Recently I was invited by the Asia-Pacific Alliance for Disaster Management (APAD) to deliver remarks at their annual regional forum, held in Colombo. I focussed on the economic imperatives of disaster resilience in cities, and possible initiatives and systems that can be fostered to strengthen urban resilience through innovation and a private sector approach.
Keynote Address at the Advocata Institute and Fraser Institute ‘Economic Freedom Summit 2017’, 12th October 2017.
In my remarks today I will highlight some aspects of economic freedom – from my own perspective – that might find some resonance with you and try and provide some food for thought to take forward the discussion on economic freedom in Sri Lanka.
It is by no means an exhaustive investigation of economic freedom in Sri Lanka – and I’m sure you’ll find many things you felt I didn’t touch on and felt I should have. Rather, I’ll aim to give you perspectives to ponder on.
My keynote will be in three main Parts. Part 1 is one some thoughts on policy orientations and the role of the state. In Part 2, I flag a couple of examples of contradictions in our economic debate, where I think the lens of economic freedom needs to come in very strongly. And Part 3 is about creating a popular narrative around economic freedom.
This week Sri Lanka and India held their latest round of negotiations on the India-Sri Lanka Economic and Technology Cooperation Agreement (or ‘ETCA’). I thought it’s a good a time as any to recollect some ideas I shared at the Daily FT Forum last month on ‘Growing with Giants’ (referring to India and China) during the session on enhancing trade linkages with India.
We Know the Potential, We Know the Pitfalls
So, here’s what we already know.
We know that India is seeing strong economic growth and has a large consumer base, and boasts a growing consumer base. Indian consumer spending is on the rise, with big opportunities for sellers in and into that market. The Indian middle class is set to be 250 million by the end of the decade; that is over ten times Sri Lanka’s entire domestic market.
We know that trade between India and Sri Lanka has grown over the past decade and a half (albeit slower than one would expect for two bilateral FTA partners – but more on that later). According to an excellent presentation by Dr. Kelegama, which he shared with me days before his untimely demise (can be accessed here), Sri Lanka’s exports to India have grown from 505 product lines in 1999 to 2100 product lines in 2012. We also know that 70% of the exports by Sri Lanka to India are under the FTA (i.e., benefit from the FTA preferences). While imports have also grown over the past decade and a half, most of these imports are outside of the FTA – only less than 10% of Indian imports come under the FTA (see the table below, extracted from Dr. Kelegama’s presentation).
We also know that the FTA has not always worked smoothly for both sides. From the Sri Lankan perspective, there are a lot of issues that businesses face in doing business with India. This is especially true of non-tariff barriers, customs and other border facilitation issues, and state-level hindrances (including a multiplicity of taxes, which have now been flattened after the introduction of nationwide GST in July).
So, we know all this. We know what the opportunity or potential is, and we know what hasn’t worked for us and why. What we now need to move towards is practical measures to boost Sri Lanka’s entry in to India and make most of the opportunities, and breakthrough the challenges, alluded to earlier.
At the recent Colombo International Tea Convention marking 150 years of Ceylon Tea, I was asked to speak on a panel on ‘Trade and Finance’. Amidst all the discussions around ethical tea, branding, and supply chain, I was keen to add a new perspective. I was also very conscious that I was one of only a handful of non-tea industry experts speaking at this event. Yet, with that disclaimer, and asserting that I would draw from around the tea industry to provide some implications and ideas for the tea industry, I made three points – one on finance, and two on trade. I’ve captured them here – expanded and extended from the original remarks.
1. Ceylon Tea – First to Launch a Blockchain Transaction in Tea?
After 150 years, the tea trade today is ideally placed to leverage on the blockchain revolution taking place today. Blockchain is a virtual transactions process that has huge potential for trade finance, and is already being piloted. It works on a distributed ledger technology system, where end to end transactions are done seamlessly and with greater transparency and predictability. We are seeing this with several commodities already and many pilots blockchain transactions have been done recently. Last year, Barclays Bank was the first to do a blockchain letter of credit (trade) transaction between Ornua (formerly the Irish Dairy Board) and Seychelles Trading Company. The Commonwealth Bank of Australia and Wells Fargo did one for the cotton industry, HSBC worked with Bank of America Merril on replicating a letter of credit on a distributed ledger, and it has been used in the grain and fisheries industries.
It’s definitely something for our banks and our big tea trading houses and commodity brokers to look at. Having marked 150 years of this traditional industry, Sri Lanka should now be at the cutting edge of it – we must be the first country in the world to do a blockchain transaction for tea. This will also add to our repositioning globally as a modern beverage brand. While local banks may take time to get onboard, international banks like HSBC and SCB operating in Sri Lanka should lead the way in making this happen.
Things are certainly moving fast in the world of blockchain pilots. This week the largest blockchain consortium, R3, announced that thirteen global banks have built a prototype trade finance application on R3’s Corda platform. According to Global Trade Review, the app, hosted on distributed ledger technology (DLT) will streamline the processing of sight letters of credit and is one of a number of trade finance apps R3 will be piloting on the platform this year. Eleven of the banks involved are Bangkok Bank, BBVA, BNP Paribas, HSBC, ING, Intesa Sanpaolo, Mizuho, RBS, Scotiabank, SEB and US Bank.
– from GTReview, ‘R3 Corda reaches trade finance milestone’ https://www.gtreview.com/news/fintech/r3-corda-reaches-trade-finance-milestone/
I was shared this excellent white paper on how blockchains can help enhance transparency in product supply chains, by R3’s Niki Ariyasinghe. With Sri Lanka wanting to strengthen the Ceylon Tea value proposition of being an ethical, clean tea with high quality, discoverability and transparency in the supply chain becomes ever more important. Blockchain can help with that, as shown in this paper.
AmEx has this useful primer on the application of blockchain specifically in the trade finance space.
2. Ceylon Tea – Not Just a Beverage, But a Lifestyle
We often think that tea is competing in the hot beverage market, or more accurately, in the highly competitive beverage market. I think we need to change that. Tea should be playing in the lifestyle market. During the whole Tea Convention we heard many speakers extoll the virtues of Ceylon Tea – in terms of health, wellness, cleanliness and purity. It is then a logical extension of that that our tea should play in the lifestyle market – ‘its not just a beverage, its a lifestyle’. This proposition can also be aligned to Sri Lanka’s new push on wellness tourism as a new export sector (under the new National Export Strategy).
Increasingly the healthy lifestyle segment is a growing consumer segment around the world – especially among young people. More and more people care about what they eat and drink (organic, all natural, pure, clean, poison-free, environmentally conscious, etc.), and what beverages complement those smart choices. They should be seeing tea as an integral part of that lifestyle, and be choosing tea as a lifestyle choice rather than a beverage choice.
This also then means policy makers and trade promotion agencies need to reorient how they see the tea trade, or the trade aspect of tea. While it used to be that in Sri Lanka the tea export sector was looked at by the Tea Board or the Export Development Board, under this new positioning, tea needs to be promoted much more holistically.
In the opening session of the Convention, Tea Board Chairman Dr. Rohan Pethiyagoda mentioned that there is little empirical research on the medicinal benefits of tea. This was reiterated by the head of Twinings who spoke later and noted that, “There is no body of excellence for research on tea’s health benefits’. If we are to play in the wellness and lifestyle space we need to change that. Part of Sri Lanka’s tea promotional budget (that’s unfortunately already stuck in Government) should be unlocked to not only spend on ‘version 1.0’-type promotions like tea trade fairs, but to spend on commissioning medical papers from influential academics in prominent international universities or health research institutes.
3. ‘Your Ceylon Tea’ – Artisan, Curated, Delivered
Looking at the twin themes of the Tea Convention, I noted that one of them was ‘Spontaneitea‘.
A friend of mine is a banker in London, and whenever he wants to give a unique gift to a client, he orders a special bottle of wine from his favorite wine growing region of France. On demand, through e-commerce. We should be doing that in Ceylon Tea. When a consumer in London would order a speciality tea packed exclusively for him, personalized with his name, from his favorite of the seven tea-growing regions or from a single estate, with a note from the head tea maker at the factory, and delivered to his desk in 72 hours.
A millennial consumer – who increasingly wants to make unique and authentic choices – sees a video about a particular elevation of Ceylon Tea – say, Dimbulla – being used by a chef on a cooking show, and decides right away that she wants to order that speciality tea right from Sri Lanka and in time for the weekend when she has time to cook. E-commerce and logistics enables her to do that, and our tea brands must cater to it.
This also strengthens the link between tea and and tourism. If a honeymoon couple on holiday in Sri Lanka visited a Uva-region estate and factory during their trip, fell in love with that experience and the tea they tasted there, and wanted to order that particular tea spontaneously in the future, e-commerce and customization can enable that.
I remember Mr. Anil Cooke of Asia Siyaka Commodity Brokers telling me a few months ago that there had been frost on the high-grown estates a few days prior to that, and how this event would completely change the flavor profile of the tea made from that day’s picking. Imagine being able to get a customised order of getting that out to discerning consumers who have subscribed online to speciality tea packs. A limited special edition with that unique flavor profile, a collector’s pack of teas made on that frosty day in Talawakelle, at a premium price of US$ 500 for a 500g pack (instead of just US$ 5 for a 1 kilo of bulk tea).
Take a look at an equivalent model for coffee – with so many subscription models for coffee around the world, bringing personalized and curated coffee packs to discerning consumers.
The Roasters Pack in Canada allows you to subscribe from hundreds of coffees, delivered to your doorstep every month. Similarly Craft Coffee promises “fresh-roasted coffee, delivered when you need it” (subscription) and “tailored to your taste” (curation). Another site, MistoBox, promises that, “Your coffee curator reviews your preferences and selects a coffee for you from 300+ coffees” and “Your coffee is fresh-roasted to order by one of our 40+ amazing artisan coffee roasters”. There’s dozens more examples.
Of course, there are a few of these in tea as well, like Bruu Gourmet Tea Club, Teavana, and TeaBox. But I strongly believe that Ceylon Tea can have its own dedicated tea subscription service to take curated teas global, and direct from our estates and factories straight to the consumer – true to the spirit of Ceylon Tea of authenticity and purity.
An important caveat in all this of course is that Sri Lanka would need to rethink the tea auction system, because right now majority of tea that is traded is mandatorily sold via the auction only. Only very small quantities are permitted outside of it (around 10%). Yet, while our tea export that has gone from bulk tea to tea bags and other value added products, Ceylon Tea now needs to leverage much more strongly on the growing e-commerce market, and there are huge opportunities for capturing much more retail value right here in Sri Lanka through this.
For a wonderful website on the ‘History of Ceylon Tea’ recently launched by Dilmah, visit http://www.historyofceylontea.com
For an analysis of recent rends in tea export and drivers and challenges in the year ahead, read this article by my colleague – ‘Brewing Resilience Amidst Challenges’ https://www.chamber.lk/wp-content/uploads/2017/06/TIPS-Vol-21-22-June-2017.pdf
On the sidelines of the recent Sri Lanka Economic Summit organized by the Ceylon Chamber of Commerce, I interviewed Dr. Harsha Vardhana Singh on an emerging area in international trade – private standards. Are they the new competitive edge? Are they a subtle Non-Tariff Barrier (NTB?) What role does the government have in helping firms with standards? This is an important, yet under explored area in international trade discourse in Sri Lanka today. Much of the discussion is limited to SPS/TBT issues (Sanitary and Phytosanitary/Technical Barriers to Trade), while private standards are whats emerging.
Listen to the podcast below to find out more.
Dr. Harsha Vardhana Singh has worked for over three decades on international trade policy, development, infrastructure regulation and global governance. He is Executive Director, Brookings India, and Senior Fellow of the Council on Emerging Market Enterprises (Fletcher School). Dr. Singh was Deputy Director-General at World Trade Organization for eight years till 2013. His direct areas of responsibility included trade in agriculture, services, trade and environment, technical barriers to trade, sanitary and phytosanitary measures, and electronic commerce.
More than at any time in recent history, the health and performance of the Chinese economy is front-and-centre on the minds of investors, economists, businesses, banks and world leaders. In just thirty years, China has become systemically important to the global economy, probably more so than the US has been. It’s linkages to Asian supply chains, its demand for global commodities, its increasingly globalized consumers and financial markets, are just some of the many reasons why China matters more to the world than every before. Which is why everyone is concerned about how China’s ‘great re-balancing’ pans out.
China’s Growth Rebalancing
China’s growth record has been nothing short of exemplary, albeit with a highly centralized and overbearing state. It demonstrated the fastest and most sustained economic growth performance in human history. Driven by globalization (manufacturing) and infrastructure investment, China’s economy soared. Over last 20 years, it plowed 8.5 percent of GDP each year into infrastructure – twice the level of India and more than four times of Latin America. In the past 15 years, China built 90 million new homes – enough to house the entire populations of UK, France and Germany combined. But now, this growth is slowing down. But what is driving it?
It is now widely acknowledged that the slowdown is part of an inevitable rebalancing of the Chinese economy. Rebalancing on two fronts – rebalancing of growth drivers from investment to consumption and rebalancing of growth poles from the coastal regions (mainly in the South-East like Shenzhen and Zhengzhou) to inland areas. The former is probably the most critical. Growth in China over the last decades has been driven by an aggressive investment drive – investment in factories and investment in infrastructure to support those factories. The rebalancing that needs to take place is away from an investment-led growth, to a more domestic consumption-led one. Economist and Nobel Laureate Paul Krugman suggests that the Chinese model is about to “hit it’s Great Wall” because of this rebalancing.
To understand the Chinese model, we must go back to revered economist Arthur Lewis. He suggested that countries in the early stages of development typically have a small modern sector alongside a large traditional sector containing huge amounts of surplus labour. This has two effects. The first is that the country can keep plowing in capital in to new factories, construction, and so on, without running into diminishing returns on that capital. It can also keep drawing on surplus labour from the countryside to keep fuelling growth. The second is that as there is ample rural to urban migration of workers, competition among labour is high, and so wages are low. But now, China has hit its ‘Lewis Point’, where that seemingly unlimited flow of labour at cheap wages is rapidly waning.
Krugman, explaining his viewing on ‘hitting the great wall’, has observed that, “all successful economies devote part of their current income to investment rather than consumption, so as to expand their future ability to consume. China, however, seems to invest only to expand its future ability to invest even more […] Investment is now running into sharply diminishing returns and is going to drop drastically no matter what the government does”. Household consumption accounts for less than 40 percent of China’s GDP. Put differently, the Chinese consumer has not begun picking up the economy’s slack caused by the country’s investment-led model reaching its limits. Chinese household consumption as a proportion of GDP is barely half that of USA which is at around 70 percent, and significantly less than other large economies like France, Brazil, Germany and India, which are hitting around 60 percent in recent years.
According to a new report on the US retail sector, brick and mortar stores are haemorrhaging money as e-commerce dominates the retail scene more than anticipated by big retailers like Macys and Sears. Apparently, “the US retail industry is on pace to close more stores this year than the 6,200 shuttered during the Great Recession in 2008“. This is yet another symptom of the tectonic shifts taking place in nearly every industry on account of technology. It’s no surprise that e-commerce, probably one of the most basic manifestations of the shifts driven by technology, is causing upheaval in basic sectors like consumer retail.
Despite the flux in the sector, I feel that rather than an outright end of brick and mortar retail, what would happen is a proliferation of different models of brick and mortar retail and diverse in-store experiences that complements, not competes with, e-commerce. Immersive tech-driven stores, stores that help personalise the shopping experience, in-store virtual fitting rooms together with a shopping advisor that is then connected to an e-commerce shopping basket, etc….
The full article is at Quartz here – “US retailers are on pace to close more stores in 2017 than in the 2008 Great Recession”
Meanwhile, large format retailers like Walmart are also feeling the pinch, not only due to low cost competitors like the hugely successful German chains Aldi and Lidl that have made inroads in the US, but also due to online retailers like Amazon. Operating profits for US supermarkets have declined by about 5% last year, according to Moody’s Investor Service. Walmart’s strategy to compete has been based on aggressive cost and price cutting. Wolfe Research recently found prices for a basket of grocery items at Philadelphia area Walmart stores were 5.8% lower than a year ago, while those in Atlanta and Southern California were 4.9% and 2.7% lower respectively.
This is part of a larger trend; groceries in the US fell by 1.3% annually last year – apparently the steepest decline since 1959. This is of course good news for US consumers, as consumer surplus widens and Americans can enjoy a higher standard of living for a lower cost. But it puts huge pressure on brick and mortar supermarket firms, and by extension their employees, who are likely to get squeezed on the wages side. With President Trump likely to toughen his stance on Chinese imports – which have been a primary contributor to low costs at supermarkets for American consumers – it will no doubt be a few years of flux for any firm engaged in retail – both from a technology perspective as well as from a trade policy perspective.
There’s a lot of discussion right now in the econ policy circles about how to strengthen the innovation eco-system in Sri Lanka to boost export competitiveness. In this, a particular focus is on better research-industry, or science-industry, linkages with the right mix of incentives. A new World Bank paper that studied the effect of government subsidies on spurring science-industry collaboration found that government support did help and that it did spur new discovery and did not “just pay firms and researchers to do what they would have done anyway”, an important principle called additionality.
As a blog article on the paper notes,
Efforts to foster collaboration between science and industry have long been a part of innovation policy in many countries. Firms stand to benefit from accessing the specialized infrastructure and expertise available in universities. Researchers gain access to practical problems that can provide greater relevance for their research, and to industrial capabilities for manufacture and assistance in commercializing their ideas to take them to market. Yet, there are barriers that inhibit collaboration, including financing constraints, information asymmetries, and transaction costs in negotiating collaboration agreements. Government subsidies may foster increased interaction between firms and scientific units.
A new World Bank project, funded by the Australian government, aims to strengthen the innovation eco-system to improve trade and competitiveness of the country’s private sector. More info about it here.
I have studied the university-industry interaction system of University of Moratuwa and found some remarkable best practices that can, and should, be replicated across the public university system in Sri Lanka. In a previous post on this blog, I highlighted three ways in which we can do this.