Export Development and EDB
Posted on May 28th, 2022

Sugath Kulatunga

It was reported that the EDB Chairman Suresh de Mel insists boosting exports and celebrating exporters must be made a national priority, noting that it is the only sector generating a steady foreign exchange inflow to keep the economy afloat. He has stressed that we cannot grow as a country without exports. Any rational Sri Lankan will strongly endorse the Chairman’s opinion.

The adverse balance of trade has been a perennial problem in the economy of the country. In many years imports have been double the value of exports and the gap was covered by borrowings. With the open economic policies of 1977 imports were liberalized and the flood gates were open for imports. In the last few years before the Corvid pandemic the foreign exchange earnings from tourism and repatriation from foreign employment helped the balance of payments position. The pandemic demonstrated the vulnerability of returns from these sources.

The panacea adopted to solve the trade deficit was to devalue the currency with a view to discourage imports and induce exports. Devaluation has been a futile exercise in Sri Lanka where at the time of independence in 1948 the US dollar was only 3 rupees and now it is over 350 rupees. We continue to chase the dollar without focusing on the real problem of poor export performance. The Export Development Act of 1979 was designed to address this lacuna. In 1980 there were 3 lead projects i.e. EDB, GCEC and the Accelerated Mahavali. It is noted that the Export Development and Investment Promotion institutions were conceptualized by a handful of dedicated staff of the Export Promotion Secretariat of the past.

The Act envisaged the commitment of the highest political level for export development. This was guaranteed by an Export Council of Ministers chaired by the president of the country. The EDB Act ensured that the export development be truly a national effort by accommodating in the management Board secretaries or additional secretaries of all the Ministries responsible for production of exports and providing services. In addition, the private sector was well represented on the Board. Professionals in relevant fields were roped into several Advisory Committees. Exporters and Producers Association were formed to cater to their specific interests and an apex body of the Association was also established.

It was also envisaged that to be effective the EDB should have both financial adequacy and independence. To achieve this the Act provided for a cess to be charged on non-essential imports. In order to serve the special needs of the wide range of products and functions the Act authorized the Board to form subsidiary companies.

Production for export carries far greater risks than production for the local marker or any other form of investment. Investors are reluctant to put their money on long maturing export projects with higher risks when import and construction business carry lower risk and ensure fast returns. The Banks too were comfortable in lending money to the latter type of investments. This was the actual experience in 1977 when there was import liberalization.

Government of Sri Lanka had established the National Development Bank for the purpose of promotion of industrial, agricultural, commercial and other evelopment of the economy of Sri Lanka having regard inter alia to the development of the rural sector. One of the objectives of the NDB was to undertake development projects, including pilot projects, in order to achieve the purposes of the Bank. Unfortunately, the NDB acted like any other commercial bank and was finally privatized. It is no more national.

In consideration of the absence of any other financial institution to provide funds for innovative investments with risks, the EDB Act provided for investments in selected export projects. A special Division was created in the EDB to evaluate and participate as a Venture Capital provider in inventive pioneering projects.

In the initial period the EDB was privileged to have as Chairman the former Head of the International Trade Centre (UNCTAD/WTO) and be inspired by the dynamic and smart Minister Lalith Athulathmudali.

In the early part of 1980s Sri Lanka had an ideal institutional arrangement and best of leadership. The tale of what happened to the EDB is a disgrace and is bordering on criminal.

The Council of Ministers was not convened for 35 years as EDB had no policy innovations to take up with the Council and the Ministers after Lalith and the Chairmen of EDB were diffident to face the Council.

The later Chairmen of the EDB had no development vision as their background was only Trade Promotion. The result was that not only the venture capital conception was rejected the Projects Division with trained and dedicated staff was disbanded.

We also had a Minister who terminated export incentives well before the mandated time of the WTO. He also is alleged to have allowed the import of Kankung from abroad. He was so cussed that when exporters of gherkins requested for a short-term incentive to retain their markets in the face of an advantage gained by their Indian competitors due to a currency devaluation in India, the Minister advised them to take their business to India.

While the shortsighted Chairmen of the EDB abandoned the Pioneering Project Scheme and the scheme to reward exporters on performance over the previous year, recently India has announced an outlay of INR 1.97 Lakh Crores for the Production Linked Incentive (PLI) Schemes across 14 key sectors, to create national manufacturing champions.

Another novel program discarded by the management of the EDB was the Export Production Village EPV) program which was aimed at mobilizing rural production potential to produce for export and linking the production collective with exporters. This was a very imaginative and popular scheme which inspired the global program on Export Led Poverty Reduction Programme (EPRP) of the International Trade Centre’s (ITC). This program covered countries in Latin America, Africa, India and even China. The EPV program in Sri Lanka was implemented under the patronage of the Assistant Govt Agent (Divisional Secretary). When the Gamudawa program of President Premadase was launched the AGAs were made to understand that their priority should be only the President’s pet scheme. Thus, the EPVs lost the leadership of the AGA and the EDB too neglected them. In later years the EDB which also had a financial stake in the EPVs were not aware even on the location of most EPVs. What was good globally was considered irrelevant by the EDB which originated the concept.

While political leadership were blind to the critical problem of the adverse balance of trade they made detrimental decisions which affected export development and the economy of the country. The turning point was the decision taken by the first Prime minister DS to focus on paddy cultivation in the dry zone to the exclusion of industrial development. This was in spite of DS ardently supporting In the State Council in 1944 to launch a State Project of Industrialization in Ceylon and the  Industrial Corporation Bill.

 Later, when in South Korea President Park directed the leading business houses to venture into high tech industries, president Premadasa forced leading business houses in Sri Lanka to invest in low tech garments industry in rural areas to generate employment. While South Korea through industrialization developed into a leading industrial powerhouse in the world, Sri Lanka continues to excel as a superior tailoring shop.

Even in the 1977 regime the GCEC was keener to fill up the Zone rather than attracting technology. The result was GCEC became a haven for apparel quota seekers.

In 1983 the Black July resulted in Sri Lanka losing high tech investments by firms like Samsung and Motorola. The greatest setback in all aspects of development was caused by the war against separatists. This internal war had cost the country around US$ 200 billion according to India’s former National Security Adviser and Foreign Secretary, Shivshankar Menon.In his book Choices: Inside the Making of India’s Foreign Policy, Menon says that this estimate does not include the opportunity cost” to Sri Lanka which was once the fastest growing and the most open economy in South Asia. htps://www.newindianexpress.com/world/2016/dec/13/sri-lankas-internal-war-cost-us-200-billion-1548433.html” If this money and the human effort was invested in development Sri Lanka would have been a different place.

While the EDB was not responsible for the wrong political decisions, EDB continued to dismantle many useful instruments introduced by the first Board of management.

The popular Exporters Forum which was an effective trouble shooting mechanism was not conducted. The prestigious Presidential Export Awards was not held, and the statutory requirement of the National Export Plan was not formulated. It is not clear whether undoing the good things done by previous regime was political one-upmanship or sheer lack of understanding and interest of the EDB leadership. Well, a minister had suggested that the EPV scheme be revisited under a different name.

The sad decline of the EDB was mainly due to the poor leadership of Chairmen who were merely time servers in retirement. There were a few professionals who adorned the post, but they sought for inspiration from Western models. They were not interested in the developments of excellence in the Far East. There were others whose appointments could only be justified with the Premadasa philosophy of preference for the mechanic over the engineer.

Now with the massive devaluation of the currency there is an excellent opportunity to push for a concerted export development drive. It appears that the political leaders have got into their thick heads that the only solution to get out of the dollar crisis is to produce for export and export more.

Exports cannot be increased overnight. It is necessary to have both short term and long term programs. In the short term we could concentrate on adding value to existing products and making the best use of our existing physical and human resources. But in the long run the country has to improve its expor supporting services and industries.

Taiwan is an Island smaller than Sri Lanka with a similar population. It was a predominantly an agricultural economy. Today it is a high tech powerhouse leading the world in a number of high tech industries. It has a per capita income of 36, 000 dollars. At the beginning of the 1980s, Taiwan increased the ratio for senior vocational schools and general high school to 7:3. By 2012 there were 155 senior vocational schools, 14 junior colleges, and 77 universities/colleges of science & technology, totaling 246. It is the education system that has sustained the significant development of this small nation. Our education policy must be revamped if we are to progress in technology and expand high valued exports. Far back in 1944, the Kannangara education reforms proposed practical schools (vocational) but this aspect of reform has not been implemented seriously. The private sector should be encouraged to conduct Technical and Vocational training. It could be useful to request India to establish a branch of their IIT in Sri Lanka.

If the government is serious about giving priority to export development the export cess should be made available in full and directly to the EDB. The EDB should use these funds on export incentives and for venture capital investments in pioneering projects. Export and investment promotion should be made the primary function of our representatives in foreign countries who should be given targets for FDI and market access. Business leaders should be encouraged with incentives as done in South Korea to venture into selected high-tech industries. One effective incentive would be to give them import quotas which could be resold. EDB should again be made a lead project of the government. I wish the Chairman of the EDB good luck.

 Sugath Kulatunga

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