Sri Lanka’s uphill climb to a ‘knowledge’ economy - I


By C. R. de Silva


President Maithripala Sirisena has articulated his vision for Sri Lanka mid-October during the BISTEC/BRIC meetings in India as moving the country towards a ‘knowledge economy’; and the government in pursuit of this objective, has already embarked on a futuristic concept in the Western Region Megapolis Master Plan (WRMP) project of building numerous ‘smart cities’ in the most developed region, dramatized by Prime Minister Ranil Wickremesinghe and the Minister concerned in their many speeches. The minister has also referred to arrangements to launch the first Techno City as part of the above-mentioned WRMP , "which would take Sri Lanka along the ‘Information Super Highway’, transforming the country into a ‘Smart Nation’ and the Western Province, where it is located into a Hyper Centre of the Indian Ocean." The overriding issue is : Has the intellectual foundation been laid in Sri Lanka over the years, through a reoriented education system, appropriate human resource development and institutional capacity building, necessary prerequisites for this revolution to take place ? And until then, is the highly publicized hype justified in reality or merely only a pipe dream?

Since a ‘knowledge economy’ is a little known concept in this country, it may be worthwhile to define what it is and delineate the country conditions necessary to realize this objective, as well as explain what pre-requisites have to be satisfied to achieve such a new-age development objective, and identify the roadblocks for a middle income country at the lower income range, in negotiating the road to that destination, which for some countries may simply remain in the currency of politicians’ oratory provoking people to dream big, which is often a politician’s motivation.

Stanford University experts in California, who are at the very forefront of preparing for the developments now taking place in the context of the New Technology Revolution in the world, have defined the ‘knowledge economy’ as one "where production and services based on knowledge-intensive activities contribute to an accelerated pace of technological and scientific advancement". They have added that the "key components of a ‘knowledge economy’ include a greater reliance on intellectual capabilities than on physical inputs or the exploitation of natural resources, combined with efforts to integrate improvements at every stage of the production process from the research and development (R&D) laboratory to the factory floor and to the interface with consumers".

The significant issue being addressed in the paragraphs that follow is whether Sri Lanka is currently at a stage of sustained and dynamic development which enables the government authorities and the private sector to take the economy forward to a ‘knowledge’ economy and the smooth functioning of numerous ‘smart’ cities, and the conditions precedent that must be satisfied in the eyes of experts, on Sri Lanka’s path to realise that objective or whether it is a premature objective for Sri Lanka, since developing countries can never leapfrog into such higher levels of futuristic, sustained development on the large scale envisaged as economic history has amply demonstrated.


Snapshot of an Economy in Crisis

An accurate summary of the state of the economy today, an essential issue for review when discussing the prospects for Sri Lanka progressing to a "knowledge"-based economy, is articulated by a former Central Banker as follows: The economy is characterized by "many economic vulnerabilities manifested by persistent fiscal deficits. Revenue generation is constrained by the limitations in mobilizing direct taxes which have led to a continuous rise in the indirect tax burden making the tax system more regressive, hurting the poor and further widening income inequality. Meanwhile, the slowing down of economic growth inhibits any autonomous increase in revenue collection. The debt stock continues to rise" (of which about $ 50 billion is unsustainable foreign debt), "reflecting a high level of fiscal sustainability risks in the medium term. Given the revenue constraints and the unlikely expenditure cuts, bringing down the budget deficit seems a daunting task…FDI inflows are still less than $ 1 billion per annum" – which is less than half what they were in each of the years 2012, 2013 and 2014, despite numerous fiscal and tax incentives. (Prof. Colombage, Fiscal Challenges, The Island, 4.11.2016).

Various economists have also referred publicly to "the economic crisis we are currently facing…that, regrettably, economic rationality is not politically expedient" and that "around 40 percent of the population (or about 8 million) live below the poverty line of $ 2 per day" (while mega projects are being planned and executed), and that the just proposed budget cuts down public investment on infrastructure, with negative effects on economic growth, and on health and education, instrumental in developing human capital.

Sri Lanka’s present credit rating of B+ (Negative) by Fitch is the same country credit rating of nearly-bankrupt Greece, after the IMF/EU approved the first $ 350 billion equivalent bail-out in 2010, demonstrating the prospective crisis looming over Sri Lanka in raising funds overseas ($ 5 billion needed annually for interest rate and amortization payments) in the global bond markets, to service and pay off its staggering foreign debt. (See Sri Lanka - Avoiding the ‘Road to Greece’, The Island, 13.06.2016). Therefore, a return to economic stability and setting a solid foundation for sustainable development is an unforeseeable event at this time, despite irresponsible IMF forecasts of a "lift-off" of Sri Lanka’s economy, made earlier in 2016, repeating the bad judgements that in a richer country have led to the Greek economic tragedy. (See Sri Lanka – Reliability of IMF’s Judgements and Program Efficacy, The Island,3-4, August,2016).


Political Stability and

Governance Issues

A first prerequisite for a country moving its economy to the next level of development, which is what the revolutionary transition to a "knowledge economy" means for Sri Lanka, is a stable, united government which speaks with one voice at the top, in a largely corruption-free economy, well respected both at home and overseas, as being confidently and single-mindedly steered without intermittent hiccups in a very positive and planned direction. The predominant issue whether that level of development urgency and effectiveness necessary to revolutionize the economy to move in a different direction today can be achieved in an inherently raucous, though superficially democratic milieu, in a coalition regime in which historically opposed parties try to reach a policy consensus, and in a situation where political opinions diverge, and reaching timely consensus on financial, taxation, corruption and other governance and development issues, is a very difficult task.

Since foreign investment and transfer of technical know-how is an essential component of such an effort at systemic economic change, for a government to appear to the outside world in this age of instant global communication, to virtually appear to have two competing power structures, with the constitutional roles of Executive President and supportive, almost ceremonial Prime Minister, completely reversed and turned on its head, is the source of the resulting indecisiveness, simmering scandals and lack of clarity in policy formulation and execution that appears to civil society to characterize the decision-making processes of this coalition regime. After these thoughts were drafted into words, a well known media personality writing only the other day, referred to "…what is now a systemic breakdown in policymaking. This is serious and impacts everything from transitional justice to investor confidence in the country…this is partly the nature of coalition politics in general, and this government in particular, with an infuriatingly complex constellation of power centres, each competing daily for visibility, legitimacy and favour. But aside from the friction between the President and PM, is the catastrophic failure of coherent communication and policymaking from within each camp." (Sanjana Hattotuwa, ‘Amateur Hour’, The Island, 6 November 2016). The issue is what happened to the ‘social contract’ entered into between the people and the elected in 2015. Are they running the country; and also, in the interests of the people?

These political constraints are further complicated at the national level by the presence of some fifty Ministries, in charge of mini-topics into which each discrete sector of economic and social activity has been sub-divided; as a result, it is nearly impossible at the operational level to achieve a reasonable level of inter-agency coordination for unimpeded development activity to proceed on the ground. Added to this impossibly disintegrated governmental framework at the centre, there is yet another level of political approval at the Provincial level, creating a complex administrative hierarchy, where bilateral and multilateral project and program funding inevitably meet obstacles in the course of approval as well as implementation, with delays in decision-making and funds remaining undisbursed after being committed to advance the country’s development plans and objectives. Similar delays often impede the authorization and support for private capital investment; including foreign direct investment (FDI), so essential for Sri Lanka to advance to a higher technology and services level, but now concentrated mostly on infrastructure. Foreign investors hesitate to penetrate developing countries with daily publicized political instability and complex, multi-tiered approval mechanisms, absence of governance expressed in long-drawn out and highly publicized, unresolved corruption scandals.

A Crisis in Governance - Central Bank’s Ongoing Saga

An outstanding symbol of the current paradigm is the multi-billion rupee ongoing scandal that has riveted the whole country, subsuming many others of lower intensity, allegedly commencing in early-2015 and long simmering now for some twenty two months, right at the pinnacle of governance decision-making, and concerns the country’s reserve bank and periodic public bond issues – a highly publicized unresolved, so-called ‘scam’ - which is alleged to have defrauded the Government, as splashed in newspaper headlines on a daily basis, seriously interwoven from the start with party politics, and laid bare for the whole world to witness the indecisiveness of a government unable to resolve a significant financial and governance issue, which should have been addressed head on and squashed immediately at its very inception in a smooth functioning governmental set-up, blocking a similar alleged recurrent scandal which again occurred in 2016.

The new Governor of the supposedly "independent" reserve bank, where all this is being played out, has inadvisedly decided to export the scandal to the foreign aid sphere, by signalling publicly a move to defer possible resolution of future bond procedural issues to the presumed expertise of the IMF and World Bank – omniscient oracles in grievously mistaken and simplistic Sri Lankan eyes – both institutions having to stray very far from their original mandates of relieving temporary balance of payments (BOP) crises and assisting member countries with the alleviation of poverty, respectively, to move this far afield, if they agree, to display their apparent expertise to help enrich the already super-rich by buying bonds - an altogether ill-considered move into foreign technical assistance, which to their obvious delight, further empowers the multilateral institution’s leverage in the economy even more! A similar emphasis of the Central Bank’s new top management to go after staff leaks in a confidential on-site report on this ‘scam’ rather than promptly address the troubling issues raised in it, in an attempt to shift headline focus, should be another matter for deep concern among civil society, since it just reinforces the declining staff morale following last year’s indiscriminate transfers of senior staff by the previous administration, even before the then new Governor stabilized himself in his new role in the Central Bank.

Politicization of Public Sector

Added to such significant governance issues amidst public perceptions of alleged pervasive corruption, and the impossibly divided and cumbersome governmental and administrative structure described above, is the long-time politicization of the public sector, starting from the very pinnacle of the administrative structure, including the management and operation of the vast, profit-oriented but mostly loss-making state owned enterprise (SOE) sector, said to have recently lost 300 billiion rupees, but now authorized to raise foreign loans!. The functioning of the organs of government, through steady and persistent politicization by successive governments over the last some fifty years has now got ‘merged’ with the political sphere itself. Recent moves to establish new institutional mechanisms to monitor the effectiveness of public sector performance, which is clearly dragging down the pace of development activity and systemic economic transformation which the Government would dearly like to see, will not yield adequate results without abandoning the culture of politically-motivated appointments and influence-peddling at all levels of the administration, based on personal or party loyalty and even nepotism, for a revolutionary reversal to the days soon after national independence when executives’ selection based on merit, and judged by competence and integrity, were the criteria for entry into the public sector.

These are some conditions precedent to any concerted movement towards a "knowledge" economy, propelled by a dynamic governmental machine purposefully guiding the private sector and setting the policy guidelines for information and technology development to the next level, which is an absolute necessity before any successful revolution to a different kind of economy is planned or embarked upon – and the current unsatisfactory prevailing paradigm is dramatically described by a government-supported think tank, the Institute of Policy Studies (IPS), in the following words: "Posts and privileges are dispensed freely, encouraging the practice of ‘competitive populism’ to the detriment of sound policy-making…the bureaucracy has also become more political and powerful, performing both political and administrative functions as politicians rely on a few hand-picked technocrats to formulate and implement policy. The dual role and discretionary powers they enjoy mean a greater blurring of transparency and accountability in policy decisions, and a distancing of policy makers and politicians from their constituencies." (Sri Lanka - State of the Economy, IPS, 2015). (Tomorrow: Prerequisites of a ‘knowledge’ economy)

(The writer, who is an Attorney, was a member of the C.C.S., and worked at World Bank Headquarters in Washington D.C., for three decades, before retiring).

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