7 December, 2019

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Ricardo Hausmann’s Strong Message

By W.A Wijewardena

Dr. W.A Wijewardena

Dr. W.A Wijewardena

Ricardo Hausmann’s strong message: Restructure exports for growth choosing products over which you can compete with others

Sri Lankans’ strange psyche: Exports are good but Imports are bad

There is a popular economic belief among Sri Lankans. That is, to build Sri Lanka as a strong nation, it should produce everything within the country and say good bye to imports as far as possible. It is so indelibly ingrained in the psyche of Sri Lankans that it is not a belief that could easily be erased. Anyone who speaks against it is immediately branded as somebody odd, without nationalistic sentiments and pro-Western. Hence, politicians of every generation have used it as an effective Mantra to rally masses around them. Historically, this belief was put into practice by directing public policy to impose import controls and develop what were known as ‘import substitution industries’. When these import substitution industries could not survive without continuous government protection and support, that policy was temporarily abandoned in 1977 when the country moved for export-oriented economic growth’. But subsequently, the nation, supported by convincing arguments by some critics, began to experience that even the export-oriented economic growth policies had failed to deliver their promises. True, that policy transformed the economic structure and generated some economic growth. But, that economic growth was not adequate to push Sri Lanka to the rich country club status within a generation, the aspiration of many.

Re-christening import substitution as import replacement

Hence, import substitution was re-christened during the last administration by giving it a new name called ‘import replacement economic strategies’. This new name was coined by its topmost economic policy official, Dr P B Jayasundera, possibly to remove the bad spells which the previous import substitution policies had carried. Thus, the policy package adopted by Sri Lanka since about 2005 paid lip service to export growth and concentrated on developing a domestic economy based economic strategy as its policy thrust. The results are well known: though exports increased in absolute terms, they failed to record an increase compatible with either the domestic economic growth or world export growth. This was manifested by a sharp decline in the exports to GDP ratio from around 28% in 2004 to less than 15% in 2014. Similarly, Sri Lanka’s exports as a percentage of the global exports too fell from 0.08 in 2000 to 0.05 in 2014.

Imports are necessary even to promote exports

Sri Lanka, being a country with a small domestic economy in terms of both the size and the income, cannot think of generating high economic growth continuously without opening its borders for exports. Since the country does not have a sufficient supply of domestically available raw materials, it also requires the country to continue with an open import policy programme. As such, without imports, the country cannot grow its exports. Hence, imports are connected to exports through a very strong umbilical cord and it can be severed only at the risk of impeding both exports and economic growth.

Increase the value added of import based industries

If imports are necessary for exports, then, how could the country grow continuously since what it produces is leaked out in the form of a higher import bill? The secret lies in what the economists call the ‘value added’ in which the country would contribute to produce a more value-contained product by using its own labour resources, facilities and services. This positive value added will generate local income and if the product or the service in question is sold to foreigners, it would then get sufficient foreign exchange revenue to pay for imports. Hence, the trick which a country should use is that it should produce by using imports a higher proportion of exportable goods and services. For instance, when the country went for garment and textile industry as an exportable commodity after 1977, the local value added was just 5%. With the development of a local supply chain, this has now increased to 45%. Comparatively, tea generates a value added of 90%. But garments and textiles now earn three times more than tea. Hence, the value added of the garment and textile industry standing at US $ 2.2 billion in 2014 has far exceeded that of tea industry which amounted to just US $ 1.4 billion. Hence, a country can have a smaller percentage of value added but it can compensate itself if it has a bigger volume of exports.

Past growth has come from domestic services and not from exports

Then, how has Sri Lanka got into a severe foreign exchange crisis in the recent past? The blame goes to the domestic economy based economic policies pursued by the government in the last 10 years. During this period, was a significantly high economic growth in the country as announced by the Department of Census and Statistics amounting to on average about 6.5%. Yet, the whole of that growth had come from the domestic services sector comprising mainly of trading activities, telecommunication, government services and the banking services. Economists call these services non-tradables because they are mainly meant for domestic consumption and not for selling to foreigners. Hence, while the economy grew, its foreign exchange earnings did not grow in a commensurate manner as the growth in the economy.

Foreign exchange crisis is due to domestic orientation of production

The result was a higher import orientation by people who now had larger domestic incomes. Accordingly, it increased the import bill, while stunting the export earnings generating a bigger and bigger trade deficit in each of the passing years. The trade deficit was partially met out of the moneys sent by Sri Lankans working abroad, called foreign remittances, according to the Central Bank. But, the recipients of foreign remittances too had a high import orientation. Hence, the money so received too leaked out of the country over the years, further widening the trade deficit and thereby augmenting the foreign exchange crisis. Accordingly, the proper economic strategy for the country should have been to produce not just for the local market but for the wider global economy. Having identified this dire need, the Economic Policy Statement of the Prime Minister, delivered in Parliament in November 2015, had announced that Sri Lanka should produce for a market much bigger than its local market meaning that exports are to rescue the country.

Ricardo Hausmann’s validation of policy strategy

This economic strategy was validated by Ricardo Hausmann of Harvard University’s Centre for Economic Development delivering the main address at the Sri Lanka Economic Forum concluded last week in Colombo. Hausmann was responsible with MIT’s Cesar Hidalgo for compiling an economic complexity index and preparing an economic complexity atlas for the world nations (available here ). This writer in a previous article arguing that Sri Lanka should convert itself from a simple product producing economy to a complex product producing economy in order to win the global export markets introduced Hausmann and Hidalgo to Sri Lanka’s readers. Both Hausmann and Hidalgo have used the historical data to map the economic complexity of the export structure of the world nations and the map pertaining to Sri Lanka has not changed even a little bit since the first map so prepared for 1995. In his presentation in Colombo, Hausmann used this rich data base liberally in the form of graphs, maps and historical developments to prove his point.

Debunking the belief that growth should come only from the domestic economy

He first debunked the popular belief that Sri Lanka could grow and generate prosperity to its citizens merely by producing for the local economy. When he plotted the export growth against the economic growth for the last 10 year period, it showed that both variables had moved one for one in the same pattern over the period. Accordingly, when exports went up, so did the economic growth. When exports faltered, economic growth too faltered. Thus, if there is any extraordinary growth that has been made by Sri Lanka over this period, that growth has simply come from better-performance in the export sector. This revealed that if Sri Lanka wishes to raise its growth and sustain it over the period, it should necessarily concentrate on tradable goods and services. Those tradable goods are used by people outside the country and therefore, Sri Lanka should have better trade relationships with its main customers if it is to promote them. If on the other hand, Sri Lanka produces purely for the local market as it had done over the previous 10 year period, it could still attain some economic growth but that growth would not be adequate and sustainable. This is the crucial policy dilemma which Sri Lanka has been facing right now compelling the Prime Minister to choose a path leading along the export sector. Hausmann very clearly validated the path so chosen by the government.What_did_Sri_Lanka_export_in_1995_

Sri Lanka’s simple product producing track record

Then, Hausmann went into the roots of the current crisis in the external sector to find that Sri Lanka had been concentrating producing simple technology products to the world market. There had not been any change in the product mix between 1995 and 2014. In both years, about 98% of the country’s exports had been simple-technology products like garments, textiles, plantation crops etc. The danger with such a product orientation is that they are easily copiable and anyone with cheap labour could start producing the same to the world market in competition with Sri Lanka.

Garment and textiles sector being threatened by new entrants

This has already happened in the case of Sri Lanka’s lifeline of exports, namely, garment and textiles. With respect to these products, cheap labour countries like Bangladesh, Myanmar and Cambodia have already begun to compete Sri Lanka away from the world markets. Sri Lanka had a good fortune with the garment and textile sector in the past. It helped the country to reduce its reliance on the plantation crop sector and allowed it to provide employment to a sizeable portion of the country’s aspiring youth. It over the years became a good contributor to economic growth by increasing the value added from 5% to 45%. All these pluses it has brought to the economy are granted. Yet, the future of the garment industry in the midst of competition coming from low wage countries as pointed out by Hausmann has been gloomy. It may also be threatened by the introduction of new manufacturing technologies like 3D Print Manufacturing by making it a household production rather than a factory production. Hence, Sri Lanka should seek out new production lines over which it still could command competitive and comparative advantages.

Sri Lanka remaining a laggard, while others becoming leaders

Hausmann used his data base to identify the countries which too shared Sri Lanka’s product mix in 1995 in the past to find out where they are now. Strangely, countries like Thailand, Turkey and Costa Rica had shared the same product mix which Sri Lanka had at that time. That mix consisted of a proportionately high percentage of goods that used simple technology for production. The amount of high tech exports were negligible. But those countries have now changed their product mix significantly into mainly complex technology using products. What has happened is that while Sri Lanka had been complacent with what it had in 1995, the other countries have successfully changed their product mix to sustain economic growth. Sri Lanka got itself elevated to the status of a lower middle income country. But the three countries under consideration managed to become higher middle income countries and are virtually at the doorstep of joining the rich country world. Thus, Sri Lanka had been a laggard, while the other three countries had been leaders. This is a crucial lesson which Sri Lanka’s policy makers have overlooked in the past and should take into account immediately when framing its future growth strategies.What_did_Sri_Lanka_export_in_2014_

Sri Lanka’s competitive advantage in tourism and high tech products

The current challenge faced by Sri Lanka is how to catch up with the other fast growing countries in the world. Haussmann gave some hints about this in his presentation. According to him, the products in which Sri Lanka is doing well today such as tea, garments and textiles have no promise for the future. That is because Sri Lanka’s wage rates have increased over and above those of its competitor countries in both these products. Hence, Sri Lanka’s choice is clear with respect to these products. It cannot reduce wage rates. But it can increase productivity in them and accommodate the increase in costs due to increases in wage rates. If it is not possible, it has to concentrate on other types of products over which it has competitive advantage due to its wage rates still being lower than its competitors. Haussmann opined that Sri Lanka can move into tourism industry and high tech products because its wage rates are significantly lower than the competitor countries. The biggest earners of tourism income today have been the rich countries like France, UK and Spain. The wage rates in those countries are significantly higher than those in Sri Lanka. Hence, with proper marketing strategies and logistical support, Sri Lanka can move into the tourism sector in a big way. Similarly, in the case of high tech products too, Sri Lanka’s wages remain significantly lower than those in the close competitor countries like Malaysia, Thailand and Indonesia.

Build the technological base over the next 10 to 15 years

What is therefore necessary is to build up the technological base of the country in order to become a high tech product exporter country. This is difficult, but not impossible as this writer has argued in a previous article on the subject in this series. But it is not a goal which Sri Lanka can attain tomorrow. It will take at least another 10 to 15 years for Sri Lanka to become a nation with high tech products, provided it lays a firm foundation for it.

The outcome of the Sri Lanka Economic Forum 2016 should be to lead Sri Lanka along this path.

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

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  • 3
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    Dr. W.A Wijewardena

    RE:Ricardo Hausmann’s Strong Message

    “Ricardo Hausmann’s strong message: Restructure exports for growth choosing products over which you can compete with others”

    “There is a popular economic belief among Sri Lankans. That is, to build Sri Lanka as a strong nation, it should produce everything within the country and say good bye to imports as far as possible. “

    Comparative advantage. That is the key. In what segments does Sri Lanka have a comparative advantage?

    “What is therefore necessary is to build up the technological base of the country in order to become a high tech product exporter country. This is difficult, but not impossible as this writer has argued in a previous article on the subject in this series. But it is not a goal which Sri Lanka can attain tomorrow. It will take at least another 10 to 15 years for Sri Lanka to become a nation with high tech products, provided it lays a firm foundation for it.”

    “The outcome of the Sri Lanka Economic Forum 2016 should be to lead Sri Lanka along this path.”

    Yes, but what are the inputs necessary for this?

    What inputs are lacking? Skill level, capital, infrastructure, intelligence, critical mass? These need to be identified.

    • 3
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      So Mr Wijewardena, you think Hausmann is going to lead you and other economic gurus to heaven, and you plan to drag Sri Lanka with you?

      You need to start by buying a brain at a good price.

      You thought there are no economists worth their salt in this country to plan our economic future independent of these blood-sucking, neo-liberal neocon vampires? You invite Soros of all people? Which country has he helped save economically Mr Wijewardena?

      You should be ashamed of your colonial mentality that is making you blind to the north-south division in the global poverty equation and to the fact that there can’t be economic salvation until we free ourselves from these blood suckers.

      But there you were, sitting at Cinnamon Grand at public expense, [Edited out]
      Shame on you, Harsha de Silva nad Ranil Wickremesinghe. You will be buried economically. Harvard will not come to save you.

      Sri Lankans value their economic blood much more than you colonial [Edited out]

  • 7
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    The most important thing first sack all fake professors from public University system and promote R&D and S&T in Universities and link Universities with industry. That is the only way. You need to sack all fake profs and follow international criteria to appoint them: In order to be a real international professor your PhD from world top 100 University, minimum 20 articles in ISI/SCOPUS indexed journals, 10 text books with international publishers and three countries have to appoint you as a Visiting professor. But all these Sri Lankan Professors are jokers and more than 40% University Lecturers are relatives to each others and they give degrees to each other (Husband gives PhD to wife and girlfriend/mistress getting PG degree, sons, daughter and son-in law and daughter- in-law). MY3 clean University system and sack fake professors and University mafia system. Some Dept are family trees. We well know how they recruits and promoted in University Mafia. First find a person and then advertise according to his/her requirement and send aboard for their friends’ places for PhDs. Go beyond Sri Lankan airport and see International job market. Even in Middle East job market, without PhD from accredited Western University you cannot become even Assistant Lecturer. But in Sri Lanka more than 80% professors do not have PhD. The countries they (University teachers) go to do higher studies, no person is going to studies: China, Malaysia, Thailand and India.

    • 0
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      [Edited out]

    • 1
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      Fedrick

      “But in Sri Lanka more than 80% professors do not have PhD. The countries they (University teachers) go to do higher studies, no person is going to studies: China, Malaysia, Thailand and India.”

      Why?

      Because they do not have the grades or marks to qualify?

      Is it because they were not taught well at the undergraduate level?

      So, this is a pathetic vicious cycle. So what is a workable solution?

      How have the other addressed this problem? Or is it that they simply do not care?

    • 1
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      “….your PhD from world top 100 University, minimum 20 articles in ISI/SCOPUS indexed journals, 10 text books with international publisher….”

      How many SL Lankan professors do you think would have these qualifications? Publications come from research and the country does not have a strong research culture. Even the best University in the country is rated below some of the universities in Africa. Universities need funds to do research, and the current infrastructure and the quality of researchers do not attract much interest from international funding bodies. The government does not have money to pay its own workforce let alone finding research. So what do you suggest they should do?

  • 2
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    As expatriate what I think about Sri Lanka.
    Stop political involvement for every thing.
    Stop corruption.
    Establish Law & Order.
    Get good and best technology from outside not the experts, Sri Lankans experts are far more talented to handle the new technology once they trained.
    Let our experts, economists handle their field of expert and the economy.
    Sri Lanka does not want foreign experts to develop our country.
    Last if we fail in some thing go back and analyze the failure and do not let it happen again.

    • 1
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      We have no “experts” with any real experience other than writing to newspapers. If we did, Sri Lanka would have been a developed country long ago.

    • 0
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      Dear Kaplia,

      If you need the best technology, you need the experts to train the people to use that technology. That’s why you need foreign experts; you do not know how to use it until you are trained. One you know how to use them, add the local expertise and then use it, because everything needs adjustments to suit the local needs.

  • 0
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    Ricardo Hausman’s message is much more than what he intended to convey to our Leaders, As I see, he in fact is telling us, “Do what you are capable and have the capacity to handle”. Since Independence up to now, all our Political Leadership and the Peoples” Representatives did and still doing was to “Embark” on projects of “High Magnitude” mostly to “Impregnate” the “Gullible” mass voter base. These power hungry politicians know very well how to pull wool over the eyes of the voter and that fact can be understood very well with rear facility if one were to go through each and every political party manifesto. Our “Gullible” voters(supposed to be having a literacy rate of 98.5%) who also carry a “Gene” of a “Superiority” grade would dream and fall for any and every type of “supper luxury” life style so offered to them on a platter. That is how we have steadily “Inherited” and “ungraciously” passing that huge National Debt down to the “Unborn” generations to come. The IRONY is that we never even think or talk of it any more, because every successive Government comes out with a more lucrative and grandiose solutions supposed to be the way out of the problem.

    In the above context, these Economists who attend seminars in this part of the world would have definitely comprehended the “backwardness” of our mindset and prompt at least now to say: “Do what you are capable of and able”. Now the the “Trillion” dollar question is: Will our Political Leadership and the Peoples’ Representatives GET the message and are CAPABLE of UNDERSTANDING what is being told. If that is understood, we would never have HEARD slogans like “Miracle Of Asia”; “Hub of Middle East and Asia” etc. On the other hand if the PEOPLE were not so “GULLIBLE” they would never have ALLOWED such LUNACIES to pass down to them and specially commit them to huge DEBT BURDENS in the name of DEVELOPMENT. Isn’t it time therefore to think of “SMALL IS BEAUTIFUL”?

  • 2
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    The author says: ”There is a popular economic belief among Sri Lankans. That is, to build Sri Lanka as a strong nation, it should produce everything within the country and say good bye to imports as far as possible. It is so indelibly ingrained in the psyche of Sri Lankans that it is not a belief that could easily be erased”.

    Dr Wijewardana, I think you are underestimating Sri Lankans. One has to be very careful when making such statements and not go in to generalizations based on emotions and scant data. What are the studies, researches, surveys, polls etc. that you are basing that sweeping statement on?

    An ingenious kitchen appliance made locally: To all those who doubt the ingenuity and the entrepreneurship of our people, I suggest you to a small workshop producing motorized coconut scrapers, situated on the Battaramulla – Kottawa Rd a few km from Battaramulla. I was amazed by the work done there. The motors are salvaged from discarded refrigerators. The fuel for heating up is extracted from discarded engine oil. The only large imported item is an NMC (Numerically controlled) lathe for the machining parts.

    The most amazing part of this appliance is the blade. It has an ingenious design. The baldes are not rigid and are made fromdiscarded bicycle chains. I have not seen any such design in any other country. I live and work in ME where the Indians almost outnumber the locals. They need coconut scrapers in their thousands but what they get are rigid blade designs from India.

    So what is so great about a flexible bicycle chain as opposed to a rigid blade? Ask any housewife and she will tell you that the coconut scrapings should as fine as possible. This improves the taste and reduces the effort needed for extracting the juice and also improves the amount of milk one can extract. It also saves energy by reducing the time one spends on scraping a coconut. This property makes it a great labour saving device you will see it being used in food outlets, dana caterers etc.

    What is the principle of engineering used here? The flexible blade spreads out due to centrifugal force of its rotation, assumes the same shape as the internal surface of the coconut. This applies a gentle and uniform pressure on the coconut internal, rather than the non-uniform force applied by hand in a conventional scraper and that makes the scraping as fine as the most demanding housewife wants. One just has to hold the coconut still and there is no need to apply pressure or move it around.

    I asked the owner why he does not start exporting these. His answer was so sensible and typically Sri Lankan: “This is a hobby for me. I get sufficient profits to get by and that is enough for me. Why should I try to expand and take a load of additional trouble on my head?” I understand what he means. His thinking is in accordance with teaching of Buddha – to make your life frugal (alpechcha).

    There are many such unknown geniuses in small towns and villages of Sri Lanka. The problem is to use their ingenuity more effectively.

    • 1
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      Edwin Rodrigo:-
      This is exactly what I mean. Most people use either Coconut Milk Powder or Canned Coconut Milk.
      Sri Lanka is producing an outdated machine to grate Coconut, which will only be used to make ‘Pol Sambol’.

  • 2
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    Dr Wijewardena, Thank you for this sensible article and your other writings, all of which are reasoned, balanced, and pragmatic. Your critics exemplify our major national problem, thinking no end of Sinhala ingenuity and heroism and constantly harking back to a glorified past, combined with a paralytic inability to understand the realities of the present. Our competitors are embracing modernity and advancing towards happiness and prosperity for their people. They are accepting what is good for them, irrespective of whether it comes from blood suckers or vegetarians.

    • 1
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      “…..our major national problem, thinking no end of Sinhala ingenuity and heroism and constantly harking back to a glorified past, combined with a paralytic inability to understand the realities of the present.”

      H L Seneviratne; Is this not a fault with our Education System?

      It Teaches Pupils to Pass exams, but does not Teach them to Think for Themselves and Rationally Question, anything that is taught to Them!

      Some People we meet, have not read anything newer than the Textbooks they read when they were at School!

      With Scientific Knowledge and Global Communication, expanding daily, it is so Sad to read some of the Outdated Comments made on Colombo Telegraph!

  • 0
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    Are you kidding me mate? The world is introducing waterless toilets to aid sanitation in Africa and all you can talk about is motorized coconut scrapers?

    • 0
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      First they can use those waterless toilets to homeless people in Boston where Harvard is located.

  • 1
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    I’d rather entrust the government of the United States to the first 400 people listed in the Boston telephone directory than to the faculty of Harvard University. (William F. Buckley, Jr.)

    Harvard makes mistakes too, you know. Kissinger taught there. (Woody Allen)

    Bagehot, do not be distressed by what Buckley and Woody Allen say. Who knows, if the stupid people in Sri Lanka can produce something so silly, but yet is motorized, surely Harvard can produce a Pandithaya who can safely walk across a Sri Lankan Edanda.

    I talk about food appliances and you talk about e-toilets. Sure, I see the connection. One produces food and the other handles the waste. I am looking down at it from the direction of my mouth, while you are looking up at it from the direction of my – you know what.

    That is a perspective that I was never interested in, and thanks for bringing it to my notice. It is a radical new way of looking at the stuff we are talking about. Perhaps we may see eye to eye one day, but that day is not going to come soon. So don’t hold your breath.

  • 0
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    WAW, [Edited out]

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