Financial Times

Issues at Davos - World Economic Forum 2006
By Rohantha N.A. Athukorala
Davos 2006 - saw many of the worlds leading economists gathering at the World Economic Forum to discuss how poverty, decease and hunger of the less developed world can be addressed but the most important issue to the developing world like us, was not addressed- how much of the pledges from the earlier summit was actually executed and used.

Jim O’ Neill, chief global strategist at Goldman Sachs, said that 2006 could complete, a three year period in which the global economy grows more strongly than at any time since the Second World War. Even if GDP growth slows in the US, the growing strength of Brazil, Russia, India and China – will take up the slack. He may be right given that the emerging super powers of China growing at 9% plus and India at 8% plus is poised to take centre stage with the drive on the new business model of BPO’s and the former gearing itself for the 2008 Olympics. But to my mind, this is strategic growth based on an internal model of a respective country.

The global economic summit must focus on how the rich nations are going to intervene in troubled economies of the world and then ask what impetus can be given to move them to an upward path. It is only then that we can say that the Economic Forum has done justice to its existence.

For instance a tsunami hit country like Sri Lanka in 2005 has delivered $ 2.9 billion worth of garments to the top brands of the world such as Victoria Secret, Speedo, Gap and Next.

Could not have a rich nation agree to invest in our country in areas such as fabric mills, washing plants, printing and heat sealing plants and may be even water treatment plants, given the 10 year tax holiday offered by the government for companies setting up outside Colombo and Gampaha? This would have not only helped Sri Lanka achieve the magical mark of a 40% value addition in the industry, but also provide employment. May be, at the next World Economic Forum of 2008, Sri Lanka could have been a case study of a success story from the Davos Economic Forum in Switzerland.

US economy and link to Sri Lanka
Laura Tyson, once part of former president Bill Clinton’s economic team strongly believed that 2006 will be another goldilocks kind of year where the global economy will be not too hot or too cold, but just right. However, he forgot that sustainable economic growth in the US for instance is dependent on how the booming housing market will be sustained.

Even though the financial markets will behave in an opposing way with equity prices increasing and volatility being low the base line is that America’s import-led economy will be balanced by Asia’s export-led growth. Once again Sri Lanka’s thrust with garments, Blue Sapphires, Cinnamon and the export of services can exploit the opportunity the US market offers.

Let me single out Cinnamon where we supply 70% of the world market demand. We should have been offered financial assistance for a model Cinnamon peeling and processing plants that could have given way for Sri Lanka to enter the tough western markets based on the percentage of sulphur content.

We could also have taken the high ground by positioning Sri Lanka exports on an “Ethically produced” platform so that we can differentiate the price savvy products coming from countries like China, Mexico, Vietnam, Bangladesh and even pip India off the western consumers mind.

Complacency
I remember former US Treasury secretary Larry Summers once saying that if you have been waiting for a bus for a long time and one has not arrived there are two possibilities -- one that the bus is not operating and the other is that you have missed the last one.

He went on to say that the maximum risk was not when the maximum alarm is on but when the maximum alarm has passed. To my mind this is when complacency sets in. This is so, true as when the Nasdaq was at 4,500 – close to the point it should have crashed, actually it did not happen. But it did, when it was at 3,500 - much to the surprise of the pundits of the New York Stock Exchange.

The cue for Sri Lanka is that if we take the Sri Lanka Stock Exchange, it is not governed by fundamentals but on business sentiment. It is time that we understand this and correct it by communicating the necessary information to drive this change.

Why not have a TV channel dedicated to reporting the financial performance of companies, stock market reviews from experts that can be picked up by global investors too. This can stimulate investment from global players especially in Sri Lanka’s insurance and telecom business.

The case is point is Dialog where the real success of the issue was the investment that was attracted from overseas. The recent budget proposals of India for 2006 offer special incentives to overseas investors. These investors can be attracted to Sri Lanka if we can market our corporate performance in the right manner by way of the Sri Lanka stock market.

SMEs
It is possible that the US economy is very resilient and it should never be underestimated and that the imbalances in the world economy are part of the natural process of global integration.

The South Asian economy is home to 2 billion people and is estimated to be worth US $ 850 billion. With the drive towards SAFTA, SMEs will become an important player in the region.

However we need to keep in mind that Sri Lankan SMEs are smaller than Indian SMEs. Hence in a free market such as SAFTA Sri Lankan SMEs can get swallowed.

Protectionism is not the answer. A better strategy would be to drive technology up and thereby make Sri Lankan SMEs more competitive and sharper to face world competition.

This can in fact drive investment from Chinese companies into Sri Lanka so that the EU market can be accessed indirectly. The technology required by developing nations to compete with the larger economies by driving productivity up should have been a key issue that the Economic Forum could have addressed.

The best example is Sri Lanka’s handloom industry that has been an area of focus in the recent Indian budget too. Hence if Sri Lanka does not support this artistic sector we will be beaten by our elder brother in the global market place.

Another point that was discussed was that in the US, one will expect interest rates to be pushed up to meet the appetite for global savings to fund its enormous trade deficit. But we see the contrary, where interest rates are unusually low, because markets estimate that inflation will remain low.

The US is not worried if the excess demand, as excess supply from China and the drive from countries like Sri Lanka can make the country reliant on exports for the growth of the economy. Hence once again we see the opportunity Sri Lanka has in a western market.

The best case in point is the Sri Lankan gem and jewellery industry. Currently before exporting of precious stones one has to get certification.
This is done in Switzerland. If funds could have been allocated at the Davos Economic Forum towards a country like Sri Lanka for a ‘certification’ laboratory to be set up, we could be more competitive with shorter lead times in deliveries. Gem and Jewellery brings in US $ 125 million to Sri Lanka.

Pledges and Sri Lanka
With regard to focusing on poverty alleviation, reduce eradication and addressing the hunger issues of the world the UK Chancellor of the Exchequer Gordon Brown pledged support for 100% debt relief for poor nations by the world’s seven richest countries(G -7) with the finance minister of France supporting the British pledge.

Now the challenge is whether Britain and France can convince the rest of the other five G-7 countries to give total debt relief to the poor countries. More importantly, will they collectively agree to honour the pledges committed. In the past the rich have shied away from such promises made with full pomp and glory at international forums. Will 2006 be different for a nation like Sri Lanka?

Poverty eradication funds
This is big business globally. Around $78 billion was around in the last financial year. Every year billions are pledged in the name of poverty and hunger and help victims of natural disaster like the tsunami. However the gap between what is pledged and what is collected as well what goes to the poor is vast.
I remember a study done by Barbara Mcpake of London School of Hygiene & Tropical Medicine that in Uganda, ¾ of drugs ‘leaked’ to the private market and more than a quarter were prescribed to non – existent patients. In early 1990’s the World Bank found that only 13% of what was allocated under the programme on primary education in Uganda ever reached the recipients. A recent trend seen in funding is that most of the money doesn’t come from official channels but from private enterprises.

For example at the Bill Gates Foundation, the founder of Microsoft pledged $750 million to a global programme to vaccinate children against deadly diseases. Gates’ contribution was bigger than a single government. The challenge to countries like Sri Lanka is that we must develop a structural unit which is credible to tap into these private funding sources. Thereafter these investments must be monitored and marketed so that future funding will happen automatically.

I like to share some thoughts from top leaders that addressed the forum. "I was particularly impressed by this notion of 'I will'," said Founder Klaus Schwab. "That's what the purpose of this meeting is.

The Forum will provide platforms for collaborative efforts so the new initiatives or ones that have been enhanced will be implemented," he told participants in Davos.

Peter Brabeck, Chairman and CEO of Nestlé, urged participants to take individual responsibility to act. "I think sometimes we are not translating what we are discussing in virtual terms into action which would really reflect the 'spirit of Davos'. I think the Forum is here to help us to find out what the main issues are and then it is up to us to act individually," he said.

"Some of what we achieved in the trade sessions, discussing the education divide and others, we got excellent inputs to create a more balanced world," added Mukesh Ambani, Chairman and Managing Director of Reliance Industries.
John Thain, CEO of the New York Stock Exchange, argued that developing countries would attract capital if they have the appropriate policies. He noted that foreign direct investment to Jordan increased sharply after it concluded a free trade agreement with the US.

Reporting on the Japanese economy, Heizo Takenaka, Minister for Internal Affairs and Communications and for the Privatization of Postal Services of Japan said the government was pursuing proactive reforms which would unlock an enormous amount of household savings and contribute to stimulating domestic demand.

Future
Oil touching $70 a barrel and the sagging pressure of the Iraq war on the US economy is putting pressure on the US$. The US Treasury Secretary cut interest rates by 1% in the wake of the terrorist attacks in September 2001 and money in flow into the US property market has resulted in the current account showing a deficit of 6 per cent. The military action and the natural disasters like Hurricane Kathrina have pushed the budget deficit to 3.5% of the GDP.

The Central Banks in Asia - buying into the Greenspan ideology - is following suit so that one’s own currency can be kept artificially low and enjoy, export led growth.

Once again an opportunity for Sri Lanka also to follow suit as exports grew by 9.6% to Rs. 638 billion in 2005. We must target Sri Lanka exports to be Rs.1000 billion by end 2008. Even though the stock market lost Rs.200 billion, the Sri Lankan economy can register 8% plus GDP growth. The challenge once again is how each of us as citizens of Sri Lanka can contribute to nation building so that the ethos will be “ Let us ask what we can do for the country than what the country can do for us.”

(The writer is a former chairman of the Sri Lanka Export Development Board, currently Executive Director of Sri Lanka’s National Council for Economic Development(NCED) while also being the Country Head for the Unilever/ S.C. Johnson’s Global Detergent Arm –JohnsonDiversey. The above comments are the writer’s own personal views and has nothing to do with the office he holds in the private or government sectors).

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