The whole country is agog with the passing of a resolution against alleged human rights violations in Sri Lanka (SL) in March this year. Some say the LLRC report should be implemented not only to avoid such a second resolution containing sanctions but also to resolve the ethnic problem and improve governance. In other words the implication is that this is one of the highest priority challenges facing the country. Actually it is not, although the solution may include implementing the LLRC recommendations. Why should one come to this conclusion?
Poverty and Malnutrition
It is about three years since the LTTE was vanquished and peace restored after a 30-year war. The country should have by now started the economic development war. The question that should be asked is whether we have done so. The most important problem to be tackled in economic development is poverty alleviation. There are claims that the level of poverty has declined to 9% on the basis of the Official Poverty Line which was Rs 3028 per person per month (2009/2010).
The rationale behind this line of poverty is that it enables a person to obtain 2030 kilo calories which is considered to be the level of nutrition that a person needs from food. While it is questionable that this level of nutrition can be obtained with this income, another question that arises is what about expenditure on clothing, shelter, medical needs, education of children, transport etc. during the month.
The US$ 2 a day per person per day poverty line gives an indication of the minimum income per month needed by a family of four to meet all these needs; currently it is about Rs 30,000 a month (1US $= Rs 125). On this basis about 42% of the population of more than 20 million is considered poor. The 30% level of malnutrition reported among children of less than five years of age and expectant mothers may not be surprising given the US$ 2 per person per month cut off line.
Thirty percent is the average level of malnutrition; how much could it be in the poorest districts of Nuwara Eliya, Moneragala, Rathnapura and Badulla? In the war-ravaged areas of the North and the East it is higher- for example in Batticaloa it is reported to be 53% and in Vavuniya it is 51%; this is an indication of the level of rural poverty, which can be attributed mainly to the prevalence of subsistence agriculture in ‘stamp’ sized allotments of land, the farmers of which are unable to invest to increase their incomes (unless ownership is given and the size of holding is increased). If the poverty and malnutrition levels are so high in the country, what effect would they have on the future level of health and productivity of the nation for instance? Malnutrition or anemia is known to affect the physical and mental growth of the persons concerned in general and in particular lead to stunting and vulnerability to diseases. No doubt the level of poverty in SL is one of the gravest problems facing the country and the authorities.
Investment the way out
I believe the major solution to this problem is one of increasing the level of investment (particularly in the poorer areas of the country) from the present level of 28% of GDP to about 35% or more of GDP to create employment opportunities. A part of this level may have to come from foreign direct investments (FDI) as local investors find it difficult to secure the necessary capital, technologies, management skills and global market access to expand earnings from exports (foreign demand), which undoubtedly is the way out to speed up the rate of income growth.
A small country like SL should have a positive investment climate unlike in the case of countries like China and India where the main FDI attracting force is a large market (though with political, social and economic stability). Have we had a positive investment climate at least after the defeat of the LTTE ignoring the 30-year war period? SL had attracted US$ 581(net) and 516 million in 2009 and 2010 respectively (official figures). Whereas similar small countries like Singapore had an inflow of FDI of US$16.8 and 37.4 billion, Hong Kong US$ 48.4 and 62.6 billion, Thailand US$ 5.9 and 6.8 billion and Malaysia US 1.4 and 7.0 billion in 2009 and 2010 respectively; these countries have attracted FDI to the tune of billions of dollars and not a trickle of millions as in the case of SL. What this proves is that in these countries the investment climate has been far better or positive and has been a veritable magnet for investments unlike in Sri Lanka.
Our level of international competitiveness is low. According to the Global Competitiveness Index (GCI) 2011 and 2012, SL’s competitiveness ranking, out of 142 countries, in respect of public institutions is 50, (from 73 in 2010/11), infrastructure is 60 (64 in 2010/11), macro economic stability is 116 (128 in 2010/11), higher education is 66 (64 in 2010/11), labour market efficiency is 117, goods market efficiency is 41 (45 in 2010/11), technological readiness is 85 (85 in 2010/11) and innovation is 42 (44 in 2010/11). The figures within brackets indicate that SL has made progress in certain areas and in a few areas like higher education our competitiveness has deteriorated. In the case of Singapore it must be stated that the country’s ranking is within the first 10 in respect of all these competitiveness measures.
The trouble with our public institutions including the judiciary and the police is that they are not politically neutral, are inefficient and mostly corrupt due to politicization of recruitments and promotions particularly in the absence of the independent commissions under the 17th Amendment to the Constitution; a serious question that can be raised is how can good governance with democratic rights as well as the rule of law (with security of persons and property sought after by investors) apply to all irrespective of race or religion if there are no such checks and balances on centralized power? It is mainly the existence of these qualities with macro economic (fiscal and monetary) stability and quality physical infrastructure along with high educational attainments that attract investments especially to a small country. Mere extension of incentives such as tax holidays to compensate the absence of these will attract only ‘footloose’ FDI who will decamp after utilizing the incentives.
Infrastructure and Education
Among infrastructure facilities, power supplies are not only expensive (US Cents 7.00-7.50 per unit vs. 1.52-3.90 in Indonesia) but also the quality thereof even in Colombo is poor that most firms use oil-fired generators for emergencies. The authorities have certainly taken pains to improve roads, but still the connectivity or the time taken to transit between Colombo and the towns in the rural periphery has not been shortened significantly, except in the case of the Southern Expressway, to improve productivity and entice investors to these undeveloped areas. The system of tertiary education does not produce the technical and management skills required by investors to compete with the rest of the world; according to latest GCI data it has in fact worsened in 2011/12 in ranking.
Macro-economic (fiscal and monetary) stability has been poor and therefore the costs incurred by firms have been high, although the authorities to their credit have tried to bring it under control particularly with the recent introduction of some increases in taxes and a flexible exchange rate to reduce (inflationary) budget deficits and to improve the balance of payments.
Labour market efficiency
Our labour laws have been most complex and have not been liberalized in line with competition in the rest of the world so much so that firms have been compelled to engage special staff to negotiate through the maze.
Ease of doing business
According to the World Bank ‘s Ease of Doing Business Index 2012 SL is ranked 89 out of 183 countries (98 in 2011); in respect of other parameters the ranking has stagnated or got worse.
Investors and the public have also to contend with widespread corruption, SL’s score which according to the Transparency International’s Corruption Perception Index 2010 was 3.2 , (0.0 being most corrupt).
These being some of the internal weaknesses, what are the external threats? Prospective investors have been given wrong signals as they may have to examine the possibility of nationalization of assets with a new law to expropriate under-performing and unutilized assets of a number of firms last year. SL has in addition not been consistent or predictable with its policies having done away with tax holidays in one government budget and reintroducing them in a later budget and in implementation. Our relations with the rest of the world especially with the developed West which form the major markets for our exports and from which most of the FDI flows have been deteriorating, reaching a low point with the Geneva resolution on alleged violations of human rights.
Wonder of Asia
My contention is that if we had kept our priorities like poverty alleviation in mind we could have done better, in fact if we had differentiated ourselves against countries competing for FDI and produced a world class or even superior investment climate, (the most notable qualities of which have been stated above under public institutions), without getting distracted by issues like national sovereignty which is of dubious importance in the context of global competition for trade and investment, we could have avoided the devastating Geneva Resolution for the simple reason that there would not have been anything seriously wrong with our governance set up to find fault with. One would think that this is exactly what ‘Wonder/ Miracle of Asia’ means. For this purpose we have no doubt to overcome the above mentioned weaknesses and threats and build on strengths and opportunities like the superior location of the island in the Indian Ocean close to the booming markets of India, Indonesia and China, while maintaining contact with the rich markets of the West until they recover from the recession.
Back to Basics
We can start the process of building a differentiated and dynamic investment climate right now by concentrating on the most serious of our priorities, namely overcoming poverty and malnutrition. The authorities have shown that if they make up their minds, they can attempt any task successfully; the only stipulation is we stick to the most basic of priorities, which if realized will give an additional bonus to the authorities- continue to make them popular because the implementation of this process will benefit a majority of people.
(The writer is an economist)