Monday, October 1, 2012

Have we missed the bus this time too?


By Dr. Sirimal Abeyratne, Professor of Economics, University of Colombo

A few months after the end of the 30-year long war, I wrote an article titled, "Don’t miss the ‘luxury’ bus this time!" to The Island published on 19th October 2009. It is a well-known and well-documented fact that for whatever the reasons Sri Lanka continued to miss its development opportunities during the past 60 years after gaining independence in 1948. As many have considered, since the end of the war in May 2009 the country entered into a new era of its development process. Because all factors seem conducive to sustain a rapid growth momentum for the first time in the post-independent history of the country, it is only the Sri Lankans who can now hold it back and, no one else! Even if the government does not have to do anything to accelerate growth, in the post-war environment all factors seem to be working together to accelerate growth.

However, a retrospect on the experience over the past 3 years led me to rethink whether we missed that ‘luxury’ bus too. Let us look at some facts and figures that might help us to understand the answer to this question and, more than that to correct ourselves if it is needed.

A couple of months ago, I met a group of Professors in Economics from an East Asian country who had scheduled a meeting with me when they were in Colombo. It was the first visit to Sri Lanka for most of the professors in the group, including the team leader, while others had also visited the country many years ago. Nevertheless, I realized that they had done their homework before coming to Sri Lanka and, had finished their fact-finding mission in the country before meeting me. So I posed a question that raised my curiosity: "Since you all have a fresh knowledge and understanding about Sri Lanka, what is your impression about this economy?" The Team Leader paused for a while and said: "You claim to have per capita income over USD 2000 and, rate of economic growth at 8 percent per annum; yet when we look around, the Sri Lankan economy does not seem to be so – I mean, it is not as live as an economy with figures as such".

I knew what they meant; the reality does not match the numbers. Apart from that, as any other economist, I also knew that the numbers should match the numbers too.

A high-performing economy

However, I had the opportunity to see what they meant with my own eyes, when I spent few weeks in Vietnam recently, teaching at the University of Economics in Ho Chi Minh City (HCMC). Vietnam is a high-performing economy which has been growing at around 7-8 percent per annum over the past decade. We do not need to have knowledge in Economics to understand where growth comes from. When the country generates more and more investment – domestic or foreign, the country’s productive capacity increases so that the country can produce more and more. A little complicated issue is that growth also comes from productivity improvement of the investment – doing things better than before. You can do the investment, but if that investment project produces little business or output below the acceptable norms, there is no contribution to sustainable growth.

In the true meaning of the term, the Vietnam economy is as live as a "high-performing economy", as it is known to be now. You witness the flourishing business activities, small and big both alike, every corner. You see new business ventures are being constructed in many parts of the city, mostly with foreign investment. You see that the city is too small to accommodate growing investment flows, so that the city is being expanded converting even thousands of acres of paddy fields into modern urbanized industrial and commercial cities. You witness that even in the Universities and other tertiary educational institutes, the demand for higher academic and professional qualifications are on the rise and, their prices are also on the rise.

Investment comparison

In the year 2000, Sri Lanka’s investment ratio, measured in terms of gross fixed capital formation as a percentage of GDP, amounted to 28% and was greater than 27% of that in Vietnam. However, the investment ratio of Vietnam has recorded a steady growth over the decade exceeding 35% by 2010 so that the Vietnam economy could grow at higher rate per annum. After seen the live economy at a glance, I thought of my country too: Although we have a slogan to be the "wonder of Asia" by 2020, can I also observe that economic dynamism in Sri Lanka? Apart from the government’s mega projects and infrastructure projects, how many private investment projects I can count now. How much we struggle to bring about USD 1 billion worth foreign investment last year, when Vietnam receives about USD 10 billion foreign investment annually? Even the total accumulated foreign investment stock of Sri Lanka for the past 3 decades has not yet amounted to USD 10 billion.

Exports comparison

Higher growth should be consistent with even greater export performance – more in small economies than in large economies. The simple reason is that the domestic market is too small to sell higher output of goods and services. Therefore, exports rise rapidly in growing economies as production expansion is basically export-oriented. In the early 1990s, the level of exports of Vietnam was not much different from that of Sri Lanka which was amounted to USD 5 billion. In fact as a percentage of GDP, Sri Lanka’s exports (over 35%) were higher than that of Vietnam’s. By 2010, Sri Lanka could laboriously manage to double its exports reaching USD 10 billion, while Vietnam’s exports exceeded USD 100 billion. Vietnam’s higher growth is consistent with fast-growing exports. But, how do we explain higher economic growth of Sri Lanka in the midst of falling exports, as the two scenarios are inconsistent especially for a small country like Sri Lanka; Sri Lanka’s exports that accounted for nearly 40% of GDP in 2000, have dropped to 22% by 2010, while the fastest drop has been during the second half of the decade.

Even if there were crises, internally as well as internationally and led by either economic or non-economic factors, crises mean new "opportunities". They usually provide golden opportunities to correct ourselves, and to address even the deep-rooted fundamental weaknesses affecting growth and stability. Sri Lanka has faced with a series of shocks over the past decade beginning from economic contraction in 2001, followed by the tsunami in 2004. Then, the country was exposed to global oild and food crisis in 2006/2007, followed by US financial crisis in 2008/2009 externally and the last phase of the war simultaneously. Apparently, there were costs in each of them, but they all brought about golden opportunities to correct ourselves too. I hope we would not miss the present opportunity, unless we have already missed it.

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