Reversing negative export trends
If an economy is growing without export growth, economists know that there are enough reasons to doubt such growth. At least they know that economic growth in the absence of export growth is not going to last long. Sri Lanka has been there for many years now.
After long years of silence, I am happy that Sri Lanka is back to talk about exports. A few weeks ago the Sri Lankan government launched its official document of export strategy - the Export Strategy of Sri Lanka ( NES). The document also acknowledged that “key upgrades are required to reverse the long decline in share of exports to GDP.”
In spite of Sri Lanka’s poor track record of implementing strategies and plans, at least we are now back to understanding what needs to be done. However, I am not going to focus on this question or to review the export strategy. Rather I want to emphasize the point that why we need to prioritise export growth.
Failing to keep abreast in South Asia
Over the past 20 years Sri Lanka has failed to remain even in line with export growth in its South Asian region. In 2017 South Asia as a region exported US$ 370 billion worth goods, while Sri Lanka had just a tiny share of it which amounted to 3 per cent. About 20 years ago Sri Lanka had a 9 per cent of South Asian regional export share.
South Asia has exported about $ 210 billion worth services, while Sri Lanka has exported $8 billion worth of services in the areas of tourism, trade, finance, IT and BPO, port and aviation.
It is not a surprising fact that the service export growth in the South Asian region was faster than its merchandise export growth. In this case too, Sri Lanka’s service exports have not performed on par with the South Asian average.
Service exports
South Asia’s export growth was distinctively different from export growth in East Asia because of the differences in service sector growth. South Asia is more “service- oriented” than East Asia in the case of export performance. In fact Sri Lanka is even more “service- oriented” than the rest of the South Asian region.
Given the proper business environment, Sri Lanka has already exhibited that it would grow with an overwhelming expansion in the service sector. This may not be a good news for “old- fashion” economic fallacies, but it is the reality and a topic for discussion for another day.
No more export-oriented
Even though Sri Lankans were proud of being able to take a dramatic turnaround in its policy reforms in 1977 to be the first and, the most “export- oriented” in the region, I don’t think it remained export- oriented. The country’s export- orientation got distorted gradually, as our “policy bias against exports” got intensified.
Sri Lanka’s highest exports- to- GDP ratios were reported in 2000; merchandise exports which reported to be 33 per cent of GDP then declined steadily to 13 per cent of GDP.
Service exports which accounted for 39 per cent of GDP declined to 20 per cent by 2010; it then reported a slight upward trend reaching 22 per cent of GDP by 2017. In fact it shows that after the end of the war, Sri Lanka’s export growth has been contributed mostly through service exports than merchandise exports. In fact, it further confirms that, Sri Lanka’s future growth would be contributed more by the service sector than by the merchandise sector. The country has already exhibited that it would be an international service hub in the region.
Why exports?
Although I have answered this question on a number of occasions in various ways, let me repeat another kind of answer.
To be a high- performing country in the South Asian region - the fastest growing region in the world now, Sri Lanka has to show two things. The first is that it should achieve a higher growth momentum of around 8 per cent per annum. The second is that it should sustain its higher growth momentum over a long period of time around 10 - 20 years.
It is a fundamental fact that Sri Lanka cannot establish the above two conditions without export growth. This is simply because “higher growth should be directed to the international market” which does not have market boundaries. For every country, including large ones in the world such as China and India, the “domestic market” is small. Sooner than later, the smaller market would be a constraint to growth as it has been so evident in Sri Lanka too.
This is the reason why “growth without exports” cannot be sustained. The government can hire more people to the public sector and provide pay hikes and handouts, but it will not sustain growth. The government can build seaports, airports, bridges and highways, but they cannot sustain growth. There should be an export growth even to sustain such activities in the economy.
Other side of the coin
The other side of the coin is the origin of growth: where does higher growth come from? Let me talk about one of the fundamental sources of growth - investment. I use the term investment to elaborate “productive investment” and not various forms of financial investments.
Productive investment expands a country’s productive capacity. Evidence suggests that high- performing countries have maintained their investment in the range of around 40 per cent of GDP to sustain about 8 per cent of average economic growth.
It has to be private investment, because public investment generated from taxes or borrowings has a limit. We are familiar with the fact that Sri Lanka has already crossed these boundaries so that in the absence of growth itself the government is not in a position to increase its capacity to generate more taxes and more borrowings.
Foreign investment
The second limitation comes from the investment capacity of the private sector. It is also a fact that our private sector is too small to generate large investment flows within a short period of time. In fact, it doesn’t have be the case in a world where billions and trillions of US dollars had accumulated as investment funds seeking better locations.
In the past few years, the annual average foreign investment flows in the world have amounted to US$1.5 trillion; if you diverted just one per cent of that into your own country, it would be US$ 15 billion! Some countries are doing that successfully in attracting billions of foreign investment.
Two policy issues
There are two policy issues emerging from our discussion: The first is about the “direction” of higher growth; what prevents Sri Lanka from expanding its export market? There should be policy or regulatory or logistic barriers that hinder the country’s penetration into global markets.
The second issue is about the “origin” of higher growth; why do the international investors not consider Sri Lanka as a “great location” for their investment? There should be valid reasons for investors to be reluctant to invest here.
As export- oriented growth has now revisited and got into the country’s policy agenda, I hope reforms - that are aimed at returning to its “export-oriented” policy regime and at restoring the investor confidence over that policy regime - are on the top of the policy priorities.