Following Wednesday’s ‘Smart Future’ article, I had a lot of very insightful feedback and pertinent questions. A couple of exchanges in particular were very rewarding, as it helped jog my thinking further as well. I thought it would be useful for the readers of the blog to get a taste of it, so I am reproducing extracts of it here. The gist of many of the Qs were: So why the declining export/manufacturing in China? Is it that it is being out-competed? What about their markets still being healthy, unlike the EU? Isn’t the US still the world’s consumer? And how come the markets reacted so sharply?
My responses covered 4 main areas, (apologies in advance as they may not be very well ordered):
This article appears originally in the Daily Mirror Business of 27th August, under the ‘Smart Future’ column
“When China sneezes, does the world catch a cold?” is a question on the minds of investors, economists and world leaders this week, as recent troubles in the Chinese economy sent ripples through markets around the world. The sneezing came in three bouts. In July, China’s stock market began to show the first signs of stress, with the markets in Shanghai plunging and over 1000 listed companies suspending trading. Then in a sudden move in early August, the People’s Bank of China devalued the Yuan by the sharpest amount in two decades, leading investors to believe that China was facing severe weaknesses in exports. The final sneeze was just last week when a key manufacturing factory activity indicator – the Caixin-Markin Purchasing Managers Index (PMI) fell to its most pessimistic level since the global slowdown in 2009 – a 77-month low of 47.9 (PMI below 50 on the 100 point scale indicates a decline). All of mini-sneezes combined to send jitters across the global economy, and since Friday last week the global economy has been sniffling. The full-blown cold came on Monday – now dubbed ‘Black Monday’ where nearly all major markets saw declines not seen since the onset of the global finance crisis. The Shanghai Composite Index fell by 8.4% – the largest one-day drop since 2007 and continued a further decline of 7.6% on Tuesday. Meanwhile, the Hongkong HangSeng fell by 3.5%, Singapore Straits Times Index by 2.3%, Australia S&P/ASX 200 by 2.6% (steepest since May 2012), and the Dow Jones Index and NASDAQ in the US and the FTSE in the UK all down by more than 3%. The Dow fell by nearly 600 points after starting trading down over 1000 points. Many of the markets have since recovered somewhat, but continue to be volatile. Whether the cold goes away or develops into a full-blown flu’ remains to be seen.
As the Chinese economy continues to disprove it’s critics and grow at a steady pace with a greater focus towards domestic consumption, the Chinese consumer is doing exactly as expected and spending a lot more than before. A most notable consumer segment to have emerged is the luxury goods consumers. I just saw a report in the WSJ that China has just opened the ‘world’s largest duty free mall’ in Hainan, a clever strategy to tap into the luxury consumer wallet.
Although the author mentions in passing that luxury demand has dipped (attributing it to the government’s crackdown on corruption) the numbers tell a different story. As I noted recently, in an article on ‘Asia Rising’, Chinese consumers contribute as much as 10% of the world’s luxury sales! Asian consumers, in general, are lapping up nearly half of the US$ 80 million luxury goods market.
But as the WSJ article questioned, “if you build it, will they come?”. A pertinent question when thinking about the latest addition to Colombo’s luxury offering (well, relatively), the Arcade Independence Square. Will people come, to not just walk over the fish tank?
In his remarks at the recent Sri Lanka Economic Summit 2014, the Chairman of the Ceylon Chamber of Commerce Suresh Shah made it a point to mention the role of R&D and private sector linkages in gearing Sri Lanka for a post-US$ 4,000 per capita income era. He remarked,
“I urge the private sector to establish strong partnerships with the universities. The universities are an incredible reservoir of knowledge which the private sector must leverage for innovation and R&D.”
I fully agree with him. It’s encouraging that a business leader would come forward and challenge the private sector to collaborate more with universities. It reminded me of a discussion earlier this year, where the GIZ brought together universities, private sector and government agencies for a workshop on ‘Strengthening University-Business Linkages in Sri Lanka’. The lead presentation was delivered by an expert in technology policy, Dr. Chris Green of SQW, a UK-based consultancy. Interestingly, Green (and SQW) were the first to study the success factors of the Cambridge Innovation/Hi-Tech Cluster, which is now a globally recognised model for university-industry collaboration. Following Chris’s presentation, I was asked to share some ideas on what needs to be done to get this going. I shared 3 key ideas, but I will get to that in a minute. First, some context.
Kensuke Shichida, a japanese sake brewer, grappling with changing times. Image by Ko Sasaki for NYT, from http://nyti.ms/1AQKFEe
Apparently Japanese Sake brewers are gradually letting loose their ultra-traditional stance and looking for new ways to push their products in foreign markets. According to an article in the New York Times titled ‘Sake With Your Burger? Japan is Looking West to Save a Tradition’, Japanese Sake brewers are partnering with restaurants in cities like New York to re-position the beverage. Pairing sake with burgers in New York can by no means be an easy shift to make for traditional Japanese brewers whose roots are steeped in history, but they have rightly identified the need to bring this Far-East alcoholic beverage up to speed with contemporary international food and drink trends.
While reading the article I couldn’t help but wonder, should’t Ceylon Tea consider a similar strategy? With demand for orthodox teas here facing stiff competition from CTC (cut-tear-curl) teas in Kenya and other locations, ‘pure Ceylon tea’ is facing it’s biggest challenge in decades. The issue is certainly not new, and the debate over whether we should relax our strict laws on blending tea for export markets or retain absolute purity of Ceylon tea continues unabated. But like what Dilmah (and to some extend Heladiv Teas) have done, it’s surely time for the entire tea industry to think about a much more ambitious foreign markets strategy. Similarly to the Japanese sake brewers, could Sri Lankan tea estates actively and directly approach cafés and restaurants in major cosmopolitan cities globally to get them to have single estate teas on their beverage menus? Or clever tea-inspired drinks that can compete with the mocha lattes listed alongside them on a menu?
While researching on the new trends in industrial policy for some writing on the role played by the state in Asian growth and what lessons Sri Lanka can draw from it for its own efforts, I came across this cracker of a line that captures the challenge nicely,
“Focus now should be not on policy best practices, but rather on policy best matches with institutional capabilities”
Read the full article here: ‘Industrial Policy Reconsidered’ – http://www.project-syndicate.org/commentary/andres-velasco-makes-the-case-for-a-revival-of-government-action-to-promote-promising-economic-sectors
The author also refers to an interesting new set of policy tools that are a from the typical set of industrial policies as practised in East Asia. It is a new brand of “industrial policies”, called Productive Development Policies (PDPs). The idea is that rather than targeting specific sectors or industrial like in traditional industrial policies, these PDPs are sector-neutral, and productive capacity-enhancing policies. For instance, investing in transport infrastructure, training engineers, improving the standard of English in the workforce, etc. – inputs that stand to benefit a broad range of firms in different sectors to improve their competitiveness.
Need to read more about them, as they gradually take root in Latin America.
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.