Dr. H.N. Thenuwara: Sri Lanka should regain the missed industrial revolutions

Dr. H.N. Thenuwara

A necessary condition for a country to have an industrial revolution is the creation of a suitable environment for inventions that should be innovated by entrepreneurs through a process, according to the Austrian American economist Joseph Schumpeter, known as innovation. For this to happen, people should have opportunities for acquiring skills and knowledge and business ability to put the new inventions into commercial production. If countries have gone through this process successfully embracing each of the successive industrial revolutions, the result would be the continuous increase in the income creating wealth and prosperity

A new book in the making

Central Bank’s ex-Assistant Governor and Director of Economic Research and presently Adjunct Professor at the University of Iowa, Dr. H.N. Thenuwara, unveiled the contents of his new book for comments and suggestions to a select audience in Colombo last week. The event was hosted by the Institute of Policy Studies or IPS. The book titled ‘Economic Growth, Development, Stability, and the Government in Sri Lanka’ is to be released in print form shortly. 

It contains 11 essays, some of which have been published earlier, on the present state of the Sri Lankan economy and prospects for its growth. It is a critical review which deserves the attention of all those with an interest in Sri Lanka and its economy. According to what he presented to the select audience, the book demonstrates his rich experience as a top central banker and scholar, on one side, and his learning from the interactions with the students at the University of Iowa, on the other. 

Reviewing the economy critically

The book contains a critical review of many current issues relating to Sri Lanka’s economy. However, I have selected only three topics of current interest for this review. They are ‘How to miss five industrial revolutions’, ‘Prospects for the recovery of Sri Lanka’s economy’, and ‘A pragmatic economic policy regime for Sri Lanka’. 

Missing five industrial revolutions

The objective of the chapter on five industrial revolutions, as claimed by Thenuwara, is to provide suggestions for a pragmatic economic policy regime by the new government to be elected at the next Presidential or Parliamentary elections. The world has already gone through four industrial revolutions and is now on the verge of entering the fifth one. Thenuwara describes an industrial revolution as a “profound economic, technological, and social transformation arising from a series of innovations that radically transforms the existing ways of production and distribution”. 

A necessary condition for a country to have an industrial revolution is the creation of a suitable environment for inventions that should be innovated by entrepreneurs through a process, according to the Austrian American economist Joseph Schumpeter, known as innovation. For this to happen, people should have opportunities for acquiring skills and knowledge and business ability to put the new inventions into commercial production. If countries have gone through this process successfully embracing each of the successive industrial revolutions, the result would be the continuous increase in the income creating wealth and prosperity. 

Colonial hand in missing the first two revolutions

Thenuwara says Sri Lanka missed all the four industrial revolutions in the past and would probably miss the fifth one too unless suitable policies are adopted. Sri Lanka missed the first industrial revolution because when it occurred in the late 18th and early 19th centuries, the country was under the colonial rule. The colonial masters did not want any new development to take place in the periphery. Instead, they wanted the development to occur at the centre by using the raw materials extracted from the peripheral countries. 

Explains Thenuwara: “During the advent of the first industrial revolution Sri Lanka was mostly under the rule of European Colonisers. In 1815, Sri Lanka was fully conquered by the English Empire. In fact, at that time, the English industrial policy was to prohibit any form of industrialisation in any of their colonies, and to use them only as sources of raw material to fuel up the industrialisation in England. In colonies they built canals and railroads and used steam engines only to transport raw materials from inner parts of colonies to the seaports. They set up government institutions that facilitated the extraction of resources and did not set up complete sets of institutions that were necessary for industrialisation and promoting economic growth and development within colonies. Thus, Sri Lanka missed the first industrial revolution.” 

Lack of sufficient and reliable electricity power

The second industrial revolution took place between 1850 and 1930 when Sri Lanka was still a British colony. In this phase of industrial production, the steam driven machinery was powered by electricity. Sri Lanka missed the second industrial revolution due to two reasons. One is the colonial policy of not allowing peripheral countries to transform the production system from agriculture to industry. This was the point highlighted by Thenuwara. The second and the more pressing one was the non-availability of electrical power on the scale required and the unreliability of its supply for running small machinery or setting up large industrial plants. Hence, even when the local businessmen and entrepreneurs were desirous of joining the second industrial revolution, they could not do so.

In fact, even after independence till about 1978, this was the situation in Sri Lanka. In this context, the accelerated Mahaveli Project which improved the electrical supply helped Sri Lanka to join the second industrial revolution belatedly. However, the high cost of power supply, highlighted by the World Bank in its Ease of Doing Business Surveys repeatedly, handicapped the entry of industrialists to this phase of industrial revolution properly. It is a major issue even today. 

Corruption at the root of the problem

Sri Lanka can be forgiven for failing to join the first and the second industrial revolutions at the proper times due to the lethargic economic policy during the colonial times. But what about after independence? For three decades it had missed the second industrial revolution and even today it has been missing the third and the fourth industrial revolutions. That was due to unsupportive Government policy during the early phase of independence. 

This is explained by Thenuwara as follows: “Sri Lanka gained independence in the middle of this industrial revolution in 1948. At the time, Sri Lanka was lagging in technology, growth and development because of not having gone through the first two industrial revolutions. Sri Lanka also did not have a complete set of government institutions to maintain a corruption free economy. This incompleteness later led to countrywide corruption and creating a generation of rent seekers whose primary objective was to profit from the government, at the expense of the welfare of the general public. This should have been obvious to the political leaders and bureaucrats of Sri Lanka who oversaw the transition of political power from the colonial master. Thus, the need to import and adopt technology and the need to install the full set of institutions should have been a top priority of the country. In similar situations, countries like Japan and Singapore adopted correct strategies”. 

Thenuwara has explained in detail the correct strategies adopted by Singapore and Japan to move along with the rest of the world in embracing the oncoming industrial revolutions. 

Thenuwara says Sri Lanka missed all the four industrial revolutions in the past and would probably miss the fifth one too unless suitable policies are adopted. Sri Lanka missed the first industrial revolution because when it occurred in the late 18th and early 19th centuries, the country was under the colonial rule. The colonial masters did not want any new development to take place in the periphery. Instead, they wanted the development to occur at the centre by using the raw materials extracted from the peripheral countries

Paying only lip services to growth needs

How did Sri Lanka miss these goals? The current President Ranil Wickremesinghe started talking about making the country ready for joining the fourth industrial revolution after he attended the World Economic Forum in 2016. Later in 2018, addressing the World Economic Forum, he highlighted the action plan to make Sri Lanka a developed country by 2025 under his Vision 2025 program. The strategy was to connect Sri Lanka to the fast growing Asia through trade and investments, while maintaining the trade and economic relationships with its traditional partners in North America and Europe. 

Though Wickremesinghe had not openly said so, the strategy had been to import the fourth industrial revolution to the country through these improved trade and investment relationships which in my view was not a sustaining policy strategy. That is because the revolution should take root within the economy with the local businessmen and industrialists, on one side, and the local population, on the other. Even this weak move was not permitted to progress by the political, economic, and social instability delivered to the country by the constitutional coup delivered by his President Maithripala Sirisena in late 2018 and the heinous Easter bomb attack by extremists Islamic groups in April 2019. 

At the Presidential elections in November 2019, his Government was ousted and the new regime did not take notice of the need for aligning the economic strategies to join the fourth industrial revolution within a set timeframe, though IPS had provided a blueprint to follow in its State of the Economy Report for 2019. 

I requested in this column the presidential aspirants in 2019 to follow this report and voters to take note before they cast their vote for a candidate (available at: https://www.ft.lk/columns/Presidential-aspirants-and-voters-Read-IPS-s-SOE-2019-before-you-make-your-next-move/4-688892). Yet neither the winner nor the losers seemed to have realised the importance of driving on a wave of science and technology for delivering prosperity to Sri Lankans. 

Leapfrogging from the second to fourth bypassing the third

The challenge which Sri Lanka faces today is to leapfrog from the second industrial revolution to the fourth industrial revolution bypassing the third. Sri Lankan policymakers who are following the IMF methodology and have now run out of ideas seem to be believing that it can be imported from abroad without creating the necessary ground conditions locally. Artificial intelligence is an important component of the fourth and the fifth industrial revolutions. 

Thenuwara has tried Chat GPT, an outcome of artificial intelligence, to give us a work program to attain this goal. It has advised us that the following ground conditions should be established if Sri Lanka to join the fourth industrial revolution. They are creating a stable economic environment, developing and maintaining infrastructure facilities, promoting education and a skilled workforce, supportive government policy and regulatory structure, recognising the need for developing technology and promoting innovations, accessing the wider global markets, and paying attention to environmental and social considerations. These are, in my view, beyond the much cherished IMF formula and should be incorporated in any long-term development strategy. 

Sri Lanka missed the second industrial revolution due to two reasons. One is the colonial policy of not allowing peripheral countries to transform the production system from agriculture to industry. This was the point highlighted by Thenuwara. The second and the more pressing one was the non-availability of electrical power on the scale required and the unreliability of its supply for running small machinery or setting up large industrial plants. Hence, even when the local businessmen and entrepreneurs were desirous of joining the second industrial revolution, they could not do so

Pragmatic approach free from fixed ideologies

This leaves us at what Thenuwara has designated a pragmatic approach to economic policy. Pragmatism here means not sticking to any ideology like capitalism, socialism, neoliberalism, market fundamentalism, etc. He begins his discussion by noting the following: “Building a pragmatic policy regime begins with an evaluation of the nature and quality of the existing political regime, politicians, government, government institutions and bureaucrats. If all those entities are corrupt no socialist economic policy regimes will work well”. Hence, at the root of this policy is the elimination of bribery and corruption in the political, economic, and social life of all Sri Lankans. Sri Lankan policy leaders seem to be paying only lip service to this important ground condition. 

Says Thenuwara: “The reason for the prevalence of corruption is not having checks and balances as well as not having a comprehensive set of institutions dedicated to upholding transparency and accountability of all political and government entities. Thus, the first step of establishing a good policy regime is to reform and clean the government and government institutions and set up new institutions to uphold transparency and accountability.”  He says that the Government should participate in the economy after cleaning itself fully of corrupt practices. After doing so, the pragmatic policy should be a mix of the policies involving the market economy and clean government involvements. He is hopeful that a new and pure government will usher prosperity to Sri Lankans. In my view, this is a tough call because neither Sri Lanka’s political leaders nor its citizens have shown a real commitment to have a corruption free society though they publicly make this announcement. 

Sri Lanka can be forgiven for failing to join the first and the second industrial revolutions at the proper times due to the lethargic economic policy during the colonial times. But what about after independence? For three decades it had missed the second industrial revolution and even today it has been missing the third and the fourth industrial revolutions. That was due to unsupportive Government policy during the early phase of independence

Examples from East Asian countries

In the chapter on prospects for economic recovery, Thenuwara has drawn examples from the East Asian countries which managed to make a turnaround of the crisis-ridden economies in late 1990s. Those countries, except Malaysia, were supported by an IMF program to stabilise the prices and the exchange rates, two ingredients for sustained long-term economic growth. According to Thenuwara, they were successful because their ground conditions were different from those of Sri Lanka: before the crisis, they had not adopted crippling agricultural policies and they had been fully attuned to the global economy. Hence, the question of energy shortages and foreign debt defaulting did not arise in those countries. 

Says Thenuwara: “Economic growth was feasible because all growth promoting factors were already in place since those countries have been economic power houses prior to the crisis. Central banks in those countries learned their lessons and allowed the exchange rates to freely float to stem any more speculative attacks. All countries except Indonesia recovered faster than anyone expected. The recovery took only one year. However, in Indonesia a grave political crisis emerged, but the country recovered eventually.” His worry is that Sri Lanka is killing its economy through high taxes, unbridled government expenditure programs, and a lack of long-term growth promoting policies. 

Once out in print form, Thenuwara’s new book will be a good read for all those who have in interest in Sri Lanka and its economy. 

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