Three Forces Reshaping the Global Economic Order

In the midst of tumultuous global markets, a migrant crisis in Europe on top of their economic weaknesses, and continued bloody conflicts in the Middle East, the global economic order continues to be shaped and reshaped every day. Attending the recent Global Shapers Annual Meeting of the World Economic Forum (WEF) gave a unique insight into the forces shaping the contemporary global economy, with exciting discussions with 450 young leaders from over 150 countries, complemented by the insights of the WEF’s Founder Prof. Klaus Schwab. Three forces, in particular, are likely to influence the future trajectory of the world.

  1. Era of ‘Grand Deals’ Over

There is growing recognition that the global order set up after World War 2 does not function as well as it should anymore. While some may feel it is a cynical view, its becoming increasingly clear that the era of grand global deal-making – whether it is on trade liberalization (evidenced by the stalling of the WTO Doha Round) or cutting CO2 emissions (evidenced by troubles in climate change agreements) – seems to be over. Particularly with regard to trade, we are seeing more and more bilateral, regional, and mega-regional trade deals being forged, in the absence of serious progress on multilateral ones. Mega-regional trade deals like the Trans-Pacific Partnership (TPP) between the US and Asia, the Trans-Atlantic Trade and Investment Partnership (TTIP) between USA and Europe, and the Regional Comprehensive Economic Partnership (RCEP) within Asia, have come to dominate the global trade agenda in recent years.

Simultaneously, we are seeing new global financial institutions emerging, challenging the post-WW2 order of Bretton Woods institutions. The New Development Bank forged by the BRICS economies of Brazil, Russia, India, China and South Africa (nicknamed ‘The BRICS Bank’) and the Asian Infrastructure Investment Bank (AIIB) launched by China and joined by the majority of countries in the West and East, are evidence of the rebalance of economic might and the challenge to the previous global order that governed international finance and development under the World Bank and IMF.

  1. New Industrial Revolution

Another fast-evolving force, which Prof. Schwab especially pointed to, is “the fight between brains and artificial intelligence and the fight between robots and humans”. The WEF, and Schwab in particular, has written widely on this subject. Of course, this issue may seem years away for Sri Lanka, but we cannot ignore the fact that this phenomenon will completely change the structures of global production, as we know it today. This ‘New Machine Age’ or ‘Fourth Industrial Revolution’ will have profound effects on the competitiveness of economies, on the functioning of society, and on the lives of individuals. One major way in which this will affect individuals is through education, or the lack thereof. Without a focus on education that gears people to take advantage of this new economy, we risk this new industrial age being deeply polarizing across skill and income groups, driving new wedges of inequality and injustice in society. All countries – especially developing countries – need to build education systems that foster agility, versatility, and continuous learning.

  1. Globalizing and Polarizing

Another important realization is that, as Prof. Schwab eloquently put it, “we are living in a world that is globalizing as well as polarizing at the same time”. The proliferation of global connections and information, through technology and social media, at the swipe of a screen or the click of a mouse has meant that we are now more globalized than ever before. Facebook and Google allowed friends of Nepali earthquake victims from another continent to check on whether they were safe. A young inventor from anywhere in the world can now raise money for his invention via a crowd-funded platform online. A protestor in a small town can broadcast about police brutality to an audience of millions, instantly. A consumer in a remote town can buy a product from a mall a million miles away. Yet, amidst this globalization has been an alarming polarization of people, across lines of ethnicity, religion, wealth, political ideology and other divides. And increasingly these are becoming more violent than before, and they are having a knock-on effect on the global economy. Global institutions, global agreements, and traditional power structures seem to be struggling to keep up, to mediate and mitigate these.

Future Outlook

Many of the young people participating in the WEF meeting collectively realized that the world we are now living in is completely transforming itself and we are not fully ready. Political power lines are being redrawn. Old economic structures are being deconstructed and reshaped. Technology is both empowering as well as marginalizing. The importance of young people having a seat at decision-making tables is clear, yet the extent of influence is not. The outlook sounds rather challenging, but it should be seen as a call to action, especially for young people who will inherit this new economy. It is also a warning for countries like Sri Lanka to not lose slight of the changes going on rapidly around us, reshaping the world as we know it; even as the domestic agenda often takes up most of our attention.

This is the 22nd article in the ‘Smart Future’ column that advances ideas on competitiveness, innovation, and economic reforms.

Advertisements

Turbulence in Global Markets: Systemic Risks of a China Slowdown?

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.

Continue reading

Post-Election Agenda: Setting Up a National Innovation Council to Drive an Ambitious Programme

The Sri Lankan economy is in the midst of a unique, and tricky, transition. It’s easy for Sri Lanka to get stuck in what economists call “the middle income trap”. Already the country is finding it increasingly difficult to compete against cheap labour in low-income economies (like Bangladesh, Cambodia and Laos), on the one hand, and with the technology and innovation-driven economies (like Malaysia, Indonesia, and South Korea), on the other. Essential, then, to making a successful transition to upper-middle income levels and beyond, is fostering innovation in the country.

Ambitious Programme

Sri Lanka needs an ambitious and focussed national programme to boost innovation. Fostering a forward-looking innovation system, that supports knowledge-interaction among various parties, builds linkages between domestic and foreign firms as well as between universities and R&D institutions and the private sector, and commercialization of inventions, is critical, if Sri Lanka is to achieve faster growth. Also, of course, the daunting but essential element of raising the overall level of R&D in the country – currently at an abysmal low of 0.2%. The innovation agenda needs to be driven across the economic spectrum – not just in manufacturing and exports, but also in sectors like agriculture, healthcare, urban development. This is why the innovation agenda needs to be driven at a national, strategic level, taking an economy-wide and all-of-government approach.

Continue reading

Post-Election Agenda: A Sri Lankan Economy That is More Open to the World With More Companies Going Global

Over the past decade or more the Sri Lankan economy has become less and less open to the world than it has ever been. Exports to GDP has nearly halved; the share of trade in overall growth has fallen, our overall tariff protection rates are higher now than in the past; our export diversification and product complexity now is far behind countries that were at the same level as we were several decades ago; and our foreign policy has not focused enough on economic relations and trade agreements. Looking at Sri Lanka’s export product categories, not much has changed between 1990 and 2013, whereas in countries like Thailand there are dramatic shifts from basic exports to highly sophisticated exports.

Reforms to Open Up

We must change the orientation of the Sri Lankan economy, if the country is to succeed at achieving sustained high growth and boost prosperity for our people. When you measure along trade openness (exports + imports as % of GDP) and along public vs. private sector participation – the Sri Lankan economy in 2013/2014 looks more like 1970, according to analysis in a forthcoming World Bank publication.

But the positive news is that when Sri Lanka did undertake liberalization policies in the past, the economy saw positive results. In the years following waves of reforms – both in the early 1980s (after 1977) but most clearly in the late 1990s and early 2000s (after the 2nd wave of reforms in 1990) the economy was more export oriented and more private sector driven. In the last couple of decades, in the absence of critical next generation reforms, we have slid back.

Continue reading

Promoting Entrepreneurship in Sri Lanka: Balancing the Government’s Role and Introducing an Entrepreneurship Climate Index

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.

Renewed Focus

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.

Enhancing Knowledge Capacity for Sri Lanka’s Energy Sector: Takeaways from the Energy Symposium

This article originally appears in the ‘Smart Future’ column of the Daily Mirror Business on 1st July 2015. At the Energy Symposium, my speech during the Energy, Economics, and Policy session was drawn from a recent ‘Smart Future’ article on the global oil dynamics and implications for Sri Lanka – https://thecurionomist.wordpress.com/2015/06/03/the-evolving-dynamics-of-the-global-oil-market/

—–

It is now recognised that for developing countries like Sri Lanka, meeting the energy needs of an economy aspiring to achieve rapid growth, while ensuring environmental sustainability, is a key challenge. The Energy Symposium held last week, organized by the Ministry of Power and Energy on the theme ‘Energy Challenges in the Knowledge Economy’ was an important effort in putting the energy agenda front and centre. There was an impressive range of technical presentations made at the symposium, including how to reorient the transport sector to be more energy efficient, leveraging renewables like solar and wind, leveraging biofuels as a new alternative, keeping nuclear energy options open, and institutional reforms to meet evolving energy challenges. Amidst this, a crosscutting theme that resonated throughout, was about building up the knowledge capacity in the energy sector. This article highlights a selected set of key takeaways from the Symposium that relate to this.

Preparing for a Mannar Oil/Gas Era

Although progress in tapping the oil and gas reserves in the Mannar basin has been slow, with exploration running into various obstacles, a takeaway from one of the first sessions was that the state institution charged with leading this task – the Petroleum Resources Development Secretariat (PRDS) – has been doing a lot to build up capacity in, and enhance the country’s readiness for, this emerging industry. The PRDS has begun implementing a very progressive and holistic capacity building programme, including conducting research on what models have worked globally and what can be adapted for Sri Lanka’s own approach, and hiring young graduates and providing opportunities for on-the-job training (including sending them to Cairn India’s off-shore drill ship). Efforts to help local parties gain more and more from domestic oil and gas exploration activities have had early success. The PRDS reported that 23% of the 60 services contracts went to local parties, and 17 local businesses have benefited. But on the technical capacity, there are gaps in what the academia supplies and what the industry demands. This doesn’t seem to be a problem unique to Sri Lanka, however. For instance, a study by global energy giant NEXT (a Schlumberger company) revealed that around the world, only a handful (3-4) types of technical worker categories are produced by academic institutions, compared to over 25 categories that the industry demands. The PRDS needs to be supported to implement the policy reforms needed to expand the capacity in this sector.

Partnering with China for Renewables

Another takeaway was how China can possibly be a key partner in supporting Sri Lanka’s renewable energy thrust. Sri Lanka has an ambitious medium-term goal (under the CEB’s Generation Plan) of a 20% contribution from Non-Conventional Renewable Energy (NCRE) by 2020. If this is to be mainly met by solar and wind power, Sri Lanka must look at closer partnerships with countries that have the capacity to help us get to these targets. One good example is China. With a mix of policy pushes and practical considerations, China has developed a huge renewable energy capacity over the last decade. It is not unusual to see hundreds of kilometres of Chinese roads, highways, and local streets being lit up by solar-powered lights, and the emergence of a number of Chinese renewable energy companies with competencies rivaling those in the West. Specialised companies like the China Power Engineering Consulting Group have developed capabilities to undertake international contracts. Last year, China emerged number one globally in the installed capacity for wind power. There is a prima facie case to be made for Sri Lanka to cooperate with China closely to access the required technical capacity and technology transfer, as well as possible joint ventures and foreign direct investment, in order to meet our NCRE goals. The proposed China-Sri Lanka Free Trade Agreement could include a separate environmental goods section, and the FTA could be leveraged to build technical and technology partnerships beyond just the trade in goods.

Enhancing Technical Capacity and Research

A recurring theme throughout the Symposium – from the speech by the Hon Minister of Power and Energy to the comments by the technical experts – was the need for an aggressive push to enhance Sri Lanka’s local capacity in the energy sector. As the energy mix changes, new domestic energy sources are explored (like oil and gas resources in the Mannar basin), and more complex energy innovations occur globally with relevance for Sri Lanka, the country will need to move away from the over-reliance on foreign expertise and build up the engineering, technical, and planning talent in the energy sector. Encouragingly, the Symposium revealed that there is a lot of interest and latent knowledge among Sri Lankan academics on various aspects of energy. Yet, as acknowledged by many of us who spoke at the sessions, there is room to increase the volume and quality of energy-related research. For instance, a Sri Lankan university can explore setting up a specialised Centre for Energy Security, while another can introduce a postgraduate degree in Energy Economics. An existing engineering faculty can consider introducing a new Petroleum Engineering specialised degree to cater to an era where domestic resources like those in Mannar are tapped. Partnerships can be forged with specialised South Asian think tanks like the Centre for Science, Technology and Policy (C-STEP) in India that is conducting influential policy research on energy efficiency and smart grids. The Ministry of Power and Energy could play a lead role in helping universities and research institutions develop new research programmes to cater to the knowledge needs of the energy sector so that national policies as well as firm-level strategies regarding energy can be better informed by evidence and cutting edge ideas.

This is the 17th article in the ‘Smart Future’ column that advances ideas on competitiveness, innovation, and economic reforms. 

Enhancing Skills to Escape the ‘Squeeze’

This article originally appears in the Daily Mirror Business of 17th June 2015, under the weekly ‘Smart Future’ column.

As the Sri Lankan economy makes the tricky transition through middle-income, it will increasingly feel a lot like a ‘squeeze from two sides’. From one side, Sri Lanka is being squeezed on wage costs – we are no longer a cheap, poor-skilled labour destination and countries like Bangladesh, Vietnam, and Cambodia have the labour cost advantage over us. On the other side, Sri Lanka is squeezed from high-value producers – we do not have a highly skilled workforce producing exports at the upper ends of the value spectrum. For Sri Lankan businesses, this ‘squeeze’ will be the challenge that defines the next decade.

Skills Constraint

In nearly every conversation with business leaders, the lack of skilled workers for their business comes up as a complaint. According to Enterprise Surveys, a far higher proportion of Sri Lankan firms report the lack of an adequate labor force as ‘a major or severe constraint on their operations’ (16%), compared to several other South Asian countries (Pakistan 8.1%, Nepal 5.9%), and over one-fourth of manufacturing firms experience skills constraints. Roughly less than 5% of all 20-24 year olds in Sri Lanka are in university and less than 5% are in a technical and vocational education or training (TVET) programme. Meanwhile, a 2014 World Bank study warned that, “Current skills development programs are not yet well-integrated with national development priorities”.

Do Universities Hold the Answer?

Over recent years universities have been continuously blamed for not producing employable graduates – graduates with the skills demanded by businesses. One indication of this gap is the high number of unemployed young people among university graduates. This group then pressures the government to recruit them, and due to political compulsions, the government ends up absorbing them in to the workforce. It is widely acknowledged now that Sri Lankan universities need to reorient their curriculum and get better at preparing university students for the world of work. A promising example of where this is working well is the University of Moratuwa. Industry leaders are part of academic advisory councils; private sector firms help to shape and refine the curriculum; and joint research, internships, and competitions help students understand what firms are looking for. This brings the teaching much closer to what the world of work demands. There is also a case for introducing new courses in line with emerging needs – for instance, more postgraduate and professional programmes in tourism management, construction management, technology entrepreneurship, social business, etc. Yet, expecting universities to fix the whole problem is optimistic. While they do have a role in teaching in ways that build critical thinking and analytical skills – skills that are transferable in any job – they also exist to contribute to a better society more broadly. Universities don’t solely exist to batch-manufacture potential employees for firms, and all university graduates cannot be ‘engineered’ to be attractive to firms. Especially considering that state universities are able to grant entry to around 18% of qualified students each year, leaving over 100,000 behind, universities cannot be the panacea to the skills gap problem.

Expanding Support for Other Tertiary Education

State universities should not be the end all and be all of a young Sri Lankan’s education prospects. Non-state university and non-university education provision must be expanded. We often hear politicians touting a system that grants free education up to university. While this may be true for the primary and secondary level, at the tertiary level free education extends to less than 150,000 young people. We must expand this to cover more people, and taking advantage of private provision is a key element in it. Firstly, Sri Lanka must pass the required legislation to recognise and regulate private higher education providers. Secondly, the government can provide vouchers for students who did not get into state universities to go and obtain higher education or vocational training from an institution of their choosing. It can either be a state-run UNIVOTEC or TVET facility, or an approved private sector institution (with a maximum limit for tuition costs). This way, the state is genuinely expanding free tertiary education to more, rather than the current few. Government funding can be directed to state training institutions that seem to be attracting more students (due to quality, relevance, etc.) and may require greater investment to expand capacity.

Strategic PPPs to Build ‘Oases of Talent’

There will always be specific skills needs in specific industries, which may not be met by general training programmes offered by TVET institutions. Put differently, there may be a need to develop ‘oases of talent’ amidst an otherwise dessert of skilled labour. This is where strategic private-public partnerships can come in. For instance, if the government is focussing on aviation services, maritime, or logistics sectors as potential thrust areas but the skills shortage proves to be a substantial barrier, it can partner with the private sector to fix this. Instructive lessons can be drawn from Penang in Malaysia. The high-tech electronics firms that located in the Penang Export Hub, at the invitation and facilitation of the state government, soon realized that they would come up against a skills shortage, along with evolving technologies. The government knew that soon these firms would begin to look at relocating to other countries (or indeed other parts of Malaysia) where better skills would be available. To boost the skilled worker pool and to ensure that these firms can continue to be competitive, the Penang Development Corporation partnered with the firms to set up a special training facility under a PPP model – the Penang Skills Development Centre. This facility produced a steady stream of highly trained workers, required by the firms located in Penang. And since the firms were directly involved in shaping the training programme itself, there was no question of industry relevance not being met.

Conduct ‘Relevance Audits’

There are numerous state-run vocational training programmes for young people, administered by various government institutions. But according to the World Bank (2014) study, over 50% of employers reported that the quality and relevance of TVET curricula were not good. To ensure these are inline with economic needs and industry requirements, the government can conduct ‘Relevance Audits’. The audits, done with the involvement of industry/sector experts, can look in to the curriculum and pedagogy, to see if they are industry relevant. This extends the steps taken in university courses to improve relevance, for instance the World Bank’s ‘Improving Relevance and Quality of Undergraduate Education’ (IRQUE) project.

Lets Open Up to PISA

More broadly, it’s time that Sri Lanka exposed its general education system to a global audit, by way of participating in international performance benchmarks like the Programme for International Student Assessment (PISA). Conducted every three years by the OECD, the PISA tests assess the math, science, and reading ability of 15-year old students around the world. About 64% of employers have reported that the general education system is not meeting their skill needs. We are proud of our long tradition of island wide free education and relatively high educational outcomes, so a weak global performance on such assessments could be politically tricky to handle. But it may provide a crucial alarm call and spur much-needed action.

Challenge Ahead

As Sri Lanka navigates through a tricky middle-income transition, getting squeezed between cheap low cost producers on one side and high-value high-tech producers on the others, enhancing the skills in the economy becomes a formidable policy challenge. Without focussing on higher skills and higher productivity, this tightening squeeze is going to suffocate the economic potential of the country and suppress business competitiveness. By working together, the government and businesses can tackle this challenge. What other developing countries have done, and are doing, offer a useful template to start from.

This is the 16th article in the ‘Smart Future’ column that advances ideas on competitiveness, innovation, and economic reforms.

Expanding Business Development Services to Tackle Inherent Weaknesses of SMEs

This article originally appears in the Daily Mirror Business of 10th June 2015, under the ‘Smart Future’ weekly series.

In developing the Small and Medium Enterprise (SME) sector, we often assume that the quick and easy fix is concessionary loan schemes. But there is a key issue which goes beyond access to finance, but is also intrinsically linked to the access to finance problem, and that is the inherent weaknesses of SMEs. In identifying factors that constrain SME growth, the inherent weaknesses of SMEs – weaknesses in their management and operations – frequently arise. These weaknesses often make them SMEs “unattractive” or more risky in the eyes of banks – a key bottleneck in SMEs access to finance.

What are these weaknesses?

The inherent weaknesses point to issues of management, professionalism, and operational expertise. Banks, for instance, complain that the quality of business plans, project proposals, loan applications, etc submitted by SMEs are weak. The standard of accounting and financial management and reporting is weak. The ability of SMEs to understand market conditions, conduct market research to identify existing gaps, and identify expansion opportunities, is often weak. There are also weaknesses in SMEs’ management capacity and overall professionalism in the running of the enterprise. To expand markets and become more competitive, SMEs need to continuously upgrade, but their access to technology and ability to absorb technology transfer is weak. Addressing these constraints would not only improve SMEs’ access to finance – and the catalytic results that follow – but improve overall performance and business success. This is where Business Development Services Providers (BDSP) can come in.

What is BDSP?

The Committee of Donor Agencies for Small Enterprise Development – a global forum of multilateral and bilateral cooperation agencies chaired by the World Bank, defines BDSP as any type of non-financial service that is aimed at improving the performance of an enterprise, access to markets, and ability to compete. The majority of BDSPs in Sri Lanka are based in the capital Colombo and in some major cities. A limited number are available outside these areas, but are reliant on donor-funded projects. As a 2014 IPS study found, many SMEs were not able to find BDSPs in their local area, or were not aware of the various BDS schemes on offer.

More BDS Needed

There is a strong case to be made for the government to support more BDS provision. It is a far more cost effective SME development strategy than employing hundreds of government officials (for example, Development Officers) to conduct SME development programmes. It is also far more sustainable than relying on successive rounds of concessionary credit lines. But encouraging both a greater provision of BDS (increasing the number and quality of BDSPs) and encouraging their use by SMEs could have a more catalytic impact on SME development than individual and ad hoc schemes that target just one aspect of SME development (e.g. finance).

Innovative Solutions – BDS ‘Vouchers’

Given the limited number of BDSPs out there, a key step would be to boost the availability of BDSPs around the country. Of course, supply follows demand, and such providers will only emerge if there is a demand for BDS from SMEs. Here is where a small push from government can help. Instead of expanding BDS provision by existing SME development institutions of the government (like IDB and NEDA), the government could introduce a voucher system where SMEs can avail themselves of business development services from registered private providers, and the cost is subsidized by the government. The registered BDSPs would have to of course be vetted by institutions like IDB and NEDA, for quality, reliability, and relevance. The voucher system can ensure that SMEs have the freedom of choosing which BDSP they can use, and the initial subsidy (which is based on usage) can help offset part of the costs borne by the SME. This could encourage more SMEs to adopt such services, and once they see results, they would be more willing to pay for it entirely on their own. The BDS voucher system (which offsets/subsidizes part of the costs) could be valid for a limited time period (2-3 years), after which the SME would need to pay for it entirely. Expanding the demand for BDS provision in this way would also help trigger a growth in the availability of quality BDSPs.

Through BDS, and the improvement of professionalism and competitiveness, SMEs can improve their overall performance, and begin to rely less on concessionary treatment. Government institutions must begin to look at innovative methods of delivering these services that SMEs need; methods that are not expensive publicly funded schemes with lots of staff, but yet get the job done in terms of strengthening the SME sector.

 

This is the 15th article in the ‘Smart Future’ column that advances ideas on competitiveness, innovation, and economic reforms.