Practical process of increasing wellbeing of all Sri Lankans
The general impression among many is that the wellbeing of the people of Sri Lanka (SL) has not increased in recent times while prices have skyrocketed. The poor in the country defined as below US $ 2 per person per day is reported to be 24 per cent of the population in Malaysia which gained independence a couple of years after SL where it has been brought down to 2.3 per cent of the population. Table below gives a comparison of SL’s economic performance vs that of a few Asian countries.
Investment
The writer has pointed out in these columns before that in 1960, SL’s per capita income was $160, while that of South Korea was $110. Table 1 shows how by 2012 South Korea has been able to increase its per capita income in spectacular fashion while that of SL has languished at a low level. The main reason for this debacle is that reputed investments particularly foreign direct investment (FDI) capable of bringing in not only capital but also modern technologies, skills and global market access have bypassed SL.
Negative investment/enabling environment
Why has this happened? This is the basic question that we have to ask ourselves and take appropriate action. The general answer is that SL’s investment/business environment has not been positive enough. Investors including FDI generally look for social, political and economic 
stability to lessen their risks and earn more. More specifically this boils down to good governance with fair, efficient and effective public institutions, and good law and order conditions particularly property rights to protect their investments as well as predictable policies and incentives. Political parties in their foolish rush for election victories at the expense of the nation have not realised the value of these conditions. These can only be put right by introducing constitutional reforms like the separation of powers among the executive, judiciary and the legislature (parliament has to be made supreme while the other two wings of government are made independent of each other but reporting ultimately to the first), restoration of the 17th Amendment and introduction of freedom of expression.
Additionally the investors look for a stable fiscal and monetary climate . We have not been wise enough to spend less on consumption and invest more by balancing the government budgets. Investors and FDI also require labour with technical and behavioural/soft skills like creativity, ability to achieve targets and communication especially with foreign clients at least in English and of course developed physical infrastructure like paved roads and steady supplies of electricity and water. Recently, however, physical infrastructure like roads, urban facilities and telecommunications has improved tremendously in spite of various allegations). But we have not been intelligent enough at least to develop our vital human resources to create the technical and soft skills required by investors. We have also mischievously spent our time creating unrest and divisive tendencies among the various communities from 1956 for short term political gain, inviting international condemnation (described as ‘conspiracies’ against little SL). These reached crisis proportions in July 1983 when riots broke out chasing out a Japanese trade and investment delegation meeting at the BMICH at the time. The American electronics giant Motorola had to face the same fate. Investors have kept away as the investment climate has never improved since then. It is now time for us to be mature enough to think on a long term basis and create a well governed united/ integrated Sri Lankan nation with equal rights for every citizen and the necessary facilities and the skills to face an uncertain world but get the maximum to realise prosperity and alleviate poverty; with such good governance the so called ‘conspiracies’ also will disappear.
Low Productivity
Paul Krugman once said “productivity isn’t everything, but in the long run it is almost everything”. The above-mentioned problems have led to very poor global competitiveness/productivity as well (productivity could mean getting more output and return from inputs to lower unit prices further). See Table 3 for SL’s low productivity, global competitiveness and export performance – competitiveness can be described as the ability to out- sell competitors not only due to low unit price but also due to differentiation of products and services. Differentiation means the creation of uniqueness of quality, design, branding etc of goods of and services using an ability to innovate to satisfy identified customer needs. Thus productivity alone is not ‘everything’ or sufficient to be competitive. Number 3 in Table 3 gives the responsibilities of both the state and the private sector.
Economists have repeatedly pointed out that SL being a small country with a small domestic market has to enter the larger export markets for rapid economic growth through higher productivity or economies of scale and innovation. Instead we have opted for import substitution/ protection supported by high import duties and levies although the domestic market is too small to drive growth. When protected in this manner and profits are satisfactory, firms become sluggish at further investment and innovation. If on the other hand import tariffs are lowered (leaving a reasonable degree of protection for local enterprises) competition among them pressurises them to out -do each other and earn more by further investment to expand production and innovation of goods and services (see number 3 in the chart- responsibility of business firms). If we had done this supported by investment, exports would have risen by now and the large trade deficit of $8 billion (exports $10 billion and imports $18 billion in 2013) and the substantial external debts (59 per cent of a GDP of $ 67 billion in 2013) would have been reduced or wiped out.
Low productivity of factors of production
Let us now look at the chart again – a feasible pathway for achieving prosperity and alleviation of poverty- in greater detail. Numbers 1, 2 and 3 have been dealt with already. Number 4 (a duty of the state mainly) needs much emphasis. It has to do with the productivity of the different factors of production/ markets like labour, land and capital. Table 3 indicated that TFP or the efficiency of the economy of SL is one of the lowest in the Asian region. The productivity of land/agriculture as shown in Table 3 particularly is very low in SL due mainly to the fact that the size especially of about 50 per cent of over three million farm holdings is too small – less than ¼ acre. Further fragmentation is making it worse and this happens to be one of the causes for low food production leading to under-nourishment and hunger among the acutely poor (6.5 per cent of the 
population under the official poverty line).
The land holdings have to be consolidated by giving outright ownership (about 80 per cent of the land is owned by the government) to convert them to larger units to make them commercially viable accompanied by the absorption of excess employment of about 30 per cent in the agriculture sector out of total employment, by establishing/ investing in manufacturing units mainly in rural areas.
The productivity of labour is also low mainly due to the complexity of some 45 labour laws. Another reason for this is the out of date education system that does not produce the technical and behavioural/soft skills demanded by businesses. These cumbersome procedures should be rectified in consultation with the stakeholders.
In addition, in order to improve productivity, the value chains or the supporting industries (see number 5 in the chart – responsibility of the state) like planting material producers, extension providers, cold rooms, warehouses, transporters of produce and marketers especially in agriculture have to be developed/supported. Another strategy for this purpose is increasing the quality of goods and services to keep pace with international standards (number 6 in the chart shows the duty of the state and the private sector).
Conclusion
Reaching prosperity and alleviation of poverty is a simple matter of consuming less, investing more to produce more goods and services mainly for export while substantially improving productivity and competitiveness. This requires maturity, integrity and a passion especially on the part of the leaders to obtain the best social and economic conditions for the people by following a path like the one depicted in the chart (see also the economic development proposals in the Sri Lanka Economic Association website – www.slea.lk). If we avoid the ‘mischievousness’ at politics and ideology and practically and consistently follow the suggested path we might achieve prosperity in about 20 to 30 years. It has also to be monitored to check progress and change course if circumstances change. If we do not do so we might have to join the ranks of a state like Somalia, described as a failed state. Let us appeal to the leaders and the rest of the public concerned to avoid this sad scenario by adopting a path like the one indicated above.
(These are extracts from a book to be published by the writer who is a veteran economist. He can be reached at loyani@sltnet.lk)