ISSN: 1391 - 0531
Sunday, February 18, 2007
Vol. 41 - No 38
Financial Times  

A perspective of economic growth

By Haris Salpitikorala

The world economy has suddenly developed into an “Economics of Greed” as every country on the planet only try to take advantage of opportunities but haven’t prepared its culture to be responsible or to imagine the consequences of its ruthless action of some members accumulating wealth unfairly.

You cannot feed the hungry with statistics. Parents cannot send their kids to schools with statistics when there are no rooms to accommodate them in the schools.The ordinary public is still struggling to have three meals a day, get their children admitted to school, obtain proper medical care, have efficient transport system, well maintained roads, to live in a clean healthy environment.

The only way to face these phenomena is to be prepared, observe and quick enough to avoid the casualties it creates and take advantage of the opportunities that come along with it.

The golden rule is the constant change in your economic policies as it goes along because in reality we only can trail others not lead anyone due to our size and little or no bargaining power we hold in the world as a small nation.

The basic theories so far adopted in economic development in our country fell into two main ideologies. It is either capitalist or socialist. But both systems have not brought positive results so far.

The main hindrance in ideological theories is the reluctance to adopt and change when needed. So there is no point in comments, feed back, consultations and advices. If it is an ideology you have already got your mind made up. You know all the answers and that makes evidence irrelevant and arguments a waste of time. Ideologies always argue more to defend their theory than to look in to the best option for the situation. This is well demonstrated in present TV debates. Therefore, if any positive results are to be achieved, at first we must get rid of ideologies from the planning process and replace them with practical people.

Advisers on economic planning and governance who are in charge of them, so far fall into two main categories: those who believe in protectionist measures and those who believe in free trade. I think the switch has taken place recently from socialist or capitalist arguments to free trade or protectionist argument. Again these are ideologies in which sense some believe that we must have a system to protect local industries and others believe we must adopt free trade type of economic system. Since independence our theoreticians and politicians either defended one system or the other very strongly, with their ideology, but there didn’t appear any substantial improvements in the system or the economy.

These theories may have worked in the past during the cold war period but whatever succeeded in the past may not be in the future. That means, now we are looking at greater uncertainties and unpredictabilities. This is because those days it was easy to pluck the low hanging fruits, if you have guts and gumption. The guts and gumption still may be there but there are no more low hanging fruits. It is all gone. As there is nothing to pluck now, we have been waiting under the tree too long for the fruits to be dropped without looking into new innovative ideas.

Some may be quick enough to defend the system by saying that there is a growth in the economy. The recent article published in The Sunday Times FT titled “Where is the benefit of the growth?” explained well the real situation. Has that growth brought in any change to the ordinary people’s life style? Has it in anyway contributed to the economic prosperity of the country and the well being of the people?

According to Henry Clay “statistics are not a substitute for judgment and reality”. You cannot feed the hungry with statistics. Parents cannot send their kids to schools with statistics when there are no rooms to accommodate them in the schools.The ordinary public is still struggling to have three meals a day, get their children admitted to school, obtain proper medical care, have efficient transport system, well maintained roads, to live in a clean healthy environment.

All benefits mentioned above come to people with economic growth, if not the growth will have no relevance to an ordinary man on the road. The sustainable growth that can be seen and felt by people will not emerge till there is an overall productivity in all sectors such as small industries; small traders and more importantly increase in new entrepreneurships across the board. A statement made recently by a Cabinet Minister highlighted the very little contribution made by the entrepreneurs for the economy and emphasized the fact that entrepreneurship needs to be encouraged through leadership training. Though the observation was accurate and timely, the solution to solve the problem may not necessarily be the leadership training. It lies in the hands of the policy making body than in the hands of entrepreneurs.

The entrepreneurs are of no use without having aggressive guidelines, regulations and policies that are designed by the governing bodies to achieve the above objective. I think failure to create a group of entrepreneurs, through an efficient and positive business friendly civil service as a basic catalyst of our business growth; failure to diversify; restructure our economic policies; failure to incubate SMEs (small medium size enterprises); failure to get civil servants to think with pro business attitude are the reasons for self defeating the longstanding socio economic development of the country. It is not the lack of entrepreneurship but the lack of right policies to encourage them.

The line of argument is to have a system not an ideology to suit the present needs of the country that can bring about growth to ordinary people’s lives after taking into account all the variables and global constraints as we are more than integrated into the economic system of the world at present. There is no country today that decides its own economic theories without taking into account global economic environment.

We see very often those who preach protectionist theories bring examples from India and China. This needs to be studied in detail to find out how unrealistic their arguments and comparisons are. What is forgotten by these people is the size of the local market in these two countries? Size matters in economics as it creates the main ingredients in economics, which is the demand for the product, the market. The protectionist theories adopted by China and India can have positive results for their business in the short term and even in the long term cause of their natural markets. The size of the population decides the demand and demand will decide the volume and volume will decide the cost of production. Those who know economies of scale will understand this. This is well demonstrated by Intel investing US$ 1 billion in Vietnam and an additional US$525 million to upgrade the factory in China. Yue Yuen, the Hong Kong-based largest contract shoe maker decided to invest extra millions to ramp up the production lines in Indonesia. All these are countries with big populations. In the issue of costs, risk, customers and logistics that goes into building global operations, an increasing number of firms are coming to the conclusion that Sri Lanka is not the best place to manufacture things. Today the costs and benefits are not the only consideration where to put a factory.

The quality of the country’s infrastructure, the presence of suppliers, political stability, movements of the local currency and most importantly the size of the local market, all count. They can develop a product for the local market, make good profit and accumulate enough reserves in the long run to bring the same product to the export market.

Talk about local markets, where do we stand? What is the potential in our local market? To prove a point that we are on the wrong track, it is interesting to look at some of the industries that are being protected by import restrictions in Sri Lanka. Can we protect the ball point industry to compete with China or India? Those who know economies of scale know well, that we will never be able to compete with China or India in such production lines.

The unit cost of production is very much lower in China due to economies of scale as production volume is far greater than ours. Also their ability to have a small profit margin due to huge demand will wipe us out of competition. The short term result of protecting this industry will be higher cost of the ball point pen which is used largely by every school kid in Sri Lanka. So the poor pay more for a pen. Who benefits? It is a few business people who run ball point factories.

What is the long term objective? Will Sri Lanka factories with such a small profit margin can compete with giants and be able to generate foreign exchange by exporting ball points? Can we compete with China and be able to provide ball points to our kids at a cheaper price one day? The answer for both these questions is obviously “NO”.

One may argue on the ground that we need more foreign exchange to import pens. What is the net foreign exchange saving by protecting this industry locally? How much foreign exchange do we have to spend to import raw materials to produce ball points? If more than 50% of the materials are imported there is substantial amount of foreign exchange still draining out of the country. This is only one example.

The opportunities will change from time to time because markets go through cycles. The India and China equation in free trade has come up and it has created profound implication for every one especially in the manufacturing sector. Their change in economic policies brought with it a paradigm shift in economic planning in all neighboring countries and small economies. What does it mean for us when these large battleship groups, so to speak, sail out into our waters? Have our policy planners taken into account those threats and opportunities it has created? The time has come to think out of the box and discard those ideologies to move out from certain manufacturing segments as it has neither long term benefits nor short term due to heavy cost of energy and also inability to compete with giants due to market limitations.

With energy prices going up worldwide, countries have to increase their domestic energy prices making some industries that depend on energy cost as their working capital to collapse or push to closure. If there are no growing markets, no business can accumulate reserves to improve the quality, upgrade the labour force, and increase the capacity to fight against the increasing cost of manufacturing to compete in export market. The result will be locally produced expensive and low quality goods for a segment of the population who are unable to reach out to imported items.

One area we must seriously look at is trading. With 560 million people the Asean trade bloc also offers a big population. The government in the Asian region has announced a plan to create an Asean economic community by 2015, with free flow of goods services and investments. Following their free trade agreement in 1992, tariffs on the majority of goods traded fell below 5 percent. Either we need to integrate with them or we get isolated in all business transactions in the region. The correct direction has to be set by taking into account all areas of concern and planning of the regional countries to take advantage of the opportunities that may arise.

Trading is an ideal business that suits our country as we are nearer to Asians and India, a giant whose demand is enormous. This too can generate income for the government in the form of tax and other business revenue and also can create easy employment opportunities. I wonder why we have all the policies that discourage entrepreneurship in trading. Those in the trading business only know the red tape that they need to go through and the hidden cost involved in importing. Trading with Sri Lankans, Indians and Bangladeshis made Singapore a giant economy. That was how Singapore started their economic boom. We need to fine tune the tax structure and custom duties to make sure everyone who is keen to do business is willing to take the risk with less hassles at government level and the only risk being their own ability to manage the business. We have the potential to become the regional trading centre due to our location advantage and rather low overhead cost. Innovative ideas can create immense wealth for the country than constant increase of electricity bill, import tax, VAT, water bills, etc to balance our budget. Every time there is an increase, it will have an additional burden on people who are presently facing economic hardship and also on small and medium size enterprises.

All these restrictions are justified by those who believe in the protectionist theory because they believe trading can put pressure on local companies and the people. Impact of job losses and company closures are felt immediately but the benefits of which although greater, are usually indirect and widely spread. So it is not surprising that protectionist sentiments are growing in many segments. More the restriction in the flow of trade and investment, more the rivalry and tension we can expect rather than shared interest.

The challenge is to make sure new policies create more employment for those who lose their jobs and more wealth for the country to compensate less revenue if there was any, from closure of business in certain sectors. It is best to manage such a situation than hang on to a system that had not worked for many years and when analyzed logically may not work at all for a country of our size.

Let people live a decent life by having reasonable policies that suit the ordinary man more than well spoken ideologies. How long should our people tighten their belts? I am 53 years old now and since my youthful age, I am hearing this discourse of tightening our own belts for the last 30 years in the name of a better future; but the situation was gradually delivering more hardship and it has neither benefited us nor the country. Obviously there is something wrong in our economic theories.

When we introduce policies for the new economic models how do we look after the less fortunate and ensure employment for those who would be deprived of jobs in consequences of those new policies, would be the big challenges we are likely to be confrontedwith.

When civil servants brags about economic growth without paying due heed to some values, ethos, process and systems, the frustration among ordinary business people especially those SMEs are growing and they eventually seek the help of politicians who can bend the rules and regulations to suit their need. The change must take place to implement new rules and regulations and not bend them to suit few individuals. Those policies need to be reviewed constantly to bring about positive results.
If no results are attained within a reasonable period, the policy needs to be suitably changed. This must be an on-going process.

Top to the page

Copyright 2007 Wijeya Newspapers Ltd.Colombo. Sri Lanka.