Part III: National Export Strategy 2018-22:

Focus on selected sectors welcome but

challenging

Trade and Development Strategies Minister Malik Samarawickrama

presenting the National Export Strategy (NES) to Prime Minister Ranil
Wickremesinghe. EDB Chairperson Indira Malwatte, ITC Geneva Executive
Director Arancha Gonzales and European Union Deligation of Charge d'
Affaires Paul Godfrey are also present – Pic by Lasantha Kumara
Critical issues relating to NES

Monday, 13 August 2018

In the previous two parts of this series (available at:

http://www.ft.lk/columns/Part-I--National-Export-Strategy-2018-22--Disrupt-
the-economy-fast-if-the-goals-are-to-be-attained/4-659860;
http://www.ft.lk/columns/Part-II--National-Export-Strategy-2018-22--
Introducing-measurable-physical-targets/4-660298), it was pointed out that
the National Export Strategy or NES released by the Export Development
Board (EDB) was, though belated, a welcome development. It had paved the
way for Sri Lanka to move away from the domestic economy-based economic
strategy, pursued by the previous administration, to an export sector-based
economic strategy.

Given the limitation on the size of its domestic economy, Sri Lanka cannot
bring about prosperity for people only by concentrating on the domestic
economy. Hence, as Prime Minister Ranil Wickremesinghe had pronounced in
the first Economic Policy Statement (EPS), Sri Lanka needed to produce for a
market bigger than its domestic market. But in the last three-and-a-half year
period, the action by the Government, it was observed, to realise this policy
pronouncement has been very limited.

In this background, EDB has now come up with a national strategy for
developing the export sector and that strategy has to be converted to policy, to
programs and to projects for implementation at the ground level. This was the
responsibility of a game-changer, as was done by Singapore’s Lee Kuan Yew
or Korea’s Park Chung-hee.
Given the limitation on the size of its domestic economy, Sri Lanka cannot
bring about prosperity for people only by concentrating on the domestic
economy. Hence, as Prime Minister Ranil Wickremesinghe had pronounced in
the first Economic Policy Statement (EPS), Sri Lanka needed to produce for a
market bigger than its domestic market. But in the last three-and-a-half year
period, the action by the Government, it was observed, to realise this policy
pronouncement has been very limited
EDB’s internal working goals

NES did not have annual growth targets for export of goods and services,
except an end of the period goal of reaching US $ 28 billion by 2022. This was
considered a serious deficiency in NES, since the authorities would not be able
to gauge the success or failure of the strategy in the absence of measurable
annual goal posts.

However, EDB has via email informed me that it indeed has working internal
goals for export of both goods and services up to 2025, the end-year of the
Government’s main economic strategy, titled Vision 2025. These internal
working goals, as well as the percentage growth in each year, have been
presented in Table 1. It is presumed that EDB has the detailed sectoral
composition of these annual goals so that it would be able to ascertain growing
and lagging sectors and take immediate corrective measures for any
underperforming sector.
The year 2018 is already a write-off for NES

The importance of such measurable goal posts for implementing the export
strategy can be ascertained by examining the annual goal post for the export
of goods for 2018 and the achievements during the first five months of the
year. The internal working goal of EDB in these exports for 2018 has been $
13.1 billion, which amounts to an annual growth of 14.9%. However, during
the first five months, the achievement has been only $ 4.7 billion which,
compared to the first five months of 2017, has given 6.7% growth to Sri
Lanka. When annualised for the full year, this achievement works out to $ 11.3
billion. It will be short of the EDB’s annual goal by about 14%, requiring it to
diagnose the causes for underperformance and take immediate corrective
measures to catch up with the lost goal.

To be on the goal, Sri Lanka has to accelerate its export performance from a
monthly average of $ 900 million in the first five months, to a level of $ 1200
million per month in the balance seven months of the year. Percentage-wise, it
amounts to a monthly growth of some 33%. It will be quite challenging for
EDB to go for this target within this short space of time. If this target is lost,
the cumulative losses built into the targets in the balance period of NES will
become larger and larger in each successive year. It will surely derail NES
from its planned target path. It, therefore, appears that 2018 is a completely
write-off, as far as the goals of NES are concerned. This makes it necessary for
EDB to revise the strategy, as well as the underlying goal posts for the whole
NES period, and plan for a new life beginning from 2019.
Need for productivity growth at the national level

After the first two articles were published, several readers contacted me and
made valuable suggestions regarding the whole NES. One such reader was the
former Director General of Agriculture, Dr Sarath Weerasena.

Commenting on the strategy on the promotion of processed food and

beverages, Dr Weerasena has pointed out that unless an overall national
productivity growth strategy precedes the growth of exports, there will be a
shortage of nutritious agricultural crops in the domestic market, raising their
prices and thereby depriving the local population of nutritionally superior
foods. This is an important point on three counts.

First, unless there is an increase in productivity and yield rates, Sri Lanka will
not have a surplus for exports. Any forced diversion of local products into the
export market will starve the local markets.

Second, with the high cost of production of agricultural products, due to a

host of factors ranging from low productivity to rising input prices, Sri
Lanka’s agro-based export processing firms will find it difficult to get a
competitive margin for their exports in the global markets. This challenge
specifically comes from neighbouring India and Thailand, two countries
which have successfully raised their yield rates through better technology,
farming methods and farmer training.

Third, by obliging to the Government insistence, firms may get into the export
markets initially, but when the heat of non-availability of a sufficient volume
is felt, they will agitate for the import of such products to keep the factories
running throughout the year. In that situation, Sri Lanka will get only the
narrow value added margin from the export of processed foods.

An argument made in its favour will be that the country will benefit as long as
the domestic value added is at least positive, the experience which Sri Lanka
had when it embarked on apparel exports in early 1980s. But, a domestic
processed food industry for exports cannot survive if it is dependent on
imported foods continuously. Hence, the improvement of productivity and
yield rates of key agricultural crops is a must if the country is to realise the
goals of the national export strategy.
Going for new products

EDB has selected, after consultation with stakeholders in public and private
sectors, six focus sectors for promotion as Sri Lanka’s future exports. The six
sectors and their present status in the country’s production and export system
are given in Table 2.
Sri Lanka’s saturated export structure

As at today, Sri Lanka’s exports to the rest of the world are being dominated
by two product categories: apparels and ‘the three tree crops’ – tea, raw
rubber and coconut. In 2017, in which its exports figures were the highest in
the recent years, the former accounted for 44%, while the latter ‘three tree
crops’ had a share of 17% of total export of goods. A brand new category that
had been added in the recent decades had been manufactured rubber
products – mainly solid tyres – that had acquired a share of 7%.

This has been the country’s export structure in the last four decades, and it
has been happily savouring marginal improvements in these categories
whenever such improvements occurred, as if Sri Lanka had hit the ‘next big
thing’ in its exports. That complacency had sowed the risk viruses that have
stunted its growth as a mature growth sector.

On the one hand, they had already reached the saturated point, given the
country’s limited resource base. On the other, there were no new products
added to the list, and worse, no concerted action had been taken to charter the
unchartered territory of ‘services’. With proper logistics in place and
elimination of unfriendly policies, services offer a good opportunity for Sri
Lanka to bring its own next big thing in expanding the earnings base in
foreign exchange.
The internal working goal of EDB in these exports for 2018 has been $ 13.1
billion, which amounts to an annual growth of 14.9%. However, during the
first five months, the achievement has been only $ 4.7 billion which, compared
to the first five months of 2017, has given 6.7% growth to Sri Lanka. To be on
the goal, Sri Lanka has to accelerate its export performance from a monthly
average of $ 900 million in the first five months, to a level of $ 1200 million per
month in the balance seven months of the year. It will be quite challenging for
EDB to go for this target within this short space of time

It is a quantum leap that is needed

In this background, EDB’s search for new products and identification of six
focus sectors for growth are a salutary development. Since the existing
structure of the export of goods and services is already saturated, what is at
issue is whether the identified six focus sectors could facilitate Sri Lanka to
make a ‘quantum leap’ and generate prosperity for its people. In the early
1980s when Sri Lanka ventured into apparels under its export processing zone
strategy, such a quantum leap was delivered to the country, pushing its
production frontiers outward. It generated employment, changed the
structure of exports from agriculture-based products to industry-based
products and marked Sri Lanka in the world export map as a leading apparel
exporter in the world. The new focus products should generate similar results.

The six products are as follows: one, information technology and business
process management; two, wellness tourism; three, spices and concentrates;
four, boat building; five, processed food and beverages and six, electrical and
electronic components.
Use Singapore-Sri Lanka FTA to tap the ICT sector

In EDB’s view, information and technology cum business process

management together with spices and concentrates are mature sectors in the
globe. Hence, Sri Lanka’s challenge is to grab a larger share in the market
competing out the existing players who are already dominating the industry.
Of them, information and communication technology is a game changing and
also disruptive sector in the globe. With new inventions that hit the market as
the next big thing every day, many nations, including Sri Lanka have been
branded as ICT infants.

Since Sri Lanka lacks research and development facility, it has to necessarily
jump on to the bandwagon of nations who have become masters in this
particular science. Even to do so, the country has to create an ICT-literate and
conscious nation across its population. This is what Singapore did at the turn
of the new millennium, by requiring its universities and technical colleges to
concentrate on ICT, among other focus fields. The results are dramatic and
today, Singapore is a leading nation on novel ICT products such as robotics,
artificial intelligence, and internet of things.

Sri Lanka cannot reach this level in short to medium term, and should get
itself attached to a country or countries that have been masters of this science.
The recently signed Sri Lanka-Singapore Free Trade Agreement provides an
opportunity not to be missed by the country at any cost. However, it requires
the country’s ICT professionals to make a self-assessment of their own
capabilities in relation to fast-changing global trends, and look at Singapore as
a benefactor rather than an exploiter.
Sri Lanka should overhaul its healthcare system

Though EDB has selected wellness tourism or providing superior medical

treatment to patients who are to visit Sri Lanka as tourists, without logistics,
governance principles and systems, right now, the country cannot expand this
service to a significant level.

The private sector hospitals that practice Western medicine have to go

through a complete overhaul if Sri Lanka is to attract patients compared to a
country like, say, Thailand. These problems were analysed by me in a previous
article in this series comparing Sri Lanka’s private healthcare system with
that of Thailand (available at: http://www.ft.lk/columns/private-healthcare-
providers-in-sri-lanka-should-benchmark-with-better-service-providers-
abroad/4-189900). In the case of traditional medicine, the biggest hurdle will
be the lack of worthwhile research into it as an effective curative system.
These are matters beyond the control of EDB, and have to be resolved by the
special focus groups to be set up under NES.
Limited scope of agriculture without creative research

Spices and concentrates and processed foods and beverages too have a limited
scope with the country’s inadequate present research into this area, though
EDB has identified them as the next big thing for Sri Lanka. It is therefore
necessary to push the country’s universities and research institutes into full
gear as a matter of priority for it to gain capacity as a top exporter in these
areas.
Since the existing structure of the export of goods and services is already
saturated, what is at issue is whether the identified six focus sectors could
facilitate Sri Lanka to make a ‘quantum leap’ and generate prosperity for its
people. In the early 1980s when Sri Lanka ventured into apparels under its
export processing zone strategy, such a quantum leap was delivered to the
country, pushing its production frontiers outward. It generated employment,
changed the structure of exports from agriculture-based products to industry-
based products and marked Sri Lanka in the world export map as a leading
apparel exporter in the world. The new focus products should generate similar
results.

Join the global production sharing network

A real scope is provided to Sri Lanka in boat building and electrical and
electrical components, as the next big thing in promoting exports. But both
need high technology and they have to be acquired at a cost from abroad. In
boat building, it is necessary to get linked to countries which are already
masters of the game, such as the Netherlands, Japan and South Korea. Even
Chinese technology can be tapped with that country’s presence in the
Hambantota industrial zone.

An important strategy to be introduced in both these types of products is not

to produce a full product in the country. The essential strategy should be to
produce only selected components and join the global production sharing
networks. This is the strategy followed by countries in East Asia, such as
Malaysia, Thailand, and the Philippines, when they penetrated the global high
tech markets.

As I have pointed out earlier, preparing a strategy list is one thing. The
challenge is to put it into practice. The whole Government machinery should
be aligned to achieving this goal. That requires a capable game changer at the
top.

(W A Wijewardena, a former Deputy Governor of the Central Bank of Sri

Lanka, can be reached at waw1949@gmail.com)
Posted by Thavam