Becoming the Wonder of Asia:
Accelerating inclusive growth
I think we can all agree that John Exter – the first Governor of the
Central Bank of Sri Lanka (1950-53) – and the namesake of the conference
hall in which we now sit, is worthy of recognition.
As you all well know, prior to becoming Governor John Exter was the
official from the US Federal Reserve System who worked with local
officials in 1949 to establish a Central Bank in Sri Lanka.
The result of this collaboration was a terrific document, with a
boring title, “Report on the Establishment of a Central Bank for
Ceylon,” and the Central Bank of Sri Lanka was established the following
year.
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Dr Ngozi
Okonjo-Iweala |
Sixty years later we celebrate an institution that has been critical
in the drive for economic growth and poverty reduction in Sri Lanka.
I raise this bit of well-known history with you because, after
reading the report, I was struck by the relevance of the lessons that it
holds for us sixty-one years after its publication.
It is an excellent example of international cooperation that was
guided by the international experience of the day, was very practical
and focused in its approach, and was carefully attuned to the realities
of the newly independent Ceylon.
The result of this collaboration was the creation of a vital
institution for economic policy-making that would foster the well-being
of all Sri Lankans as the country charted its ambitious course through
the exciting, but choppy, waters of the post-independence period.
Sri Lanka finds itself in a similar situation today. It is again
designing an ambitious policy course in challenging times, characterized
by a post-conflict situation and a post-financial crisis global economy
that now consists of multiple growth poles. Sri Lanka has managed to end
the conflict and I must congratulate you all. Managing the peace in a
balanced, transparent and fair manner will be critical to accelerate
economic growth and poverty reduction.
Fortune favours the bold
The choices that policy-makers make today and the collaborative
partnerships they form to navigate this new environment is going to
shape the economic fortunes of Sri Lankans tomorrow in much the same way
the creation of the Central Bank of Sri Lanka did 60 years ago.
It is some of these policy choices for accelerating economic growth
and poverty reduction and the future collaboration with the World Bank
that will be the focus of my remarks today.
The Government’s development plan, as described in the Mahinda
Chintana is bold and ambitious. It is good to be ambitious, it is the
right time for Sri Lanka to think big. President Rajapaksa wants to
transform Sri Lanka into the “Wonder of Asia” and is dedicated to seeing
per capita income rise well above US $4,000 over the next six years.
To make this vision a reality he wants Sri Lanka to transform into a
strategically important economic centre of the world, serving as a key
link between the East and the West.
The Mahinda Chintana also states that a key to making the vision a
reality are dynamic entrepreneurs that aim to break into international
markets.
It is a wonderful vision and is one that the Bank would like to help
Sri Lanka realize. But as a famous Japanese proverb nicely reminds us.
“Vision without action is a daydream. Action without vision is a
nightmare.”
The vision is clear, but what are the actions required to realize a
doubling of per capita income within six years? Or, as it has been
alternatively stated – How can Sri Lanka reach eight percent real GDP
growth into the medium-term? These are challenging questions for any
developing country, as there are no set recipes for accelerating growth.
The Mahinda Chintana specifies many actions that aim to accelerate
growth and achieve these targets. I would like to compare some of these
proposed actions to the common ingredients in the successful growth
strategies of developing countries that have been identified by the
Commission on Growth and Development led by Nobel Laureate Michael
Spence – a commission of which I was a member.
a. Investment and Growth
In looking at successful high-growth economies – 13 economies that
have grown at an average rate of seven percent a year or more for 25
years or longer – we found that one common ingredient was high rates of
investment.
The Government of Sri Lanka has stated that investment rates must
rise by almost 10 percentage points of GDP from about 25 percent of GDP
to about 35 percent to reach the goal of 8 percent GDP growth on a
sustained basis.
With public investment rates already at a relatively high level of 6
percent of GDP, the majority of the increase will likely come from the
private sector, both domestic and foreign. But, how to encourage private
investments?
The Government’s stated goal to improve its place from 102 in the
World Bank Group’s overall “Doing Business” rankings will be important
in this regard.
Some policies have long been considered a drag on private sector
investment. One of the policies that has consistently been at the top of
the list of constraints to doing business in Sri Lanka is tax policy.
The recent actions taken to broaden the tax base and simplify the tax
structure in the 2011 budget send a positive signal to the private
sector that Sri Lanka is now a better place to do business. Building on
this success and tackling some of the other well known constraints to
doing business further – e.g. Weak enforcement of contracts and
difficulties registering property – will help improve investment levels
in Sri Lanka. Clearly the end of the conflict will also help reduce
investor uncertainty and spur both domestic and foreign private
investment.
Before I move on to the next ingredient, let us savour investment a
bit longer. At about 25 percent of GDO, investment levels are already
quite high given Sri Lanka’s stage of development, which I must say is
quite remarkable given the years of conflict.
So, adding an additional 10 percentage points of GDP will be a
challenge. Alongside policies to improve the level of investment,
policies to improve the productivity of those investments will also be
important.
Such policies can be directed at spurring physical and human capital
to work more efficiently together. In other words, how can we do better
with what we currently have? This calls for strong innovation policies.
That is, policies to promote “imitation” and the discovery of doing
new things or doing old things in new ways.
This may mean better management practices or simply getting into new
areas of production or export. In this regard, innovation is more
related to discovering entry points to new markets, searching for the
right product, the right technology or services that might have been
innovated elsewhere and adapting them so that they generate returns
under local conditions.
Such policies are at the heart of the President’s drive to make Sri
Lanka a knowledge hub of Asia and are recognized by the Growth
Commission as another key ingredient in the growth process.
Let me now consider more concretely innovation policies for a
knowledge-led economy.
Innovation and growth
In all cases of sustained, high growth, the economies have rapidly
absorbed knowhow, technology, and, more generally knowledge from the
rest of the world.
These economies did not have to originate much of this knowledge, but
they did have to assimilate it at a tremendous pace. But, how can policy
makers hurry the process along? Let me provide an example from some
innovative recent research in this area done by some of my colleagues at
the Bank.
They randomly selected a set of textile factories in India to receive
complimentary five-month management training and compared the
profitability and efficiency of these revamped factories with a control
group of factories that continued doing business as usual.
It turns out management does matter: productivity was boosted by
around 10 percent by improving quality, managing inventory and speeding
up production.
It is an example of simple, yet effective changes that can lead to
impressive results.
Helping to promote better management practices in the private sector
to enhance productivity can come in many forms: funding better business
schools, developing the local consulting market, or making it easier for
well-managed multinationals to enter the domestic market providing
opportunities for local workers to gain experience.
Better management practices are but one of a number of actions that
can be taken to imitate and assimilate existing knowledge. One
well-known channel that can help spur a wider transfer of knowledge and
innovation is foreign direct investment (FDI).
Post-conflict, FDI is bound to improve as a key source of uncertainty
for the private sector is gone.
However, efforts to improve the business climate must also proceed.
Particularly important will be the efforts to rationalize the exemptions
and incentives under the Board of Investment. Mauritius – where I have
just returned from a trip - provides a nice example of the role that FDI
can play in importing ideas and knowledge from the rest of the world to
generate growth and poverty reduction. Indeed, work at the IMF indicates
that FDI is a key part of the second “growth miracle” that appears to be
taking place in Mauritius.
Importing knowledge through more FDI will boost the economy’s
productive potential, but it is the global marketplace that will provide
the demand necessary to fulfill that potential. As the first country in
South Asia to liberalize its economy, Sri Lankans have long been aware
of the importance of the global market to their development success.
This opening-up helped generate a growing export sector led by garments
and tea. Exporting world class services is also making its mark.
Here I can cite the accountancy offices in Sri Lanka that are doing
financial work for some of the world’s biggest companies, including
HSBC. And it is not simply payroll and bookkeeping. The export of these
services include derivatives, pricing and risk management for money
managers and hedge funds, stock research for investment banks and
underwriting for insurance companies. There are many other similar
success stories in Sri Lanka that are worth emulating.
I applaud the Mahinda Chintana for reaffirming this commitment to
deepening connections to global markets and highlighting dynamic
entrepreneurs as the ones to get it done.
Fully exploiting global demand was another ingredient recognized by
the Growth Commission as critical to successful growth strategies.
Re-energizing the export sector for accelerated growth is not going
to be easy in a post-crisis world, but it can be done if the
multipolarity of growth is used by Sri Lanka to expand into new markets.
The post-financial crisis global economy
A key feature of the post-crisis world is the sluggish recovery in
developed countries and the faster than expected recovery in developing
countries.
Many argue that this is more than simply different speeds of
post-crisis recovery, but that it represents a more fundamental shift in
the global landscape.
Developed economies like the United States with large current account
deficits will continue to reduce excess domestic demand and seek to
raise exports, while surplus countries like China will aim to increase
domestic demand raising imports and thereby reducing surpluses.
Developing country imports are already higher than their pre-crisis peak
in April 2008.
In contrast, the imports of high-income countries are still below
that 2008 peak. Developing world imports have accounted for more than
half of the increase in world import demand since 2000.
As World Bank President Zoellick has stated, “We are witnessing a
move towards multiple poles of growth as middle classes grow in
developing countries, billions of people join the world economy, and new
patterns of integration combine regional intensification with global
openness.”
Consequently, the contribution to global GDP growth of developing
countries like China, India and Brazil is rising. By 2020, Asia could
become the largest centre of economic activity with its share of world
GDP projected to reach close to 35 percent.
This transition has important implications for Sri Lanka. It presents
challenges, but also many opportunities.
On the side of the challenges that will have to be faced, is
competing for a share of the U.S.’s and EU’s - its largest trading
partners – contracting imports.
But on the opportunities side, Sri Lanka, with a few changes that we
talked about, is well positioned to compete for the rising imports of
China, India, Brazil South Africa, Indonesia, Colombia, Mexico and in
the World’s other emerging markets in Asia, Latin America and Africa.
There is evidence that this is already happening. Sri Lanka’s exports
to India increased from an albeit quite low one percent in 2000 to five
percent in 2009.
Sri Lanka sits on India’s doorstep and is strategically located
relative to East Asia. The empirical trade literature tells us that
location matters a great deal.
Geography and the rise of South and East Asia help explain the
dramatic change in Sri Lanka’s import shares from the region since 2000
- from 46 percent of total imports to 62 percent in 2009.
But, I would encourage you to think beyond the regional geography and
explore other large emerging markets and the vast new opportunities that
they present. Lastly, it almost goes without saying that Sri Lanka has a
ready pool of skilled labour to take up new export opportunities.
But, the skills of today may not be the “right” skills for tomorrow,
so an emphasis on sustained investments in education and training is a
must for Sri Lanka to gain and maintain a competitive edge in global
markets.
The Mahinda Chintana recognizes the importance of a quality
university education, and plans are underway to bolster the university
system in Sri Lanka.
An important recent development in this regard was the announcement
that international institutions of higher learning would be invited to
set up campuses in the country. It will be vital for universities to
also partner with industry to ensure that they are graduating students
with the requisite skills for the labour market.
Such partnerships have been cited as one of the keys to the
successful South Korean – indeed the East Asian - growth story.
In addition to improving university education, technical and
vocational training institutes will also play an important role to
develop the core skills that workers will require to effectively take
advantage of opportunities in both the domestic and global markets.
Sri Lanka can think even bigger in this regard and this is where the
Mahinda Chintana is right to focus on becoming a knowledge hub in Asia.
When we talk of sources of growth we should also be talking about
exporting Sri Lanka’s educational services to the rest of Asia and
beyond.
The Chintana notes how Sri Lanka’s Buddhist monasteries were once the
seats of learning in Asia. In more recent times we saw that some of the
best hotel managers and executive chefs in region were trained in the
Sri Lanka Institute of Tourism and Hotel Management (SLITHM) in Colombo.
Exporting Sri Lankan services should not only be limited to the
education sector. I see opportunities in the health sector and with the
health sector linking up with the tourism sector to provide Health and
Fitness tourism.
The service sector makes up 60 percent of the economy. Going forward,
exportable services have potential to be important sources of growth.
Dealing effectively with this long term transition in the global
marketplace will need to go hand in hand with macroeconomic policy that
preserves macroeconomic stability in the face of future exogenous
shocks. Sri Lanka has handled the international financial crisis quite
well.
Real GDP growth slowed from six percent in 2008 to 3.5 percent in
2009, but with prudent policy responses of a small fiscal stimulus
package and the policy of gradually loosening monetary conditions, the
economy has rebounded well. Financial support from the IMF and the
post-conflict bounce also helped to reduce the crisis effects, as
remittances and other capital flowed into the country.
The Sri Lanka stock exchange has been one of the best performing in
the world so far in 2010. But it is no time to relax, macroeconomic
policy has to continue to work to consolidate post-crisis and
post-conflict gains and be ready to respond to the risk of a renewed
round of global volatility.
Macroeconomic stability and growth
Macroeconomic stability is another key ingredient in successful
growth strategies. The policies suggested above and those found in the
Mahinda Chintana will not have a fair chance of working if they are
interrupted by slumps, insolvency, and runaway inflation. I don’t think
that I would provoke a great deal of controversy if I said that past
macroeconomic instability has been holding back growth potential in Sri
Lanka.
Annual fiscal deficits of seven percent of GDP and double digit
inflation (12 percent) over the last three decades has given rise to
questions of sustainability over the years, which has negatively
impacted private investment. The fiscal deficit reached almost 10
percent of GDP in 2009.
The public debt burden has at various times reached over 100 percent
of GDP and the latest available data show it at 86 percent of GDP.
Domestic debt in particular has been a worry spot in recent years,
with domestic interest costs of almost one-quarter of government
expenditures and about 44 percent of the entire tax revenues of the
country in 2009.
The proceeds of the successful sovereign bond issue ($1 billion) in
October will be used to pay down some of the more expensive short-term
domestic debt and represents a prudent debt management operation.
Lengthening the maturity profile of domestic debt has also been helpful.
But, sound debt management can only be part of the story. Fiscal
consolidation must help end the need for building up domestic (and
external) debt to worrying levels.
The 2011 budget that was delivered on November 22 represents an
important step in the drive for fiscal consolidation. Let me take a
moment to reflect on the key elements of this important budget.
The 2011 budget projects a fiscal deficit of 6.8 percent in 2011,
down from the 8 percent expected in 2010.
The fiscal consolidation is driven in large measure by expected
revenue increases from the tax reforms that aim to simplify the tax
system and broaden the tax base – e.g. the income tax was broadened to
include public sector workers and the removal of a number of nuisance
taxes like the debit tax on bank withdrawals.
The measures are expected to reverse the worrying trend decline in
the revenue to GDP ratio of recent years – which currently stands at
14.5 percent of GDP (2009).
The tax measures are also expected to improve the investment climate
and economic growth going forward. The commentary from the business
community as reported in the local press seems to suggest support for
the measures. However, private sector investment can also get a boost
from government expenditures when, for example, the private sector gets
crowded in through public private partnerships (PPPs).
This is particularly relevant in the current context where the “Peace
Dividend” which can arise from progressively reducing defence
expenditures can open up some fiscal space for productive investments.
I think this represents the next important focus on the fiscal policy
agenda.
Looking ahead with regard to monetary policy, I think there is a
tricky balancing act to perform. It will have to be sufficiently
accommodative to help underpin growth in an environment of fiscal
consolidation, while at the same time guarding against rising price
pressures.
Inflation has come down to the six to seven percent level this year,
the recent uptick due to rising international commodity prices
notwithstanding.
This is an important development and the challenge now is to lock in
inflation expectations at roughly this level and permanently break from
the past of double digit inflation. Fiscal and monetary policy
coordination will be key in this regard because credibility will not be
easily gained as experience from many other countries shows.
When the government changes fiscal policy, it needs to think of how
these changes will affect inflation and, consequently, interest rates.
Similarly, the Central Bank needs to consider how changes in fiscal
policy will affect demand and inflation, and thus its setting of
monetary policy. Therefore, it is to the mutual benefit of both parties
going forward to enhance co-operation in sharing information and
analysis as they adjust their policy settings.
This will be essential to demonstrate clearly to the public your
resolve to achieve greater fiscal prudence and stable inflation of
single digits until credibility is gained.
Inclusive growth
Let us pause for a moment to re-cap our ingredients for a successful
growth strategy. I’ve spoken about the importance of savings and
investment, innovation and knowledge-led growth, redoubling efforts to
connect to global markets and macroeconomic stability as a necessary
condition for accelerating growth.
Suppose with implementation of these and other policies Sri Lanka
reaches its destination. What will it look like? One thing we know is
that the benefits of accelerating growth are unlikely to be spread
evenly across the country, across households and across income levels.
Unbalanced growth is the norm, not the exception.
Another important set of policies will be needed to ensure equality
of opportunities across all segments of society.
The Growth Commission also recognizes that policies to promote
inclusion of all segments of society in the growth process are critical
so that no group will seek to derail it. Leadership in this area
requires policies that unite the nation so that all move toward common
goals. A nationally shared sense of identity is a foundation for making
the tough, often painful choices that are required for sustained growth.
Factionalism tends to focus the politics on the division of the
economic pie rather than on increasing its size. I needn’t emphasize
that in a post-conflict situation like we have today in Sri Lanka such
policies take on particular importance.
Concretely, policies that help improve access to services for all
people of Sri Lanka will be critical. For example, providing
well-targeted safety nets to the poor and vulnerable, and access to
quality education and health services – especially when the demographic
dividend is going to begin to decline within a decade.
Another example might be putting in place incentives to agriculture
and agro-based industry, especially in the North and the East of the
country, to amplify market linkages to the rest of the country and
internationally. Additionally, improved transparency and accountability
of service delivery will help improve service provision. Malaysia
provides a good example where transparent mechanisms to monitor and
evaluate the linkages between economic growth and distribution where put
in place and where possible, were adjusted over time.
Another set of inclusive policies that are particularly important in
the Sri Lankan context are those that will help improve the female
labour force participation rate, currently at 35 percent. There is
reason to think that some of the future declining demographic dividend
can be offset partially through higher female labour force participation
rates.
The simple math of the matter states that the higher is the female
labour force participation, the higher will be per capita incomes for
all Sri Lankans. There is also a need to provide incentives for skilled
females to stay in Sri Lanka rather than migrating. With Sri Lanka’s
track record in reducing gender based disparities, combined with the
measures to improve the investment climate and the drive to enhance
skills and education, there is good reason to believe that female labour
force participation can indeed increase in the coming years.
World Bank Sri Lanka collaboration
The World Bank is an active partner in supporting Sri Lanka in its
transition from a low income country in conflict to a middle income
country in peace. We have supported the Government’s efforts with
rehabilitation and reconstruction in the North and the East, we have an
active portfolio of road infrastructure projects, and have long been a
partner in the health and education sectors just to name a few areas of
partnership.
The post-conflict environment provides us with an opportunity to
build on this relationship and become a trusted partner in the
Government’s vision to double per capita incomes and firmly establish
Sri Lanka’s place in the ranks of fast growing middle income countries.
Let me now highlight some areas where I think the collaboration between
the Bank and the Government can work to great effect going forward.
First, let me say that a middle income country partnership with the
Bank requires more resources. The IDA allocation has been running at
below $200 million annually and while I think that amount served the
relationship well in the past, the time is right to increase the lending
envelope to an amount that better reflects the new development ambitions
of the Government.
In this regard, I am pleased to be able to announce that the Bank’s
recent creditworthiness assessment has been concluded and that Sri Lanka
is now eligible for IBRD financing – funding from the Bank’s
non-concessional window.
IDA resources will continue as it is important that Sri Lanka benefit
from these highly concessional resources to support its post conflict
reconstruction and rehabilitation needs.
Together, these financing sources have the potential to significantly
increase the amount of resources available on an annual basis. This is
an important recognition of the middle income country status of Sri
Lanka and signals a different sort of relationship going forward – a
relationship that is founded on knowledge sharing that complements the
available financing.
The constant search for innovative ideas by Sri Lankan policy makers
will be a key feature of a successful quest to accelerate growth and
improve living standards. Learning from the experiences of their
counterparts in other emerging economies will help to swiftly apply
practical solutions to problems that others at a similar stage of
development have seen before.
The Bank can play an important role in facilitating this process by
sharing not only our own knowledge, but also the expertise of other
emerging economies through South-South exchanges. Indeed, Sri Lanka
would also be expected to share its experiences and accumulated
expertise with others throughout the South Asia region and beyond, for
instance in Africa, and other developing and developed countries. Two
recent examples in this connection that are worth highlighting are the
Central Bank’s training on open market operations provided to Maldivian
counterparts and the impressive knowledge sharing and technology
transfer of innovative ICT initiatives to Ghana, Rwanda, and Bangladesh,
among others. Indeed, as a recognized leader in this area, Sri Lanka has
been elected to chair the United Nations Economic and Social Commission
for Asia and the Pacific’s (UNESCAP) Committee for Asia Pacific ICT for
consecutive terms (2008-2012). I want to congratulate you on that.
Let me conclude by emphasizing a few points. Sri Lanka has what it
takes to be the Wonder of Asia and decisively tackle issues of poverty
reduction and economic growth acceleration. To get there I have
mentioned the importance of raising investments and improving the
productivity of those investments through innovation policies. I have
mentioned the importance of skills development, macroeconomic stability
and implementing policies that promote the inclusion of all segments of
society in the growth process. I also highlighted some of the challenges
and opportunities for deepening connections to global markets. In this,
Sri Lanka has to be fast, flexible and agile to be able to exploit ever
growing opportunities in a fast changing world.
It needs strong partnerships and to nurture a sense of ownership by
all Sri Lankans in the growth process.
The Bank stands ready to collaborate with Government as they
implement the Mahinda Chintana. We are willing to increase our lending
envelope and will scale-up our knowledge services to help support your
ambitious development plans. Let us find creative ways to work together
to help Sri Lanka become the “Wonder of Asia”. As we say in my language:
Onye si naya ge na enu ugwu chiya ekwelu:
Determination is everything. A person who determines that they will
reach the mountain top will surely get there because once they agree,
their personal spirit will agree and everything will support them.
Once again, thank you Governor for inviting me to speak to this
distinguished audience today. Thank you all for listening patiently and
congratulations to the Governor and his staff on reaching the milestone
we celebrate today with such professionalism and dedication.
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