Sri Lanka (SL) could export a significant volume of manufactured products like the South Eastern and East Asian nations, which have made it the major plank to achieve spectacular success in economic growth and create well paid jobs; but does not; why is the question. This article attempts to answer this puzzle especially by analysing the 2014 government budget and making recommendations to correct the situation.

Performance compared

Manufactured Sri Lankan exports (that is excluding apparel, cut/ polished diamonds and gems and jewellery) had achieved a share of only 22 per cent (US$2.255 billion) of total exports ($10.3 billion) or 3.7 per cent of GDP in 2012 (in which year total exports had declined to 17 per cent of GDP from a high of 33 per cent of GDP in 2004); the highest share reached was 24/25 per cent of total exports in 2005 and in 2007.

Manufactured exports are an amalgam of some 14 products none of which had achieved a share of 10 per cent of total exports; the lead product among them was rubber products which had a share of 8.4 per cent of total exports in 2012; this was followed by petroleum products (4.5 per cent), food beverages and tobacco (3.5 per cent) and electrical and electronic products (3.0 per cent), making a total of nearly 20 per cent; the size of the other manufactures could be imagined. (The share of high tech products was only1 per cent of manufactured exports).

In contrast Malaysia which had achieved independence a couple of years later than SL, exports high tech products such as semi-conductors, motor vehicles, pharmaceuticals, medical technology besides light manufactures, petroleum and liquefied gas etc, all worth $239.8 billion (2012 estimated).The size of the industrial sector was 41 per cent of GDP in 2012 (est.) . The share of high tech products was 43 per cent of manufactured exports.

Reasons for lagging behind

There are two major reasons for SL lagging behind other East Asian countries where manufacture for export is concerned. They are the failure practically of all governments to attract investments and improve national competitiveness of which productivity and innovation for differentiation of products and services are essential elements. Significant investments especially foreign direct investment (FDI) which are necessary, as our national savings (24 per cent of GDP in 2012) are inadequate to meet the estimated 35 per cent or so of GDP of investment necessary to achieve the objective of a sustained economic growth rate of 8 per cent; FDI could also provide the necessary technologies, skills that are scarce in SL apart from world market access for goods and services.

Investments could not be attracted because we have failed to develop the necessary enabling environment consisting of good governance, the rule of law, politically neutral public institutions and social harmony/stability, sought after by investors. The writer remembers when a Japanese Trade and Investment Mission which came to SL on the invitation of the EDB in July 1983 and were discussing the subject at the BMICH, riots broke out in the streets of Colombo and other parts of the country; the Japanese stopped the discussions forthwith and left the country. In the case of attracting investments, we have been paying for this sin ever since, as a determined effort has not been made to solve the ethnic problem to bring communal peace and harmony to this country; we have also failed to improve governance which has continued to deteriorate. So SL appears to have become an unsafe destination for good investments. In 2012 SL attracted only $776 million FDI while for Singapore it was a massive inflow of $57 billion and Malaysia did well with a large inflow of $ 10 billion (World Investment Report 2013, UNCTAD). This was the pattern in most years.

Where competitiveness is concerned, the main element is the ability to compete especially with the rest of the world; for this purpose tariff protection has to be reduced significantly (to pressurise firms to increase productivity and innovate to earn higher returns by satisfying customer needs).

In the 2014 budget we seem to have opted mainly for continuation of import substitution which as pointed out by economists has limited potential to generate economic growth as our domestic market is too small and does not provide sufficient demand. The other weakness of import substitution is, it tends to push up domestic prices and lower the export competitiveness of our goods and services due to the tariffs and various other levies at the point of import; import substitution also favours a small group of producers and not the large number of consumers.

There is now talk of removing certain items from the negative list of the Indo Sri Lanka Free Trade Agreement; this is a good move to reduce tariff protection and improve competition; the budget also proposes that SL should expand exports to destinations like China, Japan and Brazil (other than the hitherto favourite markets in the West). However, there are several issues to be settled, i.e. there is virtually no substitute for national competitiveness to expand exports; therefore we have to work at it continuously as circumstances change; we have to make sure that investments take place to create the capacity to export these goods especially by large foreign investors; the local enterprises concerned who are mostly SMEs, (who may protest; but it is the advantages accruing to nation that are important, not to individuals), have to be assisted by maintaining some degree of protection and to side –step these FDI by finding niche markets that these large investors do not compete in.

However, it would be unfair to say that the government has not made any effort to improve competitiveness of which productivity is an element. It has made a very commendable effort, where previous governments dillied and dallied, to improve physical infrastructure consisting of expressways, ports and airports, (though there are allegations that in some of these programmes costs have increased steeply and quality has dropped due to omissions and commissions ).

Now we see in the budget 2014 that these programmes are to be continued to develop rural infrastructure; not only that, we see proposals in the budget to develop tertiary level and technical education to develop skills as well as technology that could help to develop innovation to differentiate goods and services for export to earn premium/high export prices; productivity and innovation will certainly improve in these areas if adequate allocations made and implementation takes place successfully. In addition it appears an effort is also being made in this budget to improve revenue and prune expenditure to contain the budget deficit to realise macroeconomic stability (in addition to the current policy of maintaining a flexible exchange rate and low interest rates); this could help to reduce costs.

There is also a proposal to amalgamate banks/ financial institutions perhaps to improve their productivity and another to solve the problem of non- performing loans of the state banks.

All in all it is gladdening to see programmes to improve productivity and competitiveness being introduced; one must add that significant productivity improvement in other neglected factors of production areas such as labour (including the public service by making it politically neutral) and land has also to be realized and simplification of cumbersome procedures and documentation, along with a reduction of tariff protection to improve competition has to be undertaken to achieve full national competitiveness. In other words a comprehensive set of proposals is required to achieve national competitiveness – see www.slea.lk of the Sri Lanka Economic Association for such a complete set of proposals.

Why manufacturing units

First, manufacturing by large reputed local and foreign firms could provide well paid productive jobs and absorb the excess employment in agriculture (about 31 per cent of total employment), in the public service (about 1.2 million and counting) the men and women (over 1 million) slaving away in the Middle East and other foreign lands, (while their children are neglected/abused back at home) and also reduce the brain drain of skilled personnel which is supposed to be 10,000 per year; the reduction of staff in the public service will help to push up productivity in it; those seeking employment in foreign lands especially women and their families will be able to lead happier lives in the country since manufacturing units could provide them with alternate gainful employment.

Reduction of those employed in agriculture will boost the productivity of rural agriculture tremendously as it will result in a smaller number of farmers managing a larger area giving rise to economies of scale enabling the production of a greater output at a lower unit cost. The resulting reduction of encroachment of forested lands due to land hunger on account of farm fragmentation will lead to an abatement of the human -elephant conflict and a reduction of the felling of trees in catchment areas of our streams and rivers.

If it also results in crops selected on the basis of further processing possibilities being grown on a large scale, urban clusters could be established, where factories and services could be located to process the surplus primary produce of these farms; this will lead to the expansion of the food, beverages and tobacco sector among manufactured exports; this sector had contributed only 3.5 per cent of total exports in 2012 as noted above; being a country with an agricultural hinterland, this is a shame. Reforms of this type can be recommended for alleviation of poverty and reduction of inequality of incomes as the agriculture directly or indirectly supports about 17 million people in Sri Lanka; the urban sector also will benefit with an abundance of cheaper food as agricultural productivity will also increase. Additionally, this is one of the reforms that will give alternative employment to those in rural areas desirous of seeking employment abroad.

In the 2014 budget one does not notice such a medium to long term development strategy for agriculture; however, in dishing out tariff protection, subsidies ( which are a burden on the budget) and rural infrastructure development for the agriculture sector, the government has a trick up its sleeve- a short term political strategy to please the 17 million people depending on agriculture directly or indirectly; most of the opposition parties do not seem to notice it as they devote much of their time shouting about price increases which do not affect the rural sector so much. Not much of a voice is given to the essential needs of farmers connected to land, irrigation, planting material, credit and marketing of produce; no wonder they are losing elections.

Another reason why manufacturing units are important is that when they are accompanied by agriculture, generate additional services in the value chain and not the other way around; so opting for development of services as in Singapore may not lead to a significant increase in gainful employment among the 17 million living in rural areas. Singapore is a unique case like Hong Kong; it is a city state without a hinterland for development and its governments have worked hard over several decades to attract services from far and wide by developing a public service that is one of the most efficient and also the required infrastructure including the managerial, technical and the soft skills such as ability to communicate in foreign languages and be creative demanded by multinationals.

Conclusion

SL being a small country with a small domestic market has to export in order to speed up economic growth and earn sufficient foreign exchange to solve its balance payments and foreign debt problems. For this purpose it has to reduce its dependence on commodity exports such as tea and low value adding products like apparel and opt for production units (and allied services) like its spectacularly successful South East Asian counterparts.

The 2014 budget presents two different strategies- one for import substitution and a just emerging export strategy; the puzzle is how these can be reconciled with each other? There is no alternative other than relying on achieving national export competitiveness, while reducing the heavy emphasis on import substitution; both cannot be undertaken successfully at the same time.

It is to be noted that competitiveness along with improved productivity and innovation for differentiation alone is insufficient. A conducive/ business friendly environment for attracting investment particularly large and reputed FDI to create a capacity for production of (manufactured) goods and services for export has also to be created; if that can be achieved most of the tax incentives which add to the budget deficit may not be necessary.

(The writer is an economist)