Poor Focus Productivity Competitiveness Governance

Sri Lanka Economic Association annual sessions highlight:


* Policy making institutions lose credibility by making pie-in-the-sky statements. ‘Best not to say anything at all’
* EDB dormant * Exports falling: Sustainable growth needs exports, protectionism and macroeconomic policy mistakes take their toll

Eminent Sri Lankan economists warning that sustainable development would not be possible unless the country took measures to revive its falling export sector, called for improved governance, better productivity, meaningful steps to mitigate corruption and a move away from protectionism.

The Sri Lanka Economic Association Annual (SLEA) Sessions 2012 took place on October 19 and 20 at the Centre for Banking Studies, Rajagiriya under the theme ‘Export Growth for Sustained Development’ where economists were joined by policy makers and other professionals in their call for better governance and accountability from the government.

The country’s export earnings which stood at 33 percent of GDP in 2000 have declined gradually over the years to 18 percent in 2011 and estimated to reach 15 percent of GDP this year. Imports too have declined but at a much slower pace from 44 percent of GDP in 2000 to 28 percent this year, resulting in a widening trade deficit.

SLEA President Prof. ADV de S. Indraratne blamed both the government and private sector for the country’s predicament.

"The Government has a lot to do in creating an enabling environment, with good governance without waste and corruption, with law and order and the operation of the rule of law, the guarantee of citizens’ right to information, practice of simple rules and procedure in regard to both local and foreign investment (FDI) and reform of higher education with improvement of its quality and relevance to meet the skill demand of a growing economy with a higher budgetary allocation than now to higher education and R&D. The Government also must play its partner role as the provider of infrastructure services, facilitator, moderator and mediator," the economics professor said.

"The private sector, as the bigger partner, must be more innovative and effective, and play the lead role as the engine of growth. It must put aside more for R & D and increase its share of the Gross investment to four times that of the public sector. Last year, while the Government contributed 6.3%, the private sector contributed 23.7%, of the GDP of a total Gross investment of 30.0 0.0%. While the Government share can and should increase slightly to 7%, the private sector’s share must be four times, that is 28%, totalling a gross investment of 35.0% of GDP. At an investment efficiency or an investment/output ratio of 3.5, this would give rise to a growth rate of around 10%.

"The increase of the government sector to 7% can easily be attained, with the elimination of corruption, waste and ostentation. The increase of the private sector can and will come from the large retained profits/reserves of local enterprises, along with the increase in FDI, when the biggest constraint to them, the lack of a conducive business climate and an enabling environment, as described here, is rectified," Prof. Indraratne said.

Former Deputy Governor of the Central Bank W. A. Wijewardena said the country ought to move away from a simple production process to a more complex production process largely driven by investments in the knowledge economy.

"By doing this we would be able to secure our export markets, reduce competition from our current competitors, avoid the middle income trap and sustain growth and prosperity," he said.

He cited the example of General Electric (GE) CEO Jack Welch. Cheap consumer appliances imports from Japan to the US drove GE to bankruptcy. "But Welch did not run to the government asking for import restrictions. Instead, he drove the company from a simple production model to a far more complex model involving high technology (jet engines, turbines and advanced medical equipments) which helped the company reduce its global competitors significantly," Wijewardena said addressing a session on ‘Export Growth as Sri Lanka’s Development Strategy’.

"There has been no change in our export structure since 2000. We still continue to import and export simple products. Garments and textiles exports still dominate our export basket although there was a drop in its relative share, but this was because tea prices increased although production had not. We have imported more bicycles during this period but this is because of the so called screwdriver plants, we imported unbranded bicycles from China and r-exported them under a brand name and this did not add any value."

He suggested several measures that could be taken to improve the country’s exports: improving the rule of law, effective law and order, respecting property rights, and the need for an independent and impartial judiciary to protect the rights of the people and using the peace dividend to the maximum were among them.

Senior Minister DEW Gunasekera said the government’s US$ 15 billion export target for 2015 seemed over optimistic given global and domestic realities. "Can we expand trade and non-trade inflows? For this we will need good governance and rule of law," the minister said.

He said the Export Development Board (EDB) Fund was not functioning.

"As Chairman of the Parliamentary Committee on Public Enterprises (COPE) I inquired from the EDB officials why the fund was not functioning but I was not given a satisfactory answer. The EDB is not innovative enough. It needs to be more dynamic.

"We need to comprehend the ground realities. We cannot talk of high economic growth without exports. There are no short cuts. Permit me to be self critical. I am sorry to say the critical role of exports has not penetrated into the mindset of bureaucrats, technocrats and policy makers," the senior minister said addressing the inaugural session of the SLEA Annual Sessions 2012 participating as chief guest.

Former Economic Advisor to the World Bank, Washington, Sarath Rajapatirana addressing one of the sessions said getting macroeconomic policy right was crucial for developing the export sector.

"We need to restore credibility in policy making institutions by being consistent. Often these institutions put out pie-in-the-sky forecasts and increase the confidence of the economic agents that the government is committed by initiating reforms and maintaining their effectiveness despite external shocks. When such statements are made, people realise them not to be true. Sometimes it is best not to say anything at all," Rajapatirana said.

He argued that large fiscal deficits, an appreciating exchange rate and import controls were hurting the country’s export sector.

"We should adopt more open trade policies by reducing overall import protection, reducing the bias against exports. By reducing both the variance in protection and barriers to production of exportables and import substitutes, we can increase competitiveness. We should not use ad hoc trade measures as done recently," Rajapatirana said.

He also said bureaucrats should not make decisions for the private sector.

Giving a private sector perspective, Asia Shippers’ Council Secretary General Rohan Masakorala said, "We are sitting on a volcano which is the public sector. Hot lava is falling on us and this is productivity which is not good."

Masakorala said the biggest challenge faced by exporters was to sell and market a product in a tough, highly competitive global market, which was why the host country should cut red tape and facilitate the private sector.

"We are paying more for unproductive labour. Each year there are wage increments announced and this is not backed by an increase in productivity. We have too many holidays and the attitude of workers in the public and private sectors is pathetic. You cannot get anything done in public institutions at four o’clock in the evening. You walk into any public sector office at this time and you see people combing their hair and getting ready to go home. Just work eight hours a day, and with a little technology, much more can be achieved."

Masakorala also said productivity was declining in the private sector. When he first began his career, Masakorala said his boss reported to work at 7 am just to ensure that he (Masakorala) would reported in at 7.30am. "Today, bosses are reporting in at 9.30am. So there is a wide productivity gap in both the public and private sectors."

He also said absolute corruption and inefficiencies of structures and processes in the public sector were other impediments for export growth.

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