Little from “little by little”
View(s):At two different forums that I attended recently I had the opportunity to listen to some comments centred on two questions. I write below the comments I was listening to, because the views embodied in the comments are not random, but widely held views.
One was about export growth in relation to the current exchange rate problem:
“How can we say that Sri Lanka does not have sufficient foreign exchange earnings, when we export more than US$11 billion worth goods a year and another $8 billion worth services? On top of all that we even get $7 billion remittance sent by our migrant workers, don’t we?” The question sounds like that the country is well-off with massive amounts of foreign exchange earnings every year.
The other comment was about the negative consequences of foreign direct investment (FDI),
“When we have our own local small and medium enterprises (SMEs) and our own savings for investment, why are we worried so much about FDI? We should be worried about our SMEs. The foreign investors will even take away from the country much more than they bring in.”
I asked my friend – an expert in the area of management studies, who was sitting next to me-: “How much is the average profit rate of a company?” He said: “About 10 – 20 per cent; why?” I replied: “Well, according to that comment, foreign investors take back more than they bring in. If you say that the profit rate is that much, I wonder how it is possible.”
The connection
The main question that I am taking today is not whether these two comments are right or wrong. In fact, it is not a question of whether they are right or wrong, but rather when they are translated into economic policies “whether such policies would take the country where the nation wants to be”.
Therefore, the question is rather on the economic outcome that we anticipate in the years to come.
The two comments were independent from each other, but by accident they are two important pieces of the same puzzle: In order to achieve rapid economic progress the country needs to increase production on the one hand and that production should be directed at exports on the other hand.
The first comment is about foreign exchange earnings through exports and other sources such as remittances. The second comment is on the means of achieving that export growth through SMEs and our own savings for investment.
They are connected to one another from another dimension as well: FDI itself is an important source of foreign exchange earnings, but it has been disregarded in both comments.
Foreign exchange earnings
The problem of exchange rate depreciation can be stopped immediately, irrespective of its secondary effects. You don’t need to know economics to do that! The only thing that you must do is “start giving strong antibiotics regardless of side effects”. Start pumping the foreign exchange reserves to the market so that depreciation will come to a halt.
The Central Bank has accumulated about $7.5 billion reserves, while if it is not sufficient we can start foreign borrowing.
The chronic problem is not the exchange rate depreciation; rather it is a symptom! The export growth is the main “stable sources” of foreign exchange earnings so that weak export growth has been the chronic issue.
Export performance
Let’s elaborate the issue a little bit more to understand why it is a chronic issue. About 25 years ago (1992) Sri Lanka and Vietnam, both countries had almost the same level of exports which amounted to about $2.5 billion. Exports from Sri Lanka have grown, as the above discussant also mentioned, up to $11 billion, while exports from Vietnam grew to $214 billion.
It is interesting to note the export performance in Bangladesh too, one of our neighbouring countries in the South Asia region. About 20 years ago (1997), Sri Lanka and Bangladesh, both countries, exported less than $5 billion worth exports. By last year, Bangladesh had improved its exports to $36 billion.
File picture of tea, one of Sri Lanka's traditional exports
Is it possible to say that we have a good track record of export performance or we do have a good outcome of our export strategy? What is more interesting is that both Bangladesh and Vietnam are still poorer than Sri Lanka: Per Capital GDP is $1500 in Bangladesh and $2300 in Vietnam, compared to $4000 in Sri Lanka. But the indicators show that these countries have the ability to surpass Sri Lanka sooner than we think.
Production and investment
Export expansion requires production and, production requires investment. This is where the second comment fits well with our discussion. There is no doubt that in the good old days, countries progressed with much emphasis on their own strength: Savings mobilisation was based on local efforts, “collecting and collecting Cent by Cent” for investment. They were invested in local SMEs awaiting for 100s of years till they become global business giants and conquer the international markets.
While we appreciate that effort and recognise the ability of the local SMEs to become global business, there are alternative paths to be taken easily and quickly: the same progress that we expect in 200 years can be produced within 20 years!
Over the past four decades, Sri Lanka has sustained on average 5 per cent annual growth rate while maintaining private investment at about 20 per cent of GDP. If we expect the Sri Lankan economy to grow by on average around 8 per cent per annum, then our private investment should rise to over 30 per cent of GDP; this is about $10 billion to begin with!
Foreign investment
There is no dispute over the fact that Sri Lanka does not have the capacity to generate that much investment annually. However, in today’s context it is also not at all a matter for disappointment because about $1.5 trillion worth FDI flows take place annually. These FDI flows seek better locations all around the world for the location of businesses.
If you calculate just one percent of the world FDI outflows to Sri Lanka, it will amount to $15 billion! It has to be a topic for serious policy discussions and policy reforms: why even that 1 per cent does not come to Sri Lanka? The simple answer is that there are many other countries in the neighbourhood which provide better investment locations to FDI flows.
While Vietnam has improved its FDI inflows to over $14 billion last year, Bangladesh has surpassed even Sri Lanka by recording over $2 billion last year. Until last year Sri Lanka’s annual FDI flows were less than $1 billion.
Investment versus borrowings
Every year Sri Lanka has been borrowing from abroad more than the foreign investment it receives. Sometimes, I wonder why many of us in Sri Lanka favour borrowing more than investment! Some may criticise and even come forward to protest against foreign investment, but they hardly engage in such activities against foreign borrowing.
The above comment made by the discussant is appropriately fit into borrowing rather than investment: When we borrow, we pay back more than what we borrowed.
But when we receive investments, it generates much more income within the country than its profit rate which is perhaps taken away from the country.
It is a more pragmatic approach to replace foreign borrowing with foreign investment.
FDI is another stable source of foreign exchange earnings which would accelerate export earnings. Until and unless the country gets these two types of foreign exchange sources right, the chronic illness of the economy would continue to exist.
(The writer is a Professor of Economics at the University of Colombo. He can be reached at sirimal@econ.cmb.ac.lk)