26 September, 2020

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Limping Merchandise Exports: Gota Should Not Make The Same Mistakes As The Previous Governments

By W A Wijewardena

Dr. W.A Wijewardena

Sri Lanka’s sluggish export performance

Sri Lanka’s merchandise exports have been limping from around 2011. Exports which amounted to $ 10.6 billion in 2011 have changed at a very slow rate since then. During 2011-18, the average annual merchandise exports amounted to $ 10.75. During the first 11 months of 2019, exports had grown by 1.7% to $ 10.7 billion. A prorated estimate will reveal that Sri Lanka could reach an export level of $ 11.7 billion in 2019. However, due to the high export performance in December 2018, this estimated annual performance records a decline of close to 2% in 2019.

The inactivity of previous governments

I have in previous articles in this series, drawn the attention of both the Mahinda Rajapaksa government and the Ranil Wickremesinghe government to the peril of an unwarranted slow-down in export earnings. Exports for centuries have been the main source of Sri Lanka’s import financing, wealth creation, employment generation, poverty alleviation, exchange rate stability and servicing the external debt obligations. The non-recognition of these vital roles played by exports and remaining inactive in the midst of a major economic crisis by both governments have driven the country to a critical level today. Hence, Gota’s challenge has been to break loose from the past fetters and implement an immediate action program to reverse the ominous trend.

Sri Lanka’s sluggish export performance during 2011-14 was known to RW administration. It was evident in the first economic policy statement which RW presented in Parliament in November 2015. The issues relating to exports and strategies to be adopted to resolve them had not been presented in the statement under one heading. Hence, one has to undertake the laborious task of piecing together the numerous references made in different places to exports to gauge his government’s strategy on the issue.

Recognising the importance of exports in increasing the welfare of people, RW had emphasised that Sri Lanka should produce for a market larger than that in the country. For that purpose, the country should find space in the world market. That space would be harnessed by entering into formal trade agreements with India and China which will offer a market as large as 2.5 billion people to Sri Lanka’s exporters. The strategy to be adopted by his government, according to the policy statement, was to link Sri Lanka to the global value chain. This requires empowering the country with high technology. To acquire high technology, 11 business and technology development areas will be established throughout the island. This would be kicked off by establishing such areas in Hambantota, Ragama, Trincomalee and Mahaoya in 2016. The local and foreign investors who are to invest in Sri Lanka under the government’s incentive schemes will be linked to this value chain.

Export targets should not be mere wishes

None of these promises were delivered and as a result, they just remained a mere wish-list. But, in the next economic policy statement presented to Parliament in October 2016 the government made further revelations about the planned export growth. It had correctly identified that to have a high growth in exports, Sri Lanka needed to have a major capital infusion and greater investments. To attain better results, Sri Lanka should go for new technological innovations, better management of data systems and up to date market information systems, the policy statement opined.

Lamenting over Sri Lanka’s lagging behind both Bangladesh and Vietnam which were pretty much below the country in export performance a few decades earlier, the second policy statement promised to create a suitable climate for investments to take place in the export sector in the country. While foreign investors were to be used as a vehicle to join the value chain, the government promised to help local investors too to join the same. In this manner, the proclaimed goal of the government, as pronounced in both policy statements, was to direct all investments toward achieving a higher export growth.

But the promises made in the second economic policy statement too remained mere wishes with no practical application. Consequently, exports continued to show a sluggish performance in the first three years of the new administration. The annual average export level during 2015-17 amounted to just $ 10.7 billion marking almost the same level recorded during 2012-14.

The fate of the defunct Vision 2025

Towards the middle of 2017, the Government came up with a new medium-term policy statement titled Vision 2025. This vision did not have a detailed vision for the export sector except making some passing references. It had promised to put a stop to the anti-export bias that had dominated the economic policy making in the past. According to the vision, this anti-export bias had prevented Sri Lanka from entering the global production networks, which had been referred to as the entry into value chains in the previous policy statements. It had also envisaged to double the export earnings from $ 10 billion in 2017 to $ 20 billion by 2020. But there was no policy framework proposed in the Vision 2025 to attain this highly ambitious goal.

The new export strategy was no better

In April 2018, the Government came up with a new export strategy that had provided a detailed plan to boost the country’s exports. However, the New Export Strategy had been silent on the main strategy proposed in the Prime Minister’s economic policy statements, namely, Sri Lanka’s joining the value chain or the global production networks. Instead, it had proposed to develop six selected areas of exports – two already mature, two emerging and two visionary sectors – which the designers of the strategy had considered as important for Sri Lanka to increase its export earnings quickly.

The two mature sectors are the development of the country’s Information Technology plus Business Process Management and Spices and Concentrates. The two emerging sectors are the Wellness Tourism and Processed Foods and Beverages. The two visionary sectors are Building Boats and Electrical and Electronic Components. Though the designers of the new export strategy had been working on a set of internal physical targets for merchandise exports over the planned period, they had not been revealed in the document containing the national export strategy. These internal targets had envisaged Sri Lanka to increase its earnings from merchandise exports at an exponential rate of 11% during 2017 to 2025.

The ambitious targets in the strategy 

This strategy was also not implemented by the Government like the previous economic policy statements and the Vision 2025. As a result, the actual export performance fell far below the targets. In 2018, the plan had envisaged to earn $ 13.1 billion through merchandise exports. But the actual realisation was $ 11.9 billion only. Similarly, in 2019, the target of export earnings was $ 15.1 billion. But the developments so far in the export sector shows that the country would not be able to earn more than $ 11.7 billion.

It is inevitable that the same fate would befall on the targets for the rest of the period too. The exponentially growing exports are to reach, according to the internal targets, $ 17.4 billion in 2020, $ 19.1 in 2021, $ 21 billion in 2022, $ 23.1 in 2023, $ 25.4 billion in 2024 and $ 27 billion in 2025. As it is, the installed capacity – technological as well as managerial – would not permit Sri Lanka to reach these targets.

This is the position which Gota is facing today. Even a modest growth in export earnings in the next six-year period would require Sri Lanka to adopt a special policy package relating to the export sector. The problem can be summarised as follows.

Sri Lanka’s saturated export structure

As at today, Sri Lanka’s exports to the rest of the world are being dominated by two product categories, apparels and ‘the three tree crops’ – tea, raw rubber and coconut. In 2017 in which its exports figures were the highest in the recent years, the former accounted for 44%, while the latter ‘three tree crops’ had a share of 17% of total export of goods. A brand-new category that had been added in the recent decades had been manufactured rubber products – mainly solid tyres – that had acquired a share of 7%.

This has been the country’s export structure in the last four decades and it had been happily savouring marginal improvements in these categories whenever such improvements occurred as if Sri Lanka had hit the ‘next big thing’ in its exports. That complacency had sowed the risk viruses that have stunted its growth as a mature growth sector.

On the one hand, they had already reached the saturated point given the country’s limited resource base. On the other, there were no new products added to the list, and worse, no concerted action had been taken to charter the unchartered territory of ‘services’. With proper logistics in place and elimination of unfriendly policies, services offer a good opportunity for Sri Lanka to bring its own next big thing in expanding the earnings base in foreign exchange.

Sri Lanka’s main manufactured export – textiles and garments – face a major challenge due to two related developments. The textiles and garments sector benefitted from the wave of globalisation that took place in the global economy in 1980s. Accordingly, the rich countries in the world taking advantage of the low wage costs in low income countries began to set up their mass consumption product factories in the latter category of countries. This process was known as off-shoring.

However, an unintended consequence of this process was the development of the bazaar effect, as first revealed by German economist H.W. Sinn, in which the rich countries simply became trading nations – bazaars in a traditional sense – with manufacturing off-shored to low income countries. With the consequential decline in manufacturing jobs in rich countries, there was a wide public outcry against off-shoring which became a political weapon for leaders to gain popularity among the masses.

Hence, the production model was changed to locate the mass production consumption goods industries near the final markets – called near-shoring – or on the land itself – called on-shoring – through product automation. The textile and garments industry has been the first industry to exploit these new production models.

New production model to replace off-shoring by on-shoring and near-shoring 

A recent survey conducted by McKinsey and Company on the apparel sectors in North America and Europe has revealed that both near-shoring and on-shoring have become the most popular production model adopted by a large segment in the final consumer countries. According to the survey, about 67% of the US apparel executives and 80% of the global chief procurement officers have indicated that the top-most priorities in the apparel sector have been the speed at which the final products should be delivered to the market and how the goods could be procured within the season.

In the past, fashions developed by apparel companies had been forced on consumers. But, that trend is fast changing and instead, a bottom-up consumer preference system in which the consumers will inform garment manufacturers to produce the fashions they desire is developing in the apparel sector. To gain capacity to produce and supply these products, apparel trading companies need to have manufacturing facilities near the markets. That is the reason for near-shoring and on-shoring to get established in the apparel sector value chain. On-shoring has been facilitated by automation of apparel manufacturing brought in by such technological advancements as 3D print manufacturing, gluing and bonding instead of stitching and robotic employment.

Already, a Sri Lanka-born start-up entrepreneur Gihan Amarasiriwardena, together with partner Aman Advani, both of whom are MIT alumni, has begun a global enterprise in garments using 3D print manufacturing processes. The new enterprise called Ministry of Supply is to change the landscape of apparel production in the globe in the coming years. All business giants today have started their empires from humble beginnings and Gihan and Aman are set to creating such an empire in the coming years (For details see: https://medium.com/authority-magazine/empathetic-invention-the-process-of-inventing-new-products-services-and-experiences-but-b137ee71617d). As a result, the cost advantage enjoyed by low income countries like Sri Lanka with respect to garment manufacturing is fast eroding.

Apparel sector is to return home 

McKinsey Survey has predicted that by 2025, a large segment of both the North American and European markets will be supplied by both on-shoring and near shoring. Table 1 presents the countries that are located around North America and Europe standing to benefit by adopting the new value chain model.

Will Sri Lanka lose its markets?

Both North America and Europe are Sri Lanka’s established markets for apparel products. During the five-year period from 2013 to 2017, European Union absorbed 43% of Sri Lanka’s apparel exports, while North America absorbed 46%. Thus, these two markets had accounted for 89% of the country’s apparel exports. Accordingly, if they are to near-shore and on-shore apparel supplies, Sri Lanka’s traditional apparel industry will face a serious risk of maintaining sustainability. It is therefore necessary for Sri Lanka to change the focus of its production to new export commodities to avert possible downside development of its export sector.

This is the challenge faced by Gota in rescuing the country’s merchandise export sector. He should not make the mistakes made by the two previous governments. Instead of coming up with a mere wish list, he should present a comprehensive action plan, with time bound targets, to diversify the country’s merchandise exports and link them to global markets by activating all the possible global production networks.

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com

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Latest comments

  • 1
    1

    Too technical for me. Does Sri Lanka have an Export development which looks after these aspects. Sri Lanka TEA industry is centuries OLD. Sri Lankan TEA known all over the world as the best tasting tea and as the number one. Yet, it’s contribution to the world Tea market is 5% and in Sri Lanka coffee had being popularized over Tea. I think, Sri Lanka has so many products that can be number by default and very popular. But, they grow other products. No imagination in marketing or product development. I think, those who are successful should lecture in universities, Guest lectures, to new students. Promotion only because of seniority or political connection should be stopped.

    • 4
      0

      SRILANKEN exports are already taken away from Bangalasdesh and Kenya SO the country’s merchandise export sector cant be reovered. With rapidly growing EU and West connections with africa today – tiny nations such as us in ASIA would not have more chances.
      If you would buy veg, fruits and flowers in Europe today – most of them are imported from Ethiopia and few other countries in Africa.

      Recently I happend to buy a bunch of roses in the Netherlands, that was from Ethiopia.

      Last week I bought my weekly vegetables and fruits, – they were from Africa.

      So over the last 10 years, with Rajakshes ‘s ignorance towards the EU and WEST growing, the quotas were grabed by other countries in the region or africa.
      :
      Our politicians – are on arguments on and on leaving the crucial issues of the nation aside. They are not real good politicians, or those who are wholehearted are being attacked by self glorified crime friendly politicians. This game is set like walking on a curve over the years. Specially Rajakashe politics cant do any good to this nation.

      Roads and Development are not common only to SRILANKA. If you travel to AFRICAN CONTINENT, they the chinese have built few hundreds of highways in Ethiopia and Angola. Ours is not yet reached to 200 km. But we talk high about our highways.
      Lanken situation is PEOPLE are misled by MEDIA MAFIA that would only work for RAJAKSHE CRIMINALs and preventing them being taken into HIGH LEVEL crime investigations. I think GOTABAYA and HIs brother did various high crimes deliberately, more than any other leaders did together.

      • 0
        1

        Yes, we need to export stuff, but what and where to? No major manufacturers seem to want to set up shop here. Why, because our domestic market is too tiny, even though we spend time praising our own “middle income” tails. Is it not a fact that the economy is kept afloat by Middle East remittances? Is it not a fact that 3 wheeler driving is the career of choice for a million able-bodied males? Well, that may be a “service industry”.To change attitudes will take a generation at least.
        With respect to Dr W, he seems to have missed out on the elephant in the room…India. We can very quickly integrate with the Indian supply chain.This is of course a very hot political potato, but Gota unlike Ranil need not fear the Sinhala Buddhist hang-ups about India. Practically any manufacturer worthy of the name has set up in India. Anybody who has been there recently would have seen the VW, Ford, Nissan, Toyota , Samsung, Nokia and countless other operations changing the face of the country. Tamil Nadu itself is a major player. But our “opinion leaders” see the lack of toilets but not the gleaming new Metros and IT parks. What we need is integration to the point of unification. Currency union will give us a relatively stable money supply. Is anyone in this country aware that the INR is now worth 2.6 LKR, from 0.5 LKR a few decades ago? Yes, some of our so-called industries will have to close down, but those who know how to do business in the huge Indian market will prosper. Already, companies like Damro and MAS are doing well in India.
        My suggestion is simple. Stop speculation about multiple birds in the bush. Grab the one at hand, and to hell with fake sovereignty.

      • 0
        0

        I only agree with the comment on the improvement made by African Countries in Global Market. I am disagreeing on political comments. When you mix Economic and political comments, the comment looses validity and the hidden agenda of the writer comes to light. So do not be biased, but look at the future

  • 2
    0

    Mr Wijewardana,
    With respect, reliance on merchandise exports as the panacea for our ills has not worked, has it?
    So, shouldn’t we look for new answers?
    /
    This neo-liberal argument of handing over our economy to international markets (with no rules), without considering other options that do not compromise our sovereignty and social needs need to be explored.
    /
    So take a breather please, and let some new blood take over the task of advising the government on economic issues.
    /
    Thank you for your erudite services.

    • 0
      1

      “So, shouldn’t we look for new answers?”

      The best idea is, instead of keeping one or two in aquariums, and feeding, there is whole range of sharks are roaming in the Bay of Bengal. Just dump with a bulldozer (as Royal did the 150,000 in Mullivaaikkaal, in 2009) all the worthless (about 7 Millions) like the flushfull Money Men. Sharks will thrive & export the sharks to Europe to pay all the debts.

      Ranil came with the Western support, but secretly did deals with China and sold Hangbangtota to them. Then he kicked on the butt of Ambassador Atul Keshap when ambassador informed about embassy in Jerusalem. King was working with America to have the Ahimsa Case pushed away, promising MCC ACSA UNHRC resolution…… Now he is saying Western countries are not willing to Invest in the Miracle of Asia. So he has signed for $2B loan with China, the real Shark. During Royal rowdies times they closed down many Richard. P’s garment factories and opened Billions dollar worth factories in Andhra, partnership with Karunanidhi, Sonia, Shiva Shankar Menon, Chidambaram et a. It is said a 13,000 girls are working those factories. Dr. WAW is bringing here CBSL statics and saying Western countries stopped buying garments. Did he shop in North America for Vietnam, Bangladeshi shirts? Is that why Old King moved Garments factories to India? Close to Consumption? Is that the comedy he wants to make in Lankawe and sell it to India?

      I don’t know what hate has penetrated into this Sinhala Intellectual Dr. WAW mind against West. His whole explanation is about is why not to export to West, but to China and India.

    • 0
      1

      Dr. WAW is talking about what they say in Tamils, as “Kollan Theruvile Kundusi Vickra Kathai” (Selling head pin in Blacksmiths’ neighborhood.) (When we came to North America we didn’t know what AIDS was. Our boys here explained it to us America gives aid-s to whole world, but it was the poorest country in the world, Haiti gave AIDS to America). Here an economist is talking about exporting to China which is out on the process of buying Lankawe to create its ambitious adventure of BRI to maintain its export market. China and India with 2.5B consumers keeping their hands folded and waiting to Lankawe feed those hungry mouths. This is the Priest who could not catch the rooster on the roof (export to West) describing the methods to climb on the sky and go to Heaven (exporting to China); this is so stupid man! It is this type of economists’ fooled leaders and they in turn brought rice from moon to make Biryani and Arrack for their Modaya voters with the hard earned Indian coolies’ exchange money. Those collies are, after building the mountains for Modayas for 200 year, still they are suffering as slave in Lankawe. India wanted to open the ETCA. The export biased Chitanta government and Yamapalanayam fooled India on ETCA but signed with Singapore to import their Waste & Garbage. The New Royal Modaya government had challenged during the election to tear the Singapore Free Trade contract. But right after the election, they said they cannot even renegotiate the Garbage import Free Trade with Singapore. They just want to protect Sinhala Buddhist from Tamils; not worrying about Lankawe exports anymore. DR. WAW thinks that Cabal was a master mind to fund the LC credits for $400B loan war! For the economy not improving from 1948, It is not just leaders, even the economist like Cabal, DR WAW all have to take responsibility.

  • 1
    2

    the Sri Lankan rupee is one of the weakest currencies on the world market.
    the more it drops [ depreciates ] it’s better for the sorry nation as it brings in the much needed and valued foreign exchange in the global currencies.

    the downside is that as this sad isle is not a raw material; producing one all the stuff needed to meet the demands of the much-valued clients,’

    the African and Asian nations produce goods at a cheaper price and at a better quality.
    the kallathoni American illicit president, his kith and kin along with their boorish corrupt court jesters have been in power for the last nearly 90 days [ 3 months ] but apart from appointing their crooked to the core mates who are nothing but uneducated petrol station attendants/latrine cleaners will share their ill-gotten monetary gains with the jarawama rajapuka;s.

    what a comedown for the one-time rice exporter better known as the granary of the east.

    cheers, R. J., the human crusader is lucky to be away from this shitty hellhole for the last 33 years and i boldly challenges any of the arseholes to come and get me.

    • 1
      0

      White vaners know where you are!. The have got the info from pettikada karayas of Galagedara.
      Don’t try to fool them.
      =
      Shit hole will be buggered soon with a hot iron rod probably. You’ll enjoy!

  • 0
    2

    Dr. W.A Wijewardena – Limping Merchandise export?
    have you conveniently forgotten….
    limping economy
    limping state sector
    limping public transport
    limping tea industry
    limping tourism industry
    limping etc etc etc
    what is not limping is corruption and the Rajapakse clan

    • 0
      0

      To Rajash. It is simple when 44% export is based on apparel, the economy depends mainly one sector. We must maintain the same same volume in apparels, but must diversify, so that reliance in apparel come down to 25%. The easy path is rubber based Industries, and tourism, and better human resource export. Do not blame governments, but our social culture. Our People , like more government jobs, and lacks instinct for entrepreneurship . Few who risked their path for entrepreneurship over secured jobs are rewarded well,

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