Enabling local ICT firms: How it boosts the economy (commoner’s view)

Monday, 29 August 2016 00:01 -     - {{hitsCtrl.values.hits}}

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By Thareendra Kalapge

Economic recovery and the relaunch of sustainable economic growth seem to be underway, or at least we hear the Government talking about it. That’s actually a good start. That means that the Government understands the world’s and country’s economic situation. 

During the past year the Government has started to talk in the right language; it has talked about more jobs, making sure of more equality, sustainability, helping the underprivileged and educating young people in the best possible way.

So what is the role of the local business community or the role the country needs the local business community to play and how does enabling more local business firms inject a much-needed boost into the local economy?

To understand this we need to understand one key element – the country’s export revenue. Exports have been regarded as an engine for growth. Examining export growth (or decline) and growth in income could potentially give us the reality check which we might badly need. 

We have seen our export earnings in 2015 end up at $ 10.5 million compared to $ 11.13 million in 2014. They declined by 5.6% year-on-year in 2015 (refer table 1/source: Central Bank of Sri Lanka). 

While there is no problem on still focusing on traditional export industries like tea, rubber and garments, we need to understand that what got us here is not going to take us into the future. In other words, we should be getting a little tired of being known only for tea, rubber and garment exports. 

If we look at the world stage, exports of high technology products are giving a quick boost to the export incomes of several countries (refer table 3/source: World Bank), but unfortunately the numbers related to high-tech exports in Sri Lanka are dismal to say the least (refer table 2/source: World Bank). The above charts (table 2 and table 3) actually sum up the entire problem that the country is facing. 

While we have declining export revenue year-on-year, we are also facing declining high-tech export revenue. We are doing less than 1% from GDP and further declining in 2015.

While the idea that export can contribute to national growth and productivity is obvious, export-related high technology goods can provide a quick push and expansion to growth in trade. For example, local ICT firms’ technological advancements can create new finished products, consumer and industrial goods as well as new product market sectors. But the question is whether policymakers are creating the necessary ground situation for such change. 

Declining high-tech export revenue shows one thing and one thing only – a lack of manufacturing/product design houses in the country. The country seems to be ok with importing goods rather than building them here. This core problem is creating a negative impact for the Sri Lankan economy on multiple fronts. 

Let me put forward some interesting developments that have occurred as a result of our policymakers’ failure to correctly identify the issues at hand.

n As per the Central Bank of Sri Lanka, Total Migration for Employment in 2014 was around 300,000 and from that 1.8% was under the professional category. That is 5,400 professionals.

n If we divide the education budget and higher education budget allocations from a number of students, the Government spent roughly Rs. 3 million to produce a university graduate. 

n If 75% of that 5,400 are to be considered as local State-owned university graduates then do the math - more than Rs. 12 billion of our investment goes out of the country and that’s for 2014 alone. It’s like Sri Lanka is running a donation program to so-called developed countries.

n In a way, without fixing this core issue, the more we spend on education the more we donate to develop other countries.

Our education system is like an export-focused farm where we harvest, process and export the best quality products to consumers in the developed world. Good luck with 6% allocation for this education system without sorting the issue at hand.  

Increased allocation will just increase the export quantity. Our biggest problem is not producing professionals; our biggest problem is consumption. We do not use the skilled professionals which our education system produces, simple as that. We need more product design houses or manufacturing plants here in Sri Lanka so that we can consume the professionals we create and we need to start giving those professionals enough reasons to say no whenever developed countries dangle a permanent residence visa carrot in front of them. 

But can we blame those professionals for leaving? We cannot as we have no plan to consume them in a way that will also benefit them. That’s why we need more product design houses rather than service centres; so that the engineers we produce can work on the actual building of a product rather than just joining a company which imports the same product and handles the after-sales service of the process. 

A company in import and resale is working with just a 10% margin, so naturally that is not sufficient to allocate a salary that will retain professionals and prevent them from seeking employment in other countries. But product design companies or manufacturing plants easily make more than a 50% margin so they can retain these people by paying attractive salaries.  

The Government needs to understand that these professionals will contribute to creating more jobs and generate a positive impact by creating a whole ecosystem which will generate income paths up to the grassroots level. 

The role of Government 

In short, core issue can be sorted out if local communities begin producing goods and services for local consumption versus relying on imported goods and services. The question is in what industries should the country compete in the global economy of the future? What competitive edge should the country’s firms have that will make them unique compared to firms of other developing countries? What countries will be its main competitors in the years to come? What infrastructure, labour skills and technology will it have to develop to compete in a world where customers and products are constantly changing? 

I have heard ministers speaking about the competitive advantage of nations, that’s great. But nations do not compete with each other. It is the individual firms in those nations that fight competitive battles. 

For example, Taiwan or China does not compete with Japan for a share of the Asian technology hardware market. It is Taiwanese and Chinese companies that compete against the Japanese manufacturers. Kenya does not compete with Sri Lanka for shares of the world tea market. It is the tea plantations of Kenya and Sri Lanka that compete with each other to harvest, process and deliver the best quality tea to consumers at a competitive price. 

Thus, the unit of analysis in seeking keys to a country’s growth and prosperity must start with its firms. The question of interest is what conditions the Government of Sri Lanka will create to make its firms more competitive in the global economy.

First and foremost, the Government needs to start thinking about using solutions developed by local firms and giving local firms a fair opportunity to compete with global firms in local government procurements. 

If the Government starts to put financial and other conditions that are in favour or in line with global firms, and cannot be matched by local firms, then that is the end of it. Right now there is a risk that local firms spend a lot of money developing capability in Sri Lanka and then they loses out to a price and eligibility criteria mentioned in large national level procurements. 

The Government and its policy bodies need to avoid making decisions with a short-term and limited focus on cost minimisation and past experience on similar level projects with respect to individual contracts, rather than true value for money and national interest considerations. 

If the Government and its policy bodies concentrate on the past experience of the local firms on the same level of projects, no local firm will ever be able to take up a national level project as it is obvious that no local firm carries that sort of experience as some of those projects are one-time national projects which are very unique for a single country. Without the Government helping local firms to get that experience in Sri Lanka no local firm will be able to go global and bid for the same project in a different country in the same domain. That itself is the end of the high-tech export revenue conversation. 

Without local firms going global there will be no conversation about high-tech export revenue. There will be no conversation about creating 1 million jobs. There will be no conversation about reducing the impact of the brain drain. 

In conclusion, I hear many politicians arguing about the current economic conditions of the country. They might argue about why and whose fault it is but the core issue is very clear and all of them seem to know it. 

The more dollars going out of country the more dollar loans we need to take. In other words, we are suffering because too little cash comes in as well as a result of what happens to that money. The thing that politicians do not understand is that money is like blood - it needs to keep moving around to keep the economy going. When money is spent without the national interest in mind, we know that it flows out, like blood out of a wound.

The writer is the Chief Operating Officer at Epic Lanka Ltd.