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Analysis of SLs drop in global competitiveness

Monday, 2 October 2017

Sri Lanka cannot become a hub by building infrastructure alone, liberal trade
and investment policies are key Dr. Saman Kelegama

From the first email sent in 1971 to the celebration of 10 years of the
iPhone today, we all live in the fourth industrial revolution. Many nations need to
compete with different sets of strengths and sophistication.
There are impressive developments in many fields such as artificial
intelligence, synthetic biology, big data and on-demand technologies. Nations
with higher economic competitiveness will be more productive and will provide
the most social benefits whilst creating the best innovation ecosystems.

While economic growth is important, it is also necessary to work toward the

social aspirations of a society. With the ongoing geopolitical uncertainty and many
global challenges including natural disasters, world leaders need to focus on
better political and economic policies.

A comprehensive report that does a deep analysis and measures economic

competitiveness among nations is produced yearly by the World Economic Forum.
Global Competitiveness Index report

This year the Global Competitiveness Index report measured the performance of
140 nations. WEF has been measuring the economic competitiveness of nations
from 1979. It assesses the factors and institutions identified by empirical and
theoretical research as determining improvements in productivity, which in turn is
the main determinant of long-term growth and an essential factor in economic
growth and prosperity.

The Global Competitiveness Report hence seeks to help decision-makers

understand the complex and multifaceted nature of the development challenge;
to design better policies, based on public-private collaboration; and to take action
to restore confidence in the possibilities of continued economic progress

Sri Lanka has slipped from 71st place to 85th on the World Economic Forum
Global Competitiveness Index (GCI) this year. According to the report this is due
to a deteriorating institutional environment, lower goods markets efficiency and
infrastructure that is assessed as less well developed.

The ranking comes as a shock since Sri Lanka has dropped further in rank when
compared to 2015 at 68th, 2016 at 71st and 2018 at 85th.

In South Asia many nations, including Bhutan (up 15 places), Nepal (up 10 places),
Pakistan (up seven places) and Bangladesh (up seven places), have improved in
According to the report, the most problematic factors for doing business in Sri
Lanka have been the inefficient Government bureaucracy, poor work ethic of the
national labour force and policy instability. Many South Asian nations such as
Bangladesh and India face corruption as their topmost problem factor.
Crumbling pillars

Of the 12 pillars of assessment, four pillars of basic requirement

monitor institutions, infrastructure, macroeconomic environment, health and
primary education. The other six pillars are the efficiency enhancers which include
higher education and training, goods markets efficiency, labour market efficiency,
financial market development, technological readiness and market size. The final
two pillars are business sophistication and innovation (Figure.1).

When compared with last year, Sri Lanka has done worse in all 12 pillars albeit
making a slight improvement in two pillars namely the macroeconomic
environment and market size. Bangladesh has performed exceptionally well when
compared to last year, especially in the innovation and sophistication sub-index
from 116 to 106 - a 10-rank improvement.

Pakistan when compared to last year has seen tremendous improvement in all
three sub-indexes and most of the 12 pillars (Figure 2). As many South Asian
nations have significant improvements in all 12 pillars of competitiveness, the
question remains why has Sri Lanka done worse this year and it should be a
concern for our economic policymakers.

According to the report, Sri Lankas macroeconomic stability needs to remain a

priority for the government, as the country continues to cope with high levels of
debt and tries to restore a sound macroeconomic environment. The government
managed to decrease the deficit and stabilise debt after the country entered the
assistance program by the IMF in 2016. Yet, the burden of interest on debt
remains high and currently amounts to most of the revenue collected by
government. Inflation also increased and forced the authorities to tighten
monetary policy, with negative effects on credit. Business confidence has been
declining over the past two years.

Despite the report showing that we have performed worse than most South Asian
nations, the Prime Minister at a recent event at the inauguration of a middle class
housing scheme explained, Total debt exceeds the revenue. However, the
revenue is higher than the debt today but we will have to borrow more. Some
thought the Government will not be able to manage the economy. However, we
successfully managed the economy and increased the revenue. (Daily Mirror 29
Failing expectations

Due to weak economic planning and miscalculations from many beautification

projects to massive infrastructure loans borrowed in the past, unfortunately the
mega projects have failed to create revenue or decent jobs and strengthen the
economy. The Central Bank projection was to achieve $ 7,000 by 2020. It is clear
that in this present state we will not achieve this target.

Sri Lanka has not managed to expand its value added exports and tap into global
value chains. As cautioned by the young economist and IPS Research Officer
Kithmina Hewage at a recent ADB forum: Goods included in the export basket of
Sri Lanka that was set up in 1995 and 2015 were almost identical after 20 years.
Vietnam made a decision on its exports and changed its priority structure which
helped them to reach export revenue of $ 185 billion in 2015 from $ 5 billion in
1995, but sadly for Sri Lanka that did not change its perspective of exports which
ended at $ 10 billion in 2015 from $ 3 billion in 1995. Sri Lanka failed to
implement economic liberalisation policies for trade and investment as well as
establish a stable environment to attract investments which support plugging into
regional value chains.
This same message was echoed by Harvard Professor Ricardo Hausmann. While
Vietnam has added 48 new products to its export basket, Sri Lanka has added
seven from 200-2015. Sri Lankas seven products did not create much value
according to Prof. Hausmann (Figure 3).

What we are facing is a serious economic situation. If it is not immediately

addressed with the right set of economic policy prescriptions, the condition will
further deteriorate. It is unclear if the investment in further mega infrastructure
projects and resetting of the constitution which will create a headwind towards
further instability is the right kind of prescription at the moment towards
strengthening the economic environment.

(The writer is a Young Global Leader of the World Economic Forum, Director
General of the Institute of National Security Studies and a visiting lecturer in
International Political Economy).
Posted by Thavam