Falling Garment factories and Failing Local Enterprises: What has to be done.
Posted on February 16th, 2013

By Garvin Karunaratne

It is a fact that many garment factories are closing today. This is attributed to the denial of the GSP Plus concessions. A number of foreign investors had even taken local bank loans and have bolted taking profits away. – It was a decade ago that Kabool of Pakistan vanished overnight with unpaid bank loans, unpaid EPF contributions and unpaid salaries. It is sad that we do not have the ability to learn from earlier mistakes.

In a case personally known to me an entrepreneur exporting pottery and coir items has gone bust, has had to sell his lorry and cabs and even some land to settle his debts. A few years ago he was a jubilant entrepreneur, who did two trips to Europe in connection with his trade.

In 2009 in one of my Papers I recommended that all garment factories that are on the verge of declaring themselves bankrupt should be taken over. I yet stand by this idea. It should be done in the case of all enterprises: In my eyes, any enterprise in Sri Lanka though it rightly belongs to the owner, the latter is also bound to run the enterprise in the national interest- for the creation of employment to the people and to produce what is required for the nation. In that process the owner makes a profit. Though he may be the owner he is not entitled to close down the factory. If he has a problem the Government should help him.

It is also high time that our Government understands the basic fact that a high interest regime- that gives bank loans at 24% interest though it may be good to curry favour with the IMF, will inevitably see the end of all our existing industries.

In case the enterprise is yet under performing the Government should adequately compensate the owner and take over. Thereafter it is up to the Government to get going with the enterprise, providing employment and also producing what the country needs.

The question that then comes up is: Can the Government handle commercial establishments efficiently?

The answer is that the Public Sector did handle commercial and all types of development work very efficiently from the Fifties onwards.

The chief officers the Assistant Commissioners, the Commissioners, the Directors. the Government Agents and their Assistants all were once adepts in running the commercial and development institutions. I speak through sheer experience as I was one of them.

The Controller of Foreign Exchange at the Central Bank did do a marvelous job of controlling the use of foreign exchange that came into the country. Before Sri Lanka embraced the IMF’s Open Economy in 1977, every penny that came in was counted and used in the national interest as determined by the Sovereign Government. Since 1977 the Central Bank no longer controls the foreign exchange that comes in. In my thinking since 1977 Sri Lanka was no longer a sovereign country as it ceded total control of its foreign exchange to the Private Sector in keeping with the IMF dictates. That task is left to the Banks to make money- to plunder our hard earned foreign exchange. The Central Bank has again and again stated that it controls only our local currency. (The Island, 17/2/2000: Page 95 in my book: How the IMF Ruined Sri Lanka(Godages)

Since 1977 Sri Lanka gave up national planning, gave up the task of accounting the foreign exchange that comes in and allowed the Private Sector and that includes the foreign banks, multinationals and companies to handle the economy. The Public Sector that ran the task of national planning and administering the country was made non functional all due to following the Structural Adjustment Programme of the IMF.

Out goes the aim of serving the people. Comes in the motto of making profit. Serving the people is of secondary or no concern. Even after three decades of implementing the Structural Adjustment Programme of the IMF our leaders fail to realize the basic fact that all the dictates of the IMF are aimed at crippling our industries and our production base to enable the Developed Countries to export their manufactures to us and make riches in the process.

Since 1977, the Private Sector has had a hey day. The owners and the management have been drawing fantastic salaries and perks. In the Golden Key Company some eight Deputy Chairmen are alleged to have drawn salaries of Rupees three million a month plus perks. The Owners and the higher managers drawing high salaries has been the order of the day y in Sri Lanka and paying perhaps the lowest tax in the World- 24% only, far lower than in the UK and the USA.

Another aspect is that private enterprises expect fantastic profits. They close down enterprises when the profits are low..

Is there a method out of this?

My mind goes back to my work in the Administratiive Service in Sri Lanka and my consultancy in Bangladesh..

The Government Agents handle development work This began in the Fifties with Rural Development and Cottage Industries. Later the Cottage Industries was expanded to Small Industries. At Hakmana, in the Matara District, we had a Powerloom Cooperative, which turned out the best quality textiles- that could easily match the best quality available for sale in the UK. There was a huge demand for Hakmana suiting material and people from Sri Lanka who had migrated to the UK whenever they came on holiday would come in search of Hakmana suiting. I became aware of this when they sometimes approached me to get this suiting. This Power loom was managed by leading members of the community and it was headed for long by the Divisional Revenue Officer at Hakmana, Ranjith Wimalaratna, who did not draw a cent as a salary from the Powerloom. . It was a part of his onerous duties being in charge of the area. He guided the entire powerloom cooperative. As the Government Agent, the officer in charge of the District I became concerned when any of the powerlooms ran into difficulties and then I would spend some time to trouble shoot and sort out the mess. I did not get paid for that task because that fell to me in addition to my duties.

Was this Hakmana Powerloom industry a one and an only factory? No every District had a number of powerloom industries- established in the Sixties with Chinese Aid by the Small Industries Department that had a special Deputy Director in charge of arranging supplies of yarn etc and also attending to the infrastructure that was necessary for powerlooms to function efficiently. The Department had a Special Unit at Velona which would guide the powerlooms on all technical matters. As the Government Agent at Matara we ran at least three powerlooms and Hakmana was one of them.

Earlier at Kegalla I had around four powerlooms and all ran well under the same management pattern.

Cooperative industries, run by the community members, under the guidance of government officers- the Government Agents of the Districts and his Assistant Government Agents in the Divisions did perform a yeoman service in textile manufacture in the pre 1977 period. They also ran the handloom industry where handloomers worked in their homes turning out sarees and handwoven textiles. The Cooperative Union and the Small Industry Department shops- the Lak Sala sold the sarees done by the handloomers. In this manner by the Seventies Sri Lanka was almost self sufficient in all its textile requirements.

The Public service was also entrusted with creating employment when the Divisional Development Councils Programme of 1970-1977was implemented. I was in charge of the Matara District in 1971. Many industries were newly established and ran at a profit for the entrepreneur youth to enjoy. For details: Papers on the Economic Development Development of Sri Lanka(Godages) 2013, which contains a detailed study of the Divisional Development Councils Programme.

I can quote the success of the Coop Crayon Industry at Deniyaya, established under my direction, in 1972, run by the Deniyaya Cooperative Union which was fully commercially viable within six months of its establishment and which turned out a tenth of Sri Lanka’s requirements during the period 1972 to 1977. This was the Flagship Import Substitution Industry of the Divisional Development Councils Programme. This was only one of many industries successfully run under this Programme The Public Service attended to commercial and development work with service as the aim. Profit making was never the criteria. The officers were all paid normal salaries. The President of the Deniyaya Coop Union, the late Sumanapala Dahanayake, the Member of Parliament handled this Coop Crayon, without drawing a cent as a salary. In today’s private sector his work would enjoy the salary drawn by the Deputy Chairmen of Golden Key- Rupees three million plus perks a month. They were the cooperative entrepreneurs who contributed their might for the success of enterprises without any payment.

An important premise of this type of industry is that it is a community cooperative a cooperative that is run by the community where the workers are also members of the community. The aim of this community cooperative is to enable production that the people need at a reasonable price, bring about employment to the people. The aim is not profit making, though a small profit is aimed at to ensure that there is no loss to the Government..

Considering this experience it is not a difficult task to attend to garment factories that are closing down. The Government has to take over all closing down garment factories and run them as cooperatives, run by the workers and members of the communities. The Government has to provide the infrastructure that is necessary. The technical aspects have to be done by a Department like the Small industries of the pre 1977 period headed by a Deputy Director with a task force, finding orders and guiding the production. The administrative guidance can come from the Government Agent and the Assistant Government Agents of the Divisions.

It would be interesting for our leaders to realize that since 1977, the Department of Small Industries exists merely in name with officers drawing salaries while they have very little work to attend to. The role of the Deputy Directors of Planning in every District is similar. This is due to no fault of the officers but the fault of the system which does not get them working.

Herein lies the answer to the ailing garment factories and ailing industries in Sri Lanka.The Government need not be frightened to handle this responsibility, because within its own Administrative Service ranks there are able officers who can manage these tasks. They have a history of managing enterprises and they can be entrusted with this task immediately. The Government has to provide the infrastructure, ban the import of garments and all sorts of goods that can be produced locally, from foreign countries. and all items that can be made locally. The Government has also to establish the abolished Marketing Department with canneries in Colombo and many districts. The closed down segments of the Department of Small Industries has to be re established.

There will be senior officers in the Administrative Service that can get the unemployed graduates on national tasks that will end in creating production. All this can get done through the funds being spent for vocational training today.

Self employment has to be added to the curriculum of vocational training. Today we train thousands in vocational training and do not guide them on how to be self employed. In the Youth Self Employment Programme that I established in Bangladesh in1982, which has grown from strength to strength and has guided over two million to be self employed by February 2011, the key strategy was to include self employment guidance to the thousands that are being vocationally trained. Self Employment guidance has to be done alongside vocational training.

All these suggestions do not require a red cent extra to our budgets. Guiding enterprises to success falls to the Government Agents, the Divisional Secretaries and the Small Industries Department. Introducing Self Employment as an area of study and guiding the trained to become commercially viable falls to the staff that deal with vocational training. In fact the Youth Self Employment Programme of Bangladesh established by me did not get any new funds. Funds being used for vocational training was used. What is required is not funds, but a re direction of effort and new curriculum.

The voice that the Public Sector cannot handle commerce is dead. That was the voice of Professor Milton Friedman, amplified by the IMF in its Structural Adjustment Programme which we have to dump if we are to create employment for our people, alleviate poverty and bring about prosperity. Professor Friedman’s ideas of free markets-liberalization-deregulation stand totally discredited today.. His economic strategies have caused billions in the Third World to become poor and they suffer in silence. It has also caused endless Third World Countries to become indebted. Though this is a fact the IMF yet follows the Friedman policies embedded in the IMF’s Structural Adjustment Programme, because it helps the Developed Countries to use the Third World countries to remain as producers of raw materials while manufacturing is to be done by the Developed Countries. If any country criticizes the IMF they will not get approval for loans. Unfortunately Sri Lanka is a country that is caught in this stranglehold.

It is upto our leaders to understand the process of under- development thrust upon our countries by the IMF and to have counter policies in place before Sri Lanka is totally ruined.

Garvin Karunaratne, Ph.D.(Michigan State Un iversity)

former SLAS, Government Agent, Matara District

9/2/2013

6 Responses to “Falling Garment factories and Failing Local Enterprises: What has to be done.”

  1. Nanda Says:

    Garmets of the politicians have been dropping for so long. We thought Mahinda is the one to wear the Sarong firmly, but unfortunately not ot be.

  2. Dilrook Says:

    The government should make sure lost employment in garment industry are made up in other industries.

    Although our garment exports are very significant, the devil is in the details. There is a very large corresponding import bill as almost all accessories are imported. Therefore the loss of the garment market will not as significant as some portray. The value addition is the cutting and making charge net of electricity (which is subsidized), loan defaults, cost of displacing a large number of women, associated social problems, loss of tax revenue (tax holidays to factories mean no tax for the government) and other connected economic costs. Most garment industry profits end up in the hands of minority groups. Considering all these, it is highly advisable to divest from this industry.

    State owned commercially managed entities should be set up employing a large number of people particularly to replace import and wholesale industries currently owned by minority groups. TNA and SLMC are financed by these businesses. Even inflation is dictated by them.

    Indian Oil Company should be removed from the equation. All this can be done by CPC at a profit. Tariffs for electricity and Mihin Air fuel should be increased. That relieves the government a very large amount of money. If these savings can be obtained, interest rate will not be at 24%.

    Tax base must be broadened. Most people in Jaffna, Batticaloa, Vanni, Trincomalee don’t pay income tax. They get away with their grievances stories. This is not only unfair by the honest taxpayers but it also builds wealth disproportionately.

  3. aloy Says:

    Dr. Garvin,
    “It was a decade ago that Kabool of Pakistan vanished overnight with unpaid bank loans, unpaid EPF contributions and unpaid salaries. It is sad that we do not have the ability to learn from earlier mistakes.”
    This is not true. The officers at the controls know very well that these racketies would one day default. They close their eyes for obvious reasons. This has been happening all the time. So, it is not learning from the past, not mistakes.
    Why are the local enterprises failing?.
    The other day I saw a news item that some of our custom officials go and deliver unopened containers to some unsrupulous business men in their warehouses straight from the port. This type of news items should be investigated as it would give unfair advantages to some businesses that do not work for countries progress.

    “The Controller of Foreign Exchange at the Central Bank did do a marvelous job of controlling the use of foreign exchange that came into the country. Before Sri Lanka embraced the IMF’s Open Economy in 1977, every penny that came in was counted and used in the national interest as determined by the Sovereign Government”
    Garvin,
    They did not have money to control before 1977. For the little they had they put some funny controls. According to their rules in 1975, I was entittled to take 21 pounds when I wanted to go for employment in Nigeria. That government had spents thousnds of pounds to send air passage for me and my family. For me to claim that forex I had to undergo a comprehensive medical fitness test in General hospital, Colombo just to make sure that I will be fit to work and refund that money. When I finished all that they gave me 7 pounds to my hand and asked for an address of a bank in the place where I am going, so that they can send the balance of 14 pounds as resettlement allowance after I go there. I never received that money untill now. That was the civil service you praise so much (they may not be from the civil service, but for me they are the same lot). today they are at the opposite end. Any wealthy Sri Lankan can send his or her child to US or Canada for studies with a foreign exchange component of over one million rupees and there is no guarantee that the student will ever return to work in this country after completing the course of study.
    Is there a good demand for handloom products in this country today?. People’s taste change with the trend in the world and our people move with those trends. public servants of today are entitled for car permits of over Rs. 3.0 million. They have to find that money. Some try to find money to educate their children overseas. Naturally some get corrupted.
    Bangladesh is a different country; it is a baby factory too. There are enough people to work for low wages. Few days ago in Sri lanka I had to pay a skilled carpenter Rs. 3000 for a job lasting less than two hours. So, how can we have a viable garment industry?

  4. aloy Says:

    Sorry, correction:
    It is learning from the past, not mistakes.

  5. sena Says:

    Sir, I think the purpose and the direction of the higher education system should be refocused to include a contribution to economic development and tech transfer as well as start up technology development around the universities should be mandated . For too long poor people have been funding free higher education with out much return and in fact it has become a burden with the graduates agitating for publicly funded employment. The only way out of the present subsistence economy is to develop a knowledge based economy and the capabilities and know how available in universities should be mandated to be part of this process.

  6. Ben Silva Says:

    Good article.IMF, the International Mafia Fund is there to act in the interests of the money market. They will not care about traditions and susustainasble living. They will act to promote globalisation and to safeguard dollars. The world is changing fast and add what sena has said, we need to be educated to cope and deal with new situations. We now have to deal with threats coming from the whole world and not just the Indians, where the power comes from finance and economic power. We will have no chance of survival if we do not adapt and just hang on to Indian beliefs dumped even by Indians. The growth industry is software industry. Also caring field is growing. So there will be opportunities in the medical and caring fields. My views on various skills to be developwed are given below. The key point is learn and evolve and dump unproven old beliefs, that make us less competitive.
    Ways to survive and move forward:
    1. Adapt and change to meet new situations and threats.
    2. Continuously improve, develop problem solving and crical thinking skills
    3. Learn from those who re successful and learn from those who failed, so that mistakes could be avoided.
    4. Develop information seeking, analysis, design, presentation and communication skills
    5. Be prepared to overcome difficulties and undergo suffering.(Do not expect to have an easy ride, if you want to win )
    6. Be aware of the external environment and be aware of threats.
    7. Be prepared to dump old beliefs and move forward
    8. Be imaginative, innovative and have self belief.

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