Last week, the Bandaranaike Centre for International Studies hosted a timely seminar on ‘Sri Lanka at 70 Years Since Independence’, and I was invited to speak on ‘Economic perspectives for the future’. Given the vast subject matter that could be given on this, I thought I’d ask my intern what someone like him would like to hear at a session like this. “Technology is going to shape our future. How will Sri Lanka latch on to it?”, was his response. I expected the BCIS audience at this seminar to consist primarily of students, and so my intern’s suggestion was a wise one. Anchored to the themes of technology, the economy, and inclusion, I weaved together a speech that essentially called for Sri Lanka to do more to invest in skills to help our people be ready for, and take advantage of, the tectonic technology shifts that are taking place now and will continue to accelerate. I reproduce the speech, in full, below.
When David Irwin joined the UK Small Business Service as its first Chief Executive he had an uphill task – getting civil servants to understand enterprise promotion. One of the first things he did was to get all the bureaucrats in the agency to visit small businesses across the UK for several days each year to better understand their needs, their concerns, and their pains. In just two years, the Small Business Service had emerged as a strong voice for small business at the heart of government, and was at the forefront of advocating the case for an improved regulatory environment. In recognition of his continued efforts to support SMEs, David was awarded the Queen’s Award for Enterprise Promotion in 2009.
I was privileged to have spoken with him on the sidelines of a recent workshop. We talked about how a public agency can support enterprise development and what the role of government is in helping SMEs. Our chat is captured in this latest edition of ‘The Curionomist Podcasts’, embedded below. Just click to listen, for about 12 minutes.
“In an increasingly volatile world, flexibility in government policy is essential” argued Dr. Montek Singh Ahluwalia, the respected Indian economist and former World Banker, at an event in Colombo yesterday. That was my main takeaway from his one-hour long tour de force on undertaking economic policy reforms in a country. He argued that flexibility in policymaking can ensure that countries don’t get stuck in a rigid model and are able to be more nimble and quickly respond and adapt to global and local economic changes.
Dr. Ahluwalia was a key player in India’s market-oriented reforms during the 1990s, and Chaired the country’s key economic policymaking body – The Planning Commission.
Ahluwalia remarked that when he often gets asked what should the most important policy reform priorities be he prefers to stay away from naming a list – “I don’t believe in policy check lists”. But he argued that there are a couple of fundamental areas that a country needs to get right and at the top on the agenda should be fighting macroeconomic imbalances. He said macro imbalances are the most damaging to developing economies in particular. He called for keeping a close watch on budget deficits, and not to assume that any particular “level of debt” is a sustainable one especially as reliance on foreign debt grows. He remarked that countries like Sri Lanka should try as much as possible to get loans from multilateral lenders, rather than go for commercial borrowing. However, he didn’t explore in detail how this would work for a country like Sri Lanka that is no longer eligible for ultra-concessional loans. He probably meant that we should go for at least the semi-concessional, long-tenor loans from lenders like the World Bank and ADB, which have long repayment and grace period, rather than relying on commercial borrowing through sovereign bonds.
He went on to highlight a few key areas that countries like Sri Lanka should focus on, in placing the country on a sustained growth path
- Creating more jobs and not relying on public sector to pick up the employment creation slack.
- Encourage public private partnerships to meet infrastructure needs, as debt-fuelled infrastructure spending is now sustainable
- The importance of creating well-functioning and dynamic financial markets, which can finance firms of all sizes
- Bring dynamism in labour markets through reforms for labour market flexibility
Dr. Ahluwalia was speaking at the MILODA Academy of Financial Studies, of the Ministry of Finance, as part of the ‘Eminent Speaker Series’ supported by ADB. This evening he is scheduled to speak on ‘Managing Economic Reform’ at the Bandaranaike Centre for International Studies, where I teach some courses on international financial institutions. I just might go and listen to him there too….
President Maithripala Sirisena delivered a keynote address at the closing session of the Ceylon Chamber of Commerce ‘Sri Lanka Economic Summit 2015’ today, addressing over 500 of the country’s leading private sector representatives. Here are my 9 highlights from his remarks.
- The government must be transparent, accountable, clean, and fair in its dealings with the private sector.
- The private sector must have the freedom to thrive and the government should not unduly interfere or intrude on private enterprise.
- Although there are many of them, state institutions need to better focus and align themselves to private sector needs, especially in promoting exports.
- Economic growth in Sri Lanka should be inclusive across regions, should be sustainable, and should be solely aimed at improving living standards and increasing prosperity.
- In prioritizing and planning investments, political compulsions should not get in the way and only good economic sense should prevail. For instance, building of a new road or locating a new factory should not be based on political compulsions but based on whether that investment is the right one in the right place
- It is essential to align foreign policy with economic policy, and these two are intrinsically linked. A balanced and mid-ground foreign policy can help Sri Lankan businesses. He is keen to pursue good relations with all multilateral and regional institutions like World Bank, ADB, UN, SAARC, etc.
- Sri Lanka needs to make better use of its vast ocean resources – an area hitherto neglected. He envisages a 100% growth in incomes from the fisheries industry
- Sri Lanka needs to move away from traditional production and focus on innovation, as well as the human resources needed to support it.
- There needs to be a much closer working relationship between the private and public sectors, a better understanding based on trust and transparency.
I’ve uploaded the full audio of his speech to Soundcloud. You can listen to it via the embedded clip below, or visit it on Soundcloud here.
This article originally appears in the Daily Mirror Business of Thursday 9th July, under the weekly ‘Smart Future’ column.
Entrepreneurship is very much about ideas and efforts of individual (or a collective) of private actors, who start a business, hire employees, make profits, invest, expand, etc. – all through private initiative and risk-taking. So, to talk about a role for government in all this might seem unnecessary. At the same time, believing that there is no room for government and policy in fostering entrepreneurship is also a fallacy. There are two aspects to the government’s role in promoting entrepreneurship – the first is knowing when and how to get out of the way, and the second is knowing when and how to help create a way.
Where to Get Out and Where to Get In
Government policies can sometimes hurt and sometimes help entrepreneurs. In shaping a conducive climate for entrepreneurship, we need to look at what are the regulations, rules, government procedures, regulatory provisions, policy bottlenecks, etc., that get in the way of entrepreneurship and innovation. For instance, are the rules around starting up and running a business conducive for young entrepreneurs?; are government institutions geared to understand the needs of a new breed of young entrepreneurs?; are the fiscal and financial frameworks in place to support them? Then we must also look at what specific initiatives that must be in place to create a helpful path for entrepreneurs. For instance, can there be government support to encourage the setting up of affordable working spaces for new start-ups?; what can be done to increase the speed and coverage of broadband internet and telecoms infrastructure to help entrepreneurs leverage digital technologies?; are rules around land use and property development – the taxes and ownership rules for example – helping or hurting investment?; is the visa regime in place to attract good talent from abroad and cross-fertilize here in Sri Lanka?; to bring in mentorship and networks among Sri Lankans and others abroad?. These are some critical areas that the government can lend active support, to shape a better climate for entrepreneurship.
Sri Lanka Needs an ‘Entrepreneurship Climate Index’
Many of these questions need to be looked at not only at a national level but also at a sub-national level. This requires a rethinking of how we measure the entrepreneurship climate at the sub-national level, as existing indicators are inadequate. The Doing Business Index, for example, measures costs and delays in government procedures and regulations in the largest commercial city of the country, i.e., Colombo. Previously, the Asia Foundation’s Local Economic Governance Index has attempted to measure sub-national business climates but there was no continuity in the assessment and therefore planning and measuring change over time was not possible. Sri Lanka needs a new comprehensive assessment of entrepreneurship for the whole country – and I suggest an ‘Entrepreneurship Climate Index’. This ‘ECI’ can not only measure elements that traditionally form the basis of an entrepreneurship climate – like start-up regulations, access to infrastructure (like electricity, roads, water, etc.), but also elements like the availability of start-up financing and the entrepreneur-friendliness of local bank branches; the attitudes towards entrepreneurship of young people in different localities (rather than job seeking); the perceptions on constraints faced by young entrepreneurs in different regions; the availability of land, workspaces, and incubation facilities for new start-ups; the spread and quality of services by government agencies that support entrepreneurship (like the National Enterprise Development Authority, the Industrial Development Board, the Industrial Technology Institute, the Inventors Commission, the Registrar of Companies, etc.); the quality of networks between young or new entrepreneurs and the leading businesses, trader associations and chambers of commerce in a locality; and other measures to capture the quality of the entrepreneurship eco-system.
A Good SME Policy Can Help Entrepreneurship
Any policy framework that focuses on the overall small and medium enterprise sector – an SME policy – can help all entrepreneurs. It’s unfortunate that 13 years since Sri Lanka developed an SME White Paper, we are yet to see it become a full-fledged policy document. The latest effort at legislating a SME Policy Framework, which was near completion, has also stalled due to the dissolution of Parliament. Such a policy framework is important because it pushes all government agencies relevant to this area to align their work towards supporting entrepreneurship; to focus their efforts and make them coherent so that businesses truly benefit. It can help streamline the numerous ad hoc, overlapping, wasteful and ineffective entrepreneur development programmes currently being implemented, and focus efforts on where government support is truly needed. It brings a clear focus on what the government should do and should not do. It also helps those outside of government – private sector, chambers of commerce, development agencies, and universities – orient their work towards supporting this agenda. Overall, it gives a national push – from the local schools to the highest government agencies.
Once the latest round of elections are done with, we need to focus on gearing regulations and administrative procedures towards fostering entrepreneurship and innovation. We need tight rules for the right reasons, not long rules for the wrong reasons. Let’s look at the policies that are holding entrepreneurship back, and improve them; and let’s look at the policies and programmes that can help entrepreneurship and fine tune them and scale them up. Everyone can and should influence that process. Our goal should be to make Sri Lanka the “best place in Asia for a young entrepreneur to start and grow a business”.
This is the 18th article in the ‘Smart Future’ series that advances ideas on competitiveness, innovation, and economic reforms.
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)
‘Public sector must also come under tax net’ (excerpts of a super interview with an Inland Revenue Commissioner)
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.
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.
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.
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
- 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”.