By W.A Wijewardena –
When The Engine Of Growth Gets Into A Comfort Zone, It Is The Engine Driver Who Gets Into Trouble
Private sector is the engine of growth and public sector is the engine driver
Private sectors in modern economies are branded as ‘Engines of Growth’. They have earned this brand name due to their innovative power, resilience, foresight and ability to assess and mitigate future risks. In the opposite, the government sectors lack these attributes. As a result, when they take part in economic activities, they very often end up in disasters requiring taxpayers to put their hard-earned money into them continuously to keep them afloat.
A good example is Sri Lanka’s budget airline – Mihin Air – which had to be rescued by the Treasury by pumping capital and assuming its debt to banks on a number of occasions. The figure is staggering Rs. 2.4 billion to partly clean its tainted balance sheet where the capital had been eaten up – a negative net worth – to the tune of Rs. 5.6 billion by end 2010. Despite this extraordinary support, the result has been a perfect disappointment. Mihin Air has continued to be a big loss maker – Rs. 6.2 billion over 2011-13, three times higher than the annual budget of a medium-sized State university – and has even budgeted losses for the future – Rs. 6 billion during 2013 to 2016 according to Finance Ministry Annual Report 2012 – without even bothering to take necessary remedial action.
Hence, wise governments have chosen not to be active players in economic activities. However, they cannot allow the economies to be fully driven by private hands. Hence, they choose to be at the top – at the ‘commanding heights’ as called by Vladimir Lenin when he relied on the private sector to rescue the dying Soviet economy in early 1920s. Today, that role of the government sector is called the ‘Driver of the Engine of Growth’.
Engine of growth meets the engine driver at the pre-budget forum
But what will happen when that Engine of Growth gets into a comfort zone devoid of vigour, energy, foresight and strategy? Then, it is the driver of the engine who gets into trouble. That is because the driver then fails to push the engine to the heights to which he wants the engine to rise.
This was demonstrated on stage when the business leaders met the Treasury Secretary P.B. Jayasundera, popularly known as PB, to communicate to him their proposals for the upcoming budget. The event had been organised by the Colombo University MBA Alumni Association together with the Daily FT (available here ).
Government’s ambitious growth plans
According to reports, 18 business leaders representing diverse sectors in the economy had made their presentations at the Forum which had been attended by senior officials of the Treasury led by its Secretary, PB, a seasoned economist and a leading public policy maker. Hence, it was a face-to-face frank dialogue at which issues relating to the future course of Sri Lanka’s economy would have been debated, sorted and finalised.
The Budget of 2015, though it pertains to one year, is a part of the long-term plan which the present Government has about the country’s economy. The main deliverable outputs of this plan, as pronounced by PB at the recently concluded Defence Seminar 2014 and elsewhere, have been quite ambitious (available here ). They included, among others, making Sri Lanka’s economy as big as $ 100 billion economy by 2016, beating the Middle Income Country Trap by increasing the per capita income to $ 7,500 by 2020 from the targeted level of $ 4,000 in 2015, generating a surplus in the country’s trade account by early next decade and joining the rich country league by 2035.
These ambitious targets which Sri Lanka’s top economic policy makers have set for the country have to be realised not by the public sector but by the private sector, which is the engine of growth. Hence, the engine of growth should be attuned right from now to lead the way to realise these goals by taking into account the current developments in the local economy, emerging global outlook in the next two to three decades and the constraints which Sri Lanka’s economy would face in its march forward. This needs a correct reading of the present situation, not revealed by the macro numbers released, and using foresight and long term thinking on solving the issues concerned. It certainly prevents them from being complacent and getting into a comfort zone.
Business leaders to PB: ‘We’re happy now and don’t need any more’
But, many business leaders had admitted to Treasury officials that they did not have issues. One business leader speaking on behalf of the construction sector has said that ‘ours is a sector growing faster than the country’s growth rate; we cannot ask for more than what we have got’. The business leader representing the tourism industry has thought it necessary to speak about only the absence of a level-playing field relating to the remittances coming from abroad where the unregistered foreign owned small boutique hotels have been sending only the net amounts to the country thereby avoiding the payment of even the essential taxes.
In the case of tea industry, the major issue has been the non-utilisation of funds raised under the tea cess system. The garment sector has been very happy about the current state and according to its representative, ‘they have nothing to ask’. The local confectionary manufacturers are worried only about the absence of protection to the industry. The local footwear industry which uses natural rubber as an input has drawn the attention for increasing the local production in order to meet the shortage in the market. The aviation group is worried about not having a transparent fuel policy.
The shipping and logistics industry has drawn the attention to the problem of ‘ease of doing business due to massive paperwork involved’. The advertising industry is worried about the tax anomalies relating to the industry. The local business conglomerates have demanded the issue of environmental certificates by a single body. Another business leader has asked the Government to issue direction to banks that they should at least allocate 15% of their loans for long-term purposes.
A proactive economic policy that is attuned to the targets of the Government has been suggested only by three business leaders: One suggesting that a human skills development council has to be set up to meet the need for quality skills, another suggesting that Sri Lanka should go for a mega pharmaceutical industry in the country and finally the last suggesting that the formation of start-up IT companies be encouraged in order to tap the vast potential that is available out there for that industry.
Thus, the representations made by private business leaders have demonstrated that they are quite happy about the current good-going and they need not worry about the future perhaps assuming the same good-going will continue into the future as well. The fundamental message they have delivered is that ‘if we are doing our business well today, why should we be bothered about the major economic issues confronting the country’ It is a stand where the future risks have been assessed at a very low level and a perception that the current good business environment, according to their view, will prevail forever in the future.
A polite warning by Treasury Secretary
The dissatisfaction of the Secretary to the Treasury about the comfortable stand taken by the business leaders has been clear from the following response he has made. He is reported to have said: “Each and every one of you is talking from your own business perspective by looking at your own balance sheet or your own industry. But as a person responsible to manage the overall macro-economy of the country, what we need to do is to ensure that all risks which any economy tends to confront are reduced and ensure that private sector is free from such vulnerabilities.”
PB, the learned economist he is, has driven his message forcefully to business leaders in the following statement he is reported to have made next: “We have an economy that was open from 1937, but when some people express from a protectionist point of view, I feel nervous. What we need is competitiveness and to address the existing issues.”
PB has then drawn their attention to such critical issues confronting the country. One is the need for building up skills and he welcomed any proposal that would aim at producing skilled workers. The second is the rising wage costs in the Sri Lankan economy. Thus, the cheap labour is no more a bonus for manufacturers and it is available only in small isolated pockets of the country. Even that labour which is skill-backward now will not be cheap once the country has developed its road network ensuring broad connectivity throughout.
Complacency is the enemy of a dynamic private sector
Sri Lanka is planning to become a rich country by 2035. The main task of reaching that goal rests with the country’s private sector, which is the engine of growth. But if the engine uses the same fuel, is maintained by the same mechanics and takes the same route day in and day out, reaching this goal will rather be an impossible task.
This is because any economy aspiring to become a developed country within a generation needs to undergo a complete transformation if it is to move up from a low state to a high state. That transformation can be delivered only by a private sector that takes a holistic view of the economy. That holistic view should cover a number of areas: global economic trends and how those trends will affect Sri Lanka, what will be the technological, human capital and infrastructural challenges faced by the economy and how Sri Lanka could be integrated to the global economy.
Intrapreneurship: ‘If you want to survive and prosper, take the risk of destroying from inside’
Marcus Wallenberg, Chairman of the long standing Swedish bank, Skandinaviska Enskilda Banken or SEB, has identified one of the qualities which a private businessman should necessarily have if his business is to survive in the long run. He has called this quality ‘intrapreneurship’ meaning that businessmen should be prepared to take the risk of destroying the internal systems that do not serve the business to compete with both local and foreign rivals anymore (available here ).
Wallenberg has taken this concept from Joseph Schumpeter’s famous ‘creative destruction’ where old systems in any economy will be destroyed by new systems to facilitate the economy to move forward. For instance, the bullock cart was destroyed by the motor-driven truck but that destruction was necessary and well-paying for the forward march of an economy. Similarly, quite apart from ‘entrepreneurship’ where the business leaders will take risks outside in the market, they should be intrapreneurs who will destroy the non-serving internal systems to facilitate continued survival. Thus, businessmen should be species who will reinvent businesses over and over again to suit the changing conditions that throw up new challenges for them to operate.
Ratan Tata: ‘Don’t be complacent and inject urgency continuously’
Wallenberg has explained what he means by intrapreneurship as follows: “Much depends on the attitude of the owners, board, and top management. In my opinion, it’s their strong duty to foster a culture of constant innovation that drives its own creative destruction on the inside. A related issue is a willingness, when things look bad, to find ways of breathing new life into and rebuilding even very old companies. It’s not easy, but in my experience it’s possible, with the right determination, to take the long view, persevere, and succeed in what seems to others a hopeless situation. It’s not always necessary to break up companies or introduce innovations from the outside to stay ahead of the game. Established firms have a huge natural advantage in the marketplace because of their strong customer and supplier bases, their long-term shareholder structure, and their deep reservoir of capable people”
Ratan Tata, the retired Chairman of the Tata Group of India has narrated his experience of inside creative destruction as follows: “Open markets have encouraged local companies to adopt new technologies, to become more creative, to lower costs, and to improve offerings to the consumer. One of the big dangers for any business is complacency; the challenge for leaders is how to keep injecting urgency” (available here ).
Creative internal destruction by General Electric
A good example of inside creative destruction has been provided by Jack Welch who became the CEO of General Electric of USA, better known in its acronym GE, at a time when the company was on the verge bankruptcy and faced the threat of being closed down.
In his autobiography, ‘Straight From the Gut’, Welch explains how he made a turnaround of GE, a household appliance company which could no longer do business due to cheap Japanese imports, by destroying all the traditional production lines involving the manufacture of electric irons, ovens, refrigerators etc that used simple technology and moving into complex technology products like the manufacture of turbines, jet engines and sophisticated medical equipment. That was a risk he had taken but it paid GE well. That was a risk he has taken to destroy GE’s long established internal setup. But it was necessary and by taking that risk, he could make GE a worthwhile mega corporate once again within about 5 to 6 years.
No choice but to beat the comfort zone, the enemy of a dynamic private sector
Thus, the complacency which the local business community feels about the future of their business is not a good sign for Sri Lanka’s avowed goal of becoming a rich country by 2035. Becoming a rich country is not a gradual and seamless transformation of an economy. It requires a complete change in the mindset of the key players; they should critically review their current position and then be ready to take the risk of destroying established order, however much such order is loved by them, creatively. It requires them to beat the comfort zones which they have now established round them.
Two slogans used by South Korea relating to private sector in its march toward a rich country within one generation may well fit to Sri Lanka today. One is that “The government will support those who make improvement and not those who need improvement”. The other is that “Encourage competition and support the winner”.
Move from ‘catch-up’ growth to innovation led ‘endogenous growth’
Moratuwa University’s Senior Professor Sohan Wijesekera in his keynote address at Geospatial Conference 2014 organised by the Centre for Research and Development of the Ministry of Defence has mentioned some fine points of technological developments that contribute to sustained high growth.
In my view, Sri Lanka’s private sector should necessarily heed to him when it works toward the goal of making Sri Lanka a rich nation. According to Wijesekera, Sri Lanka is presently pursuing ‘catch-up growth’ by borrowing technology from outside. It is this growth about which the country’s private sector has been complacent. But Wijesekera says that this growth tends to become slower over time and becomes equal to the growth in developed nations where such technology had been developed and now become outdated. That growth today is around 1 percent. Hence, the decline of long term economic growth based on borrowed technology is inevitable.
The sustainable high growth comes from inbuilt innovations which Wijesekera calls the ‘endogenous growth’ involving the development of new technology on a continuous basis. Today, the world is in an era of ‘intelligent technology’ – combination of tools and methods with human brain power – at which knowledge economies have come to prominence. Unless the private sector gets into this intelligent technology mode, becoming a rich country through mere catch-up growth will be a dream. For that, it has to first beat its comfort zone.
If it does not do that, it is the driver of the engine, the public policy maker, who gets into trouble.
*W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at email@example.com