Financial Times

(The Sri Lankan economy has stagnated for the past three decades, when compared to that of its neighbours. However, this is no excuse not to have a new mission for the country, and to make it one of the best and most vibrant economies in Southeast Asia within the next decade.

This article by the author who is based in the United States attempts to – elucidate what Sri Lanka can learn from other emerging regional economies; Outline the ‘pros and cons’ of the current economic development approach; Emphasise what should be done to achieve the goal of creating a vibrant Sri Lankan economy? And show the importance of public relations and overall positive attitude.)

Learning from the economic success of Shanghai

For the past 20 years, China’s economy has been growing rapidly at about 9 percent per year, while the Sri Lankan economy has been stagnant. However, the Chinese success story is not uniform across that country. China’s economic growth is concentrated in few major locations including Shanghai, Beijing, Tianjin, and the Pearl River Delta. These areas dramatically raise the overall Chinese economic growth over and above the neighboring countries.

Amazingly, one tenth of the world’s construction cranes are currently operating in Shanghai and China also consumes a fifth of world’s petrol. This excessive thirst for energy by China is one of the reasons for the current high price of petrol. From the economic point of view, unlike in failed Russian economic reforms following the end of cold war, the experimental transformation of the communist philosophy to a market-based economy in three large cities has been an extraordinary success in China.

The current Sri Lankan GDP is about 80 percent of the city of Shanghai. Yet, the land area of Shanghai is less than 5 percent of Sri Lanka whilst the population of Shanghai is about a quarter. What is the reason for this major discrepancy? How can Shanghai, with only 5 percent of the land of Sri Lanka, generate more revenue than the entire Sri Lankan economy? Is it governmental policies, types of industries, motivation of people, or all of these? The same argument can be extended to many other industrialized countries; e.g., England which is twice the size of Sri Lanka, many other European countries (in fact some of these countries are smaller than Sri Lanka; and several individual states within the United States of America which are only 2-4 fold higher land size in comparison to Sri Lanka, have several fold higher GDPs. Sri Lanka can learn from these developing and mature economies to identify needs and rectify weak areas negatively affecting the economy, and its co-competencies.

Even though the economic model that China has adopted is far from a full-fledged market-driven economy and continues to be under tight control by the communist government, implementation of its policies has resulted in major economic advances during the past 20 years.

The GDP of Shanghai alone rose from under $2 billion in 1980 to over $24 billion in 2004, while outside these three economic development areas, there has been only a modest change.

This is in contrast to the Sri Lankan economy, which has been somewhat, stagnated during the same period. The question is could other developing countries with smaller economies such as Sri Lanka learn and adopt from the Shanghai and other vibrant economic models? However, when comparing an open market economy as in Sri Lanka's with the Chinese economy, it is important to be watchful because it is not clear how much money the Chinese government is pumping into these cities. Such monetisation would create an unsustainable artificial and illusionary growth.

It has been reported recently that an increasing number of individuals and corporations in mainland China are defaulting on bank loans, which may eventually destabilise its economy.

In recent years, India’s economy has also grown approximately 7 percent annually, and is poised for even higher growth as the government embarks on a programme of proactive increased liberalisation designed to overhaul the country’s creaking infrastructure. Proactive spending by the Indian government to improve the infrastructure and education, albeit only in certain areas such as in Bangalore, had great economic success.

For example, IBM has recently announced that they will be investing additional $6 billion US in India.

The Bush National Security Doctrine of 2002 (and more recently in, 2005 and 2006) envisages closer cooperation between US and India to build civilian nuclear facilities, which will presumably establish strategic stability in the Indian Ocean region. At the same time, military ties, including joint exercises and weapons sales, are also set to increase substantially.

Stability in Southeast Asia is good for all countries in the region. However, it would be very helpful for the US to extend the same philosophy (including provision of economic, military and intelligence assistance) to Sri Lanka to help the country overcome its present terrorist problem. It is also time for the Indian government to abandon its preoccupation with curtailing the economic growth of Sri Lanka, a practice that has apparently gone on for the past three decades.

There is no valid rationale for continuation of this policy. Simply, India should not consider taking over Sri Lankan affairs or its economy; instead, it should respect and whole-heartedly support Sri Lanka’s sovereignty. After all, the Sri Lankan economy is only a fraction of India‘s GDP, and offers no serious economic competition to India. On the other hand, further economic ties, mutual help, and security cooperation between India and Sri Lanka, as well as the Sri Lankan and Pakistani and Chinese governments, should be helpful in overcoming regional terrorism and achieving harmony and prosperity in the region.

New vision for Sri Lanka

Sri Lanka has a well-educated labour force. However, due to short-term planning and inadequate spending, professional education and skilled labour training have lagged behind. Although, Sri Lanka has extensive natural resources, it has not adequately demonstrated the political will or long-term commitment to use or integrate these resources for strategic advancement of the country.

For 40 years, only a handful of long-term projects have been inaugurated. Not many of these have been completed or even implemented. There have been only a limited development of infrastructure and no significant progress has been made in areas such as environmental protection, preventive health care, and education.

For the country to advance rapidly, it is necessary to bring more foreign direct investment capital (FDIC) into Sri Lanka. However, without an adequate infrastructure layout in the country, it is difficult to attract FDIC investment. Since it is impossible to develop the whole country at once, let us equip selected areas with state-of-the-art infrastructure facilitating the inflow of FDIC. As the country gains experience and capital becomes more readily available and affordable, this development could be expanded. Let us call these the “Sri Lanka Development Zones” (SLDZ), in contrast to free trade zones, which are already in existence.

Pre-requisites of the SLDZs would include “rapid” access to airports and shipping terminals, good roads, high-speed internet and reliable telephone access, excellent schools, housing, reliable high-speed communication systems and power, and of course political stability.

It is most important that these SLDZs be free from corruption. To minimize bureaucratic interference, these SLDZs could come under a special ministry or directly under the presidential or prime minister’s supervision, with the ability to rapidly implement programs.

These SLD Zones would attract investors if located near coastal areas, in order to be pleasant destinations for visiting VIPs and foreign investors.

The trade resulting from the SLDZs would benefit both Sri Lanka and its trading partners. The Sri Lankan government should also consider accelerating the SLDZs by using post-tsunami economic funding in the affected areas to leverage the development process.

Since the skilled labour force in Sri Lanka speaks English, the government should encourage the establishment of skill-driven industries such as call centre businesses. India has been leading this lucrative industry as industrialised countries continue to move call center jobs offshore. In India, labour rates and overall costs are rising, causing many industrialised countries to relocate call centres in alternative locations such as the Philippines. For Sri Lanka, this is an opportunity to create new jobs (with little capital investments) as well as to obtain additional FDIC. Political stability, stable currency, and peace are fundamental to attract FDIC. As illustrated below, creating sustainable new jobs is paramount to economic success and the long-term stability of Sri Lanka. Compared with capital-intensive manufacturing, service-oriented businesses are less expensive to set up, and could generate a hundred times as many jobs for a given investment.

Demand for service sector support, including the need for call centres, is increasing rapidly. Overall offshore information technology and business-process outsourcing amounted to $34 billion in 2005, and is expected to double by 20012. While India is currently enjoying a 60 percnet share of this market, its share is set to decline as its wages and job turnover increase. China has an edge on absorbing more service sector outsourcing work due to its governmental policies, huge human resources, and success in attracting basic manufacturing work due to its rapidly expanding infrastructure. China is already capturing India's lucrative information technology and business services work.

However, Russia, Brazil, and Mexico are likewise competing, offering costs and skills often on par with India's, plus the advantages such as closer proximity to US and European markets. However, Sri Lanka has a competitive edge due to its prevalent high literacy rates and trainable work force, and is well positioned to take on some of this outsourcing investment. However, to capture this market, the Sri Lankan government must create opportunities for its entrepreneurs.

Medical vacations or medical tourism is another potentially lucrative business. Sri Lanka has a wealth of well-educated physicians. Sri Lanka must explore how best to utilise these resources to earn foreign exchange, offering Westerners surgical and convalescence medical care packages.

The costs of health care in the US, and waiting times for routine surgeries in Europe have escalated tremendously in recent years. Thus, many large health insurance companies as well as individuals in affluent countries are beginning to look for alternative and creative ways to keep their costs contained, while attaining the desired outcomes.

With proper strategic planning and positioning, Sri Lanka should be able to take advantage of this new economic opportunity, especially with the availability of affordable five-star hotels and sunny beaches making this healthcare venue a family-oriented enterprise.

Medical tourism (in parallel with eco-tourism) could encourage a substantial flow of US and European investment into the Sri Lankan hospital industry and related infrastructure, with forward and backward linkages. However, it is not going to be successful without a significant change in the attitude of the physicians, improvements in nursing care and customer relations. Properly executed, it could become a multi-billion dollar opportunity for Sri Lanka.

The key to developing a long-term plan for Sri Lanka is to identify its co-competencies and where exactly Sri Lanka has comparative advantages. A feasibility study of this nature should include lower-cost labour, high literacy rates, excellent medical training, favourable climate, availability of raw material, beautiful beaches, etc. But the use of these can be severely hindered by prevailing corrupt practices and inadequate infrastructure.

Based on these (using the Hecksler Ohlin Theorem), the country should be able to identify products and services that use these abundant renewable resources and factors intensively (e.g., call centres, “medical vacations”, software development, high-end textiles, high-tech industries and high margin products, tourism, etc). Once identified, it should facilitate specialisation in those products and services. Government must aggressively identify foreign markets for these products.

This would then lead to establishment and expanding trade freely; a win-win situation Since corruption and ‘red-tape’ will only hinder progress, implementing stern programs to curtail these practices is essential. In fact, elimination of corruption, and hence elimination of wastage, within a short period could double the effective-GDP in Sri Lanka. Two such examples are the recently exposed large-scale VAT fraud and significant wastage due to multi-tier commissions taken by high-level administrators, military personnel, and politicians.

These would unnecessarily increase end-contract price to the country and product prices to the consumers.

Countries and large cities, which have shown rapid progress, such as Shanghai in China, and Singapore, have been consistently backed by their respective governments in most of their major development programs. As a consequence, concrete development-related decisions are made and developmental activities would begin within weeks to months. This is in contrast to Sri Lanka; the approval process alone can take years.

For example, the approval to build a highway, industrial park, or a free trade zone takes years to materialise. By comparison, a similar major development project in China or Singapore, from the decision-making stage to project completion, can be built in just a few years. Under the current system in Sri Lanka, such a project would take more than 30 years, and often many projects are never completed. Under these circumstances, it is no surprise that sustainable long-term development projects are neglected, resulting in economic stagnation in Sri Lanka. For the country to be successful, this approach must be change.

Unfortunately, politicians tend not to support big projects, because these don’t materialize during his or her political career. These vicious cycles must stop, and the government should be prepared to take bold steps for the sake of long-term development and prosperity of the future generations in Sri Lanka. There are too many bureaucratic organisations, departments, so-called authorities, and procedures and paths involved in the decision making process; these should be streamlined. It is no secret that the final decision(s) are heavily influenced by personal gains for those involved, especially politicians.
This process must be reversed; politicians should allow decisions to be made by competent experts in the respective field with appropriate supervision. Politicians must learn to accept the importance of long-term prosperity of the country instead of short-term gain for themselves.

Political stability and the economy

Political stability and internal peace are crucial for long-term development and the overall progress of the country. Decades long internal wars against a handful of terrorists continue to waste the country’s precious human and economic resources.

Yet, there is no hope that Sri Lanka would ever achieve long-term peace via ‘biased third-party’ mediation. There is no role whatsoever to play by the current third-party involved in the negotiations who in fact is interfering with the internal peace process in Sri Lanka for their personal gain.

The Sri Lankan government must take care and solve these internal issues itself, rather than depend on highly biased outside third-parties with harmful agendas.

In addition, the country’s internal conflicts have been consistently fueled by unscrupulous non-governmental organisations that push destabilizsing agendas. It is worth noting that in many occasions these NGO’s use local people or so called experts to get their unethical missions and harmful agendas accomplished.