Harsha’s plan to innovate the economy is welcome but time is running out for him

National Policies and Economic Affairs State Minister Dr. Harsha de Silva

Launching of Venture Frontier Lanka

The State Minister for National Policies and Economic Affairs, Dr. Harsha de Silva, in his second incarnation in that ministry, has acted promptly to propose a strategy to convert Sri Lanka into an innovation and entrepreneurship economy. 

This was unveiled by him at a function last week in Colombo to launch the new facilitator for start-up tech companies – Venture Frontier Lanka – a company owned by US-based Ovibees Ventures (available at: http://www.ft.lk/front-page/Govt--to-launch%C2%A0Innovation-and-Entrepreneurship-Strategy/44-651311 and at https://www.youtube.com/watch?v=Pt_A7x3Y620). 

Ovibees Ventures

Ovibees Ventures was founded by Ovidiu Bujorean, a Romanian educated at both Harvard and MIT, to help promising start-up tech companies to attain maturity through entrepreneurship-coaching and penetrate the global markets successfully. Thus, it plays the role of a venture capitalist supporting new entrants to business by holding onto their fingers and backing them at every stage which they call ‘over the entire ecosystem’ of business. Its focus has been to identify disruptive and leapfrogging technologies and take them to the global arena.

A disruptive technology will completely replace an existing technology making it obsolete and, therefore, it is a killer. A leapfrogging technology, on the other hand, will bypass an existing technology and make it irrelevant. 

This is happening practically every day and the winners are those who can successfully and seamlessly capture presently non-existent markets. Ovibees, a strengthened form of Ovidiu by the entrepreneurial skills of bees, operates in Asia, Africa and Latin America, supported by networks built in the developed world. 

Problems faced by startup companies

Venture Frontier Lanka has only been launched in Sri Lanka and it has not yet started its business. But, given the present situation in Sri Lanka which lacks venture capital financiers, it has a massive role to play. 

This is a complete change in the country’s existing financing system which is, as Harsha himself branded, simply giving loans if there are only acceptable collateral. But Sri Lanka’s promising entrepreneurs have been handicapped by a number of obstacles before them. In addition to the collateral issue, they have to tackle the problem of inexperience, inaccessibility to global markets, inability to adapt and sophisticate technology and operate in the hostile business environment in the country. 

The support by venture capital is therefore an essential ground condition for developing entrepreneurship among young and dynamic would-be starter-ups in business. Imagine what would have happened to Apple if Steve Jobs had not been supported by young venture capitalist Mike Markkula to unveil his Apple Macintosh II desktop computer.

In this background of gloom and disappointment, there are a few success stories, like Lanka Harness which produces sensors for airbags in leading brands of motor vehicles throughout the globe. One or two, and for that matter even a dozen, success stories will not help Sri Lanka to create wealth for its people by penetrating global markets. 

For that, Sri Lanka needs a critical pool of entrepreneurs – a number that is sufficient to make a real forward-movement by changing its present status from inactivity to activity. Venture Frontier Lanka alone will not be able to accomplish this task. Yet, it is the beginning and, if successful, would be able to help Sri Lanka to attain its long-term growth targets.

The support by venture capital is, therefore, an essential ground condition for developing entrepreneurship among young and dynamic would-be starter-ups in business. Imagine what would have happened to Apple if Steve Jobs had not been supported by young venture capitalist Mike Markkula to unveil his Apple Macintosh II desktop computer

Harsha’s reincarnation

Harsha became the Deputy Minister of Policy Implementation and Economic Affairs in the new Good Governance Government that was formed in January 2015. But, that was a very short stint and before he could even streamline a suitable economic policy for the country, he lost the job in August that year after the general elections. He was then in external affairs shuttling from country to country. He was given a reincarnation in economic affairs in mid-2017 but by that time, the country had lost two and a half years. 

Now back in the seat as its State Minister, he could make a real contribution to the country’s growth initiatives. However, all the odds are against Harsha.

Fixing the ailing economy

One problem he faces today – and that is the gravest problem too – is how he to fix Sri Lanka’s fast slowing down economy. In fact, Sri Lanka’s economy began to manifest its ailments from around 2013, three years after it had experienced an economic boom following the end of the 30-year-long war in 2009. During 2010 to 2012, the economy had grown at an average annual rate of 8.5%. 

This growth had been attained by the country by concentrating on producing for the domestic economy, totally neglecting the export sector. The ability of the domestic economy to support an ever growing output was limited. Thus, the economy began to slow down from around 2013 with growth falling to 3.4% in that year followed by a temporary uplift to 5% in 2014. 

Government misguided by Central Bank in 2015?

The challenge before the new good governance government was to correctly diagnose the emerging economic ailment and take suitable prescriptive measures. However, the Central Bank, which was expected to convey this message to the Government, had painted a rosy picture about the economy in its Annual Report for 2014 released in April 2015. This was soon corroborated by the Ministry of Finance which released its Annual Report for 2014 in June 2015. It not only hid the true position from the Government but also embarrassed critics like Harsha by refuting their claims about economic mismanagement by the previous administration. Thus, in the three years that followed, cracks began to appear on every front of the economy from the external sector and fiscal sector to the monetary sector and real sector. 

A howler by Census and Statistics

Growth began to further decelerate with a growth of 4.8% in 2015 which fell to 4.4% in 2016. The year 2017 was a write-off and all the indications pointed to a worsened economic status in which growth would fall even below 4%. But now, news has flashed in the market that the country’s growth compiler, the Department of Census and Statistics, has made a silly howler (available at: http://www.ft.lk/front-page/Statistics-office-withdraws-GDP-data/44-651477 ). 

According to reports, it had posted to its website the overall growth for 2017 as 3.1%, coming mainly from the dismal performance in the fourth quarter of the year amounting to 1.4%. However, within 24 hours, it had killed the report on the web, claiming that it needed to further fine-tune the numbers. 

Reputation of the Government is already damaged

Whatever the justification given, it has already tarnished the reputation of both the Department and the Government which is overseeing its affairs. The general perception by the public is that the growth number is not to the liking of the Government and therefore, action is being taken to kill that number and reproduce a suitably massaged one. 

Harsha, who was a severe critic of similar practices of the previous administration, cannot overlook this critique as the State Minister in charge of the country’s statistical bureau.

Trading prosperity for political expedience

The other problem which Harsha faces is entirely beyond his control. The Government, which has been beaten very badly at the just concluded local government elections, is poised to face three other elections in the next three-year period. In this year, it has to face the provincial council elections, in 2019, the presidential election and in 2020, the general election. 

A government in election mood will naturally trade long-term economic prosperity for day-to-day political expedience. Thus, strategies like the one to promote innovation and entrepreneurship will naturally be relegated to a backseat, while the Government will embark on vote-catching expenditure programs. In this background, the next three years will also be lost years as has been the case in the last three years. 

Unimplemented economic policies

All the economic policy statements and policy strategies released by the Government in the last three-year period have pointed to the need for producing for the export market by converting Sri Lanka from a simple technology-based economy to a complex technology based economy. However, the Government has been slow to direct the economy in this direction in the last three years. 

It had planned to sign a number of free trade agreements with a host of countries in order to create a reliable export market for Sri Lanka’s existing as well as future exporters. Of them, the Government was able to sign a free trade agreement only with Singapore. Converting the country’s product mix from simple technology to complex technology is yet to be inaugurated. In this context, the launch of Venture Frontier Lanka has been a step taken in the right direction.

Disruptive technologies 

Disruptive technologies, which were branded ‘creative destruction’ by the Austrian-American economist Joseph Schumpeter, are taking place almost every minute of every day. Sri Lanka’s current problem has been how to come up with such disruptive technologies of its own, given its low engagement is research and development. 

However, research and development will create new inventions and new inventions alone will not help a country unless they are commercially produced, a process which Schumpeter called ‘innovation’. 

In the absence of its own inventions, Sri Lanka has to adapt inventions made by other countries and then, innovate them by getting into commercial production. This is where the Venture Frontier Lanka and Harsha’s plan to introduce an innovation and entrepreneurship strategy come in handy. But for that purpose, Schumpeter’s wisdom should be taken into account.

Joseph Schumpeter on creative destruction

Schumpeter in his 1942 book ‘Capitalism, Socialism and Democracy’ has laid out the requirements for a nation to use creative destructions for innovative production.

In this book Schumpeter has explained his proposition as follows: “The opening up of new markets and the organisational development from the craft shop and factory to such concerns as US Steel illustrate the process of industrial mutation that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one ... [The process] must be seen in its role in the perennial gale of creative destruction; it cannot be understood on the hypothesis that there is a perennial lull.” 

So, according to Schumpeter, like a continuously happening gale, new inventions and innovations take place replacing the old ones driving the mankind forward; it is something about which the mankind should be happy and not angry. A lull that is there forever cannot bring this change in the capitalist world. Thus, the secret to the continuous prosperity of the capitalist world is the ‘creative destructions’ or the perennial gale prompting latter day economists to nickname it the ‘Schumpeter Gale’.

Schumpeter: Without innovation and diffusion, invention is helpless

According to Schumpeter, four factors, namely invention, innovation, diffusion and imitation lead to the final phase of creative destruction. Invention is the creation of a new product, new idea or a new process which comes from education, learning and research. 

These inventions standing alone will not lead to capitalist growth. They should be put into practice or viable commercial ventures by entrepreneurs through a process known as innovation. 

Thus, without innovation, inventions are simply fruitless. An example from recent times for the combination of inventions and innovation comes from Apple products. According to Walter Isaacson, biographer of Steve Jobs, it was Steve Wozniak who invented the Mac computer. Had it not been used commercially by Steve Jobs, the innovator, that invention would have simply remained an abstract invention.

Inventions remain idle unless innovators step in 

Another example of an invention being successfully innovated has been given by Fred Vogelstein in his 2013 book ‘Dog Fight: How Apple and Google went to War and started a Revolution’. 

Steve Jobs, once again in search for a scratch-free screen for his new iPhone, had used a glass known as Gorilla Glass, which had been invented by American Tech firm, Corning Incorporation in the 1960s for the US Air Force. For some reason, the US Air force had decided not to use it and therefore Gorilla Glass had remained unused in its stores. 

Jobs had decided to use it for the iPhone in 2005 and as a result, an invention lying idle for need of an innovator was commercially produced after some 40 years.

Words about inventions and innovations spread through the market by diffusing information to all. They open opportunities for all. Thus, they are imitated and as a result, the whole world moves to a new phase. 

This is the process which Harsha is planning to replicate in the next two and a half years. He had gone through this mill in early 2000s as a starter-up without success. This writer recalls that he worked with the Central Bank to support the farming community to get the best price by helping them to discover prices in the market. For that, he proposed to digitise the Dambulla Wholesale Market. But against the objections by those in the market who felt threatened by the farmers’ becoming more informed, the project could not be implemented.

Time is running out fast

People like Harsha have a lot of ideas as to how the economy should be steered for long-term prosperity. But those ideas should be converted to policies, policies to plans, plans to projects and projects to project implementation units. All these cannot be handled by a single person or a single ministry. 

The resources of the whole Government need be marshaled to implement them successfully. But for that, time is running out and there is no room for respite. The late astro-physicist Stephen Hawking put this very cogently in his bestseller, A Brief History of Time, when he said that time is moving and it is moving in a forward direction. Hence, it is not possible to stop the time machine and work on policies. They have to be implemented as time also passes. This has been made more complicated by the three election years ahead.

Build local and reach global 

Hence, within these limitations, the Government has to help Sri Lanka’s startup companies to commercially use inventions created elsewhere and then penetrate global markets. Only then can the slogan pronounced by Venture Frontier Lanka, ‘Build Local. Reach Global’ become a reality. 

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected]).