Colombo Telegraph

How Sri Lanka Could Move Into A Complex Production System

By W.A. Wijewardena


Dr. W.A. Wijewardena

Sri Lanka’s problem: No entrepreneurs but traders

A reader of the previous week’s My View titled “SL’s future: Convert the simple economy into a high-tech based complex economy” has taken up an important issue with this writer via email. He has said that it is unlikely that Sri Lanka could have a complex production structure in the country because Sri Lanka lacks the type of innovative and visionary entrepreneurs to take the country toward that goal. Instead, according to him, Sri Lanka has traders who are good at buying goods from another country and selling the same in the local market. In the absence of the type of entrepreneurs of the required calibre, Sri Lanka may have to import entrepreneurs from abroad and such importation, he says, will not do any good to the country in the long run.

This reader who has taken such a trouble to reflect on the issues presented in the My View under reference should be commended for the debate he has generated and the learning experience which everyone will get out of his intervention.

But, he is both right and wrong.

Sri Lanka’s past policy has killed true private entrepreneurship

He is right because after independence, Sri Lanka has failed to create a truly entrepreneurial class in the country as its policies were anti-private sector and anti-profit making for most of the time. Whenever a local entrepreneur of worth emerged from the dusts at the ground level, Sri Lanka had killed him either by expropriating his business under the pretext of serving the common man or bringing him within a strict governmental regulatory regime to prevent him from, as the country’s leaders had argued, harming the people. Hence, in the whole of the post-independence period, leading industries were started and managed by the government by employing bureaucrats who had no knowledge of running businesses in a competitive environment or handing such industries to political supporters whose only interest in the industry was to serve their political masters. Even the trader type entrepreneurs who got nourished in the system could not work on their own and had to seek comfort of the country’s rulers to win numerous business favours from them. Thus, creativity and innovativeness, the two pillars on which a true entrepreneur would stand high in society, were alien to Sri Lanka’s entrepreneurial class. They were, for all practical purposes, shrewd businessmen who took advantage of the prevailing regulatory and protective regime of the country. Hence, in an environment where there is free competition in the market, they would find it difficult to survive unless the government comes to their rescue.

So far the story is not that encouraging.

Rule of Law a must to protect property rights

However, the reader is wrong because he has come to his judgment by observing the past behaviour of the entrepreneurs of the country. Such judgment is based on what we have classified as linear thinking in our previous My View. This thinking is fraught with the weakness that it does not take into account the ever changing environment and how people are able to adapt themselves to new situations. If the government, as the all mighty authority to shape the future course of society, creates the right conditions in the economy, new entrepreneurs with talents, creativity and innovativeness will blossom just like they blossomed in the post-war Europe and Japan and in recent times, in Singapore. What the government should do is to observe the Rule of Law, both to the letter and in its spirit, and through it, establish the private property rights. The protection of property rights should be ensured by maintaining law and order in the society. To maintain law and order, the law enforcement agencies – the police, Attorney General’s Department and the judiciary – should be impartial and independent. To ensure that these agencies perform their jobs properly, appropriate social and legal institutions have to be set up and promoted by the government. The complexity economists call this type of shaping society or social engineering ‘the social technology’ – the networks, human interactions and human institutions that facilitate people to attain their goals. They all provide the necessary legal and social impetus for the blossoming of true entrepreneurs.

So, Sri Lanka can change itself but it requires a host of policy changes that would facilitate a quick migration from a simple economy to a complex economy.

There are some lessons which Sri Lanka can learn from Singapore which accomplished this feat within a generation and Malaysia which is now on its way to building a complex economy system.

What matters is ‘productive knowledge’

The development of what is known as the productive knowledge as against the simple knowledge has been the precursor of all countries which have migrated to complex economies. This requires the development of a different kind of human capital within a country. The knowledge base of a population becomes productive only if that knowledge is current and used for creating prosperity for its people on a sustainable basis. For instance, as revealed by the MIT-Harvard “The Atlas of Economic Complexity”, Ghana has spent more on its education than Thailand since 1965. But Ghana has failed to use its investment in education productively compared with Thailand and as a result it remained a poor country while Thailand managed to move up from a poor country to a lower middle income country by transforming its economy to a midway complex economy. Thus, not all education that matters; only the education which helps a nation to create wealth on a sustainable basis that matters, as argued by Alison Wolf of the University of London in her 2002 book, “Does Education Matter?”.

Singapore and Malaysia invested in productive knowledge

Both Singapore and Malaysia have concentrated on developing productive knowledge in their respective countries. As revealed by Lee Kuan Yew in his autobiography, “From Third World to First”, in late 1960s, Singapore took a conscious policy decision to link its primitive university system to the best of the world’s universities like the University of Chicago, Harvard University and Yale University. The objective was to expose the Singapore students to the best of the knowledge being created in the world. This practice is being pursued by Singapore even today. Its universities have joint research programmes with leading US universities so that the knowledge is developed collaboratively with them. According to Malaysia’s former Prime Minister, Mahathir Mohamad, the country sponsored a generous scholarship programme to enable young Malaysians of promise to study in reputed Western Universities and return to the country and help it in its economic transformation. To facilitate them to use their knowledge productively, he embarked on a massive investment programme in information and communication technology wiring the entire nation in a project titled ‘Communication Super Highway’, since he foresaw as early as 1990s that the future belongs to ICT savvy nations.

Sri Lanka has built only simple knowledge

Sri Lanka too, like Ghana, has spent a vast amount of its national resources on education since independence and created knowledge. But that knowledge has not been productive knowledge due to two reasons. The first is that that knowledge has not been current because Sri Lanka failed to link itself with the best universities in the world. The second is that Sri Lanka did not have a suitable institutional structure to tap that knowledge in business and enterprise. Its anti-private sector and anti-profit making stance encouraged those who acquire even that limited knowledge to seek jobs in the government sector. Worse, the successive governments too, due to the obvious political reasons, accommodated that demand by offering state sector jobs freely to passing out graduates even though the state sector had already been filled to the brim. So, from a prosperity point of view, its vast investment in human capital in the past has been unproductive.

Spend more on education, but productively

But this does not mean that Sri Lanka should give up all the hopes now. It can make amends for its past mistakes by building a knowledge based society as outlined in the government’s policy document “Mahinda Chinthana”. For that purpose, it has to change its policy stance and work in collaboration with the academics instead of confronting them. Just like its investments in physical infrastructure, investments in social infrastructure a must for Sri Lanka today. Hence, the government should look positively at the demand for increasing its spending on education to match other nations in the world, but it should get the academics binding for raising the standards in education to world-class level within a given time frame. For instance, it should raise the spending on education, but get the university authorities to introduce a time bound action plan to get at least a half of the universities ranked within the top 500 universities in the world. Those who get ranked according to this plan can get higher funding for both research and investment purposes in the future. In addition, as envisaged in the now abandoned Comprehensive Economic Partnership Agreement or CEPA with India, the top Indian institutes of Technology or IITs which are ranked within the top 500 universities in the world should be permitted to open branches in the country. As a long term plan, Sri Lanka has to invite world class universities to come and help the local state universities to improve their quality standards, including the release of results on time.

Foreign mentoring a must to build entrepreneurs

Can Sri Lanka develop its entrepreneurs to world class entrepreneurs within a given time frame? Yes, provided it gets other world class entrepreneurs to coach and mentor them. In this sense, Sri Lanka needs outside entrepreneurs to come to the country with capital, knowledge, technology and markets. Singapore, having recognised this dire need adopted a comprehensive policy package to attract such talents from abroad. As revealed by Lee Kuan Yew in his autobiography, “From Third World to First”, first, the legal and social structure was reformed by ensuring the maintenance of law and order and the observance of the Rule of Law. These are two important requirements to protect the private property rights. The judicial system was improved by making them independent and impartial. Today, even the regional arbitrations are filed in Singapore, because the foreigners have faith in their judicial system. Then, according to Lee Kuan Yew, a ‘Western Oasis’ was created within Singapore to enable the expatriate entrepreneurs to feel like living in their home countries. The infrastructure, transportation facilities, quality of public service and environment were developed to the standards in the Western world. Finally, Singapore adopted a policy called a ‘leap-frogging policy’ under which Singapore looked beyond its immediate neighbours and had economic relationships with the developed world. Lee Kuan Yew says that neighbours are important but they cannot supply Singapore with capital, technology, management practices and markets. As a resource poor country, it had to look for these resources from those who possessed them.

Sri Lanka’s plantations were built by foreign entrepreneurs

Sri Lanka had had the benefit of the foreign entrepreneurs in the 19th and early 20th centuries. Its plantation industry was developed by the enterprising Scottish planters who established world class practices of plantation, management, marketing and financing to run their operations. As mentioned by the first Sri Lankan Central Bank Governor, the late Mr N.U. Jayawardena, in an article titled ‘Development of Ceylon’s Trade since 1834 – From the Coffee Bubble to the latest Depression 1934”, these planters in early years, in the absence of banking facilities, carried their funding in the form of British coins stored in iron trunks in physical form to the upcountry plantations. Like the Western Oasis of Lee Kuan Yew, they built a similar Scottish Oases in the plantation raj to feel like living in their homes. In return, these indefatigable planters passed their entrepreneurship to their local counterparts who ran these plantations profitably until they were nationalised by the Sri Lanka government in 1974. Many later day Sri Lankan planters have confided with this writer the good management practices they had learned from those Scottish planters.

Develop the relevant human capital

Now, let us look at the strategies to change the current simple system into a complex production system. First and foremost, Sri Lanka should have the required trained workers to run those complex manufacturing outfits. Sri Lanka does not have a worthwhile pharmaceutical industry located in the country because it has not produced a sufficient number of biomedical scientists to serve in them. Until recently, this was an alien field for any Sri Lankan student who has aspired to enter the medical profession. Despite the fact that there are a dozen of universities in the country, there has not been any degree programme leading to biomedical qualifications offered by a Sri Lankan university. Even the small number of Sri Lankans who had got this qualification from universities in the West had to offer their services to foreign countries because they could not find attractive job opportunities in Sri Lanka. In this background, it is encouraging that a few private sector educational institutions are offering the UK and Australia accredited diploma programmes in biomedical science in Sri Lanka. Similarly, Sri Lankan universities should start such rare courses for equipping the Sri Lankan students with the required talents and skills to convert its simple economic structure into a complex one within a given time frame.

Top priority is survival and success

Second, the government should recognise that Sri Lanka cannot survive in a hostile and competitive market unless it adapts itself to the changing world conditions and acquires capability to meet its future requirements. Investment in infrastructural facilities is important but unless these facilities are used productively for creating further wealth on a sustainable basis, they are not of any use to the country. Many countries, including the former Soviet union, which had invested heavily in infrastructure later found that they got dilapidated pretty soon because the economy could not sustain even their maintenance. A good example quoted by foreign journalists is the Myanmar’s new capital Mandalay with 6 lane roads but without vehicles. According to Ruchir Sharma, author of the 2012 bestselling book “Breakout Nations’, Viet Nam has built some 54 ports which are not visited by ships and therefore, they have become ‘ports to nowhere’. What it means is that infrastructure programmes should be undertaken carefully taking into account the benefits they bring in and the links they establish to offer wealth creation prospects.

Hence, looking at the economy as a whole and designing its future course in line with the changing global conditions is the requirement of the day.

(Writer is a former Deputy Governor – Central Bank of Sri Lanka and teaches Development Economics at the University of Sri Jayewardenepura. This article first appeared in Daily FT  – W.A. Wijewardena can be reached at )

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