SL being ensnared in middle income trap-Champika

7 July 2014 09:30 am - 1     - {{hitsCtrl.values.hits}}


Minister of Technology and Research Champika Ranawaka on Monday said that evaluation of some positive and negative factors from an economic perspective reveals that Sri Lanka is gradually being ensnared in what is known as the middle income trap.
Delivering a speech at the Biennial Conference on Science & Technology BICOST at Waters' Edge, Battaramulla the minister also said, “Today, we as a nation are going through an era where the debate on national economy has probably assumed unprecedented heights. Yet, it is an irony that no clear dialogue has yet emerged about the future strategic direction of the development of Sri Lanka’s economy. “
“Some seem to believe in and act upon the premise that a further enhanced service economy, with a vibrant leisure-and-entertainment sector, would result in economic growth. There are others who, despite questioning the issues of corruption and good governance, do not bother to question the above approach to economic development, simply because they cannot think of any other alternative strategy,” he said.
Full speech
Today, we as a nation are going through an era where the debate on national economy has probably assumed unprecedented heights. Yet, it is an irony that no clear dialogue has yet emerged about the future strategic direction of the development of Sri Lanka’s economy. 
Some seem to believe in and act upon the premise that a further enhanced service economy, with a vibrant leisure-and-entertainment sector, would result in economic growth. There are others who, despite questioning the issues of corruption and good governance, do not bother to question the above approach to economic development, simply because they cannot think of any other alternative strategy.
In the meantime, there are still some others who argue that the economic policy of the country should be one centered on domestic production for import substitution, using local resources, within the one-time experimented approach of the closed economy. In addition, there are also other vociferous critics, despite having no clear view of their own, who criticize anything and everything as usual, obviously with little knowledge on the subject of economic development.
The time has come for us to view the economic future of the country from a more rational perspective, avoiding the two extremes of self-anesthetized optimistic exaggeration of isolated instances of economic success on the one hand, and on the other, vicious baseless criticism. During the past few decades, we have experimented with several different models of economy and identified some socio-political issues as impediments to growth.  
During the era 1956 – 1970, the government adopted an approach in which there was a heavy slant towards industries and agriculture.  During the period 1970 – 75 the drive was aimed at self-sufficiency through import substitution and in the post 1975 era we have adopted a free market economy.  The free market economy of this era, as you know, had to sustain severe attacks of terrorism – both in the North as well as the South. There was a time it was argued that the largest impediments to economic growth were war and political instability.  
An independent view on the experience of the open economy shows that during the period 1978 – 82 or the first few years under the advent of the open economy, there was a surge in economic growth rates and export products. Garments, in particular, got established as a major export product in the country.  Foreign debt, grants and investments flowed into the country due to the advantage of being the first open economy in South Asia, with cheap rural labour as well as the pursuit of a foreign policy that readily aligned itself with the geo political interests of Western powers.  
However the 1987 – 91 era landed the whole country in crisis with heightened socio-economic and political issues including unemployment, debt, inflation, political instability and social unrest. This situation, which got stabilized to a certain extent during the period 1994 – 2000, once again deteriorated during the 2001-2004 period due to political instability, a growing energy crisis and social unrest leading to a major catastrophe.  During 2005 – 2009, despite an intense war-effort there was a marked improvement in infrastructure development.
As we know the year 2009 witnessed the defeat of the decisive impediment to economic growth – terrorism, thus sowing seeds of an optimum level of political stability.  The question before us today in 2014 is whether our economic growth is heading in a healthy direction.
Sri Lanka’s economy entered into the middle income territory in 1998. This according to today’s rates is US$ 1,090 – 12,665 threshold.  The country’s official state economic institutions maintain that we are steadily progressing from the rank of a lower middle income country towards the next higher income bracket of US$ 4,000 – 8,000. They also forecast a consistent and sustained growth rate exceeding 8% during 2015 – 2018. According to those statistics, growth in the economy is consistent and steady.  Poverty, unemployment, inflation, and variability of exchange rate have been brought down to a single digit.  The indicators such as life expectancy, literacy, access to electricity and telephones etc. are in par with developed nations while political stability too remains quite strong.  
Going by these statistics, there should be no strong impediment to continued and sustained growth. However the international monetary institutions version of this narrative is a wee bit different. They say that going by the current position of the factors of production, the maximum achievable growth rate would be somewhere between 6.5 – 6.7. 
They also say that the factors of production have got contained due to the characteristic constraints exerted on a middle income country that is striving to increase income.  They are the increasing cost of labour, increased imports for consumption and rising costs of fuel and electricity in the absence of a comprehensive energy policy. 
In the meantime there are disturbing trends in the labour market due to an increasingly ageing population, a phenomenon brought about by so-called family planning measures. This situation is getting further aggravated with the gross expatriation of skilled labour, mainly youth. The export income has been continually declining in relation to both gross domestic product and import expenditure while the Exchange continues to plummet. Expenditure on loan repayments and interest payments is almost equal to the government revenue.  Foreign loan installments and interest payments are mounting in relation to export income.  
Although absolute poverty has been brought under control, disparity in income distribution continues to widen. Inadequacy of capital investments by the government and issues over capital investments as to whether they are on prudent areas of national priority have raised serious concerns.  
The country wide expansion of a leisure-and-entertainment economy has led to a new social crisis and a critical dialogue has emerged in society on corruption and good governance.  Obviously, erosion of confidence of the society at large has already become an impediment to the development of social capital necessary for economic growth.  On the other hand, the literally ‘poisonous’ environment, that has been brought about by the haphazard ad-hoc process of industrialization, with increasingly adverse implications on food production and health etc., has deteriorated to a point of threatening the country’s very civilization, with its share of consequences on the economy in the process.  
Evaluation of these factors from an economic perspective reveals that the country is gradually being ensnared in what is known as the middle income trap.  Going by the general experience of the countries in the aftermath of opening of their economies, it is possible to identify several distinct phases of development that those economies have gone through.
Producing export products using foreign investment and foreign technology
Producing interim products or parts of products for export using local investment but foreign technology
Producing import substitutes for the local market by adapting foreign technology
Producing export products using local investment adapting foreign technology
Local development of advanced technologies and management systems through research and development conducted locally on technologies originally acquired from abroad
Producing advanced goods and services and systems of management which are competitive in foreign markets using local investment
Innovation and knowledge component become the prime process of economic growth
Although nearly 40 years have lapsed since the introduction of open economy to the country, it is obvious that Sri Lanka has not managed to go past even the second phase of the above seven stages. This is in contrast to the experience of countries like Malaysia, Thailand and Vietnam, which have surpassed four of the seven stages, and particularly, the experience of certain other Asian countries such as Hong Kong, Korea, Taiwan and Singapore, which have successfully gone through all seven stages.
This seven stage process can be generally described in terms of three different strategies adopted by economies at different stages of development, namely,
competitive growth achieved by sourcing factors of production such as labour, energy, and other resources at competitive prices
competitive growth achieved through increased efficiency of the production processes 
competitive growth achieved through innovation
One of the popular views held in this regard by some scholars, is that Sri Lanka, which relied on the first strategy of using cheaper factors of production in the process of its graduation from a poor country to the status of a lower middle income country, has now reached the limiting point of this strategy, and therefore, the country’s future trajectory of growth should sequentially progress initially through the efficiency driven stage, eventually to the innovation driven stage.
There is absolutely no logical reason why the second and the third strategies listed above should be in that particular sequence in succession, except perhaps that they are listed in that sequence in textbooks.
Ladies and gentlemen,
There is absolutely no reason why Sri Lanka’s economy cannot leap-frog straightaway to the third stage of an innovation-driven economic growth as its dominant strategy for growth. The main contributory factors that would enable such a leapfrog are the high literacy rate, penetration of access to electricity, telephones and Internet, and the energies of social capital such as free education.
Let us reflect for a moment, on the historical evolution of technology and its global impact. With the advent of the industrial revolution in Europe, labour productivity improved. At a subsequent stage, human labour was substituted with fossil fuel and other sources of energy, thereby multiplying the effect of labour.  
Similarly, the capacity and the capabilities of the human brain were also multiplied by computer and communication technologies that subsequently evolved.  History has recorded those events as the power of technology.  In the early days, technology needs were arising out of the need for creating more resources and social network, in order to meet the basic human needs such as food, shelter, health, communication and protection.  
In the era that followed, technology provided a platform where the conflict between capital and labour got defused. The new socio-economic classes that could be distinctively identified as managers, technologists and workers, were born in relation to the class that owned capital. 
It was after considerable time that it became apparent that the development of technologies had given rise to a serious crisis in the form of environmentally related degradation, and decrease of resources, whilst robbing the future generations of their due share of resources.  As an example of the measure of economic implication of the crisis, it has been warned that global warming, if continued at the present levels, could shrink the global economy by 5 – 20% within the next 2 centuries.  
By now, it has dawned on the whole world, that technology, which is purely maneouvered by market forces, has no heart.  For the same reason it is absolutely necessary to exercise proper judgment in choosing between technologies to invest. The mere increase of per capita GDP is not something that we can be content with.  Striving for a mere increase of per capita GDP could well lead to social unrest and destabilization, and the eventual collapse of social capital.  
We cannot forget the fact that Sri Lanka is a country that sustained multiple rebellions and uprisings.  In the meantime, the risk of collapse of ecological systems due to degradation of water, soil, air and bio species should not at all be underestimated.  
Therefore, the triple principles of economic policy, strategy or action plans that should act as the pillars of a sustainable future, should be, 
Sustainable economic development
Sustainable social development, and 
Sustainable environmental development 
In Sri Lanka, there are two main lines of criticism about investments in science and technology.  
The first, coming from scientists and engineers, is that the amount of funds spent on research and development by the government and the private sector is a meagre amount.  The opposing line of harsh criticism is that the funds allocated and the concessions granted to the public as well as private sector for research and development, has failed to produce any productive results impacting economy. In the first place, it has to be made very clear that investment in research and development will not yield any tangible economic results.  A market environment, which is conducive for translation of research outcomes into commercializable products, and for transformation of inventors into entrepreneurs is absolutely essential.  It is the absence of such a conducive environment that has caused Sri Lanka to rank pretty low in the knowledge economy index.  
This has resulted in a vicious cycle between research and development investments and economic benefits.
There are several obvious requirements that need to be met for R and D investments and economic benefits to break away from this vicious cycle and to complement each other constructively.
Investments should be mainly on applied and developmental research, and on innovations 
An environment conducive for research and innovation should be created
Investments and market stimulation for commercialization of innovations should be promoted 
A fraction of the economic outputs should be redirected as R and D investments 
There should be a stable innovation environment
In this context, we have identified ten priority areas for intervention during the next five years from 2015 to 2020.  They are, water, food, health, housing, energy, garments, minerals, knowledge services, fundamental sciences and technologies, and environment.
Further, we have also identified ten strategic interventions. They are policy planning, research, innovations, nano-technology, biotechnology, information and communication technologies, indigenous knowledge, science and technology infrastructure, skills development, marketing and promotion.
Accordingly, we have hundred activities at most.  
We have identified the annual investment requirements by the state and the private sector, which may change during midcourse depending on the progress.  Further, we have also estimated the economic benefits that those interventions would yield to the nation under appropriate socio-economic factors.
There has been no state investment based on a national plan since the five-year plans of 1952 and 1972.  
The R and D investment proposed here is one that has to be contributed to by both state and private sectors.
This obviously calls for certain structural changes in economic and finance policies, socio-political policies and education policies. The future of sustainable development that all of us aspire for the nation will not just dawn upon us.
Both the will as well as the capability to guide Sri Lanka towards the future we want, are with us.

  Comments - 1

  • no problem Tuesday, 08 July 2014 07:37 AM

    At least the government has few people who stick to their principles

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