by Professor Sunil J.  Wimalawansa

Preamble:

This article was published in June 2006 as a three-part series in the Sunday Financial Times (Part 1: https://www.sundaytimes.lk/060618/ft/2.1.html).  There were several requests to republish this article in full. Since the entire piece was not published then, the author is grateful to the editor of Lanka Web for the opportunity to republish it in full as a series over seven consecutive articles fulfilling the public request.  

The article was written in February 2006 as a mid-term paper for an executive MBA training program at Rutgers University Graduate School of Business.  It was adapted and published in the Financial Times in June 2006.  The author values the editor’s offer to print the entire manuscript as a series of articles for easier reading—note that they are interconnected.  Except for the references to the three decades of terrorist war completed in 2009, the contents of this series are entirely relevant and applicable to the prevailing situation in Sri Lanka—in 2023.  Hence the importance of this publication.

Abstract:

The Sri Lankan economy has stagnated for the past three decades compared to its neighbours.  However, this is no excuse not to come up with a new mission for the country and make Sri Lanka one of Southeast Asia’s best and most vibrant economies in Asia.  Establishing stability by eliminating terrorism, harmonising different ethnic and religious groups, and working together as Sri Lankans” for the longer-term betterment of its people and the country, can beat the Singapore economy within a decade, except for the fiancé and shipping industry.

Rather than repeating mistakes, Sri Lanka should learn from other emerging economies the importance of diversification, adding value to exports, expanding the IT-electronic sector, attracting offshore contracts and Foreign Direct Investment Capital (FDIC), and new ventures.  It is time that it dumped the unproductive, backward colonial mentality and the dependent subsistence economy.  It must get out of the lazy path—seeking and dependency on loans.  Instead, it must aggressively pursue sustainable developments, create an export-oriented economy, and not get trapped by loan predators like the World Bank and International Monetary Fund.  With its soaring economy, China is also getting into this lucrative business with the view of the effortless acquisition of assets at no cost from developing countries using loan traps.  

The article outlines the pros and cons” and fallacies of the current economic development approach.  It emphasises what should be done to generate a vibrant economy in developing countries like Sri Lanka.  The article also discusses the importance of transparent governance, honesty and openness, a positive attitude, and the importance of private-public partnerships and improved public relations.

Learning from the economic success of Shanghai

For the past 20 years, China’s economy has been increasing by about nine percent per year, while the Sri Lankan economy has stagnated.  The latter is partly due to a lack of vision for the macro economy, particularly for revenue-generating sustainable development programs.  The greed of politicians and senior bureaucrats and the lack of transparency in transactions exacerbated the economic downturn.  They were focusing only on the short-term benefits—the next election. 

Important to note that although China’s economy is rapidly growing, its success is not uniform across the country.  Poverty is rampant in rural districts.  Such a skewed approach is unlikely to sustain in the long run, especially with strict autocratic controls and a lack of freedom for its citizens.  China’s economic growth is concentrated in a few major cities, including Shanghai, Beijing, Tianjin, and the Pearl River Delta, which the Chinese Communist Party (CCP) can monitor closely.  Astronomical developments in these large cities strengthen the control of the public and political power base.  Consequently,  their countryside is neglected.  It results in divergence of disparities, eventually likely to pave the path for a second major revolution in the country.

One-tenth of the world’s tallest construction cranes are operating in Shanghai.  Besides, 14% of world’s crude oil is consumed by China.  Its excessive thirst for energy and construction materials and real estate development are trying to cope with the high demand, thus pushing the price of crude oil.  In comparison, the large-scale attempt by the Russians on economic reforms following the end of the cold war failed.  The rapid experimental transformation of the previously stagnant communist philosophy-based economy into a market-based economy, restricted to its large cities for easier control.  This transformation has been an extraordinary success in China. 

One of the reasons for this high economic growth in China was a determined approach with a longer-term vision and focusing on the most profitable export industries.  Unfortunately, Sri Lankan leaders never had a longer-term vision: consequently, they failed to achieve any of the mentioned successes s with China, Ireland etc., in recent years.  Instead, Sri Lankan politicians have been hooked dependent on handouts”—loans— and myopically focused on opportunities to steal funds.

The current Sri Lankan GDP is about 80% of Shanghai City alone.  Yet, the land area of Shanghai is less than 5% of Sri Lanka, and the population is nearly a quarter—significant discrepancies.  The GDP of Shanghai City rose from under $2 billion in 1980 to over $30 billion in 2004.  With exponential growth, it is expected to double every five years.  The economic model that China has adopted is far from a full-fledged market-driven economy.  CCP, which has governed China since the last revolution, has tight control of all industries in this knitted conglomerate.  Policies adopted by the communist government resulted in skewed but significant economic advances during the past 2two decades.  It will continue to grow at this rate till its real estate market collapse and/or its over-ambitious control over neighbouring countries like Taiwan fall into a war.

Outside the economic development areas in China, there has been only modest or no growth.  It is unclear whether this is by design to use as cheap labour and shipping raw materials to industrial complexes or the tight focus only mentioned a few cities (each has more population than entire Sri Lanka) to exploit the growth maximally.  How can Shanghai, with only 5 percent of the land of Sri Lanka, generate more revenue than the entire Sri Lankan economy?  From an economic (but not social) point of view, it provides an opportunity for leaders of Sri Lankans and other developing countries to closely examine it to identify what works and what would not. 

Nonetheless, governmental policies like deregulations, incentives, BoI facilities, stability and law and order, business transparency, and openness make a difference in attracting Foreign Direct Investment Capital (FDIC).  Opportunities and needs vary with types of industries, value-added products, incentives and motivation of people (vs. laziness), appropriate investments and available trained labour force.  Sri Lanka has a major disadvantage with its top-heavy government loaded with ministries, departments, boards, and institutions working in the same sector.  It sometimes makes a mockery and is made worse by corrupted, entrenched bureaucrats.

Compared to Sri Lanka, several other industrialised countries with comparable sizes have higher GDPs.  England is about 3.7 the size of Sri Lanka, but several European countries are smaller than Sri Lanka.  Similarly, several states within the United States of America (USA), which are only 2-4-fold higher in land size, have several-fold higher GDPs than Sri Lanka.  So, from an economic point of view, the size of a country alone would not reflect its financial capacity or growth potential.  The country’s leaders must take a week-long retreat with top local experts (not sitting administrators)  to assess and develop real solutions, identify co-competencies and values, and establish paths of action to develop them properly.  Sri Lanka can learn from developing and mature economies to identify the process and eliminate, privatise, or improve weaker state-owned enterprises (SOEs) that burden the economy.

Indian influences on Sri Lanka:

Stability in Southeast Asia is good for all countries in the region and for world peace.  However, it would be helpful for the US to extend the same philosophy, including providing economic and intelligence assistance to Sri Lanka to help the country overcome its present terrorist problem.  Despite its economic advances, for some bizarre reason, Indian policy-makers do not want to see Sri Lanka becoming another Singapore but do not want to see Sri Lankan economy collapsing.  It is also time for the Indian government to abandon its unnecessary hostility and preoccupation with curtailing the economic growth of Sri Lanka.  This practice has gone on for the past three decades. 

There is no rationale for continuing such adverse policies, including creating disharmony in Sri Lanka by the Indian government or its agencies.  India should not attempt to take over Sri Lankan affairs or its economy.  The Sri Lankan economy is a fraction of India‘s GDP and offers no serious economic competition to India.  Therefore, the neighbouring big brother should respect the unitary nature and the sovereignty of Sri Lanka- and should wholeheartedly support its sustainable development and export-oriented economy.  

Prosperous and stable Sri Lanka is also good for India and its economy.  Economic ties, mutual help, and security cooperation between India and Sri Lanka (as well as the Sri Lankan and Pakistani and Chinese governments) should help overcome regional uncertainties and terrorism and achieve harmony and prosperity in the region.

Why is the Sri Lankan economy stagnant?

While the Chinese economy is booming, the Sri Lankan economy was stagnant during the same period.  Could other developing smaller economies, like Sri Lanka, learn and adapt from Shanghai, another economic model, to create a vibrant economy?  However, when comparing an open market economy in Sri Lanka with the ‘quasi’ Chinese economy, some key parameters are likely to misleading conclusions.  It is unclear how much money the CCP is pumping into economic growth in these cities or the reliability of the reported economic indicators like GDP.  

However, as with the USA, China, and Sri Lanka continue to monetise (i.e., large-scale printing of their own currencies, not backed up by gold): such will exhibit an illusionary high growth but invariably add to unsustainable inflation.  To systematically mitigate this, CCP is expanding its octopus-like economy by gradually extracting wealth from developing counties, disguising their investments as compassionate local developments.  However, an increasing number of corporations, especially mainland China’s real estate sector, are defaulting on bank loans, eventually destabilising its economy.  Due to many reasons, developing countries should not attempt to copy and implement such unreliable system(s) in their country.

In recent years, in parallel, India’s economy has also grown approximately 7% annually.  It is poised for even higher growth as the government embarks on a large-scale program associated with liberalisation and value-added exports designed to overhaul the country’s failing infrastructure.  However, India simulates the quasi-Chinese model by only focusing on developing industrial cities like Bangalore while neglecting rural regions.  Proactive spending by the Indian government to improve infrastructure and education, particularly the communication and IT sector, albeit only in certain limited areas, will lead to economic success, but it could cause marked social unrest.  

For example, IBM recently announced that they would invest an additional $6 billion US in India as an expansion effort with the availability of a Hi-Tech, IT-literate workforce.  Does Sri Lanka incentivise or pave the path to attract such FDICs?  In addition, the National Security Doctrine of 2002, the Bush administration in the USA (and more recently in 2005 and 2006) envisages closer cooperation between US and India to build civilian nuclear facilities, presumably establishing 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.  Regarding energy dependence, Sri Lanka has sufficient renewable resources, but only a fraction has been exploited.  Yet again, Sri Lanka still does not have national policies for energy, clean water, food security, education, or agriculture.  To date, it has no national policy for the safe dispersal of sewage—only ~2% of households (in very few locations) have a pipe-borne secure sewage disposal system.  While Sri Lanka boasts various successes (mainly historically), it is four decades behind in these areas.

A new vision for Sri Lanka

Sri Lanka has an educated labour force.  However, due to short-term planning and inadequate spending, professional education and skilled labour training have lagged.  Mushrooming universities in Sri Lanka are over-producing liberal arts and other non-skill graduates.  They can be employed only by overcrowding the non-productive government sector, further burdening taxpayers.  The education system and the curricula in schools and universities are outdated and need replacing that align with the country’s needs and the future. 

As the author has expressed many times over the previous 15 years to the leaders of the Sri Lankan government, we need to set up formal skills training centres across the country.  We already have infrastructure built in for more than 20 universities.  At least half of these should be converted into technical and skills training centres.  For example, ancillary-allied health training centres should be expanded—two-year colleges and four years degree programs dedicated to nursing, physiotherapists, occupational therapists, etc.

These established institutes could provide the necessary additional training and skills that the county needs to export skilled labour that attracts higher salaries and enables foreign exchange inflow than domestic helpers.  Such technical centres should provide mundane basic training for professions and opportunities to develop high-end expertise using state-of-the-art equipment and guidelines to understand and adhere to the necessary codes of practice.  For example, for carpentry, masonry, electrical, plumbing, construction, draftsmanship, planning, etc., via two-year programs to four-year specialised degree courses, enabling foreign employment.  

Another key area that should be developed is the proper use and value-added export of natural resources without over-exploiting or harming the environment.  Sri Lanka has extensive natural resources, but it has not exploited them because of a lack of forward-thinking and the political will for long-term commitment to use-integrate these for the strategic advancement and benefit of the country. 

For 40 years, only a handful of long-term projects have been inaugurated.  Some of them are re-establishing previously successful projects, like large-scale irrigation schemes.  However, some failed to complete, and others ended up in failure.  While Sri Lankan governments have taken foreign-currency loans sneakingly, few development projects that generate foreign currencies.  So, why is it taking loans that do not create exports and, thus, not generating foreign currency to pay back loans?

More than half of loan funds had been spent on politically motivated projects that did not create exports, only to attract voters who were not benefiting the masses.  These are worthless for economic purposes and development.  Who has been authorising these unnecessary projects that waste funds?  How do you plan to generate surplus foreign currency to repay these loans?  There is no plan but to kick the can down the road for future generations to pay these loans with interest.  There are many examples where these projects failed to generate economic or expected outputs.  Consequently, having severe negative impacts on the economy and, in some cases, on the environment and people’s health [e.g., the accelerated Mahaweli project that contributed to the ill-health of new settles in Mahaweli Ares C, including chronic kidney disease of unknown aetiology (CKDu), or multifactorial origin (CKDmfo)].

Sri Lanka can advance sustainable and cost-effective developments (SLDZs)

Bringing more FDIC into Sri Lanka is necessary for the country to advance rapidly and repay loans.  However, attracting FDIC investment without an adequate infrastructure layout in the country is challenging.  Investors need assurances not only of reasonable profit but also that they can take back the capital at the end of the project.  Consequently, no sensible international company would invest in a developing country with no political stability and excessive red tape-over-regulation, bribery, and corruption, where they will be unable to recover their investment.  

Since developing the whole country at once is impossible, it should be done in selected areas (as CCP did with three large cities and India with Bangalore) with state-of-the-art infrastructure, sound transportation, and a disciplined labour force to facilitate businesses and incentivise FDIC.  As the country gains experience and develops negotiation skills, access to FDIC capital becomes easier.  Establishing development regions away from main cities that benefit rural communities is necessary.  Let us call these the Sri Lanka Development Zones” (SLDZ), in contrast to free trade zones, which are too narrow and already exist. 

Pre-requisites of the SLDZs would include easy travel and rapid” access to airports and shipping terminals, good roads, reliable supply chains, telephone access and high-speed internet, excellent schools, affordable housing for staff and workers, transparency of the operation, forward-looking communication systems, reliable grid power, and the political stability.  The operations of these SLDZs must be free from corruption.  To minimise bureaucratic interference, these SLDZs should come under an independent authority (not under a minister, so politicians could not interfere) under the legislation and have the legal power to make decisions and enable rapidly implementing approvals and programs without bribery.

To attract investors, these SLD Zones should be located in suitable locations—such as coastal areas and access to highways, rail, and shipping terminals, so as reliable supply chains and travel/visits by foreign investors.  The location of each complex should be based on the requirements of the investing company.  The trade resulting from the SLDZs would benefit both Sri Lanka and its trading partners: sustainable and a win: win situation.  The Sri Lankan government should also consider accelerating the SLDZs by using post-tsunami economic funding (most of these funds are under or unutilised or publicly undeclared yet) in the affected regions to leverage creating new jobs and economic and social development.

Part 2 will address attracting FDIC, competitive advantage, bureaucratic delays in approvals, and the country’s progress.