It is becoming increasingly clear that for a sustained high-growth path, Sri Lanka needs to undergo further structural transformation of the economy - building more competitive industries, raising exports, generating productive and well-paying jobs and moving more people out of poverty, would be key elements in this. During a recent visit to Sri Lanka, the head of the United National Industrial Development Organisation (UNIDO), Dr. Li Yong shared some very interesting insights on strategies to boost industrialization as a crucial element in the structural transformation of an economy.
Li is no stranger to formulating and implementing development strategies. Prior to joining the UNIDO as its Director General, Li was the Vice-Minister of Finance in China and member of the Monetary Policy Committee of the Central Bank for a decade. He led the way in setting and harmonizing fiscal, monetary and industrial policies, during a time when the Chinese economy was undergoing a decisive structural transformation. Li shared these thoughts as we travelled together to visit the impressive nanotech facility in Homagama – SLINTEC. Here are four main takeaways from my conversation with him.
1. Pragmatism over dogma
The first idea he shared was his advice to modern policymakers - to choose pragmatism over dogma. In devising industrial policies, there is often a lot of debate on what the right policy mix should be, which ideology it should follow, etc. We spoke about how ideological shifts of rulers have influenced policy shifts. Given all this, I asked him, “How did China industrialize? How did China figure out what ideology to go with?” He responded by quoting Deng Xiaoping’s famous adage - “it doesn’t matter whether a cat is black or white, if it catches mice it is a good cat.” Li argued that for too long Western academics have been preoccupied with trying to classify development paradigms into discrete categories. Given the complexity of the world today, the impatience of societies to prosper and the pragmatism required of politicians, clinging on to particular ideologies as dogma will not help. Instead, he argued, whatever policies can get the job done is where the focus should be. And if this is a mix of multiple ideologies, it shouldn’t matter.
2. Industrialization needs a holistic approach
The second idea he shared was that a country couldn’t sustainably develop industries without thinking about urbanization, water, sewerage, transport, etc., at the same time. He cited plenty of examples in China where ambitious industrialization efforts had been constrained because expansion plans of critical city and related infrastructure hadn’t kept pace. Having good land use policies to ensure industries have space but do not harm quality of life and the environment; clever transport strategies that ensure that workers can get to industries; water, sanitation and sewerage systems that keep pace with requirements of industry and overall urban planning that takes into account how industries will grow and how society will interact with cities that industrialize (from rural to urban), must go hand in hand with industrialization efforts, he emphasized.
3. Letting the small fish go
The third idea he shared was on promoting small business and making it easier for business to operate. He likened this to fishing. “It’s like how you don’t catch the small fish, you let them grow up. It’s the same for small business. Tax and regulatory issues must be relaxed for them.” I found this unusual coming from a former Chinese official – given China’s notoriously overbearing state. Yet, the state is increasingly easing its grip. During a visit to China last year I saw first-hand how over 600 items of regulations being either removed or delegated to lower levels of authority to be closer and more responsive to local business needs. This is also very relevant in the Sri Lankan context. The focus on small business development in Sri Lanka for many years has been rounds and rounds of concessionary credit lines. But little attention has been paid to making government regulatory systems work better for small and medium enterprises (SMEs). Small businesses often complain of unfriendly government services, burdensome and costly tax compliance and lengthy licensing and permit regimes. Unlike larger businesses that have dedicated teams to navigate the complex web of state regulations and compliance needs, small businesses don’t. As Li said, we need to reorient regulatory systems to be more supportive of small business – whether it is in tax, licenses, EPF/ETF, etc.
4. Firms must go global
The fourth idea Li shared was that the only way to enhance the competitiveness of firms in an economy is by encouraging them to go global. In any economy, it’s often easy for firms to be comfortable with a domestic market if they are not exposed to global competition. As I remarked in my column a couple of weeks ago, protectionism and special preferential treatment of domestic firms could hurt their competitiveness. That competition sharpens firms and breeds success is a powerful axiom in economics. In fact, Li suggested going a step further – providing the right incentives for local firms to go and operate globally. Li remarked, “Once you get companies to go global they learn. They open up and reform. It’s like going from high school to a PhD. They grow up. Without this they won’t know how to compete globally.” There are several Sri Lankan firms that have already ‘gone global’ – MAS, Dilmah, etc. What can we learn from these companies? What did these companies learn by going global and how did it sharpen their competitiveness? Do governments have a role in helping more companies go global?
(This is the 12th article in the ‘Smart Future’ column that advances ideas on competitiveness, innovation and economic reforms. Anushka Wijesinha is a Consultant Economist with an MA in Economics and a ‘New Champions Awardee’ of the World Economic Forum. He blogs at thecurionomist.wordpress.com and is on Twitter @anushwij)