Imports Aren’t a Bad Thing

In Sri Lanka, imports often get a bad rep. Very often you hear people talking about how we must “cut down on our imports”, “imports are draining our foreign reserves”, “imports are hurting our balance of payments”. But these views are far too simplistic, and indeed misleading, as they fail to recognise the role that imports play in an economy. Worryingly, this fallacy is repeated by veteran economists as well; for example this article prescribing that to reduce the trade deficit we must “import less, export more”.

It’s a good time to highlight this, though. Next week (24th November) marks the 80th Anniversary of the Imports Section of the Ceylon Chamber of Commerce. To mark this, a colleague of mine in the Economic Intelligence Unit has written a commemorative article on ‘Why Imports Matter for a Trade-Oriented Economy’ – http://nation.lk/online/2015/11/06/why-do-imports-matter-for-a-trade-oriented-economy/. It’s well worth a read.

For Sri Lanka – small open economy dependent on international trade – imports matter as much as exports. In fact, the two are intrinsically linked. But how often I’ve heard top bureaucrats decrying imports. Dr. Razeen Sally captured it candidly at the Sri Lanka Economic Summit in August, when he called out the former Treasury Secretary for his view that Sri Lanka must double its exports while curbing imports at the same time:

“Exports and imports are Siamese twins. They are two sides of the same coin. Not only does it not work, but it’s stupid to say such things”

With the proliferation of global value chains, imports are now a vital element in international trade. Parts and components are imported and exported in countries at a dizzying pace, with the value chain spliced and diced into multiple layers across countries and continents. If East and South East Asian policymakers and economists took the view that imports must be curbed, they wouldn’t be the global value chain powerhouse that they are today. In fact, it would be impossible to imagine Asian value chains sans imports. As I highlighted in a previous blog,

…90% of GVCs are concentrated in just 10 Asian economies; 43% of global intermediate exports and 39% of global imports are from the region; and over 65% of GVC intermediate imports by countries in this region were sourced from each other. 

But admittedly, Sri Lanka does have a problem. Imports of consumer items, in volumes that the economy cannot bear, does affect the balance of payments when it comes alongside sharply declining and low export income. It’s not unusual then that from time to time a government may take some measures to ‘stabilise’ the situation (as seen recently with motor vehicle imports). Yet, this is not a sustainable strategy. The greater focus instead should be on opening up the economy overall, encouraging greater trade, and promote trade-oriented FDI so that the economy benefits from the trade-investment nexus. The focus should be on growing exports and earning more export income, so you have to worry less about the cost of imports in the balance of payments. But the notion that overall ‘curbing of imports’ is a desirable economic policy objective to be pursued is a fallacy. And it must not be propagated.

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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.

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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.

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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/

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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.

Strategies for Transformation: Four Takeaways from a Chat with the UNIDO Chief

This is the 12th article in the ‘Smart Future’ column, which originally appears in the Daily Mirror Business of Wednesday 13th May.


li_yong_mainIt is becoming increasingly clear that for a sustained high growth path, Sri Lanka needs to undergo further structural transformation of the economy – building more competitive industries, raising exports, generating productive and well paying jobs, and moving more people out of poverty, would be key elements in this. During a recent visit to Sri Lanka, the head of the United Nations Industrial Development Organisation (UNIDO) Dr. Li Yong shared some very interesting insights on strategies to boost industrialization as a crucial element in the structural transformation of an economy. Li is no stranger to formulating and implementing development strategies. Prior to joining UNIDO as its Director General, Li was the Vice-Minister of Finance in China and member of the Monetary Policy Committee of the Central Bank for a decade. He led the way in setting and harmonizing fiscal, monetary and industrial policies, during a time when the Chinese economy was undergoing a decisive structural transformation. Li shared these thoughts as we travelled together to visit the impressive nanotech facility in Homagama – SLINTEC. Here are four main takeaways from my conversation with him.

  1. Pragmatism Over Dogma

The first idea he shared was his advice to modern policymakers – to choose pragmatism over dogma. In devising industrial policies, there is often a lot of debate on what the right policy mix should be, which ideology it should follow, etc. We spoke about how ideological shifts of rulers have influenced policy shifts. Given all this, I asked him, “How did China industrialize? How did China figure out what ideology to go with?”. He responded by quoting Deng Xiaoping’s famous adage – “it doesn’t matter whether a cat is black or white, if it catches mice it is a good cat”. Li argued that for too long Western academics has been preoccupied with trying to classify development paradigms into discrete categories. Given the complexity of the world today, the impatience of societies to prosper, and the pragmatism required of politicians, clinging on to particular ideologies as dogma will not help. Instead, he argued, whatever policies can get the job done is where the focus should be. And if this is a mix of multiple ideologies, it shouldn’t matter.

  1. Industrialization Needs a Holistic Approach

The second idea he shared was that a country couldn’t sustainably develop industries without thinking about urbanization, water, sewerage, transport etc., at the same time. He cited plenty of examples in China where ambitious industrialization efforts had been constrained because expansion plans of critical city and related infrastructure hadn’t kept pace. Having good land use policies to ensure industries have space but do not harm quality of life and the environment; clever transport strategies that ensure that workers can get to industries; water, sanitation, and sewerage systems that keep pace with requirements of industry; and overall urban planning that takes into account how industries will grow and how society will interact with cities that industrialize (from rural to urban), must go hand in hand with industrialization efforts, he emphasized.

  1. Letting the Small Fish Go

The third idea he shared was on promoting small business and making it easier for business to operate. He likened this to fishing. “Its like how you don’t catch the small fish, you let them grow up. It’s the same for small business. Tax and regulatory issues must be relaxed for them”. I found this unusual coming from a former Chinese official – given China’s notoriously overbearing state. Yet, the state is increasingly easing its grip. During a visit to China last year I saw first hand how over 600 items of regulations being either removed or delegated to lower levels of authority to be closer and more responsive to local business needs. This is also very relevant in the Sri Lankan context. The focus on small business development in Sri Lanka for many years has been rounds and rounds of concessionary credit lines. But little attention has been paid to making government regulatory systems work better for SMEs. Small businesses often complain of unfriendly government services, burdensome and costly tax compliance, and lengthy licensing and permit regimes. Unlike larger businesses that have dedicated teams to navigate the complex web of state regulations and compliance needs, small businesses don’t. As Li said, we need to reorient regulatory systems to be more supportive of small business – whether it is in tax, licenses, EPF/ETF, etc.

  1. Firms Must Go Global

The fourth idea Li shared was that the only way to enhance the competitiveness of firms in an economy is by encouraging them to go global. In any economy, it’s often easy for firms to be comfortable with a domestic market if they are not exposed to global competition. As I remarked in my column a couple of weeks ago, protectionism and special preferential treatment of domestic firms could hurt their competitiveness. That competition sharpens firms and breeds success is a powerful axiom in economics. In fact, Li suggested going a step further – providing the right incentives for local firms to go and operate globally. Li remarked, “Once you get companies to go global they learn. They open up and reform. It’s like going from high school to a PhD. They grow up. Without this they won’t know how to compete globally”. There are several Sri Lankan firms that have already ‘gone global’ – MAS, Dilmah, etc. What can we learn from these companies? What did these companies learn by going global and how did it sharpen their competitiveness? Do governments have a role in helping more companies go global?

This is the 12th article in the ‘Smart Future’ column that advances ideas on competitiveness, innovation, and economic reforms.