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”.

The Curionomist 10-minute Podcasts | #1: Presidential Manifestos and Public Spending

I’m launching a series of 10-minute podcasts on this blog, to share with you new thoughts, ideas, insights, and curious musings regarding economic issues. This first one comes on the eve of Sri Lanka’s Presidential Elections on 8th January 2015). In this I talk about 3 things: the economic agenda contained in the two candidate’s manifestos and how they are overwhelming populist (disappointing, but unsurprising); the need to reshape the narrative around the role of the state and public spending in Sri Lanka; and finally about the misuse of state resources and how it means that all of us as taxpayers have subsidised one candidate’s campaign over another’s.

Click the embedded Soundcloud clip below to listen to the podcast.

For a more comprehensive comparison of the two Presidential Candidates’ manifestos, see this article by the Pathfinder Foundation – http://www.ft.lk/2015/01/06/the-election-manifestos-an-auction-of-non-existent-resources/

And for the CMEV report I refer to in the podcast, visit http://cmev.org/2015/01/07/presidential-election-2015-cmev-interim-campaign-report/

Re-commissioning the Jaffna Rail Link, Rekindling Connectivity

Today (October 13th), the President is scheduled to re-commision the Colombo-Jaffna Yal Devi rail link all the way to Jaffna – a route not travelled for decades. I have always believed that transport connectivity and the resultant people-to-people connectivity is an integral part of reaching national harmony.

The Yal Devi re-commissioning has strong economic implications too, as I shared with Amantha Perera in an interview for his article, subsequently published here. In it I note,

“The new transport [line] can certainly boost economic connectivity of businesses in Jaffna and Mannar,” Wijesinha said. “But enterprise policies must focus on helping to grow indigenous businesses in these regions. Otherwise the enhanced connectivity might benefit businesses coming from outside into these regions more than it helps businesses that are already struggling to grow.”

“Policies that improve the business climate, access to finance, technology and business skills will be key,” Wijesinha concluded.

Colombo’s Urban Regeneration Could Rewrite the ‘Socio-economic DNA’ of Entire Communities

As urban regeneration continues at a dizzying pace in Colombo, it was the focus of the opening technical session of a recent forum on ‘Sri Lanka’s Road to Sustainable Development’ organised by the Law and Society Trust (August 22nd 2014). I was a panelist at this event, along with Eran Wickramaratne (MP) and a consultant to the UDA, and was asked to provide a socio-economic perspective on the issue. In this post, I capture the thoughts that I shared here. My primary thought was that the Colombo urban regeneration drive could “rewrite the socio-economic DNA” of entire communities who are being resettled, and more needs to be done to help people cope with the negative consequences of the project. I also argued that, in the rush to ‘free up’ land for private investment, important aspects of governance, inclusivity, and economic security must not suffer.

Youth and Employment in Sri Lanka – Comments on the UNDP #NHDR2014 Report

On the request of some of those who attended this morning’s launch of the UNDP’s National Human Development Report 2014 on the theme of ‘Youth and Development’ (coinciding with Int’l Youth Day today, 12th August), I am posting here my comments that I shared during the short panel discussion that followed the formal launch. I was asked to focus on the ‘Employment’ chapter of the report, while Senel Wanniarachchi focussed on the education chapter, Salma Yusuf on the reconciliation and social integration chapter, Mohammed Hisham on the political and civic participation chapter, and Kenosha Kumaresan focussed on the health chapter. My key thoughts were that the rapdily-shifting aspirations and attitudes of youg people towards types of jobs must be factored in when talking about youth employment policies; that policies to support small biz and entrepreneurship will certainly help young people; that the emerging focus on Sri Lanka as a ‘knowledge-driven economy’ will put pressure on rural youth and we must ensure they are not left out from the new growth opportunities; that youth-focussed interventions risk being incoherent and fragmented if we don’t focus on coordinated implementation; and finally that Sri Lanka must make sure that the array of youth-focussed national policies and frameworks truly work for youth and don’t suffer from “policy creep”.

Mattala Airport Not Yet a Lost Cause? – My Interview to BBC Sandeshaya

Recent weeks have seen much controversy over the performance of the Mattala Airport, stemming from an interaction in Parliament between opposition MP Dr Harsha De Silva and Minister for Civil Aviation MP Priyankara Jayarathna. Linked to this, the BBC’s Sinhala service ‘Sandeshaya’ wanted to explore the success or failure of mega infrastructure projects like Mattala (and others coming up in Hambantota), and I was asked to provide some insights. Here is the link to the Sandeshaya interview in Sinhala, conducted with BBC’s Sri Lanka correspondent Azzam Ameen – http://www.bbc.co.uk/sinhala/sri_lanka/2014/07/140726_airport_srilanka.shtml

In the interview, I argued that mega projects like this have not been undertaken by Sri Lanka for a long time now, and such projects are important – especially connective infrastructure – if the country is to make a steady progress through the middle-income transition. I added that the success or failure of such projects cannot be measures in a short time span, and so the accusations that Mattala is a failure may be slightly premature. However, I also point out in the interview that these were expensive projects, and now that they have been built we need strategies to maximise utilisation and this is where things seem to be coming unstuck. I noted that it may not be appropriate to have the Sri Lanka Ports Authority be the main investment driving force, and that we need a high powered agency that has the best of all agencies. I remarked that we can learn from examples like the Penang Export Hub in Malaysia in making this happen.

Meanwhile in the closing part of the interview (which hasn’t been included in the voice clip but is paraphrased by Ameen), I recommended that instead of chasing passenger airlines to stop at Mattala, we should attract global air cargo players like FedEx, DHL, UPS, etc., to set up there taking advantage of the huge land availability, and make Mattala a cargo hub, linking the sea port and industrial zone nearby. My overall message was that we need to think through the Hambantota hub much more strategically and fine-tune the policies of investment attraction, if these projects are to be a true success. Do listen to the interview and let me know what you think.

 

Less Rainfall, More Losses for You and I

A dry Kotmale Reservoir. (Pic courtesy Sunday Times)

Sri Lanka’s electricity sector is in perpetual crisis – either a malfunctioning coal power plant built with costly funding, or severe contractions in hydropower generation. Despite all this, electricity supply to people and businesses has by and large been steady and predictable, unlike, say, 15 years ago. (of course bearing in mind the random blackouts and brownouts that occur). The cost, then, of ensuring steady power even during times of generational-crisis, is that the power utility – the CEB – bears the brunt of it. Most folks are quick to assume that the CEB’s losses are due to downright inefficiency. This is not always so. The culprit is often, simply, the rain. Why? Problems in Sri Lanka’s power generation mix.

Latest numbers from the CEB indicate that the power sector is facing severe losses due to the delay in anticipated rainfall to the catchment areas – the reservoirs (here’s a useful infographic by the CEB on where they are located). According to this news report citing the CEB, the utility is now making a Rs. 7.65 loss per unit. This is because the CEB is having to turn to expensive power generation, in the absence of sufficient hydropower. Hydropower generation, which costs just Rs. 2.50 per unit,  has fallen to record low levels, due to the lack of rainfall. It is currently meeting only 12% of the national requirement, while 85% is being met by thermal power, which is far more expensive. Over 40% of this thermal power is being generated by “high cost fuel oil plants”. Hence, the heavy losses incurred by the CEB (in Q1 2014 alone, it was Rs. 24 bn).

This situation isn’t new. Problems with the ‘generation mix’ have been going on for some time. They were expected to abate as more of the coal power plants (cheaper than fuel-powered) come on stream. But as we can see with the Norochcholai plant, the prospects on this seem rather bleak too.

The 2012 edition of the State of the Economy report by the IPS had an entire chapter dedicated to the power sector, reiterating that Sri Lanka cannot sustain rapid growth over a longer term without tackling the problems of this sector. This policy brief is a good quick read to get an overall understanding of the sector and how the issues in it impact on households and firms. Meanwhile, as this article argued, problems in the electricity sector are continuing to be felt disproportionately on the very sector that generates jobs and growth – the industry sector.

Despite the folly Sri Lanka faces in hydropower each time the rains are delayed, some experts argue that there still is potential for Sri Lanka to still maximise it’s hydropower capacity, by adopting better management of water resources and new technology. As this article by my colleagues posits,

“…it is still too early for Sri Lanka to focus overwhelmingly on coal energy for the future. Even though hydro will not be sufficient to cater to the growing electricity demand in Sri Lanka, there is additional potential that can be explored. With focused research on better management practices and innovations, the contribution from hydro could well be more than the 19.5% by 2020 as currently predicted by energy planners”.

Nevertheless, the electricity generation mix continues to cause problems for Sri Lanka. The symptoms due to the lack of rain may not be obvious to you and I, the average user – we haven’t, and probably unlikely to see, see power cuts. But we do pay indirectly, and here’s the summary of it:

As the rains delay → hydropower reduces → expensive thermal power must increase to bridge the supply gap → the higher costs are not passed on to consumer, prices remain the same → CEB bears the cost difference → CEB makes losses → loss is a fiscal burden on the Treasury → this is paid for by your taxes and mine. 

Construction Bias in Sri Lanka’s Recent Growth

A new office building coming up off Union Place in Colombo, Sri Lanka. Image by author, April 2014.

As we near the 5 year mark since the end of the war in 2009, I’ve been reflecting on Sri Lanka’s economic journey since then. A discernible trend in post-war growth is that it has been led largely by growth in what economists’ call the ‘domestic non-tradable sector’ – construction, domestic transport, utilities and wholesale and retail trade. These are products that aren’t internationally traded (i.e., exported) and for which valuable foreign exchange is earned to support a country’s import bill and foreign debt payments.

Within these non-tradables, the construction boom is especially notable, whether it’s the high-rises, new office buildings and apartment blocks in the city, or the hotels, roads and highways outside it. The role of construction in recent GDP growth also no doubt is reflective of the domineering role of the ongoing public sector infrastructure development drive.  Manufacturing has not been a notable driver of recent growth. While construction’s share of GDP rose from 6.65% in 2009 to 8.70% in 2013, manufacturing’s share of GDP has even slightly declined from 17.45% in 2009 to 17.10% in in 2013.