By Asoka S. Seneviratne –

Prof. Asoka.S. Seneviratne

“Innovation distinguishes between a leader and a follower.” ~ Steve Jobs

“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” ~ Charles Darwin

After the establishment of the AKD/NPP government about six months ago, it faced a minor crisis regarding shortages of rice and coconut. However, a significant challenge arose from the Trump administration’s increase in tariffs on exports to the USA from 10% to 44%, which constituted an external shock. Its impact on various aspects, including (i) foreign exchange earnings, (ii) employment, (iii) debt repayment, and (iv) overall growth and development, remains paramount among many. Therefore, in light of the external shock, a paradigm shift in export products (i.e., diversification) and in the export market or trade diversification is crucial.   

It should be noted that advances in digital technology (i.e., IT) have dramatically enhanced export production through complex supply chains at reduced costs. Traditional trade models, which assumed goods were produced in one country and consumed in another, are no longer relevant in many sectors. Notably, trade in services, including intangible and intellectual property, has grown substantially and will become a key component of global trade. Countries that prioritize investment by valuing people as their most valuable resources tend to experience more pronounced economic and social progress. Innovation, creativity, and dynamism arise from human talent, underscoring the importance of education and skill development in fostering economic growth. Furthermore, trade is increasingly centered on services, ideas, intellectual property, and brand value. Physical products often serve as carriers for embedded innovations, highlighting the significance of creativity and innovation in driving economic activity and job creation. Based on the above, the challenge posed by Trump’s tariff presents an opportunity to foster a resilient export economy that supports and accommodates the four outlined elements in a strategic and results-oriented manner. It must be noted that many measures have been in place for decades, including the Export Development Board (EDB), yet their achievements have lagged. The calamity caused by the Trump administration’s tariff increase indicates EDB’s failure. If approached wisely, the challenge imposed by Trump’s tariff increase can transform into an opportunity that catalyzes structural change and repositions Sri Lanka as a resilient, dynamic exporter in the global marketplace.

Given the situation, short-term and long-term measures can be implemented to resolve the challenge permanently. Engaging with the Trump administration regarding the 44% tariff increase and retaining GSP+ status are short-term to medium-term actions. However, resilient long-term strategies are crucial, as Sri Lanka has been overly reliant on a limited basket of export products and a narrow market base for an extended period. Therefore, Sri Lanka must diversify its product offerings and seek out new markets to achieve “A Thriving Nation and Beautiful Life” by avoiding the abovementioned four impacts. For a paradigm shift, Sri Lanka needs to prioritize the following long-term measures: (i) emphasizing knowledge-based production and export, (ii) securing new markets in Africa, Latin America, and Asia, (iii) fostering economic cooperation, and (iv) increasing Foreign Direct Investment (FDI), among many others.

Focus on knowledge-based production and export

Based on the reference to advances in digital technology in the introduction, I wrote an article for Vision 2030 Focus Magazine 2013 titled “Transforming Resource-Based Economy into Knowledge-Based Economy.” Vision 2030 is the comprehensive blueprint for economic growth and development in Namibia. One of the objectives of Vision 2030 is to transform Namibia’s resource-based economy into a highly competitive, industrialized, knowledge-based economy that fosters sustainable economic growth (i.e., 7%) and a quality of life comparable to that of advanced countries. As a result of this transformation, the knowledge intensity of the increasing variety of exports becomes resilient to external shocks in international trade and supports market diversification beyond Africa. Given the country’s economic growth and development challenges, this explanation is valuable, relevant, and applicable to Sri Lanka. In short, the NPP policy document “A Thriving Nation and Beautiful Life” shares a purpose similar to that of Vision 2030. With this aspiration in mind, this article explains how to confront and resolve the significant challenge created by the Trump administration’s increase in tariffs on exports to the USA from 10% to 44%, by transitioning from a resource-based production economy to an export-oriented economy founded on knowledge-intensive production and market diversification.

Meaning of Resource-based economy & Knowledge-based economy

The primary sources of GDP in Sri Lanka are the services sector, industry, and agriculture. In 2023, the services sector contributed the most at 59.93%, followed by industry at 25.59% and agriculture at 8.28%. Sri Lanka’s primary export industries are textiles and garments, tea, rubber and rubber products, gems and jewellery, and seafood. Together, they contribute significantly to the country’s export revenue. In 2023, the service sector dominated employment in Sri Lanka, with 47.34% of the workforce employed in this sector. The agricultural sector employed 26.26%, while the industry employed 26.4%.

Subsistence agriculture is a significant part of the agricultural landscape in Sri Lanka, with approximately 26% of the total employment in the country being in the agricultural sector. About 1.8 million farm families are involved in paddy cultivation, a significant component of subsistence farming. Natural resources include limestone, graphite, mineral sands, gems, and phosphate. Agricultural products include tea, rubber, coconuts, rice, and spices. Industry comprises textiles and garments,  food processing, wood and wood products,  paper and paper products—generally, 8.28% of agriculture alone does not indicate Sri Lanka is a resource-based economy. However, 26% of employment in agriculture and the above-mentioned natural resource base is part and parcel of the resource-based economy. Furthermore, Sri Lanka’s primary export industries are textiles and garments, tea, rubber and rubber products, gems and jewelry, and seafood, which are part and parcel of the resource economy. The four factors of production are land, labor, capital, and entrepreneurship. Compared to capital and entrepreneurship, Sri Lanka’s exports indicate land and labour intensity.

The opposite of the above is a knowledge-based economy. In a broader sense, economic growth and development are anchored in knowledge creation and its systematic application in producing goods and services competitively. Knowledge creation and application pave the way for the knowledge intensity of economic activities, which contrasts with land and labor in the resource-based production economy. In the knowledge-based economy, knowledge is (a) created, (b) acquired, (c) managed, (d) disseminated, (e) assimilated, and (f) applied or exploited. This process is called invention, innovation, or creativity, leading to marketable goods and services in world trade that are resilient to shocks. In this context, knowledge (i.e., invention, innovation, and creation) is at the heart of value addition, representing an unthinkable departure from the reliance on labor or traditional labor.

Over the last few decades, due to extensive research and development, changes in education and training systems, the world has witnessed the application of computing and communication technology (IT) in all areas of the production of goods and services, management and businesses, transportation,  logistics, and distribution and storage, etc. Compared to human labour, a sharp increase of  IT per unit of performance/output is a continuing process. In this respect, digitalization, open systems standards, scanning, imaging technologies, memory and storage technologies, display systems, copying technologies, etc., intensified the knowledge economy or knowledge-intensive production, growth, and development.

Indeed, the knowledge economy results from an unimaginable dynamic process involving research and development, leading to (a) invention, (ii) innovation, and (iii) creation—the Trio. The Trio is anchored in the IT revolution, which is an integral part of globalization. Compared to the capital-intensive exports from developed countries approximately three decades ago, the increase in knowledge intensity (value addition) of these countries’ exports demonstrates the transformation of their economies from capital-intensive production of goods and services to knowledge-intensive output of goods and services.

Production Diversification: Knowledge-based products & Services, & Industries

While Sri Lanka focuses on strengthening value-added industries, particularly in agriculture and sustainable manufacturing, top priority should be given to knowledge-based products (i.e., the TRIO), which primarily leverage and build upon existing knowledge. They often fall into categories like software, text documents, creative works, and legal documents. Essentially, these products emphasize the creation and delivery of information as key elements. Examples of Knowledge-Based Products include: Software, which serves as a classic example since its core functionality is based on algorithms and data structures that represent and process knowledge. Text Documents encompass books, journals, articles, and other written materials that convey information. Creative Works, such as art, music, film, and other expressive forms, rely on knowledge and skills for their creation. Legal Documents, including contracts, laws, and other legal texts, are also knowledge-based products as they define and regulate actions and relationships. Knowledge Bases are digital repositories of information accessible for various purposes, such as customer support or internal training. Smart Products feature technologies like sensors and software to provide users with information or feedback, exemplified by a smart tire that monitors air pressure. Training Materials comprise courses, manuals, and other educational resources that impart knowledge and skills. Technical Documentation includes instructions and manuals for software, hardware, or other products. Key Characteristics of Knowledge-Based Products are: (a) Interactive: Many knowledge-based products allow for user engagement and feedback, often becoming more useful as users interact with them more frequently, learning and adapting over time. (b) Customizable: Some knowledge-based products can be tailored to meet the user’s needs.

Examples of Knowledge-Based Industries:  (a) Information Technology, (b) Software development, data analysis, and other IT-related activities are knowledge-intensive.(d) Biotechnology: Research and development in pharmaceuticals, genetics, and other biological sciences are knowledge-based. Creative Industries: Film, music, design, and other innovative sectors rely heavily on knowledge and skills. Consulting: Expert advice and guidance in various fields is a knowledge-based service.

*To Be Continued in Part II