Invigorating the economy

After defeat of terrorism:

Lloyd F Yapa Vice President - Sri Lanka Economic Association

The purpose of this artical is to explain how improvement of productivity and competitiveness could help in invigorating the economy in the aftermath of the defeat of terrorism in Sri Lanka and in the context of the fallout from the global recession.

Definitions

What is productivity?

Productivity is the ratio between the output of a product or service and the factor inputs of labour, capital, land and any other input which have been used in producing that output expressed in terms of the value of output per labour hour.

What is a recession?

It is a downturn in the business cycle characterized by a decline in demand for goods and services. As a result employment and personal incomes fall off. Profits of firm's contract and sales decline creating under-utilized capacity.

The global recession and its impact

The prevailing global recession commenced in the US, the world's largest economy, late in 2007. It has had an unfavourable impact on the Sri Lankan economy.

In the first quarter of 2009 it had forced 192,000 workers out of employment, (due to closures of some 55 factories) It is reported that total exports had declined by 18.9 percent by the end of May 2009 in US dollar terms compared to the same period in 2008. As far as the public sector is concerned it is reported that Government revenue had declined by 10 percent in the first quarter of 2009 while expenditure had increased by 28 percent resulting in a further increase in the fiscal deficit which is expected to be 10 percent at the end of the year compared to the same period in 2008.

The Central Bank estimates that GDP growth in 2009 will be slowed to about 3 percent due mainly to the impact of the recession.

Improvement of productivity

Improvement of productivity has been advocated as a solution to problems such as those created by the global recession (See Annex 1 (in page xii) for details of ranking in respect of Sri Lanka vis a vis some Asian and African countries). It has essentially to be undertaken by business enterprises so that even during the recession and certainly after it, they will be able to compete with the rest of the world and earn higher profits and more foreign exchange for the country. The Government has to support this effort by assisting the firms and by improving its own productivity. The next question that arises is how business firms could improve productivity. The techniques that they can adopt can be categorized into internal and external (the latter are basically Government interventions). The internal ones can be subdivided into hard and soft methods.

Internal techniques

The following are some of the Hard internal techniques:

1. Realization of Economies of Scale:

i. Large-scale of Production.

ii. Formation of Corporate bodies among SMEs.

iii. Orchestration among firms in the value chain using the internet.

iv. Value Chain Co-operation and Subcontracting.

v. In the Sri Lankan context an essential productivity measure is the (part) privatization of the loss-making and inefficient public sector business undertakings such as the CEB and CPC which are reported to be losing billions of rupees every year; this haemorrhage exerts pressure on the budget deficit unnecessarily. vi. Capital deepening/widening using machinery and equipment.

vii. Research and Development (R&D).

The following are some of the Soft methodologies:

Kaizen - The Japanese word 'Kaizen' meaning continuous improvement in small steps which involve available resources. There are numerous other soft productivity improvement techniques such as '5-S' just in time inventory (JIT), waste reduction, total quality control (TQC), quality circles (QC) and human resource management (HRM) and development.

Improvement of productivity necessary but not sufficient

The problem with productivity improvement methods is that they can easily be copied by competitors so that competition among firms would ultimately lead to reduction of profits, though the gains are received by the buyers and customers.

The solution to the problem is to adopt a strategy of positioning in a segment of a market with a different set/system of complementing activities to deliver a unique mix of value to customers. Even this is not sufficient if not strongly supported by the Government.

External techniques of improving productivity

The supporting role of the Government could be summarized as follows:

1. Establishing a clear set of national goals and objectives and a suitable culture to give direction to the activities of firms.

2. Raising the level of governance (the quality of democratic processes and public institutions) for creation of socio political stability and inducing macro economic stability mainly by reducing budget deficits to encourage investment and enable the improvement of productivity.

3. Reform particularly of land, labour, interest and exchange rate policies, incentives and regulations to motivate cost reduction and innovation in respect of products and services to meet customer expectations, thereby increasing earnings; the main policy required is to increase competition among firms in the domestic market to compel them to innovate to realize cost reduction and value addition to products and services; protection induces indolence among entrepreneurs and prompts them to lower the quality of products and services, while imposing higher prices on consumers.

4. Development of infrastructure especially the undeveloped road and rail network which slows down transport and increases costs

5. Development of education to allow the country to enter the global knowledge economy by emphasizing on developing ICT and science and technology (S and T) to reduce costs and to improve value adding capabilities. This is an area with great potential to achieve higher economic growth as the country does not posses extensive natural resources.

6. Simplification of cumbersome bureaucratic procedures and reduction of the number of institutions which hamper decision making/implementation as well as the removal of the strong anti export and anti enterprise bias that may exist in the economy, after study by a high powered committee; see the low ranking of Sri Lanka in Annex 1 for the quality of the business environment in this respect.

Conclusion

The economy battered by the 30 year war against terrorism and the impact of the global recession can best be coped with by improving productivity/competitiveness. But since productivity improvement techniques can easily be copied by competitors, ultimately lowering profit margins, entrepreneurs are advised to position their businesses by adopting a differentiated system of complementing activities and products that cannot be imitated by their competitors to maintain high returns on a sustainable basis.

The Government has to strongly support the firms in this endeavour not only by assisting firms with incentives to improve productivity/competitiveness but also removing the suspected anti export and anti enterprise bias in the economy, particularly by lowering import tariffs and levees as well as by fiscal, monetary, land, labour, interest rate and exchange rate policy reform and simplification of procedures.

From the Global Competitiveness Report 2006-07, World Economic Forum