‘Smart Future’ Column #4 – Sri Lanka Must Leverage its Diaspora for Development, But It’s More than Just the Money

This is the 4th article in the ‘Smart Future’ column originally published in the Daily Mirror Business on Wednesdays.

Sri Lanka has struggled with engaging its diaspora. The protracted conflict polarized diaspora communities abroad and created negative perceptions at home. Yet, a conference held last week attempted to reverse this. Titled ‘Our Sri Lanka: Engaging Persons of Sri Lankan Origin Overseas’ the Consortium of Humanitarian Agencies (CHA) and International Alert brought together inspiring and committed individuals from the UK who are demonstrating how diaspora communities are already positively engaging with Sri Lanka. Over the two-day conference, I shared some thoughts on diaspora engagement, anchored to a draft paper titled ‘Leveraging the Diaspora for Investment and Knowledge in Sri Lanka: Challenges and Policy Options’ I co-authored with a member of the Sri Lankan diaspora community in Canada. Interestingly, she was part of a successful diaspora engagement initiative called the LankaCorps Fellowship (The Asia Foundation). While there is much debate on what constitutes “the diaspora”, here is it taken to generally mean persons of Sri Lankan origin who are living overseas, regardless of when they went or how long they’ve been away for.

 

Unpacking the Motives for Engagement

 

Diaspora groups are not homogenous. They not only vary in terms of their ethnicity, religion, and political views, but also in their interests in and motives for engaging with Sri Lanka. According to the literature, motives forpeople map engagement are classified as financial, social, and emotional (or sentimental); sometimes these motives overlap no doubt. The paper revealed a few key findings that are interesting in this regard. Firstly, those born in Sri Lanka have a greater frequency of re-visiting and 77% of them are likely to return on a visit or short stay at least once every five years. Secondly, of those who do engage with Sri Lanka 50% said they do so purely due to sentimental connections; a further 21% for philanthropic reasons; and 11% for social recognition of their efforts. Only 14% said they do so for financial gains. Thirdly, engagement in terms of ‘sending money to friends and family’ and ‘donating to charities’ are the most popular forms of engagement among the 45-64 age-group, but the highest proportion of those who ‘donated professional time to a Sri Lankan institution’ were among the 25-44 age-group. So, when devising policy approaches for diaspora engagement, we must be acutely aware of such heterogeneity in motives; it has implications for the success or failure of any programme.

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‘Smart Future’ Column #3 – Future of Sri Lanka’s Apparel Exports to the US: Losing To Vietnam Or Winning with Innovation?

This article originally appears in the Daily Mirror Business paper of 25th February 2015, and is the 3rd in the ‘Smart Future’ series.

In recent years, Sri Lanka has not been as serious and aggressive about forging trade agreements as many of its competitors. As global agreements like the Doha Development Agenda have stalled, many countries have resorted to signing bilateral and regional free trade agreements to expand the market for their exports. In this, the Trans-Pacific Partnership – commonly known as ‘TPP’ – stands out for its mega-regional nature. The TPP is led by the USA and brings together 12 pacific-rim countries (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam) covering over 40% of global GDP. Parties to the TPP stand to gain through greater duty-free access to the US market, while others who are not parties to it but still depend on the US – like Sri Lanka and Bangladesh – stand to lose. This was the gist of a report by Standard Chartered Bank released last month. The report – ‘Trans-Pacific Partnership (TPP): Winners and Losers’ – focused particularly on the apparel sector and argued that the TPP will make Sri Lanka’s apparel exports to the US less competitive compared to Vietnam’s. This has big implications for Sri Lanka, as the US is the largest single-country market for our apparel exports, accounting for over 40%.

 

TPP Risk to Sri Lanka

 

Smart Future Article 3 IMAGEThe size of the loss to countries like Sri Lanka and the gain for Vietnam is contingent on how the Rules Of Origin (ROO) regime is drawn up, and this is still being discussed. A flexible ROO regime would require that only the ‘assembly of the final product’ be done in a TPP country in order to gain preferential access to the US market. Under this scenario, Vietnam’s market share in apparel exports to the US by 2024 could rise to about 11% from the current 4%. This would result in Vietnam’s apparel exports coming close to US$ 115 billion, overtaking Bangladesh to become the largest emerging market apparel supplier after China. According to the SCB analysis – Sri Lanka’s share could decline to 0.8% from the current 1%, equivalent to around US$ 2 billion. The report argued that, “To cushion against the negative impact of the TPP, Sri Lanka’s apparel industry will have to continually move up the value chain with respect to its product offering. Investment in the latest technology and know-how and continued training and up-skilling could help achieve this”. Yet, the report was optimistic about our capabilities, and observed, “Sri Lanka outperforms Vietnam and Bangladesh across a range of metrics that measure value addition and quality”. Sri Lanka was ranked an impressive 3rd out of 14 countries for capacity for innovation, mainly due to skills (Vietnam: 11th), 2nd for high supplier quality (Vietnam: 10th), but 9th for sophistication of the production process (Vietnam: 13th).

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‘Speakonomics with The Curionomist’ 1: Today – “GAME THEORY”

For a while now I’ve wanted to have a special segment on this blog that picks out a key jargon-y word or phrase in economics from time to time and help to unpack it, and advance the knowledge on it among non-economists. So, welcome to ‘Speakonomics with The Curionomist’!. You’ll see me posting these from time to time. The first one is on Game Theory. A concept I first learnt in my first year of an economics undergraduate, in a microeconomics module. I later went on to learn a little more about it in the context of decision making around wage setting at the firm level, in Labour Economics. So why did I think of Game Theory this week? This week was a tough week for Greece, as it attempted to play a game with Eurozone authorities and try to postpone its debt commitments in exchange for very weak conditionalities on austerity and other reforms. And interestingly, the new rockstar Greek Finance Minister is a student of Game Theory and has written books on it! While of course he claims that he won’t use such stratagem in his discussions with European authorities and creditors, I’m sure his awareness of game theory-based decision making does come in handy when warding off demands of belt-tightening from one group and demands of cancelling austerity on the other.

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So, what is Game Theory? A lot of definitions exist, but they all point to the same idea. Its the mathematical study of decision-making, of conflict and strategy in social situations. It’s also been described as an “analysis of strategies for dealing with competitive situations where the outcome of a participant’s choice of action depends critically on the actions of other participants.”

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Recent Articles on Tax and Fiscal Issues

I found some interesting articles in the days following my article last week on tax reform, related to taxation/revenue/fiscal issues. It’s always encouraging to see more opinion pieces as well as news articles on tax. It’s especially encouraging to see journey covering tax issues. I thought it would be useful to capture them here, as they deal with some of the points that I discussed in my article.

‘New opportunity to chase elusive fiscal deficit target’ (opinion piece by Dr. Nimal Sanderatne)

http://www.sundaytimes.lk/150215/columns/new-opportunity-to-chase-elusive-fiscal-deficit-target-135767.html

‘Public sector must also come under tax net’ (excerpts of a super interview with an Inland Revenue Commissioner)

http://www.dailynews.lk/?q=business/public-sector-must-also-come-under-tax-net

‘Smart Future’ Column #2 – Exporting to Europe: Beyond GSP Plus, Understanding the New Mindset of European Consumers and Companies

This is the 2nd article in the ‘Smart Future’ series – my new weekly column in the Daily Mirror Business

In recent years Sri Lankan policymakers have turned their back on Europe – not only in terms of political issues, but also in terms of trade policy. The pivot of international economic policy to countries like China have come at the expense of neglecting what is still one of the largest export markets for Sri Lanka – the European Union (EU). The new Sri Lankan government appears keen to correct this. It has expressed interest in negotiating to regain the EU GSP Plus concessions that we lost in 2010 due to concerns over human rights issues, which is estimated to have cost the economy US$ 1.5 billion according to IPS Executive Director Dr. Saman Kelegama. Despite all the rhetoric about ‘diversifying to Asian markets’, we cannot ignore the fact that EU countries absorb nearly one-third of all our exports. And this has hardly changed in years.

 

Sri Lanka’s Peers Have Performed Far Better

 

While I am rarely in favour of extended periods of special concessions, which could undermine longer-term competitiveness and dynamism, right now the regaining of GSP Plus would come at a welcome time and we must take anything we can get. Why? Sri Lanka’s export performance is troubling. While Sri Lankan merchandise exports grew at less than 5%, our export competitors like Bangladesh, Cambodia and Vietnam who face similarly tough export market conditions grew their merchandise exports by 22%, 21% and 15% respectively during 2010-2013. Looking at their performance in Europe particularly, a similar picture emerges. While Sri Lanka’s exports to EU grew at an average of 5.4% between 2011-2013, Vietnam’s grew by 7.4%, Thailand’s by 13.2%, Cambodia’s by 16.6%, Laos’s by 21.2% and Myanmar’s by 61.6%. Sri Lanka’s exports, however, performed better than Bangladesh’s (1%) and Pakistan’s (1.2%). Several of these countries have a special tool in their trade kit that Sri Lanka doesn’t. They are all parties to the EU’s ‘Everything But Arms’ (EBA) agreement, which gives far greater preferential access (duty-free, quota-free) than GSP Plus does.

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“What Good Are Economists?” and “Are Economists Overrated?”

rfdecon-sfSpanIn the aftermath of the global recession and the financial crisis, economists escaped largely unscathed. Thanks to the behaviour of banks and taxpayer anger at them, most people spared economists from much critique. However, five years since the first collapse, economists seem to be getting scrutinised a little more closely, albeit mainly in the American context, and it has led to an interesting debate about the profession.

I came across two of them – one in the NYT and the other on Project Syndicate – and thought I’d share them here.

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‘Smart Future’ Column #1 – Tax Reform: Time to Stop ‘Kicking the Can Down the Road’

Today (11th Feb), I’ve launched a new column titled ‘Smart Future’ in the Daily Mirror Business section, which will come out every Wednesday. The column will be short opinion pieces, on contemporary economic issues. My aim is to widen the debate to reach a larger readership, and advance ideas on economic reforms, innovation, and private sector development.

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Tax Reform: Time to Stop ‘Kicking the Can Down the Road’

Tax matters don’t make for the most riveting of conversations. For most people ‘tax’ is that cumbersome thing that needs to be filed in time to avoid getting a ‘red notice’. Debates on tax issues in Sri Lanka rarely extend beyond the immediate days after Budget speeches. The recent Interim Budget was particularly contentious, with the imposition of a range of “one-off taxes” and taxes aimed at particular sectors and types of firms. Yet, we seem to be unable to embark on a concerted tax reform effort that transcends immediate political and fiscal concerns. The fact is that Sri Lanka’s tax performance is worrying. And in the context of reduced concessional financing (as Sri Lanka has moved in to middle-income status), finding the money from domestic sources (i.e., ‘domestic revenue mobilization’ – taxation) to finance emerging development needs in education, health, infrastructure, science, etc., becomes critical.

Low Tax Take

Sri Lanka’s tax-to-GDP ratio of below 12% is lower than many peer countries like Vietnam, Malaysia, and Thailand; lower than the middle-income country benchmark of 25%; and lower even than the low-income country benchmark of 18%. The country’s GDP has grown without a concomitant rise in tax revenue collection, and it appears that Sri Lanka’s tax system has not kept pace with changes in the economy. It has not evolved with the changes in composition (rising services sector), emerging business models and sources of income, rising informal work, etc. Unplanned and ad hoc revenue measures and long exemptions lists continue to be key features of the Sri Lankan tax system that is long overdue for streamlining. A complicated system makes collection harder and makes compliance trickier to enforce.

Shift to Direct Taxes

The country has only approximately half a million income tax payers and collects just around 25% of total taxes from direct sources (i.e., taxes on income and profits), while the rest is from indirect taxes (mainly consumption-based taxes like VAT), which hurt the poor disproportionately as they are inherently regressive. Many other countries’ have a higher direct tax proportion – Malaysia (over 60%), India (over 50%), Pakistan (around 40%), Thailand (50%), Uganda (just under 30%), and Kenya (around 42%). Sri Lanka needs to up its direct tax take – whether it is through a revisiting of the rate structure or better collection and auditing, or indeed a combination of the two. Relying on one-off and ad hoc taxes like the recent Super Gains Tax is far from ideal.

Tax Commission Report

I was fortunate to work with the Presidential Commission on Taxation 2009, which submitted a trilingual report on tax reform in 2010. The Commissioners of the PCT were leading lights in the private and public sectors and academia, and under the leadership of eminent economist Prof. W.D. Lakshman, produced a comprehensive report dealing with everything from VAT reform, tax incentive reform, revenue administration re-haul and IT systems adoption, and more. In compiling the report, I was very impressed with the extensive consultations, the lively internal debates, and the nuanced yet pragmatic approach of all the Commissioners. The analysis was anchored to Sri Lanka’s evolving socio-economic needs, realistic political scenarios, and inherent administrative constraints. It is strange as to why the report was not made public, for even the potentially controversial LLRC report was released for all to read. Under the reform-minded new government, there is a new opportunity for the Report to be taken up. The merits and demerits of its recommendations can be re-assessed, and a suitable reform programme based on them can be mapped out. These efforts can be complemented by the excellent analytical insights of think tanks like the International Centre for Tax and Development (under IDS, Sussex) – one of the few Western research institutes that focuses on tax matters with an intimate understanding of developing country contexts.

Tax Talk

We need a stronger and wider discourse on taxation that permeates through all of society; it should not be the preserve of just the business community, tax advisors and fiscal policy officials. The majority of the public feel that tax issues are not their issues. We need a tax movement that reminds more people that whenever they buy food or other household items in a ‘kade’ or a supermarket, or whenever they pump fuel in their vehicle, they are paying indirect taxes like VAT to the state. We must also remind people that the little tax revenue that is collected should not be wasted due to mismanagement of public funds and state resources. For example, one-third of income tax collected in 2013 was wiped off by the aggregate losses of just 12 loss-making State-owned Enterprises (SOEs), and these losses wiped off Rs. 26 out of every Rs. 100 that was paid as VAT by you and I in 2013.

Running Out of Road

Tax reform won’t be easy. It will be politically challenging and administratively time-consuming. Yet, without a clear and comprehensive tax reform programme, Sri Lankan authorities will have to keep undertaking ad hoc measures to raise revenue, and inconsistency in tax policy hurts business sentiments and hurts the country’s attractiveness as an investment destination. Sri Lanka cannot continue to kick the tax reform can down the fiscal road. Soon, we may run out of road.

‘Smart Future’ is a column dedicated to advancing ideas on economic reforms, innovation, and private sector development.

Industrial Development Needs Smarter Policies

This article was written to coincide with the visit of the UNIDO Director General Li Yong to Sri Lanka, and originally appears in the DailyFT of 5th February 2015

Key Points:

  • Visit of UNIDO Director General offers opportunity to push ‘ISID’ approach, focussing on ‘inclusivity’ and ‘sustainability’
  • Coherent and holistic policy framework needed
  • 95% of industrial establishments in Sri Lanka are small and medium-sized. 61% of industries are still concentrated in the Western and North-Western provinces
  • Food and beverage products can be a industrial growth sector, as the highest number of industries across every district is in this sector. Must push them to export-orientation. 59% of food exports by middle-income countries are processed (manufacturing) foods

Today, Sri Lanka sees the visit of the highest-ranking UN official since the new government took office, and indeed since 2010. That this official, Li Yong, is the head of the UN’s industrial organization – UNIDO – at a time when Sri Lanka is aiming to boost its economy through growth of its real sector, is particularly noteworthy. Director General Li’s visit offers a wonderful opportunity to marry Sri Lanka’s objective of boosting economic growth across the country together with UNIDO’s new ‘Inclusive and Sustainable Industrial Development’ framework.

Sri Lanka certainly has had a history of industrialization, albeit a relatively lackluster one compared to many Asian peers. The island-wide garment factory programme, the BOI Export Processing Zones, state-owned industries (with mixed success), etc., have helped grow light manufacturing in the country. Yet, the examples of modern and high-tech manufacturing are few and far between. In fact, even the recent growth of the industrial sector (at least in terms of the numbers) has largely been due to the construction sub-sector (growing from 7% to 8.7% over the last decade) and not really the manufacturing sub-sector (growing from 16.3% to 17.1%). However, although it is not widespread yet, a handful of competitive and highly competent Sri Lankan industries have emerged on the global stage through innovation as well as environmental leadership.

Industry AND (not OR) Services

In the last decade or so, the Sri Lankan economy has certainly gone through structural transformation, away from agriculture (declining GDP share from 20% to 11%), towards industry and services. Industry’s share grew by just under 4% (reaching 31%) and services share grew by just over 5% (reaching 58%) over this period.

Together with its high share in GDP, employment in the services sector has been the most prominent feature of the recent structural change; employment in the sector now reaches nearly 45%, far ahead of the 26% in industry. A prima facie reading of these numbers may suggest that Sri Lanka’s economic future lies in services and services alone. Yet, this apparent prominence of services must be looked at beyond the headline numbers. Much of the services sector in the country consists of domestic non-tradables like wholesale and retail trade (nearly a quarter of GDP), and transport, storage and communications services (over 14% of GDP). These are not particularly dynamic sub-sectors in the economy, are not export revenue generating, and do not necessarily capture high-income shares for those employed in it. So, we cannot assume that a larger services share in the economy will necessarily bring catalytic impacts in terms of export growth, productivity, and higher incomes. So, there still is a strong role that industrial development has to play. As the UNIDO Director General has asserted, “there is not a single country in the world that has reached a high stage of economic and social development without having developed an advanced industrial sector”.

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