Export Diversification

Sri Lanka in ancient times exported its elephants, peacocks, gems, spices and even monkeys (!) to the then known world.
Old Europe, more precisely the writers of ancient Rome and Greece have made reference to such imports from Taprobane, the name referred to by them to Sri Lanka then. It was not only the Europe of the caesars, but the Moors of ancient Arabia too benefited from the largesse of the island’s natural resources.
Its last colonial masters the British enhanced Sri Lanka’s export basket by introducing the three plantation crops; tea, rubber and coconut. The British came to Sri Lanka in 1796 and left 152 years later in 1948, but their legacy, not least the plantation crops that they introduced to the island, lived on.
Those not only lived on, but also became Sri Lanka’s primary source of export revenue, with the island’s main export market mainly being the West.
Sri Lanka in the 21 year period from 1956 to 1977 embraced a closed economy which included the trappings that go with such, like exchange controls, import substitution and adopting and following Socialist Marxist polices; where the means of production, by and large were wrested in the State, either by nationalization or by the state itself setting-up industries.
Sri Lanka was also largely a welfare state with free education and health, subsidies and free rice rations being available for the benefit of all and sundry of its citizens.
But a sea change took place in Sri Lanka’s economy in 1977; 29 years after the British left the shores of this island.
1977, both, from an economic and political perspective, was an epoch making year for the island. Space however does not permit this column to elaborate on the political ramifications made on the country’s landscape as a result of 1977.
Though economics is intrinsically linked to the politics of a country, however, this piece mainly includes the economic changes brought about more specifically on Sri Lanka’s export sector as a result of the political transformation for better or for worse that the country underwent in 1977 and the current challenges faced by this sector.
The island’s exports till then were largely dominated by plantation crops (more often than not exported in the raw form with little or no value addition), gems and jewellery, spices and fruits; mainly catering to the markets of and in the West.
However the political change brought about in 1977 that resulted in the opening up of Sri Lanka’s economy encouraged foreign investments backed by the setting-up of free trade zones where investments established in such zones enjoyed tax free holidays.
The economies in South East and East Asia, particularly countries such as Singapore, Hong Kong, Korea and Taiwan were experiencing a transitionary shift in their export paradigm during that period.
Those countries were fast becoming uncompetitive, especially in the field of garments, bags exports and such like as a result of rising costs of labour due to the prosperity enjoyed by those nations, a beneficence derived from embracing free trade, thereby also creating diversified and better paying employment opportunities to its people.
Those economies were then looking at exporting items such as high value electronics and computer chips, rather than low value garments and such like which brought about their original uplift.
They were therefore searching for new production bases where they could transfer the manufacture of such low value exports at lower costs.
In that context Sri Lanka with its educated and cheap labour force, political stability and investor friendly laws fitted the bill and were their ideal destination of choice for the relocation of such industries, a solution to the problems of rising costs in the original bases that they were operating from, thus therefore being found.
However, the opening up of the island’s economy not only resulted in low value industries such as garments finding their way into Sri Lanka, but also paved the way for the setting-up of technological driven industries of high value being established here; only to be disrupted due to the events that overtook the island as a consequence of July ’83.
The markets of much of those new industries, if not all were the West and possibly Japan as well.
But after the Great Recession of 2008 the consumer in the West and in Japan has become cautious in his spending habits, preferring rather to save than to buy on credit, thereby causing a pall of gloom in regard to the future of the island’s export industry.
This is where the phrase “export diversification” gains credence.
Tax consultant N. R. Gajendran’s solution to this was to seek after new markets in growing economies such as India, China and Indonesia (see last week’s business pages).
A banker speaking in the same vein however interjected a rider saying that Government support is needed to find new markets. He gave the examples of President Ranasinghe Premadasa’s 200 garment factories programme and the Government of Japan’s assistance to Sony to find export markets for its television sets.
The source went a step further by saying that the Government should stop all tamashas, and divert the monies thus saved on export promotion.
Gajendran said that due to the economic crisis facing the West it was unlikely that the growth momentum that the island’s exports are currently enjoying could be sustained next year.
Or, in the alternative, to create that economic climate where local consumption may increase, he said.
What is priority? Hambantota Port? 2018 Commonwealth Games? Or Exports and Export Promotion?
Those are the issues that President Mahinda Rajapaksa and his Government should have the boldness and the foresight to take head on and prioritise.
The pressure that the local currency is currently facing may be but a symptom of this disease with dangerous ramifications to the economy and to Sri Lanka’s political stability as well, if left unattended (see also the Economy page).