“There’s a tide in the affairs of men, when taken at the flood can lead on to good fortune”. This Shakespearean introspection on humanity is as applicable to nations and economies. A nation too has good years and lean years; years of high production and low output; years of external and internal shocks and years [...]


No room for complacency in export development


“There’s a tide in the affairs of men, when taken at the flood can lead on to good fortune”. This Shakespearean introspection on humanity is as applicable to nations and economies. A nation too has good years and lean years; years of high production and low output; years of external and internal shocks and years without strains; years when the terms of trade go against you and years when they improve. This inherent dialectic is more applicable for developing countries than the developed.

Well managed economies save in good years for the lean, and avoid profligacy at times of prosperity. Such nations are economically stable and sustain a growth momentum. It is imperative that the improving export performance is harnessed for productive purposes and that policies to enhance exports are pursued vigorously.

External and internal shocks
External shocks and adverse terms of trade have been regular features of the Island’s economy. Escalating prices of imports and decreased prices for exports; food and petroleum price hikes; and trade embargos, such as the recent US embargo on Iran, have adversely affected the trade balance.
Internal disruptions had even more serious impacts on the economy. Ethnic violence, terrorism, insurgencies and civil war were serious disruptions of the economy. Droughts, floods and the Tsunami have also been impediments to the economy. At times external shocks have coincided with internal ones such as in 1970-74.

Good opportunity
There is every prospect that 2014 will be a year when external factors would be favourable. However, we are a nation capable of missing opportunities and creating problems for ourselves when every prospect pleases. The emerging favourable conditions must be invested in development. Vital among the prerequisites for current economic growth are meaningful steps towards ethnic harmony. Dangerous communal and religious fires must be doused, if the country’s economic potential is to be realised. The economy cannot prosper with internal conflicts.

Global economic conditions
International economic conditions, on which the country’s economic fortune depends so much, are turning brighter. The revival of western economies that are the main markets for the country’s manufactured exports could revive exports that are vital for economic prosperity. Exports of more than US$ 1 billion in the last three months and the tourist boom portend benefits not only for the trade balance, but the development of the economy. We can either fritter away these advantages or use the good fortune to strengthen the economy and reduce its vulnerability.

The post-independent experience has been one of complacency when economic conditions are good. Instead of using favourable conditions to strengthen the economy, they have been years of economic self-satisfaction and lost opportunities to address economic issues. The manner in which the favourable developments this year are harnessed and managed could make a vital difference to the country’s economic future.

We could continue to increase our indebtedness or reduce debt; we could use the enhanced resources in developing priority sectors that would strengthen the economy’s long term economic capacity or continue our economic wastefulness; we could invest in social infrastructure that is an essential foundation for sustained economic growth or continue to invest in high cost conspicuous spending with low returns.

Export development
It is realistic to expect export earnings to reach US$ 12-14 billion this year. The turnaround in exports must be seized upon as an opportunity to promote exports further. Policies have to be put in place to encourage foreign direct investment in the production of tradable goods and services. However, there are hazards lurking behind this success. The favourable export performance could result in a lesser concern in constraining imports; low interest rates may lead to increased imports; and there could be neglect of policies to expand exports. It is essential that there is a powerful thrust to improve exports.

Strategies for increasing exports
One of the prerequisites to encourage exports is a realistic exchange rate that would ensure that exports would be competitive with other countries and producers would have adequate profit margins to spur them to produce more for export. It is not the nominal exchange rate that matters, but the real effective exchange rate that takes into account the relative rates of inflation, the relative production costs and exchange rates of other export competing countries. The exchange rate should be flexible so that the real effective exchange rate does not appreciate and render exports less competitive.

Business confidence
Business confidence is vital for particularly new entrepreneurs to begin export-oriented enterprises. Economic stability, healthy macroeconomic fundamentals, guarantee of property rights, industrial peace, reform of labour legislation, law and order and the rule of law are vital prerequisites that are particularly important to attract foreign direct investment for export industry as these not only help increase export earnings but transfer technology that enhances productivity in export industries.

Export surpluses
The possibilities of increasing agricultural exports must be explored. Supply inelasticity is a serious constraint for increasing agricultural exports. Limited land availability and low productivity limits production and exportable surpluses. Productivity in tea estates could be increased by better cultivation practices and replanting with higher yielding strains. Replanting and extending rubber cultivation is needed to increase rubber exports. The opening up of the North and East provides opportunities for growing crops such as cashew, vegetables and fruits for export. It is necessary to release cultivable land for agricultural enterprises that have export potential.

Export diversification
The diversification of exports is needed to increase export earnings as well as to provide a greater degree of export stability. There is potential for increasing many local products such as cut flowers, Ayurveda medicines and food preparations. Export diversification must look to export of services. Earnings from information communication technology (ICT) services that have increased recently have a good potential provided educational and technical skills are improved to enable further IT exports.

Wrapping up
The improvement in exports this year must be seized to expand exports further through increased exports, diversification of exports, search of new markets and by economic policies conducive for export expansion.

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