Do countries with lower barriers to international trade experience faster growth? This has been one of the most vigorously debated questions in economics and political economy. Mainstream economics since Adam Smith strongly favours free or freer trade. In contrast, different strands of political economy have been critical of these views. Liberal trade has become a policy position pursued by international trade organizations like the GATT (and after 1995, the WTO), and by international financial institutions like the IMF and the World Bank. For many in this line of thinking free trade has become an ideology. Renato Ruggiero, the first Director-General of the WTO, writing in the last decade of the twentieth century, argued that liberalization had “the potential for eradicating global poverty in the early part of the next [twenty-first] century—a utopian notion even a few decades ago, but a real possibility today”. The free trade ideology has attracted traditional elites and economic bureaucracies in many developing countries as well.
The free trade policy prescription is based on the theory of comparative advantages developed by a long series of well-known economists starting from David Ricardo of the nineteenth century. (Ha-Joon Chang in our issue of May-June 2019 presents a lucid explanation of the fundamentals of comparative advantages theory). In reality however, international trading has never been free. During the period of European colonialism, foreign trade was controlled by the imperial powers and a few large and powerful trading companies. Colonial territories were opened up for foreign trade using imperial power. Countries that could not be brought under direct colonial rule (e.g. Japan and Thailand in Asia) were compelled to open up for foreign trade through unequal treaties which they were forced into signing. Foreign trade in colonies and countries brought under unequal treaties was seriously disadvantageous to the territories concerned.
After World War II and in the era of decolonization, there was the US domination of world trade matters. The currently prevailing pattern of international division of labour and the rules of the game governing international trade are being governed and managed by the set of international institutions referred to earlier, working according to dictates of the US-led bloc of Western powers. Various global forces operate in support of these institutions – the ideological commitment to free trade, bribery and corruption unleashed by MNC-led international capital, and numerous political pressures, occasionally backed up by military power of dominant nations.
Foreign trade has been described as an engine of growth (implying causality) or at least as a handmaiden of growth (implying concurrent movement). Countries which have experienced export-led or outward-oriented growth processes are cited in support of growth-engine or growth-handmaiden hypotheses. Mainstream theory however ignores inward-oriented import substitution activities which often pioneered the economic growth processes of the countries concerned. The export-led characteristic developed later once production capacities were developed through import substitution. Historically, in the initiation, sustenance and guidance of both these growth processes – import substitution and export orientation – active trade policy has played a crucial and critical role. The effective policy stance here has never been free trade, passively leaving trade flows to global market forces. In effective trade policy stances there were always complex and dynamic combinations of openness and restrictiveness.
A point of great significance in trade policy discussion is that every process of development, taking place over time and space, is unavoidably uneven from one region to another at the country level and across different countries at the global level. As development processes take place at different rates in different countries, some regions and countries have achieved development earlier than the others. In this process, the “developing countries” always have got themselves stuck in a “late development” syndrome, subjecting them to more disadvantage than advantage. The “one suit fits all” type of development policies advocated in different versions of neoliberal packages, are hardly likely to meet the development challenges of all developing countries. This point comes out strongly in the extensive trade policy debates in development theory and practice.
By Dr. Kenneth De Zilwa, Business Cycle Economist and Financial Markets Expert
Business Cycle of Over Production is Coming to an End:
The global economy is now witnessing its second correction in the business cycle, post the 2008 financial crisis, thereby ending the short juglar business cycle. What is important and mostly missed is what the juglar business cycle brought about. It paved the way for two important outcomes; namely, new risk-takers and new production capacities. This means that we will see new global economic leadership, change hands from the USA to China. It is a common secret that this will be a difficult transition for the world to adjust to from a structural point of view; nevertheless, the past decade of trade and investment flows has made this transition relatively easier. And this is now the new reality. The change in economic leadership would usher in new markets and with it, new consumer segments are bound to emerge. In other words, the business cycle of ‘over-production’ is complete and the legacy of consumer goods and services is at its end.
The brief economic rebound during the period from 2009 to 2019 was problematic as it was mired by the lack of fixed capital formation in many countries and was an indication that the global economy would run into trouble. Once again many Banks and Central Banks of countries refused to accept the reality that balance sheets had not really recovered and continued monetary easing, resulting in inflation rapidly declining. Part of the monetary easing process was the injection of significant amounts of cash i.e. money liquidity, by Central Banks across the world and the reduction of monetary policy rates. During the 2009 period, alone global broad money supply increased from 100.33pct of GDP to 128.11pct of GDP recoding a 11 year high as at 2019. The rush to stimulate the developed world’s economies underscored the rise in global money supply.
The flush of money saw the global top 1000 banks’ asset base increase from USD 95 trillion in 2009 to 124 trillion in 2018. Since the financial crisis in 2009, the asset base of the USA banking sector had doubled from USD 11.2 trillion in 2009 to 20.3 trillion in 2020 while China’s banking sector assets alone grew four fold from USD 10.3 trillion to USD 41.7 trillion by 2020. It was believed that in order to overcome the financial crisis, as in the past monetary stimulus, there was dire needed to ensure the global economy had the legs to continue. In order to do so it was injected with sufficient steroids (i.e. monetary and fiscal) to overcome the 2009 recession.
As in the case of the USA and China, many other economies too found that their growth in banking sector assets were not matched by commensurate economic growth rates. Central Banks’ multiple monetary and fiscal tools found limited success in stimulating aggregate demand and it did not materialize despite the low-interest rates and wall of money. The global 11-year average of gross fixed capital formation, for 2009-2019, declined to 23.23pct of GDP from 23.89pct of GDP witnessed in 1998-2008. The splurges of cash only limited the scope for any global balance sheet led capital formation expansion and output growth, as overproduction still i.e. excesses, persisted.
The end result was that market was awash with low cost funding that was channeled back into Central Banks and the rest into financial assets i.e. stock markets, as banks provided highly toxic liquidity which saw stock buy back fueling stock market rallies and delighted beneficiaries of such a monetary policy. Not surprisingly we find that the US and Japan stock markets have had their best performance since the 2009 crisis with the US S&P 500 recording a compounded annual growth of 13pct and 12pct respectively, over the past 11 years.
Covid-19 Made the World Playing Field Flat:
Two forms of events are visible in any business cycle that has peaked. The first being, systemic events which are unpredictable but unquestionably negative and can short-circuit expansionary plans. These include wars, commodity price shocks and asset bubbles. The second category, balance sheet events, is to do with the real economy or financial imbalance and eventual financial crisis that is unsustainable and requires adjustment. Excess production based inventory swings can negatively impact growth in the short term. However, these have rarely caused recessions at least in the last few decades. Excesses in production i.e. inventory, need to be large and the associated adjustments needs to impact a broad section of the global economy. In March this year, the World Health Organization (WHO) announced the Covid-19 virus had reached pandemic status and the world must brace itself for unforetold events of disruption from both the supply side and demand side.
This global dislodgment saw both the systemic and balance sheet events unfold in markets as never seen before. The world economy saw its worst GDP decline since the Great depression, contracting by 4.5pct. The downward adjustment of global GDP soon meant that corporate balance sheets would deflate, stock markets fall and global commodities follow in this same direction and they did. Stocks across Europe were down on average by 14pct, Japanese stocks by 14pct and UK by 21pct. Crude oil too fell to negative 20.0 USD per barrel as storage capacities were fully utilized and crude oil companies were unable to manage the excess inventory, created due to the lack of demand, and were forced to pay higher prices for storage than their revenue per barrel.
The unravelling of the ‘new normal’ and post Covid recovery started in China by mid April 2020. It had an undeniable effect on both global and domestic growth and balance sheets, particularly for more open economies exposed to trade; while closed economies proved to be more resilient. Self-sufficiency, import-substitution, cashless settlements and cost savings were back on the table. World economies have been forced to re-examine and re-design new business models as new winners and losers were emerging, with the resilience clocks for economies being re-set and the playing field made flat by the Covid-19 global shut down. A fresh re-start has now dawned and a new business cycle is rapidly unfolding, with an Asian focus taking center stage.
The Emergence of New Risk-Takers:
As with all unsustainable outcomes, the eventuality would be a steeper and more painful correction as balance sheets need to be leaner and debt reduced for a new start to emerge. Post the financial crisis of 2009, banks in Europe and US had written down more than USD 2.1trn of assets by the end of 2010 alone. The figure was far less for Asian banks which were just $115bn. Since then, globally banks have been engaged in restructuring corporate balance sheets in order to create the needed space for resurgence in aggregate demand. Chinese banks have already made arrangements to write off USD 490 billion in 2020 accelerating the non-performing asset disposals. U.S. banks too will set aside up to USD 320 billion to cover potential credit losses in 2020 due to the financial strain of the pandemic, according to a new report from Accenture. Therefore, banks in emerging markets are now well-capitalized and well-funded and big enough to be able to compete directly against their western counterparts in the global marketplace.
In fact as the financial crisis (i.e. business cycle) of 2008 took its toll on the US banking system, systematically dislodging many US Banks from the Top 10 list of Global banks by 2020. US Banks such as Citi Bank, JP Morgan, Bank of America and Wells Fargo have been relegated to the bottom of the pile of the Global Top 10 Banks. The top four slots have been secured by Chinese Banks, namely, ICBC, China Construction Bank, Agricultural Bank of China and Bank of China who are placed as the new leaders of the prestigious Global Banking list. Therefore, we are now witnessing greater equalization across the world as never seen before. If the past century of development rested with the USA (as it was indeed the leading economy and accounted for much of the global demand), with the emerging new business cycle the leadership shifts to China as it replaces the US in many key strategic areas such as trade, resources, banking and finance and patents of technology.
Asia with 48 countries, accounting for 30pct of the Earth’s land area, 60pct of world population, average per capita of USD 7,500, accounting for 50pct of the world fishing catch, producing 90pct of the world’s aquaculture-raised fish, home to 65pct of the world’s total IP with regard to industrial design patents and enjoying an average growth rate of 5.7pct; is positioned to capture the ‘new normal era’. As the global economy looks toward a ‘V shape’ recovery in 2021, it will also be the dawn of a new business cycle: global growth likely to be 5.1pct. The new Asian risk-takers, namely, China, India and Indonesia are expected to lead the new growth story, growing by 8.1pct, 10.8pct and 5.6pct respectively in 2021 providing the rest of Asia the launching pad. As with all growth stories the entrepreneurial class stands out and by 2020, China and India were collectively home to 430 Dollar billionaires (China 324, India 106). In fact, according to the World Economic Forum, by 2030 Asia is expected to contribute roughly 60% of global growth.
Sri Lankan Bankers and Businesses Must Adopt or Perish:
It is believed that the banking sector mirrors the real economic activity. The recent chain of negative events, both locally and globally, which lead to the economic contraction has prompted bankers to become risk averse as they see their scope narrowly, focusing on 10pct of their non-performing assets. With considerable amounts of time and resources invested in the area of recovery, and understandably so, as it is depositors’ funds. However, depositors are also customers on the asset side of the balance sheet and bank CEO’s seem to be missing out on this aspect. The bigger picture details must be considered by Sri Lankan banks as with their many foreign counterparts. Global banks are busy re-structuring, writing off bad loans, looking at mergers and acquisitions and re-positioning their and customer balance sheets for the next phase in the business cycle. With the emerging Asian take off, Sri Lanka cannot afford to remain complacent or live in disdain.
As witnessed with each new business cycle there always comes an upsurge with the change in the adopted technology, and in this case, energy efficient GT technology, (i.e. we are seeing the unfolding of green tech revolution) and with it new consumer markets, new products that require a new management ethos, and also new risk management tools for doing business. To cater to this journey Sri Lankan CEO’s and Treasurers both in banks and in the private sector have to adopt or will surely perish.
The recent business cycle events have opened up discussions on the ability of Sri Lankan bankers to look beyond the cyclical annual budgeting outcomes and position their banks balance sheets to capture the ensuing global trends and business cycles. For the 10-year correction phase will soon come to an end by 2020 and would provide a wide range of opportunities to the brave who have understood the nature of business cycles, and positioned themselves to be risk-takers and market-makers instead of being passive players in order to maximize the national potential of the growth phase.
Secretary to the President Dr. P.B. Jayasundera remains supremely confident in the country’s push towards self-sufficiency. However, despite the government having charted the country’s post-pandemic path to prosperity in its ‘Saubhagyaye Dekma’ (Vistas of Prosperity and Splendor) Economic Development Strategy, questions still remain over what this entails exactly. With that, Sri Lanka’s most high profile public servant sits down with Biznomics to outline not only how, but why the country is capable of achieving what some believe are quite lofty goals.
What does the alternative development model of the government entail?
I believe that the “Saubhagyaye Dekma” Economic Development Strategy of the Government has been vastly misread. The Government has a visionary approach in defining an alternative development model, taking new dynamics in the changing comparative advantage in the global economy. Particularly with technology and innovation being the force in production whether it is for import replacement or exports. So the Government’s Economic model is to reach market needs through exports and import-competing sectors. Just think about big-ticket items in the import composition in Sri Lanka. The import cost of fuel and fertiliser is one-fourth of total imports. The country’s dependency on these alone is $5 billion a year. Now in the past, oil exploration was the only option and was a costly option. Today, solar, wind and other renewable energy sources have become feasible simply because of technology. The same is true for bio-fertiliser in place of chemicals. It’s not just a change in supply source. Even the public’s preference is increasingly in favour of clean and renewable energy and biofertiliser. On a similar note, the apparel industry was the industry for the global market. It has certain links to import-competing opportunities for fabrics, packaging, branding etc. Now, IT has become a billion-dollar export business, with a huge local supply chain that makes import competition in IT and enabling industries viable businesses. Many startups, whether in agro-business, manufacturing, or services, are linked to technology. So instead of thinking only of apparel or tea factories, the time has come to go beyond. The “Techno Parks” proposal in the 2021 Budget is such an initiative to break down the thinking process in economic progress. It’s an aspirational change.
When you think about even primary agriculture. Classic import replacements like rice, maize, black gram, green gram, soya, big onions, potatoes, dry fish, canned fish, dairy, sugar etc. The market size of this sector is around $2-3 billion in annual imports. High tech agriculture, land use, sensible trade and industry policy, incentive structure, infrastructure, particularly electricity and communication, and vocational education are the critical building blocks in putting all of this in one; that is a national production base for exports with a diversified supply chain to replace some imports. That is the space creation in the external account to accommodate imports that Sri Lanka needs to be in the global economy i.e. technology, advanced machinery, and equipment, medical and scientific innovation.
“Instead of thinking only of apparel or tea factories, the time has come to go beyond.”
Some have questioned the numbers put forth in the budget 2021. How do you rationalise them?
Here again, there is a big difference between the statistical approach versus the development approach. If one approaches from statistical sense, the last 5 years average growth is around 3 percent, and before that 6 percent. So statistically you can get 3-4 percent growth, depending on how you calculate the average figure. As you know, growth is an outcome of many behavioural activities in production and consumption.
Think of what has been taking place. Plantation companies have not been a growth sector. Agriculture was lagging behind. Apparel depends on global markets. There has been no diversity in exports for years. Domestic market needs have been met from imports. The trade deficit has been debt financed. There is a need for alternatives to change the behaviour of farms and households to move out of this path. Investments and consumption demand, earnings and savings options etc., need new horizons. So the government has sets a growth of 5.5 percent for 2021, and placed the economy on a path of 6 percent inclusive growth reflecting those behavioral changes in the economy and lifestyles.
“The government has sets a growth of 5.5% for 2021, and placed the economy on a path of 6% inclusive growth reflecting those behavioural changes in the economy and lifestyles.”
It is to generate from what I discussed early, exports and diversified supply chain for import competition. Sri Lanka should, in my view, look at a $10 billion annual export figure, and a $20 billion import figure, and work out as to how this $30 billion trade is raised with a different export-import mix, and global commodity exports and supply chain activity, to raise the size of the economy. Think of an overseas employment market of $6.5 billion, with low skill supply of labour versus the scope for transformation to middle and high end skill supply such as diversified vocational skills, IT, nursing and health care, business outsourcing activities, overseas, and make it into a $10 billion earning source.
Similarly, “Saubhagyaye Dekma” means to move the high end tourism market to generate $10 billion tourism sector, with much more diversified products and linked to local supply chain. IT and pharmaceuticals are new drivers in the emerging economy set up. So both the private and public sector need to work in these areas to generate growth. The provision of enabling environments through changes in the legal system, finance, taxes, and the decision making process are very important.
The budget is another set of numbers people are debating heavily on statistical grounds rather than behavioral grounds. Some feel the revenue/GDP ratio of 11 percent is not adequate to keep the fiscal deficit in check. However, if one looks at the source of the revenue, 50 percent is from selected excise/commodity taxes, and 80 percent is from 20 percent of large tax payers. If there is optimum and efficient collection, that may be fine, but we all know leakages, irregularities, malpractices, weak administration and enforcement capacities, policy ambiguity etc. are all over.
So although the revenue/GDP ratio may be 11 to 12 percent, the tax compliance and transaction cost could be another 5-6 percent of GDP to the tax paying community. So reforms in these institutions are unavailable to increase tax efforts, rather than introducing further complex taxes through discretionary actions.
Secondly all taxes, whether they are from wage income, interest income, property, rent or businesses, come from the economy that is GDP. So the economy has to grow in a manner where all sources of income are growing to create taxable income and expenditure. So growth has to be broad-based. The Deregulation Commission has been tasked to simplify systems and procedures, and the ICTA has been assigned to popularise IT solutions.
Thirdly, deficit management involves public expenditure management to ensure that the least is spent to get a most desired outcome. Choices between long gestation of expensive debt financing projects and programs, versus quick yielding low cost debt and investment financing strategies must be desired on the basis of cost benefit analysis. So the budget must be read in this context. In a debt heavy environment, particularly in the external sense, the sensible approach is to contain new borrowings from expensive and high risk sources. Moreover, debt finance activities too must have high domestic content so that it brings foreign inflows rather than simply financing imports. These are difficult, but we are encouraged as large multilateral development agencies have moved along this wave length. Bilateral lenders are encouraged to invest in commercial projects besides looking at private sector debt and equity market as well. So private sector and banking and financial institutions will have to work out new business models.
What is your perspective of “Saubhagyaye Dekma”?
It is new economic architecture for Sri Lanka. “Saubhagyaye Dekma” is a business model for the entire corporate world as well as for SMEs, residential household economies, the public sector, and for the Central Bank and the financial sector to support the real economy. It is a strategic view as to how Sri Lanka is positioned in the emerging global economic landscape. It is a mindset change and an alternative path to development. It is a fulfilment of Sri Lankan aspirations for which his Excellency the President got a resounding mandate. It has fundamentally three pillars. Namely, (a) National Security, Law & Order (b) Nationally Centric Production Economy linking exports and competitive import replacement and (c) Corruption Free People Centric Public Service delivery.
These pillars are designed to support a platform for gainful opportunities for all Sri Lankan with secure and predictable environments for doing business and for them to live with aspirational goals. It is a challenge for those who are bogged down with what they are used to and those who are reluctant to change. Resistance and criticism are unavoidable from that group. Resistance to these changes is resistance to progress. There are many openings for those who are hungry for progress. The Techno Park is a place where investors will not waste time in construction but start with plug and play from day one of IT and supply chain activities.
“Saubhagyaye Dekma’ is based on 03 pillars: (a) National Security, Law & Order (b) Nationally Centric Production Economy and (c) Corruption Free People-Centric Public Service delivery.”
Take 30,000 mini market outlets for Samurdhi women entrepreneurs, they just lease them and operate village centric mini supermarkets. Take energy secured for low income households through solar based electricity connectivity. Think of 250,000 students of which 200,000 are from the Government’s new city universities and vocational educational establishments, acquiring marketable skills to engage in gainful employment and with ambitions of engaging in a business of their choices with startup capital. So these are a few avenues, just to highlight what this new economic architecture is all about.
The investment capacity is high. Every country with investable funds are looking for countries with political stability, policy continuity, investment protection etc. Growth prospects in various sectors such as tourism, IT, renewable energy, advanced agriculture, manufacturing with global supply chains, are strong. Sri Lanka has leverage with them. The Port City is a new economic zone open to all. The government is encouraging large nations in Asia; India, China and Japan, against where Sri Lanka runs trade deficits, to provide market access. This means they will be encouraged to increase investments here or open markets for others to invest here. So the strong economic positions of India and China encourage other countries to look at Sri Lanka as an investment destination. We have investors from U.S., Europe, the Far East, and South Asia already in Sri Lanka and they have been driving many export industries.
The IMF, the World Bank, and the ADB all project China as the only country reporting a positive growth in GDP in 2020. So China has edged forward in the background of all other nations having seen negative growth. With the setback suffered by the U.S. due to the Covid-19 pandemic, there are indications that China will overtake the U.S. before 2030. If so, we are in a decade that will witness the transfer of economic super power status form the West to East. So it is a phase of West-East economic balancing.
This does not mean the U.S. and China, or for that matter China and other advance countries are identical. They will have their own strengths, and Sri Lanka is an investment and business destination for all. This is why His Excellency is very explicit on “neutrality” in the country’s foreign policy approach. The government has tested our missions overseas to focus on economic diplomacy as that is more relevant to us.
Can the country continue to rely on China for investment in the long term?
We don’t rely only on China. This nation has a much more diversified foreign investor preference. As you know, investors come from domestic and foreign sources. In Sri Lanka, to date, in terms of domestic investments private investment is very large. Foreign Direct Investment has been not large and has not exceeded 2 percent of GDP. Public investments, largely in infrastructure, has been around 5 percent of GDP in recent times. So the balance is private, which is around 23 percent. However, a noteworthy feature is that foreign investments continue to come into the country through several channels like manufacturing, ports, energy, telecommunication, and banking etc., which has expanded in the country with significant value addition.
The present government encourages Foreign Direct Investments from all countries, provided they fall in line with the national development strategy of looking for exports, technology, external markets and supply chain import competition
In fact, compared to the past governments, this government encourages foreign investments instead of foreign loans. That itself is a shift.
“Sri Lanka’s import based trading community needs to continue their trade based on domestic supply.”
The UK and EU have a new trade deal after Brexit, improving European prospects for recovery rapidly.
Disinvestments will also be a part of the post COVID global recovery. Bankable restructuring of businesses may be a priority in many advanced countries as well. Some companies may also look at new opportunities elsewhere, and Sri Lanka could be one of such attractions. So all depends on how each economy evolves in the post COVID recovery process.
How will the imports rationalization policy work?
The Government of President Rajapaksa is deeply committed to alleviate poverty in order to create a poverty-free advanced middle income country. As you know, 70-80 percent of agricultural land ownership is with small holders, below 5 acres. Small farm agriculture has huge potential to make the country go beyond self-sufficiency targets to create an export surplus. This requires farm agriculture linkage to processing through agro industrialisation. So import of agricultural commodities that are being produced locally have been put under a Negative List in our benchmark free trade agreements with India and Pakistan. So this Negative List is part of the Government’s agricultural development strategy.
Agricultural commodities such as maize, green grams, soya beans, black gram etc., are smallholder farm activities. The small agriculture sector has remained poor as these commodities have been liberally imported. Giving them a support to grow is a step towards alleviating poverty as they have a market to supply. Agricultural farms in advanced countries do not belong to the poorest sectors but they are subsidised. The value of imports of these easily cultivable commodities is around $500 million. Imagine the impact if this money is transferred to farm agriculture through import rationalizing.
So Sri Lanka’s import based trading community needs to continue their trade based on domestic supply. Processing options are huge, human and animal feed processing, coconut, soya oil and many consumables out of such materials must be encouraged. The world is also shifting to natural products rapidly and Sri Lanka should capitalize on it.
Fruits, vegetables, poultry, eggs, dairy, and aquaculture are other huge supply chains that require investments. Then the next big ticket items like cosmetics, milk powder, pharmaceutical drugs, sugar, and wheat flour, of which combined imports are worth nearly $2 billion per annum. The government is encouraging large import dependent business operations in Sri Lanka with multinational experience to convert them to export industries using Sri Lanka’s locational advantage. This process involves our farmers in the supply chain of global trade.
Then the large import bill with fuel and fertiliser imports annually costing $5 billion. Renewable energy provides a huge scope for import replacement of oil and help us to work out an economically viable energy mix. Imagine the value impact of 50 percent savings from energy in the total import cost of oil on the balance of payments. His Excellency has advised the reduction of the application of chemical fertiliser each year to find a proper fertiliser mix to provide sustainable fertiliser solutions to address agriculture, health and biodiversity concerns. Even big market economy like China is looking for local solutions through joint ventures to transfer manufacturing technology of the Airbus 320 to the Chinese market.
So Sri Lanka has prospects in the manufacture/assembly of motor vehicles for the local market on a similar basis. Technology, skills, and digital governance are key.
Motor vehicle import is the least value added sector with huge foreign currency outflows and currency mismatches in import cost and domestic sales. The compression of such imports are necessary considering the country’s foreign debt service obligations. However, importation of spare parts and components that are not available here to maintain vehicle fleets in the country will be. Export diversification is unavoidable as Sri Lanka cannot rely only on apparel and predominantly bulk tea exports.
Critics argue that the savings-investment gap cannot be met. Does the government have the savings to finance its investment goals?
This is a National Account identity which has extended to very sophisticated open macroeconomic models like the financial programming model of the IMF which largely applies in fund supported programs. They are good, useful and relevant to blend with country specific development models. There are country specific development models like the Japanese growth model. Malaysia, India, China etc., all have rich growth experiences through country specific programs. All these countries raised domestic savings to finance investments, in addition to foreign savings mobilised by way of investments.
The Budget has proposed several incentives to raised savings such as Samurdhi Savings Accounts, additional exchange rate-based incentives for remittances from overseas employment, extension of retirement age to raise life cycle savings of working populations, ratifying payments for insurance, housing, and capital markets to the tax paying community, and incentives to multinationals to invest dividend payouts are some noteworthy measures. The Government has also kept the door open for foreign investments in commercial infrastructure.
There is no single recipe for development. So, the Government has to overhaul the entire system to get its alternative development path right. It may be seen initially as difficult, but once the going gets tough, the tough get going. Technology, skills, and digital governance, are key to galvanising this process.