Harsha de Silva reveals Victoria’s secret


Government of J. R. Jayewardene swept to power in 1977. Jayewardene introduced a new constitution, together with a free market economy and a powerful executive presidency modeled after that of France. It made Sri Lanka the first South Asian country to liberalize its economy. Since 1977, the Sri Lankan government has been implementing privatization and an open economy for global competition thereby encouraging foreign investments. Subsequent to the quelling of the leftist Janatha Vimukthi Peramuna (JVP), privatization and reforms received a major boost and stress on export oriented growth further assisted in reviving the economy’s performance escalating GDP growth to 7% in 1993. Realising Sri Lanka’s growth potential major international companies like NTT, Shell and Caltex have made huge investments. From 1983, ethnic tensions were manifested in on-and-off insurgency against the government by the Liberation Tigers of Tamil Eelam (LTTE). In 1987, the Indo-Sri Lanka Accord was signed and Indian Peace Keeping Force (IPKF) was deployed in northern Sri Lanka to stabilize the region by neutralizing the LTTE. In 2002, the Sri Lankan government and LTTE signed a Norwegian-mediated ceasefire agreement. In the ensuing years the economy of Sri Lanka witnessed many upheavals resulting in uneven economic growth but the overall average annual GDP growth was at 5.2% in 1999-2000. Since 2002, following the change in management the country’s economy gradually recovered. Defence expenditures were reduced which helped in paying more attention on getting the country’s larger public sector debt under control. Increased direct foreign investment (FDI), lower interest rates, revival of the stock exchange and increased tourist arrivals have benefited the economy immensely.

by Maheen Senanayake

Most people expect a firebrand politically charged bullet pointed list of public wrong doings from an economist turned legislator once branded as the opposition’s ``economic hatchet man’’ by no less than the Central Bank Governor.

When I interviewed Eran Wickramaratne, the previous week, I had debated on whether to speak to Harsha too. But I had delayed it on the grounds that even the caricature artists at the English dailies have no more novel means of shearing his image given the numerous debates he has fronted. But my instincts prevailed and lo and behold, I discovered last week at his residence at MalalasekeraMawatha, a pensive, visionary whose eloquent and steadfast beliefs revealed ‘the Central Banker in him’. In the backdrop of a bamboo wind chime, Harsha de Silva reveals to us Victoria’s secret. This, is his story.

My first question to him was Do you enjoy politics? Well yes, he said, smiling cheek to cheek. He obviously was having a lot of fun on the Diyawanna.

What are our most burning issues?

Our biggest challenge today is to leverage the end of the war. We have a rare opportunity to do this. We know that the fighting ended in May 2009. Whatever we have done up to now, we still have that window open to leverage on that opportunity. There are two counts on which we have to be clear with respect to what we want. The first is a sustainable peace. The second is sustainable growth. Both of these were difficult during the war, but today they are both possible provided the government has the wisdom and the will to do what has to be done.

These two are fortunately related. The peace dividend is a virtuous cycle. It will snowball and become bigger and bigger. Inclusive economic development leads to greater inclusion and strengthened peace that will in turn lead to greater economic development. If you look at the first cycle itself, what you see is like a magnet beneath a sheet that contains iron filings. Move the magnets and the iron filings move.

Policy is the magnet and without the right and virtuous policies we cannot move anything. The iron filings are the people. In order to build stronger peace and bring communities together we need to square with the truth. We need to understand the issues are and decide on how to solve these issues. Then we sort of move out of the narrow focus and vision that we now have. We are not talking about the chief ministers’ police and land powers. We are talking about bringing together not just the partners in a coalition government, but the partners of development of our nation, including the international community and the friends of this nation who support our growth.

You need to do things that are strategically important. Sustainable peace necessarily results in sustainable development and growth.

Whatever has happened has happened. We need to move on as a united people. We have to create a bigger canvas and a bigger opportunity. A lot of the things that are not in place could fall into place. You cannot now say that because … "I have finished the LTTE and now I want to destroy everything else in my way…".

We talk of a ‘deshiya’ or an indigenous economy. The question is how are we going to grow our economy?

There are a fundamental set of assumptions. A theory cannot be proved wrong unless you prove the fundamentals wrong. The fundamentals depend on whether we are 20 million or 200 million or whether there is 20% literacy or 95% literacy, whether we are landlocked or an island. These are the facts that we have to deal with.

The Silk Route

Let us go back to history and look at successful Kingdoms in this country. We have always been a trading country. It is said that in Parakramabahu’s time they had what we now call export or investment zones. During the Kotte period it was the same, and this was before the Portuguese where multiple records clearly indicate how we were trading in cinnamon and precious stones and in a host of other commodities. The people of those days had been using Sri Lanka’s competitive advantage and were at the foundation of the economy. You have to look at foreign policy from within that context. The kind of foreign policy we would have to practice if we were Lesotho is different. If you are Lesotho you only sell to South Africa so you have to maintain good relations with her.

Here we have a wonderful opportunity to export and create markets due to our legacy from the British and the Commonwealth and the strong commercial relations we have built with the American Market during the 70s and 80s, India with which we have been trading for thousands of years. We need foreign policy that includes economic policy. You can’t have foreign policy being dictated by a single objective and an economic policy being dictated by another. These two are one and the same. Foreign policy is not about fighting wars; it’s about creating markets.

We have seen media reports of `irrational’ statements and `autocratic’ views. What are your comments on these?

Today we have a situation when the economic minister says we have to strengthen economic development with India. Two days later the powers that be, the Rajapaksas say we don’t need CEPA because we have moved beyond that. Then you have the extremist pawns doing everything they can to sour the relationship between Sri Lanka and India, working at cross purposes.

What is your India police, I was asked and I said "we should hug India with both arms". The benefits to expanding to India are enormous and far greater than the disadvantages. Two small examples include a brand of intimate wear and furniture. They are doing very well in India and expanding very fast.

There is a lot of scaremongering and one of the issues that the public fears most has to do with employment. There are so many unemployed in India numbering in excess of the population of Sri Lanka. The fear is that they will just come over and take all the jobs. It doesn’t happen like that. When America signed an economic partnership with Mexico, during a time when Mexico was not doing so well… It didn’t happen there. That is why we have trade, Mode 1 Mode 2 and Mode 3 trade. In an age of advanced technology, so many services could be sold to people around the world.

There is a fundamental fact that it will always be an assymetric deal that we will have to sign with India, meaning that when we open up a little they open up a lot. However, anyone selling services can add massive value opening to India and enhance value to both parties. People living in open economies anywhere are better off than those living in closed economies. This goes back to the fundamentals of economics – the division of labour. From time immemorial, bartering was based on the division of labour. As Ricardo expressed, trade is good specially in terms of comparative advantage specially for us We sit smack in the middle of a trading route ‘ the Silk Route’. We have air and sea connectivity to both sides of the planet.

What is the next step?

When JR opened up the economy we had 3 to 3.5 % rate of growth in our economy. We were closed, were not trading and there were hardly any investments. He liberalized part of the financial markets and part of the investments. He did a half hearted opening up of the economy. Even then it took the growth rate from 3.5 to six percent which is almost double. He couldn’t complete the reforms. But in economic terms we call it a ‘Structural change in the growth path’. He couldn’t complete this initiative because of 1983 and then 1988/89. The rest is history.

There are different ways in which growth is analyzed. The fundamental analytical measure is the marginal returns to scale. Are they diminishing constant or increasing? We used to think that poor countries could grow rapidly and catch up to stabilize growth resulting in a steady state of growth. People are now beginning to converge upon the idea of endogenous growth where capital is in human capital. We include the human/labour factor coming in through better skills, better working structures, efficiency improvements, technology etc. which do not necessarily have to cap your growth making it possible for countries coming in from behind to overtake others where incentives are highly stacked. Countries like Sri Lanka, where the labour force is well educated, can make it possible to enhance the quality of labour.

We have to make that structural change happen. All the research carried out by the most accepted authorities including the IMF converges upon the fact that the 2010 and 2011 growth was a flash in the pan. It happened by default and by accommodating monetary policy driven by interest rates and exchange rates. Artificially low interest rates and artificially high exchange rates; and the default was the opening up of the North and East and driven by consumption, rather, imported consumption.

Classified adverts?

Mahinda Rajapaksa wanted tangible dividends of peace. Officials used the thickness of the classified sections of Sunday papers as a measure of economic development. One institution said ‘No Poli, More Jolly,’ another said ‘Three years interest free,’ because interest was low the rupee was strong so they could keep importing. That was what drove a 10 billion dollar deficit against advice of all independent economists. That policy resulted in the whole idea crash landing. If an economy is strong, its currency must be strong. Look at the picture now – Rs. 134 to the dollar today as against Rs. 109 in 2009 when the war ended.

Sri Lanka’s medium term growth forecasts converge at around 6.8%, nowhere near the 8+%. But remember these are all independent forecasts. We were around the 6+ mark. The next structural change should have taken us to 9, 9%+. We can see a lot of revving, a lot of smoke, but when you put the wheel down there is no speed.

Can the myth be maintained?

I was appalled by the Central Bank attacking Dr. Nimal Sanderatne in an emotionally charged response using exclamation marks. The Central Bank has to rise above such petty behaviour. Dr. Sanderatne is an economist of repute and the fact that it was a response to a well argued and thought out analysis made the Central Bank’s response even more unrealistic and totally unfair. The Central Bank in its official capacity should not have done that to a foremost economist in the country.

Structural changes

Let us say you have a standardized growth path. We are growing at 6 – 6.5 %. What you do is create a boom, a positive business cycle. Then you can’t hold on to it . It becomes a bust. You engineer another boom. It comes down again when you can’t sustain it. Business cycles can be generated. Business cycles can happen due to many reasons. But a political business cycle is driven primarily by political decision. The 2010/2011 boom was driven by politicized economic policy that were never sustainable. The difference I am trying to make is that if a 6% went to 8% it should stay there. You can then have a business cycle around that 8% to push it and elevate it further. In 1977 when it went up, it was a structural change. JR did it because he changed policy. He opened banks, investments, policy was the key. Here we have not done anything.

Every year there is a team from MIT who come down and create startups. MIT’s centre for entrepreneurship which is looked up by one and all is called the Martin Trust. That is where tech entrepreneurs are churned out. And Martin was telling me how when Victoria’s Secret came to Sri Lanka for the first time, our people let alone knowing what lingerie was couldn’t pronounce the word or knew the meaning of ‘lingerie’. But all they said is that they can make them.

Today they are the biggest lingerie manufacturers in the world. Not only in Colombo but all over. Premadasa had a vision and you have to give credit to Ranil in the same breath. He was the minister of industry at the time. Premadasa was the president. The industrial strategy that Premadasa and Ranil worked towards was a newly industrialized Sri Lanka. That was what took us from where we were and plugged us into a global value chain. And still 20 years later, or 25 years later we haven’t moved beyond that. Where is that vision? That is my question.

Sure we have a port with no ships and airport without aircraft. But of course we have a highway. Take the telecommunication sector. The vision was IT / BPO related tech sector. And partly the setting up of the ICTA was driven by this vision. More than that, the real reform was driven by opening the telecom monopoly to foreign investment. It was Rs. 100 for a call to the US then. What is it now? This is policy. The policy was if you were to attract telecom related services, then fundamentally you had to have cheap communication. How do you do it? Break the monopoly. Then he brought the TATA undersea cable breaking SLT’s monopoly here too and linked the HSBC call centre through that. HSBC was TATA’s first client here. We saw a new industry beginning to emerge. What happened to that industry? It has grown phenomenally. There are a few more but we were not able to leverage on that. If you are moving away from low cost apparel to high tech high value businesses, then we should have 20 HSBC call centres around the country. If Premadasa was able to build 200 apparel factories Rajapaksa should have been able to build 20 technology outsourcing centres around the country.

Victoria’s Secret

When Fortune Magazine asked what Victoria’s Secret was, their answer was simple and explains the opportunity before us. The answer was ‘Sri Lanka’.

In this answer lies the idea, the philosophy approach and policies. In this answer rests the vision we must have for our country.

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