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Sri Lanka need not be overly fascinated with industrial manufacture or exports - Bellwether

By Bellwether

Jun 30, 2015 07:49 AM GMT+0530 | 0 Comment(s)

TRADE LIBERTIES:  Though most commentators in Sri Lanka talk of exports from Vietnam, they do not say that imports grew faster. A freer trade regime, partly imposed by ASEAN and helped by the lack of nationalist/Mercantilist private enterprise to exploit the poor, boosted economic freedom helping reduce poverty.

ECONOMYNEXT - Sri Lankan policy makers and commentators have a great fascination with exports and industrial exports in particular, but it must be kept in mind that all labour is noble provided the transaction is freely made.

There is nothing particular superior about what people do to earn money, provided it is honest and does not hafrm their fellow man.

The great virtue of capitalist mass production is not whether the output is exported or not, but that it lifted the living standards of poorer people, both consumers and workers, regardless of his or her geographical location.

One advantage came from the division of labour which allowed poorer ill-educated people to break away from the feudal-artisan order of the day.

Artisan Order

Division of labour may have made work boring and repetitive on a production line as some critics charge now, but it allowed a great many people with little or no education to leave the agricultural fields they were toiling in and get work in a city factory with a few days training.

An artisan cannot be turned out in a couple of weeks. An aspiring artisan would have had to serve as an apprentice for years literally at a pittance (if he was lucky) or nothing before he learned the craft. It was much worse than the extraction of labour from little part-qualified accountants that goes on today.

But if there are schools, or technical colleges, where people can pay money and learn a craft to become more skilled and engage in services, for example. There is no need to produce only hard goods on an assembly line.

They can also use their brains instead of just muscles as is done on the factory floor. There is nothing superior about that either. The virtue comes from the fact that knowledge is more difficult to come by and consequently they may be able to earn a premium for their wages until some other innovation creates new knowledge.

The artisan guilds also controlled many things. Competitive capitalist production broke the order.

Artisans produced many beautiful high quality products from anything ranging from wood to iron. But they were mostly consumed by the nobility because the rich were the only people who could afford them.

It would have taken many years or month of wages of an ordinary worker to afford the products they made. Today an apparel worker can buy even a branded item for the salary of a few days or weeks, but no 16th century dress maker's assistant in any European capital would have been able to purchase an article of clothing worn by the nobility for even for several months of wages.

The output of capitalist mass-production however could be consumed by anyone especially the factory workers themselves. A model T-ford, was very cheap and could be bought by a floor worker, compared to a phaeton made by artisans drawn by two horses.

There was a time when European migrants sold themselves into indentured labour for American farmers and suffered for many years under worse treatment than slaves (slaves were permanently owned by their owners and were treated better), but now anyone can travel by airin economy class for very little money. Budget airlines are even cheaper.

By making the products cheap, capitalist mass-production allowed factory workers or even others in agriculture or services to enjoy many more things than they did with their earnings.

Similarly everyday electronics items or flush toilets, which improved health standards across the board, would be unthinkable for them. In Sri Lanka flush toilets are extremely expensive even now due to import duties imposed to artificially push up profits of big business.

Export Virtues

The virtue of hard exports lay in allowing these innovations to spread faster to more geographical areas benefitting more people. Exports also compete with and force artisans or Mercantilist businesses who try to control trade to be challenged, and free the less affluent from their yoke.

Capitalist mass production was and is a continuous process. Productivity rose steadily, with the use of capital (machinery) and innovation.

Artisan guilds are no longer powerful, but Mercantilist industrial lobbies have taken their place, trying to control the choices available to the poorer consumers and limit imports so that they can make easy money without responding to the pressures of the market (read consumers).

When industries in one country try to control trade through import duties and resist innovation or progress and exploit all people and the poor through import duties, it is the foreign producer that can save them through exports from their country.

Innovations in shipping cut down costs and speed of long-distance trade, that made industrial exports which were not of very high value feasible.

Now innovations in telecoms have made it possible to export some services very efficiently. India's services exports could not be foreseen by Prasanta Chandra Mahalanobis who did the disastrous 5-year plans modelled on the Soviet Gosplans.

At the time it was heavy industry that was the favourite of the planners.

After progressively destroying the currency, and a series of crises, these Indian plans generated the biggest crisis of all in 1991, and most of the hard planning and state intervention was abandoned, allowing the people of India to rise up once again.

Now IT-enabled services are a key growth area.

When the Mercantilists and industrial planners wrote their arguments even a few decades ago looking at East Asia, such things had not yet happened. Now even East Asia has progressed to be part of a global supply chain where one country only makes part of the whole unit. If salaries are good, it does not matter whether 10 or 80 percent value is added. What matter is the total value created, not some arbitrary percentage.

Opposition to making Sri Lanka a tea blending hub shows the lack of knowledge about supply chains and a vicious Mercantilist or nationalist philosophy to preserve the status quo using the coercive power of the state.

It is this type of freedom robbing that makes people go abroad to countries with less state control and freer trade that throws up opportunities for different economic activities. It is ironical that Sri Lankan tea blenders are working in the Middle East.

Already there are tens of thousands of vacancies in Sri Lanka's free trade zones in areas such as apparel. Clearly people do not want to work in these places or at these salaries or both.

Low Hanging Fruits

Businessmen and entrepreneurs will not care too much about rants for exports by industrial planners or other advocates. They will put their money where profits are made the easiest. After the war, there were easy pickings in tourism.

As a result massive amounts of capital is being put to tourism. There is nothing wrong with that. There can be a bubble in that sector. That is also part of the game.

Sri Lanka also had expensive power for a long time due to a state monopoly in electricity messing up costs. That also pushed up costs compared to countries that had coal power.

It is a good strategy from the point of view of the individual businessman (and the country as a whole therefore) not to go to areas such as industrial exports that create more problems and go to other areas.

Hard goods manufacture can also be environmentally damaging, and services may be superior in that aspect. In the same way that agricultural exports is a way of exporting water, industrial manufacture is a way of importing pollution depending on the type of backward linkages there are. But it is possible to tackle pollution.

Many Sri Lankans have also migrated abroad to sell their labour to countries in the Middle East or East Asia or Europe. There is nothing wrong with that either. It is not business of planners and interventionists to tell them what best to do with people's lives.

As everyone knows import duties have pushed up livings costs in Sri Lanka to levels far higher than East Asia lowering living standards. This contributes to making people go abroad seeking jobs.

A stylish Japanese branded scooter that is owned by a typical female worker in an East Asian such as Vietnam which is held up as a poster child in this country by many commentators would cost less than a 1000 dollars.

But in Sri Lanka a similar Indian made scooter costs more than 200,000 rupees. A basic bike could be bought or as little as 600 dollars in Vietnam.

Foreign Investment

Since Vietnam is often held up as an example it is pertinent to mention that a key factor in the very fast non-agricultural export growth in Vietnam has been foreign investment. Though domestic firms played a big part in Japan when it industrialized in the Meiji period and Korea later, the very fast export growth in about in a couple of decades in Vietnam was driven by foreign investments.

This is not surprising. Since innovation and branding is key now a driver in hard goods, it is companies located in competitive market with free trade that are forced to innovate the hardest and make new products to tempt consumers.

A protected market made up of greedy politically savvy businesses, or ailing state enterprises do not make for such an environment. But for a socialist country, where there are only loss-making state enterprises which have already incurred the wrath of rulers, the move to free trade is easier than a country with entrenched private business who pay politicians and the benefits to the people very fast. Marx also favoured free trade, which makes the transition even easier.

The value of FDI is not that it brings 'foreign exchange' but that new technology, innovation, ways of doing business and management comes with it. In a country where big domestic business is engaging in 'import substitution' which is the last word in lack of innovation, then FDI is a must to produce new goods in new ways and increasingly in the latest fashion, to win export markets.

Protection and import substitution not only points to a lack of innovation and imagination on the part of existing business but it also shows the inability to even to make a copycat product at a competitive price despite having the advantage of transport costs.

In 2014, Vietnam exported 150 billion US dollars of industrial and agricultural goods according to government data. Out of that 101 billion US dollars came from FDI firms. Without oil it was 94.1 billion dollars. Among key export categories an overwhelming majority came from FDI firms. In telephone and telephone components amounting to 24.1 billion US dollars 99.6 percent was from FDI firms. In machinery and tools exports, 89 percent came from FDI firms.

Why Export

A great value for ordinary citizens also comes when FDI firms are allowed to sell freely in domestic markets like they do in 'rich' countries.

In Vietnam all kinds of foreign firms sell in the domestic market raising people's living standards with first world goods. It only costs 200,000 dollars for an FDI export firm to get a license and set up a domestic trading house.

Policy makers and export promoters in Sri Lanka are fond of saying Vietnam's exports grew much faster than Sri Lanka. True, just last year's growth alone of about 15 billion US dollars was more than the total exports from Sri Lanka.

But they also forget that Vietnam's imports went up in parallel. Until a domestic credit bubble burst around 2010/2011 and then FDI inflows also slowed, Vietnam had a trade deficit.

 

Why do people export? People do not export in order to bridge trade deficits as Mercantilists claimed then and still do now.

Exports simply bring in money. Livings standards are raised when people – workers or owners - spend the money. If something is cheap, or if we can buy two for what we earlier paid for one, our living standards take a quantum jump.

The value of foreign exchange come from the ability to import and consume goods or services, not simply the export of such goods so that foreigners can consume. Like the concept of comparative advantage this another idea that was difficult for Mercantilist and Nazi autarkists to understand.

It was Thomas Munn, a one-time director of the imperial British East India Company who articulated very well the Mercantilist ideas so favoured by Sri Lanka's politicians and others.

"Although a Kindom may be enriched by gifts received, or by purchase taken from some other Nations, yet these are things uncertaim and of small consideration when they happen," he wrote in Englands Treasure by Forraign Trade published in 1664.

"The ordinary means therefore to encrease our wealth and treasure is by Forraign Trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value."

Neither Mun nor Hitler who came up with the concept of 'export or die' could understand the concept.

"I can only give the assurance that in such a case a desperate economic struggle would ensue, which would be easy for us to carry out, easier for us than for the ever-satiated nations because our leading idea would be a very simple one: the German nation must live; that means export or die," Hitler said in a now-famous speech in 1939.

A key worry of Hitler for bringing forward the concept of 'export or die' was the lack of foreign exchange to buy raw material. But foreign exchange shortages were the direct result of printing money. This is important in the current context when Sri Lanka's rupee is under pressure and imports are rising due to low interest rates and liquidity releases by the central bank.

It is at times like these that Mercantilists and Nationalists will try to rob people's freedoms and try to block imports instead of fixing the central bank.

In this context it is important to keep in mind the words of Milton Freidman.

"We cannot eat, wear, or enjoy the goods we send abroad," explains Milton Freidman in The Case for Free Trade.

"We eat bananas from Central America, wear Italian shoes, drive German automobiles, and enjoy programs we see on our Japanese TV sets. Our gain from foreign trade is what we import.

"Exports are the price we pay to get imports. As Adam Smith saw so clearly, the citizens of a nation benefit from getting as large a volume of imports as possible in return for its exports or, equivalently, from exporting as little as possible to pay for its imports.

"The misleading terminology we use reflects these erroneous ideas. “Protection” really means exploiting the consumer. A “favorable balance of trade” really means exporting more than we import, sending abroad goods of greater total value than the goods we get from abroad.

"In your private household, you would surely prefer to pay less for more rather than the other way around, yet that would be termed an "unfavorable balance of payments" in foreign trade."

This column is based on 'The Price Signal by Bellwether' published in the June 2015 issue of the Echelon Magazine. The column was written before a rate cut further loosened monetary policy last week. To read Bellwether columns as soon as they are published, subscribe to Echelon Magazine at this link. The i-tunes app can be downloaded from here.


 

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