Exporting hair!
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My curiosity was aroused when I came to know that “human hair” has been among Sri Lanka’s export commodity mix. I called one of my friends – Sanjeewa Rathnasekera at the Export Development Board (EDB) and, asked him to confirm if there have been records of exporting human hair. He took a little while and called me back, saying: “It’s true, there have been such exports!”
I said, “It’s wonderful. It’s 100 per cent local value addition; every dollar we earn is purely net foreign exchange!”
Sanjeewa started laughing! Ignoring his laugh, I asked him again: “What’s the export share? How many millions have we earned from this last year?”
He replied: “We have earned 10 dollars in 2018.”
I realised, why he was laughing, but asked him again: “Any records in the previous years?”
He said: “Not regularly, but in some years, such as 2010 and 2011 around 1,000 dollars a year.”
European tomato and
American water
After reading about “European tomato and American water” in my Down-to-Earth Economics column on March 3, some had expressed their concern over the “imported-input content” in our exports. The concern is that if the country is spending foreign exchange to import inputs into exports, then the net value of foreign exchange earnings is low.
This concern equally applies to the tourism industry as well. Tourism is an exportable commodity so that the foreign exchange that a country earns by selling a “tourist package” can be counted as export income.
If star-grade hotels in Colombo spend foreign exchange for importing food and drinks to serve tourists, then the net value of our tourist earnings is low. The principle applies to any good or service sold to earn foreign currency: Any good (such as apparel or rubber products) or any service (such as tourism or health) makes use of imported inputs.
While we earn foreign exchange by selling these goods and services to foreigners, we have to pay for the imported inputs that are used in producing them. As a result the net value of foreign exchange earnings is less than the gross value.
The good old-days
The flip side of the point is that the imported input content reduces the local input content: The higher the imported input content, the lower the local input content and, vice versa. If the local input content is lower, it means that such products do not have strong “backward” links to the domestic economy.
Now we have a sentimental policy issue, which has been dominant in olden-day policy-making and which is still haunting the hearts and minds of our times: We must produce and export “value added products” which would maximise our national gain.
The dominant policy-making based on “value added products” encouraged our traditional exports – tea, rubber and, coconut as well as non-traditional minor export crops, handicrafts and, jewellery. With all efforts, Sri Lanka could export only a little, but most of them were value added products.
Foot-loose industries
From the old “value added” notion, most of the new export industries such as apparel, leather products, sport goods, electronic goods and, machinery are all highly import-based; the imported raw materials, parts, and components account for large portion of the value of these products.
For instance, consider a garment item such as a shirt which require textile material, collars, buttons, hooks, plastic pieces, and packing materials, in which most of these parts are imported. Similarly, consider a pair of shoes produced in Sri Lanka: Outer-sole, inner-sole, upper-cap, strips, buckles and other parts and components in which some of these are imported. Depending on the size of the imported input content, the domestic content becomes smaller.
In fact, at the beginning these industries which came under much criticism due to their high imported input content were called “foot-loose” industries; they didn’t have strong backward linkages to the domestic economy.
However, new export industries were important not for the “unit value” of the domestic content, but for the “volume growth”. During the period of 25 years from 1950 – 1975, “value added” exports grew from US$300 to $500 million; within the next 25 years from 1975 – 2000, total exports dominated by “foot-loose” industries grew from $500 million to over $5,000 million.
Global value chains
A big step forward in changing export patterns in the world has been the emergence of “global value chains” – the production of parts and components of a commodity by many different countries and, then assembling it in another country.
Therefore, countries which have established connections to global value chains engage in “network” trade in terms of (a) producing and exporting “parts and components” of the commodities assembled elsewhere and, (b) assembling and exporting “final products” by importing parts and components from elsewhere. When we add the export values of both types, it is known as “network trade”.
By implication of network trade, the “unit value” of a commodity shared by an individual country is a tiny part of the total value of the product. However, the national benefit of participating in such production activities doesn’t depend on the unit value of the domestic input content, but the volume growth of the product and its exports.
Today we are not looking for products made in a single country; even if we find it, it is actually produced everywhere and, only assembled in the exporting country.
East Asia and South Asia
The economic progress of East Asian countries owes much to their integration into global value chains. China is known to be an “assembly centre” in East Asia, because most of the manufacturing activities in China are dominated by assembling parts and components produced by other countries to finish a final product and export it.
For instance, Apple products of iPad or iPhone that are assembled in China are actually designed and developed in the US and, produced in parts and components by many countries such as Japan, Taiwan, South Korea and European Union and exported to China for final assembly. Chinese value addition to Apple products is said to be about 2 per cent only.
South Asia is, however, not a region that has developed its links to global value chains, compared to East Asia. Even in Sri Lanka, the connections to global value chains remain weak.
Myth of domestic value
The age of global value chains have challenged the older notion of promoting “value added” exports. If it is value added products that we are looking for, then “human hair” is 100 per cent domestic value added because there is no “import content” in it. But the main issue is not the unit value addition, but the volume growth.
Even if there is imported input content, rapid export growth in terms of US$ millions and billions would bring about massive contributions to economic progress as it happened in East Asian countries.
Tourism
The tourism industry also depends on imported inputs, while the article on “European tomato and American water” refers to a case as such where there is imported food and drinks in the tourist hotel menu in Colombo.
By the way, it should be noted that Colombo hotels accommodate mostly the business travellers rather than those who arrive purely on tourist purpose. Therefore, hotels in Colombo cater to a different clientele. Tourist hotels outside Colombo attempt to add more local food and drinks varieties to their menu, while the tourists also consider experiencing local delicacies as an essential part of their travel experience.
Having imported inputs in exports is not necessarily a bad thing. In fact, not having imported inputs in exports is also not necessarily a good thing. Perhaps, it shows the constraints imposed by trade restrictions which can limit export growth by excessive import controls.
Particularly, the successful integration into global value chains require a fairly open import trade; even tiny changes in import taxes can wipe out the entire range of possibilities of the country to integrate into global value chains. This is because each country is contributing a small part of a whole product but in millions and billions of units, so that a minor import tax can eliminate the entire profit margin.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk)
File picture of a garments factory.