40% Risk of Reversion to Conflict?

I’m in Jaffna today for consultations around the World Bank’s SCD study, and I am reminded of a groundbreaking paper by Paul Collier et al. It was a unique joint report by the World Bank and UN Peace Keeping Operations . In it, the author’s argue that country’s that have faced a conflict in the past are susceptible to reverting to conflict again.

Post-conflict societies face two distinctive challenges: economic recovery and risk reduction. Aid and policy reforms have been found to be highly effective in economic recovery. In this paper we concentrate on the other challenge, risk reduction. The post- conflict peace is typically fragile: the typical country faces around a 40% risk of reversion to conflict during the first decade of peace. As a result, nearly half of all civil wars are due to post-conflict relapses. Both external actors and the post-conflict government therefore rightly give priority to reducing the risk of conflict.

The authors compare political, economic and military aspects of the post-conflict situation to address the problem of high risk, based on a statistical analysis of 74 post- conflict experiences from around the world. Well worth a read… http://core.ac.uk/download/pdf/6250412.pdf

Strategies for Transformation: Four Takeaways from a Chat with the UNIDO Chief

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This is the 12th article in the ‘Smart Future’ column, which originally appears in the Daily Mirror Business of Wednesday 13th May.


li_yong_mainIt is becoming increasingly clear that for a sustained high growth path, Sri Lanka needs to undergo further structural transformation of the economy – building more competitive industries, raising exports, generating productive and well paying jobs, and moving more people out of poverty, would be key elements in this. During a recent visit to Sri Lanka, the head of the United Nations Industrial Development Organisation (UNIDO) Dr. Li Yong shared some very interesting insights on strategies to boost industrialization as a crucial element in the structural transformation of an economy. Li is no stranger to formulating and implementing development strategies. Prior to joining UNIDO as its Director General, Li was the Vice-Minister of Finance in China and member of the Monetary Policy Committee of the Central Bank for a decade. He led the way in setting and harmonizing fiscal, monetary and industrial policies, during a time when the Chinese economy was undergoing a decisive structural transformation. Li shared these thoughts as we travelled together to visit the impressive nanotech facility in Homagama – SLINTEC. Here are four main takeaways from my conversation with him.

  1. Pragmatism Over Dogma

The first idea he shared was his advice to modern policymakers – to choose pragmatism over dogma. In devising industrial policies, there is often a lot of debate on what the right policy mix should be, which ideology it should follow, etc. We spoke about how ideological shifts of rulers have influenced policy shifts. Given all this, I asked him, “How did China industrialize? How did China figure out what ideology to go with?”. He responded by quoting Deng Xiaoping’s famous adage – “it doesn’t matter whether a cat is black or white, if it catches mice it is a good cat”. Li argued that for too long Western academics has been preoccupied with trying to classify development paradigms into discrete categories. Given the complexity of the world today, the impatience of societies to prosper, and the pragmatism required of politicians, clinging on to particular ideologies as dogma will not help. Instead, he argued, whatever policies can get the job done is where the focus should be. And if this is a mix of multiple ideologies, it shouldn’t matter.

  1. Industrialization Needs a Holistic Approach

The second idea he shared was that a country couldn’t sustainably develop industries without thinking about urbanization, water, sewerage, transport etc., at the same time. He cited plenty of examples in China where ambitious industrialization efforts had been constrained because expansion plans of critical city and related infrastructure hadn’t kept pace. Having good land use policies to ensure industries have space but do not harm quality of life and the environment; clever transport strategies that ensure that workers can get to industries; water, sanitation, and sewerage systems that keep pace with requirements of industry; and overall urban planning that takes into account how industries will grow and how society will interact with cities that industrialize (from rural to urban), must go hand in hand with industrialization efforts, he emphasized.

  1. Letting the Small Fish Go

The third idea he shared was on promoting small business and making it easier for business to operate. He likened this to fishing. “Its like how you don’t catch the small fish, you let them grow up. It’s the same for small business. Tax and regulatory issues must be relaxed for them”. I found this unusual coming from a former Chinese official – given China’s notoriously overbearing state. Yet, the state is increasingly easing its grip. During a visit to China last year I saw first hand how over 600 items of regulations being either removed or delegated to lower levels of authority to be closer and more responsive to local business needs. This is also very relevant in the Sri Lankan context. The focus on small business development in Sri Lanka for many years has been rounds and rounds of concessionary credit lines. But little attention has been paid to making government regulatory systems work better for SMEs. Small businesses often complain of unfriendly government services, burdensome and costly tax compliance, and lengthy licensing and permit regimes. Unlike larger businesses that have dedicated teams to navigate the complex web of state regulations and compliance needs, small businesses don’t. As Li said, we need to reorient regulatory systems to be more supportive of small business – whether it is in tax, licenses, EPF/ETF, etc.

  1. Firms Must Go Global

The fourth idea Li shared was that the only way to enhance the competitiveness of firms in an economy is by encouraging them to go global. In any economy, it’s often easy for firms to be comfortable with a domestic market if they are not exposed to global competition. As I remarked in my column a couple of weeks ago, protectionism and special preferential treatment of domestic firms could hurt their competitiveness. That competition sharpens firms and breeds success is a powerful axiom in economics. In fact, Li suggested going a step further – providing the right incentives for local firms to go and operate globally. Li remarked, “Once you get companies to go global they learn. They open up and reform. It’s like going from high school to a PhD. They grow up. Without this they won’t know how to compete globally”. There are several Sri Lankan firms that have already ‘gone global’ – MAS, Dilmah, etc. What can we learn from these companies? What did these companies learn by going global and how did it sharpen their competitiveness? Do governments have a role in helping more companies go global?

This is the 12th article in the ‘Smart Future’ column that advances ideas on competitiveness, innovation, and economic reforms.

How Can We Boost Technology in Sri Lankan SMEs? Chile’s Salmon Industry Might Hold the Key

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This article is the 11th edition of the ‘Smart Future’ column, which originally appears in the Daily Mirror Business on 6th May (Wednesday).

When nearly 90% of firms in Sri Lanka are SMEs, it is no surprise that the future prosperity of the country will depend on the extent to which the SME sector can produce high value-added goods and services that are competitive abroad and also meets the needs at home. But today, too many SMEs are producing relatively simple goods and basic services, and solely for our small domestic market. As I meet with SMEs across the country, it is becoming increasingly clear that many of the country’s small firms are not ready for the shifts in the competitive landscape that the economy will go through in the coming years and decades.

SMEs and the Middle Income Trap

As Sri Lanka begins a middle-income transition, boosting the competitiveness of this wide segment of our private sector becomes a critical part of avoiding the middle-income “trap”. Sri Lanka will find it increasingly difficult to compete against cheap labour in low-income economies, on the one hand, and with the technology and innovation driven high productivity of more advanced economies, on the other hand. I discussed this challenge with an international expert on innovation and private sector development, Dr. Nicholas Miles, recently. He has worked a lot on technology and innovation in the SME sector in Sri Lanka as part of a GIZ project. He argued that, “several countries that successfully tackled the challenge of escaping the middle income Trap – like Chile, Indonesia, Malaysia, Mauritius, Taiwan, and Thailand – provide useful lessons for Sri Lanka”. Technology and innovation have enabled these countries to make the transition from an economy based on the simple exploitation of natural comparative advantages (e.g. raw materials, low wages, etc.) to one based on the competitive advantage of its businesses. Nicholas argued that, “The technologies and innovations used by SMEs have added value to existing production and service activities and have allowed ‘business stretch’, – the development of new businesses related to existing activities through the increased product and service differentiation and sophistication”.

Technology Providers Can Accelerate Change

This transformational process can begin by supporting firms and sectors with the greatest potential for growth and scaling in the global marketplace, through a rigorous application of known technologies and incremental innovations. In this process, technology providers are crucial in accelerating change in the SME sector. But in Sri Lanka, their role seems to have been neglected so far. Nicholas observes that, “the early stages of the transformation of ‘trapped’ economies by importing and absorbing technologies and developing local innovation, improvements can be accelerated by involving foreign and local technology providers.” It is clear that a wide variety of low cost and user-friendly technologies are now available and accessible through international networks of technology providers, research and development institutes, and companies operating across the globe. Sri Lanka must find a clever way to help SMEs latch on to these networks.

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Mind Boggling Economics of the Mayweather-Pacquiao Fight

mayweather-defense

It is truly mind boggling how much of a big deal today’s Floyd Mayweather Manny Pacquiao fight was, globally. And it wasn’t just for its great boxing entertainment, but because of the money involved. The two boxers earned between US$ 10 and US$ 15 million per round this morning.

Why is this match so expensive? Media hype is one, but scarcity, is a big part of the answer. Economics shows that scarcity is a major driver of price and the value of a product. It follows from the simple axiom in economics – fewer the supply, higher the price. Mayweather and Pacquiao have never fought each other and it is very unlikely that they will ever fight again after todays match (Mayweather intends to retire after one more fight in September). Why is boxing so different? Because unlike football or tennis where there is a fairly regular timetable of match-ups, and a schedule of possible games/tournaments throughout the year, boxing matches take place on a far more ad hoc basis. So, scarcity of this game is a big driver of its economic value.

Here are snapshots from some of the most informative articles on the subject, to give you a sense of the economics of today’s match.

Revenue for Mayweather-Pacquiao may reach a record $400 million world-wide. As much as $200 million of that could go to Mr. Mayweather and possibly more than $100 million to Mr. Pacquiao (they agreed to a 60/40 split in deference to the former’s recent pay-per-view track record)

– Wall Street Journal

The Las Vegas Convention and Visitors Authority estimates that the battle, for which boxing fans have been waiting for years, will have an economic impact on the region of more than $150 million, excluding gaming spending. Hotels are expected to be at 95 percent to 99 percent occupancy as fight fans fly in from around the world to watch the match

CBS Money Watch

Tickets for the fight start at US$1,500 – and 1,000 of the best seats have been sold for US$10,000. Most of the money will come from pay-per-view TV sales; viewers are paying US$99.99 to watch it at home in high definition

– Fortune Magazine

The bulk of revenue from the super-fight will be generated from pay per view (PPV) television sales. Forecasts indicate that pay-per-view buys in the United States could reach 3.5 million with a minimum of three million buys projected. Showtime and HBO, two major stakeholders in the fight, will jointly sell PPV with prices pegged at $89.95- also a boxing record. High Definition viewing costs $10 extra. Given projected numbers for PPV buys and set prices, the fight will most certainly also break the record for PPV revenue which stands at $150 million and was set during the 2013 Mayweather v Saul Alvarez fight. A simple projection of 3.5 million PPV buys at $89.95 will see the fight bank over $300 million. […] International interest in the fight is intense as various broadcasters have picked up rights to transmit the fight in different territories. In total, international rights sales are projected to generate a minimum of $35 million in revenues.

 – Ventures Africa

Meanwhile, there is a massive global multiplier effect of this match that isn’t immediately obvious, or indeed reported. For instance, this morning Playtrix Sports Bar in Colombo opened at 7am to show the fight and was charging LKR 3,000 per head for patrons to watch there. Just on cover charge alone the bar could earn over LKR 400,000. This may not be a sanctioned screening, however, because in the US there are strict rules about where the fight can be shown and how revenue can be generated off it. For instance,

Sports-bar chain Buffalo Wild Wings will only screen the Mayweather-Pacquiao fight at a few of its locations, and there will be a US$20 cover. The price for Buffalo Wild Wings to screen Saturday’s fight at just one of its locations is approximately $5,100, reports Bloomberg. It would have cost a total of $6 million to air the fight at all 1,080 B-Dubs locations across the U.S.

 Who are these people charging absurd prices for bar owners to screen the fight, exactly? The Guardian refers to them as the “Pay Per-View Cops.” And although they aren’t actual cops, they sure do act like the po po. “The PPV cops will attempt to find bars showing the fight without having paid licensing fees,” reports The Guardian. “If they help promoters nail establishments that have not paid, the companies say they can make hundreds or even thousands of dollars.” PPV cops are paid by the number of illegal locations they are able to find, which gives them a whole lot of incentive to bust bars screening the fight without paying the fee. One Lake Elsinore, CA bar shut down after paying a $23,000 fine for illegally showing a previous Mayweather fight.

– First We Feast

Aside from all the global multiplers of this match, the biggest gainers are the two boxers –Mayweather and Pacquiao earned roughly US$ 4.9 million and US$ 3.3 million every minute that they spent in the ring this morning. I can’t help but wonder whether the scale of the money involved for just one night’s match isn’t rather ludicrous.

Introduce a National Minimum Wage with Care to Avoid Edging Out Young Entrants

May Day (or Labour Day) each year always fuels conversations around wages, cost of living, working conditions, etc. On wages, the discussions on minimum wages often come up. Interestingly,  the government has just announced that it plans to introduce a National Minimum Wage (NMW) soon. This is a contentious issue, with profound implications for labour market clearing. Set it too high and it will negatively impact job creation and enterprises’ willingness to retain – and indeed hire – more workers. Set it too low and it’ll defeat the purpose of introducing it in the first place as it won’t have the desired impact.

Consultations with the private sector will be essential in this process. Last year, the Employer’s Federation warned against introducing an ad hoc devised NMW, arguing that “a national minimum wage could distort and create problems to certain sectors which need to be separately considered for fixing minimum wages”. They further elucidated their point of view, which highlights the competing ideas and intentions nicely:

“The issue of the minimum wage is controversial. Many argue that it is too blunt an instrument to be useful and could have detrimental effects on employment, growth and incentives to work, and that it can negatively impact opportunities for lower skilled workers and the youth. Supporters of minimum wages conversely argue that it is an effective instrument in protecting the lower paid and in combatting poverty. Minimum wages are essentially labour market interventions used by governments, either as an instrument of political macroeconomics or as a social tool. Minimum wages represent the lowest levels of pay, established through a minimum wage fixing system, to be paid to workers by virtue of a contract of employment”.

Seeing this ongoing debate I was reminded of a former university professor of mine at UCL who was  a thought leader on the subject of NMW and conducted one of the modules of the Economic Policy Analysis course I was taking. He was an influential academic, who’s research had shaped the UK’s own Pay Commission deliberations on introducing a NMW back in the late 1990s. His research revealed an interesting – rather unorthodox – view on the subject:

Until 1999 many economists and policymakers thought that introducing a National Minimum Wage (NMW) could lead to the loss of up to two million jobs. Professor Stephen Machin (UCL Economics) provided the empirical analysis which demonstrated that this was not the case. He showed, in 1996, that a minimum wage pitched at the ‘right’ level both need not harm employment and, indeed, has the scope to give a significant wage boost to raise the incomes of the poorest workers in the economy.

Regardless of what the rate is, the fact remains that setting a state-mandated NMW is distortionary and restricts the freedom of an employer and an enterprise to enter into a pay negotiation and pay accordingly. The floor is always set. The main concern I have with a NMW is the effect on new entrants to the labour market – young people seeking first time jobs with little to no experience. Employers will now be very reluctant to hire them, at the mandated NMW, and may deny a valuable ‘foot-in-the-door’ training opportunity for unemployed young people.

Interestingly, in the UK case – and particularly due to the work of Prof. Machin – the Low Pay Commission decided not to raise the minimum rate for 18–20 year olds by as much as the adult rate, to avoid risking youth unemployment.

Expanding Sri Lanka’s Trade with India: Winning with Competition or Cowering under Protection?

Author’s note: This article originally appears in the Daily Mirror (Business section) of 29th April 2015, as part of my weekly column on Wednesdays. Subsequent to this article appearing, the National Chamber of Commerce took an unusual decision to remove me as the moderator for today’s forum on ‘CEPA and It’s Implications for the Sri Lankan Economy’. The reason, I was told, was that the Council did not feel that the moderator should have an opinion about this issue. Apparently “several members and two panelists were against having me”, in light of my article. I suppose what they really meant was that they didn’t like it that the moderator had a view that was contradictory to their own. It is unfortunate that the NCCSL Council wasn’t sophisticated enough to differentiate between a) my ability to share an informed opinion based on my insights, and b) my ability to effectively moderate a session entertaining diverse views – as I have done in countless business forums in the past. We must continue to not let the narrow interests of the few dominate the discourse, and drown out the potential benefit to many.

In preferential trade agreements, we often see the potential losers being the most vociferous and more organized, while the gainers are quieter and more fragmented. This has been a typical characteristic of the debates on the India-Sri Lanka Free Trade Agreement (ISFTA) and the proposed Comprehensive Economic Partnership Agreement (CEPA) as well. But Sri Lanka must be careful of letting one side be heard more – by the public as well as by policymakers – than the other. More eclectic and informed debate representing all sides is essential, which is why I look forward to moderating this afternoon’s National Chamber forum on ‘CEPA and Its Implications for the Sri Lankan Economy’ – the first by the private sector following Indian PM Modi’s visit and announcements by both him and the new Sri Lankan government that they would forge ahead with the deal.

Deeper Engagement

The proposed CEPA would expand the current ISFTA to cover services, investment, and economic cooperation. The agreement was to take in to account the massive asymmetry between the two countries (economic size, population, etc.), afford Sri Lanka a more than disproportionate advantage, and allow for partially or fully restricting sectors it didn’t wish to open up right away. Following aggressive lobbying by narrow nationalist business leaders with close political affiliations, there was an eruption of uninformed and exaggerated sentiments against promoting greater commerce with India over the past few years. These groups successfully scuttled efforts at completing the CEPA deal several times in the past. “CEPA” became such a taboo word that the India-Sri Lanka Joint Statement in January 2013 avoided using that terminology, and referred to a “special economic partnership framework” instead!

india CEPA

Problem with Protectionism

It is not surprising that protectionist trade lobbies have emerged so influential. Sri Lanka has been sliding backwards in its openness to the world. For around 10-15 years now, protectionism has been on the rise and there has been a creeping up of applied tariffs and para-tariffs. A tangle of para-tariffs has now effectively doubled nominal protection rates to over 20%. Simultaneously, successive Budgets have introduced a range of ad hoc, special protection and promotion schemes for various domestic industries and indigenous enterprise. While this is not an unprecedented industrial policy approach, it does serve to weaken competitiveness of Sri Lankan firms. I recall a conversation with a business school friend of mine who started a high value added spice export operation out of Sri Lanka some years back. He lamented about the severe protectionist behaviour from local spice industrialists even though the project had been given the green light by the necessary authorities. Economic theory and evidence amply proves that in the presence of protection and in the absence of competition, firms become more complacent, less innovative and dynamic, and less able to face international markets. Is this what has happened to Sri Lankan firms vehemently against expanding trade ties with India? Ill-prepared for competition, cushioned by industrial policy that afforded special comforts?

 

Government Must Play Smarter Role

It is incumbent on the government to ensure that stakeholder concerns are heard and addressed; that as much transparency as possible is maintained (without of course compromising the country’s negotiation position), and information is shared more comprehensively and consistently so as to prevent groups with narrow vested interests being able to misinform an mislead. Most importantly, the government cannot let the agenda be highjacked and held hostage by narrow interests groups, like in the past. A bilateral trade or economic partnership agreement that Sri Lanka enters in to affects not just a handful of firms and their employees but hundreds of other firms, hundreds of thousands of employees, and millions of consumers in Sri Lanka. The government must provide a clear policy direction on its economic engagement with India, making a strong departure from the ambiguous statements of the past – i.e., calling for a ‘special economic partnership agreement’. Meanwhile, although I did acknowledge at the start that the gainers from freer trade are often fragmented, less organized and less vociferous, it’s time that changed. Consumer and producer groups that gain from freer trade must speak up.

Opportunity to Win Big or Cower Down

Whether its called a CEPA or any other variation of it, the fact remains clear – it is in Sri Lanka’s interests to deepen economic ties with India. An agreement must be forged that cleverly expands Sri Lanka’s economic interests – those of our firms and our consumers; not a narrow few of them, but the wider many. To those who claim that it threatens our national interest, we must remind them that expanding our trade interests for the benefit of the many is also a part of our national interest. Just the opportunity to tap in to India’s growing middle class alone, set to be over 250 million this year – 20 times our entire domestic market – can be transformative. There are Sri Lankan firms with quality products that can and must break in to India. There are service providers, including dynamic Sri Lankan start-ups like Trekurious – a provider of unique lifestyle experiences – that have already entered India and demonstrated early success. A bilateral agreement will ensure that the systems are set out, for companies like these to operate in a rules-based environment. And if it is that we feel Sri Lankan firms cannot face competition, and it is for that reason alone we should not go for deeper economic engagement, then I’m afraid we have bigger things to worry about than a four-letter word starting with C.

This is the 10th article in the ‘Smart Future’ column that advances ideas on economic reforms, innovation, and competitiveness. It appears every Wednesday in the Daily Mirror Business. 

The Curionomist Podcasts | #3: Tea and Hoppers – Fixed Prices, Perverse Incentives

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In my latest podcast, I talk about tea and hoppers; two of my favourite food items, and indeed of most Sri Lankans. But the government now dictates how much shops can charge me for these – and its a pretty fantastic, lower price than ever before – milk tea at Rs 25, plain tea at Rs. 10, and plain hoppers at Rs. 10. As a consumer, I should be pretty happy right? “Not if it’s causing unintended consequences!”, the economist inside me is saying.

In this article titled ‘The Problems of Price Controls‘, The Cato Institute – a prominent libertarian think tank in the US, asserts that,

“price controls reduce quality, create black markets, and stimulate costly rationing”.

We are seeing this play out right here in Sri Lanka. Last month, we saw one of the most intrusive and bizarre examples of administered prices (or price controls) being introduced by a government in recent times. This was on tea, and hoppers, served anywhere in the country, to be enforced by the Consumer Affairs Authority. What this has done is cause perverse incentives among those making and selling these items. Using poorer quality ingredients, shaving off quantity, skimping on the add-ons. Government-imposed fixed prices not only completely violates basic economic freedoms enjoyed by firms – like the freedom (and ability) to use price to signal quality or differentiation – but it is also notoriously difficult for a government to enforce fully and fairly. We must do more to make policymakers and bureaucrats understand that badly thought out public policies cause perverse incentives by economic agents, and this helps nobody. Listen to the podcast by clicking play below, or visit it on Soundcloud Image courtesy http://www.adventure365.me

Why Didn’t a Cab Driver Think of Uber?

uber-tax-imageIsn’t it curious why a cab driver didn’t think of Uber? Why Barnes & Noble didn’t think of Amazon? Why Blockbuster didn’t think of Netflix? Or why Marriott didn’t think of AirBnB? Well, according to this article its because when a company is so focussed on the ‘cash cow’ that keeps delivering, you are less likely to be disruptive of your own biz model that works. It’s also harder to see the disruption that others could bring to your business, when you have ‘tunnel vision’ of your industry. The article also introduces the idea of hard trends (things that will happen) vs soft trends (things that might happen), and the importance of differentiating between the two, when tackling disruption.

The new digital disruptors have flipped on its head what people even mean by the sector in which they operate. Uber is the largest taxi service without owning a single car. AirBnB is the largest hotel service without owning or building a single hotel room. So the sense of what these industries even look like, has been disrupted.

According to the article by Daniel Burrus, a best-selling author and innovation expert,

“In order to thrive in this time of exponential change and rapid digital disruption, it is imperative to actively scan far outside of your industry looking for new ways to disrupt yourself, before others do it for you. When you do discover a new technology or technology-driven trend that could be used to disrupt you, it is important to separate what I call the Hard Trends that will happen from the Soft Trends that might happen.

When you can anticipate a disruption before it happens, you now have a powerful choice. You can either be the disrupter or the disrupted. You can use predictable Hard Trends to create the new cash cows that will disrupt your competitors and grow your future. It’s important to understand that disruption can either bring opportunity (if you get there early)—or disaster (if someone else does).”

Read more here – https://agenda.weforum.org/2015/04/why-didnt-a-cab-driver-think-of-uber/