Sri Lanka needs manufactured exports and innovation
The contribution of manufactured exports in 2013 was disappointing, declining to 20 per cent of total exports from 24 per cent in 2005 (EDB figures). This decline could be attributed mainly to the food, beverages and tobacco sector which fell by 23 per cent in 2013. A notable feature of manufactured exports was that only finished rubber products contributed about 8 per cent to total exports in 2013 and had grown only at about 4 per cent in 2013; each one of the others in the sector contributed less than 3 per cent of total exports.
Commodity exports vs.manufactured exports
Sri Lanka still depends on the primary agricultural sector, the contribution of which was 22 per cent of total exports in 2013. The other large export sector was textile and apparel which contributed about 41 per cent of total exports. These two sectors grew at 10 per cent and 13 per cent, respectively and contributed to 6 per cent expansion of total exports in 2013. Agricultural products are mostly commodities, (besides having limitations for expansion due to the scarcity of land) and that textile/ apparel is a near commodity. The price elasticity of the demand of commodities is known to be low and hence consumption will not increase, even if incomes of consumers increase unlike in the case of manufactured products. So the prospects of commodities contributing to economic growth significantly are doubtful.
Additional reasons for manufacturing units
Another reason for expanding manufactured exports is to improve productivity i.e. output per person vis-a-vis inputs in agriculture by absorbing the excess (subsistence type of) employment in that sector (30 per cent of total employment too high relative to Malaysia’s 13 per cent for instance) with better paid jobs especially for the youth who are not willing to engage in traditional farming. Productivity in the public service too could be improved by absorbing excess employment while foreign employment which is like slavery in certain cases could be reduced by providing better jobs in manufacturing enterprises in rural areas. Improving productivity in this manner could contribute to economic growth and for raising income levels.
The most important reason for emphasizing on manufactured exports is its direct relationship with faster economic growth, “The relationship between rapid non-resource based manufactured export growth and GDP growth is highly statistically significant” (Economic Growth in Asia, Jeffrey Sachs and others, Harvard Institute for International Development-HIID-,1997). These writers also attribute this to the fact that the close links with multinationals in respect of the provision of capital goods, technology and access to export markets, in the case of electronics for instance, promote te chnological progress.
Develop manufactured exports
Sri Lanka must looks to ways and means of developing manufactured exports. One important way is to let manufacturing enterprises to increase the scale of operations by providing openness to the rest of the world either through lowering of import tariffs or some other means. Such large enterprises selling in global markets can enjoy economies of scale for reduction of unit costs and increasing outputs i.e. improving productivity. They can in this process gain strength to undertake innovation to differentiate products and services to earn higher returns by catering to the unique needs of global customers.
Other ways
Some countries could go further in manufacturing for export and innovation by attracting investors especially (reputed) Foreign Direct Investors as the latter possess not only the technologies but also the management skills and access to global markets as well as the capital, that local investors find it difficult to command. Such countries could create for this purpose an enabling environment of social/communal and political stability, budgetary cum monetary stability, good governance, well functioning legal and institutional systems with reduced ‘red-tape’ and corruption; in addition they could offer, improved infrastructure facilities as well as education/training programmes to provide labour with the required technical and behavioural/soft skills like creativity, working as a team and communication (in English). Essentially they should go for improved export competitiveness with higher productivity in all sectors and innovation, to counter wage increases, besides openness/ low import tariffs or trade facilitation.
In fact attraction of FDI is what countries in South East Asia (SEA) did very successfully. Manufacturing enterprises in the US, Europe and Japan in the 1960s were looking for offshore locations in SEA for production to be carried out at a much lower cost as their own wage levels were rising and eroding returns. First they selected Hong Kong for relocating their labour intensive operations especially in electronics because it was the most open economy in this region, politically it was the most stable and there was a well functioning legal system and most workers spoke English.
Later they selected locations in South Korea, Taiwan, Thailand and Malaysia, where the industry prospered due mainly to the keenness of policy makers to promote openness and reduce tariff protection. It should be noted that the comparative advantage of these countries was cheap labour and not technology, which they developed later.
Innovation
The word ‘innovation’ ( a new idea, strategy, process, product or service for improving efficiency or the creation of competitive advantage) has become a misunderstood word as the interpretation sometimes is that enterprises have to develop technological capabilities for the purpose.
This is not entirely correct. Private enterprises may usually avoid R&D as returns could take some time or the effort may end up in failure. First what is needed is an understanding of the needs of customers and a little bit of creativity or imagination to satisfy these needs. For instance washing and polishing an old car before sale could help the seller to get a better price; there is no evidence that the initiators of Facebook had to invest in R&D either, before starting.
Most effective way
The most effective way to induce innovation is increasing competition among firms by reducing import tariff protection across the board to a reasonable uniform level or by trade facilitation i.e. for exemption of taxes on inputs or for tax drawback/ rebate of taxes. Another way of ensuring competition is by enforcing laws to reduce monopolies and duopolies. Competition will pressurize firms to undertake innovation through R&D and other means such as branding on the basis of customer needs, to increase returns.
Research and Development (R&D)
Rightly, there is now a discussion about investing in R&D for improving technologies. There is , however, a need to mention that R&D is not always necessary and if it is necessary, to explain the ‘who and how’ of it, perhaps these discussions mean it is the private firms which should do it. In such a case competition/rivalry among firms as described above is necessary or if they mean the state should do it what is needed is to create the required rivalry among firms and the required openness to the rest of the world or trade facilitation/ drawback schemes of taxes on imported inputs. Perhaps in addition extend some support like the necessary laboratory services or incentives to the firms like that presently available, deduction of taxes on profits, treble deduction of R&D expenditure, etc.
Without unduly emphasizing on investment in R&D, still another way of acquiring technologies is importing technically advanced machinery and equipment.
These clarifications could clear the air with regard to the need for manufactured exports and ways and means of innovation. What is most important is a will and passion to achieve it abandoning ideological and other distractions like inflaming racial and religious hatred.
(The writer is an economist)