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A  New  Narrative  for  Economic  Growth  By  Patali  Champika  Ranawaka  

Minister  of  Technology  and  Research    

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.    

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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.    

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• 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.      

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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.    

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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.