional setup and they tend to overlap and duplicate work. Managing macroeconomic policies are also important since it does affect competitiveness of exports,” stressed Abeysinghe.
Abeysinghe went on to say that while confidence is important in the sector, in Sri Lanka many are not confident about their capacities and competitiveness. With this mind-set she said it is difficult to negotiate and make use of trade agreements. “When exporters demand heavily on the domestic market, they demand for protection over market access, and eventually the way in which the agreements are used gets affected,” she noted.
Way forward for Lankan exports
Emphasising the need to go beyond the traditional thinking, Heritage Tea Director Mendis opined that one of the biggest truths according to him is that services are more tradable than goods.
There being tremendous opportunities in the world today where value can pass seamlessly across borders, services are the way forward for Sri Lanka. “We are a small island and don’t have the scale to compete with agricultural products. In cost and competitiveness we fall short of what is needed. The greatest opportunity is the services sector,” stressed Mendis.
Frowning on the idea of opening up more lands to increase production, Mendis disregarded the notion as a ‘bad idea’.
“We are already having conflicts between man and the environment. We need to protect our beautiful county for tourism which is contributing significantly to the GDP. It is better to preserve our environment than clearing the forest area for cultivation. This will not take us far in terms of progress and growth,” asserted Mendis.
Furthermore, he observed that Sri Lanka has been inward looking and has not given much thought on marketing outside the country. Pointing out that hardly any exporters in Sri Lanka are using market research, he stressed the need for it to growing the nation’s exports.
Untapped areas for growth: Maritime perspective
While Sri Lanka is mostly focusing on infrastructure for growth, Colombo Dockyard MD Yapa questioned if this alone is enough to reach the ambitious targets set by the Government.
As Sri Lanka has the geographical advantage to be a maritime nation, provided it looks after other aspects, continuous development of port infrastructure alone is not enough.
According to him, in the port arena Sri Lanka should also look at human resources, services, and regulations in a holistic approach.
“When we say shipping, today we are talking about logistic management. We are not only looking at harbours but also looking at road and air network, and ways to connect all three. It is important for Sri Lanka to exploit all these options,” he said.
Noting that it is imperative to look at total connectivity, Yapa stressed that a sector cannot work in isolation. Instead what is needed is an integrated approach where together the sectors see the big picture, opportunities, and strengths.
With Sri Lanka located at the tip of India, the two countries together will be the focus area for shipping in the future, he said. “India’s growths will definitely demand a lot of economic transaction to take place. However, both counties are not doing much to take up that challenge and soon the opportunity will be grabbed by someone else,” cautioned Yapa.
Lessons to be successful
Commending the apparel and the BPO sector for bringing success to Sri Lanka in high gain, Hayleys Senior Economist De Mel said when looking at the two, noted is that they are ‘well organised’.
With apparel having JAAF and BPO having SLASSCOM, he shared that both these associations are strong in two areas, which are in building global networks, producing and creating brands that are unique to Sri Lanka.
The apparel sector has positioned the county as a niche manufacturer of high quality products in an ethical manner whereas the BPO sector has positioned the country as a niche supplier particularly in financial and accounting services.
“From an overall export position we have to position and market Sri Lanka’s export proposition. This has evolved over the years and the biggest advantage we have now is the location and the recent policy changes have been able to capture the benefits of that,” expressed De Mel.
With the Commercial Hub Act becoming attractive when coupled with the existing FTA with India and the proposed FTA with China, Sri Lanka will become an extremely attractive nation for export oriented investments and FDI.
“This really is the key to FDI and that in turn is the key to driving exports in Sri Lanka. We now have to market and position Sri Lanka in this manner using it as a unique selling point. That is yet to take place. If we manage to achieve that, it will be one of the major driving forces from a national policy perspective,” commented De Mel.
Pix by Sameera Wijesinghe