Columns - The Sunday Times Economic Analysis

Global recession damaging industrial exports

By the Economist

The global recession is here to stay for sometime. Its intensity and duration remains uncertain. Even with the various recovery plans in place, it is likely to take a minimum of about three years for economies to get back to their former growth paths. It is still the beginning of the recession and it’s spreading. What began in the US is spreading to other parts of the world. Europe is in recession now, though France has staved it for the present. It has spread to Japan and Korea as well. As the Indian Prime Minister Manmohan Singh said, "Emerging market countries were not the cause of this crisis, but they are amongst its worst affected victims".

There have been several explanations for the global meltdown. The current recession began in the banking system owing to a speculative frenzy in the mortgage market. Curiously it was triggered by new financial innovations, such as mortgage-backed securities that collapsed when overvaluations on real estate were corrected by realistic valuations. As John Maynard Keynes pointed out, when speculators get control of the economy, sooner or later the speculative bubble would burst. He observed that:

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” This in a nutshell is what happened. And the dangers of the speculation had far more widespread ramifications than what Keynes could have prophesied owing to the globalization of economies, especially the developed economies. The linkages between financial institutions around the world meant that the crash would affect no single country but the world at large.

The global recession is of serious economic concern to the Sri Lankan economy as our exports of both agricultural products and industrial exports are adversely affected. It is also likely that tourism, foreign aid, investments and aid would dwindle. Despite this, our leadership appears quite oblivious of the impending economic doom. The fact is that Sri Lanka as a small import export economy is basically a by-stander, watching the situation without being any influence on it. Sri Lanka is a taker in the global economy, except in the case of tea exports where our production and exports are of some significance in international markets. Even here we have no control on the international demand for tea that is affected by many extraneous causes, the international recession being a case in point.

Now that the recession is upon us, we must take countervailing policy measures to ensure that we do not get hurt too severely. We must especially ensure that our progress in industrialisation and the growth in services that cater to the international market are not set back too much and that our agriculture is strengthened to enable us to take the external shocks without permanent damage. The global recession is a serious threat to Sri Lanka’s industrial exports, especially the country’s main industrial export---garments that account for over 50 percent of the country’s export earnings, contributes to 17 percent of GDP and employs about 330,000 workers. A major set back to apparel exports would have a serious impact on incomes, employment, the trade balance and balance of payments, inter alia. A decrease in garment exports is a serious threat to the country’s economic growth and development.

There is evidence that the recession is already affecting retail buying as there are lesser orders for garments. The main export markets for garments are USA and European Union countries with US alone accounting for a market share of 50 percent, while EU countries account for 45 percent of our exports of garments. The recession in US has already seen cutbacks in retail spending that could affect garment exports severely. Consequently buying orders placed for purchase of garments for exports has already declined. Foreign buyers are asking for price reductions of as much as 65 percent of the earlier price. Some factories have already closed down, while others have reduced overtime payments and are looking into the possibility of offering only part time employment. Rubber and leather goods are likely to face similar reductions in orders as these two items are also likely to face reductions in consumer spending. These adverse trends in industrial exports are on top of sharp declines in prices of tea and rubber exports.

There is a danger that the government would take a stance that the global recession is beyond our control and blame it for all the impending economic difficulties that we would face. As a matter of fact the problems in the country’s manufacturing industries, including the apparel trade, began much before the global recession affected it. Manufacturing industry has faced severe problems recently. This has been especially so with regard to export industries. The escalation of costs of raw materials, transport, electricity and fuel costs, wages and financial costs have raised costs of production and cut into profit margins and the capacity of the country’s exports to compete in international markets. Other countries competing with our exports have had lower inflationary pressures and consequently become more competitive. With costs of production rising, the maintenance of the exchange rate for the rupee, stable this year, till recently has not helped industrial exports.

It is in this context that industrial exports have not fared too well. The competitiveness of our industrial products in world markets and the sustainability of export industries were threatened even before the recessionary conditions had a serious effect. The recession in our export markets would compound the problem severely. The withdrawal of the GSP concession by European Countries (EU) spells further problems for industry. Providing a cushion to industries that are affected by the GSP Plus status is the wrong way to remedy the situation. It is an economically unwise move that is not sustainable and may be unacceptable to the World Trade Organisation.

The weak industrial export performance is prior to the full effects of the recession in the US. The early symptoms of it affected the trade performance earlier this year. Now the global meltdown would no doubt affect our industrial exports. The signs of that are already apparent with lesser orders being placed, especially for garment exports. Rubber goods are another category that would be adversely affected. The disappointing performance of industrial exports reflects the unsatisfactory conditions for industrial production in the country. When the signs of flagging industrial exports were seen early this year, economists and commercial interests drew attention to the fact that macro economic environment was becoming less favourable to industry. Most significantly, the high rate of inflation was affecting the costs of production and threatening the profitability of key industries and the competitiveness of industrial products in international markets was being eroded. Yet this was not heeded to, as if it did not matter or that other favourable factors in the trade account, such as the higher earnings from tea and rubber would compensate. Now prices for these two commodities too have declined. The stark realities of the global recession must be taken seriously and macro-economic policy must be corrected to ensure that industrial exports are competitive in the growing difficult export market conditions.

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