Take a “shortcut”
For a few weeks now, we have been discussing an important issue: How long it would take for Sri Lanka to become a “rich” country? To be more specific, the question implies that how long would it take for Sri Lanka to become a “high- income” country with over US$12,000 per capita GDP from its present level of $4,000. There are countries in Asia which have done it within a period as short as 10 years.
We began with the agriculture sector, which is traditionally the dominant economic activity of any country. On the way to becoming rich, the agriculture sector should undergo a rapid transformation. And the outcome of this transformation has directed us to “unlearn” many things that we have already learnt, and helped us to believe the unbelievable.
Believing the unbelievable
Along the path, a fewer number of people are left in the agriculture sector while more and more people are occupied in the non-agricultural sectors, i.e. industry and services. The agriculture sector becomes more and more productive with a fewer number of farmers who will then have a higher income. However, the country becomes “less-dependent” on agriculture, as its output share and employment share continues to fall.
It is strange enough, that the countries which become “less-dependent” on agriculture have a greater food security and lower malnutrition than “agriculture-dependent” countries. Similarly, they also have a greater ability to overcome global food crises too.
The secret is that these countries are rich! It is a fact that “becoming rich” and “reducing agriculture- dependence” should move together, hand in hand. This is because it is the industry and service sectors which have the ability to generate incomes and create jobs without limits. The agriculture sector has its own limits so that it cannot go too far in generating incomes and creating jobs.
Therefore, it is fundamentally important that industry and service sectors expand in order to absorb the people leaving the agriculture sector and to generate higher incomes for them. If industry and service sectors do not expand adequately, then the people have no choice other than getting trapped in the same agriculture sector. This will keep the agriculture sector also in the same “unproductive” state of affairs.
A leap forward
When a country can achieve a higher growth momentum at around 8 – 10 per cent per annum, and sustain it over a 10 – 20-year period of time, then the country is on the path to become rich. It is the expansion of industry and service sectors, which makes this possible.
Today, let’s focus on this area: The expansion of industry and service sectors. It requires investment; people should spend money to start businesses. And the business might be to produce a tangible commodity such as a manufactured good or to provide a service such as a personal service or a financial service or a computer service.
Investment requires “funds” which can be accumulated in an old- fashion way through savings of a country. In order to generate higher level savings, the country should have a higher income; the problem is that developing countries have lower income levels so that their savings will also be lower; consequently, the country cannot achieve a higher level of investment.
A country that is dependent on its own savings, which are collected little by little would have to spend a long period of time – perhaps, 100s of years, to become rich.
Origin of growth
In today’s world, however, there are “shortcuts” to acquire investment funds. There is no shortage of investment funds accumulated globally. And these investment funds flow into better investment locations as foreign direct investment (FDI).
Global FDI flows used to originate from the rich countries (primarily, from the US, the EU, and Japan) and moved into the rich countries themselves. Over the past 25 years, however, these FDI flows have changed dramatically in favour of fast growth in developing countries:
Firstly, there has been an “exponential growth” of FDI flows. About 25 - 30 years ago the total FDI flows in the world amounted to $200 – 300 billion a year; this has now grown up to about $1.5 trillion a year. Secondly, about 25 years ago the developing countries received only 20 – 25 per cent of the global FDI flows; this has now increased to more than 50 per cent, showing that it is the developing countries which receive the most of global FDI flows.
Therefore, developing countries do not have to worry about their limited savings anymore; they only need to attract FDI which do not flow everywhere but only to those countries which offer better investment locations. The countries which offer a better investment environment grow fast within a short period of time.
Destination of growth
There is another issue: When a country is growing fast, it also needs bigger markets. It is producing goods and services in big volumes so that the local market is too small to sell a big output. Domestic market is small not only because the number of buyers is limited to the local population, but also their income levels are lower.
In addition to the output market for selling what is produced, the investors also need constant supply of various inputs to keep the production of outputs running. It is the global market which provides unlimited space for selling outputs and unlimited source for buying inputs.
Therefore, fast-growing countries are characterised by “open market” economies which provide the investors an easy access to the world market. As a result, there should be “export growth” too. It is not possible for a country to achieve a higher growth momentum and to sustain it over a long period of time, without a corresponding export expansion.
When a country enters the world market with an “open economy” policy regime, there are challenges too. Because there are many other producers from many different countries, the ability to compete with “better price” and “higher quality” matters. Therefore, competition is the key word in the global market.
The good side of global competition is that, it forces producers to improve both price and quality, without which the producers cannot survive. In fact, the global market offers both opportunities to exploit and challenges to overcome.
Shortcuts
When the first country in the world to become “rich”– England, began its development process it lasted over 200 years, because it didn’t have shortcuts. It had to do everything through “trial and error” with experiments. The country had to accumulate savings for investment. It had to “invent the wheel” for technology progress and then, apply it to produce in agriculture, industry, and service sectors.
Today, if we think of the prospect of a fast train running between Colombo and Trincomalee in less than two hours, we do not have to spend 100s of years for inventing technology and accumulating capital. Technology is available to buy and capital is available to invest. Technology is also a commodity available in the world market for
Domestic market is small not only because the number of buyers is limited to the local population, but also their income levels are lower. In addition to the output market for selling what is produced, the investors also need constant supply of various inputs to keep the production of outputs running
sale. It is not necessary to start saving to find money to buy it; there are enough investors who are willing to invest in it.
England at that time had to conquer the continents and colonise the countries in order to expand the input and output markets. But today, there is no need for that. The global market is “free and open” for everybody. We need only to enter it.
In spite of all above possibilities for shortcuts, not every country is progressing to become rich, as the way it should have happened in the world. It is because, fast- growing countries are aggressively changing while others continued to remain “fearful” of changes. ( The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk).