The purpose of this article is to clarify the relationship between export growth and productivity (the main theme at the recent 2012 Annual Sessions of the Sri Lanka Economic Association) in view of the urgent need to expand exports significantly to reduce the massive trade deficit of about US$10 billion facing Sri Lanka (SL). Since [...]

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Export growth as Sri Lanka’s development strategy- Productivity as a key determinant

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The purpose of this article is to clarify the relationship between export growth and productivity (the main theme at the recent 2012 Annual Sessions of the Sri Lanka Economic Association) in view of the urgent need to expand exports significantly to reduce the massive trade deficit of about US$10 billion facing Sri Lanka (SL). Since SL has a very small domestic market there is no alternative way of driving economic growth than making use of foreign

demand or exporting to the rest of the world. Entry to global markets could enable realization of economies of scale for improvement of productivity and national competitiveness. According to the Global Competitiveness Index

(GCI) 2012/13 of the World Economic Forum, SL’s rank in respect of competitiveness is 68 (previous year 52), vs Malaysia’s 25, and Singapore’s 2 out of 144 countries. SL will have to achieve at least Malaysia’s level of competitiveness to be able to bridge the trade deficit.

What is this all important national competitiveness? It can be described as the advantage of a country by way of (a) lower unit costs of goods and services exported or (b) their differentiation the innovative ability, which depends on the level of technology, to provide unique and superior value to customers while avoiding imitation by competitors respectively to earn premium prices, or (c) both-lower costs and differentiation. SL’s ranking with regard to innovation in the GCI 12/13 is 58 (previous yr 42) vs. Singapore’s 8). SL may not be able to avail itself of the first advantage of lower unit costs as it can easily be copied. Therefore it has to strive to realize the advantages in (b) or (c) i.e. emphasizing on differentiation.

The path to achieving superior national competitiveness against competitor countries as stated earlier lies in improving productivity which involves increasing outputs/earnings with lower and lower inputs/costs so that unit costs can come down while outputs/revenue per unit increase especially with differentiation to satisfy needs of customers. SL’s labour productivity happens to be very much lower than competitor countries; in fact it was $6.7 per hour (in agriculture 1/3 of this), while Malaysia’s was $15 and Singapore’s was $40.2 (APO Productivity Data Base 2012). Responsibility for raising productivity The private sector has a direct role in raising productivity, while the state has an indirect (but vital) role via policy formulation and a direct role in cases the private sector is reluctant to invest as in construction/maintenance of infrastructure facilities like roads and ports.

Dynamic enabling environment

The main task of the state is to create an enabling environment in which firms could take risks to make investments and upgrade productivity through innovations to make higher earnings. Firstly, it involves the building of a national consensus for achieving economic success. This preparedness among the people has no doubt to be achieved by, improving governance mainly by setting up public institutions including a judiciary that are politically neutral; the objective of this measure being to create a law and order situation where the security of persons and property (of investors) is in no doubt and where public officials are recruited and promoted solely on the basis of merit to improve their efficiency.

This also involves the removal of other distractions to the economic effort such as the ethnic conflict. The following are some indices that indicate how the rest of the world views governance in SL:

i. In the Democracy Index 2011, prepared by the Economic Intelligence Unit, SL is categorized as a ‘flawed democracy’ with 6.58 points out of 10, with Japan,(8.08 pts), South Korea, (8.06 pts) and Mauritius (8.04 pts) which are categorized as ‘full democracies’ in Asia, after examining civil rights, elections, governance, corruption, media, rule of law, & participation.
ii. The GCI 12/13 rank of SL for judicial independence is 56 vs. 20 for
Singapore.
iii. In the same index the rank for SL regarding public trust in politicians is 112 vs. 17 for Malaysia.
iv. In the Sri Lanka Economic Association (SLEA) report on corruption 2007- “The Impact of Corruption on Poverty and Growth”- the magnitude of corruption was 9 per cent of (2006) GDP. According to former President Chandrika Kumaranatunge and a few others, and Minister Vasudeva Nanayakkara 40-45 per cent of government expenditure has been siphoned away all along in the form of corruption; 45 per cent of expenditure in 2006 is 11.43 per cent of the GDP of 2006 (Rs 2802 billion). The magnitude of corruption in the SLEA report is therefore rather modest.

Reputed investors who examine these indices may be reluctant to invest in SL. This may be the reason for FDI flows to SL to decrease from $752 million in 2008 to $300 million, whereas Malaysia attracted $7 billion in 2008 and $12 billion in 2011 (World Investment Report 2012, UNCTAD); Singapore did even much better. FDI could bring into the country scarce capital, management skills, technologies and global market access. What can therefore be done is to differentiate the country on the basis of good governance mainly to attract investments particularly FDI since investors value peace and the security of their persons and property and as SL cannot afford the tax incentives approach for this purpose like some of our competitors. Macro-economic policies Another major task of the state is to see that macro-economic policies (fiscal/budgetary and monetary) should be such as to (a) decrease the government budget deficit to about 3 per cent of GDP, (b) reduce its debt substantially from the present 78.5 per cent of GDP to about 50 per cent,
(c) maintain low inflation to reduce costs of enterprises, (d) ensure interest rates are somewhat higher than the rate of inflation to induce higher savings, (domestic savings have declined alarmingly in 2011 to 15.4 per cent of GDP from 19.3 per cent in the previous year) as well as (e) adopt flexible exchange rates to make exports competitive and imports expensive in rupee terms. In other words the macro policy environment should be such as to create stable and predictable policies and (neutral) incentives mainly for attracting investment and improving global competitiveness. The following are some of the international indices regarding macro-economic policies adopted in SL

i. According to the GCI 2012/13, SL’s rank regarding the macro-economic environment is 127 out of 144 countries (116 in the previous year) vs. 11 for Singapore, 35 for Malaysia.
ii. According to the same index the total tax rate as a percentage of profits of firms in SL is 105.2 with a rank of 139 out of 144 countries, while for Singapore it is 27.1 with rank 25.
iii. For reliability of policies in this index SL’s rank is 72 vs. 3 for Singapore.

These indices indicate the challenges faced by the government of SL in reaching macro-economic stability. However, if such macro-economic stability was the only strategy (even if it is successful), it will result in SL competing on price, (which can be copied/beaten down) and private sector demands for tariff and non tariff protection when faced with global competition on price. This will lead to lowered competitiveness and decline in exports, which is partly what may have happened in SL.

Concurrent action in four other areas of policy

Thus improving the enabling and macro-economic environment is inadequate to raise competitiveness as productivity may not be enhanced. Therefore concurrent and consistent action by government and firms in four other areas is essential to improve productivity:

A) Firm strategy –here the most important policy measure that the state has to implement to expand exports is to liberalize trade by reducing tariff and non tariff barriers to reduce protection which is reported to be very high and simplify procedures and documentation at the point of import particularly in respect of imported inputs for export. The pressure on local firms to compete on equal terms with firms in the rest of the world that would result from lowering of protection would activate them to improve productivity and innovation. Another task of the firms is to increase investments to expand the production capacity for export; the state has to encourage it.

B) Creation/development of factors like human resources (HR), labour, knowledge resources/ science and technology, physical resources including land, capital resources, infrastructure and information. Here, except in the case of a glamorous sector like infrastructure, there has been much neglect. A tremendous amount of work has to be put in by the state and the firms, especially in areas like education, to develop HR as well as technology to produce the skills and the technical/innovative abilities required by firms competing with the rest of the world, as well as in the case of land to convert the 1.5 million or so subsistence farms, each less than acre in size, to larger holdings for realization of economies of scale to produce a surplus for export of value added products.

C) Development of supporting industries/ value chains (input suppliers, distributors, buyers & customers) of firms and,

D) Raising the quality/standards of goods and services to international level. There is a need for leaders of firms and the government to be active consistently in all the four areas at the same time for a couple of decades for this effort to be effective; the neglect of even one area could lead to failure of the entire effort. Some global indices concerning these four areas of improving productivity in SL are as follows:

i. Regarding Trade Barriers, in the GCI 2012/13 the Ranking of SL is 101 and for Singapore it is 3.
ii. In the World Bank Ease of Doing Business Index 2012 the rank of SL is 89 out of 183 countries.
iii. In the GCI 12/13, regarding the burden of customs procedures the rank for SL is 59, for Singapore it is 1 and for Malaysia it is 23.
iv. In the same index the SL ranking for higher education and training is 79 while for Singapore it is 2 and for Malaysia 13.
v. In the GCI 12/13 the ranking of SL concerning labour market efficiency is 129 (previous yr. 117) while for Singapore it is 2 and for Malaysia it is 24.
vi. The technology readiness ranking in respect of SL in this index is 89 and for Singapore it is 5.
vii. Regarding university industry collaboration in R&D, SL’s ranking in the same index is 113 and for Singapore 5.
viii. Where company R&D spending is concerned SL’s ranking in the GCI 12/13 index is 82 and for Singapore it is 8.
ix. With regard to agriculture policy costs SL’s ranking in the same index is 33 and for Malaysia it is 4.
x. In respect of infrastructure SL’s ranking in this index is 62, for Singapore it is 2 while it is 32 for Malaysia.
It may be noticed that the indices in respect of the four areas where productivity has to be improved to achieve competitiveness in exports, SL is far behind its competitors, especially in respect of trade barriers, ease of doing business, higher educatin and training, labour market efficiency, university industry collaboration in research and development (R&D), company R&D spending, and even in infrastructure.

Conclusion

So in order to raise SL’s export competitiveness the remedy is to (a) undertake immediate reforms in respect of all the six areas discussed above, (b) distribute available resources over all the areas, particularly education and not in a couple of areas as at present and above all (c) give a greater role to the private sector for creativeness and innovation to emerge for differentiation of export goods and services to be possible, for instance by improving the efficiency of the loss making state owned enterprises by infusing private sector management. Most of these reforms are mentioned in the revised National Export Development Strategy formulated by the SLEA.

(The writer is an economist).




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