Salary that goes with age
View(s):
Old currency notes and old coins.
Nakamura-sensei, a young university lecturer from Japan, came to Sri Lanka in the mid-1960s and joined the Peradeniya University. “Sensei” is the Japanese term with a sense of respect used to address any type of a teacher, while “san” is the term for all others.
Nakamura-sensei spent a couple of years at Peradeniya University doing his research work as well as learning Sinhala and Tamil. He also made many Sri Lankan friends there, while some of them were also the young lecturers from the university.
For his living expenses, Nakamura-sensei brought his own salary from Japan which was transferred every month to his bank account in Sri Lanka. The bank converted every 100 yen from the salary of Nakamura-sensei just for 1 Sri Lankan rupee; the exchange rate between the two currencies was just one cent per Japanese yen.
Interestingly, when his Japanese salary was converted into Sri Lankan rupees, it was lower than the university salary of his Sri Lankan friends who were in the same position and at the same age. An assistant lecturer at the Peradeniya University was drawing little more than Rs. 600 a month, then, as the take-home salary.
Sri Lankan salaries
The Sri Lankan lecturers who did their postgraduate studies in the UK at that time, used to do the same thing as Nakamura-sensei did; as I learnt from some of them who later became my own teachers, the Sri Lankan salary was enough for them live in the UK with their families.
By the way, having completed the studies, many of them didn’t forget to buy a motor car and ship it to Sri Lanka before leaving the UK. It was a time that European motor cars were common, while the Japanese cars were not yet in the world market. As import controls had already initiated in Sri Lanka, domestic prices of motor cars were high in the domestic market.
With all that, why not bring a motor car from the UK when returning home?
Age and salary
It was about 35 years later, that I began to associate with Nakamura-sensei, who was then serving as a Professor of Economics in Japan. Once when I met him at his University in Kyoto, he jokingly mentioned that “Here in Japan, our age and our salary go together”.
He continued to explain what he meant: “Now I am 60 years old, and my salary is 60 mang yen”.
What he said in a Japanese way was that his salary was 600,000 yen, because “mang” is the Japanese name for 10,000-yen note.
By then, the exchange rate between Sri Lankan rupees and Japanese yen had changed so much; it was 70 cents per Japanese yen in the year 2000. When I converted 600,000 yen into Sri Lankan currency, it amounted to Rs. 420,000. I compared it with the salary of a Sri Lankan professor at the time, which was Rs. 60,000 a month.
What a change in just over a period of 35 years! Where was the problem? Was it a problem of differences in managing the exchange rates between the two countries or something else? I thought of discussing this issue today, not for analysing Japanese and Sri Lankan salaries, but its underlying economic reality.
Exchange rate movements
We could immediately note that Sri Lankan rupees and Japanese yen have moved exactly in opposite directions. Rupees per US dollar has continuously increased throughout the history. On the contrary, Japanese yen per US dollar has continuously decreased; only after 2012 Japan was able to reverse it with a deliberate attempt.
At that time in the 1960s, a US dollar was about 360 yen in Japan. It was a fixed exchange rate system under which countries had pegged their currencies to the US dollar. As this system collapsed in the early 1970s, Japan along with many other Western countries moved into what we call today, the floating exchange rate system.
Since then, the Japanese yen became stronger and stronger; this means Japan needed fewer and fewer yen to exchange for a US dollar. It was 106 yen per US dollar by 2000, and 83 yen per US dollar by 2010. Under the floating exchange rate, the foreign currency inflows and outflows – in other words, supply and demand – determine the exchange rate.
It is clear that the Japanese yen that was held fixed against the US dollar should have been highly “under-valued” before the 1970s; when it was left in the market, it began to appreciate steadily.
Opposite directions
Sri Lanka gave up the fixed exchange rate in 1977, and started off its floating exchange rate as 16 rupees per US dollar. Since then, the rupee became weaker and weaker against the US dollar; this means that Sri Lanka needed more and more rupees to exchange for a US dollar.
It is clear that the Sri Lankan rupee that was held fixed against the US dollar should have been highly “over-valued” before 1977; when it was left in the market, it began to depreciate. Even before that in 1968, the government had already devalued it once, because it was difficult to hold fixed.
Even after 1977, it was not entirely the market forces that determined the exchange rate; it was a “managed floating” system under which the Central Bank continued to intervene in managing it.
The differences in exchange rate movements in Japan and in Sri Lanka can explain the differences in salaries; but it still leaves with us the important puzzle to solve: Why did the two currencies move in opposite directions?
Heart of the puzzle
In the heart of the puzzle is the international trade, which determines the exchange rate ultimately. I mean the “trend movement” of exchange rate rather than its daily ups and downs.
Japan started its export drive with less than US$1 billion before 1950, and exceeded $50 billion in 25 years. Today, Japan’s exports amount to over $700 billion. Together with that, Japan has been able to sustain a healthy trade surplus, which had led to a strengthening yen against the US dollar.
Sri Lanka commenced its export drive after 1977 and had reached $1 billion exports in 1980. In 25 years’ time by 2005, Sri Lanka was able to increase it to $6 billion. Today the country’s exports have reached $12 billion level. Together with sluggish export growth, Sri Lanka has faced an increasing trade deficit, which has continued
to weaken the rupee against
US dollar.
By the way, rapid export expansion makes real economic growth higher and sustainable, allowing people’s income to rise fast too. Japan had maintained about 10 per cent average annual rate of growth until early 1970s.
The worst case
Someone can raise the question: What about other types of foreign exchange inflows? It is, perhaps, worthwhile distinguishing between long-term foreign exchange inflows which are “more stable” and, short-term inflows which are “more volatile”.
The “trend movement” of the exchange rate which we discuss today, is determined by more stable foreign exchange inflows which can include export of goods and services in the first place, and secondly foreign direct investment inflows.
The point is, however, in all these “non-volatile” foreign exchange inflows, Sri Lanka has never performed well. In spite of greater potentials, today Sri Lanka’s service exports amount to about $8 billion, and foreign direct investment to little over $1 billion.
All other types of foreign exchange inflows include highly volatile foreign exchange inflows into stock markets and bond markets, including government borrowings. Better performance in international trade is also an incentive to encourage international investors in stock markets and bond markets as all these foreign exchange inflows go hand in hand.
A “worst” case of exchange rate movement is presented by greater exposure to short-term foreign exchange inflows along with poor performance in international trade.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk).