14 August, 2020

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SL Growth Profile: Arrest Moving Down The Staircase Immediately To Avoid Hard Landing On The Floor

By W.A. Wijewardena

Dr. W.A Wijewardena

Strong message in the Sri Lanka Development Update 2019

Sri Lanka Development Update for 2019 was released by the World Bank last week. This document contains a review by the Bank’s residential staff of the present state of the country’s economy and the risks it faces in the immediate future. Behind the diplomatic language it has used, there is are two strong messages it has delivered to the previous Mahinda Rajapaksa administration, the present Good Governance Government and any government that may come to power in the future. One is that the deteriorating economic performance which the country had started as from 2013 will continue without an appreciable recovery till 2021. The other is that the country’s declining labour force and labour productivity will have a negative effect on its growth potential in the next two to three decades. The gist of these two messages is that Sri Lanka should take immediate measures to arrest and reverse this trend if it is to realise its goal of becoming a rich country within a generation.

Failure to maintain economic buoyancy after the end of the war

The picture painted by the World Bank in its development update is summarised in the graph 1. Immediately after the end of the war, there had been ‘significant buoyancy’ in economic activities in the country raising its average annual growth rate to a level above 8%. However, the economic strategy adopted by the country during that period as well as in the few years following had basically concentrated on establishing an economic system based on the domestic market for growth and prosperity. This was manifested by the low emphasis given to exports that declined as a ratio of both the Gross Domestic Product or GDP and the global exports. Since the domestic market placed an effective limitation on the expansion of industry, the country could not sustain this high growth beyond 2012. The period thereafter saw a drastic fall in the growth rate recording nearly a half of what had been attained previously.

Good Governance Government too has failed

When the new Good Governance Government came to power in January 2015, the average growth rate amounted to 4.2%. The challenge before the new government was to recover the economy from that low growth and push it back to the previous high growth path. Yet, the outcome was dismal and it also had to live with the same low growth rate of 4.2% till 2017. The projection for the period from 2018 to 2021 by the World Bank has been even below the average growth rate in the previous period. It will amount on average to 3.5% per annum. This is a too low growth compared to the target envisioned in the Vision 2025 plan of the government. Thus, Sri Lanka is moving down a staircase placing its step on a lower stair at each successive move. This is the conclusion which an intelligent reader could make from the data which the World Bank has produced in its development update. When it is translated into policy, it calls on the government to take measures, as a matter of urgency, to arrest and reverse the declining trend. If this is not done, the next move will be to step on the ground causing Sri Lanka economy to stagnate, on the one hand, and become a laggard among its peers, on the other. Surely, this cannot be the goal which Sri Lankans are planning to realise.

Shooting the messenger instead of the message

This is an objective and impartial analysis made by an outside body. Its aim is to impress upon those who rule the country that there is no time left for them to hang around. The sooner they get into action, the better for the economy. However, the normal tendency in Sri Lanka, as well as in many other countries, has been to consider critique with disdain. When the economy started stalling in 2013, I drew the attention of the Rajapaksa administration to the need for quick action. Instead of taking the message, it began to shoot the messenger calling my analysis ‘unprofessional and vindictive’.

Politicians should learn to tolerate criticism

The Good Governance Government was not better. Its leaders not only ignored the warning, but also began to attack me personally after the economy had plunged to an unrecoverable depth. Similarly, the warning by the World Bank and my highlighting the same in this article will run the risk of being ignored, on the one hand, and causing the government policy makers to transform themselves to an offensive mode, on the other. They must take cue from a former Minister of Finance – Dr N M Perera – who was with a leftist orientation. Addressing the Central Bank staff in 1971 he had said that he would value the reports made by the bank ‘impartially and dispassionately without the colour of the political complexion of the party in power’. If the present government does not take this message in its true spirit, the unavoidable casualty will be the economy.

Effective population planning reducing the growth rate in population

Sri Lanka’s growth drivers in the past had been not the investment in physical capital but the increase in the labour force in numerical numbers. As such, the country which had an unemployment rate of 26% in 1977 was able to reduce it progressively through the deployment of its cheap labour in labour intensive industries, namely, the apparel industry. This helped Sri Lanka to diversify its exports, provide employment opportunities to a large number the unemployed and make a positive contribution to economic growth. This is known as ‘demographic dividend’ in economic parlance and Sri Lanka used it to the maximum in those high unemployment days. However, along with the open economy policy introduced to the country as from the end of 1977, Sri Lanka went for an effective population planning programme. Previously, the population in the country had been growing at more than 2% per annum. It not only imposed constraints on the country’s carrying capacity but also its ability to continue with welfare measures in which most of the public services were provided free of charge or at heavily subsidised rates. The population planning programme paid its dividend in about two decades by pushing the growth in population close to 1% per annum. In 2017, it is now even below 1%.

Population pyramid getting converted to the Lotus Tower

The result was, as projected by demographic experts, to convert the traditional population pyramid to that of a ‘flower vase’ in which the middle was bulged. In 2015, it was like a Buddhist Stupa or a pagoda, but by 2050, it is projected to take the shape of a cylindrical tower as given in figure 1. The main contributors to this development have been the decline in women’s fertility rate, while the mortality rate remaining unchanged. According to the World Bank data, in 1960, Sri Lanka had on average 5.5 births per woman. By 2016, it has fallen to 2 births per woman, almost equal to the rate prevailing in developed countries. At the same time, the mortality rate has remained at around 6 per 1000 people in the country. With increased longevity of Sri Lankans, especially the females, the traditional population pyramid is expected to imitate the Lotus Tower which now adores Colombo’s skyline. This would not only reverse the demographic dividend, but also will compel Sri Lanka to change its resource allocation and economic policy strategies.

Figure 1

Ominous increase in the dependency ratio

But this outcome has not been unexpected since it is the natural transition which a country following population planning would go through. In such a situation, economic policy strategy should be changed from labour intensive to technology intensive production methods. Sri Lanka will be compelled to do this, since the share of Sri Lanka’s working age population, according to the World Bank data, had peaked in 2005 and is on the decline right now. The corollary of this development has been the increase in the dependency ratio, that is, those below 15 years plus those above 69 years as a ratio of the working population. Given the present population projections, Sri Lanka’s population is expected to peak by 2035 worsening the dependency ratio thereafter. It will not only reduce the country’s potential growth but also create a new old age social security problem. Hence, making Sri Lanka’s population tech savvy is a must for recovering and sustaining the falling economic growth of the country.

Using off-shoring to the maximum

There are other global developments that have compelled Sri Lanka to go for this strategy. As mentioned earlier, after 1977, the country went for a cheap labour using production model that produced textiles and garments for labour expensive markets in developed countries. In order to exploit the cheap labour in developing countries, the developed countries too had adopted a production model in which factories were set up in the former group of countries. This production model was known as ‘off-shoring’ since the factories had been located in countries located off to the shores of the sponsoring countries. Three developments have caused those sponsoring countries to rethink of the off-shoring production model.

Off-shoring has created Bazaar Effect

One is, as presented by German economist Hans-Werner Sinn, ‘the Bazaar Effect’ in manufacturing production which the developed countries had begun to undergo. After off-shoring became the mantra used by production units in those countries, they just became traders or bazaars in manufactured products earning only trading profits while losing manufacturing sector jobs. In the bazaar trading system, goods manufactured in off-shore factories would be labelled as products of the parent country and exported to other destinations. A good example is the Apple products in which there is a production tag saying that they had been designed in USA and assembled in China. The other two reasons have arisen due to the action taken by mother companies to address the hostility to Bazaar Effect by both the domestic policy makers and the domestic workers.

Desire to have production facilities in proximity to the markets

Accordingly, through Artificial Intelligence or AI and robotic development, most of the labour intensive products could be manufactured in the countries where the markets are located. A case in point is the garment industry which was off-shored to the developing world because of the cost advantages. But technology had permitted the mother companies to produce the same garments in locations in the countries where the markets are within proximity. This production method is called ‘on-shoring’. At the same time, the need for delivering swiftly the customised products to customers back at home have compelled the major trading houses to look for factories located in nearby countries. This is known as ‘near-shoring’ of manufactured products. This is because a garment manufactured in Sri Lanka or Bangladesh would take at least 30 days for delivering to trading houses via sea routes. But the same garment manufactured in a nearby country under near shoring will take only three days for delivery via land. Hence, there is a growing demand for both on-shoring and near-shoring of garments by trading houses operating in developed country markets.

Growing importance of on-shoring and off-shoring

McKinsey Global Institute in a recent report has identified the on-shoring and near-shoring garment production units serving both the European and North American markets. This is presented in the figure 2. Accordingly, Europe is served by on-shore industries located in the UK, Macedonia and Portugal that use robotic manufacturing methods. At the same time, it is served by near-shoring productions units in Turkey, Tunisia and Morocco. In the same way, the North American market is on-shored by factories in Mexico and the United States. That market is also supplied by near-shoring manufacturing outfits located in El Salvador, Guatemala and Haiti. According to McKinsey Global Institute, about 65% of the requirements in these markets would be supplied through on-shoring and near-shoring by 2025. This new global development will affect both Sri Lanka and Bangladesh which heavily depend on the apparel industry for earning foreign exchange and creating wealth.

Figure 2

Sri Lanka should move to tech-intensive production models

Thus, the World Bank Economic Development Update 2019 pinpoints to the Sri Lanka government that it should immediately take action to change the country’s production strategy. It cannot rely on the demographic dividend anymore to create wealth and prosperity. It should now seek to improve the quality of the work force so that the workers could embrace high technology and commence producing new products for export market. As I have argued in my previous articles, joining the global production sharing network and supplying components for high tech involving manufactured goods is a must for Sri Lanka today.

If this is not done, it is unavoidable that the country moving down in a staircase would make a hard landing on the floor.

*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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Latest comments

  • 1
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    I agree with this analysis and yet; main factor for down fall of Sri Lanka economy is corruption …
    Consider how many billion public money is wasted by many many corrupt political leaders. …
    For isntnance, many billions might have been looted by MR and co ,,,
    Today Sri Lankan Air line is almost bankrupt now. Once it was one of the best in Asia … now billions are lost by mismanagement and corruption. Some seniors take millions in salaries ? Who cares if politicians could approve it ?..
    We are still paying back all interest money for mega projects that China has initiated …
    China did not come to Sri Lanka to help us but to exploit us ?
    But our experts in economy did not open the mouth about it( including this writer too) sorry for some academics they knew this but they could not say anything in front of MR and co…
    For Sri Lanka it will take any 10 years to recover from this economic mess unless good political leader comes into power we are bound to go down … or face fiananical calamity at the scale of Greece or worst than that…

    • 1
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      Quite right critique, This so called analysis of World Bank and Dr. Wije shows the intellectual bankruptcy of Sri Lanka’s economist and WB thinking.

      Sri Lanka is in a massive foreign development (fake) “aid” debt trap because of corruption, corruption and corruption . Corruption has both a supply side and demand side.: there is the corruption of local politicians, but more important the fake” aid” donors and their Fake Experts who are advancing their (donors) strategic business and security interests in this strategically located country while giving loans for white elephant development. When it comes to Fake Development Aid that puts countries into debt traps – USA, Japan, Korea and Europe lead..

      It is in fact the World Bank and IMFWashington Consensus at its policies that has put Sri Lanka into a massive Middle Income Country (MIC) debt trap and IMF bailout Business, as the Washington Consensus has done to many other countries like Argentina, Brazil, Ecuador, Greece, Pakistan, Laos, by defining Lanka as an MIC and forcing these countries to borrow from International Sovereign Bond markets at very high interest rates– to benefit America First and the Global q percent.

      No Foreign investment (FDI) will go to a country where the Central Bank was scammed by the Prime Minister because business is not done of a level playing field.
      Also, the gold rush for Lanka’s land given its statigeic location in Indian Ocean Cold War with China and vast marine resources (living and mineral), give by so-called “aid” donors who have underdeveloped the fisheries and energy sectors in the country is on. Fake Fisheries Habour develpoment project by French and Dutch govt. loans is on going without any consultation with Fisheries Communities to build harbour infrastructure for that will be white elephants for Lankans, but advance US-Japan-Euro security interests.

      • 0
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        Dr. Wije: Shouldn’t Sri Lanka stop all foreign aid projects and review them and put on hold all unnecessary projects as the country is in so much debt due to supply side and demand side corruption?

        Today’s Daily Mirror says that the Govt. would be seeking 48 million for a credit line from India to build KKS port. Why now? Shouldn’t the debt trapped govt. spend these funds to fast track and build decent housing for war displaced people in northeast first?
        The Netherlands and French Agency for Fake Development with unqualified and expensive foreign experts and Euro consulting companies is doing surveys of Sri Lanka’s fisheries Harbours infrastructure with no plan to up scale fishing with massive loans to GoSL.
        Why this massive interest in Sri Lanka’s harbours without consulting fisheries communities at this time of US Cold War with China in Indian Ocean when Lanka is in a huge debt trap.
        Why, for whom? The northern seas are over fished

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          The internationally funded local corruption game called Debt Trap Development of Sri Lanka by Bondscam Ranil and his mafia, is played and sanctioned by Washington Consensus (MCC, IMF, USAID, WB). \
          These fake aid and development institutions have perfected the art of the ‘Debt Trap and Bail Out Business” with their fake expertise at Mckinsy and Harvard Professors of the dismal Science, to ensure Trumpland’s grip on Lanka’s and other global south economy, territory and peoples.
          Argentina, Brazil, Ecuador, Venezuvela, Greece, Pakistan, etc. have been borrowing for decades from IMF-WB and are deeper in debt than ever????!
          But this old Dodo does not notice and quote’s WB reports as if they were god’s gift?! He needs to be retired and spare us these translations of WB platitudes.
          Meanwhile Washington blame China for Washington’s and IMF’s financial crimes, debt trap and most important the IMF Bailout Business after debt trapping counties in a Middle Income Trap (MIC) , so that IMF can continue to have clients..

    • 1
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      Right on! Corruption – local and global networks of development fake aid and corruption are the biggest impediment to equitable development but the World Bank will not mention Corruption because it is part of the global financial corruption racket, headquartered in Washington that works for America First and the Global 1 percent..
      Corruption has a Supply side and Demand Side, an international and local face, and Sri Lanka is in a massive foreign aid debt trap and corruption racket which is all part of the World Bank-IMF bailout Business, also visible in Argentina, Greece, Ecuador, Brazil, South Africa, Pakistan, etc.
      Sri Lanka’s debt trap is because of white elephant and fake foreign development aid projects in which Corrupt donors and their Aid Agencies collude with corrupt local politicians like Bondscam Ranil and his butterfly mafia, or US citizen Avant Guard scammer Sri Lanka Diaspora member Gota Rajapaksa and his brothers – to benefit themselves and the donor countries and aid agencies.
      We need accountability from so-called Paris Club aid donors who preach about Aid Accountability– US, EU and Japan and their aid agencies need to be held accountable as much as local politicians.
      1.. Japan has flooded Lanka with Toyota car and SUVs for corrupt politicians and overpriced highways to benefit its car companies and causing pollution, while blocking light rail public transport projects. Lanka’s transport sector is a mess due to Japanese and ADB “aid”.
      2. Another good example in the corrupt education minister Akila Kariyawasam’s scam of 5 billion rupee tabs for students, when there are so many schools without basic facilities in rural areas for which education funds may be spent. Which foreign aid agency and computer company is behind this and should be black-listed for the Tabs scam in this debt trapped island?

  • 0
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    Either CT or the authro doe snot allow our own comments. So, we can not write. How ever, there was some growth because of the peace dividend, but since 2012 , in some years there was not growth because once the GDP is adjusted for inflation the growth was Zero. So, both egovts have been in the dark with respect to the economic development.
    With respect to politicians, Politicians give some strage figures. As Sri lanka has no honest people, poor do not understnd those figures. right now both eWB and IMF are in the country, IMF will give some good trouble if the govt is not UNP. I am sure, Maithripala Sirisena will have lot of hand cuffs to remove. Otherwise, he won’t be able to work because of the Internaional community.
    The govt is infested with agents. They all all over the world like money and power.

  • 0
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    The WB and Dr Wijewardena have warned us, but is anybody listening? The governments of at least the last ten years played fast and loose with our economy. The peace dividend that should have enriched the country ended up in the pockets of corrupt bastards and commission-kakkaa’s.
    Inward investment is slow because the bribery, corruption, and unbelievable incompetence from minsters downwards are tolerated at the highest levels. Outsiders, once they find our the obstacles when doing due diligence, will not touch us with a barge pole. One very high up manadarin left me dumbfounded (I had to gulp down my g’n’t to steady my nerves) when he said “what are people complaining about men, people now get more dollars for their rupees”. The shortcomings in our economy are not insurmountable, but not if you are only considering sticking plaster solutions.

  • 1
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    Dr W A Wijewardena here talks about “….Moving Down The Staircase…….” after the end of the civil war.
    ‘The moving down started much much earlier. Successive GoSLs took the stairway steps above and added them below.
    The civil war resulted from the creation of language/religion-divide. Has the civil war ended?
    Not quite. SLPP will exploit the ‘divide’ yet again.
    .
    In the meantime the staircase is getting steeper and the steps below are held by band-aid plaster ‘debts’.
    Our ruling elites are nonchalant.
    Sigh………sigh.

  • 0
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    Does Dr. Wijewardane know, I am pretty sure he knows, that the IMF loan comes from MCC. IMF is in Sri lanka. TRUMP says he can dilte the debt of his country by printing money. SO, they say they print and release money when some one keep it it is their worth that goes down.

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