Doubling per capita GDP, a milestone towards high income nation

Sri Lanka's target of $ 7,000 per capita income by 2020 will be a milestone in a much longer journey that must transform the country into a high income nation, Chairman, Ceylon Chamber of Commerce (CCC) Chairman Suresh Shah told the Sri Lanka Economic Summit 2014 in Colombo last week. It was held on the theme 'Sri Lanka 2020: Towards Surpassing $ 7,000 Per Capita'.

Excerpts of his speech.

"This year's theme is indeed an appropriate subject since Sri Lanka is set to achieve a $ 4,000 per capita in 2015 and the time is right for us to look beyond and fix a new target. A per capita of $ 7,000 will make Sri Lanka a significantly better place.

Rising incomes will mean improved standards of living for all Sri Lankans and greater success for our corporates. Road networks, power supply, the education system, public transport, health care, connectivity, entertainment and recreational facilities. All of these and more would move up many notches.

'Consumer7000'

"Our cities will be cleaner, our buildings taller and our parks greener. However, a few challenges remain as we make the transition from $ 4,000 to 7,000 and the private sector will need to re-think.

"First, imagine a consumer with double the per capita income of today, whom I shall call, 'Consumer7000'. Thanks to rising incomes and cheaper access to modern communication tools such as smart phones and tablets, he or she would be far more connected. They would be more travelled than the consumer of today.

"Due to greater connectivity and easier access to information, 'Consumer7000' would be more aware of what is available in the world and this in turn will make him or her more demanding. Our products and services will need to match up in terms of features, quality and price.

"They will demand global brands. We, the private sector, will need to compete with imports. Rising incomes mean higher wages. Do our product and service portfolios allow for higher input costs? Can our brands demand a higher price to offset the increased expenditure?

"Are we sufficiently innovative, do we have R and D, do we have the technical skills and do we have the partnerships to meet the needs of 'Consumer7,000'?

"We don't have much time since 2020 is five years away. We must make a start now. As a first step, I call upon the private sector to establish strong partnerships with the universities. The universities are an incredible reservoir of knowledge which the private sector must leverage for innovation, R and D and new export markets

Wealthy minority

"Second, we must not leave the poor behind. I was surprised to find that almost 75% of the world's poor - those who earn less than $ 1.25 a day or approx. Rs 5,000 a month - live in middle income countries. Some of these countries have reached or are close to a per capita income of $ 7,000. This is a result of a very wealthy minority skewing the data towards a middle income per capita.

"In Sri Lanka, approximately 24% earn less than $ 2 per day (or Rs. 8,000 per month). Sri Lanka must strive for more inclusive growth. This is also in the interest of the private sector. Businesses would benefit more with a broad group of consumers earning a reasonable income rather than with a small group of very high net worth individuals. Therefore, the net of development must be cast wide across all districts of Sri Lanka, not just a few.

"Fast-tracking SME development will also help. SMEs desperately need access to skills, affordable finance and supply chain links with the larger firms. There is a need for a multi-stakeholder approach to create an eco-system to nurture SMEs. The Ceylon Chamber has recognised this need and is in the process of implementing an SME capacity building program. This program will be launched at a National SME Forum in October this year.

Middle income trap

"Third, is the middle income trap. In the context of today's economic summit it is pertinent to note that the middle income trap is said to come into play when a country's per capita income is between $ 5,000-10,000. Over the last 65-70 years, as many as 100 countries made the transition from low to middle income. But not many made it from middle to high income.

"It is relatively easy for a low income country to step up. Cheap labour, trade concessions, concessionary funding by international lending agencies, all help in the process. However, to move from middle to high income is more challenging. The cheap labour advantage is lost and with it, the ability to compete with the poorer countries.

"The advantage of technology and market access enjoyed by the rich countries pose a different set of challenges. The answer to the conundrum is to move up the technology ladder and to find markets that can absorb the new offerings. This means innovation, R and D and new export markets.

"Former Governor of the Reserve Bank of India, Dr. Duvvuri Subbarao speaking at the 25th anniversary Convention of the Association of Professional Bankers of Sri Lanka, laid down a 10-point strategy to avoid the middle income trap. Among the points he made, three stood out.

Counterproductive

"He spoke of good governance which was the ability to prioritise the long-term against short-term compulsions. He said sunset industries - i.e. those whose products and services that have no future - must be eased out. He said that enhancing the life-cycle of such industries through subsidies, tariffs and exchange controls is counterproductive.

"In their place, sunrise industries must be encouraged. He also spoke of the need to regulate but doing so efficiently. He said that structural adjustments involve the public sector yielding to the private sector. He said that the challenge is to regulate efficiently in a manner that the benefits always exceed costs.

"The Sri Lankan regulatory system as it applies to the private sector is in need of overhaul. Many of the regulations are perceived as a deterrent to investment and doing business rather than an enabler. Going forward, a consultative process between the public and private sectors is essential before new regulations are implemented.

"The extensive use of ICT will make it easier to do business. So will a single window to facilitate international trade and a genuine one-stop-shop to fast track local and foreign investments.

"It would be beneficial if our labour regulations facilitate the creation of employment rather than suppress it. While the private sector seeks reform, it is also true that, at times, our actions don't lend itself to that process.

"It is a common perception, mostly unfair, that we care for nothing but our next quarter's bottom line, don't pay proper taxes and use influence to bend the rules. This makes the process of reform difficult. It is our actions, not our words, that will change this perception. To many, the relationship between the public and private sectors seem adversarial. Instead, it needs to be one of partnership."