Target 2048 – Part X: Growth lab experiment should be converted from a mere wish to ground level reality

Today, the policymakers should focus on promoting the export of both goods and services since Sri Lanka has now reached its saturation point with respect to the traditional exports, namely, tea and apparels

Growth lab, social market economy, and four pillars of economic reforms

Sri Lanka’s choice of 2048 as the target year of becoming a rich country has some sentimental value. That is the year in which the country will celebrate the centenary of independence from Britain. However, this goal seems to be an offshoot of a similar goal announced by India in August 2022 to become a rich country by 2047 when it celebrates the centenary of its independence from Britain. Neither country has come up with a long-term policy strategy to reach this target by late 2040s. 

In the case of India, Modi will do so if he is reelected for another term at the general elections set for 2024. In Sri Lanka, Wickremesinghe has assigned this task to the policy lab, following the Growth Lab model of Harvard University’s Center for International Development, to be set up before the end of September 2023. He has however given some broad guidelines for the growth lab to follow when it meets in its proposed policy retreat. Accordingly, his Government will follow the ideology of social market economy to deliver prosperity to all the citizens of the country. This social market economy ideology, borrowed from the post-war Germany, highlights the adoption of the middle path in policy development and implementation avoiding both the extreme capitalism and the extreme socialism. He also pronounced four pillars on which the new policy development should be made: disciplining the budget, investment promotion, provision of social safety nets for vulnerable groups, and reforming the state-owned enterprises. These four policy pillars are what has been agreed with IMF for securing the extended fund facility in March 2023.

Given the present economic structure and the country’s installed capability, attaining this goal is quite challenging. It is difficult but not impossible if Sri Lanka identifies the constraints correctly and introduces suitable remedial measures to overcome them. I will conclude this series by focusing on some of the important challenges.

Minimum growth needed

In terms of the World Bank classifications, a country becomes a high-income country in 2023 if it passes the threshold of a minimum of $ 13,205 as its per capita gross national income calculated according to the World Bank’s Atlas method. If this threshold is increased by 1% as it has happened in the past decade, richness will be gained by countries which will have a GNI per capita of $ 17,579 or more. There are two demographic projections made for Sri Lanka over the period under consideration. 

According to the World Population Review, Sri Lanka’s population now growing at 0.35% per annum is to peak in 2035 and then it will begin to fall continuously. In 2048, its population will be 22 million, same as its population in 2023. If the same threshold per capita GNI of $ 17,579 is used to classify a country as a high-income country, Sri Lanka’s economy should expand from its size of $ 75 billion in 2022 to $ 387 billion in 2048. This requires Sri Lanka to grow at a minimum compound annual rate of 6.5% over the next 26 years. This is a gigantic challenge for Sri Lanka.

An aging population is a constraint

This demographic development associated with a contraction, or a very low growth will throw another hurdle in Sri Lanka’s growth path. That is the gradual aging of the population which is already at a very high level compared to India. Sri Lanka’s median age in 2022 is 34, compared to India’s average age of 27. With the anticipated developments, its median age will rise to a level between 42 and 47. This will be further complicated by the current high flow of migration of skilled labour in search of greener pastures elsewhere. Sri Lanka will face a serious labour shortage in its march toward richness unless it tackles the aging of population and anticipated labour shortage. In the past, this was tackled by allowing free labour immigration policy. 

Singapore which also faced the same problem in the early years of economic transformation allowed foreign workers, especially the skilled categories of workers, to enter the country. In addition, as an incentive for those workers, the city state was converted to a First World Oasis with respect to law and order, rule of law, environmental conditions, transportation and healthcare services, and education. What this means is that a country cannot encourage people to stay and work by using coercive laws but by offering a conducive living environment.

Female entry to labour force is not a solution

It has been suggested that Sri Lanka can tackle the aging problem of population and the consequential depletion of the quality of the labour force by encouraging females to enter the labour market. This suggestion has some merit because despite the high literacy rate among women in Sri Lanka, the female labour force participation has been at about 33% in 2022 down from 45% in 1990. However, this is a short-term solution since the whole population is to shrink or grow slowly in the period ahead and even with higher female participation in the labour force, the aging problem and worker migration problem cannot be resolved. Both these issues need a separate approach.

Decline in productivity

The aging of the labour force affects the output and the growth rate adversely via a decline in productivity. This problem should be tackled by Sri Lanka by retraining its workforce continuously, on one side, and introducing technology and automation to production processes, on the other. The popular belief that old hands cannot be retrained to make them tech savvy is always not true. The Dompe e-Hospital could retrain its old hands in the use of advanced ICT successfully to transform its patient management system to an ICT platform. When the fuel distribution was rationed in 2022 in Sri Lanka via a QR code, both the motorists and the pump operators picked up the new technology quite easily. Hence, continuous retraining of the workforce is a must.

Loss of skilled workers and professionals

The migration problem has been largely misunderstood by many policymakers in Sri Lanka. In the recent few months, Sri Lanka has witnessed many skilled workers and professionals leaving its shores for greener pastures elsewhere. The ICT sector, healthcare services, and educational institutions have been very badly hit by this sudden upsurge of Sri Lankans moving out for foreign jobs. Angered by this sudden adverse development, President Wickremesinghe is reported to have remarked that compensation should be sought from countries which recruit Sri Lankan doctors. 

The basis of this argument is that these doctors have been trained by Sri Lanka under its non-fee charging education system and, hence, their moral obligation has been to serve the people who have financed their education. This is an erroneous argument since it is those who have received education in Sri Lanka that have met the cost of their education. This is because it is the whole population, including the students and their parents, that has funded the Government’s total gross expenditure through taxes paid in the current period, taxes to be paid in the future if the Government has financed it by borrowing, and foregoing the real value of their assets due to inflation if the Government has printed money for financing it. 

Hence, the free education argument to restrict those who seek foreign employment is erroneous. If education has been funded by them by financing the total gross expenditure of the Government, they should have the right to get the maximum return on their investment.

High taxes

It is, therefore, useful to find why these professionals are leaving Sri Lanka. The most recent cause, as has been presented, has been the high taxes which the Wickremesinghe Government has imposed on professionals. They had been given free bonus by the previous Gotabaya Rajapaksa administration by reducing the taxes which they should pay drastically. They indeed enjoyed this bonus during 2020 to late 2022. Wickremesinghe administration, faced with a massive fiscal deficit, reversed the Gotabaya tax concessions by returning to a tax regime more stringent than the one that had prevailed prior to 2020. It was also delivered as a sudden shock to the target taxpayers. 

By the time these taxes have been imposed, the real earnings of all Sri Lankans had fallen nearly by a half due to the increase in the cost of living by about 92% between January 2021 and December 2022. Therefore, with high taxes imposed, the professionals had been hit by a double whammy, an inflation tax, and an actual income tax. Since there was no prospect of increasing earnings to compensate for these two whammies, the available way out in the form of seeking employment elsewhere has been used by Sri Lanka’s professionals.

Elimination of trust deficit

However, an argument presented by the critics of those who are leaving Sri Lanka is that in their new host countries they are subject to higher tax rates than the rates imposed in Sri Lanka. This is factually correct. But what is omitted by the critics is that in their new host countries, they pay a higher tax on an income significantly higher than what they get back at their home country. Hence, on a net basis, their welfare level is higher. In addition, in those countries, those taxpayers have an assurance that what they pay to the Government is prudently used and returned to them by way of Government expenditure programs. This trust is a must between the citizens and the rulers. In Sri Lanka, there is a significant trust deficit between the two parties. This deficit has been created by imprudent, illogical, and irresponsible behaviour of the rulers. Hence, the critics should attack not the fellow citizens who leave the shores of the country for employment elsewhere but those rulers who have been responsible for creating the present trust deficit between the citizens and the rulers.

Encourage reverse migration

Therefore, what is to be done is not the restriction of the flow of foreign employment by coercive laws. Those people who leave the shores of the country will get experience, accumulate capital, learn of business knowhow, and build valuable social capital. Sri Lanka should tap these resources by encouraging reverse migration for the continued economic advancement of the country. In Vietnam, the migrant boat people have not only promoted trade but also investment by returning to their original home country with capital, experience, business acumen and market access. Sri Lanka should encourage those who leave its shores now to return to the country soon with the same resource base. But to do that, an essential prerequisite is the elimination of the present trust deficit between the citizens and the rulers.

Investment promotion

Investment promotion is one of the pillars on which the Wickremesinghe Government is relying for bringing richness to Sri Lankans. Though the detailed strategy that should be followed is to be determined at the growth lab to be formed, given the present low economic performance in Sri Lanka, the strategy should necessarily involve integrating the economy with the global economy. Wickremesinghe while presenting the economic policy statement of the previous good governance government in November 2015, highlighted four policy strategies to accelerate the country’s economic growth. They were: creating the background needed to enter the global value system, encouraging the small and large scale farmers and entrepreneurs to participate in the global economy, encouraging competitive international organisations to invest in Sri Lanka, and digitalising the Sri Lanka economy. None of these strategies were pursued by his Government of 2015 to 2019 and they remain even as at date unfulfilled.

Promotion of the export of both goods and services

This is the point at which the Wickremesinghe Government should start its development strategy. Today, the policymakers should focus on promoting the export of both goods and services since Sri Lanka has now reached its saturation point with respect to the traditional exports, namely, tea and apparels. Tea cannot be promoted anymore due to the constraint of lands and the competition from soft drinks. Apparels face new challenges due to the entry of newcomers to the sector, on one side, and the measures being taken by the importing countries to on-shore and near-shore the production processes. 

Hence, new production lines should be developed and Sri Lanka should endeavour to produce parts of a product and not the whole product in Sri Lanka. Sri Lanka-born economist Prema-Chandra Athukorala has termed this strategy as ‘joining the global production sharing networks’. Sri Lanka should as its policy strategy join this network to enhance its wealth and foreign exchange earnings.

Need of a critical mass of entrepreneurs

Two Sri Lankan manufacturers have successfully joined the global production networks by supplying vital components to global assemblers. One is the Lanka Harness which supplies sensors for the activation of air bags in motor vehicles. The other is MAS Matrix that supplies the canvass for the Nike sports shoes, assembled in a factory in Vietnam. This is an encouraging development but for a country to get the full benefit from global production sharing networks, there should a critical mass – a sufficiently large number to change the characteristic of the process – of such producers engaged in this production process. This is the biggest challenge which Sri Lanka faces in its march toward richness by 2048. The growth lab to be organised by the Wickremesinghe administration should come out with a suitable policy strategy with time bound targets to develop such a critical mass within Sri Lanka’s economy.

Goal should be elevated from a mere wish list to ground level action

In the past, Sri Lanka has made the bold pronouncement that it will adopt suitable policy strategies to become a rich country within a specified timeframe. However, there were not any concrete measures taken at the ground level to realise that goal. Hence, they just became wish lists rather than realised policy goals. This was specifically valid for the good governance government of 2015-19 during which the pronounced goal was to make Sri Lanka a rich country by 2025. The present goal of becoming a rich country by 2048 should also not fall into this category. It behooves the Wickremesinghe administration to take effective measures to transform the goal from being a mere wish to a realisable target. 

This is the biggest challenge which the administration presently faces. As mentioned earlier, it is difficult but not impossible. Since it is a target to be realised over the next two and a half decades, the pursuit of the target by the present administration is not sufficient. It should be signed off by all the parties involved that they will pursue the goal until the country reaches the expected rich country state by 2048.

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