Beware of the governments
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Today, I thought of ending our discussion series on “the possibility of becoming rich”, as we began on September 29 under the column heading “Impossible possibilities”. We raised the question: “How many more years should we wait for Sri Lanka to become a “rich” country?”In other words the question meant that “how long would it take for Sri Lanka to reach “high-income” status by raising its per capita income to US$12,000 from its current level of $4,000?” There are countries in Asia, which have done it within a period as short as 10 years. As a nation, can we be on par with them?
Fast-track
In today’s world, development doesn’t take 100s of years, as it did 100 years ago. This is because there is a “fast-track” opened up for today’s developing countries. They only need to put the economy on that fast-track; then, within less than a generation, we would see the difference in front of our eyes.
During the past few weeks, we elaborated on the major economic changes that we encounter along the pathway to become rich: Industry and service sectors grow faster than the agriculture sector so that the output and employment shares of agriculture continue to fall.
Correspondingly, more and more people move from the rural areas to the urban sector, and begin to enjoy the benefits of development in terms of higher living standards. The process will also eliminate rural poverty, because fewer and fewer number of people would remain in the rural sector producing higher output and achieving higher productivity in the agriculture sector.
The economic transformation is accompanied by and supported by the population changes too: Less and less people would be in agriculture sector and in the rural areas, while more and more people would be in industry and service sectors and in urban areas.
Transformation
The transformation begins with industry and service sector growth, which leads agriculture growth as well. In other words, there will be no agriculture development, if it is not led by industry and service sector growth.
It’s already a peculiar statement, but we can extend it further to disclose an even more shocking statement: There will be neither rural development nor poverty reduction, if there is no urbanisation.
Industry and service sector expansion creates higher incomes and more jobs, which would attract people, or precisely the excess labour, from rural agriculture. It would reduce the population pressure in the traditional agriculture sector which would also begin to grow with a fewer number of people contributing to higher production and productivity.
As a fewer number of people begin to produce a larger output in agriculture, it would translate into more incomes to the rural sector leading to a decline in poverty. New jobs are created in industry and service sectors. As more people leave from agriculture to take up these new jobs in industry and service sectors, there would be an increase in their incomes too. The whole process involves a change in urban-rural population composition as well; more people would leave rural areas, and begin to concentrate in urban areas.
Some are rich, not all
The above is the fundamental economic transformation that we have observed in all of the rich countries around the world without any exception. But we still have an important question to answer, which I intend to focus on today: Why is every nation not becoming rich?
If we examine the economic transformation that makes nations rich, we would realise that “industry and service sector growth” is at the heart of the issue. The new facets of growth that come from industry and service sectors requires “greater investment” on the one hand, and “bigger markets” on the other hand.
Today, there is no need for countries to wait for a long time until they collect their savings little by little in order to generate investment. There is enough investment funds accumulated in the world, and the investors are looking for better locations to transfer these funds. On the other hands, today, there is no need for undertaking voyages and conquering the nations to find markets. The global market is “free and open” and, expanding continuously.
This is where the problem is: Not every nation is good in attracting global investment funds that flow as foreign direct investment (FDI) into their countries. Neither are they good in penetrating into the “global market” by generating exports.
FDI and exports
FDI and exports move closely in the same direction: The greater the FDI inflows, the higher the export growth and vice versa. FDI is needed to fill the domestic resource gap, while exports are needed to permit industry expansion.
Over the past 10 years, China alone stands as the top FDI-recipient country in the world attracting $1,250 billion investment, while the country has generated nearly $22 trillion exports.
Among the developing countries, India has also become the second country after China to receive the second largest FDI flows: Over the past 10 years, India has attracted $357 billion FDI inflows, and recorded over $4 trillion worth exports.
The size of FDI inflows and export volumes do not depend much on the size of the country: Singapore has attracted $597 billion FDI inflows, and reported over $5 trillion worth exports.
Compared with all that, Sri Lanka has attracted only $9 billion FDI over the past 10 years, which makes up less than $1 billion a year on average. It has also reported a dismal track record of exports, amounting only to $153 billion for the same period.
Investment-friendly
If investment flows in, exports will grow too. But the main issue in question is that why does investment flow into some countries, and not the others.
A fairly free and open policy regime matters. Apart from that, let me list out a number of reasons that affect both foreign and local investment. Not all types of FDI seek cheap labour; then there is no reason why many of the high-wage countries also attract so much FDI.
The investors are looking for predictability and consistency in policies. If some businesses fall and others rise overnight due to a change in a tax, then there is no predictability and consistency.
Investors are not interested in whether there is capitalist or communist rule; but they are interested in rule of law. They are interested in observing how the politicians and policy-makers react to business matters or pledge to act on business matters particularly during election times.
They are not interested in running around like “headless chickens” to get many signatures on the documents. Reasonable business taxes are not a problem to attract investment, but dealing with tax payments can be a nuisance to investors. If rules, regulations, laws, and Acts are preventing or exhausting the investors, it is not a conducive investment environment. Corruption and bribery swell additional costs to the investors, while corruption and bribery keep the investors away.
It’s the government
When you list out all possible reasons that keep the investors away from investing in a country, they all can be reduced to one thing: It’s the “government”.
The investors are afraid of the governments, and not the markets. Why would they waste time to figure out “how bad the government is” in a particular country, when many other countries offer competitive business environments? (The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk).
