Dark clouds over the (investment) horizon;

do we care enough to blow them away?

Wednesday, 25 July 2018

It is perhaps the dark clouds that appear over the horizon in Sri Lanka that
made Jayakala Mahesvaran speak nostalgically about the return of the LTTE.
It is a reference to the dark mood that prevails in the north and the east after
the electorate voted against the present Government at the last Local
Government elections and made reconciliation among communities as well as
settlement of grievances in such areas impossible.
 Promises,promises!

It is divisive tribal politics, discrimination against minority

communitiesandthe failure at poverty alleviation that led to the 30-year war,
the youth uprisingof the late eightiesand thelow FDI stockof about $ 10billion
(most of itfor construction and not for manufacturing for export) to Sri Lanka
(SL) while some of theEast Asian economieshad FDI stocks of hundreds of
billions and evenUS$ trillions as of 2016.This was made worse by adoption of
economic policiesthat did not lead to incomegrowth. Theresult was a high
level of poverty and hardship all round.

So thewinning coalition at the2015/16 electionsgave hopes of a new

Constitution to restore the rights of all citizens, decentralisation of governing
power,settlement of grievances especially of the people in the north and the
east, better governance and law and order, elimination of corruption,higher
investment for creatingone million new jobs and a spurt in export expansion
to earn American dollars to helpsettle our massive external debts and so on.

Failure!

Nothing of the sort happenedeven afterthree-and-a-half years due to the

absence of a passion to serve the people, theaddictionto corruption and the
surprisinginefficiencydisplayedby the new Government. The people were so
angry that they voted in large numbersagainst it at the lastLocal Government
elections for political elements that do not support equal rights for the
minority communities,advocate socialist policies not followed by the
prosperous countriesof the worldand extendprotection for the tiny domestic
market oriented business sector, which has failed to proliferate sufficient jobs
for the unemployed youthandadequateexports to erase our external debts.So
now it has become almost impossible to enact a new Constitution mainly to
achieve reconciliation among the various communities and settlement of
grievances particularly in the north and the east.

Another result of the absence of reconciliation and the inefficiency ofthe new
Government is the continuance of political instability and insecurity that has
prevailed in the country for several decades, leading tolow levels of export-
oriented manufacturing investment, particularly by Foreign Direct Investors
(FDI)who could bring in locally-scarcecapital, new technologies and access to
global markets. It is the inadequacy of such investment for creating
manufacturing production capacitythat has led to a serious decline in exports
(33% of GDP in 2004 vs. 13% of GDP in 2017).

But the present Government wrongly believesthatthe decline is due tothe

inadequacy of markets for our exports and is bent on promoting Free Trade
Agreements;what is desiredis greater investment to create export production
capacity especially byFDI.

Some successes!

But it is not correct to say that the Government has failed entirely in its efforts
at promotion of investments and exports. It has succeeded in drawing up a
fairly satisfactory set of policies for this purpose. They include a
comprehensive Vision 20/25 document, a Policy on Trade and Investment,
awell-prepared National Export Strategy (NES) that correctly aims at
simplification of complex regulationsand an Enterprise Development
Programme targeting mainly Small and MediumEnterprises(SMEs).

However, they are not without shortcomings. One of them is the emphasis on
tradeand not on investment. The Enterprise Development Programme
appears totarget SMEs, the failure rate of which is very high due to anabsence
of adequate knowledge of financial, human resource and marketmanagement
on their part;those who are not genuinealso may exploit theincentives offered.
The low productivity of these due to theirsmall scale of operations/high unit
costswill not enable them to be competitive inexports;it is thelarge firms,about
10%, of themthat undertakeabout90% of exports in SL.It is necessary to
correct these weaknesses, for these programmes to succeed.

Adding to the successes

What the Governmentshould do to overcome the serious decline in exports is

to incentivise particularly the large-scale domestic firms to invest in export-
oriented ventures asthe FDI might keep away due to the continuation of
political instability and insecurity,while encouraging the SMEs to operate as
suppliers to direct exporters. The absence of such aprogramme is very
unfortunate.

The import tariffs are very high, encouraging production for the domestic
market; theselead to an absence of competition (among firms) thatnormally
pressurises them to invest and add value to products towin well paying
customers abroad and avoid competition from rivals.

There is alsoan absence of adynamic set ofincentives which could encourage

export expansion. There are no tax holidays for exportersanymoreto
compensate them for the constraintsthey still suffer from, such as the complex
labour laws, the scarcity of labour with the required skills, cumbersome
regulations (some being simplified under the NES);poor physical
infrastructure such as quality power supplies with frequent cuts; the increase
of theincome tax rate on profits generated from exports from 12% to 14%, an
Economic Service Chargeto be paidby exporters as well and the numerous
problems that exporters have with the Inland Revenue Dept., such as delays in
VAT refunds and unsigned letters of demand,(though100% capital allowances
are available on investmentsduring the first year andimported inputs are not
taxed). Such weaknesses have to be corrected to succeed significantly inexport
expansion. In fact exporters have to becared fordynamically, as the EDB did
in the 1980s for this purpose.

Apart from private sector investmentthe Government too has to be active with
capital expenditureand greater attention to carefully selected areasthat
maximise the welfare especially of the poor without going feverishly after
large/expensive construction projects that could generatebribes and boost
heavy importsas well asfor improvingthe dark mood ofthe people especially in
the north and the east.They arementioned below.

New Constitution
It is essential to create a new Constitution and other laws to introduce good
governance/law and order,to build a stable socio political environment with:

Equal rights for all, devolution of power to local areasand other

laws/regulations such as provisionsto deal withenforced
disappearances,missing persons, grievances arising from racial discrimination
andthe 30-year war, to settle the ethnic conflict issues once and for all that
lead to socio political instability.

Separation of powers (among the Legislature, Executive and Judiciary)

mainly to reduce harmful political interference particularly in the
public/justiceadministrations.

First Past the Post,electionsystem to reduce the unit of election to the

smallerconstituenciesand not the larger districts/areaswhich increases election
campaign expenditurethat motivatesundesirable elements to offerbribesfor
state captureas well as to strengthen the bond between the voterand the
Parliamentarians/local politicians.

Independent commissions mainly to improve the public service to enable the

appointment of officials based on merit as in Singaporeand not on political
affiliations; this may involve the cancellation of Article 55.3 of the present
Constitution which enables the President and the Ministers to interfere in
making official appointments and promotions.

A system to achieve a better conviction ratein the courts of lawto improve law
and order.

New articles in the Constitution and other lawsthat create special institutions
that report only to parliament to deal with rampant corruption and other
forms of crime and toempower them to bring the accusedbefore special courts
and impose the strictest of punishments to those found guilty especially in
view of the insecurity created by themagainst investment.

‘Teeth’ for Parliamentary committees such as the COPE, COPA andfor

officials likethe Auditor General and AttorneyGeneralto deal with corruption
in the public and private sectors as well as in political parties and improve
thequality of management by public institutions.
Basic qualifications for MPs, so that parliamentarians with a better level of
educationare electedto improve the quality of legislation and policies enacted/
formulatedbythe Parliament.

Reduced number of parliamentarians/localpoliticians and doing away with

one of the levelsof the local administrationwhich hasnot been effective so
far,the formerbeinga burden on the taxpayer.

Productivity of land

Since the British colonial administration initiated theLand Development

Ordinance of 1935, all governments have been busyleasingout land(later most
of it converted to grants)in small lots supported by irrigation and subsidiesto
selfishly gain self-sufficiencyin food crops especially ricewithout
pushingforreduction ofpoverty among the farmers.

Subsequentsubdivision of suchlandhasbeen so heavy that there are reported to

be more than 45% of the lots which are less than 40 perches in extent
according to the Censusof Agriculture 2002.It may be worse in 2018 .The
tenure conditions have been so restrictive that farmershave beenengaged in
litigationand numerous visits to meet officials who often demand bribes.This
is mostly subsistence farmingand is one of the reasons for thelow
productivityin rural agriculture. The net result is poverty among 85% of
people in rural areas.

The solutions to these problems may involve the following:

a)Grant of ownership of the land to the genuine farmersafter a thorough

analysis of the ground situation and the socio economic end results.

b)Consolidation of small land holdings in to larger lots; ownershipcould lead

to this as subsistence farmers might sell their small holdingsand look for other
work;asthis has not been done and adequate investment in manufacturing has
not been pushed for either, excess labour in agriculture (27% of total
employment) has built up leading to encroachment of steep hillsides andeven
forest reserves.

c)Re-plotting (plottingcontiguously,instead of the normal location of

properties far apart)andpaved roads to easemachinery use to createeconomies
of scale (to reduce unit costs).
d)Givingpriority to development ofrural infrastructure including repair of
irrigation works and provision of clean drinking water; theGovernment has
launched a Rs. 9 billion programme for this purpose but it may be necessary
to avoid the usual corruption in the award of such contracts, to maintain
standards.

e)Supportingcultivation of crops(preferably exportable/drought resistant)on a

large scalewith comparative advantage(production at lower unit costs than
competitors).

Reform of the

system of education

It is strange that the Government, like all the previous administrations,never

thought ofreforming the country’s thoroughly outdatedsystem of educationin
pursuing the target of one million jobs byprovidingthe skills required
byinvestors.In addition,as the job seekersdo not possess the required skills
and lack proficiency in English, findingwell-paying jobs in the countryto get
out of poverty becomes hard,compelling them togo abroad to work under
slave like conditions.

This is one of the greatest crimes committed by all governments againstseveral

generations ofyouth in SL. It should thereforerestructured without delay
toprovide the hard or cognitive skills on basis of STEM subjects such
asscience, technology, engineering, mathematics andICT, as well as thesoft
skills (or social and emotional skills) such as thehuman values required to live
and work peacefully as well ascreativity, hard work,leadership, management,
team work, communication, etc.,and of course proficiency inEnglish
demanded by businesses.

Conclusion

The failure of the Government to carry out its promises at the elections in
2015/16 hasraised several dark clouds over the horizonthat indicatethe
country may be carriedback to a state of inter-communal clashesand lower
investment, particularly by FDI.

What is needed by all political partiesis to take immediate action to defusethe

situation as a base to carry the country collectively towards prosperity; these
may include particularlythe creation ofa new Constitutionwith all the
necessary features, support for the private sector to undertakeexport-oriented
investment and measuresto reduce povertyparticularly in rural areas with
special attention to the former war-affected regions.

The present Government could help in introducingall thiswithin the rest of its
period in power by emphasising on the key result areas indicated
above,without stooping tocorruption and unnecessary politicisationas in the
case of thepublic services; if this is doneeffectively it may even win the hearts
and minds of the people.

(The writer is a development economist.)

Posted by Thavam