Talking Economics

India’s Middle Class Boom: Sri Lanka Must Cash In

2012-01-18T02:18:00.000-08:00

By Anushka Wijesinha (Research Economist) and Burhanudheen Thassim (Project Intern) - IPS

Indian middle-class consumption set to be 3rd highest globally by 2020

Sri Lanka currently exports only 5.6% of its total exports to India

Forbes Magazine’s Rich List reports that India is home to 50 Dollar Billionaires, with 2 in the Top 10. Most people associate India’s ‘wealthy’ with the well-known names – Ambani, Mittal, Jindal, Birla, etc. But just below that tier is an ever expanding segment of Indian society that is driving the domestic economy, and is earning more, and spending more, than ever before – India’s middle class.

The estimates on the size to which India’s middle class is set to grow in the coming years according to various agencies1 are staggering - 267 million by 2015, 583 million by 2025, 600+ million by 2030. According to the McKinsey Global Institute (MGI)2, “India’s middle class will swell by over 10 times” in the next 10 or so years. An MGI report added that “by 2025 over 23 million Indians – more than the population of Australia today - will number among the country’s wealthiest citizens”. With the country set to enjoy a demographic dividend like no other and 65% of the Indian population under the age of 35, India’s ‘people power’ will be its biggest asset to future growth.

The market potential, just next door as it were, is clearly enormous. Sri Lanka has to seize this opportunity by increasing its trade and investment integration with India and gain access to this huge consumer base.

Koshy Mathai, IMF Resident Representative in Sri Lanka, said at the inauguration of the Sri Lanka Economic Association Annual Sessions 2011 last October that Sri Lanka should not miss out on taking advantage of India’s growth opportunity3. Even in weathering the effects of the global recession, it is the demand stimulated by a growing middle-class that kept the Indian economy buoyant. The Indian economy is thriving as a result of the increase in consumption by its middle-class. Discretionary spending by Indians is set to rise from the current 52% of total private spending to 70% by 20254. The middle-class in India is likely to overtake US and Europe in terms of consumption in the years to come (see Table 1).

Table 1: Middle Class Consumption – Top 10 Countries (in US$ Billions at 2005 PPP and the global share)

More people in India seem to be moving to urban areas in search of jobs and education. According to estimates made by the investment bank Goldman Sachs, 500 million more people will be added to India’s cities by 20395. It also notes that 10 of the 30 world’s fastest growing urban areas are in India6.

India: First Step in the Destination Diversification Drive

Sri Lanka’s traditional export markets of US and Europe, to which we currently export nearly 60% of our exports, are in dire straits. Severe sovereign debt concerns, governments faltering due to fiscal dilemmas, and consumer spending dampened by weak growth recovery and austerity measures have made these economies fragile. And this is not likely to abate soon. The balance of economic vitality is decidedly shifting East, particularly to China, India and East Asia. Sri Lanka’s Export Development Board (EDB) envisions a reduction in the country’s export dependence on the US and EU to 50% by 2015. Trading more strongly with India would be an important element in achieving this, to catalyze Sri Lanka’s push towards diversifying our export basket. Our exports to India - a country set to see its higher spending middle-class grow to a 500 million consumer market in just 10 years – was only 5.6% of total exports in 20107.

In the export destination diversification drive, Sri Lanka would no doubt need to also look at new markets in the Middle East, Africa, Central and East Asia. But, unlike seeking out new markets that are largely unfamiliar to Sri Lankan businesses, the advantage with India is that given the similarities in cultural background, tastes, preferences, etc., making headway in the Indian consumer market may be relatively less challenging.

The push towards increased marketing of Sri Lankan products to India, however, will have to be preceded by a careful and comprehensive evaluation of what type of product categories could succeed there, what level of quality and branding is required, how to effectively to link into supply chains that link India, and what tariff and non-tariff barriers need to be addressed in tapping these markets

An important step for Sri Lankan enterprises should be to leverage the India-Sri Lanka FTA (ISFTA) to develop strong regional consumer brands. It is important to note that competing on price alone may not be the best approach in marketing to India. A more appropriate strategy would be to compete on quality and differentiated goods. Sri Lanka is known for its relatively higher quality products – many of them which have an international presence – whether its tea by Dilmah, solid rubber tyres by Loadstar, lingerie by MAS, or porcelain by Dankotuwa. Several exporters have succeeded in making inroads into the Indian market, including in sectors like furniture, garments, ships, animal feed, rubber gloves, rubber tyres, food products, and electrical machinery among others. Products such as MAS’ lingerie line Amante have succeeded in capturing lucrative niches in high-end consumer markets in India, and Colombo Dockyard has succeeded in outbidding established Indian and foreign firms in major ship repair contracts. At an ISFTA review seminar last year, Somi Hazari of the Indian business chamber FICCI noted that “the quality of some of the Sri Lankan products has set new benchmarks in Indian industry”. Sri Lanka’s Unique Selling Proposition (USP) should be geared more towards quality, yet affordability. Sri Lankan firms have an advantage in the latter exactly because of the location advantage and reduced costs of transport.

However, we cannot ignore the significant challenges in trading with India. Many entrepreneurs have noted the difficult behind the border procedures that they face in trading with India. Bureaucratic red-tape, hassles at border control, and unexpected fees and taxes have at times even negated the tariff benefits accruing from the ISFTA.

Investment in India is another important consideration. With a growing middle class, enhanced consumption, tastes and preferences shifting to higher value, Sri Lankan firms need to closely monitor new investment opportunities that would emerge – whether it’s in hotels and leisure, apparels and garments, logistics, or processed foods. A few large Sri Lankan companies like Brandix, MAS Holdings, Hayleys, Aitken Spence, Damro and JKH have already set up operations, albeit in differing magnitudes, in India. Investing in India will not only provide the opportunity of catering to a large market but also make use of cheaper factors of production such as labour and certain raw materials, particularly as Sri Lanka’s labour cost advantage in manufacturing gradually wanes. Meanwhile, Indian investments in Sri Lanka have also been emerging across diverse sectors – from oil exploration by Cairn India, telecom services by Bharti Airtel and Tata Communications, petroleum distribution by Indian Oil Corporation (IOC), manufactures by Piramal Glass, Ultra Cement, Ceat-Kelani Tyres, L&T Cement, and Asian Paints, leisure services by Taj (Vivanta) Hotels, transport by Ashok Leyland, and banking and financial services by State Bank of India, Indian Overseas Bank, Indian Bank and ICICI.

Bilateral Agreements – Getting Our Act Together

Greater trade integration with India would mean a keener focus on our bilateral trade relations with it. Sri Lanka has still not been able to expand the existing India-Sri Lanka FTA to cover services and investment by signing a Comprehensive Economic Partnership Agreement (CEPA), despite years of discussions, due to domestic resistance from certain quarters. Though there are many who contest the benefits of the India-Sri Lanka FTA, now in operation for just over 10 years, it is clear that it has had positive impacts. Sri Lanka’s exports to India have increased, both in terms of volume but also in terms of diversity of products (measured by the number of tariff lines). The number of product lines exported increased from 505 tariff lines pre-FTA to over 1,050 tariff lines by 2009. But businesses in the country still seem to not be utilizing the ISFTA to its full potential – some posit that it is due to a lack of awareness. As highlighted in an article8 by a business chamber representative following an ISFTA review seminar last year, “even after a period of ten years, there yet seems to be a lacuna in regard to an understanding of Free Trade Agreements, their mechanism, the advantages as well as connected problems, especially among some members of the business community outside the metropolis…”. SMEs in Sri Lanka are particularly unaware of the opportunities available through the FTA, and this has been stated repeatedly at many forums.

Sri Lankan businesses have a lot to gain by enhancing our access to the large Indian market, and it would be a shame to miss this opportunity. For Indian businesses, the Sri Lankan market is not really a big deal - a 20 million total population in Sri Lanka compared to a current 150+ million middle-class consumer market alone, in their home country. While Sri Lanka stalls on making any serious headway on preferential trade liberalization, India is steaming ahead. India has already signed Comprehensive Economic Cooperation Agreements (CECAs) with Singapore and South Korea, and a Trade in Goods Agreement with ASEAN (soon to be expanded to an FTA in services). India has also begun negotiations on an FTA with the Gulf Cooperation Council (GCC) and EU (European Union). With greater integration with India, Sri Lanka could exploit the trade investment nexus and tap into these other large markets that India has signed agreements with. Additionally, Sri Lanka needs to have the right trade and investment frameworks to attract global enterprises to locate in Sri Lanka, as they look for a convenient foothold to tap into the growing Indian market.

Sri Lanka Mustn’t Miss Out

So, it is clear that the case for Sri Lanka to tap into a thriving and growing Indian consumer market is a strong one, especially in the light of the projected phenomenal growth of its middle-class. However, the emerging policy questions are - Will Sri Lanka integrate stronger with India in terms of trade and investment through mutually beneficial, suitably phased bilateral agreements? Will the Sri Lankan private sector, the group set to benefit the most from the growing consumer opportunity in India, be able to successfully convince the government to put aside narrow protectionist interests in favour of a profitable trade potential with broader benefits to the economy? Will Sri Lankan businesses stand and watch this opportunity pass by, or will they get in there and seize it?

Citations

1National Council for Applied Economic Research (India), McKinsey Global Institute, Asian Development Bank, respectively

2McKinsey global Institute: “The ‘Bird of Gold’: The rise of India’s consumer market”, May 2007 http://www.mckinsey.com/mgi/reports/pdfs/india_consumer_market/MGI_india_consumer_full_report.pdf
3“Sri Lanka should focus more on India: Koshy Mathai”, The Sunday Times Business Times
http://sundaytimes.lk/110731/BusinessTimes/bt23.html

4McKinsey Quarterly: Tracking the growth of India’s middle class
http://www.relooney.info/00_New_2016.pdf

5THE EMERGING MIDDLE CLASS IN DEVELOPING COUNTRIES by Homi Kharas
http://www.oecd.org/dataoecd/12/52/44457738.pdf

6ibid

7Central Bank of Sri Lanka, Annual Report 2010

8‘Private sector perspective and experience in free trade agreements: A Sri Lankan case study’, By Jagath C. Savanadasa, The Island, 09th March 2010,
http://www.island.lk/2010/03/09/business6.html

Mainstreaming Migration into the Development Process - Budget 2012 Takes Vital Steps

2012-01-03T19:52:00.000-08:00

By Roshini Jayaweera and Priyanka Jayawardena (Research Officers – IPS)

In 2010, total foreign remittances increased by 23.6% and amounted to US dollars 4,116 million1, thereby crowning remittances, personified by the migrant worker, to the foremost foreign exchange earner for the Sri Lankan economy. At present, 23% of the total labour force (1.8 million) is engaged in foreign employment2.

The 2012 Budget proposals clearly acknowledged the lack of formal training institutes and reintegration programmes for migrant workers in Sri Lanka, and acknowledged further that the lack of such essential frameworks create significant barriers to mainstreaming migration into the developmental process.

The 2012 Budget proposed that:

Selected hotel schools and technical colleges are further enhanced into special foreign employment institutes
Provision of project and enterprise related management skills in order to encourage those who return home to invest their savings as capital and commence new businesses
Equipment (for small enterprises) to be made free of customs duties for returning migrant workers
Launch a Credit Assurance Scheme to enable access to credit at low interest

Protecting Female Migrants
Figure 1 below shows that both skilled and unskilled labour categories have recorded significant increases in migration for foreign employment. It is now estimated that the number of female migrant workers seeking employment as housemaids fluctuates between 100,000 and 115,000. The female workforce is confined to housemaids and unskilled manpower categories, indicating that feminization and unskilled labour, feature prominently in Sri Lankan migration patterns and female migrants are more vulnerable.

Unskilled labour migration and feminization feature prominently in Sri Lankan migration patterns, and have exposed migrant workers to a myriad of labour issues, harassment, and abuse in the workplace, making them a vulnerable group. It is reported that, in 2010, the primary cause of complaints (21%) received by the SLFBE were based on breach of contract, which was closely followed by 20% of complaints being related to defaulting on payment of wages. Alarmingly, the third highest category of complaints was related to physical and sexual harassment, of which 96% was made by female migrants3. The statistics related to complaints are in all instances, higher for female migrants than for male migrants, indicating that female migrants are most at risk.

Bridging the Gap

Due to the unskilled nature of migrant labour, return to labour is also low and as result the impact of migration on economic development can be lower. The impact of migration and remittances on household welfare is said to depend on the allocation of household resources. A recent study4 on the impact of remittances concluded that migrant households spend more on education and health annually than non-migrant households. However, a significant improvement in education or health was not observed. It was also concluded that the impact of the remittances is influenced by the remittance sender and remittance user, and thus the capacity of the migrant worker plays a crucial role in the eventual welfare of the household. This requirement is clearly acknowledged by the Budget 2012 proposal to develop the capacity of migrant workers, thereby increasing the number of skilled labour migrants which would also bridge the gap between the international demand for jobs, and Sri Lanka’s capabilities.

Table 1 depicts the supply gap of Sri Lankan labour for foreign employment by skill level. The highest percentage of unutilized employment opportunities is observed in the skilled level (77%) whilst the lowest is observed in the middle level (9%). It is also significant to note that whilst the majority of Sri Lankan migrant workers are made up of housemaids, 68% of employment opportunities remained utilized.

Issues cropping from supply shortages can be addressed through fully implementing the 2012 Budget proposals. The pre-departure training programme conducted by SLBFE offers only limited capacity development for migrant workers. Further, only a handful of institutions offer training and/or educational programmes for migrants, thus leaving them vulnerable as discussed above. It has already been identified that offering National Vocational Qualification (NVQ) Level 1 qualifications to migrant workers could be offered by the Tertiary and Vocational Education Commission (TVEC). The proposed Budget 2012 changes would be welcome and have a lasting impact not only on the migrant worker, but also have an impact on the migrant worker’s household and thereby impacting on economic development.

Conclusion
The Sri Lankan migrant workforce provides an important contribution to the economy. However, their contribution is being undervalued by a lack of existing institutional frameworks to maximize their potential whilst at the same time provide protectionary measures in the course of foreign employment. This is particularly significant for female migrant workers who are exposed to an alarmingly high rate of physical and sexual abuse. The proposed Budget 2012 changes provide an ample opportunity to rectify and minimize risks that are presently at a high level. They provide opportunities for returning migrant workers to reintegrate better by offering incentivized schemes that encourage returning migrant workers to invest their earnings and start their own businesses. Furthermore, a holistic implementation of these changes, along with consideration of the demand that exists for skilled workers from Sri Lanka presents a more optimistic opportunity for those presently unemployed. Implementing the declared policy will be the key in mainstreaming migration to the overall development strategy of Sri Lanka.

Citations:

1CBSL Annual Report, 2010.

2SLBEF Annual Report, 2009.

3Annual Statistics Handbook of Foreign Employment 2010.

4Based on a study carried out for a South Asia Network of Economic Institutions (SANEI) funded project in 2010 by a team of IPS researchers consisting of Nisha Arunatilake, Suwendrani Jayaratne, Priyanka Jayawardena, Roshini Jayaweera, and Dushni Weerakoon.

5The demand is overestimated as foreign employer companies offer the same job vacancy to 3-4 local recruitment agencies.

Budget 2012: First steps towards strengthening Sri Lanka’s logistics sector

2011-12-08T22:31:00.000-08:00

by Burhanudheen Thassim, Project Intern - IPS

“We are very excited and bullish with the possible developments taking place in the logistics sector. I’ve always been saying that the time for Sri Lanka’s logistics sector will come, and this budget has brought it, with a stroke of a pen”. These were the comments shared by the Group CEO of Expolanka at the DailyFT post-budget seminar recently. The transport and logistics sector is important in any economy as it impacts much of a country’s economic activity, whether it is for an individual – accessing agricultural produce from farm-gate to retail shop, or for a firm - the entire process of materials and products moving into, through, and out of it. The efficiency and effectiveness of this sector can translate into an increase in productivity of the economy and facilitate faster economic growth.

Sri Lanka is ranked poorly in the World Bank’s ‘Logistics Performance Index’ (LPI), falling consistently on the rankings from 92 out of 150 in 2007 to 137 out of 155 countries in 2010. The LPI is a perception-based index that takes into account six indicators to determine the logistics ‘friendliness’ of a country. Here, Sri Lanka has been ranked even below that of some less developed countries like Bangladesh and Kenya. So, will the new budget proposals be a shot in the arm for this sector to be put on a stronger footing? This article reviews the budget proposals relevant to this, takes a first look at how it would impact the sector, and what other issues need to be borne in mind. Several key persons in the sector were interviewed to obtain better insights.

Budget 2012: What is in it for the domestic logistics sector?

The Budget 2012 announced last month introduced several proposals in favour of the logistics sector, particularly in terms of tax reductions.

A direct incentive in terms of taxation is on the importation of lorries, trucks and new lorry engines where it is proposed to remove VAT which was at 12% and Customs Duty which was at 5%. Currently, the bulk of domestic transportation is undertaken using trucks and lorries. Here it should also be noted that the majority of truck owners are individuals. The removal of these taxes will naturally reduce the cost of purchasing new vehicles for transport operators who run small fleets of trucks as well as larger logistics operators. This will also help re-fleet ageing truck and lorry fleets of smaller operators – having spillover positive externalities in terms of enhanced safety and reduced pollution.

The budget also proposed reducing by 50% the import duties on specific tyres used for buses and lorries. A General Manager of a transport and logistics company noted that tyres amount to around 20% of the costs and therefore the reduction in import duty on tyres is likely to be a substantial cost saving and will certainly help achieve higher standards in the sector.

Indirectly, this and previous budgets benefit the logistics sector through continued efforts to improve roads and building new highways. Moreover, budget 2012 further incentivizes small and medium enterprises, the backbone of the country’s Provincial economies, by offering various tax benefits. For these provincial enterprises to thrive, an efficient, reliable, and affordable transport and logistics services will be integral. As private enterprise growth in the Provinces increases in the coming years, the demand for logistics is likely to receive a substantial boost.

Apart from direct beneficiaries of lower costs of acquiring vehicles for domestic logistics, users of these services would also benefit. Supermarket chains like Cargills Food City which have a strong collection and distribution network, and have grown to become an integral part of most urban and sub-urban households, may see a reduction in their operational costs and could in turn pass these on to consumers in the form of lower prices. Improving domestic logistics and supply chain will be particularly important for agricultural produce and agri-business. At the post-budget seminar, the Expolanka CEO noted that “45% of perishables are lost in transit”.

Taking a closer look…

Although these budget proposals appear quite favorable for the logistics sector, there are other key issues that impact the sector that need to be considered. Stakeholders in the sector observed that the recent increase in fuel prices causes significant cost increases as around 30% of the costs are on fuel. This resulted in many operators feeling less optimistic about the positive budget proposals, and remarked that the impact of the higher fuel prices would offset the tax benefits introduced through the budget. However, what is important to bear in mind is that operators must not take a myopic view – while the fuel increase does raise operating costs in the short term, the fiscal benefits proposed in the budget would help strengthen the sector in the medium to longer term.

Another area that needs to be considered is whether the tax cuts on imported trucks and lorries and their tyres will translate into lower prices for logistics firms and in turn for consumers. Many formal logistics firms tend to outsource their transportation. There were two views that were brought out by them. The majority of transportation in this sector is undertaken by individuals who run small fleets of trucks, and logistics firms that outsource to them remarked that they were doubtful that these smaller players would reduce prices even if their costs reduce as a result of the tax cuts proposed in the budget. Logistics firms observed that it will be likely that the marginal benefits will be retained by truck and lorry owners as well as being passed on to their drivers who constantly agitate for wage increases or a bigger proportion of earnings in the case of a profit-sharing scheme. However, another operator was of a different view. Currently, the transport and logistics market has heavy competition with a large number of trucks and lorries in operation. Therefore, in order to remain competitive, some operators may reduce prices charged to logistics firms, accruing from the tax savings.

However, much of these arguments are on the basis that transport operators – whether large or small – will take advantage of the tax relief to invest in expanding or renewing their fleets. For this, a key consideration is the ability to raise capital to do this, especially as most of the truck and lorry owners are individuals. If they do not have access to sufficient funds, the desired effect of the tax relief may not materialize. Therefore, an important add-on to the tax relief proposed in Budget 2012 would be a scheme to assist these operators raise capital – for example, through concessionary loan facilities.

Meanwhile, the depreciation of the rupee would have an overall effect as well. An official at the Container Transport Owners’ Union noted that the benefits stemming from the Budget 2012 would be mixed – while tax relief on vehicles and tyres was a good thing, they noted that as a result of the depreciation, the cost of spare parts and the imports of tyres, etc., have increased. It remains to be analyzed whether the benefit of the former outweighs the impact of the latter.

At first glance it appears that it is only a few large logistics companies that can afford to own a large fleet of trucks and lorries, and may have the capacity to raise capital to re-invest in new fleets, etc., utilizing the proposed tax benefits. Meanwhile, the majority of transportation in the sector is by smaller players - individual truck and lorry owners as well as owners of small fleets. They may in fact need assistance the most in terms of re-fleeting and becoming modern, competitive, and efficient. Yet, the critical factor would be ensuring that they have the requisite financing facilities to take full advantage of the tax cuts offered.

With stimulated economic activity in post-war Sri Lanka and the heightened investment in connective infrastructure islandwide there is no doubt that the logistics sector will have a key role to play in supporting growth. Budget 2012 has indeed brought in proposals that give the logistics sector a ‘shot in the arm’. But it is just the beginning.

Sri Lanka as a Rice Exporting Country: Possibilities and Problems

2011-12-06T19:35:00.000-08:00

Dr. Parakrama Samaratunga, Research Fellow – IPS

The Budget 2012 presented last month touches on agriculture at several points. However, the proposal to establish “four rice export zones” stands out as the most provocative, in an economic sense, amongst all of them. Sri Lanka has just achieved near self-sufficiency in rice. But the rice sector, including both production and consumption, is still plagued with a multitude of economic and social problems. Against this backdrop, a proposal to commit resources to promote rice export raises a number of questions ranging from “is it possible” to “at what cost and for whose benefit”. This article seeks to take a deeper look into this complex issue.

Promoting exports of agricultural commodities is certainly a good thing and Sri Lanka should have done this before. But the question is whether rice is the right choice. Although we have touched self-sufficiency in a good crop year we have not yet become fully self sufficient, let alone being able to produce surpluses for export on a regular basis. Although “self-sufficiency”, as defined in Sri Lanka, is not a necessary condition for becoming an exporter, having an “excess supply” or a surplus over domestic demand is a must. Therefore, in order to gainfully export rice without negatively impacting domestic consumption, Sri Lanka should (1) raise production over and above the present level, (2) through a process that is (socially) profitable and (3) find stable international markets for the surplus. A closer look at these three aspects is necessary for evaluating Sri Lanka’s possibilities of venturing into the rice export arena.

Increasing rice production

Increasing rice output to have a surplus is possible with area expansion, yield improvement, or both. The fact that Sri Lanka does not have additional area to be brought under rice is well known and if the government commits some prime land in four highly productive areas exclusively for the purpose of exports, that would reduce the supply to the domestic market. So, the only logical solution is to improve yield levels. But this is a challenge too. Rice yield levels have not been increasing significantly over the last two decades and the country’s average yield hovers around 4.5 mt/ha. The highest level achieved in high potential areas is 6 mt/ha and a quantum jump in Sri Lankan rice yields is therefore necessary to produce a surplus for exports.

Cost of production

Sri Lanka is a high cost rice producer. Cost of production of paddy in high potential areas is around Rs.15,000 per metric ton. At prevailing milling, transport and storage costs, this translates to Rs. 41,000 per mt of milled rice at Colombo. With the ceiling price of Rs. 70 per Kg of rice in the local market, the exporters are not likely to export at a lower price and the minimum price at which Sri Lanka can export rice will be Rs.70,000 per mt. As such, exporting rice produced in high potential areas appears to be feasible on private profitability grounds, if it can be exported at Rs. 70,000 per mt or more.

“Profitability” of rice exporting

However, the profit of Rs.29,000 per mt of rice achievable according to this data is a “private profit” accruing to various parties involved in the rice value chain. This private profit is possible because the state bears the costs of free irrigation, subsidized fertilizer (Rs. 25,675 per ha) and the artificially high guaranteed prices. Although private agents do not bear the above costs, the society (or the country) bears these costs for producing rice in Sri Lanka. Hence, in calculating the social cost all these should be added to the private cost. The “social profit” or the net gain to the country by exporting a metric ton of rice is the difference between Rs. 70,000 and this social cost, which is larger than the private cost mentioned above. This is not the perfect way to compute social profit but it is good enough to show that social profit is significantly lower than the private profit in the case of rice production in Sri Lanka. In fact, systematically conducted research has shown that rice is only marginally profitable at social levels even when its private profitability is substantial as in the case of high potential irrigation areas1.

Does Sri Lanka have the scale?

The third issue is whether exporting rice is feasible at a large enough scale on a sustainable basis. Sri Lanka produces medium and small (grain) non-sticky rice varieties for which there is no international demand. Most importers prefer long grain varieties with varying degrees of stickiness. Moreover, the quality of milled rice produced in Sri Lanka is lower than that of average quality rice traded as bulk exports. Other competing countries offer better quality rice of preferred varieties at the same price - for example, ‘Thai 5% broken’ at Rs. 70,000 per mt. Under such conditions the chances of securing an FOB price of at least Rs.70,000 per mt of Sri Lankan rice in the world market is bleak.

In addition to competitive prices and acceptable quality standards, another important requirement for being established as a food exporter is the ability to maintain a regular and orderly supply. As was mentioned earlier, Sri Lanka just managed to fulfill the domestic rice demand in good crop years and hardly produces a surplus maintained over the years. As such, Sri Lanka’s chances of securing an export market at this point in time are further reduced by this instability of production.

Yes, to niche markets?

All the above factors lead to the conclusion that Sri Lanka is not yet in a position to enter the bulk export market for rice. Nevertheless, Sri Lanka is already engaged in exporting to small niche markets. These markets comprise the Sri Lankan diaspora abroad who create a limited demand for “Samba” and red rice and another limited market for special varieties such as red pericarp long grain rice. Neither of these niche markets offer sufficient demand for Sri Lanka to embark on an ambitious export promotion programme. Moreover, the varieties for the second type of niche markets is in the possession of private firms and seed material is not available to the farming community in sufficient quantities.

If Sri Lanka wishes to be a steady rice exporter in spite of these problems some adjustments to the rice sector are essential. Obviously, these adjustments should be targeted at producing a steady surplus of better quality rice at internationally competitive prices. Although there are two possible markets to enter - i.e., average quality bulk export market and high quality special rice varieties market - the adjustments to be effected do not vary accordingly.

To be improved…

The first aspect that needs an improvement is the profitability at a social level which results from higher yields and reduced cost of production. This involves technical change in rice production which comprises breeding new higher yielding varieties and substituting the present high cost production techniques with low cost ones. Unfortunately, there is no short cut for this and the only way it could be achieved is through time consuming research efforts. Sri Lanka allocated only a marginal proportion of the GDP for agriculture research and extension during the last three decades2 and consequently, there does not exist a possibility of bridging the technological gap without investing in this area over an extended period of time.

The second requirement is that the surplus we produce needs to be of the types of rice that are in high demand in the world market. For bulk export, we do not produce the preferred rice varieties as the Sri Lankan rice breeding programme never attempted to breed such varieties which are not preferred by Sri Lankans. However, as new destinations for rice exports emerge, for example Africa, Sri Lanka may find an outlet even for lower quality grades. But exporting large volumes will only be a long run possibility. For the specialty rice category, Sri Lanka neither possesses any preferred variety nor do we have the right agro-climatic conditions to grow them.

Another aspect of quality is related to the post-harvest handling of rice. The milling quality of rice produced for the domestic market is poorer than what is expected in international markets. In fact, the cost of milling envisaged in calculating the profits relates to substandard milling. Producing better quality milled rice involves higher capital and operating expenditure, but this is a must if Sri Lanka aspires to enter the rice export market.

Conclusion

With this simple cost analysis, it emerged that an immediate or short run boom in rice exports is not possible within socially profitable limits. Private profitability could be increased through the continuation of the existing input and price subsidies as well as the introduction of export subsidies. If exporting rice in the short run is a pressing political priority, it could be done at positive private profits but not social profits. This means that the country as a whole would not be making a profit although various parties involved in the value chain will.

References

1. Rafeek, M.I.M. and P.A. Samaratunga (2000) “Trade Liberalization and its Impact on Rice Sector of Sri Lanka”, Sri Lankan Journal of Agricultural Economics, Vol.3, No.1

2. Institute of Policy Studies (2008), “Does ‘ Foodflation’ Call for Agricultural Reforms?”, in Sri Lanka State of the Economy 2008, Institute of Policy Studies, Colombo, Sri Lanka.

SMEs and Budget 2012: Strong Steps, but Tax Relief is Half the Story

2011-11-28T00:44:00.000-08:00

By Anushka Wijesinha, Research Economist – IPS

Ministry of Finance has delivered, now time for SME-mandated government institutions to sharpen their focus and address the vital issues

Budget 2012 is clearly the most SME-friendly budget in recent years. A comprehensive set of tax and financial proposals, specifically intended to strengthen and develop the SME sector have been put forward in the budget proposals announced by H.E. the President on 21st November. Business Chambers with a strong SME interest, like the NCCSL and the FCCISL, have commended the budget for its focus on the SME sector.

This article takes a look at the important SME-promotion proposals contained in the budget, but also argues that promoting the SME sector requires a look beyond just tax relief.

As is clear from Table 1, apart from the SME-specific concessions and exemptions, many other concessions will have a positive impact on SMEs engaged in particular activities.

Table 1: What is in Budget 2012 for SMEs?: Snapshot of the Proposals

Definitional issues

A few areas are yet to be clarified, and would likely be done in the implementation documents that would follow the Budget 2012. For example, the minimum investment requirement of Rs. 25mn for a new “small scale enterprise” may be a challenge. Most small-scale enterprises have much less in terms of fixed capital. This concern also applies to certain bands of minimum investment in the “medium-scale” category – Rs.100mn-200mn -- is a steep investment for a standard Sri Lankan medium-scale enterprise. The level of investment will also vary widely depending on the nature of the activity. An enterprise engaged in gem cutting and an enterprise engaged in canned fish production may both have similar turnover to be classified in the “medium” category. But the minimum investment needed in each will be quite different. In all of this, a key issue that emerges - in fact a recurring challenge - is that of the need for a common SME definition. Commercial banks, the Central Bank, EDB, IDB, business licensing authorities of the government, etc., all have slightly different definitions, and this causes various problems for an SME in participating in the various schemes/services offered by each of them.

It’s not just about taxes

So, yes, the tax burden on SMEs has been reduced in Budget 2012. This builds on the reduction to 10% of corporate tax rates for SMEs introduced in Budget 2011. But SMEs need more, and it’s not just about tax incentives. SMEs in Sri Lanka are facing numerous other constraints that need to be simultaneously addressed in order for these valuable fiscal incentives to have maximum impact.

Electricity constraints

In a visit last week to a couple of Industrial Estates which are home to small and medium industries (SMIs), it emerged that electricity issues are severely hampering their operations. One medium-scale industry that produces rubber products for the Swedish market, employing nearly 500 people, noted that it faced 118.5 ‘electricity down hours’ last year. This is an average of over 2 hours a week, but in some weeks it peaked to as high as 10-14 hours. At a recent public-private consultation, an industrialist remarked that at the Ekala Industrial Estate there have recently been 14 electricity ‘brown outs’ in as many days. The Yarlpanam Chamber has noted that of around 24-26 working days in a month, they enjoy only about 10 days of reliable power supply. A small industrialist in the Kalutara district lamenting on the impact of the electricity issue on his ceramic ornaments operation remarked (translated from Sinhala), “the power brown outs not only ruin our machinery, they cause production delays, increase costs, and cause a higher proportion of rejects”. So, although connective infrastructure in areas outside Colombo are improving, and electricity coverage is reaching 80-90% in many areas, electricity reliability and continuity that impinge on SMEs profitability needs to be addressed quickly.

Financing SME growth

The proposals contained in Budget 2012 are very progressive and important further steps in improving the access to finance for SMEs were announced. They are:

Out of the funds available in the Investment Fund Accounts in banks (which was introduced through Budget 2011 to ensure long term finance), 10% must be lent to the agricultural sector and a further 10% to be lent to SMEs.

State-owned banks (Bank of Ceylon, People’s Bank and Regional Development Bank) will each set up a special SME bank branch in all districts within 2012, and all other banking and financial institutions also encouraged to set up such branches in all districts.

Interest income from such banking and other fee levying activities will enjoy a reduced income tax rate of 24% (from the standard 28%).

A government guarantee of 50% for those banks that provide loans to restructure SMEs to improve their performance

These are important proposals. Many regional entrepreneurs complain that bank branches in their area are not SME-friendly and do not know how to evaluate loan applications with an “SME lens”. One entrepreneur in Batticaloa remarked that “most branch managers just don’t know to deal with us, they sometimes treat us like dirt, a nuisance”. The setting up of dedicated SME banking units is, therefore, an important first step. Meanwhile, it is important for all banks to train all their regional banking staff -particularly loan officers and branch managers - on how to cater better to SMEs, which is the majority of their client base in the regions. The Central Bank could also consider some mandated training/orientation for these officers on ‘SME Banking Best Practices’, similar to the mandated training it conducts for bank directors on corporate governance and other issues.

The 10% mandated SME portfolio is also a useful step. But it needs to be carefully monitored by the regulator to ensure it is not abused. For instance, ensuring that a bank doesn’t provide the majority of the portfolio to a few, low-risk enterprises, at the larger end of the SME chain just to comply with the requirement.

At a recent private-public dialogue on the cut-flower industry organised by The Asia Foundation in Nuwara Eliya, it emerged that the awareness of SMEs on special loan schemes is minimal. Out of 10 cut-flower associations, representing dozens of cut-flower SMEs, not one of them were aware of the two concessionary loan schemes offered by the Central Bank (the ‘Saubhagya’ and ‘Viskam’ schemes). There’s clearly a disconnect with the generous and valuable loan schemes on offer and their utilization by the SME sector. Commercial banks must do more to actively disburse concessionary credit lines available to them from multilateral financial institutions, to SMEs.

We could also think of innovative models like revolving funds, financed possibly by donors, that are housed in one or more selected local bank branches, and are used to finance specifically targeted enterprise sectors that are of particular importance to a region - for example, the tourism and cut-flower sectors in Nuwara Eliya. This type of ‘policy-based lending’ would help direct credit to sectors that have the most potential to grow that locality’s economy, provide employment, and reduce poverty.

The role of the Regional Development Bank (RDB) is also now more important than ever in taking up the cause of SME banking. The Lankaputhra Bank (LPB), which was meant to be a strong development bank after merging with the SME Bank and cater better to SMEs, seems to have lost its way.

Business development

Another key area is on business development and organizational improvement. Many SMEs do not get necessary advisory and technical support for technology upgrading, improving management and accounting practices, enhancing efficiency, and boosting productivity. Institutions like the IDB, mandated to assist SMIs need to take a strong look inwards to see if they are providing the services they are mandated to provide, and whether the services they do provide are useful and sufficient for the SMEs to grow to the next level. These SMEs don’t need basic support. A closer look at many of them will show that they have set up without any generous tax holidays unlike the BOI projects, and operated in trying times. They have grown gradually and won foreign markets. They certainly do have the potential to go to the next level, but getting the right support package is key – taxation and access to credit are only two elements in this. Entrepreneurs are asking for not just lower taxes and cheaper credit, but a more holistic support. As one entrepreneur in Nuwara Eliya said, “what we want is a package of support, not just better access to loans, but also help with technology, and help with market development, along with it”.

Again, we have much to learn from neighbouring countries. For example, in the Philippines, SMEs are partnered with Universities and other tertiary training institutions in local areas that have management faculties. Senior students in business administration and related subjects in these institutions run ‘business clinics’ at subsidised fees for local SMEs. This is a ‘win-win’ scenario – the local SMEs are able to get affordable assistance on business improvement, while the students get hands-on business experience and real world insight – thereby improving their non-academic skills and enhancing their employability.

Getting serious about SME strategy

It’s time we got serious about the National SME Policy that is still under formulation, despite a draft being presented at a stakeholder discussion almost a year ago. We need to build on the strong SME White Paper of 2002. Since the formulation of this document there has not been an all encompassing national strategy document for SME development. Sri Lanka needs to learn from its Asian neighbours in developing this SME strategy. A good start would be looking at the Philippines comprehensive ‘Magna Carta for SMEs’ document, which has very relatable ideas and transferable concepts like SME credit guarantee schemes and strategies to encourage subcontracting between SMEs and large enterprises.

Once the National SME Policy is ready, there needs to be a taskforce to implement the various elements. The taskforce should include representatives of all relevant stakeholder groups – both from the public as well as private sector. Currently there are a myriad of programme and interventions, all of which are strong individually, but are hampered by the disconnect with each other and therefore cannot have the impact that they actually could. This fragmentation and overlap leaves SMEs confused on what programmes are on offer. The National Enterprise Development Agency (NEDA) needs to play a vital coordinating role and assume leadership once more as the apex SME body – this was what was expected of it when it was initially set up as the ‘SME Authority’ under a proposal of the 2002 SME White Paper.

"The SME sector is the future", Treasury Secretary Dr. P.B. Jayasundara said at a post-Budget forum organized by Ernst & Young this week. The importance of SMEs has clearly been identified and articulated. The Ministry of Finance has done its bit by announcing a variety of SME-focused proposals. It is now time for the other government institutions mandated to develop the SME sector like NEDA to sharpen their focus, coordinate and collaborate more for maximum impact, and work closely with the private sector on really growing Sri Lanka’s SME sector.

Yes, tax concessions are a vital component in the SME-strengthening effort, and the Budget 2012 has much to offer for SMEs. But tax concessions should not be thought of as the panacea for the struggles of Sri Lanka’s SMEs. Other issues are often equally constraining, and more needs to be done about them. Of course, it is unrealistic to expect such non-tax related policy support from a Budget, but SME supporting institutions have to come into action and address these vital issues without further delay.

Sri Lanka Grapples with Child Malnutrition despite Major Improvements in the Health Sector

2011-11-20T21:22:00.000-08:00

By Priyanka Jayawardena, Research Officer - IPS

Despite remarkable achievements in the health sector, malnutrition has been a persistent health challenge in Sri Lanka. More than 1 in 5 under-five year olds are underweight in the country. Nearly 1 in 6 babies born has a low birth weight. These numbers are worse for some population groups in the country. Children in the estate sector are twice as likely to be underweight than children in the urban sector, and in the Badulla district, 1 in 3 children are underweight. Despite countless initiatives to alleviate malnutrition over the years, child nutritional levels have improved only marginally in the country (see Figure 1). As Sri Lanka aims to set itself on a high growth trajectory, this is no doubt a cause for concern as it impacts on the quality of the country’s workforce.

Figure 1: Little improvement in prevalence of underweight children and low birth weight babies

Child Malnutrition: Looking Beyond Health

Internationally, there is recognition that, improved health care alone cannot improve all health outcomes. This is because there are deep rooted socio-economic factors affecting health. For example, a child's nutritional status in life as well as child's birth weight is determined by a number of factors, genetics, maternal characteristics, the environment in which a child lives, and social circumstances. Nutritional disparities themselves are also driven by so-called social and economic determinants, such as income level, mother's education, and living conditions in homes and neighborhoods. Therefore, the study of overall determinants of childhood malnutrition is not solely enough to address the malnutrition problem at a practical level. Information on socio-economic determinants of childhood malnutrition as well as causes of higher childhood malnutrition amongst lower socio-economic groups is important to improve the effectiveness of policies aimed at reducing childhood malnutrition, especially in severely affected populations.

Childhood Malnutrition: Exploring the Causes

Low birth weight is a major cause of malnutrition in children under five years old. Babies born with low birth weight are twice as likely to become underweight children compared to babies with normal birth weight. Low birth weight is also associated with growth retardation throughout childhood, adolescence, into adulthood, and also carry on the vicious cycle of malnutrition. Finally, low birth weight causes long-term consequences for individuals, households, communities, as well as the country.

Growth retardation accelerates with weaning. One child in four is underweight among 18-59 months old children (see Figure 2). Child malnutrition seems to increase after the first year of life and remain high thereafter (see Figure 2). Long term childhood growth retardation may be an indication of either inappropriate food intake in terms of quantity or quality during the weaning period as well as poor health status. The low risk of malnutrition during the first 6 months may be due to the protective effect of breastfeeding. According to DHS (Demographic and Health Survey)) estimates, 98% of children in the country are breastfed, while about 73% are exclusively breastfed during the first four to six months.

Child malnutrition is linked with mother’s malnutrition, education and knowledge. Mother's nutritional status has a strong impact on a child’s nutrition as well as a child's birth weight. 1 in 6 reproductive age (15-49 year olds) women are malnourished in Sri Lanka. Other than this direct impact, mother’s education has an indirect impact on childhood malnutrition. A child with a mother with an education level below primary level is twice as likely to be underweight than a child with a mother who has completed senior secondary level education.

Figure 2: Growth retardation accelerates with age

Child Malnutrition: Influence of Socio-economic Status (2)

There are considerable disparities in child nutritional across socio-economic groups that favour the better-off (Figure 3). A child belonging to the “poorest” socio-economic quintile is three times more likely to be underweight than a child in the richest quintile.

Figure 3: Prevalence of underweight children and underweight birth babies by wealth quintile

Figure 4: Prevalence of underweight children and underweight birth babies by region

In the estate sector, about 1 in 3 under-five year old children are underweight, and 40% of babies have low birth weight (see Figure 4). A household’s socio-economic status is significantly lower in the estate sector than in the urban and rural sectors. In the estate sector, almost 63% of households fall into the poorest category while in the urban and rural sectors this is 8% and 19%, respectively. In the estate sector, low levels of education, especially among females, are a major cause of poor nutritional status, where nearly half of all women of reproductive age are educated below primary level. Poor education reduces the ability of mothers to benefit from the awareness programmes on family health and hygiene conducted by the health service.

Child Malnutrition: Sources of Disparities (3)

There is a need for improving child nutritional status not only in terms of averages but also for reducing disparities. Therefore, the reasons for prevalence of higher childhood malnutrition amongst lower socio-economic groups need to be examined. Half of the socio-economic inequality in child underweight is explained by the continuity of maternal malnutrition and low birth weight babies among lower socio-economic groups. On the other hand, 30% of the inequality in low weight births is also due to mother's poor nutrition. A mother's low level of education and health knowledge contributes one fourth of total inequality childhood malnutrition, while 40% of inequality in underweight birth babies. We must also bear in mind that regional factors also contribute considerably to measured inequality.

Addressing a Critical Concern

To break the vicious cycle of malnutrition in the country, Sri Lanka needs to go beyond health and look closer at the deep-rooted socio-economic factors which are transmitted from generation to generation in lower socio-economic groups. As the country enters middle-income status, it would be imprudent not to address this important issue of child malnutrition. It will be critical to ensuring inclusive and sustained growth in Sri Lanka in the coming years.

Notes:

(1) Study uses the nationally representative DHS (Demographic and Health Survey) conducted in 2006/07. All the estimates of this paper are based on DHS 2006/07 unless otherwise mentioned. Anthropometric index weight-for-age (underweight) is considered as a measure of underweight children. This index is expressed in standard deviation units (SD) from the median of the WHO Child Growth Standards adopted in 2006. Low birth weight is defined as a birth weight of less than 2500g. Body Mass Index (BMI) classification is employed for identifying mother’s nutritional status

(2) Household asset index was used as the measure of socio economic status

(3)The measure of socio-economic inequalities of underweight children and low birth weight babies are decomposed into determining factors. Concentration Index is used as measure of socio-economic inequality

Electricity Constraints: Can CEB Profits Lighten the Burden on the Industrial Sector?

2011-10-30T21:52:00.000-07:00

By Buddhika Brahmanage, Research Assistant - IPS

Electricity: Continued Constraint for Sri Lankan Industries

Speak to any major industrialist in Sri Lanka, and they will tell you that electricity is a critical constraint on their operations. A forthcoming World Bank report entitled ‘More and Better Jobs in South Asia’ reports results from country-level Enterprise Surveys that shows that electricity is the number one constraint for enterprises in Sri Lanka, and is in at least the top 5 list of constraints for all South Asian countries1.

The World Bank report investigates major constraints hindering employment generation and expansion of enterprises, and their severity, through the surveys. While in Sri Lanka electricity is reported as the top constraint, it is second most severe constraint for a South Asian benchmark firm in the urban formal sector (a benchmark firm is defined as a medium-size manufacturing firm with 30 employees that is domestically owned, does not export or import and, is located in a large city).

More significantly, according to the Enterprise Survey results contained in the jobs report, electricity in Sri Lanka out ranks other constraints such as business licensing, corruption, political instability and macro instability. It is the top constraint for medium-size and micro benchmark firms in the urban formal sector and second most severe in a micro benchmark firm in the rural sector in Sri Lanka2. These results indicate the severity of electricity related issues for the commercial sector in the country.

Industrial firms in Sri Lanka are faced with three main bottlenecks with regard to electricity - accessibility, reliability and affordability. The problem isn’t new. Even in 2004, a World Bank report Sri Lanka: Improving the Rural and Investment Climate identified that over 40% of urban manufacturing firms and 25% of rural enterprises in Sri Lanka found electricity to be a major bottleneck for enterprise growth. The report noted that less than 70% of rural enterprises received electricity from the national grid3. This has no doubt changed since then. Electrification levels in Sri Lanka have improved significantly and by the end of 2010 it was estimated at 90%. Yet, we must remember that this was achieved partly due to the host of rural electrification schemes, many of which are not yet connected to the national grid.

Apart from urban centers, particularly in the Western Province, few areas enjoy uninterrupted power supply in the country - 52% of medium-size enterprises in Sri Lanka are compelled to use generators to cope with power outages5. Generators could account for as much as 12% of a firm’s fixed assets on average. So, the lack of reliable power supply significantly impacts operational costs of Sri Lanka’s industries, which in turn impinges on their competitiveness.

Electricity: Impacting Enterprise Profitability

Maintaining cost competitiveness is crucial for the industrial sector. However, the industrial sector in Sri Lanka, along with the hotel sector, cross subsidizes other categories of consumers such as households and religious establishments.

The Public Utilities Commission of Sri Lanka (PUCSL) has started implementing a new tariff rebalancing exercise since the beginning of 2011 with a view to bringing the power sector back to profitability4. Mandating time-of-use (TOU) tariffs (applying differential tariffs depending on the time of the day electricity is being used such as daytime, peak, and off-peak) for all medium and large industries as well as medium and large hotels since January 2011 is a salient feature of this exercise. This has further driven up the costs of hotel and industrial categories.

Tariff increments in the hotel category affects the key growth sector, tourism, where it is estimated that top city hotels will incur additional costs of Rs. 120 million due to electricity tariff increases in 20115. Similarly, electricity-intensive industries such as textile, cement, ceramic, metal and aluminum, ship building, and food and beverages are also affected. Industry sources expect a cost increase of 4% to 8% on average, which adversely affects the competitiveness of export-oriented manufacturers in particular (with the current exchange rate policy). In the ceramic industry, for example, the electricity component alone accounts for about 50% of total costs. A statement by the Sri Lanka Ceramics Council, the industry body of the sector, noted that, under the new measures, the cost of electricity of their member companies could increase by as much as 20 to 42%6.

CEB Profitability: Passing on to Users

According to the tariff rebalancing exercise, the licensees (i.e., entities tasked with generation, transmission and distribution) are to be “compensated transparently for external or market related features of the business” such as weather7. Similarly, any direct or indirect subsidy received by the CEB is to be “clawed back and passed-on to customers as a discount, as provided in the approved Methodology for Tariffs”8. Tariff revisions are to take place every six months in order to facilitate this process.

The recent financial turnaround of the CEB should be viewed in this light. In 2010, the CEB recorded profits worth Rs. 5 billion after a decade of steady losses. According to the methodology outlined above, these profits should be passed on to consumers as discounts. A careful look at the factors behind CEB’s profits indicates that this may not be possible.

According to the Ministry of Power and Energy, numerous reasons contributed to the financial turnaround of the CEB. First, is the implementation of the Ten Year New Plan which brought the CEB a profit of Rs. 8,006 million9 (the details of this plan are not available in the public domain). Second is the reduction of unlawful usage and wastage of electricity by strengthening the Investigation Unit of the CEB. As reported by the Ministry of Power and Energy, total wastage in 2010 was 1.19% lower than in 200910. Third is the adoption of “stringent methods of staff administration” at CEB which improved productivity and financial efficacy11. In addition to these, the increment in hydro power generation during 2010 reduced the dependence on the more expensive, thermal power generation.

While the above measures undoubtedly had a significant role in the CEB’s profitability, it seems likely that other factors also contributed strongly to this result.

CEB Profitability: Taking a Closer Look

The heavy rains experienced in 2010 favoured hydro electricity generation, a fact which may not have received enough significance when considering recent reports on CEB profitability. At present, Sri Lanka is heavily dependent on oil-fired thermal generation. The average cost of thermal electricity generation by the CEB licensee is Rs. 18.11 per kilowatt hour. This is significantly higher than the average cost of hydro electricity which is just Rs. 1.35 per kilowatt hour12. In 2009, the generation mix was 60% thermal and 34% hydro. While in 2010, thermal generation was 47%, hydro electricity generation increased to as much as 47% due to heavy rainfall13. Thus, the reduction of thermal generation was a key contributor to CEB profitability, without which the generation costs incurred by the CEB would have escalated much further.

The financial assistance provided by the government to the CEB also needs to be considered. As the ‘Consulting Paper on Setting Tariffs for the Period 2011 – 2015’ by the sector regulator, the PUCSL, states - “the total outstanding debt stock (of CEB licensees) to the Treasury and Ceylon Petroleum Corporation as at 31.12.2009 should be considered as zero”14. This includes dues to the Ceylon Petroleum Corporation (CPC) for Heavy Fuel supply amounting to Rs. 46 billion as at the end of 200915. This moratorium was continued in 2010 as well16.

The fuel subsidy given to the CEB is also an important element. The CPC has remarked that 80% of their losses are due to selling underpriced Heavy Fuel to the CEB17. Although the exact percentage cannot be verified, it is established that the CEB receives heavily subsidized fuel from the CPC, also a state-owned enterprise afflicted with profitability issues. While the price of furnace oil is Rs. 81 per litre, the CEB has been paying Rs. 25 per litre until September 2010, at which point it was revised to Rs. 40 per litre, still half of the market price18.

Therefore, it is clear that even though administrative reforms taking place to streamline the CEB as an entity would have contributed to the profitability of the CEB in 2010, it has also been significantly dependent on favourable weather and direct government assistance. Moreover, due to very low water levels in major reservoirs during the middle of this year (reducing to as low as 20%19), the CEB had to increase the share of thermal power generation to cater to the demand in the country. Thermal power generation has been stepped up further as the second inter-monsoonal rains have been delayed. The CEB states that hydro power generation has dropped to 20% as of October20. This would no doubt mean that generation costs would be higher again in 2011, unlike in 2010. In fact, the CEB has already requested the PUCSL to increase electricity tariffs in order to cover their monthly losses of around 5 billion21. Moreover, according to the forecasts by a renowned energy specialist, electricity costs will keep rising until 2013, which will burden industries further22.

So, it is unlikely that the concerns of the industrial sector could be effectively addressed amidst the attempts by the CEB to make the power sector financially viable. It seems that the industrialists would have to continue to grapple with their electricity issues at least until financial viability is restored to the sector by 2015, assuming the tariff rebalancing exercise is executed on schedule. Meanwhile, the Sri Lankan industrial and commercial sector (including tourism) needs to place greater focus on energy efficiency and go ‘lean and green’ in their energy consumption. These changes take time and won’t be easy in the short-term, but would no doubt reap rewards in the longer run.

Citations

1 The World Bank, 2011, More and Better Jobs in South Asia: Overview, Washington D.C.; 2 Ibid; 3 The World Bank, and International Finance Cooperation, 2004, Investment Climate Assessment. Sri Lanka: Improving Rural Urban Investment Climate.; 4 Public utilities Commission of Sri Lanka, 2010, Consultation Paper on Setting Tariffs for the Period 2011-2015.; 5 http://www.porcelaintablewares.com/news/news32.html; 6 Ibid; 7 Siyambalapitiya Tilak, 2011, The New Electricity Pricing Policy in Sri Lanka, Prof. R. H. Paul Memorial Lecture.; 8 Public Utilities Commission of Sri Lanka, 2010, Consultation Paper on Setting Tariffs for the Period 2011-2015.; 9 Official website of the Ministry of Power and Energy - http://power.lk/2011/03/ceb-has-made-profit-of-5-billion-for-2010-financial-year-after-incurring-losses-running-into-115-billion-in-the-previous-10-years/; 10 Ibid; 11 Ibid; 12 Ministry of Finance and Planning, Annual Report 2010.; 13 Ibid; 14 Public Utilities Commission of Sri Lanka, 2010, Consultation Paper on Setting Tariffs for the Period 2011-2015.; 15 Ministry of Finance and Planning, Annual Report 2010.; 16 Ibid; 17 http://www.lbo.lk/fullstory.php?nid=1668399651; 18 Ministry of Finance and Planning, Annual Report 2010.19 The Daily Mirror, July 18, 2011. The Real Truth Behind the Power Crisis.; 20 The Daily Mirror, October 4, 2011. Rain delayed: Threat to food, hydro-power. 21 Lanka Business Online, October 24, 2011. Sri Lanka power sector facing bankruptcy: minister. 22Siyambalapitiya Tilak, 2011, The New Electricity Pricing Policy in Sri Lanka, Prof. R. H. Paul Memorial Lecture.

View our Bundlr:
A compilation of articles on the ongoing issues in Sri Lanka’s electricity sector created with the online tool ‘Bundlr’

Repositioning South Asia: A Positive Look

2011-10-23T23:33:00.000-07:00

By Stephanie De Mel and Anushka Wijesinha – IPS

This week (Oct. 22-23), in Dhaka, Bangladesh, policymakers, economists, SAARC officials and diplomats will come together for the 4th South Asia Economic Summit (SAES), following on from the first three held in Colombo, Delhi, and Katmandu. The theme this year for the SAES is: ‘Global Recovery, New Risks and Sustainable Growth: Repositioning South Asia’. In this context, this article takes a look at some of the positive factors that are likely to support South Asia’s emergence as a formidable economic force in Asia.

Following the Asian Tigers’ emergence in the 1970s and China’s subsequent rise, the South Asian region has displayed strong and consistent growth, due in no small part to India’s growing preponderance in the world economy. South Asia’s average growth rate in 2003-08 was approximately 8% and, despite the protracted ill-effects on the global economy of the recent financial crisis, the region is projected to grow quite strongly into the future.1 Certainly, numerous challenges remain to be met: the persistence of poverty, difficulties associated with facilitating regional integration, and inherent structural and institutional weaknesses in these economies are significant in this regard. Nevertheless, there is reason to be optimistic about South Asia’s future economic prospects, not only because these issues are beginning (however slowly) to be addressed, but also due to a range of emerging growth opportunities. Key among these opportunities are the ‘demographic dividend’ created by South Asia’s current demographic transition (not in all countries in the region), a rapidly growing middle-class, increased global integration, and the regional benefits derived from India’s continued and increasing economic successes.

The Demographic Dividend

South Asia is currently undergoing a demographic transition, resulting from a change over time from high mortality and fertility rates to low ones. This has important growth implications: as the generation born just after the fall in mortality but just before the fall in fertility approaches working-age, the region experiences a significant swell in its labour-force. Indeed, it is estimated that by 2020 South Asia will have the youngest population in the world.2 The opportunity for increased economic growth which the demographic transition affords is termed the ‘demographic dividend’, a phenomenon which arises out of an increase in a country’s working-age to non-working-age ratio.

South Asia’s working-age population is projected to grow by an average of 18 million people per year for the next twenty years.3 If this excess labour is productively employed, the potential benefits to be reaped by the region are extensive. Apart from Sri Lanka, whose relatively early and rapid mortality and fertility declines have already generated a demographic dividend, the working-age to non-working-age ratio is still rising for the South Asian states, and is estimated to peak at various times over the next four decades. Thus, these economies require a favourable policy environment in order to capture the maximum possible benefits of this demographic change.

Bloom et al. consider some important factors in this regard.4 The ability of government institutions to provide a sound base for facilitating the demographic dividend is one. Particular attention must also be paid to labour legislation, in order to ensure that the extra labour generated by the demographic transition is productively employed. The study suggests two alternative paths in this respect: a ‘low road’ approach, which consists of expanding low-wage jobs in order to absorb the excess labour, and a ‘high road’ approach, which seeks to develop more highly-skilled forms of employment in the services, industrial and agricultural sectors.5 Macroeconomic management and trade policy are two other factors that contribute to an enhanced demographic dividend. Curbing inflation and maintaining a favourable domestic environment for the expected savings and investment increases are important, as is developing the export industry in order to increase employment opportunities. Another consideration is education policy: the burgeoning services sector in South Asia requires highly-skilled workers. The demographic transition provides an ideal opportunity for swelling the ranks of this type of worker through effective investment in education. Such investments enhance the possibility of achieving a ‘high-road’ form of employment for a larger cohort of workers.

The Rise of the South Asian Middle-Class

Demographic change in South Asia has also occurred along income lines. A significant decline in poverty has pushed large numbers of people who formerly survived on less than US$ 2 a day into the ranks of the middle-class. This effect is particularly marked in India, a country home to a significant proportion of South Asia’s poor, and where strong growth has generated improvements in income over several years. Sri Lanka is the other South Asian state expected to experience a large middle-class expansion within the next decade. South Asia’s middle-class has grown at an average rate of 12% per annum over the last decade, rising in absolute terms from 24 million in 2000 to 72 million in 2010.6 It has been estimated that, by 2025, South Asia could boast a middle-class of 1 billion people, or 55% of its population.7 This is a notable increase from its current proportion of 4.5% and, even more significantly, represents approximately one-quarter of the global total. India’s middle-class could, by the same year, become the largest in the world in absolute terms.8

The ways in which a large and growing middle-class can contribute to economic growth processes have been frequently documented.9 Firstly, strong links exist between the degree of entrepreneurship in an economy and the size of its middle-class. Secondly, members of the middle-class contribute significantly more, at least in absolute terms, to aggregate savings and human capital investment than do their poorer counterparts – middle-income groups typically save sizeable amounts for retirement, housing and their children’s education, thereby providing ample resources for capital investment. Another consideration is the relationship between the size of the middle-class and levels of domestic consumption. Growth in the middle-class raises demand for consumer durables and other manufactured goods. This increase in the size of the domestic consumer base encourages capital investment and fosters the development of international trade.

There is also the possibility that, once the middle-class reaches a critical mass, it creates a virtuous cycle of higher consumption, higher firm profits, higher savings and investment, higher growth and, consequently, a larger middle-class. A contributing feature is the middle-class’s willingness to pay more for high-quality goods, which encourages product differentiation among firms and, consequently, higher profits.

Increased Global Integration

South Asia has made significant strides in trade participation and financial openness in recent decades. Imports and exports have grown strongly – the region’s average export growth rate rose from 5.3% in 1997-2001 to 14.3% in 2002-2006.10 Similarly, import growth increased from 2.2% in 1997-2001 to 24.6% in 2002-2008.11 Notably, the region’s export growth rate in 2002-08 of 19.3% is significantly higher than the global average of 11%.12

Another important development has been an expansion of the region’s base of trade partners. Traditionally, most South Asian states supply agricultural and manufactured products to Western markets. More recently, however, strong trade linkages have developed between these states and other developing states, notably in Africa, the Middle East and other parts of Asia. Developing countries received 38.1% of South Asia’s exports and provided 43.8% of its imports in 1985. By 2006, these shares had increased to 42.7 and 49.1 percent, respectively.13 Trade with China has, in particular, been expanding quite strongly since the early 2000s – aggregate trade between China and the group of SAARC states was valued at approximately US$ 80.5 billion in 2010, for example.14 Seeking to further expand the scale of these mutual benefits, India and China have agreed to a bilateral trade target of US$ 100 billion for 2015.15 Encouragingly, South Asia also experienced a doubling of its intra-regional trade figures from 2003 to 2008.16

Furthermore, FDI flows to South Asia have increased steadily over the last decade. FDI grew from US$ 6.7 billion at the start of the 2000s to US$ 22 billion in 2006-07.17 Between the periods 2003-04 and 2006-07, FDI inflows more than doubled for the region’s three largest recipients: India, Pakistan and Sri Lanka.18 Although South Asia’s share of FDI inflows is only about 5% of inflows to developing states in Asia and about 3% of inflows to developing states in the world, this share is increasing over time, an indicator of its growing attractiveness as a region for investment relative to its other developing counterparts.19

An interesting development in South Asia’s process of financial integration with the world is its slow but definite emergence as a source of outward FDI. In 2006-07, FDI outflows from South Asia amounted to nearly US$ 10 billion. Of this, US$ 9.67 billion came from India, US$ 0.11 billion was from Pakistan and US$ 0.03 billion was attributed to Sri Lanka.20 In fact, India is beginning to be viewed as a significant source of intra-regional FDI. This represents another means by which the states of South Asia can aid each other’s growth through closer cooperation.

India’s Success Story: Regional Spillovers

India’s emergence as a significant player in the global economic arena represents one of South Asia’s most important opportunities for regional growth and development. The nature of such potential is multiform. Firstly (and arguably most importantly), we consider India’s booming service sector. Beginning in the late 1980s with a burgeoning software industry, India’s service sector has expanded over time to embrace IT enabled (including Business Process Outsourcing (BPO)), pharmaceutical, biotechnological and medical services. As an indicator of the speed of Indian service sector growth, the country’s services exports tripled between 2002-03 and 2005-06, increasing from US$ 20 billion to US$ 60 billion.25 Furthermore, India accounted for 60% of all global software outsourcing in 2008.26

Importantly for the region, as Indian IT and other service sector firms continue to move up the production value chain, they are themselves beginning to outsource more routine procedures regionally. South Asian states which demonstrate low wages and a sufficiently skilled workforce therefore benefit considerably from continued developments in the Indian service sector. Regional service sector developments are thus no longer confined to India bur rather, have extended to the other South Asian states, notably Pakistan and Sri Lanka. The notion that South Asia could become a global ICT outsourcing hub is, consequently, garnering attention. In order to realise such an aim, however, considerable efforts are required to deepen the degree of regional integration within South Asia, as well as to improve the regional infrastructure necessary to sustain a vibrant service sector. Endeavours to improve education and to lower establishment costs in order to foster a favourable business environment are also desirable.

Furthermore, Indian service-sector firms are increasingly moving towards economic activity that involves knowledge production. For example, certain Indian pharmaceutical companies have begun to develop new drugs, rather than merely producing low-cost, generic versions of existing drugs, as was previously their practice. If, in this manner, India is able eventually to establish itself as a centre of research and development, the potential spillover benefits to the region – in terms of knowledge and technology transfer – would expand considerably. Yet again, however, the realisation of these benefits depends crucially on states’ ability to integrate effectively, both amongst themselves and with India.

A second Indian ‘success’ which could benefit the region is its emergence as a source of FDI outflows. As previously discussed, capital inflows to South Asia have been on the rise in recent years. Equally, however, growth in the Indian economy has spurred a culture of Indian investments overseas. India’s FDI outflows have grown appreciably in the last five to ten years: for instance, they grew from US$ 5 billion in 2005-06 to US$ 12.8 billion in 2007-08.27 Notably, much of India’s FDI is directed towards developing states, a significant proportion of which are regionally located. India is Sri Lanka’s third-largest source of FDI at present, for example. As is the case with service sector development, however, deepened regional ties are desirable in order to ensure that higher levels of Indian FDI flow intra- rather than inter-regionally.

Conclusion

Despite the continued challenges posed by poverty, global economic volatility and the slow progress of regional integration, the unique and important opportunities currently afforded to South Asia have poised it on the brink of a period of significant economic growth. If appropriately harnessed, these opportunities could establish the region as a growing economic power of considerable note. Its success in this regard will, however, depend crucially upon India’s continued economic achievements and the region’s ability to absorb the consequent spillover benefits. This in turn relies upon a far greater level of regional integration than is currently being experienced. Yet, despite the relative slowness of the process, greater attention is now being paid to achieving just this. If, during the next few years, South Asia is able to overcome geopolitical concerns and improve regional integration, particularly with India, to a more desirable level, it could well fulfil its potential of becoming Asia’s newest economic ‘miracle’.

Citations

1 Tan Tai Yong (ed.), Challenges of Economic Growth, Inequality and Conflict in South Asia, Singapore: World Scientific Publishing, 2010, p. 32.; 2 World Bank, Reshaping Tomorrow: Is South Asia Ready for the Big Leap? (forthcoming); 3 David E. Bloom, David Canning and Larry Rosenberg, “Demographic Change and Economic Growth”, in World Bank, Reshaping Tomorrow: Is South Asia Ready for the Big Leap? (forthcoming); 4 Ibid.; 5 Ibid.; 6 Homi Kharas, “The Rise of the Middle Class” in World Bank, Reshaping Tomorrow: Is South Asia Ready for the Big Leap? (forthcoming); 7 World Bank, Reshaping Tomorrow: Is South Asia Ready for the Big Leap? (forthcoming); 8 Ibid.; 9 Ibid.; 10 Research and Information System for Developing Countries, South Asia Development and Cooperation Report 2008, New Delhi: Oxford University Press India, 2008, p. 27.; 11 Ibid., p. 27.; 12 Ibid., p. 27.; 13 Ibid., p. 29.; 14 IMF Direction of Trade Online Statistics, <http://www2.imfstatistics.org/DOT/>, last accessed 16 June 2011.; 15 ‘Sino-Indian Trade Volume Exceeds USD 60 bn Target’, Jagran Post, 27 January 2011, http://post.jagran.com/SinoIndia-trade-volume-exceeds-USD-60-bn-target-1296141127, last accessed 26 June 2011.; 16 Research and Information System for Developing Countries, South Asia Development and Cooperation Report 2008, p. xix.; 17 Research and Information System for Developing Countries, South Asia Development and Cooperation Report 2008, p. 47.; 18 Ibid., p. 47.; 19 Ibid., p. 48.; 20 Ibid., p. 53.; 21 Ibid., p. 19.; 22 Ejaz Ghani (ed.), The Service Revolution in South Asia, New Delhi: Oxford University Press, 2010, p. 6.; 23 Research and Information System for Developing Countries, South Asia Development and Cooperation Report 2008, p. 37.; 24 Ibid., pp. 38-39.; 25 Arvind Panagariya, India: The Emerging Giant, New Delhi: Oxford University Press, 2008, p. 266.; 26 Ejaz Ghani (ed.), The Service Revolution in South Asia, p. 216.; 27 Research and Information System for Developing Countries, South Asia Development and Cooperation Report 2008, p. 54.

Post-conflict Growth: Making it Inclusive

2011-10-23T23:29:00.000-07:00

The IPS launched its ‘Sri Lanka: State of the Economy 2011’ report yesterday (19th October 2011) at its first Annual National Conference at the IPS Auditorium, in the presence of two Senior Ministers of the Cabinet. This year’s report has as its theme ‘Post-conflict Growth: Making it Inclusive’. In this post, we bring you some extracts of the ‘Policy Perspectives’ section, the introductory chapter in the report. The full version of it is available in PDF format at the end of the post. But first, here is a ‘wordle’ (using the online tool available at www.wordle.net) which captures key words and highlights them according to the frequency with which they feature in the ‘Policy Perspectives’ section.

For Sri Lanka, emerging from a costly era of a long drawn conflict, rising socio-economic aspirations must be met to help restore and cement social harmony in its post-conflict development efforts. Besides the desirability of inclusive growth from a purely ethical standpoint, from a more practical perspective, inclusiveness is needed for sustaining economic growth, as exclusion leads to underemployment of productive resources that restricts growth. Access to productive employment is a critical element to drive inclusive growth. It requires improving employability of workers on the one hand and improving access to productive employment opportunities, on the other. On the supply side, improving employability involves access to good quality health, education and other productive assets. On the demand side, improving access to employment requires opening up opportunities in various sectors of the economy in different geographic regions and for diverse types of workers.

Overall growth performance…

“As the global economy begins the arduous road to recovery, 'growth' has become the cornerstone for the world's policy makers, be it the US policy on 'foundations for long term growth', UK's 'strategy for economic growth' or Japan's 'new growth strategy'. In this, Sri Lanka is no exception, setting itself an ambitious medium term growth target in excess of 8 per cent per annum in the country's new post-conflict environment. Indeed, Sri Lanka achieved it in 2010 with a strong economic rebound, amidst a steadily improving macroeconomic environment. This was in stark contrast to the experience a mere two years ago, when economic performance was at best erratic, with unacceptably high inflation and dwindling foreign exchange reserves.”

Some issues remain…

“Amidst the strong recovery and seemingly bright medium term prospects for the Sri Lankan economy, there are, nevertheless, some concerns about specific aspects of the country's recent economic performance. The relatively weak recovery of private investment to take advantage of the country's new stability has been one such area. Growth in private sector credit disbursement was slow to pick up, as has been inflows of foreign direct investment (FDI) to the country. Private sector credit growth was sluggish for much of 2010, picking up only towards the latter months of the year, while net FDI inflows saw only a mild recovery at US$ 435 million as against US$ 385 in the crisis-ridden year of 2009. As in the previous year, it was buoyant public investment that kept Sri Lanka's growth momentum moving to allow the country to reach a GDP growth of 8 per cent.”

Investment drive…

“In this respect, Sri Lanka's public investment drive that is heavily tilted towards improving physical infrastructure capital in the country will no doubt provide a useful initial boost to growth. But, the longer term sustainability of that growth momentum can only be ensured with appropriate investment in technology, knowledge transfer, etc. Here, private sector investment, and FDI especially, has a particularly important role to play.”

Financing development…

“[…] the government's stance on deficit financing - i.e., limiting reliance on domestic sources of finance - in its attempt to retain a relaxed monetary policy stance to spur growth can prove to be double-edged. It necessarily raises Sri Lanka's reliance on foreign financing to meet the country's growing public investment needs. The repeated calls for fiscal consolidation efforts stem from a recognition of the potential medium to long term risks that arise from rising exposure to external debt.”

Foreign debt…

“Notwithstanding the overall figures, the composition of the debt matters. Here, Sri Lanka has seen a rapid change in its external debt structure with non-concessional and commercial sources raising their share from 7.3 per cent in 2006 to 37.5 per cent in 2010. These are costlier sources of foreign finance, and not surprisingly, the country's overall external debt service ratio has crept up over the period from an annual average of 12 per cent during 2002-04 to 16.4 per cent over 2008-10. To make certain that future external debt service payments can be met comfortably and limit the country's exposure to unanticipated external shocks, Sri Lanka must ensure that its foreign exchange earnings remain strong. As a first step, a prudent course is to limit foreign currency borrowing to projects that will, either directly or indirectly, enhance the foreign exchange needed to service future payments.”

Striking a balance…

“Ongoing developments in the industrialized economies offer a salutary lesson and a necessary reminder of the choices available to governments. Economic growth can be given a short term boost by fiscal and/or monetary policy stimulus, but at the risk of worsening long term debt problems. Alternatively, a more cautious approach on fiscal austerity can damage growth in the short term, and indeed incur electoral unpopularity along the way. For Sri Lanka, the current Stand-by Arrangement (SBA) with the International Monetary Fund (IMF) has provided an external anchor, underscoring the government's fiscal and monetary framework. As the IMF programme ends in 2012, Sri Lanka will have not only a healthier economy and stronger public finances, but also the necessary 'political space' to consolidate public finances in the absence of major electoral imperatives.”

Fiscal frugality…

“In view of the above concerns, it is encouraging that the overall fiscal outcomes in 2010 are positive. The deficit was reduced from 9.9 per cent of GDP in 2009 to 7.9 per cent in 2010 and looks set to be reduced further to under 7 per cent in 2011. This is, of course, not to imply that low fiscal targets per se are always desirable or appropriate. Arguably, Sri Lanka's expansionary fiscal policy stance of 2009 in the midst of a sharp economic downturn and domestic socio-political imperatives stemming from immediate rehabilitation needs of a war weary population could be justified. Without such a fiscal stimulus to the economy, the private sector's reluctance to undertake investment would have depressed economic activity even further than the 3.5 per cent growth recorded in 2009. Rather than adopt a dogmatic approach to fiscal targets, what is needed is a clear understanding that sound public finances allows a country the necessary leeway to respond appropriately to emerging domestic and/or external shocks.”

“Fiscal policy has clear implications not only for sustained high growth, but also in relation to the distributional impacts of such growth. For instance, Sri Lanka's current focus on public infrastructure is found to be concentrated heavily on the construction of roads, ports, airports, etc. By contrast, capital investment in education and health which stood at 1.1 per cent of GDP in 2006 had declined to 0.6 per cent by 2010. The tight fiscal constraints within which the government is attempting to achieve a host of complex objectives are clear. Perhaps, most importantly it also serves to underline the necessity for placing Sri Lanka's public finances on a sounder footing as an immediate priority.”

Inflationary pressure…

“Sri Lanka's rate of inflation has been rising incrementally from the last quarter of 2010, primarily on account of rising food prices following inclement weather conditions. Political turmoil in some key oil exporting countries has also mounted rising pressures on international oil prices. Such supply-side price shocks will have inevitable one-off impacts on inflation. Standard monetary policy responses to contain supply-side induced inflation are not effective and alternative interventions through administered price controls and tax measures were adopted. There is, however, the threat that food and fuel price increases will be absorbed into the general inflationary pressures via wage increases, even as a recovery in credit growth to the private sector is anticipated to quicken and add to inflationary pressure on the demand-side.”

Export earnings…

“[…]However, in the midst of a significant drop in the ratio of exports to GDP in recent years - from 28 per cent in 2004 to 16.7 per cent in 2010 - Sri Lanka cannot be complacent about the need to push for higher foreign exchange earnings in the midst of a heavier exposure to external debt repayments in the long term. The drop in the exports-to-GDP ratio despite an increase in absolute dollar terms suggests that the higher growth momentum Sri Lanka has been seeing more recently is driven less by an export-push and more by other factors, such as the higher public investment drive in infrastructure, etc. However, given the very limited domestic market, sustained high growth can only be achieved if Sri Lanka raises foreign demand for the country's goods and services.”

Poverty…

“[…]sustained growth can help poverty alleviation by not only pulling the poor up into gainful employment, but also by providing larger volumes of revenue to finance targeted social programmes. On the face of it, Sri Lanka appears to have made significant strides in tackling overall poverty in the country and reducing emerging gaps between sectors of the economy. The Household and Income Expenditure Survey (HIES) carried out by the Department of Census and Statistics (DCS) appears to suggest that the poverty headcount index has dropped from 15.2 per cent in 2006/07 to around 8.9 per cent by 2009/10. The most promising is the suggestion that the gap between urban, rural and estate sectors have narrowed in the interim.”

“Despite the overall narrowing of imbalances, inequities in access to gainful economic opportunities - across different dimensions such as gender, geographic location, sector, ethnicity, etc. - continue to persist. Policies to address these become all the more important in the context of post-conflict reconciliation efforts.”

Skills for growth…

“If, as anticipated, Sri Lanka's economic growth becomes increasingly driven by a higher skilled services sector in the coming years, widening wage gaps can emerge. Additionally, as more and more employment is created in the contractual/informal sectors - where limited incentives are present for employers or the self-employed to invest in training - the lack of skills development can exacerbate structural rigidities in the labour market. Often the most vulnerable segments will be unskilled, female labour.”

The inclusiveness imperative…

“While there is broad consensus that economic growth is vital for development, it is also recognized that growth alone is not the be-all and end-all of development. In this context, the notion of economic growth that is both sustainable and inclusive becomes an important policy imperative for governments. While these are often fashionable lexicons in policy documents, country-specific contexts demand that they are not ignored. For Sri Lanka, emerging from a costly era of a long drawn conflict, rising socio-economic aspirations must be met to help restore and cement social harmony in its post-conflict development efforts. That calls for economic policies that will not only deliver broad-based rapid growth, but policies that are also sensitive to issues of equity in the distribution of, and access to, resources.”

The IPS State of the Economy 2011 report - ‘Post-Conflict Growth: Making it Inclusive’ - is now available for purchase at the IPS.

http://www.ips.lk/publications/contact_information.html

Dynamic Growth in Sri Lanka: the Innovation Imperative

2011-10-13T02:35:00.000-07:00

By Anushka Wijesinha, Research Economist – IPS

Innovation is beyond research, it requires clever commercialization

Sri Lanka needs to take a 360 degree approach to innovation policy

As Apple’s co-founder Steve Jobs bids adieu to an ipod/iphone/ipad/macbook crazed world, it brought to the fore how much technological innovation has touched the lives of millions, and become so important in this new dynamic global economy. Jobs was a veritable trailblazer in innovation, with Apple products forever changing the way people interact with technology.

Apple now operates more than 300 retail stores in 11 countries. The company has sold more than 275 million iPods, 100 million iPhones and 25 million iPads worldwide. Jobs' climb to the top was complete in summer 2011, when Apple listed more cash reserves than the U.S. Treasury (US$ 76 bn to the Treasury’s US$ 72 bn) and even briefly surpassed Exxon Mobil as the world's most valuable company.

True, Steve Jobs was a tech titan, a once in a century kind of innovation genius. But neither he nor the Apple company could have done it alone. The key to innovation of this nature is that it is bolstered by a myriad of supporting structures – what is known as an ‘innovation system’.

Innovation system – more than just S&T and R&D

The concept of a national innovation system is not new. Metcalfe (1995) writes that it is “a system of interconnected institutions to create, store and transfer the knowledge, skills and artifacts which define new technologies”. In practice, this is the network of universities, research centres, think tanks, firms, business associations, and more generally, producers and users of knowledge in the country. A forward-looking innovation system that supports knowledge-interaction and commercialization among various parties is critical for building a knowledge economy. If Sri Lanka is truly aspiring to be a knowledge-based economy hub, it needs to take the creation of an innovation culture and an innovation system much more seriously.

“S&T” and “R&D” are buzz phrases that are often heard in the discussion on how to propel growth by building an economy’s innovative capacity and driving high value exports. The relationship between science and technology (S&T), research and development (R&D) and economic development is a strong one and has been well established in the literature.

But innovation is distinct from just research. In fact, it need not result from it. Innovations come from the entrepreneurs who make them happen and ultimately depend on a society’s responsiveness and ability to transform research into something that adds value to people’s lives, to the economy. Innovation, therefore, is fundamentally a social process. An innovation system is made up of private and public organizations and actors that connect in various ways and bring together the technical, commercial, and financial competencies and inputs required for innovation. Fundamentally, innovations are carried out by entrepreneurs who exploit existing knowledge and technology to propose new products or practices and disseminate them. Government policy should act as the lubricant that helps this process along. So, looking at the business climate that fosters entrepreneurship becomes important – is the government giving the right signals on private entrepreneurship? Is the technology infrastructure in place? Are the requisite skill pools available? Are government licensing and other regulatory procedures business-friendly? – these need to be addressed.

Developing a robust innovation system in a country, requires a robust network consisting of government institutions, regulators, research institutes, universities, enterprises, consulting firms and professional/business groups. Once these networks are firmly in place, the next step is to then develop a productive nexus from this – essentially building an innovation system – strengthen the country’s innovative capabilities. The general underdevelopment of the individual components as well as this nexus in Sri Lanka is a symptom of the low priority given to S&T and R&D investment over the past several years, and will be a determinant of our competitiveness in the coming decades. According to the ICT think tank LirneAsia, Sri Lanka produced just 2.5 PhDs per year on average during 1991-2000 in 7 universities (Colombo - 5 per year and Peradeniya - 6 per year). Meanwhile, qualification levels of universities faculties remain poor, with 23% of Humanities and Social Science teachers having only a Bachelors degree and 33% having a Masters degree from the same university.

In its Five Year Strategy, the Ministry of Technology and Research states that “at present very few knowledge intensive companies and very little R&D that is required for innovation, is taking place in the private sector. On the other hand, most of the R&D undertaken by Sri Lankan scientists end up as mere publications in scientific journals with very few research outputs yielding a commercial product or a process. As such, the contribution of R&D to the growth of our GDP at present is negligible”.

As Figure 1 demonstrates, unlike in most developed countries where much of the R&D expenditure is by the private sector (over 65% in most cases), in Sri Lanka it is a mere 8%. The bulk of R&D expenditure in Sri Lanka is by the state sector (71%). This has strong implications on the rate of commercialization of research.

Innovation also means adaptation

Innovation as a concept doesn’t just mean the domestic development of cutting-edge scientific discoveries – say for example, Sri Lanka trying to develop a game-changing technology, but also the adaption and use of existing innovations for productive use in the local context. This balance needs to be struck in Sri Lanka. While we continue to drive new innovation, for example, through innovative PPP (private-public partnership) mechanisms like the SLINTEC, we need to cooperate more closely with technology champions in the world – from the world’s most innovative nation, the USA, or Europe’s innovation and technology champion, Germany, to Eastern technology giants like Japan, China, South Korea and even India.

Many developing countries like Sri Lanka have a long way to go before they can start creating world-changing, cutting-edge technologies. It will be some time before Asia sees the birth of its own Apple. But this does not mean that their development should not focus on creating an innovation culture. According to the report on ‘Building Sri Lanka’s Knowledge Economy’ (published by the World Bank in 2008), large rewards from technology accrue to those that adopt new technologies, adapt them, and make them productive in the local context. So, an innovation culture for developing countries like Sri Lanka must be understood as the building of a technical culture and a system of incentives that support the adoption and subsequent adaptation of existing (often foreign) technologies. The success of East Asian economies has also followed this pattern of first moving to existing best practices and then attempting to develop new technologies.

With technological transformations continuing at a rapid pace, and the emergence of a globalised marketplace, all countries are under pressure to become more innovative and technologically connected. For Sri Lanka too, adopting existing technologies and best practices, while of course gradually developing new ones, is the quickest way for the economy to move up the value chain. A report on Indian innovation revealed that India achieved a five-fold growth in output by simply adopting existing information and technologies elsewhere. East Asian champions like Korea, Singapore and Malaysia also grew rapidly by adopting existing technologies by often ‘looking East’ towards early adopters like Japan. Of course, later they developed new and advanced capabilities and became global innovation hubs themselves.

Global economic leadership – the innovation imperative

Steve Jobs once famously said “innovation distinguishes between a leader and a follower”.

As the debate about the changing economic power balance shifting East, and the debilitation of the economic might and dynamism of Western economies continues apace, we mustn’t write them off just yet. An important reason why several of them remain fundamentally strong is that they possess a key ingredient to adapt to changing tides - innovation. Particularly, the United States and Germany.

The strength of the US economy lies in its capacity to invent and innovate. These inventions are converted into commercial products at a rate much faster than in other countries. Many social factors and flexibility in economic policies contribute to this innovative dynamism. America’s Gross Domestic Expenditure on Research and Development is the second highest in the world (next to Japan) and has consistently been higher than the OECD and EU average. It accounts for a significant 43% of all pharmaceutical patents, half of all medical patents and almost 20% of all environmental patents. It publishes nearly 280,000 scientific articles each year, the highest in the world. At a recent lecture in Sri Lanka, Dr. Razeen Sally, Director of the European Centre for International Political Economy, mentioned that “the number of patents being registered in the USA far exceeded patents being registered by the rest of the world combined”.

Immigration policies have strengthened the innovation talent pool in America, attracting both the best minds from East Asia, and ample labour from South America. The Harvard political scientist, Joseph Nye, considered the father of the concept of ‘soft power’, points out in his book The Future of Power that Chinese- or Indian-born engineers run more than a quarter of all high-tech companies in Silicon Valley. By 2005, one in four technology start-ups had been launched by immigrants. According to Nye, America’s greatest long-term strategic asset is “its ability to attract the best and brightest from the rest of the world and meld them into a diverse culture of creativity”.

In Europe, Germany is the innovation powerhouse, and will help it navigate the changing tides of the global economy. The country boasts of not only industry-leading firms but also one of the world’s strongest and most innovative small and medium-sized enterprise sectors - the powerhouse of its economy. Products with the insignia “Made in Germany” still command an unrivaled global position, re-known for their high quality and cutting-edge technology. In 2008, Germany spent around 2.6% of its GDP on Research & Development, well above the EU average of 1.9%. In 2009, firms based in Germany registered the 3rd highest number of patents in the world. In an analysis of the world’s leading innovation hubs, 5 German cities featured in the top 15 – Frankfurt, Hamburg, Berlin, Stuttgart, and Munich. Germany’s focus on Research and Development is clear from the highest level – it doesn’t just have a Ministry of Education, it has a Ministry of Education and Research. The country boasts over 750 publicly funded research institutions, the highest in Europe. Yet, it is the German private sector that leads the way in R&D. Of the 62 billion Euros spent on R&D in 2009, more than two thirds was by industry.

China, too, is emerging as an innovation leader, mainly by adopting and adapting Western technologies, while developing its own new-innovation capabilities. Although both China and India are touted as the new ‘Asian Giants’, China is clearly ahead of India on the innovation pillar. Even when we factor in the different population and land sizes, the numbers are impressive. China has 708 researchers per million people compared to 119 in India. By 2009, China had over 16,000 PhDs in science and engineering, while India had around 6,400. In 2007, the Chinese filed 245,000 patents compared to 35,000 in India. China is set to overtake Japan as the second largest spender on Research and Development after the US in the next two years. So if you thought China is still thinking of competing on low cost labour, think again.

But some argue that Asia doesn’t have what it takes to give birth to people like Steve Jobs. At an event in Delhi last year, Lord Meghnad Desai of the Centre for Global Governance at the LSE said that “Asians aren’t rule breakers. We tend to follow the pack. What sets Western trailblazers apart is that they break the rules and refuse to conform, giving birth to a dynamic innovation culture.” (Similar thoughts are shared by Sri Lankan commentators – see ’Goodbye Steve Jobs, Long Live Mavericks!’
(http://groundviews.org/2011/10/09/goodbye-steve-jobs-long-live-mavericks/).

Innovation policy – the Government as a Gardner

An effective and comprehensive innovation policy needs to take a holistic approach by looking at the overall innovation climate. This goes beyond just science and technology policy and involves many ministries, government departments and other state organs, while actively engaging the private sector. A World Bank report on creating innovation policies in developing countries uses the analogy of a gardener tending to plants.

“Government action can usefully focus on a few generic functions comparable to nurturing plants to help them grow. It can facilitate the articulation and implementation of innovative initiatives, since innovators need basic technical, financial, and other support (watering the plant). The government can reduce obstacles to innovation in competition and in regulatory and legal frameworks (removing the weeds and pests). Government-sponsored research and development (R&D) structures can respond to the needs and demands of surrounding communities (fertilizing the soil). And finally, the educational system can help form a receptive and creative population (preparing the ground)”.

We don’t need to reinvent the wheel. Advanced as well as less advanced countries offer good practices that Sri Lanka can adapt to local contexts in developing a holistic innovation policy towards building a robust national innovation system. But the institutional challenges to creating an effective innovation system, and driving forward an innovation policy would no doubt be many. What is critical is leadership at the highest level to ensure the success of a national innovation policy – a high-level task force or commission chaired by the President or Prime Minister would give credibility to a national vision and would facilitate the adoption of key measures to remove hindering bureaucratic hurdles. A good first step has clearly been made by the Ministry of Technology and Research in preparing a National Science, Technology and Innovation Strategy 2011-2015 (the full document is downloadable via the link below). It is possibly the most comprehensive and futuristic look at driving innovation in Sri Lanka, so far, even speaking of ‘techno-entrepreneurship strategies’ to promote greater science-industry linkages. However, what needs to happen now is to embed this strategy within a broader strategy that looks at the national innovation system – what are the other government institutions and private sector organisations not only in the science and technology sphere that need to be linked in to take this agenda forward?

Steve Jobs once said in an interview with Fortune magazine (9th November 1998) that, “innovation has nothing to do with how many R&D dollars you have […] It's not about money. It's about the people you have, how you're led, and how much you get it”.

For Sri Lanka, it still WILL matter how much R&D rupees are spent. But what Steve Jobs said here about his company Apple, is relevant for Sri Lanka as a country. Spending on R&D, focusing on expanding science and technology education and utilization, alone will not be enough. Innovation is about people, about providing the space and opportunity for Sri Lanka’s people to develop their innovative and creative capabilities. It is about providing a conducive business climate to commercialize their innovations and creativity. It is about ‘getting it’ - understanding what it takes to build a holistic national innovation system and how to incentivize all the actors involved. And it is about giving the right leadership from the highest levels of government. Sri Lanka needs to take a 360 degree approach.

11-Science Technology and

Innivation Strategy

Useful links:

World Bank (2008), ‘Building Sri Lanka’s Knowledge Economy’ - http://go.worldbank.org/ONUB0VVB70

Lanka Business Online (4th July 2011), ‘Sri Lanka ranked 82nd in innovation index’ - http://www.lankabusinessonline.com/fullstory.php? nid=1748864538

The Island Financial Review (2nd Oct 2011), ‘A closer look at innovation in Sri Lanka’ -http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=35971

Lanka Monthly Digest (2nd September 2011), ‘BURDENED BY A STAID PRIVATE SECTOR’ -http://lmd.lk/2011/09/01/sri-lanka/

Ministry of Technology and Research - http://www.motr.gov.lk/web/index.php?lang=en

Sri Lanka Institute of Nanotechnology (SLINTEC) -http://www.susnanotec.lk/

Is Low Agricultural Productivity Keeping Batticaloa Poor?

2011-09-27T04:41:00.000-07:00

By Roshini Jayaweera (Research Officer - IPS)

In considering issues of poverty in Sri Lanka, Batticaloa is conspicuous as a district that requires particular attention. In addition to being identified as the country’s poorest district in 2009/10, it is also one of two districts for which poverty statistics actually increased between 2006/07 and 2009/10.1 According to the latest Household Income and Expenditure Survey (HIES) 2009/10 of the Department of Census and Statistics, the poverty rate in Batticaloa district was five-and-a-half times higher than that of the Colombo district – 20.3% vis-à-vis 3.6%. A major contributing factor to this is the low agricultural productivity which the district continues to experience. This is of particular concern given that the majority of Batticaloa’s residents are engaged in agriculture – especially paddy farming. This article, based on a survey conducted by the Institute of Policy Studies of Sri Lanka in 20112, shares some thoughts on why Batticaloa’s agricultural productivity is low and is, in turn, keeping its people who are engaged in agriculture poor.

The survey focused on two of the poorer and more remote DS divisions out of 14 DS divisions in the Batticaloa district - Manmunai West (Vavunathivu) and Kiran. In the survey, 1,545 individuals surveyed were above 10 years of age, and of them 37% were employed - a statistic which features a larger proportion of men than women. Around 24% of individuals were students. Nearly 10.5% were unemployed, a percentage that is slightly higher than the district’s average unemployment rate of 7.4%.3

Youth unemployment is relatively high in these two remote DS divisions - 84% of the total unemployed population is less than 30 years old and 31% per cent of the population aged between 10 and 30 years are unemployed. So, clearly, attempts at reducing poverty in this district must focus on strategies to raise employment levels.

Many in Batticaloa are ‘working poor’

A key issue in this district is the persistence of poverty even among employed members of the population. The existence of this group of ‘working poor’ indicates that employment does not, of itself, guarantee an escape from poverty. So, in addition to lowering unemployment, poverty alleviation efforts must also consider the factors which constrain earnings among the working population of this district.

The three largest categories of employment in Batticaloa are agriculture (largely paddy farming), labour and market gardening (see Figure 1). Taken as a whole, 58% of workers are employed in the agriculture and fisheries sector. The majority of these workers are poor due to low incomes from employment.

Low agri productivity – the blight of Batticaloa?

A main reason for the persistence of low incomes among this group of workers is low agricultural productivity. Batticaloa is ranked among the five districts which recorded the lowest productivity in paddy farming in the 2010/11 Maha season. Certainly, it may be argued that this is due in part to the severe floods experienced in this region in early 2011. However, although paddy productivity has been slightly higher in previous years (i.e., years unaffected by floods), it has still compared poorly with other districts even over time. For instance, Batticaloa recorded the seventh and ninth lowest levels of paddy productivity for the 2008/09 and 2007/08 Maha seasons, respectively.

Thus, it is clear that improving agricultural productivity is the key to transforming the agricultural sector in a manner that meets the challenges currently faced by the district. Consequently, it is important to identify the issues that continue to bar the expansion of agricultural production and incomes.

One of these is weather and other environmental issues. Among those surveyed, 33% of people were engaged in agricultural activities and they reported that this was a key issue for them. Of them, 44% have been the victims of flooding.4 Simultaneously, however, another 22% have suffered from drought. This odd combination would suggest that accelerating climate change may be a contributing factor to low productivity in the region. One of the best solutions to this is the introduction of short-age seed varieties, especially drought tolerant and flood resistant verities. Another possible solution is the development of the irrigation system and sound irrigation water management.

“2/3 of the cultivation areas have no irrigation facilities. Rain-fed farming can only be done during Maha season” - key informant, Vavunathiv

Attacks by wild animals are also a concern in Batticaloa’s agricultural sector. Nonetheless, measures to minimize the effect of this need to be taken not merely by the government but also by farmers themselves. The latter must take the necessary precautions to protect their farms by traditional methods. The government and Wildlife Department could then become involved only in cases where farmers are unable to protect themselves.

A second important issue which was reported as hindering the expansion of agricultural production is a lack of capital. Around 12% of farmers in the sample identified this as a constraint on productivity. Another 11% identified high input costs as a major concern. Given the links between the two (high input costs might be considered a consequence of capital shortages), it may be inferred that nearly 22% of farmers in this area face financial difficulties in their agricultural activities. This is mainly due to low incomes which in turn, as previously discussed, result from low productivity.

Many farmers in the Eastern Province are now keen to utilise higher technology techniques in their paddy fields. However, this equipment is expensive and requires easier access to credit.

http://ipslk.blogspot.com/2010/10/access-to-credit-critical-issue-for.html

“We do not need storage facilities as we have to sell our whole production to the moneylender from whom we borrowed money for the cultivation. We have to sell our products at a lower price to them immediately after harvesting, although the government is buying it at a higher price” – a farmer from Pudumandapathadi

Qualitative information gathered during the survey suggests that the issue is becoming increasingly severe, as most of these farmers also face credit constraints and cannot sell their products at higher prices in order to make larger profits. The low quality of these agricultural products also limits the price that farmers receive and, by extension, their ability to invest in capital. Most of these farmers are unable to sell their paddy to the government’s paddy-buying scheme because it does not meet the required quality standard.

A solution to these financial issues is microfinance. The results of the household survey show that currently, the most important financial sources in Batticaloa are government banks. NGOs, Community Based Organization (CBOs and moneylenders are equally ranked as the second most important financial source. Informal financial lending is high among selected households, mainly due to land ownership issues which give rise to a lack of collateral. Therefore, the availability of microfinance can go a long way in bridging this. Although many microfinance institutions already operate in these areas, and some government banks also engage in microfinance activity, greater awareness must be generated among the population on the availability of such schemes, as well as their benefits. At the time of conducting the survey, most of the villages in this area had an active producer organization or farmers’ organization. These could potentially be a useful medium through which financial institutions could reach the working poor.

A lack of access to inputs is a third obstacle faced by Batticaloa farmers. Insufficient access to seed paddy is a problem, which has become more severe as a result of the floods experienced in the region in early 2011. This contributes to the consistently poor quality of the paddy produced by farmers and, consequently, to the low prices received at the marketplace.

Visvalingam, a farmer in rural Batticaloa, installed a pilot micro-irrigation system on his vegetable plot in 2009, with UNIDO funding. He now earns Rs. 18,000 more a month due to higher yields and lower costs, after moving to better productivity technology for irrigation. Despite his optimism for the future, however, Visvalingam echoes the gripes of other farmers in the area, that getting micro loans from local banks is nearly impossible.

http://anushwij-photos.blogspot.com/2009/10/how-better-technology-is-helping-mr.html

“We get deceived when buying seed paddy” - A farmer from Mandapathadi

Access to crop insurance is also limited in Batticaloa. Additionally, a lack of market access and of infrastructure facilities (notably transportation) contributes to the phenomenon of the ‘working poor’ in this area.

Conclusion

Adverse weather and climatic changes, capital shortages, high cost of inputs, access to credit difficulties, and poor quality of output are affecting agricultural productivity in Batticaloa, and impacting on the incomes of the farmers in Batticaloa. Among these issues, capital shortage emerged as the most pressing issue that needs to be remedied.. Meanwhile, introducing short-age seed varieties, as well as drought tolerant and flood resistant seed varieties could help to overcome issues generated by climate change. For this, greater investment in agricultural research and development is critical. More access to microfinance is also required, to help ease financial constraints faced by the agricultural community. Developing agriculture-based rural entrepreneurship can also be a solution to the problem of seasonal unemployment among agricultural workers. Interventions such as these, particularly those that could improve agricultural productivity, have the potential to pull up the ‘working poor’ in Batticaloa out of poverty and ensure better living standards in the future.

The author acknowledges valuable inputs received from Dr Parakrama Samarathunga (Research Fellow –IPS) and Asha Gunawardena (Research Economist – IPS) in developing this article.

References

Department of Census and Statistics (DCS), Household Income and Expenditure Survey (HIES) 2009/2010.
This study was carried out in four districts in the Northern and Eastern provinces: Ampara, Trincomalee, Batticaloa and Vavuniya.
Department of Census and Statistics (2009), “Sri Lanka Labour Force Survey – Annual Report 2009”
This study was carried out in January 2011 immediately after severe floods in the Northern and Eastern provinces and therefore this figure might not be representative.

Sri Lanka Continues its Rise up Global Competitiveness Index: Jumps 10 Ranks in 2011-12 World Economic Forum Report

2011-09-07T00:29:00.000-07:00

Ranks just 2 below the Top 50
WEF warns against complacency, biz community expectations will evolve as country develops

By Anushka Wijesinha (Research Economist) and Dilani Hirimuthugodage (Research Officer) – IPS*

The World Economic Forum today (7th September) released its latest Global Competitiveness Report (2011-2012), which reports that Sri Lanka has made an impressive jump of 10 places in the rankings, to 52nd from 62nd in the 2010-2011 report. This is a further improvement from the 2009-2010 report which ranked the country at 79th position.

The Institute of Policy Studies of Sri Lanka (IPS) was the Sri Lankan Partner Institute in conducting the Executive Opinion Survey which is a key element in building the GCR rankings, and on Monday the IPS received an exclusive preview of the results via international audio conference with the WEF headquarters in Geneva, Switzerland. It was noteworthy that the WEF economists speaking to all the partner institutes specifically mentioned Sri Lanka as having performed strongly in rising up the rankings, and are among the top risers in the Asian region.

On the eve of the global release of the report, we spoke yesterday (6th September), directly with an official at the WEF to get Sri Lanka-specific perspectives on the latest report.

Thierry Geiger, Associate Director of the WEF’s Centre for Global Competitiveness and Performance said, “Sri Lanka has made a remarkable performance. When I look at the evolution across all indicators, Sri Lanka shows improvements on 80% of them - 80-90 of the 110 indicators - both in terms of scores as well as rank.”

“Last year was a big jump. But you need to be cautious of ranks. So many countries are ranked so close to each other. It’s important to focus on the scores. In the last GCR, Sri Lanka improved its score by 0.24 points which we consider a big jump. This year the score improvement was not as big as last year, but there is consistency”.

Sri Lanka made the greatest improvements in scores, year-on-year, in the pillars of ‘macroeconomic stability’ (up by 0.48 points) and ‘infrastructure’ (up by 0.33 points). Meanwhile, the most noteworthy decline in scores was in the pillar of ‘labour market efficiency’ (down by 0.11 points).

Certain pillars still sticky

Despite the strong performance, however, scores of certain indicators weakened, reflecting the business community’s continued concern on these issues and their impact on economic activity. Geiger noted that “Everything is on the rise in Sri Lanka except for pillars like ‘public trust in politicians’, ‘irregular payments’, and ‘independence of the judiciary’ which have declined. The pillar of ‘red tape’ has improved significantly from a score of 3.8 to 5.1 (rising from rank of 113 to 59). An improvement of 0.8 is seen in the ‘security’ pillar, which the WEF economist noted was “remarkable”, and attributed it to the improved climate following the end of the war.

Table 1: Sri Lanka’s recent performance on GCR pillars

Notes: *Basket of countries was 133 countries in 2009-10, 139 in 2010-11, and 142 in 2011-12. Due to variances in total countries being ranked over the 3 periods, the key point of interest should be the changes in scores of each pillar.

Source: Global Competitiveness Report (various years), WEF

Guarding against complacency

Some recent reformers appear to have stalled in their rise up the rankings, and this was considered noteworthy. “What is interesting is that we are observing some stagnation among several developing Asia economies, for example Vietnam and Indonesia. Even though they had been doing quite well on the GCR lately, they have stagnated this year. We attribute it to growing concern among the business community that the necessary reforms have not been made fast enough to sustain growth at high levels”, Geiger said.

It appears that, in these countries, expectations have not been met and the business community is “getting impatient”. This had important implications for a country like Sri Lanka where, although improvements in the rankings have been made it is important that policymakers and government officials do not become complacent. Geiger remarked that, “As a country develops, expectations change, the needs evolve. If governments don’t deliver, this creates disappointment among the business community, and this is reflected in the scores of countries like Vietnam and Indonesia this year.”

Can it be sustained?

When asked if it is likely that the recent dramatic jumps in GCR scores and rankings were mainly due to strong positive sentiment by the business community following the end of the war and whether this was likely to taper off in the coming years, he noted that, “it is hard to quantify the optimism. Rwanda observed a similar situation when it came out of conflict in the 1990s. Sometimes we tend to observe overshooting due to short term strong positive sentiment. But for Sri Lanka, it is not only the opinion survey data that shows the improvements, hard data on the various indicators support this too. But the country must guard against complacency”.

Asian picture

Asia’s rise to economic prominence has been accompa¬nied by a remarkable dynamism in terms of competi¬tiveness. Over the past five years, several countries in the region—including China, Indonesia, Vietnam, and Sri Lanka—have made important strides in the GCI rankings. Yet the disparities in terms of competitiveness within the region are unique, ranging from Singapore at 2nd place to Timor-Leste at 131st. Two of the region’s largest economies, Bangladesh (108th) and Pakistan (118th), continue to rank very low, while a number of Asian emerging economies enter the top 30.

Sri Lanka scores better than India (91st) this year too, but the WEF economist cautioned against comparing the two. “You must keep in mind that improvements in smaller economies are easier to make”. However, he added that even among the ‘developing Asia’ country group, and even among smaller economies, Sri Lanka does well. Table 2 provides a selected cross-country benchmarking, showing that the country still lags behind South East Asian neighbours like Malaysia, Thailand, and Indonesia, and clearly has some way to go to become competitive on par with these dynamic economies.

Table 2: GCR 2011-2012: Sri Lanka’s performance vis-à-vis selected economies

Global picture

Switzerland tops the overall rankings of the GCR, while Singapore overtakes Sweden for second position. Northern and Western European countries dominate the top 10 with Sweden (3rd), Finland (4th), Germany (6th), the Netherlands (7th), Denmark (8th) and the United Kingdom (10th). Japan remains the second-ranked Asian economy at 9th place, despite falling three places since last year.

The United States continues its decline for the third year in a row, falling one more place to fifth position. In addition to the macroeconomic vulnerabilities that continue to build, some aspects of the United States’ institutional environment continue to raise concern among business leaders, particularly related to low public trust in politicians and concerns about government inefficiency. On a more positive note, banks and financial institutions are rebounding for the first time since the financial crisis and are assessed as somewhat sounder and more efficient.

Within the Eurozone, Germany maintains the lead, although it goes down one position to sixth place, while the Netherlands (7th) improves by one position in the rankings, France drops three places to 18th, and Greece continues its downward trend to 90th. Competitiveness-enhancing reforms will play a key role in revitalizing growth in the region and tackling its key challenges, fiscal consolidation and persistent unemployment.

The results show that while competitiveness in advanced economies has stagnated over the past several years, in many emerging markets it has improved, placing their growth on a more stable footing and mirroring the shift in economic activity from advanced to emerging economies. China (26th) continues to lead the way among large developing economies, improving by one more place and solidifying its position among the top 30. Among the four other BRICS economies, South Africa (50th) and Brazil (53rd) move upwards while India (56th) and Russia (66th) experience small declines. Several Asian economies perform strongly, with Japan (9th) and Hong Kong SAR (11th) also in the top 20.

Xavier Sala-i-Martin, Professor of Economics, Columbia University, USA, and co-author of the GCR, notes in the report that, “Amid re-emerging concerns about the global economic outlook, policy-makers must not lose sight of long-term competitiveness fundamentals. For the recovery to be put on a more stable footing, emerging and developing economies must ensure that growth is based on productivity enhancements. Advanced economies, many of which struggle with fiscal challenges and anaemic growth, need to focus on competitiveness-enhancing measures in order to create a virtuous cycle of growth and ensure solid economic recovery.”

The Global Competitiveness Report’s competitiveness ranking is based on the Global Competitiveness Index (GCI), developed for the World Economic Forum by Sala-i-Martin and introduced in 2004. The GCI comprises 12 categories – the pillars of competitiveness – which together provide a comprehensive picture of a country’s competitiveness landscape. The pillars are: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication and innovation. The rankings are calculated from both publicly available data and the Executive Opinion Survey, a comprehensive annual survey conducted by the World Economic Forum with its network of Partner Institutes. This year, over 14,000 business leaders were polled in a record 142 economies. The survey is designed to capture a broad range of factors affecting an economy’s business climate.

*Ayodya Galapattige (Research Officer – IPS) led the IPS team conducting the Executive Opinion Survey for WEF. Harini Weerasekera (Project Intern – IPS) contributed to this article.

Read the latest 2011-2012 GCR Report:The Global Competitiveness Report 2011-2012

WORLD ECONOMY HEALTH CHECK: Snapshot of Continuing Concerns

2011-08-23T22:04:00.000-07:00

by Kithmina Hewage and Harini Weerasekera (Project Interns, IPS)

As Sri Lanka is on the cusp of a new economic era, the world economy could be on the cusp of a new economic slowdown. This article gives a quick snapshot of the current state of the world economy, particularly recapping the events of the past few weeks indicating the ongoing fragility of Western economies. In closing, it puts forward some issues for debate on the impact of these developments on Sri Lanka.

Although media debates on prospects of another serious economic meltdown continues apace, it is more apparent that, rather than the prospects of a serious collapse, it is the overall uncertainty and lack of confidence pervading these economies that are blighting the current global economic climate. At the outset of the financial year, the IMF and World Bank identified a possible phase of global economic recovery, which has failed to materialize thus far.

Sources: IMF World Economic Outlook (WEO) Update (January 2011), IMF World Economic Outlook (April 2011), IMF World Economic Outlook Update (June 2011), World Bank Global Economic Prospects (GEP) Report 2011, World Bank Global Outlook in Summary 2009-2013

According to the latest IMF World Economic Outlook Update (June 2011), despite some ‘negative surprises’, global growth in Q1 of 2011 was around 4.3%. Further, although downside risks have been recognized, the latest IMF forecasts for the EU show upward revisions. The update further remarks, that, “growth in the advanced economies is projected to average about 2.5% during 2011–12, slightly weaker than in the April 2011 World Economic Outlook. This would represent a modest deceleration from an average of about 3% in 2010”. US growth in Q1 of 2011 was only 0.4% with consumer spending at its weakest in 2 years. The Economist newspaper calls America’s outlook ‘grim’; statistical revisions have revealed a weaker than assumed recovery, and the odds of a ‘double dip’ recession to be as probable as 50%.(1) Over the past 6 months the US has grown at an annualized rate of merely 0.8%, which was well below expectations(2). The Bureau of Economic Analysis (BEA) revised US numbers through the recession, to reveal a downturn more severe that previously understood (3).

Several continuing challenges have had a significant influence on these original forecasts causing a reevaluation of the performance of the global economy. Given the magnitude of debt and fiscal issues involved (as discussed below), particularly in the US and Euro Area, recovery from global recession will be tenuous and may take a fair amount of time, contrary to preceding expectations.

1. US ECONOMY: DEBT DEAL, RATINGS DOWNGRADE, AND STOCK MARKET REACTIONS

Following weeks of political maneuvering and distress calls from politicians and economists, the American political structure succeeded in agreeing on a debt deal that averted a US sovereign default, the first in the country’s history. Yet, just two days following the passing of the debt deal, indicating continued investor uncertainty, the New York Stock Exchange suffered severe losses. The Dow Jones Industrial Average plunged more than 500 points on the 4th of August, its ninth decline in 10 sessions. This is the Dow's ninth-worst day ever; the worst being a 777-point drop in September 2008 following the Lehman Brothers collapse(4).

The end of day trading on Monday 08th August 2011, the first full day of trading after the downgrade of US credit rating, resulted in Wall Street’s worst day since 2008 and its performance has proven to have a resonating effect on Asian markets, triggering a global equity sell off. What should be noted though is that the negative turnover in the US market is not solely due to the debt deal or any single domestic matter, but rather a culmination of reasons pertaining to the economy in general and economic problems faced overseas, particularly in Europe.

AAA to AA+: An Unprecedented Fall, but Limited Global Impact?

The downgrading of the credit rating for the United States of America from an AAA to an AA+ rating by the US credit rating firm, Standard & Poor’s, dealt a severe public relations blow to the US, but hardly an indication of a possibility of US debt default.

Given that it is only S&P that has downgraded the US credit rating it could, if at all, add more fear and uncertainty to an already sluggish economic recovery, rather than result in a collapse of the economy itself. It is important to understand that the ratings downgrade by S&P is more of a reflection of macroeconomic and political factors and not necessarily default risk. Ironically, it is interesting to note that following assurances made by the Federal Reserve on the 09th of August, 2011 the US stock market performed unexpectedly well – the best performance during the last two years. Moreover, US Treasury Bills suffered little from the ratings downgrade announcement, and global investors continue to park their money in them.

Moreover, the fact that it is in the interests of all to ensure that the dollar remains the reserve currency, also contributes to the fact that such a downgrade has limited global impact. Especially given that a potential drain away from US Treasuries will lead to significant losses to those who hold dollar reserves (such as China, the biggest holder), the international community seem to have taken particular interest to limit the global impact of a downgrade in US credit ratings. Essentially, there is no alternative to dollar as a reserve currency for now (especially in view of euro problems). Therefore, it has become a necessity that the dollar remains stable for the benefit of the global economy.

Investor Confidence: Business and Government

The problem for the US and European markets is not a lack of liquid cash available to major companies for investments, but a general lack of confidence in the market, more so, the government. Since the expansive stimulus packages that were effective since the height of the financial crisis in 2008, by choice or by necessity, a symbiotic relationship between the market and the government was created. As such, today, both the stock market and the economy have become dependent on government support. With greater emphasis by policy makers on spending cuts, the markets are showcasing a growing sense of insecurity, as safety nets for companies are perceived to be shrinking. That creates worries about economic growth, hurting stocks and other risky assets that depend heavily on the economy. (5)

2. EU ECONOMY: EURO AT RISK?

While the recovery of the American economy has been sluggish, the global economic situation is compounded by concerns surrounding the debt crisis in European economies. A string of fiscal crises in Greece, Portugal and Ireland (less prominent of late) have fuelled fears of a collapse of the Euro Zone (Greece being the hardest hit economy by the financial crisis, with revenues falling 15% in 2009). Following crises in these countries, and a re-emergence of concerns in May this year regarding Greek debt refinancing and austerity measures taken to counteract it, Europe is now faced with the new possibility of dealing with a separate debt crisis involving Italy and Spain.

In the EU, especially in countries where sovereign debt has increased sharply due to bank bailouts, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany.(6)

Italy and Spain

The matter seems to have culminated into greater insecurities with financial tensions rising in both in Italy and Spain with an ever increasing level of public debt in both countries. This has in turn fuelled worries of default and another potential bail out with the assistance of the economically stronger nations in the region, i.e., Germany and France. On a brighter note though, both Italy and Spain have taken proactive initiatives to address financial issues pertaining to their respective country, thereby somewhat reducing this risk.

Response by the European Central Bank (ECB)

Given insecurities regarding the ‘PIIGS’ economies (Portugal, Italy, Ireland, Greece, Spain), there is a growing call for proactive measures by the ECB in order to stabilize the situation. Saddled with large public debt and high, and potentially unsustainable, debt-to-GDP ratios, fiscal reforms regulated and centralized through this European body may become a necessity.

The expansion of the SMP (Securities Markets Programme) to include bonds of Spain and Italy by the European Central Bank (ECB) is also seen as a positive step in reassuring all those involved. The SMP along with the European Financial Stability Facility (EFSF) are essentially designed to get the Euro through the crisis so that fiscal reform can take place in a more orderly fashion.(7)

However, albeit such intervention may be a temporary fix, it is not the cure for the problem. The argument holds that the only way to prevent a complete breakdown of the Euro is by stronger AAA rated economies in the Euro zone such as Germany stepping forward, risking their own credit, in order to refinance loans at reasonable interest rates for the likes of Spain and Italy. It is however, a role Germany is eager to avoid and unwilling to accept, with the consequences mounting as it prolongs such efforts.

3. SRI LANKAN ECONOMY: WHAT ARE THE EMERGING ISSUES?

Sri Lanka is a small open economy dependent on its trade integration with the world economy. As Sri Lanka is on the cusp of a new economic era, the world economy could be on the cusp of a new economic slowdown.

Yet, it may not be necessary to revise Sri Lanka’s growth forecasts for this year despite these concerns, as much of the current growth is being driven less by exports, rather, more by domestic stimulus – heavy infrastructure spending.

No doubt, Sri Lanka’s exports are likely to be adversely affected, particularly as the bulk of the country’s exports are to the very markets that are currently in limbo. Rethinking Sri Lanka’s export destination concentration is an urgent need. For decades now, Sri Lanka has relied on Western markets for its export earnings. For much of the last decade, the bulk of Sri Lankan exports (ranging from 55 to 60%) have been to the US and EU. In 2010, 21% of total exports were to the US (8) and 35% of total exports were to EU countries (UK-12%, Germany-5%, other EU countries-13% (9)). However, with the weak recovery, sluggish consumer spending, depressed job market, woes due to austerity measures (mainly in Europe), Sri Lankan exports to these markets are under severe stress. The case for developing stronger trade ties with apparently healthier economies of Asia couldn’t be stronger, also given that it constitutes for a large share of FDI flows and other development finance to the country. India and China are growing, along with East and South East Asia; but currently account for only around 16% of Sri Lanka’s total exports (10).

Sri Lanka has been increasingly losing its global export share over the last few years, having a comparatively weak export performance globally. In the backdrop of weak consumer demand in our key markets, is it likely that this situation would worsen? In the medium term, the outlook for the US and EU is, therefore, decisive. Improving our export performance, and thus our export earnings, becomes an added imperative in the context of increased borrowings from international debt capital markets, which means the need to service growing external debt service obligations.

Among the possible impacts on Sri Lanka resulting from the fragile economic health in the West as discussed in this article, here are some important issues for debate:

A global slowdown would cause oil prices to move downwards, which will benefit an oil importer like Sri Lanka, particularly in containing inflation. But what about other commodity prices? How will changes in commodity prices as a result of a global slowdown affect Sri Lanka?

The impact of this fragility on investor confidence is likely to be high, as is the likelihood of high risk averseness by the global investor community. In that backdrop, what will be the outlook for FDI and other financial flows to Sri Lanka?

Will we see more inflows of ‘hot money’ to our region’s emerging markets, from investors seeking better returns? Are Sri Lanka’s current safeguards, like the cap on foreign investment in government securities, sufficient?

Is there a likelihood that credit rating agencies take a tougher approach in the future, and therefore will maintaining and improving Sri Lanka’s sovereign credit rating require a more stringent approach, where there are no allowances for policy slip-ups?

What are your thoughts on how these issues will pan out?

References

“Time for a double dip?” The Economist (Print Edition), 6 August, 2011.
ibid
“Six years into a lost decade”, Washington, DC, The Economist (Print Edition), 6 August, 2011.
“How much more could stocks drop”, J. Hough, The Wall Street Journal, http://online.wsj.com/article/SB70001424053111903366504576488853000636600.html
“A question of confidence”, E. S. Browning, Wall Street Journal, August 5, 2011. Available at: http://online.wsj.com/article/SB10001424053111903885604576488672973950288.html(accessed on August 9 2011)
Financial Times, February 18, 2010. Available at: http://www.ft.com/cms/s/0/7d25573c-1ccc-11df-8d8e-00144feab49a.html
“European Central Bank signals expansion of SMP”, 08 August 2011, Central Bank News. Available at:http://bx.businessweek.com/european-financial-crisis/view?url=http%3A%2F%2Fwww.centralbanknews.info%2F2011%2F08%2Feuropean-central-bank-signals-expansion.html
Central Bank of Sri Lanka, Annual Report (2010)
ibid
ibid

Pulling Ourselves Up: Taxation, Development, and Away from Aid

2011-08-14T23:07:00.000-07:00

Guest Article by Prof. Mick Moore*
Institute of Development Studies (IDS), University of Sussex, UK

In our first guest article on ‘Talking Economics’, British political-economist and taxation specialist, Prof. Mick Moore, argues that, as developing countries strive to move away from their dependence on foreign aid, the discussion on the role of tax in development is getting renewed attention. ‘Taxation’ is being increasingly seen not purely as a technical fiscal topic, but also in the context of broader imperatives of governance, accountability, and state-building.

In March of this year, the IMF published a new policy paper on Resource Mobilisation in Developing Countries. Much of the advice that it offers to developing countries is very familiar, including the need to simplify tax systems, to broaden tax bases by reducing the range of tax exemptions and tax holidays, and continuously to improve the quality of tax administration. However, Resource Mobilisation also includes some departures from the previous IMF orthodoxy. Three are particularly significant. First, it states clearly that many governments need significantly to increase the proportion of national income that they collect in taxes to fund a range of social needs. Second, it argues the case for more emphasis on property taxes, especially as a way of dealing with the neglected problem of adequately funding sub-national governments. Third, it acknowledges that taxation may serve purposes beyond simply raising public revenue, and talks positively of ‘taxation and state building’ – if only to step back immediately by suggesting that the meaning of the phrase is unclear.

The Role of Taxation: Renewed Debate

Resource Mobilisation is not going to set the world afire. However, in the context of the narrow and rather staid and stable world of orthodox public finance specialists, it does represent a real policy shift. What brought this about? Why did the IMF feel the need to declare a new policy stance? One possible answer is that it simply represents lessons learned from experience. The new ideas are indeed pragmatic and sensible. The IMF has shifted its tax advice in the right direction. But the shift does not result only from the power of reason and experience. It also reflects the fact that a number of other international organisations are now competing with the IMF to define international policy in the field of ‘taxation and development’.

While the IMF is still the main repository of technical expertise, other organisations have been setting the pace in the global policy debate. The G20, the European Commission and the European Parliament have decided that revenue mobilisation is a key dimension of development policy. Hilary Clinton made this the main subject of a speech in Brussels this summer. The OECD, that has long been the main alternative source of expertise and influence to the IMF, has been getting a much wider audience. Even the sleepy United Nations has realised there might be something interesting here. Below the radar, aid and development organisations probably have organised more seminars, meetings and conferences on ‘tax and development’ in the last two years than they did in the previous twenty. The topic is hot, and the IMF feels the need to show that it is being responsive. But why is it so hot?

The dominant reason is the way in which the 2008 private banking crisis has transmuted into fiscal stresses and crises in most of the richer countries. The least fortunate governments are struggling even to meet their immediate financing needs without defaulting on their debts. Most of the others face large and long term public sector deficits, which they will have to finance just as their own populations age and become more of a fiscal burden. All governments are looking for revenues, and for ways of closing tax gaps and loopholes. Under pressure from the richer countries, tax havens have been rushing to clean up their acts, and get off the OECD’s list of ‘uncooperative jurisdictions’. The US Treasury has begun to pummel and bully Swiss banks into cooperating more with US tax authorities. Developing countries are not the main actors in this drama, but they now seem to merit at least a place on the stage. Previous campaigns drawing attention to the extent of capital flight from poor countries, facilitated by weak tax administration, did not get much attention from rich country governments. This is now changing. If tax evaders begin to lose the generous protection afforded them for decades by Swiss banks and small Caribbean tax havens, they will be looking create new havens in places like Brazil, China, India, Nigeria or South Africa? Not only do the OECD governments now see an interest in discouraging such countries from becoming tax havens, but they also increasingly would like the active cooperation of their tax authorities in tracing international capital movements and identifying tax evaders. That cooperation in turn implies that tax authorities in the developing world become more powerful and effective. Interests have begun to converge. OECD governments can support with genuine enthusiasm new international rules and practices that will simultaneously help them close their tax gaps and enable developing country governments to raise more revenue to finance the achievement of the Millennium Development Goals.

Away from Aid and the Taxation-Governance Link

While it is the urgent fiscal needs of many OECD government that has propelled ‘tax and development’ to the centre of the current development policy stage, there is more of a back story. The ground has been under preparation for several years. First, over the past decade, a number of international advocacy organisations have become increasingly active in exposing the extent to which rich people and transnational companies have been funnelling capital out of poor countries, partly as a result of weak tax administration, sometimes in volumes that seem to equal or even exceed the levels of aid going in the opposite direction. The figures remain very uncertain and disputed. But organisations like Tax Justice International, Global Financial Integrity, Christian Aid, and Action Aid have sowed serious seeds of doubt. Does it make sense continually to pressure governments of richer countries to increase aid to Africa if similar sums are coming back clandestinely from Africa to the OECD countries and to tax havens as a result of tax evasion and transfer mispricing?

Second, development aid itself has come under more sustained critique. Until a decade or so ago, aid generally was presented in public as a good thing and a moral obligation for rich countries. By arguing that aid might in some circumstances do harm to recipients, authors like Bill Easterly (2006) and Dambiso Moyo (2009) brought into the open views increasingly shared even by people experienced in the aid business. The notion that Africans would be better off without foreign aid – and therefore implicitly with higher domestic tax burdens – is not entirely new. It has recently become more widespread, and begun to seem more practicable, at least for some countries. There is now more informed discussion about the possible trade offs between aid and domestic tax as ways of financing the expenditures of the governments of poor countries. Norway, the world’s most generous aid donor, plays an important role in encouraging this debate.

Third, a number of academics specialising in development began to argue, especially on the basis of comparative historical experiences, that governments that were not financed principally from broad general taxation – but rather from aid or natural resource revenues – were unlikely to govern well. Taxation does not serve simply to raise revenue. It also has state-building dimensions. (See D. Brautigam et al., eds., Taxation and State-Building in Developing Countries, 2008).

African Tax Authorities: Surprisingly Exemplar

Finally, and most recently, there is emerging from Anglophone Africa in particular something of professional movement among senior tax administrators animated by this notion that good tax policy and administration can help build states and nations, and by a mission to end aid dependence. This movement has two tangible historical roots. The first is in South Africa. Tax is one of the success stories of post-Apartheid governments. The African National Congress set out to raise more revenue to finance what it often termed the ‘social debt’ of Apartheid – a legacy of poor education, bad housing and deficient health facilities. The South African Revenue Service (SARS), strongly directed from the top by senior members of the African National Congress, became a hive of institutional experimentation and innovation. Many senior posts were filled by new recruits from the private sector. The strategy was to identify the best tax practices from around the world, and adapt them to South Africa. SARS met its revenue targets, and became an inspiration for much of Africa. There were willing learners. The economic crises and stagnation that affected much of Africa from around 1970 until recently prepared the ground for some major reforms in tax administration from the 1990s onwards. In most Anglophone African countries, responsibility for tax collection has been taken away from ministries of finance and lodged in new, partially autonomous revenue authorities. In some cases, there were large scale dismissals of existing staff and fresh recruitment. This change coincided with the large scale adoption of digital information technology that has the capacity radically to improve almost every dimension of the tax business. Many senior staff has been recruited from the private sector.

While no African country can match South Africa’s record, there is a strong sense of collective achievement, and of being on the right side of history. Senior tax administrators recruited from the private sector tend to be more articulate and more willing to speak out than career public servants. This is reflected in the establishment in a well-funded new pan-African professional association, the African Tax Administration Forum (ATAF - http://www.ataftax.net/). State-building was the theme of the conference held in Pretoria in 2008 where the decision to create ATAF was taken. The South African Revenue Service currently provides secretariat facilities for ATAF, and the Commissioner-General of the South African Revenue Service was elected as the first Chair of the ATAF Council. He also co-Chairs the OECD’s Informal Task Force on Tax and Development, and thus has a very direct influence on the international policy debate.

‘Tax and development’ is very much on the agenda, not purely as a technical fiscal topic, but also as a dimension of broader concerns about governance, accountability and state-building. The debate is animated by an optimistic sense of movement, progress and mission, not by pessimism about threatening or intractable problems. And Africa, for once, is in the lead.

*Prof. Mick Moore is currently Professorial Fellow at the Institute for Development Studies (IDS), University of Sussex, and is also the founding Chief Executive Officer of the new International Centre for Tax and Development (ICTD) based at the IDS. Mick has done extensive field research in Asia and Africa, especially Sri Lanka, Taiwan and India. He has taught at the Massachusetts Institute of Technology, USA. His focus research and policy input areas include taxation, governance; politics and power; state capacity; and public policy. He has written extensively in international journals and other publications worldwide.

The IPS is collaborating with the ICTD to organise an ‘International Conference on Taxation, Governance and Development’ in November this year.

Korea Calling: Results from a Snap Survey of Job Seekers and Issues of Youth Unemployment

2011-08-10T22:15:00.000-07:00

By Anushka Wijesinha (Research Economist), Roshini Jayaweera (Research Officer), Nethmini Perera (Research Assistant) and Nisha Arunatilleke (Research Fellow) – IPS

Over 4,000 youth gathered along Havelock Road near the Police Field Force Headquarters on Monday to apply for jobs in South Korea, following an announcement by the government under a bilateral foreign employment scheme with South Korea; an arrangement that could potentially provide employment in Korea to thousands of Sri Lankans annually. This centre in Colombo was one of 29 centres islandwide set up by the Ministry of Foreign Employment that are distributing applications for Korean employment (particularly language tests), and attracted youth from various districts who had queued since afternoon the previous day. While registration of applicants began at around 8am, by 11.15am the officials along with Police support, announced to those queued that the centre is now closed as the maximum number of 3,500 applicants had been registered. Just prior to this, and the slight tension that ensued following the announcement, IPS researchers conducted a snap survey of a sample of 41 youth in the queue, to get some insight into their profile, education level, employment status, and reasons for seeking migrant work in South Korea. This article discusses the key findings, supplemented by background information on youth unemployment and foreign employment migration from current research by the IPS.

Youth unemployment presents a critical challenge in post-war Sri Lanka (see comments by IPS Board Member Dr. Anura Ekanayake on this issue at the Ceylon Chamber AGM recently - http://ipslk.blogspot.com/2011/08/realizing-post-war-miracle-challenges.html)

The International Organization for Migration (IOM) estimates that, annually, Sri Lanka sends over 250,000 workers on foreign employment worldwide. According to data published by the Central Bank of Sri Lanka, remittance inflows from Sri Lankan workers abroad amounted to 8.31% of Sri Lanka’s GDP in 2010, second only to export earnings from goods, but far above that of average FDI inflows.

According to IPS research, during the period 2005-2009, South Korea had been the dominant destination for Sri Lankan migrant workers compared to other East Asian countries. A bilateral agreement between the Sri Lankan and South Korean governments on migrant workers has been a key factor influencing this.

What Does the Snap Survey Reveal?

The results from our snap survey show that the majority of the job seekers were males (78%) in the 25-30 age group, and the hometown districts of nearly all of them were either in the Western or the Southern Province (see Table 1). Colombo and Matara showed the most number of applicants, counting 26.8% and 22% respectively.

An important point to note is that, overwhelmingly, nearly 66% of those queuing to apply to work in Korea had passed their GCE A/L examinations (see Figure 1). This is consistent with the overall numbers for Sri Lanka. According to the Labour Force Survey of the Department of Census and Statistics, unemployment in Sri Lanka is highest among those in the 20-24 age category who have passed the GCE A/L exam, a staggering 37% in 2009 (see Figure 3). Moreover, according to this data, the highest unemployment rate for those with A/L qualification is in the Southern Province (20% compared to a national average of 12%), followed by the North Central, Eastern and Central Provinces (see Figure 4).

While between 1989-2006 the majority of out-migrants from Sri Lanka were female, by 2008 the proportion had equalized. In recent years, more males have out migrated for foreign employment than females. According to data available for 2009, the Western Province sends the highest number of migrant workers overall, of about 27.3%. The Southern Province sent only around 8.7%. The top 4 sending districts in 2009 were Colombo – 12.4%, Kurunegala – 9.5%, Gampaha – 9.6%, Kandy – 9.4%. Five districts - Colombo, Kurunegala, Kandy, Gampaha and Kalutara - accounted for 45% of the total departures for foreign employment.

Although we may be quick to assume that most of these Korean job aspirants were unemployed youth, the survey revealed that in fact the majority were already employed in Sri Lanka, around 63.4% of those surveyed. Around 36.6% were unemployed. When the respondents were asked as to their main reasons for seeking work abroad as migrant workers, 38% cited ‘low wages’ or alternatively ‘low income’ in Sri Lanka, while around 9% cited ‘limited job prospects’. This would indicate that these youth were suffering from underemployment rather than unemployment, and the relative higher wages in countries like Korea was the key attraction for out-migration, rather than pure unemployment in Sri Lanka.

(Of those unemployed, the duration of their unemployment ranged from 7 months to 11 years, but on average, was unemployed for around 2 years.)

Of those surveyed, the majority of 61% reported that they did not have any form of vocational or professional training, with only 39% responding that they do. This is an important point to bear in mind, in the context of the new thrust of the country’s skill development agenda towards increasing the numbers of those with vocational training, under the National Vocational Qualification certification programme and the UNIVOTEC system. This also has an implication on the skills profile of migrants that Sri Lanka sends, where the government is keen to send workers with better skills rather than manual labourers.

The research team also inquired as to what kind of work the job seekers were interested in obtaining. The majority, 58.5% stated that they were seeking ‘any type of work’, while 12.2% stated that they sought ‘factory work’, and another 12.2% sought ‘manual labour’, and 17% sought specific occupations (for example, ‘working in a printing press’, ‘business administration’, ‘technician’, ‘motor mechanic’, ‘mechanic’, ‘welding’, and ‘sewing’). It appears that nearly all of the applicants had targeted Korea as their preferred foreign employment destination, as the survey revealed that nearly 88% had either completed or were in the process of completing a Korean language course.

Better Migration Management at International Level Through Bilatarel MOUs

Bilatarel MoUs of the type signed between Sri Lanka and South Korea, while provided a systematic mechanism for sending an agreed number of workers each year, also have important migration management implications, in an era of increasing foreign worker harassment in countries in the Middle East. In an unpublished report on Sri Lankan migrant worker challenges prepared by the IPS, the benefits of bilateral MoUs with regard to migration management have been emphasized:

A MoU with a labour receiving country ensures the human rights of the migrant worker such as minimum wage, decent working environment, job security and certainty during the contracted period. So, the rights of migrant workers to South Korea may be better protected than those to many Middle Eastern countries. Recently, there were reports of Sri Lankan migrants in Iraq being denied their basic salaries for months, resulting in street protests by them.

Because of this MoU, the Sri Lankan government provides loans for the migrant workers to cover their migration cost through state banks. This is a good opportunity for migrant workers as the migration cost is high in Sri Lanka. One of the qualitative studies on migration conducted by the IPS in 2011, reveals that most of the migrants from the Anuradhapura district have mortgaged their agricultural lands to cover the migration cost.

Migrant workers have to repay the loans when they migrated. Thus, their banking activities are improved and it will reduce the informal money channeling in Sri Lanka.

Korea Job Seekers in Broader Context

Unemployment levels have come down over the last decade, but they are still very high amongst youth (20 to 29 year olds), particularly the more educated (see Figure 3). Unemployment is more of a problem outside the Western Province (see Figure 4), particularly for the more educated. But, it is surprising that even in the Western Province, where the unemployment rates are very low, even for the more educated individuals, youth are scrambling to find employment abroad. It is also alarming that a majority of those aspiring to go to Korea are willing to go for any type of job, including for manual labour.

First, this suggests that many youth aspiring to go to Korea, many of whom are already employed, are not satisfied with their employment situation in Sri Lanka. The Labour Force Survey data of the DCS reveal that of those in the non-agriculture sector, about a half of the employed are in the informal sector. Even in the Western Province, around 40-50% of those employed in the non-agriculture sector are working in the informal sector. This suggests a need for creating better jobs in the country.

Second, the data suggest that the job aspirations are not very high even amongst youth who have passed O/Levels and A/Levels. A majority of them are willing to go abroad to do ‘any job’. This indicates the need to rethink skill development at the senior and tertiary education levels, such that school leavers are better prepared for the labour market.

So, overall, here are some key takeaways from our snap survey and our background analysis:

- The unemployment situation for youth in Sri Lanka is clearly a pressing issue, and needs to be addressed as an urgent priority in post-war Sri Lanka to ensure inclusive growth and prevent social discord

- The majority of those seeking work in Korea were in the 25-30 and also the 20-24 age category.

- Despite the fact that nearly 66% of those seeking Korean jobs were A/L qualified, 58.5% stated that they are seeking ‘any type of work’ in Korea

- ‘Low income/low wages’ in Sri Lanka were the main reason cited by the youth for seeking foreign employment in South Korea

Korea Calling_Talking Economics Special Report

Quick Recap of IPS Research and Advocacy on Migration Issues

Publications

Saman Kelegama, (2011), “Migration, Remittances and Development in South Asia”, Sage Publication Pvt. Ltd

Arunathilaka. N, Jayawardhana. P. and Weerakoon, D (2011). “Migration, Remittances and Development in Sri Lanka” in “Migration, Remittances and Development in South Asia”, Ed Saman Kelegama Sage Publication Pvt Ltd.

Deshal De Mel and Suwendrani Jayaratne (2011). “Migration,

Remittances and Development in Maldives” in “Migration, Remittances and Development in South Asia”, Ed Saman Kelegama ,Sage Publication Pvt. Ltd.

Jayawardhana T. and Jayaweera, R (2011). “Migration, Remittances and Development in Afghanistan” in “Migration, Remittances and Development in South Asia”, Ed Saman Kelegama, Sage Publication Pvt. Ltd.

Arunatilake N, S. Jayaratne, P. Jayawardhana, R. Jayaweera and Dushni Weerakoon (2009) “Impact of Remittances on the Household of the Emigrant and on the Economy of the Migrant’s Country: Sri Lanka”, Study funded by South Asia Network of Economic Institutions (SANEI)

Research Studies

IPS is currently involving in a study on ‘ Migration and Development: Investment in Agriculture and Food Security” funded by the Food and Agriculture Organization (principal researchers: Dr. Parakkrama Samarathunge and Roshini Jayaweera)

Presentations

Roshini Jayaweera was a panel Discussant of the conference on “Institutionalizing Regional Approaches to Migration Management in South Asia” organized by the IPS

Priyanka Jayawardena, Research Officer, presented a paper on “Impact of Remittance on the Household Welfare of the Emigrants in Sri Lanka” at the Asia Forum on Remittances and Development, Colombo, 11 - 12 January 2011.

Roshini Jayaweera, Research Officer, presented a paper on ‘Impact of Remittances on the Households of the Emigrant and on the Economy of the Migrant’s Country”, Dhaka, Bangladesh, 30th March, 2010

Roshini Jayaweera and Thilani Jayawardhana presented a paper in ‘Migration, Remittances and Development Nexus in Sri Lanka’5th May, 2009

Conferences

The IPS organized an international conference on “Institutionalizing Regional Approaches to Migration Management in South Asia” in collaboration with Friedrich Ebert Stiftung, 19th November, 2010.

The Institute hosted a South Asian conference on “Migration, Remittances and Development Network in South Asia”, in collaboration with Friedrich Ebert Stiftung, 4-5 May, 2009 in Colombo.

Realizing the Post-war Miracle: Challenges, Opportunities and Private Sector Leadership

2011-08-02T04:02:00.000-07:00

Key Perspectives by Dr. Anura Ekanayake - Immediate Past Chairman of the Ceylon Chamber of Commerce and IPS Governing Board Member

By Anushka Wijesinha, Research Economist - IPS

In this blog post, we bring to you some key quotes from the speech by Dr. Anura Ekanayake, member of the board of governors of the IPS and the outgoing Chairman of the country’s premier private sector body, the Ceylon Chamber of Commerce (CCC), at its Annual General Meeting last week, on the 28th of July. His comments were timely and relevant, leaving some important thoughts on post-conflict economic recovery and the role of the government and the private sector.

A key statement he made, on the role of the private sector in driving Sri Lanka’s post-war growth agenda, was:

“We cannot leave all this to the government to achieve on its own. After all, over 80% of the national output, a similar percentage of investment, 75% of employment and over 95% of exports come from the private sector”.

He stressed the need for a proactive and productive engagement between government and business:

“What I am proposing is an approach where, we continue to ask the government for facilitation, but, by first taking the initiative to actively demonstrate what is indeed possible. Let us then tell the authorities, ‘see what we have done, now help us to do more’”

We created a ‘wordle’ (using the online tool available at www.wordle.net) of Dr. Ekanayake’s full speech, capturing key words and highlighting them according to the frequency with which they featured in his speech. This is displayed below. This is followed by some key quotes that we thought ought to be shared with the ‘Talking Economics’ audience.

On the role of the CCC and the private sector in the immediate post-war period:

“As people who understand markets and business, our commitment was to initially wholeheartedly support the welfare of the displaced and thereafter their speedy re-settlement along with the restoration of economic activities in the affected areas. Our members contributed immensely though silently in these undertakings.”

On the role of the Chamber in medium- to long-term post-war recovery:

“Nation building has to be supported by several pillars – not only that of economic progress. Given the expertise and the credentials of the chamber, our Comparative Advantage was and remains in the area of business and economics. Without any doubt, this is the area where we can make the best and biggest impact”.

On the need to be cognizant of the challenges, while recognizing the strong post-war performance:

“Our future progress will be much stronger and surer, if we are mindful of the challenges along the way. Not to take away or reduce the glory of what has been achieved, but rather to ensure its sustainability. Not to point fingers at any one, but to join hands with all stakeholders to do the right things”.

On the key socio-economic challenges facing post-war Sri Lanka:

“On the domestic front, my biggest worry is the relatively high rate of youth unemployment. While the overall unemployment rate is a mere 4.5%, 18.1% of our youth between the ages of 15 to 24 years are unemployed, and 10.7% of those qualified with GCE A/L or more are unemployed. At the same time, almost all sectors of the economy are experiencing labour shortages. What a paradox!”

“That youth unemployment was one of the major causes of the North-East conflict as well as the several Southern uprisings should never be forgotten”.

Further emphasizing the need to address youth unemployment:

“We of the private sector need to find ways of employing the youth meaningfully and in a productive manner. If we leave it to the government alone, to absorb them to the public sector, then, the budget deficit will widen, inflation will revert to where it was, interest rates will rise and the currency will depreciate”.

On the need to be wary of continuing regional disparities in prosperity:

“My second big worry is the continuing sharp difference between the level of prosperity of the Western Province and that of the others. While the poverty head count in the Western Province is a mere 4.2%, it is more than 10% in Northern, Eastern, North Western, Uva and Sabaragamuwa Provinces. Again, if the sole responsibility of addressing this is left to the government, then, the same story of widening budget deficit due to direct and indirect subsidies for poverty alleviation, rising inflation along with interest rates, and depreciating currency will recur”.

In a recent article on this blog, we looked at some key highlights in regional economic performance, including poverty and private enterprise growth (‘2010: ‘Phenomenal Year’ for Corporates, but Shared Growth across Sri Lanka Remains a Challenge’ - http://bit.ly/oHv04G)

In that, it was highlighted that although the Colombo Stock Exchange benchmark All Share Price Index (ASPI) almost doubled from 3,494.6 to 6,635.9 between January 2010 and December 2010, regional growth disparities are ever prevalent – the Western Province continues to dominate the country’s economic geography (45% of GDP in 2010), and most other Provinces have not grown their GDP share in the last 5-6 years by any significant proportion. The article also emphasized that while the total number of industrial enterprises increased from 2,340 to 2,404 between 2009 and 2010 in the Colombo district, the increase in the Anuradhapura district, for example, was only from 27 to 30 during the same time period. Moreover, regions outside the Western Province have not seen a significant rise in Section 17 registered BOI industrial start-ups between 2006 and 2010, with Colombo and Gampaha continuing to dominate the BOI industry geography. While the poverty rate in Colombo ranges at 3.6%, the poverty rates of Batticaloa and Moneragala are 20.3% and 14.5% respectively.

On the need for the private sector to ‘get on board’ with addressing this challenge of regional growth disparities, Dr. Ekanayake said,

“Here we need to find ways and means of building sustainable value chains on a win-win basis with the provinces…”

“I am not calling for charity. What we need are sustainable, innovative business models, which will increase economic value addition in the provinces thus creating new jobs”

On the need to address issues on the political front:

“A nagging worry, however, is that addressing economic issues alone may not be sufficient for the people of the North and the East to be happy and content”

“What we as the business community can do to help this process is to build trust between communities based on mutually beneficial commercial transactions, value chains, investments and creation of job opportunities without discrimination. As a Chamber, we must represent the interests of the regions more and more”

On what Sri Lanka should do in preparing for emerging global threats and changing global dynamics:

“On the global front, I worry about potential consequences to us arising from the US and European public debt crises, the on-going ‘re-balancing’ from the West to the East, political upheavals in the Middle East which is an important market for us, and then the volatility of global petroleum and food markets”

“We should be able to develop some degree of cover from these developments which are beyond our control by whole heartedly contributing to the domestic supply of energy – which in our case will have to be non thermal - and in food production via agriculture, animal husbandry and fisheries, and exporting more and more to South Asia and then to the rest of the Asia”

“Building much closer economic relations with India has to be an essential part of this effort…”

A previous article on this blog highlighted the need for Sri Lanka to take a close look at the changing global economic landscape and find strategic ways of fitting in. See ‘As Global Economic Power Shifts, Where Will Sri Lanka Place Herself’ - http://bit.ly/k3DOOq)

On Sri Lanka’s dependence on special trade concessions:

“We can also learn to be more and more self reliant, asking for a level playing field and not for any special concessions. Obviously we do not want special barriers thrown across our path either”

In conclusion, he asserted:

“The dream of making Sri Lanka the ‘Wonder of Asia’ is realizable – if each of us can contribute what little we can - before asking others to do the same, the totality of what we achieve together will indeed be very large”

A PDF version of the full text of Dr. Ekanayake’s speech is available for viewing below

CCC AGM Chairman's Speech 28July

Economic Freedom: Involving Stakeholders in Improving the Business Regulatory Environment in Sri Lanka

2011-07-20T01:27:00.000-07:00

By Ashani Abayasekara (Research Assistant)
and Anushka Wijesinha (Research Economist) - IPS

Economic freedom measures have ranked Sri Lanka above its neighbours in the region, but below some of its key competitor countries. To improve the business environment by addressing problems such as transparency, accountability, etc., there needs to be a genuine effort to involve all stakeholders...

The concept of economic freedom is not a novel one in economic theory. Since the time of Adam Smith, if not before, economists have believed that the freedom to choose and supply resources, compete in business, trade with others, and secure property rights are central ingredients of economic progress(1). With the recent global financial crisis being primarily attributed to perverse credit expansion and regulatory policies in the financial sector, the concept of economic freedom has attracted renewed attention worldwide. How easy or difficult it is to start and run a business, and how efficient courts and insolvency proceedings are, can influence how firms cope with crises and how quickly they can seize new opportunities(2). While Sri Lanka ranks relatively well in economic freedom in the South Asian region, its position worldwide remains much to be desired, mainly owing to problems of good governance, increasing non-tariff barriers and the heavy presence of the state in the economy. Reforming regulations and creating a conducive climate for economic activity is thus crucial. This task however is not solely the responsibility of the government - there remains a significant role for other stakeholders of the business environment to play as they are all part of the ‘business ecosystem’.

Economic Freedom: Link to Growth and Development

As pointed out by Madan (2002), economic freedom is important as it has been linked to economic growth and can be a basis for determining why some countries perform better than others. Several empirical studies establish a positive correlation between economic freedom and economic growth(3). Going beyond economic growth, an empirical study by Dehann et al (2006) demonstrates some positive relationships between economic freedom and indicators of well-being; income per capita, income level of the poorest 10%, life expectancy, and life satisfaction(4). Many of the relationships, however, reflect the impact of economic freedom as it works through increasing economic growth, and therefore do not necessarily show a direct causal relationship between economic freedom and these variables.

Economic Freedom Measures: How Does Sri Lanka Perform?

Over the last two decades, a number of indicators for economic freedom have been developed. Apart from the frequently cited Doing Business report published by the World Bank and the Global Competitiveness Index (GCI) constructed by the World Economic Forum, several other indices look at economic freedom in particular, such as the Economic Freedom of the World index (EFW) (Fraser Institute) and the Index of Economic Freedom (IEF) (Wall Street Journal and Heritage Foundation). According to the EFW, in 2010 Sri Lanka ranks 101 out of 141 economies with an overall score of 5.89 out of 10. Meanwhile, the IEF in 2011 places Sri Lanka 107 out of 183 countries with a score of 57.1 out of 100. The number of indices and the wide-ranging areas covered by each give an indication of the extensive nature of the concept of economic freedom. In fact, there is still no unique way of defining economic freedom. This article primarily focuses on the degree of economic freedom present in the business environment in Sri Lanka; looking at the extent to which regulations and bureaucratic procedures constrain business activity, makes entry and exit problematic, and reduces competition and vibrancy in product and related markets.

The overall IEF score places Sri Lanka above its regional average, but below the world average and significantly below "free economies" (Fig. 1). However, it does not entirely make sense to benchmark Sri Lanka against the world average - this score does not suggest much, given that it gets averaged out across ‘highly free economies’ to economies with little or no economic freedom. Instead, it is important to benchmark ourselves against a basket of competitor countries which compete with Sri Lanka in attracting investments. Fig. 2 shows the overall economic freedom score and scores for components on business, investment and labour freedom for Sri Lanka and some developing country competitors (India, Bangladesh, Vietnam, Indonesia, and Mauritius). While the overall score for Sri Lanka is on par with the other selected economies, its investment and labour freedom scores are lagging behind. However, according to the fifth major area of the EFW index (Fig. 3) - ‘Regulation of Credit, Labour and Business’ - Sri Lanka ranks well in terms of labour market regulations but lags behind the developing country average in credit and business market freedom.

Economic Freedom Measures: Take With a Pinch of Salt?

The use of such economic freedom measures in comparisons across countries is questionable, given various concerns regarding their reliability. On the theoretical side, in the final analysis many indices are not very sensitive to substantial variations in the weights of different components. Comparisons are also marred by differences in collecting statistical data across countries, on which these indices are based. The data collection processes itself have come under severe criticism - anecdotal evidence in the past suggests instances where surveys are conducted at the departure lounge of airports, with interviews being carried out fleetingly with one consultancy firm. Thus, the figures are not completely reflective of the reality. This in fact can be observed in Sri Lanka's ranking in terms of labour market freedom. The EFW index depicts Sri Lanka as doing well, above both the regional and developing country averages. However, this is hard to explain, given rigid labour market regulations in the country. Sri Lanka's Termination of Employment of Workmen Act (TEWA) requires that firms with 15 or more employees must justify layoffs and provide generous benefits to displaced workers. The redundancy costs in terms of number of weeks of salary that is required to be paid in Sri Lanka is a staggering 217, compared to 56 and 87 in India and Vietnam respectively(5).

Nevertheless, it is imprudent to fully dismiss such measures purely on this basis - it is clear that there are economic reforms that are crucially required to some extent, if not to the same degree as reported. However much these indices are criticized domestically, on various grounds, they are a key element in the basket of factors that foreign investors and business partners look at when considering doing business with/in Sri Lanka.

In this context, reforming business regulations and creating a good economic climate is not exclusively the responsibility of the government. The relationship between the government and other stakeholders of the business environment is inextricable. The role of stakeholder groups including shareholders, employees, employers, customers & suppliers, competitors, Trade Unions, consumer groups, and the media is critical as they affect the activities of a business, and are in turn affected by its business environment.

Improving Business Regulations: Stakeholder Involvement is Key

Most enterprises seem to believe that the relationship between stakeholders of the business environment and the firm is one of the key elements of corporate success, if not the most critical factor. The role of various stakeholders may be even greater in many Asian businesses, where a key challenge is to prevent the abuse of power by controlling authorities. Many indices reveal wide-spread corruption in South Asian economies, and Sri Lanka is no exception. The dissemination of information and channeling of feedback about policy and regulation among relevant business players, specifically small and medium enterprises (SMEs), and providing a potentially supportive community for the successful implementation of policy and regulation is important. Another key initiative is the implementing of industry standards or resolving industry conflicts internally, thereby strengthening the private sector without need for government intervention.

Furthermore, regulatory and supervisory agencies, civil activists, the media, and consumer groups can play an important role in enhancing business governance. For example, securities regulatory bodies and fair trade commissions are directly involved in setting and enforcing the rules on the conduct of business for the purpose of protecting investors. Media attention can motivate politicians, bureaucrats and managers, who are concerned about damage to their reputations, to adopt more effective corporate governance laws, policies, and practices. Consumers, by bringing to light issues relating to product quality, service delivery, negotiation processes, etc., can make a significant contribution towards enhancing the overall business environment.

In Sri Lanka, there is a need for all stakeholders (in particular, the private sector) to find strategic ways of actively engaging themselves along with the public sector in policy reform processes, rather than merely voicing their concerns. In this regard, an important initiative taken is the ‘Private-Public Dialogue’ (PPD) mechanism run by The Asia Foundation in 5 Provinces. It appears to be an effective model where both the private and public sectors work collaboratively with local stakeholders to address local-level business regulatory issues. An important characteristic of the PPDs is the aim to promote transparency and economic governance by disseminating information and creating conditions for improved business vibrancy in each locality.

Improving Business Regulations: When Stakeholder Involvement is Weak…

In Sri Lanka, the problems of transparency and inclusive policy-making are reflected in the ‘Transparency of Government Policymaking’ component under the World Economic Forum’s Global Competitiveness Index (GCI), where the country ranks 107th (out of 139 countries) in 2010-2011, compared to India, Vietnam, and Bangladesh which rank better at 42nd, 73rd, and 106th respectively.

The lack of transparency and stakeholder consultations in implementing laws was evident in the Employees' Pension Benefits Fund Bill (EPBFB), a proposed pension scheme for private sector workers which was to be passed in Parliament, but had to be postponed due to opposition from Trade Unions and employers. The opposition was mainly due to several uncertainties regarding the Bill, such as whether it was optional or compulsory, what the payment formula would be, and doubts associated with eligibility for pension at old age given the various conditions in the scheme’s implementation. The National Labour Advisory Council (NLAC) is the de facto consultative body for labour legislation and labour issues, and could have been tasked with leading stakeholder consultations on this proposed scheme on behalf of the government. However, it was not adequately consulted or utilized. It is now clear that the Bill was rushed, and did not go through a robust and inclusive consultative process, resulting in far too much opposition, dissention, confusion, and antagonism. This was unfortunate especially because most of the stakeholders, in principle, do not oppose the concept of this scheme and the need for it; just the procedure in developing it, and also key features of it.

Businesses, Yes, But Consumers - Underrepresented in Sri Lanka

An important, yet often neglected group of stakeholders - consumers - have remained under-represented due to lack of influential lobbying power. While producer interests are represented through chambers of commerce and other organizations, strong consumer associations are lacking in the country. In an era of globalization and liberalization where market forces are strong, consumers need to be protected from vulnerabilities arising from hidden strategies and processes implemented by producers and sellers. CUTS International (Consumer Unity and Trust Society), a consumer association founded in 1983 in Rajasthan, India, has been instrumental in providing a forum for disadvantaged consumers by focusing on issues of consumer protection, safety, and rights. There is a need for such organizations to be established in the country with the aim of creating consumer awareness, skills training, etc., so as to productively and proactively involve consumer groups in creating a better business environment.

Improving Business Regulations: Policy Challenge

In striving towards achieving a higher degree of economic freedom, the need to ensure that the inputs and participation of all stakeholders, including politicians, officials, the formal and informal private sector, and civil society, are reflected in the reform process is crucial. A major problem in the private sector is the tendency to go in line with every political regime so as to minimize “political risks”. In this context, a challenge is to get to strategic solutions that will create the right incentives for the private sector to push for sustainable and inclusive growth. Encouraging more direct participation of SMEs in higher level dialogue in PPDs is important, considering the need for a more mass-based bottom-up push for reform and change. There is also a pressing need to incorporate the principles of good governance – transparency, accountability and legitimacy – as an integral part of the policy process. Finally, a key challenge is to shape stakeholder/interest group dynamics so as to achieve the best possible (‘satisficing’, rather than optimizing) solution in terms of winners and losers.

References
1 North, D. and R.P. Thomas (1973), "The rise of the western world: a new economic history”, Cambridge Press,
2World Bank (2011), "Doing Business 2011: making a difference for entrepreneurs." [http://www.doingbusiness.org/reports/global-reports/doing-business-2011]
3 Barro (1996), DeHaan and Sturm (2000), DeHaan and Siermann (1998)
4Fraser Institute (2011), "Economic Freedom of the World: 2010 Annual Report" [http://www.freetheworld.com/release.html]
5World Bank (2011), "Doing Business 2011 in South Asia: Making a Difference for Entrepreneurs." [http://www.doingbusiness.org/reports/global-reports/doing-business-2011]

Alcohol Policy in Sri Lanka Needs a Rethink

2011-07-03T21:52:00.000-07:00

G.D. Dayaratne, Manager, Health Economic Policy Unit - IPS

In recent years there have been a number of developments in alcohol policies the world over. A noteworthy aspect in these is that the greatest public support is given to policy measures that are not seen as intruding on the moderate or occasional drinker and do not penalize the alcohol industry. For example, a comparison of the views on the actual policies and what is practised, suggests that the general public is less supportive of restrictive policies (where access measures are more intrusive) and more supportive of policies that involve lower levels of access.

Responses to alcohol policies successfully implemented by countries, for instance, in Europe, often offer ready-made guides for countries like Sri Lanka to follow, where incongruous alcohol policies are at the core of the problem. There has been no national alcohol policy in Sri Lanka as such, except for ad hoc strategies introduced from time to time, sans long-term prudent objectives. Alcohol has become more readily available over the past three decades with the liberalization of trade and open economy policies adopted since 1977 in Sri Lanka. This has led to some section of the population being open to greater risk of alcohol-related harm. These include the low income, unemployed, or partially employed rural and urban working population who are mainly addicted to consuming of illicitly brewed alcohol

Drinking Patterns in Sri Lanka are Changing

A noteworthy feature of present day drinking in Sri Lanka is that, in general, alcohol consumption among youth has been found to be moderate or significantly low. This is possibly due to reasons such as increasing level of education, increasing awareness of harmful drinking and health concerns, lower purchasing power, and family responsibilities tied to levels of living. There is somewhat of a debate among interest groups, as to whether higher prices of beverage alcohol (either through price differences or taxes) result in a change in alcohol consumption patterns. This is particularly so for certain target groups at higher risk, such as young people with harmful patterns of drinking. Some industry stakeholders support the view that the “Mathata Thitha” (Stop Alcohol) movement has had some impact on the youth. The “Mathata Thitha” concept is a laudable one, and it should focus more on educating children at class room level about the harmful effect of alcohol consumption which will be beneficial to society in the long run. In reality however, there is no fully fledged commitment to implement the programme. The presence of a large illicit alcohol market is a further complicating factor when it comes to implementing workable policies and which can be used by those who wish to obstruct certain policies and add to the prevailing confusion.

Excise Taxes on Liquor

Sri Lanka’s regulations are an anomaly from global practices, where restrictions on liquor are based on the pure alcohol content of the beverage. Accordingly, soft alcohol such as beer which contains a minimum percentage of alcohol, is available with least restrictions and is least taxed, whereas spirits which contain a higher percentage of alcohol are subjected to a higher tax and more restrictions. Successive governments of Sri Lanka have been following contradictory policies with respect to legal alcohol. While they have utilized it as a major source of revenue, and raised excise duty rates on alcohol to prohibitively high levels and still continue to depend on it to finance its expenditure, it is treated as a ‘sin industry’, and obstacles and restrictions are placed affecting its smooth functioning. Like in most other countries, beverage alcohol – beer, wine and distilled spirits like Arrack– are subject to taxation in Sri Lanka, mostly as an excise tax. There are also other taxes associated with beverage alcohol manufacture and consumption such as Corporate Income Taxes, Licence fees, Value Added Sales Taxes, etc. Unlike value-added taxes and sales taxes, excise tax is usually not based on the value of the product being taxed, but it is rather a fixed rate tax or specific tax, expressed as a monetary amount per quantity, as opposed to the value of the product.

According to the supply and demand theory (when all other factors are constant) increases in the price of alcohol should lead to an overall reduction in consumption, and decreases in price should lead to an overall increase in consumption. In Sri Lanka, however, rapid fluctuation in demand for alcohol against the price factor seems to contradict the theoretical model. For example, in 2002 when the government reduced beer prices there had been an increase in consumption of beer but hard liquor consumption didn’t decrease.

It has been a practice of successive governments to treat the legal alcohol industry as a source of backup funding, where revenue could be extracted whenever there is a deficit in financing. The industry contributed around Rs. 23 billion in 2007 and Rs. 27 billion in 2008 as excise tax. However, the reality is that the state coffers do not receive the total taxable income because a substantial amount of liquor produced within the country does not fall under the tax bracket. This segment is known as the “illegal alcohol industry” sector which sells imitated liquor at the same price as the legal product, possibly using the same channels, but does not pay taxes.

One of the prevailing contemporary questions is whether Sri Lankan alcohol policy should aim at eradicating illicit alcohol or whether it should aim to address patterns of drinking that have been found to be particularly harmful, by increasing taxes and controlling the availability of legal alcohol?

Trends in Alcohol Production and Consumption

Since the privatization of Sri Lanka’s key alcohol industry (State Distilleries Corporation) in March 1992, the volume of liquor produced in the country has increased from 14,888,965 (1) proof litres in 1991 to a record level of 38,456,990(2) proof litres in 2007. During the period of 16 years, the production has increased 158 per cent.

The local production and import of liquor has fluctuated in recent years. The production of local liquor in 2006 increased by 16.9 per cent compared to 2005, and it increased further by 11.5 per cent in 2007 compared to 2006. However, in 2008 the production of local liquor increased by only 8.3 per cent when compared with the 2007 production. The total amount of liquor produced by 22 companies in Sri Lanka during 2008 was 103,375,246 litres. The total quantity of liquor imported during 2008 stood at 3,369,287 litres.

The consumption of hard liquor and beer and their local production have seen an overall increase during the past ten years, despite the government’s campaign against the use of alcohol. This is evidenced by the figures placed before the Parliament on 17 January 2011. The amount of beer consumed in 2009 was 52.4 million litres, 53.4 million litres in 2008, 51.8 million litres in 2007, 51.9 million litres in 2006, and 50.6 million litres in 2000. The hard liquor consumption had increased from 52.4 million litres in 2000 to 75.1 million litres in 2009. The local beer and hard liquor production had also risen over the ten year period. The country had produced 42 million litres of beer in 2000, and 55.4 litres in 2009. The hard liquor production had shot up from 52.1 million litres to 75.2 million litres during the same period. These trends indicate that with the increasing living standards of the population, the tendency for alcohol consumption has increased despite a policy framework to combat alcohol consumption in place. It also indicates that the existing policy framework has been less effective in the context of growing human desires.

Further, it has been estimated that there are over 200,000 illicit brew retailers, compared to the 3,200 licensed retail shops (“wine stores”) in the country. It was reported that the Special Operations Branch of the Excise Department is regularly detecting illicit liquor dens of which around 20,000 were in Colombo, Gampaha and Kurunegala districts. Raids of illicit liquor dens, however, do not divert the users to consumption of legally manufactured liquor because illicit liquor consumers are compelled to consume the product that is affordable to them, within their buying capacity. There are also a few large scale manufacturers engaged in distilling high strength illicit alcohol and selling watered down products through established outlets, thereby denying a substantial revenue to government by way of loss of excise duty and VAT.

Concluding Remarks – Rethinking Alcohol Policy Holistically

A major concern for Sri Lanka’s alcohol policy is how to address the high levels of illicit alcohol consumption and its consequences across the country. This issue is particularly relevant among some sections of the population such as the rural, urban and plantation community.

The costs of alcohol-related harm to the general population, as well as within specific sub-populations, suggests that a broad-based unified approach to reduce illicit alcohol consumption is needed along with targeted strategies to reduce harm in specific sub-populations mentioned above. Amidst this situation, there had been a government plan to stop free health care to “Alcohol Addicts”. A Trade Union representing medical doctors in Sri Lanka has protested against government plans to stop free healthcare for those addicted to alcohol. The Trade Union says the new measure would jeopardize doctor-patient relations because medics are required to provide a health report for each patient. According to the Trade Union, the family gets penalized twice – firstly, by the husband's/father’s alcoholism and secondly, by the government charging for health care.

Illicit alcohol is a serious problem throughout the country. Sri Lanka is not fully acclaimed for its approach to the illicit alcohol industry while it had led to a significant cost to the community. Political influences, weak law enforcement, and unaffordable prices of legal liquor are the determinant factors of the thriving trend of illicit alcohol. The argument articulated by the legal alcohol industry that controls and restrictions only serve to increase the consumption of illicit alcohol is very valid in the Sri Lanka context. It is time to have a second look at the overall alcohol policy in Sri Lanka.

Citations:

(1) De Mel, Nishan, “Towards Describing the Alcohol Industry and Formulating a Government Policy”, IPS, 1996(2) Administration Report Commissioner General of Excise 2007

2010: ‘Phenomenal Year’ for Corporates, but Shared Growth across Sri Lanka Remains a Challenge

2011-06-16T23:16:00.000-07:00

By Anushka Wijesinha (Research Officer) and Kithmina Hewage (Project Intern), IPS

While hailing strong earnings in the post-war pick-up, the Sri Lankan private sector should be more cognizant of its role in spurring inclusive growth…

The performance of the Sri Lankan corporate sector during the past financial year has been undoubtedly strong with firms seizing on the new business opportunities emerging after the end of the war. Between January 2010 and December 2010 the Colombo Stock Exchange benchmark All Share Price Index (ASPI) almost doubled from 3,494.6 to 6,635.9. A recent article by NDB Stockbrokers hailing the past financial year as “a phenomenal year” noted a significant and arguably unprecedented performance boost across all sectors reviewed by them. The report said, “the total annual profits of companies selected to represent the overall market increased 139% Year-on Year (YOY) to Rs. 87,693 Mn in the Financial Year 10/11” . In terms of the price-earnings (P/E) ratio, the report noted that Sri Lankan listed firms currently equal Malaysian firms, and during the last year, has done better than the ‘tiger economies’ like Taiwan and Thailand. Furthermore, ‘the phenomenal year’ for corporates appears to stem from not just a few sectors but, in fact, a growth in profits across all the major sectors of the economy - Motors – 669%, Power & Energy – 230%, Healthcare – 211%, Banks, Finance and Insurance – 82%, Telecommunications – 97%, Plantations – 108%, Hotels & Travels – 146%.

Ranmini Vithanagama, ‘Earnings Snapshot: Thus Concludes a Phenomenal Year’, NDB Bank (June 2011)

While undoubtedly the end of the protracted North-East conflict now provides ample opportunities for economic growth, and corporate earnings reflect this renewed business optimism, it is important for the corporate sector to acutely aware, and consistently cognizant, of the need for this growth to be broad-based and ‘inclusive’.

The Central Bank, in its Annual Report 2010 too recognises this. It states that, “inclusive growth refers to a rapid pace of sustainable growth which is broad based across sectors. At the same time, there should be enhanced opportunities in terms of access to markets, resources and social protection...” The challenge for Sri Lanka in ensuring inclusive growth seems to lie in the latter, as disparities in economic performance and prosperity between provinces in the country have been a critical and persistent public policy issue.

Shares in the CSE have grown fast. But shares of growth across regions – less so

For decades, the Western Province has dominated the country’s economic geography. While the concentration of national GDP in the Western Province has steadily, albeit marginally, declined over the last 5 years from 50.8% in 2005 to 45.1% in 2009, it is still very much larger than of all other Provinces. Provinces that are often assumed to be strong ‘second tier’ economic centres still lag significantly behind; for example the Central, Southern and North-Western Provinces hold a share of 9.6%, 10.2% and 10.3% of national GDP, respectively. Even among these provinces, it is only the North Western Province that has demonstrated any significant improvement in its GDP contribution to the nation, rising from a 9.9% share to a 10.3% share. Meanwhile, the North Central, Uva and Northern Provinces lag far behind with shares of less than 5% of national GDP being captured by them. The Southern Province managed to increase its GDP share by only 0.1% between 2008 and 2009.

Need to push private enterprise activity nation-wide

Investments, new business start-ups and expansions in the country, both foreign and domestic, have begun picking up in the last year. However, the distribution of these is clearly still concentrated in the Western Province. The regional distribution of new industrial enterprises as reported by the Central Bank provides clear evidence that new projects in 2010 have been undertaken predominantly in Colombo, and to some extent in Gampaha, Kalutara, Puttalam and Kandy. While the total number of industrial enterprises increased from 2,340 to 2,404 between 2009 and 2010 in the Colombo district, the increase in the Anuradhapura district, for example, increased only from 27 to 30 during the same time period. Yet a positive sign in terms of post-conflict recovery is that Trincomalee and Ampara, despite being in the conflict-affected Eastern Province, have shown improvement on par with several other districts.

Interestingly, new BOI projects between 2006 and 2010 have also largely followed a similar trend, despite efforts to promote new BOI ventures in lagging regions through, for example, the ‘Gamata Karmantha’ programme and other special fiscal incentives schemes for projects locating in regions outside the Western Province. As is clear from the illustration below, according to Central Bank data, regions outside the Western Province have not seen a significant rise in Section 17 registered BOI industrial start-ups between 2006 and 2010. Colombo and Gampaha continue to dominate the BOI industry geography.

Yet, there are some encouraging signs as certain districts have shown increases in the number of BOI projects locating there between 2006 and 2010; for example Kegalle (18 to 31), Ratnapura (25 to 37), Badulla (11 to 22), Nuwara Eliya (41 to 52), and Kurunegala (61 to 76).

Poverty falls by 41%, but disparities remain

The latest calculations of poverty indices show that the poverty level of the country has further declined from 15.2% reported in 2006/07 to 8.9% in 2009/10. Yet, the breakdown of poverty rates according to regions paints a less bright picture. Disparities between regions in terms of the GDP share of the nation as well as the distribution of enterprise activity, would impact the disparities in poverty across the country as well. While the poverty rate in Colombo ranges at 3.6%, the poverty rate of Batticaloa is reported at a high 20.3% (an increase from 10.7% in 2006/07). It is not only that there appears to be a remarkable difference between these two districts, but the fact that the poverty rates in areas like Batticaloa (20.3%) and Moneragala (14.5%) being well above the national rate should be a cause for concern.

Commercial activity leading to poverty reduction: the case of Vavuniya?

In a likely positive indication of how enterprise and commercial activity can translate into lower poverty, although not rigorously empirically analysed, could be the case of Vavuniya. Poverty rates in Vavuniya in 2009/10 were as low as 2.3%, and could reflect the fact that Vavuniya was the veritable hub for relief activities during the height of the conflict. Some key supply routes were centered in Vavuniya, local and international aid agencies had their supplies warehoused in, and often purchased from, Vavuniya, and we personally witnessed local agencies and individuals sourcing large quantities of relief material from local stores in the district, as well as labour from local communities. In essence, many parts of Vavuniya saw a concentration of commercial activity during the period under survey, and may have had an impact on poverty rates there. However, this is only positing, and requires closer examination before drawing any concrete conclusions.

Inclusive growth is in the national interest. Corporate sector should get on board.

While it is true that it is largely the government’s role to implement policies and mechanisms to reduce inequality by, for example, using tax revenues to expand welfare and to provide targeted relief and widen social protection, the corporate sector does have a role to play. Not in terms of just ‘CSR’ (Corporate Social Responsibility) and assisting in meeting social needs like education and health, but rather in terms of promoting commercial activity, industries, small and medium entrepreneurship, and livelihoods via backward linkages.

The concept of ‘inclusive growth’ recognizes the need for growth as well as reducing inequality. Sri Lanka’s large-corporate sector needs to be mindful of this, and assume its broader ‘national interest’ role in promoting real private enterprise growth in the regions, going someway in bridging regional growth disparities. This may seem idealistic, but realistic and pragmatic avenues are available. Engaging SMEs via subcontracting, and promoting ‘clustered’ production (by region/product) by SMEs together with buy-back schemes are some examples. Toyota began linking up with small, independent producers to supply light-manufactured parts for its broader production chain. They not just sourced, but helped those SMEs improve their technology-utilization and management. This model not only enabled Toyota to focus on its core competencies of engineering, design, innovation, quality, etc., but also drastically reduce production costs.

While the corporate sector is sensitized to this need, the government’s role in creating the right enabling policy and institutional environment to incentivize such behavior by the corporate sector cannot be understated. For example, while laudable efforts are being made to improve our national rankings on the ‘Doing Business Index’ to attract more FDI, efforts must also be made to improve sub-national business climates. Questions like – ‘are local authorities able to provide private sector-oriented services to local entrepreneurs?’; ‘are the local licensing regimes streamlined and business-friendly?’; ‘what are the critical doing business constraints at the local level that are hampering private enterprise growth in the regions’?, need to be addressed.

(The theme this year of the IPS annual flagship publication, the State of the Economy, is ‘Post-conflict Growth: The Inclusiveness Imperative’. The report will be released in late September 2011)

Accelerating Economic Growth in Sri Lanka

2011-06-16T02:20:00.000-07:00

Dr. Saman Kelegama, Executive Director – IPS, delivered the Dr. N.M. Perera’s 106th Birth Anniversary Memorial Lecture at the Dr. N.M. Perera Centre on the 6th of June 2011.

(This synopsis appears exclusively in the Daily FT of Friday 10th June 2011. This article is not to be reproduced)

Sri Lanka is at a threshold of economic growth and development in the aftermath of three decades of war and conflict. Slogans such as “winning the economic war”, making the nation the “wonder of Asia” have been frequently used to describe the priority that economic development has received in recent years. Sri Lanka’s current strategy as articulated in the Mahinda Chintana: Vision for the Future is to achieve growth rates of above 8 per cent per annum and thereby aim at doubling the current per capita income to reach around US $ 4000 by 2016. Mention is also made that Sri Lanka will aim at achieving US $ 18 bn exports by 2016.

My focus today will be on achieving growth rates above 8 per cent in the next 5 years. If we examine Sri Lanka’s growth rates during the last decade, the following facts become clear. The average growth that the country achieved during 2000-2005 was 4 per cent (could have been more if not for the -1.6 per cent very low growth the country saw in 2001), whereas during 2006-2010 Sri Lanka achieved an average growth of 6.4 per cent (could have been more if not for 3.5 per cent growth in 2009). The high growth rate in the latter period was a significant achievement despite the war inflicting the economy from 2006 to part of 2009. A closer examination shows that the following factors contributed to the high growth during the period: rapid growth of the global economy during this period, especially during 2006-2008; increasing public investment to average close to 6 per cent of GDP and the fiscal stimulus associated with it; improved connectivity associated with rapid progress in infrastructure: road development, telecom and electricity sectors; stimulus from underdeveloped areas of the North and East rapidly taking off in the aftermath of the war, etc.

These achievements have clearly shown that the mixed economy model based on the twin engines of growth (both private and public sectors) is workable in Sri Lanka as was the case in most East Asian countries during the 1980s and 1990s. The current economic model of Sri Lanka has all the features of a mixed economy with elements of neo-liberalism, state intervention, Keynesian fiscal stimulus, and so on. The private sector performance as indicated in the Annual Reports of various companies show record profits, where 45 companies showed profits over Rs. 1 bn in 2010/11 compared to 20 companies in 2009, clearly indicating that no’ crowding out’ is taking place due to the relatively larger presence of the public sector. We are seeing today US $ 6 bn worth of infrastructure projects on the move – the second infrastructure revolution in the country after the accelerated Mahaweli Development Programme and the Urban and Housing Development we saw from late-1970s to mid-1980s. Just like during that period, large public investment and foreign assistance are playing a key role in the infrastructure drive although we could see some differences in regard to sources and quantity of foreign assistance then and now.

Boosting Investment to 33 per cent of GDP

We have seen a growth of 8 per cent in 2010 and sustaining high growth momentum in the first quarter of 2011. The question remains whether we could sustain this trend and aim at a higher level of growth under the current economic strategy. The aggregate level of growth is mostly determined by the level of investment in the economy and the efficiency of the economy in converting that investment to output (called the incremental capital output ratio or ICOR). The current ICOR in the economy is close to 5 but if we assume that with all the improvements made in economy and with better connectivity that the ICOR reduces close to 4, then with a level of investment between 32-35 per cent of GDP, Sri Lanka will be able to sustain a growth rate of above 8 per cent. The challenge therefore is to increase the level of investment to this level from the current 27.8 per cent of GDP (the 2010 level).

If we disaggregate this 27.8 per cent of GDP investment level, we find that 21.6 per cent of GDP investment has come from the private sector and the remainder of 6.2 per cent of GDP from the public sector. I will show later that there are limits to increasing public investment above the current average of 6 per cent of GDP. Therefore the increase in investment has to come from both the domestic and external private sector, in other words, from the local private sector and FDI.

For overall investment to reach the level of say 33 per cent of GDP the additional investment should be around 5 per cent of GDP – and realistically 3 per cent GDP of this additional investment has to come from the local private sector and the remaining 2 per cent of GDP from FDI. The current FDI level of 1.5 per cent of GDP should therefore increase to a level of 3.5 per cent of GDP. Can we enhance both local private investment and FDI in the coming years and what are the key impediments? This is the challenge for Sri Lanka.

The traditional determinants of investment are well known: macroeconomic stability, consistent and predictable economic policy, low interest rates and taxation, stable exchange rates, investment friendly labour and other laws, minimum red tape and bureaucracy, etc. The investors always examine these areas before they put their money on risky long-term ventures. And it is all the more in the case of FDI. It is unfortunate that Sri Lanka does not rank highly in Doing Business Indicators (DBIs) report produced by the World Bank and neither does Sri Lanka rank favourably in the World Competitiveness Report produced by the World Economic Forum. Sri Lanka ranked 102 out of 181 countries in the Ease of Doing Business Index prepared by the World Bank. A recently released World Bank’s Logistical Performance Index (LPI) report ranks Sri Lanka 137 out of 154 countries and Sri Lanka ranks lower than a least developed country like Bangladesh. We can criticize these reports as we usually do, and say that they are not accurate and they have not considered various other factors, but at the end of the day it is the ranking of these reports that the potential investors take into account before taking a decision to invest.

While infrastructure development improves connectivity and improves DBIs, that alone is inadequate. Specific problems in regard to delays in doing business have to be addressed at the root. The initiative taken by the Central Bank to release the document called “Step-by-Step Guide to Doing Business in Sri Lanka” in April this year is a positive step. The aim seems to be to take Sri Lanka among the top 30 in DBIs by the next 2 to 3 years. Improving DBIs will not only enhance investment but it will also contribute to improving the efficiency in the economy, i.e., lowering ICOR.

Equally important is the consistency and predictability of policy. Ad hoc policy reversals and frequent change of policy have to be avoided as far as possible to give the best signals to the private sector. Perceptions matter in regard to attracting FDI and in this context, managing perceptions on governance becomes a vital area to focus in the coming months.

Limitation on Enhancing Public Investment

I mentioned earlier the limitations of enhancing public investment. Sri Lanka’s revenue (with grants) amounts to 15 per cent of GDP, while the current expenditure amounts to 17 per cent of GDP. So the overall revenue is still not adequate to cover the current expenditure, thus leaving a current account deficit in the Budget. Late Dr.N.M. Perera used to say that good budgeting means producing a surplus in the current account so that you borrow only for your capital expenditure, but today you borrow not only to meet capital expenditure but also to meet part of your current expenditure.

The Presidential Taxation Commission report was submitted in October last year and it came with a number of proposals to enhance revenue to a level close to 18-20 per cent of GDP. Some of its recommendations (in adjusted form) were implemented in the 2011 Budget presented in November last year but a lot more needs to be done. While implementing the rest of the recommendations, concerted effort must be made to restructure current expenditure. Wages and salaries (5.4 per cent of GDP), interest payments (5.6 per cent of GDP), and subsidies and transfers (3.3 per cent of GDP) amounted to 14.3 per cent of GDP overall in 2010. This is almost 95 per cent of the revenue earned and in some years they accounted for the entire revenue collected. This means that three expenditure items are cutting into all other areas of current expenditure and dominating the expenditure patterns in Sri Lanka. It is high time this anomaly is rectified. Interest payment on public debt has thankfully come down from a level of 6.4 per cent of GDP in 2009 to 5.6 per cent of GDP due to the lower interest rates, if not it would have remained a burden on the expenditure side.

Subsidies and transfers occupy a significant position because of the large sums allocated to the loss making state owned enterprises (SOEs). In 2007, the losses in these SOEs amounted to 1.7 per cent of GDP and there are reasons to believe that this level has not come down significantly by 2010. In this context, the recent announcement by the Secretary of the Ministry of SOE restructuring that 6 SOEs will be leased out for 30 years to the private sector and that a Voluntary Retrenchment Scheme will be introduced to some other SOEs is a positive step. Wages and salaries are also a large expenditure item with a 1.2 million large public sector work force. This expenditure is bound to go up with recent demands for wage increases by University academics and others. As long as public sector workers are productively engaged and contributing to economic activities, such large sums can be justified but not otherwise. In this regard the recent deployment of armed forces for urban development and infrastructure development activities is a positive step.

Given this situation in regard to lopsided current expenditure and borrowing to meet all capital expenditures, there are limits to borrowing to enhance public investment especially when the debt to GDP ratio is still above 80 per cent. Thus, the government has to seriously look at various public-private partnerships (PPP) models to embark upon to develop various areas of infrastructure than relying solely on the public investment. At the Colombo Port a PPP is in operation with a leading Blue Chip company and it has so far proved a successful model, but such systems have to spread to other sectors as well and be a model that takes a burden out of the government. For this purpose, there is a need to strengthen the independent multi-sector regulatory body -- the Public Utility Commission -- to overlook all regulatory issues relevant to the investor and well as the consumer.

Exports: Key Generator of Growth

New investment will lead to multiplier investments if competitiveness of the final products could be maintained. In this context, export investment becomes particularly important as this is one area of investment that contributes to rapid growth, as the East Asian success story demonstrated. The level of exports reaching nearly US $ 900 mn in January 2011 and the rapid growth in the first quarter of 2011 at around 50 per cent are remarkable. But a note of caution is necessary here. First, exports are falling as a share of GDP making Sri Lanka a more domestic oriented economy under which growth potential is limited once existing capacity is utilized. Sri Lanka has also not done well on competitiveness as reflected by the size of exports for its stage of development. For instance, Vietnam with a per capita income of US $ 1174 recorded exports amounting to US $ 72 bn in 2010, whereas Sri Lanka with a per capita income of US $ 2435 recorded exports amounting to US $ 8 bn in 2010. Second, although exports grew by around 17 per cent last year and 50 per cent in the first quarter of 2011, our growth is much smaller than our competitors, further shrinking our share in world exports. Third, real growth in exports is much lower as significant growth in nominal US dollar terms is due to depreciation of the US dollar against other major currencies.

In this context, the appreciation of the Sri Lanka rupee vis-à-vis the US dollar is a concern because the value of the rupee against the US dollar is more important for Sri Lanka’s exports, as over 70 per cent of trade takes place in US dollars and even exports to other regions such as Euro are priced in US dollars. There are some who argue that the Sri Lankan rupee has depreciated against some major currencies but these are not our major trading currencies and therefore such depreciation does not give much benefit to exporters. Amidst large capital inflows, managing the exchange rate is not easy. What is important here is to make a clear distinction between appreciations against maintaining a stable currency and some flexibility. It is the latter that needs attention in the context of sustaining the growth momentum of the export sector which is vital in the long run.

Missing the Demographic Dividend but All is not Lost

While speaking about investment’s contribution to growth, we must not forget about social transformations taking place in Sri Lanka and their impact on the growth process. Here, I would like to speak a few words about the demographic dividend. What do economists mean by a demographic dividend? It is meant to indicate the gains to a nation consequent to the change in the age-wise composition in the population. For example, if youth workers are urgently required in a large number at a particular juncture in economic development and they are readily available in the market due to demographic transition, then the situation will generate a demographic dividend. The magnitude of the demographic dividend appears to be dependent on the ability of the economy to absorb and productively employ the extra workers, rather than be a pure demographic gift.

ADB analysis shows that a large part of East Asia’s spectacular economic growth derives from a working-age population bulge. This bulge represented a demographic dividend or a demographic “gift” because it carried with it an increased space for economic growth. East Asia has had relatively more workers (and savers) and relatively fewer non-workers (and non-savers) compared with other parts of Asia and with the rest of the world at the time of economic take-off (1).

According to Ghani (2011), demographic dividend impacts growth through five different channels. First, swelling of the labour force, as baby boomers reach working age. Second, society being able to divert resources from spending on children, to investing on physical capital, job training, and technological progress. Third, rise in women’s workforce activity that naturally accompanies a decline in fertility. Fourth, working age also happens to be the prime years for savings, which are key to accumulation of physical and human capital and technological innovation. Fifth, boost to savings that occur as an incentive to save for longer periods of retirement increases with greater longevity (2).

Sri Lanka missed the demographic dividend when the workforce was at a peak level due to a number of factors and the country is now witnessing a rapid ageing of the population (3). The above 60 years population is going to increase from the current 11.5 per cent to 18.6 per cent by 2021. Thus, the working force is ageing and growing slowly than in the past compared to competitor countries in the neigbourhood. The ratio on working population to total population peaked in 2005 and it will now only decline. The dependency ratio is projected to increase over the next 40 years while the rest of South Asia, especially India, will benefit from a decrease in dependency ratio and a demographic dividend.

But there are two redeeming aspects for Sri Lanka. First, is the relatively low female participation rate of about 35 per cent. Second, a large stock of skilled migrants will return if improved growth generates new opportunities. So there exists scope to offset some of the loss of the demographic dividend by policies aimed at raising the female labour force participation rate and number of returned migrants.

Five Hubs Need more Opening of the Economy and Stronger Regional Linkages

My next submission is to address an equally important area where the growth in the next half a decade will be enhanced by other frameworks that the government is intending to promote. The area that immediately comes to mind are the five hubs: knowledge, maritime, aviation, energy, and commercial. The hubs will certainly boost the overall economic growth but there are a number of questions that we must ponder about. Can we promote Sri Lanka as a hub without selectively liberalizing the economy in specific sectors? Can we bypass regional powers like India and become a hub in shipping and aviation? (4).

Take for instance the objective of promoting a knowledge hub. Can we create a knowledge hub by just inviting foreign universities and the ongoing higher education reforms? How are we going to promote more of the IT industry, and encourage more BPOs? Are we increasing R&D expenditure with focus on Ayurvedic medicine, bio-technology, nano-technology, etc.? We will have to seriously look at various global models and take a cue and should not assume that the geographical location per se will be adequate for the hubs to take off.

Concluding Remarks

Moving from a middle-income country to a high income country is more complicated than moving from a low-income to middle-income range. Moreover, growth strategies that proved successful in the early stages of development are less effective when moving up to high income level. While focusing on strategies to enhance growth, Sri Lanka should ensure that it does not get into a “middle income trap” where reliance on cheap labour based competitiveness and traditional ways of doing business no longer work. Many developing countries like Argentina, Thailand, and others have got into this trap. Sri Lanka should innovate and upgrade its production process and move up market with value addition and enhanced productivity.

I think if luck turns in favour of Sri Lanka there are two events that could give a tremendous boost to the overall growth scenario in Sri Lanka. First, if oil is discovered in the Cauvery basin it could give a significant boost to the economy and save about 5 per cent GDP on the import bill. Second, if the bid to host the Commonwealth Games in 2018 is successful, it will give a stimulus to the growth process via the Keynesian multiplier effect just as it did to Malaysia in the late 1980s and early 1990s. It will be always better to focus on the vital determinants of growth than depending on luck, for that is what will make high growth sustainable.

Citations:

(1) See ADB (1997), Emerging Asia: Changes and Challenges

(2) Ghani, E (2011),’Introduction’ in Ghani. E. (ed.) South Asia: Reshaping Tomorrow, Oxford
(3) See Kelegama, Saman (2006), ‘Demographic Transition: Missing the Dividend and Facing the Burden’, in Contemporary Economic Issues: Sri Lanka in the Global Context, Sri Lanka Economic Association.
(4) For a critique, see Abeyratne, Sirimal, (2010), ‘Vision for a Brighter Future in Sri Lanka: An Approach to Realize ‘Mahinda Chintana Vision’, Pathfinder Foundation, April.

Role of the State in Socio-Economic Development: Some Issues to Consider for Sri Lanka

2011-05-24T21:28:00.000-07:00

by Malathy Knight (Research Fellow) & Anushka Wijesinha (Research Officer) - IPS

‘The Economist’ of March 19th 2011 carried an article titled “Taming Leviathan: A Special Report on the Future of the State” (http://www.economist.com/node/18359896). We draw on selected policy issues highlighted in that article, in the specific context of the state and socio-economic development challenges in Sri Lanka. This piece flags crucial public policy concerns surrounding the evolving role of the state, with the aim to stimulate an informed debate, and help begin to identify strategic solutions to bridge the gap between ‘policy rhetoric’ and ‘implementation’. The issues highlighted do not place onus on a particular regime in Sri Lanka, past or present; rather, they are relevant to the practice of governance of successive regimes over the years.

Moving from ‘Leviathan’ to ‘Embedded Autonomy’

The term “Leviathan” originates from a piece on the structure of society and governance written in 1651 by Thomas Hobbes, one of history’s well-known commentators of political thought, where he prescribes a strong state and centralized decision-making whilst rejecting the notion of ‘separation of powers’. Since Hobbes prescription centuries ago, political thinking has evolved dramatically. The division of powers is now a fundamental principle of governance in most modern day states, including Sri Lanka. Moreover, the trajectory of development shows that the pattern of centralized state-led decision-making is not ubiquitous. Ebbs and flows in the state’s role in economic development are reflected in the cyclical waves of nationalization and privatization evidenced in countries throughout the world, including Sri Lanka.

At a more fundamental level, international and domestic policy experience demonstrates the futility of expecting a full dichotomization of states and markets. As described in what the eminent sociologist and political scientist Peter Evans terms ‘Embedded Autonomy’ in a book on states and industrial transformation published in 1995, the state and society are ‘inextricably bound’. This thinking is also reflected in the writings of renowned scholars such as Robert Wade, Ha-Joon Chang and Charles Wolf Jr., to cite a few. What this means in the context of reforms is that the nature of state-society connectedness and meshed networks influence policy inputs, the dynamics of the policy-making process and policy outcomes; and, that government failures are as real and can be as disruptive as market failures. Similarly, “labels” such as welfare state (Bismarck), developmental state (Chalmers Johnson), regulatory state (Giandomenico Majone), post-bureaucratic state (Tony Blair), etc., must be seen in their broader context. Most often, all these incarnations of the state co-exist in the same jurisdiction at the same point in time. Pigeonholing the state into one dimension eschews a holistic understanding of the socio-economic and political institutions that shape the development process. What would be more useful in terms of inclusive and sustainable development is to view the policy process as an outcome of strategic and dynamic interactions amongst several key stakeholders/interest groups, whether in the public or private sphere. Moving the loci of decision-making from the state to broader socio-economic and political networks – what the public policy literature terms ‘the policy space’ and what Peter Evans terms ‘embedded autonomy’ – is crucial for participatory development.

A First Look at the Issues to Consider

What is apparent is that Sri Lanka has a unique opportunity to ride the wave of optimism, seize the moment and make the vision – ‘Sri Lanka: The Emerging Wonder of Asia’ – happen.

Any change creates winners and losers. As evidenced in the examples from countries ranging from the United States and the United Kingdom to China, Singapore and Brazil set out in the piece from ‘The Economist’ - reforms inherently pose challenges. Policy makers are forced to make political economy trade-offs and strategic choices in a world where first-best solutions are hard to come by and are often politically tricky. Perceptions matter in public policy. This brings us back to the crux of this blog article: what is required of the state in post-war Sri Lanka; what does reshaping the state mean in the context of the socio-economic development imperatives in the country; and, what are the crucial public policy concerns that need to be addressed to seize the moment and bridge the gap between policy rhetoric and reality?

To this end, there are several relevant categories of issues to consider, some of which are beyond the scope of this blog article. We present a few key points for consideration in the context of participatory development in post-war Sri Lanka:

• What “model” of socio-economic development is Sri Lanka following in the aftermath of the war? To what extent is this development approach a reflection of global trends/policy transfer? How have domestic political economy factors influenced the policy process and policy outcomes? Can the “Sri Lankan model” of socio-economic development achieve the vision of putting Sri Lanka on a rapid yet sustainable and equitable growth path?

• What are the regulatory governance priorities that policy makers need to be cognizant of in order to achieve the socio-economic growth targets set out in the government’s vision statement? What are the major roadblocks in getting to a regulatory governance framework that would facilitate inclusive and sustainable development?

• Is participatory development in Sri Lanka linked to participatory/collective decision-making? Are policy decisions a function of broad-based stakeholder consensus; or do narrow interest group dynamics shape policy outcomes?

Learning from ‘Bamboo Capitalism’?

China is of particular relevance to Sri Lanka for more reasons than one. The two nations have had close diplomatic ties for over five decades. Changes in the politics of international aid have positioned China as one of Sri Lanka’s largest donors in recent years. The Chinese “model” of development seems to have some influence on the current development strategy.

The ‘Beijing Consensus’ (BC), recently conceptualized, is widely perceived as an alternative approach to the ‘Washington Consensus’ that dominated public policy debate and practice in the late ‘80s and ‘90s. In a nutshell, the BC stems from an effort to unpack the story behind China’s double-digit growth figures and its nearing the status as the second-largest economy in the world, while having a strong-state role in this feat. Proponents of the BC argue that China’s success points to the wonders of state-directed capitalism; that the numbers have been conjured by the heavy and visible hand of the state. Aside from the political palatability of this argument, it appears to be way off the mark in providing a convincing explanation for China’s stellar performance. As set out in ‘The Economist’ of March 12th, 2011, the remarkable feature about Chinese capitalism – what it terms ‘Bamboo capitalism’- is the ‘blurring of lines’ between the public and private sectors in the development process. This is a veritable example of ‘embedded autonomy’ - the loci of economic activity moving seamlessly between the state and the market, with and state-societal links shaping development outcomes.

The Government of Sri Lanka’s (GoSL’s) vision for growth explicitly shuns privatization as a policy option. Rather than ownership change, management reforms within state-owned enterprises (SOEs) and public-private partnerships (PPPs) - particularly in the case of infrastructure development - are what are touted as the alternative.

Regional disparities in economic and social opportunities for growth, access to basic infrastructure services, and access to markets became more apparent in the aftermath of the war. The pressing need to address lop-sided growth is clearly set out in the GoSL’s policy vision; and, the state’s role in facilitating and creating an enabling environment for private investment and entrepreneurship is given significant emphasis.

There is a notable gap however, between this policy vision and ground realities. Management reforms, as evidenced in past attempts to introduce Performance Contracting in the SOEs, pose significant political challenges when the notion of a patriarchal state has been embedded in the perceptions of stakeholders over several decades. Even as at 2010, the Central Bank estimated expenditure on salaries and wages for public servants at 5.4% of GDP; and, the business media and opinion polls continue to highlight public debates on Sri Lanka’s expanding state apparatus. The fallout of a bloated bureaucracy that is opposed to change is seen in the enormous loss-making SOEs – the Ceylon Electricity Board, Ceylon Petroleum Corporation, Sri Lanka Central Transport Board and Sri Lanka Railway. Perceptions of a “big state” have been further buttressed in recent years with the nationalization of major entities such as Shell Gas, Sri Lanka Insurance, and Apollo Hospitals.

Some key issues for discussion that emerge from these ground realities are:

• Questions are being asked whether the Sri Lankan state is over-extending its potential by venturing into ‘business’. Does this amount to inefficient crowding out of the private sector or efficient crowding in of the private sector? Should the state focus its energies only on rebuilding social capital where the return on private investment may well be low? Does the comparative advantage of the state lie in growing business or in facilitating business? What are the concrete policy measures that the state needs to adopt to facilitate business, particularly in areas under-served during the war?

• The vision for development set out by the GoSL envisages a rapid increase of private investment in the country, both domestically and through foreign direct investment (FDI). The past decade saw average inflows that amounted to just 1.5% of GDP, and the target for the next decade is to double the level of inflows in key sectors such as tourism, IT/BPO services, renewable energy, etc. The Board of Investment (BOI) is in the process of being revamped to facilitate increased FDI flows. Post-war optimism affords a significant window of opportunity to draw in investment. As highlighted earlier, policy changes in terms of state ownership of previously privatised entities have sent out mixed signals to the business community and impacted investor perceptions. There have been recent statements in the media by the Secretary of the Ministry of State Resources and Enterprise Development on the government’s initiatives to rationalize and commercialize loss-making SOEs with a determined focus on attracting private participation, which are certainly movements in the right direction. So, how can the uncertainties be bridged and the right incentives be created to encourage the private sector to take up these opportunities?

• The need for rapid roll-out of infrastructure in the aftermath of the war is set out as a key policy priority of the government and PPPs are seen as crucial modalities in the infrastructure drive. However, as reflected in the latest figures released by the Central Bank, state investment in infrastructure development stands at 6% of GDP as at 2010, with investment in social infrastructure such as health and education accounting for only 1% of the total. Clearly the state still maintains a heavy presence in the development of physical infrastructure in spite of the policy vision to encourage Private Public Partnerships (PPPs). What do policy makers need to do to crowd in private investment; to create a conducive business environment for PPPs? Do PPP stakeholders in country truly understand what constitutes a PPP? What governance and regulatory structures need to be in place for the before, during, and after a PPP project to ensure credibility and a secure win-win for the state and private players? Do key government offices handling PPPs have the requisite capacity and expertise for administering a PPP drive? Are we looking sufficiently at international best-practices for PPPs?

Reforming the state is not an easy task in any jurisdiction, given the political economy realities inherent in any country. In that context, there needs to be a critical discussion on the feasible options for change, and ensuring credible policy continuity.

Good Regulation, avoiding Strangulation

The preceding discussion highlights the crucial role of the state as a facilitator and creator of an enabling environment for investment, business and entrepreneurship. Regulating that environment and its players are equally important, while always striking a healthy balance so as to ‘police’ effectively while not snuffing out private initiative. Sound regulatory institutions are vital for positive development outcomes. Regulatory risk poses a big threat to investment and regulatory risk is shaped by perceptions - perceptions of policy consistency, credibility, and the business climate. International best practice shows that good regulation should have as its core guiding principles:

- Regulator to practice regulation for competition and contestability rather than regulation of competition

- Regulator to have ‘workable independence’ - i.e., operational and financial independence to ward off political and regulatory capture, as ‘complete independence’ is a superfluous idea.

- Regulator to be accountable and transparent

Let’s take a brief look at a sample of episodes/events that have dominated public discussion of regulatory governance in Sri Lanka in recent years, in an attempt to get to a better understanding of the status quo.

• Construction costs associated with the Colombo-Katunayake expressway have almost quadrupled from approximately Rs. 9 billion in 2000 to Rs. 32 billion at the time of writing. These numbers include damages paid to the South Korean company originally contracted to build the highway and the costs associated with the renegotiation of the project contract with a new Chinese company. The numbers do not capture negative externalities linked to signals sent out to potential investors and the impact on future investments.

• A press release by Fitch Ratings Lanka last month, stated that Sri Lanka has the highest ‘telecom regulatory risk score’ in the South and South-East Asian region. The rating agency cited a low level of transparency in regulatory decisions and abrupt policy changes as being crucial factors influencing risk perceptions in the telecom sector.

• The Central Bank of Sri Lanka Annual Report 2010 provides the latest figures for Sri Lanka’s ‘Doing Business Ranking’, as set out in the World Bank publication ‘Doing Business 2011: Making a Difference for Entrepreneurs”. In spite of the various methodological limitations attached to aggregated cross-country rankings such as the ‘Doing Business’ survey and Transparency International’s ‘Corruption Perception Indices’ (CPI), these scores do impact on stakeholder perceptions. Whilst the latest CPI score for Sri Lanka indicates a marginal improvement (http://www.tisrilanka.org/?p=6386), the Central Bank states the following with respect to the country’s ‘Doing Business Ranking’:”..performance in the stages of Dealing with Construction Permits, Registering Property, Paying of Taxes and Enforcing Contracts is particularly weak as it ranks below 100 of the 183 countries considered and therefore, pulls down the country’s overall ranking. In fact, in the areas of Dealing with Construction Permits and Registering Property, it fares worse than the worst performing country, Chad. Out of the economies considered, Sri Lanka’s performance falls below 10, namely Singapore, Hong Kong, South Korea, Thailand, Malaysia, Mongolia, Vietnam, China and even the South Asian countries like Pakistan and Maldives. As some of Sri Lanka’s competitors in trade are included in this group, it is a matter of concern that Sri Lanka performs worse than them.” (CBSL Annual Report, pp. 24-25)

• The Public Utilities Commission of Sri Lanka (PUCSL), established under the PUSCL Act of 2002, stands out as an example of best practice regulation. The PUCSL is accountable to Parliament- in direct contrast to sector regulators in telecom (TRC) and transport (NTC) that report to a single Ministry. What are its superior elements? Appointments to the Commission are made by the Constitutional Council (CC) set up under the 17th Amendment to the Constitution. Issues of regulatory capacity deficit and overlapping jurisdiction are addressed in the multi-sector structure of the Commission. Language relating to Regulatory Impact Assessment (RIA) is built into the Act. Yet, while its structure is in place, effective operations are hamstrung by political economy factors beyond its control. Political gridlock surrounding the 17th Amendment has impeded its functioning.

This narrative of regulatory governance in Sri Lanka points to the following key discussion issues:

• What strategies need to be adopted to make policy makers accountable for their decisions and actions? What can we learn from India’s 2G spectrum scandal that forced the resignation of the Minister of Telecom?

• Are wage increases a possible solution to the problem of rent-seeking/graft? The quality of Singapore’s civil service for instance, is a result of keeping the state lean and mean, with public sector salaries being on par with those in the private sector. Is the Singapore “model” one we can adopt? What strategies are required to deal with over-employment in most state entities in the absence of sound safety nets? What needs to give on the fiscal front to recruit highly skilled technocrats into the public sector?

• Are RIA and sunset clauses feasible options for regulatory reform?

Better Policy Engagement for Inclusive Policy-making

Development policy that is not founded on participatory decision-making rebuts visions of inclusive growth. Public discussions on the lack of what Mancur Olsen terms as ‘voice’ in his seminal piece ‘The Logic of Collective Action’ (1965) – what, in common parlance, means an active civil society - point to the three-decade North-East conflict as the main reason for general apathy on the part of the polity. However, the war is now over. Good governance includes bottom-up checks and balances, as well as inclusive policy-making.

A good example of the lack of the latter, was the uproar caused by the proposed Employee Pension Benefit Scheme being introduced, through a process which both employer and employee groups called ‘unprecedented’. Intense discussions with relevant bodies like the consultative National Labour Advisory Council (which is cross-representative of labour market stakeholders) as well as the Employers Federation of Ceylon (EFC), and numerous worker’s groups, was severely lacking until the last minute. This left too many questions unanswered, too much room for speculation and opposition, and eventually led to severe tensions between the government and trade unions, including street protests. The heavy opposition could have been avoided with a genuine engagement and robust consultative process during all stages of the policy-making process. Yet the debate and dissent surrounding this issue aptly demonstrated that the citizenry will not always remain tolerant of imposed policies, and would no doubt be a lesson for any government.

More generally, however, catering to the vote base and to electoral cycles is rational political behaviour, no doubt. ‘Pork-barrel’ politics all over the world hinges on patronage and powerful interest groups. Sri Lanka is no exception to this as evidenced in the dynamics of public policy spanning successive political regimes over decades.

Yet, whilst collective decision-making remains a laudable objective, it is also one of the stickiest challenges in governance. However, changes are possible as India can show us. The ‘e-Panchayats’ being held across India, even in the remotest of villages, demonstrate how technological advances are changing the possibilities for better governance. India’s ‘Right to Information Act’ is transforming the ability of ordinary citizens to hold their politicians accountable, and in turn is slowly changing the ability of politicians to misuse the citizens’ mandate. However, access to information and the ability to act on that information pose entirely different challenges. Going bottom-up is a slow and difficult process. Discussing how to get there would perhaps be a good starting point. This article aimed to be that starting point, by providing a backdrop for an informed, objective, and constructive discussion on the role of the state in Sri Lanka’s new era of development.