The  Asian Century

The Asian Century

Asia re-emerges as the dominant economic power in the world – opportunity beckons Sri Lanka

Dr Palitha Kohona

Former Ambassador and Permanent Representative of Sri Lanka to the United Nations; Former Secretary to the Ministry of Foreign Affairs of Sri Lanka

It has been said that in the 19th century, the world was Europeanised. In the 20th century, it was Americanised. Now, it is being Asianised. Sri Lanka has another opportunity, through the astute management of its policies, both internal and external, to be part of the blossoming Asian success story. It is reassuring that Sri Lanka’s opposition presidential candidate, Gotabaya Rajapaksa, has identified the seminal national need to participate in the Asian resurgence gathering steam now through a refined and responsive policy framework. Emerging Asia has many lessons to offer also.

Asia, after having been accorded the dubious distinction of being the poorest continent in the 1960s, has, within a very short space of time, transformed itself in to the economic powerhouse of the world, and is achieving prosperity at a dizzying pace. This rapid rise has caught the West off balance and many analysts find the transition difficult to accommodate in their existing frames of reference, not to mention the political class and the media. The much flaunted, and oft prescribed liberal democratic political structures and open economies and free trade have not been faithfully replicated by the majority of countries of resurgent Asia, as they strive to catch up to the West.

At most, only lip service is being paid by many to liberal democracy. Liberalised trade and open markets, an article of faith for so long in the West, has not been adopted in full and it is being gradually diluted even in the West, particularly in the face of Asian competition. The dominant economy of the West, the USA, is now being forced to backpedal on the trade liberalisation and globalisation crusade of yesteryear, and is busily putting up barriers. The noisy call to open doors to foreign investments is being replaced by strict monitoring of inward investments, ostensibly for security, environmental and sociological reasons. Some entertain genuine fears that one of the pillars of the Bretton Woods institutional architecture, the World Trade Organisation, might collapse due to US actions.

Economic and trade concepts advocated with messianic fervour are being modified rapidly, just as resurgent Asia was beginning to reap their benefits. Sri Lanka, as it adopts post-election trade and investment policies, must fully be cognisant of the sea changes affecting the attitudes of the West, and the responses of the rest of the world. Gotabaya Rajapaksa’s election manifesto appears to grasp these sweeping changes, and to position Sri Lanka strategically to reap advantage effectively, including through exploiting the opportunities offered by booming Asia.

Hoax

Did the West promote a hoax all these years, or were these concepts advocated for their immediate convenience, including through post World War II international institutions set up to advance their own vision for a better world? Is it now backtracking when confronted by a super-competitive Asia, which has become adept at exploiting the rules propagated by the West itself?

History has witnessed a prosperous Asia fall from grace. In the early 1820s, Asia accounted for two-thirds of the world’s population, and more than 50% of the wealth produced globally. The subsequent impoverishment of Asia could be attributed to a number of overlapping factors, including its forcible integration into a world economy on conditions determined by colonial and imperial priorities, development exhaustion, stifling and inward-looking conservatism, perhaps influenced by regressive religious constraints, dissipation of the dynamism and innovation of the past, paucity of advances in military technology, strategy and science, and internecine conflicts which were unscrupulously exploited by Western colonial invaders. The causes for the downfall hold lessons for Asia in the contemporary environment. The same weaknesses, where they manifest themselves, including overwhelming suspicions of other countries of the region, continue to be exploited by interested outsiders who still remain in control of global financial structures and the media.

By the late 1960s, Asia had slid to being the poorest continent in the world, but with more than half of the world’s population. Its social indicators were among the worst. The task of feeding this massive population was a practical and immediate challenge, highlighted in the Club of Rome’s Limits to Growth. But to the surprise of many, Asia, modifying feudal and semi-feudal socio-economic structures, and employing modern science and technology, pulled through and surprised the many pessimistic commentators. The food problem was solved despite the numerous publicly expressed reservations. Millions were extricated from absolute poverty within a single generation.

Global centre of gravity

As Sri Lanka readies itself for a new administration, and more responsive foreign and policy approaches are explored, it is pertinent to remember that Asia now accounts for 30% of world income, 40% of world manufacturing, and over one-third of world trade, while its income per capita converged towards the global average. Already Asia’s GDP exceeds that of the USA and EU. By 2040 it will account for about over 50% of World GDP, with India or China having the biggest individual GDP. China lodged 44% of patent applications in 2016. Hyderabad is catching up to Bangalore as an IT hub. Technology was spurring Asia, especially South East and East Asia ahead.

By 2040, Asia is likely to account for nearly 40% of global consumption. Asia now accounts for around one-third of global trade in goods, up from about a quarter 10 years ago. Its share of global airline travellers has risen from 33% to 40%, and its share of capital flows has increased from 13% to 23%. China alone generated over 137 million international travellers per year, spending over 130 billion Dollars, and the number is expected to grow. When I started travelling on government delegations in business class in the middle eighties, it was rare to see non-white faces in this class. Today, it is the other way around.

McKinsey Global Institute research demonstrates the impressive extent to which the global centre of gravity is shifting toward Asia with the region increasing its share of global trade, capital, people, knowledge, transport, culture and resources. Of eight types of global cross-border flows, only waste is flowing in the opposite direction, reflecting the decision by China and other Asian countries to reduce or eliminate imports of waste from developed countries. China stopped the import of waste in 2017. Some, including the Philippines, Thailand, Vietnam, Singapore and Malaysia have begun to return waste to European source countries, something unthinkable two generations ago.

Sri Lanka lags

According to the World Bank, with regard to ease of doing business around the world, India has risen to 63rd place, from 142nd when Modi took office in 2014. He is aiming for the top 50. China is already at 31. New Zealand and Singapore hold the top two positions. The Middle East demonstrated new strength with Saudi Arabia, Jordan, Bahrain and Kuwait among the top 10 gainers. That most-improved group also included India, Pakistan and Nigeria, three populous nations.
Sri Lanka lags at 99 in the world rankings and must improve fast if the people’s dreams of a better future and an expanding economy are to be realised. Sri Lanka, with many natural and sociological advantages, needs to examine what is holding it back and understand what makes the other Asian countries shine. Inefficient Tax and administrative structures, corruption, lack of transparency, dynamic and visionary managers, uncertain policies and lost opportunities, etc come to mind. Gotabaya Rajapaksa’s policy statement seeks to address these challenges methodically.

Now, 21 of the world’s 30 largest and four of the 10 most visited cities are in Asia. A dizzying range of business opportunities have opened up in Asia’s mega cities. Reflecting this trend, Yangon, Myanmar’s commercial capital, attracted greenfield foreign direct investment (FDI) in knowledge-intensive sectors totalling USD 2.6 billion in 2017, up from virtually zero in 2007. The factors that made investors attracted to Yangon are worth studying by Sri Lanka.
China, South Korea and Taiwan in East Asia; Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam in South-East Asia, Bangladesh, India, Pakistan, and Sri Lanka in South Asia, and Turkey in West Asia, account for more than four-fifths of the population and income of the continent. Japan, a high income country, was already industrialised 50 years ago.

ACEP and BRI

Today China’s GDP, although its growth has slowed, tops USD 14 trillion. India’s USD 2.6 trillion. China’s economy has been expanding at 6% per annum and contributed around 30% of global growth in the past eight years. India’s economy expanded at 5%. India is expected to overtake the Chinese economy around 2050. The regional grouping of ASEAN, with 600 million people and a combined GDP of USD 2.8 trillion, is surging ahead economically, including technologically, making it an attractive partner and a model to outsiders.

The Asian Comprehensive Economic Partnership (ACEP), currently being negotiated after the US withdrew from the Trans Pacific Partnership. offers further opportunities for collaboration. China has long pushed to conclude this pact, which also includes Japan, South Korea, Australia, New Zealand and 10 Southeast Asian nations. The technological advancements of the region are breath-taking.

Asia’s economic transformation in this short time-span is almost unprecedented in history. Rising per capita incomes have transformed social indicators of development. Literacy rates and life expectancy have risen dramatically.

President Xi Jinping’s flagship Belt and Road Initiative (BRI), covering more than 68 countries, including 65% of the world’s population and 40% of the global gross domestic product as of 2017, pledged USD 60 billion in financing for projects across the African continent. China’s trade with Africa has soared over the past 20 years from about USD 10 billion to close to USD 200 billion. In a reflection of shifting balances of power, nearly twice as many African leaders attended the Forum on China-Africa Co-operation in Beijing in September than the UN General Assembly in New York two weeks later. The BRI holds considerable promise for Sri Lanka.
Russia invited over 50 African leaders to its first Russia-Africa summit in Sochi in late October, the culmination of a strategic push that marks Moscow’s re-entry into the continent. With trade and investment replacing aid, and due to the inroads already made by China and Russia, US and European multilateral lenders are also directing more funds towards Africa. Africa offers exciting new trade and investment prospects for Sri Lankan businesses.

Diverse

But it is important to recognise that Asia is bewilderingly diverse. There are significant differences between countries in geographical size, embedded histories, colonial legacies, nationalist sentiment, natural resources, population size, income levels and political systems. The reliance on market forces and the degree of openness of economies has varied greatly across countries and over time.

Similarly, the politics and ideologies have also tended to differ widely from authoritarian regimes and oligarchies to substantial democracies. From communism, socialism with capitalist characteristics, to state capitalism and simple robber baron capitalism. Development outcomes differed and different paths to development were adopted, because they decided early that there was no universal one-size-fits-all solutions.

Rising investment and high savings rates combined with the spread of education, especially technical education, were significant underlying factors contributing to Asia’s performance. Rapid industrialisation fuelled growth, often led by exports. Co-ordinated and well considered economic policies, including international policies, contributed. The developmental states in South Korea, Taiwan China and Singapore co-ordinated policies across sectors over time in pursuit of national development objectives, using carrot-and-stick policies to implement their agenda, and were able to become industrialised nations in just 50 years. China emulated these developmental states with tremendous success, and Vietnam followed the same path two decades later. Both countries have strong one-party communist governments that could effectively co-ordinate and implement policies.

Government role

Successful Asian economies gradually embraced openness. Integration with the world economy was almost always strategic and cautious, rather than passive insertion. Trade policy was liberal for exports but in many instances, restrictive for imports. On many occasions, it was designed to encourage local manufacture. Government policies towards foreign investment have been shaped by national development priorities, rather than willy-nilly. While openness was necessary for successful industrialisation, it was not sufficient and facilitated industrialisation only when combined with industrial policy.

Governments performed a vital role in the transformation of Asia. It was catalyst and supporter. Success at development in Asia was about managing this evolving relationship between states and markets, by finding the right balance in their respective roles.

While Sri Lanka has posted some impressive socio-economic indicators, there are other areas where it could learn from the experiences of the region. As Sri Lanka readies itself for a new administration, it would be instructive to study the identifiable factors which propelled the Asian miracle.

Read more
USD stands to lose its dominant position  as global reserve currency

USD stands to lose its dominant position as global reserve currency

On 16 October, in response to spiking interest rates, the US Federal Reserve system (nicknamed “The Fed”) started a programme to buy about USD 60 billion monthly in US Treasury bills. As of the beginning of November, its holdings stand at USD 4.02 trillion. The next day, separately, its New York arm injected USD 104.15 billion into financial markets, through repurchase (repo) operations; an action it repeated two weeks later, with repo operations totalling, USD 104.58 billion; the aim being to boost liquidity and control interest rates. Meanwhile, for the third time in four months, the Fed cut interest rates by 25 basis points (a quarter of 1%).

Troubling

These moves are troubling, especially in view of the ostensibly bright prospects for the US economy. The US Bureau of Economic Analysis said on 30 October that the economy grew by 2.9% in Q3 this year, marginally down from the 2.0% of Q2 (although considerably lower than Q1’s 3.1%). Market pundits expected rather lower rates of growth. US Secretary of Commerce Wilbur Ross commented:

“Today’s report shows that the U.S. economy continues its steady growth in defiance of media sceptics calling for a recession. Since President Trump took office, wages have surged, unemployment has hit record lows, and poverty has fallen for all Americans, including the country’s most vulnerable.”
Ross’ optimism might appear justified, since the data on growth, together with rising employment data, and low inflation figures, as well as higher manufacturing growth in China, caused buoyancy in markets, and overcame fears of an imminent slowdown. Market analysts began speaking confidently about needing to re-evaluate the prospects for 2020.

However, things do not look so good under the bonnet. Although, officially, unemployment in September hit a 50-year low of 3.5%, the real unemployment rate, taking into account those who have given up on looking for work and the marginally-employed, may be twice or thrice that figure.
On 1 October, the US Institute for Supply Management said that the country’s manufacturing sector had entered recession (meaning that it had contracted for two quarters in succession). Output fell to the lowest level since the aftermath of the Global Financial Crisis. Three days later, the US Labour Department stated that the manufacturing sector lost 2,000 jobs in September, part of an overall decline in employment in the sector.

Today, manufacturing accounts for just 10% of US economic activity, part of a long-term decline as companies shift their production to cheaper, foreign location. Despite its small size, however, the manufacturing sector’s slowdown has knock-on effects on the logistics business, and there are fears of what its effects might be on the much larger services sector. The possibility of an economy-wide recession appears less distant.

Debt crisis?

In mid-August, the US National Association for Business Economics published a report on its survey of economists’ opinions, in which 34% of them believed the country might be heading towards a recession in 2021, and 40% that the recession would take place before then.
Economists worry about the rising level of US debt. The national debt surpassed USD 22 trillion for the first time in February, and stands, as of 30 September, at USD 22.719 trillion, or 106% of the US gross domestic product (GDP). Even more worrying is corporate indebtedness. The non-financial debt of large US companies stands at about USD 10 trillion. Adding to that the debt of corporations not listed on the stock exchange, small and medium enterprises (SMEs), and family-owned businesses, increases the total corporate debt to a record USD 15.5 trillion, or 74% of the US GDP.

The corporate sector has been racking up this debt, using the cheap money available in the low-interest-rate financial regime, primarily for stock buy-backs, acquisitions and dividends – in order to hike up share prices – rather than to expand. Many businesses, particularly those which took greater risks in borrowing, become vulnerable if the interest rates begin to rise, being unable to pay back debts or refinance them.

These companies make up a large part of corporate USA. The International Monetary Fund (IMF) estimates that half the debt of large corporations is high-risk, having a greater probability of default. Half of the USD 660 billion worth of leveraged debt (that is, below investment quality loans to companies with high levels of debt) is held by a range of investors as collateralised loan obligations (CLOs) – structured financial products, created by pooling high-risk corporate loans. These have high potential returns but greater levels of risk, and uncertainty in the markets could cause a stampede of selling, which could spill over into more conventional areas, such as bond markets.

Synchronised slowdown

Worries about the US economy take place amidst against a world backdrop of uncertainty. In August The Economist reported that
“Financial markets are often accused of complacency. However, the mood just now is not complacency but anxiety. And it is deepening by the day. In Germany interest rates are negative all the way from overnight deposits to 30-year bonds. In Switzerland negative yields extend right up to 50-year bonds. In America, meanwhile, interest rates on ten-year bonds are lower than on three-month bills—a harbinger of recession. Angst is evident elsewhere, too. The safe-haven dollar is up against many other currencies. Gold is at a six-year high. Copper prices, a proxy for industrial health, are down sharply. Despite Iran’s seizure of oil tankers in the Gulf, oil prices have sunk to below $60 a barrel. Plenty of people fear that these strange signals portend a global recession. Yet a recession is so far a fear, not a reality. The true problem is that firms and markets are struggling to get to grips with uncertainty.”

Nevertheless, there are ominous signs of an impending world recession. Incoming IMF managing director Kristalina Georgieva said in early October that the world economy was experiencing “synchronised slowdown”, warning that the situation could deteriorate unless governments supported growth and resolved trade conflicts. The IMF lowered its prediction of global growth in 2019 to 3%; — remarking on a “serious climbdown” from 2017’s growth figure of 3.8 %.

The slowdown in most apparent in the European Union (EU). The UK economy contracted by 0.2% in Q2. Although its return to growth is expected in the third quarter, the IHS Markit Purchasing Managers’ Index (PMI) crept up to 50.0 (zero growth) from 49.5 (negative growth) in September. The PMI figures, some of the lowest since 2009 (when Britain had its last recession), are consistent with a 0.1% contraction in Q3 – which means a recession, and which was one of the lowest readings since Britain was last in recession in 2009.

Britain’s economy has been affected by both the Sino-US trade war and by uncertainties over Brexit (Britain’s anticipated exit from the EU). The Brexit deadline, delayed again to 31 January next year, remains in doubt with the announcement of a December general election. Meanwhile, economists warned that economic recovery from the uncertainty could take years, given that many companies have abandoned the UK and moved overseas.

German recession

The British economic downturn might be the result of Brexit, but the broader picture across the EU also reveals a generalised “synchronised slowdown”. The economy of Germany, the EU’s powerhouse, may be in recession. In August Germany’s central bank, the Deutsche Bundesbank, reported that the economy of might be shrinking:
“The German economy will probably remain lacklustre in the third quarter of 2019. Total output could shrink slightly again, mainly as a result of the continued downturn in industry. According to the data currently available, industrial output is expected to contract markedly in the ongoing quarter again.”
The key manufacturing sector, it reported, facing a lack of export demand, struggled, dragging down the rest of the economy. The downturn was exacerbated by Brexit: in anticipation of the earlier, March deadline, British consumers stocked up on German goods in the Winter; but in the Spring, with the postponement of Brexit, this led to a drastic drop in demand.

In Q2, German GDP shrank by 0.1%, and a second quarterly contraction would signify a recession. This possibility became more apparent in late October, when the Bundesbank said in its monthly report that “Germany’s economic output could have shrunk again slightly in the third quarter of 2019.”
The traditional engine of German economic growth, its manufacturing export sector, is failing to rebound. “The decisive factor here is the continued downturn in the export-oriented industry,” the Bundesbank reported. “Early indicators currently provide few signs of a sustainable recovery in exports and a stabilisation of the industry.”

Meanwhile, the German Council of Economic Advisers, in its growth forecast for 2020, has shaved 0.1% off the government-predicted rate, to 0.9%. The Council, known colloquially as the “Five Economic Sages”, which evaluates economic policies for the finance ministry, envisages 0.5% growth this year. They did not, however, expect a “broad and deep” recession.

USD losing status

On top of the economic uncertainty, the USA is worrying about the US Dollar losing its status as the world’s dominant currency, as the country’s relative supremacy declines. A recent analysis by New York based financial services giant JP Morgan says:

“… in the coming decades we think the world economy will transition from U.S. and USD dominance toward a system where Asia wields greater power. In currency space, this means the USD will likely lose value compared to a basket of other currencies, including precious commodities like gold…Recent data on currency reserve holdings among global central banks suggests this shift may already be under way. As a share of overall central bank reserves, the USD’s role has been declining ever since the Great Recession… we believe the U.S. dollar could become vulnerable to a loss of value relative to a more diversified basket of currencies, including gold.”
Whereas, according to the IMF, 73% of the world’s central bank reserves were held in US dollars in 2000, this dropped to about 62% last year, and may have shrunk again this year. China’s holdings of US government paper halved from 14% in 2011 to 7% today. Investors and experts alike are examining are the US Dollar’s hegemony, which is not surprising, given that U.S. policies look ambiguous or altogether absent, together with its aggressive sanctions policy.

China and Russia (and several other smaller players) increasingly look to means of settling international trade contracts in non-USD currencies, to achieve protection from the US-established and led global financial system. Businesses are alarmed at the prospect of losing billions of dollars in fines, if the US government finds the smallest evidence connecting them to Washington-sanctioned countries or companies. Europe is attempting to bypass US sanctions on Iran using the Instrument in Support of Trade Exchanges (INSTEX) special purpose vehicle.

According to some experts, the US Dollar, Euro and Yuan may already be struggling for dominance. The effects of a decline in the US Dollars dominance are debated hotly. Questioned on the subject, St Louis Fed senior vice president David Andolfatto, said “who cares?” He added that many countries are prosperous without their money being global reserve currencies. On the other hand, Dallas Fed president Rob Kaplan said that US government interest payments could leap by USD 200 billion, due to interest rates rising by 1%, as a result of the loss of reserve-currency status.

The US Doller appears to be in the same position as the British Pound Sterling, which declined in the lead-up to the Bretton Woods agreement. Bretton Woods led to the former replacing the latter as the world’s dominant currency. Whether the Euro or the Yuan, or perhaps a crypto currency, might replace the US Dollar remains, for the moment, moot.

Read more
Production Villages

Production Villages

A programme for improving livelihoods through increased production

Neel Bandara Hapuhinne, currently the Director General of Manpower and Employment, took a large part in the development of the “Samurdhi Model Production Villages” programme, while Director General of the Department of Samurdhi Development. Intended to provide livelihoods for disadvantaged rural populations by improving labour skills and developing infrastructure facilities, the programme aimed, ultimately to remove the burden of livelihood support from the state. Hapuhinne spoke to OSL-THE Investment Magazine about the programme’s potential for developing the country.

Can you tell us, briefly about how you got involved in these production villages?

When I was the Director General of Samurdhi Development Department we had a very big problem of poverty. There should be a strategy for poverty alleviation. When we discussed this with our consultants and other people involved in this field, we identified production villages as the most influential and practical way of alleviating poverty in Sri Lanka.

What does a production village entail?

The villages we select for this particular project produce some item or product which is currently in demand by some sectors. There should be a very good local or international market for it. Only then do we decide to develop particular village based on their product.

What was your experience with these villages, how many did you set up?

We developed nearly 50 villages. I’ll tell share with you a few examples. There is one village in Matale called Udahapuhinde. Here the villagers produce sweets like aasmi, kavum and mung kavum. We started in a very small scale, but there was a very big demand for the product. Ultimately they couldn’t produce enough of the product to meet the demand. We got support from the Samurdhi Bank. Initially we had given LKR 10,000 to LKR 20,000. Ultimately, they needed around LKR 500,000 for their production equipment and delivery vehicles. It was a very successful story.

In Polonnaruwa, there were nearly seven combined villages that cultivate the bougainvillea plant. This industry is mainly handled by women. They were eventually in a position to produce nearly seven lorry loads of bougainvillea to Colombo and urban market.

In Ampara and Gampaha there are villages that produce nice saris, for which there is a very good demand. There is another village in Ampara that produces gourds. That was also very successful story. When we select a village, there should be a very good demand for their product. When you’re producing something with a very good demand, it is easily marketable. In some cases, we can use research and apply some modern technology. I think if you want to develop Sri Lanka, this is going to be a very good strategy in the future.

What about the skills of the villagers?

When you start to produce something, you eventually discover shortcuts and begin to improve your technology. That’s a very good thing. Rather than focusing on various products, focusing on one or two products is definitely easier to cater to.

How can you get foreign investors involved in this?

I think that depends on the demand. If some countries need some kind of product from Sri Lanka in bulk, like ceramic, then they can invest in this particular area. They can provide technical assistance, quality control and ultimately they will be the market. We need to emphasise the market. When there is a market, then we can definitely get foreign investors. It’s not a very modern concept. Many countries are doing this in mass scale production towns. But we in Sri Lanka can at least develop more than 500 production villages, mainly to produce flowers like orchids, roses because there is a very big demand for that.

What kind of remuneration did the villagers get out of this?

I have dealt with many Samurdhi recipients. There are three categories of Samurdhi recipients. One family gets LKR 1500, another gets LKR 2500, and the maximum amount is LKR 3500. Can an ordinary family live with the LKR 3500 maximum?
Families in production villages got an income more than LKR 50,000 per month. They said, “Sir, you keep your Samurdhi card, we don’t need this anymore.” They are really proud about this. If we really want to, we can do this.

That provides a big opportunity for both investors and the local community.

Of course.

What kind of technology are you talking about?

These are very simple technologies, but we can gradually add advanced technology. If we are going to produce agricultural products like food, then we don’t need higher, sophisticated technology. But if we come into a position to add that type of advanced technology, then profitability will definitely go up.

So how can we take this process forward in the future?

Samurdhi is the backbone because there are around 1,074 Samurdhi bank branches. They are dedicated to this. If somebody wants to get a loan, they can do so within a few hours. If you can believe it, the repayment rate is 98%. There is no bad debt. So this is a very good mechanism. It is a very good channel for distributing money. After borrowers develop to some extent, they can then go to commercial banks. But we should focus on safeguarding the incubator investors and incubator entrepreneurs. That is my personal experience.

Read more
A MEMOIR OF DEVELOPMENT

A MEMOIR OF DEVELOPMENT

How past small-scale manufacture gives pointers for future industrialisation

Today our economy is in the doldrums, with imports running sky high. If we are to reverse this position, we need to develop our industries, which requires commitment from both the government and the private sector. My experience as a government officer involved very deeply with development work, has given me insights how this might be done.

Harking back to the Fifties the Government, had a major problem to mill paddy into rice. Let us see what the then Government did. I quote from my 2006 book, How the IMF Ruined Sri Lanka & Alternative Programmes of Success:

“In 1980, when I met the Secretary to the Ministry of Agriculture, a former colleague of mine, they were pondering as to what to do with the excess rice. I replied that there should be no problem because the people preferred rice flour to wheat flour. To my amazement, I was told that the Jayawardene Government had signed a contract with Prima, a foreign company, for the Government to provide a definite quantum of wheat for a number of years and that this contract cannot be cancelled.”.

That was the contract to import wheat, mill it and hand the white flour to the Government and take away the high value bran. Earlier we imported wheat. A high ranking officer, a Deputy Controller of Food was in charge of buying wheat and getting it milled. Under the new Prima agreement it was Prima that bought the wheat.
That happened under President Jayawardene, when he embraced the IMF’s Structural Adjustment Programme of privatisation.

Rice mills…

Again from my 2006 book:
“To those who think that our private sector cannot act fast, and cannot be trusted let me narrate how the private sector rallied round rice milling. I was an Assistant Commissioner of Marketing in the Fifties and worked in charge of the Southern Province and later at Anuradhapura; key paddy producing areas. Paddy production increased and paddy had to get milled. The [then] UNP Government did not search for foreign multinationals. Instead the Government imported a few rice mills and installed them in key districts – Anuradhapura, Amparai and Hambantota. Then the Government called for applications from the private sector, to establish rice mills and said that if they were to establish rice mills they would be given a quota of paddy weekly for milling, for which they would get paid. The private sector responded quick – they were given guidance about importing machinery for which they were given foreign exchange, and told to put up buildings for storage and establish rice mills. I was one of the Assistant Commissioners who vetted and recommended and guided them, cnd I guided some 190 rice mills coming up in the Southern Province. To a man they worked fast, and private rice mills came up overnight, and what is important is that they all paid taxes, unlike Prima, which functioned on a tax holiday. When Prima’s first tax holiday was over, another tax holiday was given. The lesson in this is that we, Sri Lankan entrepreneurs can attend to development tasks ourselves.”

…and crayons

The success of the Co-op Crayon, which I established at Morawaka in 1971, which had islandwide sales till 1978, when the Jayawardene Government axed it, tells me that we can make most of what we import. A crayon is a sophisticated product and the Crayola recipe for crayons is a highly guarded patent, locked securely and sealed tight. Our Co-op Crayon was made to be equal to Crayola in quality. Under my direct supervision, at the Rahula College science lab in Matara, we fine-tuned the crayon making till it was perfect. That was achieved by my Planning Officer, Vetus Fernando, a chemistry graduate. Then it took Sumanapala Dahanayake, the Member of Parliament for Deniyaya to establish it as a co-operative concern. There were islandwide sales from 1971 to 1978. Harry Guneratne the Controller of Imports axed all crayon imports, and Coop Crayon was a hailed as a success by stalwart Ministers TB Subasinghe and TB Ilangaratne.

What this tells me is that Sri Lanka can produce everything we import and for that task our private sector is the only method. It is simple: Identify the product, turn it out at a school laboratory and allocate the task of making it to the private sector. In my recently published work, Wind power for Sri Lanka’s Energy Requirements (Godages), I have proved that if only a few hundred wind turbines are installed in our hill country, we can produce all the power we require within six months. That is a task in which our private sector will thrive. Instead of paying for foreign coal and foreign power suppliers, that money will stay in our own country.

… and paper

Is it not sad that ours is perhaps the only country in the world that does not make its own bicycle. It is the simplest of tasks. Let us not travel far. We produced paper at Valaichchenai till the LTTE took it over. It was our own scientists who found the art of making paper from straw. Today while we do not produce a scrap of paper, India and China are making paper out of straw. Let our Government consider identifying the ideal small scale paper-making machinery from either China or India, and request our private sector to invest and establish paper making industries all over the paddy producing areas. This is a task that can be done within six months and I can vouch for the fact that we will recoup the foreign exchange we pay out for the machinery within a year. This will be a grand success. We can be self sufficient in making paper within a year!

Let us hope that we will develop the will to do these tasks ourselves. There is no other way ahead. If we do not act, we stand to be doomed for ever.

Read more
Creating value for Investors

Creating value for Investors

Nihal Ranasinghe lays out the necessary fundamental changes

Independent Sri Lanka, now 71-years old, has embraced the talk of many development drives for very long, yet the country still has ample room for growth in many areas. Foreign Direct Investment, which is more conveniently known by its acronym, FDI is one major financial aspect that continues to grab the attention of development gurus. Just last year, Sri Lanka launched an online one-stop shop which facilitates investors in obtaining the necessary official approvals for making investments.
But the essential problem remains. Can Sri Lanka be expected to reach its financial goal with such steps?

OSL – THE Investment Magazine spoke to Nihal Ranasinghe, a senior public servant, to ascertain the nitty-gritty of Sri Lanka’s preparedness to attract FDI. A former Controller-General of Immigration and Emigration, and currently Secretary to the Ministry of Education, Ranasinghe is in a position to comprehend both needs and the means for fulfilling them.

Focus

He draws attention to three elements which play equally crucial roles in attracting investment: geographical location, size of the country and the volume of its labour.
The focus on FDI requires the understanding of the composition or the type of the entire investment in the country. It applies to both local and foreign investments. This component is essentially the government’s commitments to FDI.

“We need to focus on the future of investment,” Ranasinghe says, emphatically. “We have to look at it from that perspective. We are inviting capable, tested and proven investors into Sri Lanka and requesting them to reside in Sri Lanka with their assets. When we consider this, we need to be familiar with the investor’s expectations. It is the most important element.”

“Expectations” is the keyword. Sri Lanka is not the only country available on the investor’s market. The investor has many other options spread across the globe offering better convenience and myriad other temptations. Ranasinghe emphasises the need to understand – or refine, rather – the Sri Lankan context in this regard. Sri Lanka’s incentives need to be determined on that terrain.

“First and foremost, from our side, a government strategy must be formulated. The government strategy, of course, depends on the country’s location, size and its volume of labour. These are the vital factors for the investor in terms of calculating the investment cost or the cost of finance,” he explains.
Unlike other countries, Sri Lanka is confined to certain areas of investment. In it the labour volume is limited. Ranasinghe points out how disadvantaged Sri Lanka is in this respect, in comparison to Malaysia, Singapore and Vietnam. Malaysia and Vietnam, in particular, offer an appropriate volume of labour. That vital factor remains at a low ebb in Sri Lanka, which creates natural friction.

“It leads us to consider other paths. First, we need to structure. It means, basically we need to ensure that law and order have to be maintained to the entire satisfaction of the investor. The investor certainly looks for legal protection. Introducing new statutes itself would not suffice. Law must be applied on a practical stage,” he elucidates.

Legal framework

This is where commercial law comes to play. The investors are required to enter into agreements prior to the investment. It is another area that needs streamlining.
“When it comes to contracts and administration, we must have a clear and effective arbitration procedure to ensure fast and smooth passage for the investors. That is very important. The investors must be made happy ensured that their investment rests in a safe domain. That can be guaranteed by law and order as well as special law procedures that protect the investors. The government must ensure effective execution of law and order,” he notes.

As investors observe these factors with eagerness, the investment policymakers must revisit the system in such lines to assess how and where the country is moving forward. Such an assessment will build a healthy rapport and motivation that magnetises more investors to the country.Ranasinghe then brings up the cost of infrastructure, another vital element in FDI. Cost of infrastructure comes in diverse forms: transport, power, telecommunication and labour among them. The potential investor also weighs this factor against other available markets.

“Most countries have attractive packages in terms of infrastructure cost. Compared to Sri Lanka, their infrastructure cost is marginal. Naturally, the investors weigh in this factor. Remember, they are operating in a competitive market. And you are supposed to be competitive. But you cannot afford to be competitive if the cost of production is high. So we need to ensure that our investors – not only foreign but the local as well – are producing something more than what they need. And make it affordable for masses. The surplus can be channelled for exports. We need to produce more,” he explains.

The attraction for investors may well rest in many other elements. The overall stability of the country’s political and social set up is one. This is significant, as such stability paves the way to proper handling of infrastructure. In that vein, the government needs to adopt a concrete policy structure and implement it.

Global parameters

“These instruments must be world-recognised. It must function hand in hand with the global parameters. Then only can the investors compare the Sri Lankan situation and the situation in other competitive domains. For instance, Sri Lanka’s policy is different in comparison to most other countries. Most FDI-friendly countries follow an almost similar economic policy. The drawback is clear. We lose the potential investors who will settle down elsewhere more conveniently,” he points out.

Such a phenomenon is unavoidable, however heavy the advertising may be that would be carried out for FDI. The lack of inducements and a commonly-framed basis for investment appraisal evaluation are among significant aspects that hinder FDI. However, it does not mean the country must follow one national policy on investment once and for all. A policy must rather be procedural, supported by monitoring, evaluation, feedback and research. Every aspect needs to be assembled and considered before implementing a policy.

“We have to study the markets in other parts of the world, especially their competitive edges. They develop their systems daily. We need to be mindful of that, and accommodate whatever changes are possible in Sri Lanka. When it comes to an investor, we need to have packages to international standards. The investor compares and contrasts before taking a decision. Even if there is a government policy, it needs to be aligned with the international markets, export promotion and the cost of production. And basically, the entire situation should avoid or eliminate the uncertainty,” Ranasinghe elaborates.
What are the prospects in the near future in such a platform?

Many efforts accelerating FDI attraction have taken place in the past. Some were successful. Some were partly successful. Some were not successful at all. On the other hand, the country is facing a chaotic situation, where the state officials are concerned. It hampers the investor’s decision-making.

Political stability

“This is crucial from the investor’s point of view. They test how the ruling administration will handle or manage in the country. We have to manage all these situations to the entire satisfaction of the local and international community of investors. Otherwise, keeping certain issues without being resolved for a long time will create a negative impact, not only in the local but the foreign domain too. So the approach should be how we are engaged in the industry. It has a significant impact on creating a conducive environment for foreign investors,” he claims.

Political stability, administrative efficiency policy consistency, and a quiet and peaceful environment are key pillars in promoting investment. The responsibility to maintain such decorum rests in everyone’s shoulders. When it comes to developing a country like Sri Lanka, the identification of the right instruments is essential to create value.

“Value creation is a conceptual framework. How to create? Take foreign employment for instance. Sri Lankan citizens go abroad for employment, and remit a huge amount of income in return. Why can’t we create other avenues? Similar instruments that can be used for the betterment of the country? But for that matter, you need to generate people who can promote. We need to identify the areas and the resources that can lead to better knowledge,” he explains.

With foreign technology and other resources at play, the country needs to have a strong set of rules and regulations. However, rules and regulations – let alone laws – cannot be changed overnight without the consent or consultation of the parties concerned. If you have an agreement or if you are in contract with two parties, both must conclude to change the existing system.

“Capitalise on world development. We need to attract international trade into Sri Lanka. The attitudes, technological advancement, impact of the facilities must be made available. The legal systems must be in place. All these conform to one in the country,” Ranasinghe points out. With such steps in action, Sri Lanka can at least think of being smart enough to capture the attention of beneficial investors.

Read more