How Can Sri Lanka Grow?

What Growth is Good Growth?

Standard Chartered’s 2010 report titled ‘The 7% Club’, examined how merging nations can achieve sustained 7% growth levels. Any economy growing at 7% a year on average stands to double its economy in roughly ten years. And if your domestic economic mix is good enough to hit 7% on a sustained basis, you’re on the path to the big time.

Since the second world war, all countries known for outstandingly rapid development like China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Singapore and Thailand have recorded growth levels of 7% or more for 25 years. Botswana and Vietnam have growth at 7% for more than 15 years.

Before we start slavering at the prospect let’s start by looking at how Sri Lanka can get this ‘mix’ right. There are four ways an emerging market can reach growth levels of 7%, based on historical evidence.

One is through a commodity boom, Angolia, Tajikistan and Azerbaijan are examples of countries that joined the 7% club this way. But reliance on commodity exports can often cause negative effects on other parts of the economy. Although rumors that Sri Lanka could hit oil next year are beginning to excite certain circles, the discovery of oil could just as easily become a curse as a blessing if it is badly managed (and similar experiences in other countries, most famously in Africa, show that it doesn’t really take much to badly manage a resource windfall).

The other is through a ‘Recovery Bounce‘.Basically coming off a ‘low base’ from a very bad situation. Take Sri Lanka’s growth over the last two years; above 8%. That was a recovery bounce. Emerging solely from the end of the war, increased optimism in investment and productivity gains from the North and East. However, that kind of growth is largely a thing of the past. Most predictions put Sri Lanka’s growth in 2012 around the 6-7% mark, our ‘Recovery Bounce’ might keep us afloat for a little while longer, but unless we enact the measures needed for serious sustained growth, it’s only going to be a temporary bubble.

That brings us to the next two methods of growth,‘Overheating Booms’ are purely debt and spending driven nightmares, guaranteed to crash and burn and bring about Apocalypse Now.

However, what Sri Lanka can aim for is a model based on ‘Industrialization oriented for exports‘. That is, fast growth based on mobilizing savings towards manufacturing and exports. The idea is to start off with basic products and then gradually move up the value chain. At the high end of the value chain you have industries like electronics, shipbuilding and cars. Japan, the Asian Tigers and more recently China and Vietnam have followed this model with great success. But Sri Lanka’s manufacturing share of GDP is just 16% and the sector is plagued by high protectionism, dominant State Owned Enterprises and ranks behind regional competitors in ‘technological readiness’ for FDI and technology transfer.

How Does Sri Lanka Get There?

Standard Chartered’s October 2012 report ‘Economic Reform: The Unfinished Agenda’ highlights a few key areas for Sri Lanka to improve on. However, it’s rather positive on Sri Lanka’s reform trend so far and actually says that with speedier reform Sri Lanka will grow at 8%, as opposed to the 7% growth it is already forecasting for us.

A lot of this has to do with a stable government. Say what you like about the autocracy of the Rajapakse’s, but they’ve bought one thing that Sri Lanka has been lacking for ages; political stability. By effectively converting the Sri Lankan government from a faux public owned entity to a privately owned entity it is setting itself up for the long term. And so is less likely to use up current resources at the expense of their long term benefit. And hopefully, its degree of economic exploitation will tend to be much less than that displayed by the several short termist Sri Lankan governments seen over the few decades after the war.

Though Sri Lanka’s economy continues towards greater freedom (Sri Lanka is the 97th freest out of 179 countries) taxation (both rates and regulation), inflation, bureaucracy, transparency and policy instability, corruption, lack of sufficient infrastructure, access to financing and labor issues are still a major problem. The government is making clear progress on some of these issues, but is stagnant on others.

Anyway, we still have a few worrying areas to fix. The primary factor is trade and domestic investments. Trade has been on a declining trend as a share of GDP and domestic investments which are at roughly 29% need to increase to at least 35%. The biggest hindrance here is high state involvement in the business sector, painstaking bureaucracy and corruption is turning away many domestic and foreign investors who would otherwise be contributing to long term growth.

Though Sri Lanka’s economy continues towards greater freedom (Sri Lanka is the 97th freest out of 179 countries) taxation (both rates and regulation), inflation, bureaucracy, transparency and policy instability, corruption, lack of sufficient infrastructure, access to financing and labor issues are still a major problem. The government is making clear progress on some of these issues, but is stagnant on others.

How the government approaches these problems in the next few years will be key in determining Sri Lanka’s growth.

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