Mahinda Chintana, a big push for Lankan economy
W A D S Gunasinghe
It is widely accepted that the path to development should be rooted
in specific conditions of a country. This does not mean that it is not
useful to learn from the experience of other countries. However, in
doing this exercise, it is now almost a tradition to focus on missed
opportunities or success stories.
This implies that we have not followed the path that certain other
countries followed at a certain juncture and thereby unable to attain
the status of development they have achieved through that path.
Adopting a strict inward looking import substitution policy at a
stage when East Asian countries followed export oriented
industrialization policies based heavily on FDI is an example. A closer
look at this kind of proposition reveals that it is only a partial
truth. Just adopting same policies is unlikely to bring about the same
results in different countries where the level of development and the
structure of the economy are different.
Conventional path to development
It is assumed that the success of the newly industrialist countries,
or so-called late comers, is largely based on their ability and success
of switching into export oriented industrialization. Some countries like
Japan and South Korea focused mainly on heavy industries such as
automobiles and machinery while other countries like China and Malaysia
seem to continue to rely on a mix of heavy and light industries.
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Construction of Southern highway. File photo |
Singapore is an exception which believed in a merchandise trade
sector based economy. Standing on the heavy industrial base already
established, India is able to join the party at a pace. However, in the
context of highly competitive international market conditions, each of
these countries has to make a great effort for survival. Facing the
increasing competitiveness from China is a particular challenge. It is
essential that we should look at the current development strategies of
the country against this background.
Infrastructure sectors
The level of public investment in several infrastructure sectors in
the recent past has been substantially high and consistent. Roads,
electricity, water supply, irrigation, airports, ports and transport are
the main sectors which have been given high priority. This
infrastructure will create an environment conducive to investment in
other sectors in general and contribute to the increased living
standards for the people.
After a 30-year long conflict, the country is able to achieve peace
and mobilize the potential resource bases of the country, including
human resources towards development. Therefore, this is the time for the
country to take a big leap forward. Against this background one could
assume that the Government will promote the classical path of
development; start with the light industries first and gradually move
into the heavy industries. A radical decision has to be made however, on
whether the country should follow the conventional thinking or go for a
solution based on our own realities.
Mahinda Chintana an innovative approach
The main pillars of Mahinda Chintana are the proposed five hubs -
naval, aviation, commercial, knowledge and energy hubs. This indicates
the recognition of the service sector as the driving force of the
country’s economy. The contribution of the service sector to the GDP in
Sri Lanka was 58 percent in 2009.
According to some schools of thinking, rapid growth in the service
sector compared to the other production sectors within a developing
country context is not a sustainable phenomenon.
The basic argument is that the growth in the service sector can
largely be a result of too much speculative transactions rather than
real growth. According to them, the service sector does not produce
visible products like the industry or agriculture sectors do and
therefore it cannot create wealth. The argument is that only those kind
of visible products which can be stored are able to create real wealth
of a nation. One of the other impediments identified here is that the
service sector led economy will also be heavily dependent on the
external environment. However, in the context of modern Business Process
Outsourcing (BPO) arrangements and globalization, these arguments have
been worn down to a large extent. This is specially observed in the
merchandise manufacturing export oriented economies where the majority
of the stages in the modern production flow represents service sector
activities rather than the industry sector itself.
These stages include activities such as research, incubation,
financing, planning, warehousing, transporting, marketing, after sales
and maintenance which are directly related to the development of the
industry or agriculture sectors. Thus, in these economies the service
sector has become the main source of growth. Therefore, it is believed
that the service sector in Sri Lanka can expand at least up to 65-70
percent of the GDP under the present development context. For this
purpose, increasing investments in the exportable service sector through
FDI and investment for further development in the infrastructure sector
will be imperative.
The table shows that Sri Lanka has a long tradition of a fairly large
service sector which is almost comparable with many developed countries.
It is apparent that by capitalizing on the opportunities in the East
Asian region, Hong Kong and Singapore were able to expand their capacity
as service providers even beyond the boundary of the region. Being
located in a strategically important location, Sri Lanka has the best
opportunity to expand the service sector to cater to the international
markets in and beyond the South Asia region.
The time zone difference with the Europe, United States and other
developed countries will be an added advantage for Business Process
Outsourcing (BPO) and off-shoring information communication technology
services. We should look at the rapid development taking place in
neighbouring countries in the region as a facilitating factor for
service sector development in this country, rather than as an obstacle.
Singapore Government
The experience of Singapore also indicates that an economy can be
built and sustained on the service sector.
In fact Singapore was an export import trade centre in the region
before independence. After following an import substitution policy when
in the Malaysian Federation during the 1960-65 period, the Singapore
Government embarked on a solid export oriented industrial policy during
1965-67. Average annual growth rate of the economy of Singapore is 8.5
percent for the 1965-1997 period. The salient feature of the economy is
dominant manufacturing sector with a heavy emphasis on exportable and
manufacturing related services.
The service sector has become the main source of growth in recent
years. Although the country’s economy experienced economic constriction
in the post-Asian crisis period (after 1998), it was able to regain the
high growth impetus at a rapid pace.
Ground reality
At present, we do not have a heavy industrial base in Sri Lanka. One
of the reasons is that most of the industrial sector ventures started in
this country happened to be of a turnkey nature and there were also very
few backward linkages. The basic issue was that we have been trying to
establish industrial enterprises offered to us by other countries rather
than initiating our own ideas based on country’s potential. (One of the
best examples for home grown type of industry is TATA company in India
which was built on the local engineering knowledge and management
practices and has become one of the best enterprises by international
standards. The current leading manufacturing sector activities such as
apparel sub-sector (which was also built on the advantage of the Multi
Fibre Agreement which existed since the 1980s) also have minimum
backward linkages and therefore the value addition is at a very low
level.
Linkages between SMEs and larger industries such as one available,
are also weak. Under these circumstances, entering into international
merchandise market in a big way at this stage poses a massive task and
is unlikely to be viable.
Let us look at the different options too. Agriculture is unlikely to
be a promising sector at least in providing adequate number of gainful
employment opportunities particularly for the new entrants to the labour
force in the short run. Small scale production units where the majority
of the farmers are concentrated are not attractive mainly in terms of
income or application of high technology.
Agriculture sector
Despite certain achievements such as high per hectare yield in paddy,
the crop agriculture sector is so far not able to develop an appropriate
farm model or adopt a systemic production system in the country. On the
other hand, there is also a high demand among rural youth for service
sector jobs in towns.
This will lead to the reduction of the labour force in the
agriculture sector which in turn necessitates adopting improved
technology with high productivity. For example, it is observed that in
paddy growing areas, combine harvesters are widely used at present.
This is in fact evidence of an invisible hand at work releasing
redundant labour from the village to the town.
To be continued
Share of the service sector in the economy
of selected countries and regions - Percent of GDP
1960 1970 1980 1995 2004 2006 2008
France 52 57 62 71 73 77 77
Japan 42 48 54 60 68 68 68
USA 58 61 64 72 75 77 77
Singapore 78 - 61 64 65 65 72
Hong Kong 62 - 67 83 88 91 92
China 20 24 21 31 35 41 40
Malaysia 46 43 36 46 42 40 42
India 30 37 36 41 52 55 53
Sri Lanka 48 48 43 52 58 57 57
East Asia and
Pacific 35 31 27 36 36 42 41
South Asia 38 38 41 46 52 54 53
Source: World Bank Data Base
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