Ranil’s recipe to avoid middle income trap

Thursday, 7 August 2014 00:07 - - {{hitsCtrl.values.hits}}

Need to evolve strategies and enter global value chain to avoid middle income trap
Second generation economic reform a must to become an advanced economy
SL should build a strong middle class so it has its own consumer market
Education as a key ingredient
Govt. should shift priority from hard to soft infrastructure

By Shabiya Ali Ahlam The Government may have formulated strategies for the ambitious goal of over $ 7000 per capita income by 2020 but Opposition Leader Ranil Wickremesinghe yesterday shared with private sector his recipe for the country to avoid the world famous middle income trap. “While going for the 2020 vision, we must realise that this is a make-or-break period. It is important to decide if we are going to get out of it, go ahead of it or get caught to it like Latin America. Our only option is to formulate a set of strategies that will make us globally competitive,” Wickremesinghe told a packed Day 2 of the Economic Summit of the Ceylon Chamber of Commerce yesterday whilst delivering the keynote titled ‘Education – Critical Driver for Competitive Advantage’.

He also elaborated that if Sri Lanka is to avoid falling into a middle income trap, it must implement ‘second generation economic reform’ to become an advanced economy. For this, the nation should be prepared to implement the reforms in a well-planned-out sequence along with promoting cross-border flow of trade. Highlighting the importance of rule of law, Wickremesinghe cautioned that if there is no faith in the judicial system, investors are not going to come Sri Lanka’s way. “As Sri Lanka becomes more competitive, there will be a rapid increase in Foreign Direct Investment (FDI), export earnings and expansion of our economic base,” he added. “It is a must for us to get more foreign investment into the economy. We have to increase our export earnings. There is no other way out and this can be done easily from the very beginning. Our local exporters should get those concessions they require to go into markets. We have to think of exporting to the West. Even China cannot survive without exporting to the West,” he Recalling the period in which he was Prime Minister, Wickremesinghe said at that time apparel exports stood at $ 3.5 billion whereas at the same time for Bangladesh it stood at $ 5 billion. Today, while the latter’s apparel exports have grown to about $ 36 billion, Sri Lanka is only close to reaching $ 6 billion. “We need to have immediate access to the EU and USA markets if we are to increase our export earnings. Unfortunately we run at a deficit with all our big Asian brothers. That is the reality of the competition. So there are key decisions to be made. We must evolve strategies to avoid the middle income trap. We have to enter the global value chain. But once you get into the value chain, to survive there, our economy has to make that technological leap which leads to digitisation and a knowledge-based economy. Are we ready to do that?” Wickremesinghe asserted that Sri Lanka has to build a strong middle class that will provide the country with its own consumer market. “These are the strategies we have to follow. By doing so the end result is that education will become the critical driver of economic advantage,” he explained. He also emphasised that education is a key ingredient for the country to achieve comparative advantage, Wickremesinghe said: “We have to look at the role that the education system has to play. Stressing on the need to identify markets, he opined that while there is great potential in China, it will be difficult for local businesses to enter China as it is already sophisticated and has a large number of players among which the Chinese themselves dominate. Wickremesinghe pointed out that Sri Lanka requires further industrialisation based on high-end manufacturing, IT-related services including communication, logistics and financial services and should explore automation and robotics. Justifying his solution to avoid the middle income trap based on the Harvard Business Review, the Opposition Leader said going forward with the listed measures would result in the basis of competition shifting. “The role of the nation has grown. Competitive advantage has been sustained through a highly-localised process. That is the responsibility of the Government and via its policy it must ensure that the skills resources and the technological base are continuously ungraded and deployed. The quality, skills and cost of human resources is vital and it must in turn lead to scientific, technical and marketing knowledge. “The Government must invest in the most modern digital data communication structure, which also has to be upgraded regularly. In such a scenario, soft infrastructure should be given priority. If you are going to use second generation reforms to avoid the middle income trap, you have to move out of hard infrastructure to soft infrastructure. To establish education as the main driver of competitive advantage is a major policy decision to move away from hard infrastructure and that is a political decision,” he said.