The digital economy is relevant to all economic activities in the country. Since it is the main pillar of the emerging economic system in the globe, Sri Lanka cannot ignore its presence. Hence, Sri Lanka’s future economic prosperity depends on how far the country is able to surf in the modern digital world and adopt high digital technology to its production methods
Calling Sri Lanka an agriculture-based country is a misnomer
A widely-held view by many Sri Lankans is that Sri Lanka was an agriculture-based economy in the past and it should be so even in the future.
The first part of this argument is only half-true. The second one has been presented without proper understanding of how economies are being framed in the future. A clue to this second one was given by a young researcher attached to the Institute of Policy Studies or IPS – Kithmina Hewage – in a recent interview with Biz-in-Focus hosted by a popular television channel in the country (available at: https://www.youtube.com/watch?v=75LUjjAssAU&feature=youtu.be&list=PLwBEINflt3JHSgenB9VL6IbUNMYoSTOTJ ). The young researcher revealed that the Fourth Industrial Revolution is in its full swing now with its main ingredients involving artificial intelligence, robotisation and adoption of ITC for production, distribution and consumption. If Sri Lanka does not attune itself to this new wave, the result will be catastrophic for the island economy.
Sri Lanka created prosperity in the past via trade
From ancient times, Sri Lanka was a country which had depended on both agriculture and trade for prosperity. Even prior to the colonisation of the island by migrants from India, there is evidence that it was visited by traders who had brought goods from the rest of the world and taken away the produce bought from local residents, the two main functions of trade.
According to the Great Chronicle of Sri Lanka – Mahavansa – Prince Vijaya and his attendants had been served with a rice meal by local princess Kuweni having cooked it out of rice salvaged from ships that had been sea-wrecked. Though the country had cultivated grains and other essential food items within the island by using man-made irrigation schemes, such production had run into shortages very often prompting it to import them from India and Siam, now known as Thailand.
Hence, the country sustained its prosperity by tapping in to its location advantage of being on a convenient naval route that had connected the East with the West. Accordingly, the goods produced in all the countries in the naval route had been brought to Sri Lanka, stored in trading centres and sold at a profit to visiting traders.
In modern times, this trade is known as ‘entrepot trade’ in which trading centres like Singapore and Dubai have been specialised today. As reported by the Egyptian geographer Idris, during the reign of the King Parakramabahu I from 1153 CE to 1186, alcohol had been brought to Sri Lanka from a land known as Arak. The King had bought all that alcohol and established a monopoly in the commodity. Then, it had been resold to traders at prices fixed by him.
During the Portuguese and the Dutch periods, the same trade pattern had continued since that was the lifeline of the island. During the British period too, the country depended on foreign trade for sustenance and prosperity with the exception of three tree crops – tea, rubber and coconut – being introduced as the country’s new export products. Till about mid-1980s, the country’s economic structure depended on these three crops.
A promising economy at the time of independence
When Sri Lanka became independent from the British in 1948, in comparison to other South Asian countries, it was a nation of promise envied by its peers. The British had left the nation with a well-organised and well-disciplined civil service that could serve the nation as its main pillar of economic growth. It had inherited from the British a massive volume of foreign exchange assets sufficient for paying for 17 months of future imports.
The country’s indebtedness which has been the bane of the nation today had been at a very low level: foreign debt at 4% of GDP and local debt at 14% of GDP. The government budget was in a very healthy position with an average deficit of about 2% of GDP. The rupee was exchanged for the US dollar at the rate of Rs. 3.32 per dollar. Thus, Sri Lanka had all the prerequisites for a fast growing economy.
Having taken these favourable factors into account, a visiting World Bank delegation had recommended to the government in 1952 that, since Sri Lanka would not be able to absorb all the people joining the labour force through agriculture alone, it should take measures to develop both power and energy and industries. It was this recommendation that was ignored by Sri Lanka in the few decades to come.
Failure to continue with structural changes
After the open economy policy was adopted by Sri Lanka in late 1977, there was some structural change in its economy. The country’s reliance on the three tree crops for earning the bulk of foreign exchange (about 90%) and producing national output (more than a third) was reduced significantly. Instead, a new industry in the form of textiles and apparels was added to the country’s industrial sector thereby increasing the share of industry in the total output close to 30% and in export earnings to about a half of total exports.
Simultaneously, the services sector, specifically the banking, finance and insurance, on one side, and trading activities, on the other, was expanded significantly, making it an important contributor to national output as well as to economic growth.
Sri Lanka’s future depends not on re-establishing a feudalistic agri-economy but a globally connected high technology involving digital economy. Even to modernise agriculture, Sri Lanka has to introduce technology to agriculture. At present, it is only those who have dropped out of schools that have gone into agriculture today. It is necessary to equip this group with modern cultivation and farm management methods, both of which come from new technology. When the productivity of the agricultural sector improves due to the adoption of new farming methods, the average costs of farm products will fall increasing farmers’ profit margins. It will make farming an attractive occupation.
These structural changes had helped Sri Lanka to connect itself to the global economy to some extent as it had done during ancient times. However, Sri Lanka had failed to take this momentum forward and be a rising partner of the global economy as many East Asian economies, notably, Singapore, South Korea, Taiwan, Hong Kong, China and Malaysia, had done in the last few decades. Today, Sri Lanka is being threatened in the global markets by new entrants like Thailand and Vietnam. This unsavoury development in fact amounts to degeneration of Sri Lanka’s position from being a leader to a laggard in the global arena.
Challenges faced by textiles and apparel industry
The textiles and apparel industry helped Sri Lanka in the three decades beginning from 1980 to address many of the burning issues the country’s economy had been facing: provision of employment to rising labour force, supplementing foreign exchange earnings and making an important contribution to country’s economic growth. However, this industry is facing two challenges today. One is coming from within the economy domestically and the other from external developments over which Sri Lanka has no control.
Rising wage costs and eroding competitiveness
The domestically emerging challenge is the erosion of its competitiveness due to rising labour costs. Thus, it is losing markets to new entrants like Bangladesh and Cambodia which still are blessed with a pool of workers who are willing to work for relatively low wages. For instance, a garment worker in Sri Lanka expects a monthly emolument of about $ 200. In Bangladesh, a factory owner can hire a worker for half that emolument. As a result, Sri Lanka’s garment manufacturers are now shifting their investments to overseas destinations. With no new investments forthcoming, the textile and apparel industry will be a slowly dying force in the years to come.
Bazaar Effect making industrial nations just traders
The external challenge is the development of a new production system in the textiles and apparel sector in the global economy. This industry shifted from the major markets in developed countries to low-wage developing countries in early 1970s to take advantage of the low costs prevalent in the latter group of countries. This production process came to be known as ‘outsourcing’ or ‘off-shoring’.
However, as the German economist Hans-Werner Sinn presented in 2006 in a paper titled ‘The Pathological Export Boom and the Bazaar Effect: How to Solve the German Puzzle’ published in The World Economy, the outsourcing process has resulted in converting developed countries to Bazaars that do only trading and not manufacturing. The result has been the loss of manufacturing employment from the developed world to developing countries. The discontent among the voters in developed countries has been successfully exploited by the crafty politicians who have now waged war against outsourcing of industrial production to the developing world. ‘Trumponomics’ coming to prominence in USA today is a good example for this emerging wave. The pressure exerted by the political authorities in the developed world to shift manufacturing industry back to their own shores is now gaining ground and it cannot be ignored anymore by the manufacturers in that part of the world.
On-shoring and near-shoring of the textiles and apparel industry
In the case of the textiles and apparel industry, this has been facilitated by new developments in automation and artificial intelligence. Accordingly, the textiles and apparel industry is returning to the developed world in a production process now known as ‘on-shoring’ or ‘re-shoring’ as against the previous ‘off-shoring’. According to a report published by Eurofound, a research arm of the European Union, in 2019 under the title The Future of Manufacturing in Europe, during 2014-8, a total of 146 cases of re-shoring has taken place in four major economies in Europe, namely, UK, Italy, France and Germany (available at: https://www.eurofound.europa.eu/sites/default/files/ef_publication/field_ef_document/fomeef18002en.pdf ).
Location of production close to markets: near-shoring
There is another development that has caused the industry to get shifted to countries close to the major markets. In a report published by McKinsey Institute in 2018 under the title ‘Is Apparel Manufacturing Coming Home?’, it has been found that the need for having manufacturing facilities close to markets has shifted them to nearby countries in a process known as ‘near-shoring’ (available at: https://www.mckinsey.com/~/media/McKinsey/Industries/Retail/Our%20Insights/Is%20apparel%20manufacturing%20coming%20home/Is-apparel-manufacturing-coming-home_vf.ashx).
Since a garment product produced in Sri Lanka, China or Bangladesh takes at least 30 days to reach markets in Europe or North America, the transit time has been cut to 3 days by locating these factories in countries close to the markets. Accordingly, Europe is being served by on-shored factories in the UK, Portugal and Macedonia and near-shored factories in Turkey, Tunisia and Morocco. Similarly, North American markets are served by on-shored factories in USA and near-shored factories in Mexico, Guatemala, Honduras and El Salvador.
The McKinsey Institute has estimated that by 2025 about 55% of the global textiles and apparel trade will take place under the on-shoring and near-shoring production system. This is surely a formidable challenge to Sri Lanka’s textiles and apparel industry.
The Fourth Industrial Revolution
The world is entering today the fourth industrial revolution, a term coined by the convenor of the Global Economic Forum, Klaus Schwab, by his 2016 book under the same title. According to Schwab, the world is now filled with new technologies like ubiquitous mobile supercomputing, intelligent robots, self-driving cars, neuro-technological brain enhancements, genetic editing and many more. These new technologies are changing the way people live, work or relate to each other.
The artificial intelligence and machine learning-robotisation will turn the present production methods upside down. Many will lose their jobs. Those who study today to get employed in a particular job in later life will find those jobs disappearing once they complete their studies. With machine learning artificial intelligence and robotisation, jobs will be transferred from labour abundant developing countries to labour deficient developed countries. Whether Sri Lanka likes it or not, it cannot insulate itself from the consequences of the oncoming fourth industrial revolution. All it can do is to prepare itself to face the new change and become an active partner of the global production methods.
The global production sharing networks
The emerging production method is that components for a final product is produced in a number of production units located in the same country or in different countries. Accordingly, no country is able to claim ownership to any particular product today. For instance, it has been documented that parts for iPhone 6 have come from 400 odd production units located in more than 40 countries, while it is finally assembled in a factory called FoxConn located in China. Hence, iPhone 6 can claim itself that it is a global product assembled in China. This is traditionally known as the global supply chain but the Sri Lanka born economist Prema-chandra Athukorala calls it ‘global production sharing network’ since the whole world gets together to share the fruits of such products. Sri Lanka’s future depends on how successfully it can join this network.
Need for acquiring technology
Already East Asian countries like Singapore, Malaysia, Thailand and Vietnam have become partners of this global production sharing network. The prerequisite needed by a country to join this network is the acquisition and adoption of high technology. A country can acquire technology by getting it from the rest of the world or developing it domestically. Sri Lanka’s present capacity to develop technology domestically is limited and therefore the country should acquire it from others who have developed it.
One way to get technology from outside is to buy it from foreign developers but it involves making regular payments to them. Hence, the more cost effective manner of acquiring technology is to invite foreign business firms that have developed new technology to invest in Sri Lanka or get into bilateral economic partnership programs.
A likely candidate for this is the manufacturing of a battery which is more powerful but smaller in size and lighter in weight to store solar energy for subsequent use and power all the electrical vehicles that would be the main mode of transport in a few decades. Given the present state of Sri Lanka’s economy, the attraction of this type of technology to the country is a must today.
Future is clear for Sri Lanka
Hence, Sri Lanka’s future depends not on re-establishing a feudalistic agri-economy but a globally connected high technology involving digital economy. Even to modernise agriculture, Sri Lanka has to introduce technology to agriculture. At present, it is only those who have dropped out of schools that have gone into agriculture today. It is necessary to equip this group with modern cultivation and farm management methods, both of which come from new technology. When the productivity of the agricultural sector improves due to the adoption of new farming methods, the average costs of farm products will fall increasing farmers’ profit margins. It will make farming an attractive occupation.
Join the digital economy
The digital economy is relevant to all economic activities in the country. Since it is the main pillar of the emerging economic system in the globe, Sri Lanka cannot ignore its presence. Hence, Sri Lanka’s future economic prosperity depends on how far the country is able to surf in the modern digital world and adopt high digital technology to its production methods.
(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected])