Sri Lanka  must  industrialise

Sri Lanka must industrialise

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Leading economist tells
Sri Lanka’s business leaders

A larger-than-expected crowd turned up at Colombo’s Lakshman Kadirgamar Institute to listen to Sri Lanka’s star economist Dr Howard Nicholas deliver a lecture on “The Current State and Future Directions of the Global and Sri Lankan Economies”. The event, organised by ETIS Lanka, together with George Stuart Capital, Daily FT, and Hardtalk, on 11 July.

An Associate Professor at the Institute of Social Studies (ISS) of Rotterdam’s Erasmus University, Dr Nicholas has wide-ranging teaching experience in business economics and financial markets in a number of countries, especially in Asia. He won the best-teacher award at ISS in every one of the 18 years since its inception.

Born in Colombo’s Slave Island, brought up on an estate in Kalutara district, and educated at St Anthony’s, in Kandy, he moved to the West with his parents at eight years of age. Dr Nicholas followed his parents’ admonition to be Sri Lankan despite his British passport, and returned to the land of his birth in 1987, helping to set up the Institute of Policy Studies, and then moving to the University of Colombo to help set up a post-graduate faculty of economics and to develop post-graduate training in economics.

He has had substantial policy experience in Sri Lanka, having worked closely with the Ministry of Finance and Planning on a number of different projects and being lead author in the 2005 UNDP study Pro-poor macroeconomic policies in Sri Lanka. He returns from time to time to speak on economic trends, this country usually being the first place at which he reveals a new trend.

The following is a report on the part of his talk which focussed on Sri Lanka.

Optimistic

In 1990, optimistic about Sri Lanka’s future under the pro-manufacture economic programme of the then president, Ranasinghe Premadasa, he invested his money in equity in the country, advising everybody else to do the same.
“President Premadasa started this aggressive export-orientated development strategy,” he says, although “A lot of us didn’t like Premadasa, because he was brutal in some ways… We knew that if this continued Sri Lanka would reach developed country status in 10 to 15 years.”

The demise of Premadasa saw an end to the export-led industrialisation strategy, and since then government after government has ignored it, so Dr Nicholas has had no interest in investing in Sri Lanka.

He pooh-pooh’s the theory of comparative advantage, saying it was taught by rich countries to poor countries to get the latter to do what the former wanted them to. The theory posits that if everyone does what they are good at, and exchange goods, then all the parties would benefit and can thus grow. However, he rubbishes it, describing it as riddled with theoretical and empirical flaws. He lambasts the hypocrisy inherent in the theory of free trade, since whenever it suits the advanced countries, they refuse to liberalise trade in areas they consider vital, protecting their market.

Under-performed

He notes that Sri Lanka’s economy has underperformed in comparison to its peers. It has not grossly under-performed, but the system lacks dynamism. This is primarily due to a structural shift in the economy, away from agriculture and industry towards services. Manufacture has been losing its share of industry, as construction has surged ahead. Although there has been a construction boom and financial services growth, the manufacturing sector has been neglected.

However, the construction boom is losing steam. Meanwhile, Sri Lanka’s share of world trade has stagnated, and its share of the global export markets has stagnated. Sri Lanka is losing the global garments and textile export market share. its export engine is losing steam and the government is not granting any concessional facilities to propel growth. Industrial goods have declined in their share of merchandise exports, in comparison to agricultural goods. More importantly, exports’ contribution to the current account balance has declined, and together with the decline in overseas workers’ remittances, the tourism sector has increased in importance. These two sectors are now the two major avenues of foreign exchange earnings.

Tourism is far more dependent on the vagaries of climate and terrorism than the others, and especially on the economic health of the advanced nations whence the tourists come, so the economy is now dependent on an unstable component. The events of Easter Sunday and the disruption caused to the tourism sector, especially brought home the absurdity of a strategy based on a precarious foreign exchange-earning industry, and the lack of diversity in the economy.

Sri Lanka must diversify. The country needs to see a shift towards manufacturing to enhance export dynamism. Manufacturing is at the core of any sustainable growth of an economy. All the global superpowers in history became powerful due to the growth of their manufacturing dominance.

“China has taken over as the world’s largest manufacturer,” Dr Nicholas points out. “It also has the largest retail market. China is driven by massive technological change. We are in the middle of a gigantic technological change. We know Huawei and 5G are between 3 and 5 years of ahead of anyone else in the world. Huawei has 94 % of all the patents on 5G. They can say they don’t want Huawei but they are holding the patents.”

Prospects

No country has ever developed without export-oriented manufacturing and as there is a massive market in the developing world, Sri Lanka should focus on export manufacture-driven economic growth. He also says that, although Singapore is often cited as an example for Sri Lanka to follow, that country has not prospered so much because of trade, but that its economy is driven by manufacturing.

In the short-term, Nicholas predicts weakness in economic growth along with the rest of the world, pressure on reserves and the exchange rate as tourist arrivals fall sharply and world import growth slows, and increasing domestic price level, depending on exchange rate. The extent to which expansionary fiscal policies may be pursued, will be limited by balance of payments constraints.

“Sri Lanka could become one of the beneficiaries of the continuing relocation of production from advanced to developing countries (also away from China),”in the long-term, he says. “The extent to which Sri Lanka can benefit from the relocation away from advanced countries will depend on how successful it is in developing its own manufacturing base and shifting production to higher value-added products in the long run.”

Sri Lanka‘s equity market has performed weakly, and in order to draw in foreign direct investment, the country should be able to point to a thriving manufacturing sector. He cites the example of Vietnam (where he has served as an adviser), which has diversified exports heavily into manufacture. Both Vietnam’s exports and imports have increased rapidly to about 1.2% of global trade. It is able, unlike Sri Lanka, to benefit from the China-US trade dispute, especially in the crucial electrical machinery and mechanical appliances sectors. This is due to the government’s whole-hearted commitment to a strategy of export-based manufacturing.

Savithri Guruge