Lloyd Yapa’s treatise on export competitiveness: A must reference book for SL economic policymakers

Dwindling exports are Sri Lanka’s main constraint to prosperity

A pressing economic problem faced by the present Government, and any government that would come to power in the future, is the dwindling export earnings. They have been falling in relation to both the size of the economy, known as the Gross Domestic Product or GDP, and the total world exports. 

Exports as a percentage of GDP stood at about a third of GDP at the turn of the new millennium. This ratio has now fallen to a level of a little over 12% by 2017. As a percent of global exports, Sri Lanka’s exports have been on a declining path continuously. The latest data relating to 2016 have stood at 0.05%, down from 0.08% in 2000. 

The chain effect of dwindling export earnings

This dismal performance of exports, coupled with a ballooning import bill, has generated a number of other economic problems: a stubborn trade deficit that refuses to improve, an unaffordable current account deficit in the balance of payments or BOP, pressure for the Government to borrow to finance the deficit in BOP, declining foreign exchange reserves and the continuous pressure for the exchange rate to depreciate in the market. 

The Government has therefore identified the weak export performance as one of the constraints to economic growth in its Vision 2025 and attuned all its economic policies to transforming the country’s export sector to deliver prosperity to people.

Lloyd F. Yapa’s treatise 

In this background, a study published by economist Lloyd F. Yapa on improving the country’s export competitiveness, along with other nations in South Asia, for delivering prosperity to the poor comes in handy. The book titled ‘Export Competitiveness and Poverty Alleviation in South Asia with Special Reference to Sri Lanka’ has been published by Godage and Brothers. 

Yapa has been previously the Director of Policy and Planning of the Export Development Board and is presently a livewire in the Sri Lanka Economic Association or SLEA. According to the foreword by SLEA’s former President, the late Professor A.D.V. de S. Indraratna, the present volume is one of the research studies undertaken by SLEA economists on Sri Lanka’s economic problems.

Sri Lanka’s official poverty line is misleading

According to Sri Lanka’s official poverty line, designed and measured by the country’s statistics bureau, the Department of Census and Statistics, the country’s poverty level has declined dramatically in the last decade and a half. The number of households below poverty out of the total households had thus declined from 15.2% in 2006/7 to 6.7% in 2012/3. However, this measurement is based on an average monthly income of Rs. 4,123 per individual that works out to be a minimum daily income of about Rs. 137 or just 89 US cents. 

Yapa says that this measure is defective since a person cannot maintain himself with a daily income of Rs 137. If one goes by the global standard of $ 2 per day per individual, Yapa says that Sri Lanka’s poverty level, based on the same income distribution used by Census and Statistics, is at staggering 34%. 

What it means is that most of the poor in Sri Lanka are scattered just above the threshold of the official poverty line and if the bar is raised a little, there would be more poor people in the country than what the statistics would show. But a consolation is that this high figure is much lower than most of the South Asian countries. However, a disappointment would be that it is significantly higher than some of the East Asian countries like Malaysia and Thailand. 

Yapa, quoting Sri Lanka’s Centre for Poverty Analysis or CEPA, says that poverty is multidimensional and its victims are subject to a number of severe deprivations with devastating effect on human happiness, the final aim of any development initiative. 

The puzzle of unyielding poverty and lack of progress

Accordingly, Yapa says that the objectives of his study are to examine in greater detail the puzzle of unyielding poverty and the need for improving the wellbeing of people. For this purpose, Yapa has proposed the alternative of developing exports by increasing investments and raising competitiveness. As a side measure, he also suggests that the productivity of rural agriculture should be improved by developing the social and economic infrastructure in the rural areas.

Faulting the policy of concentrating only on a domestic consumption based economy

This suggestion is in contrast with the policy of the previous administration which based its economic policies mainly on developing a national economy catering to the needs of Sri Lankans. Such a policy is normally hailed as ‘insurance’ for the domestic economy when the world is going through a difficult time shutting the door for Sri Lanka’s export of goods and services.

These are known as external shocks and a country is well poised to facing such shocks if it has a sizeable number of domestic consumers. Hence, policy makers in many countries have concentrated on developing a strong domestic economy in their respective countries as a fallback strategy when they are hit by adverse global conditions. What was wrong with the previous administration was that they did it to an extreme, overlooking exports as a viable source of delivering prosperity to the nation.

More weaknesses than strengths and opportunities

Yapa has evaluated Sri Lanka’s present position in terms of strengths, weaknesses, opportunities and threats, also known as SWOT analysis in strategy formulations. His analysis has revealed that the weaknesses faced by the country are greater in number than the strengths and opportunities it is enjoying. 

These weaknesses had been known to policy makers for decades. Yet, they had been allowed to compound themselves over the years without taking suitable rectifying measures. Its corollary has been that they have now reached unmanageable levels. But all the previous and administrations and also the present one are responsible for perpetuating such weaknesses. 

For instance, Yapa has noted that the country’s growth has been impeded by its failure to build an ‘integrated nation state’ called Sri Lanka. Such a nation state could have brought all the diverse ethnic and religious groups under one umbrella as ‘Sri Lankans’, just in the way Singapore had brought the Chinese, Malays and Indians into one human group called Singaporeans.

Issue is not the education levels but following party line blindly

 As such, Sri Lanka has failed to harness the potential and initiative of all the minority groups for continued sustainable development. Yapa has also noted that the low quality of politicians as masters of the nation as a major weakness. However, his diagnosis that politicians are of low quality due to inadequate education may be subject to dispute. The present problem of politicians is not due to their low levels of education per se. 

It is attributable to their being organised as political parties and having to toe in the party line irrespective of whether the matters before them are just or unjust. However, some of the weaknesses attributable to Sri Lanka’s economy, as diagnosed by Yapa, have been the weak rule of law, corruption, waste and ostentation. He has also identified the low quality of education and inadequate level of technology as weaknesses that have fettered Sri Lanka in its march toward prosperity.

FDIs to finance the high savings-investment gap

Yapa has taken pain in describing how Sri Lanka should create an enabling environment for investment and export-led growth. Sri Lanka has to invest about 35% of its GDP annually to realise an adequate economic growth rate. Yet, its savings could finance only about 22% of such investments. This has created a sizable savings-investment gap of about 13% and it has to be filled by attracting foreign savings, mainly in the form of foreign direct investments or FDIs. 

However, compared to more successful countries like Singapore, India and Malaysia whose FDIs are in multiples of billions, Sri Lanka’s track record of attracting FDIs in the past has been totally disappointing. Yapa has noted that during 2010 to 2015, FDIs received by Sri Lanka have been just close to $ 1 billion. 

He has attributed the poor performance to disregard of good governance principles, poor law and order, high corruption, failure to resolve ethnic conflict and unsavoury ethical and family values. All these inhibiting factors have been analysed in detail by Yapa in Chapter 3 of the book. Of them, the first four factors have been analysed by other authors too on the subject of creating an enabling environment for investment. However, the last factor, namely, unsavoury ethical and family values, has been presented by Yapa in the context of prevailing religious conditions of the country and therefore need be further elaborated.

Good governance is recognising what is right and rejecting what is wrong

Yapa says that the basis of good governance is the ability of people to distinguish ‘right’ from ‘wrong’. However, the foundation for cultivating this virtue is discipline, tolerance and respect for natural environment. Though these qualities are not alien to those who follow the path shown by the Buddha, surprisingly, it is not the case with many Sri Lankans, especially politicians, according to Yapa. 

He has noted that the religious leaders have failed to uphold the value of hard work, self-discipline and the need for living harmoniously with others. When religion has failed to inculcate these values in the young, politicians, entertainers and media have assumed that role to the peril of all others in society. The end result has been the creation of a pool of youngsters who have not been able to take risk, tolerate opposing views and value the contributions made by others. 

Yapa has come up with somewhat a rebellious solution to address the issue. He has suggested that the Buddhist temple as a seat of spreading moral values should be reorganised and the incumbent Buddhist priests should be trained to interpret the Buddha’s teachings in the light of psychology, logic, philosophy and sociology.

This is in accord with what the Buddha had advised the Bhikkus in the Avasa Sobhana Sutta. He had preached that the Bhikkus could illuminate the monasteries they live in if they learn more and more Dhammas, remember and understand those Dhammas, reflect on them continuously, gain ability to relate them to others in their own words and develop ability to see beyond them. This piece of wisdom by the Buddha is relevant not only to Bhikkus but also to all of us.

South Asia’s lost competitiveness

Yapa has found that South Asia has lost its competitiveness compared to more advanced nations in East Asia, namely, Singapore and Malaysia. This is reflected in the poor performance of its exports. For instance, as Yapa has reported, in 2015, the share of Sri Lanka’s export of goods and services in GDP had been 13.7%. The same share in Singapore had been 177% and in Malaysia, 75%. Similarly, compared to Singapore, Sri Lanka’s ranking in the Global Competitiveness Index compiled by the World Economic Forum, has been low throughout. While Sri Lanka has been a failure in all the sub categories, the main culprits have been macroeconomic instability and labour market inefficiency.

Vicious cycle of debt accumulation

The first factor has as its source the sorry state of the budgetary performance in Sri Lanka. The Government’s failure to generate savings in its current operations has forced it to borrow even for financing its consumption. The result has been the accumulation of debt, need for using almost the entirety of government revenue for meeting annual debt repayment and payment of interest and eternal reissue of debt to meet debt obligations. Since debt is not linked to development but to finance the debt repayment, it has slowed the growth, contributed to inflation and finally reflected on the exchange rate. With this type of macroeconomic instability, Sri Lanka’s export competitiveness has been low. 

Yapa’s book a must read 

The focus of Yapa’s treatise is narrow. It has sought to show how export competitiveness could help South Asian countries to alleviate poverty. Poverty is only one problem faced by these countries. The main economic problem faced by them is how these countries could deliver prosperity to the whole population on a sustainable basis and help their populations join the rich country club within the shortest time possible. In that context, exports and integration to the global market have been the strongest weapons available to them to deliver prosperity to their people. The book would have been complete if Yapa had sought to address this issue.  

Despite this narrow focus, the appearance of his book is timely. It has dug into the core of the economic problems faced by Sri Lanka today. All the successive governments have contributed to this sad state of affairs. If Sri Lanka is interested in recovering what has been lost in the past, a sure way is to pay heed to the suggestions he has made.

Hence, Yapa’s book will be a worthy reading for both the students and policymakers.

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